<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 2, 1999
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
EDISON SCHOOLS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8200 13-3915075
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
521 FIFTH AVENUE, 15TH FLOOR
NEW YORK, NY 10175
(212) 419-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
H. CHRISTOPHER WHITTLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EDISON SCHOOLS INC.
521 FIFTH AVENUE, 15TH FLOOR
NEW YORK, NY 10175
(212) 419-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID SYLVESTER, ESQ. MICHAEL W. BLAIR, ESQ.
BRENT B. SILER, ESQ. DEBEVOISE & PLIMPTON
HALE AND DORR LLP 875 THIRD AVENUE
1455 PENNSYLVANIA AVENUE, N.W. NEW YORK, NY 10022
WASHINGTON, D.C. 20004 TELEPHONE: (212) 909-6000
TELEPHONE: (202) 942-8400 TELECOPY: (212) 909-6836
TELECOPY: (202) 942-8484
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ------------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE(1) REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock, $.01 par value per share.............. $172,500,000.00 $47,955.00
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(o) under the Securities Act of 1933,
as amended.
------------------------
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 AUGUST 2, 1999
PROSPECTUS
SHARES [LOGO]
EDISON SCHOOLS INC.
CLASS A COMMON STOCK
----------------------
This is Edison Schools Inc.'s initial public offering of class A common
stock. The U.S. underwriters will offer shares of class A common
stock in the United States and Canada and the international managers will offer
shares of class A common stock outside the United States and
Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the class A common stock. After
pricing of the offering, we expect that the class A common stock will trade on
the Nasdaq National Market under the symbol "EDSN."
We have two classes of common stock, class A common stock and class B
common stock. Holders of class A common stock generally have the same rights as
holders of class B common stock, except that holders of class A common stock
have one vote per share, while holders of class B common stock have ten votes
per share. In addition, holders of class B common stock will be able to elect
four of the 11 members of our board of directors and the holders of class A
common stock will be able 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.
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED
IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to Edison Schools Inc. ......... $ $
</TABLE>
The U.S. underwriters may also purchase up to an additional
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 shares of class A common stock.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We expect that the shares of class A common stock will be ready for
delivery in New York, New York on or about , 1999.
----------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
J.P. MORGAN & CO.
----------------------
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 4
Description of graphical material on inside front cover:
Photograph of children in classroom with the following caption:
"The most necessary task of civilization is to teach people to
think."
-- Thomas Edison
Description of graphical material on inside of gatefold:
Multiple photographs of children in classrooms with the following text:
The 10 fundamentals of Edison Schools
1. Schools organized for every student's success
2. A better use of time
3. A rich and challenging curriculum
4. Teaching methods that motivate
5. Assessment that provides accountability
6. Educators who are true professionals
7. Technology for an Information Age
8. A partnership with families
9. Schools tailored to the community
10. The advantages of system and scale
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY.......................................... 4
RISK FACTORS................................................ 11
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS........... 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.................................................... 39
MANAGEMENT.................................................. 56
RELATED PARTY TRANSACTIONS.................................. 64
PRINCIPAL STOCKHOLDERS...................................... 70
DESCRIPTION OF CAPITAL STOCK................................ 75
SHARES ELIGIBLE FOR FUTURE SALE............................. 79
UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S.
HOLDERS................................................... 81
UNDERWRITING................................................ 83
LEGAL MATTERS............................................... 87
EXPERTS..................................................... 87
WHERE YOU CAN FIND MORE INFORMATION......................... 87
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. National polls rank the quality
of K-12 public education, a $350 billion sector of the U.S. economy in the
1997-1998 school year, 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, serving 23,900 students in 51 schools across the
country in the 1998-1999 school year. This growth has been fueled by the
demonstrated success of our schools, as measured by significant improvements in
student academic performance, high levels of parental satisfaction and waiting
lists in many schools. We expect to operate 77 schools in the 1999-2000 school
year, which would bring the number of students we serve to approximately 37,000.
Our model offers public school authorities, who face widespread concern
about disappointing student achievement, the benefits of a large private sector
company with national scale. We believe those benefits include:
- the ability to create, implement and support a superior educational model
through focused research and development;
- the ability, through greater efficiencies, to drive a greater percentage
of educational expenditures to the classroom; and
- increased emphasis on accountability for achieving improved academic
performance.
These benefits contribute to an enhanced educational experience that has
proven attractive to public school authorities, parents and teachers alike.
Elements of that experience include:
- a rich and challenging curriculum based on clear standards and high
expectations for all students;
- a significantly longer school day and year;
- an enriched technology program characterized by computers 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 substantial levels of training, an explicit career ladder and a school
management structure that empowers teachers to participate in the
leadership of the school;
- a national support system focused on improving student achievement;
- early exposure to foreign language; and
- an emphasis on parental involvement and character development.
4
<PAGE> 7
OUR MARKET
The United States spent an estimated $580 billion on education in the
1997-1998 school year. This represents over 7% of the U.S. gross domestic
product, and makes education one of the largest sectors of the U.S. economy. Of
these expenditures, an estimated $350 billion was spent on K-12 education,
nearly double the inflation-adjusted level of spending for the 1987-1988 school
year. 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. In the United States, more is spent per pupil on
education than in most other developed countries, but by the end of 12th grade,
U.S. performance on standardized tests was among the lowest. For example, in the
Third International Mathematics and Science Study conducted in 1995, American
twelfth-graders ranked 16th in science and 19th in mathematics among 21
countries.
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. Most school districts are
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 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
national 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.
OUR STRATEGY
We believe the approximately 1,800 medium and large independent school
districts nationwide, which we estimate collectively spent $190 billion in the
1998-1999 school year, represent a significant growth opportunity. Our strategy
is to grow within this market through the establishment of expanded
relationships with existing clients as well as new relationships. Illustrating
the magnitude of the overall market opportunity, we estimate that just one
percentage point market share nationwide within our market of large and medium
size school districts would represent approximately $1.9 billion in annual
revenues based upon expenditures for the 1998-1999 school year.
Our marketing efforts will continue to focus on our ability to replicate
the success achieved at other Edison schools throughout the country. We believe
that effective marketing and communication
5
<PAGE> 8
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. Furthermore, we expect our demonstrated success at our
existing schools to encourage school districts and charter boards to enter into
management agreements providing for us to establish multiple schools either in
their first year or over time. We have opened additional schools for 12 of our
first 13 clients.
OUR MANAGEMENT
We have an experienced and talented management team led by our President
and Chief Executive Officer, H. Christopher Whittle, founder of several media
enterprises, including the first national electronic news system for middle and
high schools in the United States; our Chairman, Benno C. Schmidt, Jr., former
President of Yale University; our Chief Operating Officer, Christopher D. Cerf,
former Associate Counsel to President Clinton from 1994 to 1996; and our Chief
Education Officer, John E. Chubb, senior fellow at the Brookings Institution and
noted author and speaker on education reform. In addition, the management team
includes 10 former public school system superintendents.
THE OFFERING
Class A common stock offered:
U.S. offering............ shares
International offering... shares
------
Total.................. shares
Common stock to be outstanding
after the U.S. and
International offerings:
Class A common stock...... shares
Class B common stock...... shares
------
Total.................. shares
Use of proceeds............... We estimate that the net proceeds from this
offering (without exercise of the overallotment
option) will be approximately $ 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."
Risk factors.................. See "Risk Factors" for a discussion of factors
you should carefully consider before deciding
to invest in shares of our class A common
stock.
Proposed Nasdaq National
Market symbol................. EDSN
6
<PAGE> 9
The number of shares to be outstanding after the offering is based on
shares outstanding at June 30, 1999 and excludes:
- shares of class A common stock and shares of class B
common stock that may be issued upon the exercise of outstanding options
and warrants with a weighted average exercise price of $ per share;
- additional shares of class A common stock reserved for issuance
under our stock plans; and
- shares of preferred stock issued in private placements after
June 30, 1999.
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. 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. See "Description of Capital
Stock -- Common Stock" for a description of cumulative voting. 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 events
that are discussed under "Description of Capital Stock -- Common Stock."
After this offering, the holders of class A common stock will control __%
of the total combined voting power and __% of the total economic interest of our
common stock, and the holders of class B common stock will control __% of the
total combined voting power and__% of the total economic interest of our common
stock. Immediately following the closing of this offering, our officers and
directors and entities affiliated with them will together beneficially own
shares and shares issuable upon the exercise of options having approximately %
of the total economic interest of our common stock; approximately % of the
voting power of our class A common stock, including the ability to elect of
the seven class A directors; approximately % of the voting power of our class
B common stock, including the ability to elect of the four class B directors;
and approximately % of the combined voting power of our class A and class B
common stock. In addition, immediately following the closing of this offering,
H. Christopher Whittle, our President and Chief Executive Officer and a
director, will beneficially own shares and shares issuable upon the exercise of
options having approximately % of the total economic interest of our common
stock; approximately__% of the voting power of our class A common stock,
including the ability to elect __ of the seven class A directors; approximately
__% of the voting power of our class B common stock, including the ability to
elect __ of the four class B directors; and approximately __% of the combined
voting power of our class A and class B common stock.
7
<PAGE> 10
SUMMARY FINANCIAL AND OPERATING DATA
The following table sets forth summary financial data for our business. You
should read this information together with our financial statements and the
related notes included in this prospectus and the information under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations." Please note that:
- The pro forma balance sheet data reflect the sale of shares of preferred
stock in private placements in June and July 1999 and the automatic
conversion of all outstanding shares of our existing common stock and
preferred stock, including the shares issued in the June and July 1999
private placements, into shares of class A common stock and class B
common stock upon the closing of this offering.
- The pro forma as adjusted balance sheet data also reflect the sale of the
class A common stock offered by us in this offering, after deducting the
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.
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 earnings before interest expense,
income tax expense, depreciation and amortization, non-recurring design
team compensation and stock-based 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.
- Stock-based compensation is a non-cash expense recognized by us in
connection with stock options and amendments of stock options. For more
information on these amendments, see "Management's Discussion and
Analysis of Financial Condition and Results of
Operations -- Overview -- Expected Non-Cash, Stock-Based Compensation
Expenses."
- We consider grades K-5, 6-8 and 9-12 each to be a school, and we count
grades K-5, 6-8 and 9-12 as separate schools even if they are located in
the same building. As we expand, we often introduce new grade levels
gradually rather than simultaneously opening all grade levels within a
school. We consider ourselves to have opened a new school if we introduce
at least one grade level at a different school level, for example, if we
add grade 6 at a location housing an existing K-5 school. In some cases,
we count grades K-6 as one school if it is the local practice to
configure elementary schools in this manner.
- We define gross site contribution as revenue from educational services
less direct site expenses. Gross site contribution is intended to reflect
ongoing site-level cash flow from 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. Accordingly, gross site
contribution does not represent site-level profitability.
- We define gross site margin as gross site contribution expressed as a
percentage of revenue from educational services.
- Throughout this prospectus, when we refer to total revenue, we mean the
amount of our revenue from educational services.
8
<PAGE> 11
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------- ----------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- --------- ---------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue from educational services........... $ -- $ -- $ 11,773 $ 38,559 $ 69,407 $ 50,497 $ 95,971
Education and operating expenses:
Direct site expenses...................... -- -- 11,415 32,150 59,576 43,690 81,910
Curriculum, administration and
development............................. 14,009 14,286 7,717 12,755 18,258 12,455 22,855
Depreciation and amortization............. -- -- 1,166 3,552 7,232 5,197 9,265
Pre-opening expenses...................... -- -- 1,476 1,487 2,486 1,744 3,452
Design team compensation.................. -- -- -- -- 2,724 2,724 --
-------- -------- -------- --------- ---------- --------- ----------
Total education and operating
expenses............................ 14,009 14,286 21,774 49,944 90,276 65,810 117,482
-------- -------- -------- --------- ---------- --------- ----------
Loss from operations........................ (14,009) (14,286) (10,001) (11,385) (20,869) (15,313) (21,511)
Other income (expense), net................. (355) 161 (102) (137) (1,165) (732) 796
-------- -------- -------- --------- ---------- --------- ----------
Net loss.................................... (14,364) (14,125) (10,103) (11,522) (22,034) (16,045) (20,715)
-------- -------- -------- --------- ---------- --------- ----------
Dividends on preferred stock................ -- -- -- -- (4,290) (4,290) --
Preferred stock accretion................... -- -- -- -- (278) (209) (770)
-------- -------- -------- --------- ---------- --------- ----------
Net loss attributable to common
stockholders.............................. $(14,364) $(14,125) $(10,103) $(11,522) $(26,602) $(20,544) $(21,485)
======== ======== ======== ========= ========== ========= ==========
Basic and diluted net loss per share
attributable to common stockholders....... $ (2.31) $ (2.27) $ (1.63) $ (1.85) $ (4.28) $ (3.31) $ (3.46)
======== ======== ======== ========= ========== ========= ==========
Weighted average number of common shares
outstanding used in computing basic and
diluted net loss per share attributable to
common stockholders....................... 6,214,709 6,214,709 6,214,709 6,214,709 6,214,711 6,214,711 6,214,711
======== ======== ======== ========= ========== ========= ==========
Pro forma basic and diluted net loss per
share..................................... $ (0.57) $ (0.38)
========== ==========
Pro forma weighted average number of shares
outstanding used in computing pro forma
basic and diluted net loss per share...... 46,410,431 54,612,761
========== ==========
STUDENT AND PER STUDENT DATA:
Student enrollment.......................... 2,250 7,150 12,800 12,800 23,900
Total revenue per student................... $ 5,232 $ 5,393 $ 5,422
Loss from operations per student............ $ (4,445) $ (1,592) $ (1,630)
EBITDA, net of other charges, per student... $ (3,927) $ (1,089) $ (807)
OTHER OPERATING DATA:
Capital expenditures........................ $ 116 $ 233 $ 4,970 $ 9,090 $21,181 $11,302 $22,798
Gross site contribution..................... $ 358 $ 6,409 $ 9,831 $ 6,807 $ 14,061
Gross site margin........................... 3.0% 16.6% 14.2% 13.5% 14.7%
Curriculum, administration and development
expenses, net of stock-based
compensation.............................. $ 14,009 $ 14,286 $ 7,717 $ 12,710 $ 17,673 $ 12,017 $ 17,884
Curriculum, administration and development
expenses, net of stock-based compensation,
as a percentage of total revenue.......... 65.6% 33.0% 25.5% 23.8% 18.6%
Total number of schools..................... 4 12 25 25 51
</TABLE>
(continued on the following page)
9
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<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 7,702 78,702
Working capital............................................. 8,150 79,042
Total assets................................................ 78,157 149,157
Total debt, including current portion....................... 22,550 22,550
Accumulated deficit......................................... (112,219) (112,219)
Total stockholders' equity.................................. 42,850 113,742
</TABLE>
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 shares of class A common stock and
shares of class B common stock, which will occur automatically
upon the completion of this offering; and
- assumes the underwriters do not exercise their option to purchase
additional shares in this offering to cover over-allotments, if any.
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RISK FACTORS
Investing in our class A common stock will provide you with an equity
ownership interest in Edison. As a stockholder of Edison you may be exposed to
the risks inherent in our business. The performance of your shares will reflect
the performance of our business relative to the competition, industry conditions
and general economic and market conditions. The value of your investment may
increase or decline and could result in a loss. You should carefully consider
the following risk factors as well as other information contained in this
prospectus before deciding to invest in shares of our class A common stock.
RISKS RELATED TO OUR BUSINESS AND THE EDUCATION INDUSTRY
WE ARE A YOUNG COMPANY, AND OUR LIMITED OPERATING HISTORY MAKES IT DIFFICULT
TO EVALUATE OUR BUSINESS
We opened our first schools and recorded our first revenue in fiscal 1996.
As a result, we have only a limited operating history on which you can base your
evaluation of our business and prospects. Our business and prospects must be
considered in light of the risks and uncertainties frequently encountered by
companies in the early stages of development, particularly companies like us who
operate in new and rapidly evolving markets.
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, 1998, our net loss was
$22.0 million. For the nine months ended March 31, 1999, our net loss was $20.7
million. As of March 31, 1999, our accumulated deficit was approximately $112.2
million. 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. For more information
concerning our profitability, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Selected Financial and
Operating Data."
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 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. 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,
the growth of our business and our financial results could suffer.
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 an important element of our growth has been our ability to
demonstrate general improvements in academic performance at our schools. 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 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.
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WE COULD INCUR LOSSES AT OUR SCHOOLS IF WE ARE UNABLE TO ENROLL ENOUGH
STUDENTS
Each of our schools must operate at nearly full enrollment throughout the
year in order to be financially successful because our funding from the school
district or charter board is based on the number of students actually enrolled
while school-site costs are relatively fixed. 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. While we have waiting lists for most of our
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 maintain nearly
full enrollment levels at a school, our financial performance at that school
will suffer.
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 1998-1999 school year, we had grown to 51 schools and we expect to
operate 77 schools for the 1999-2000 school year. 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, our business and financial results will suffer.
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, 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, our business and ability to grow would suffer.
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 business could be hurt. Also, we do not maintain any key man
insurance on any of our executives. For more information on our executives, see
"Management."
WE DEPEND UPON COOPERATIVE RELATIONSHIPS WITH TEACHERS' UNIONS, BOTH AT THE
LOCAL AND NATIONAL LEVELS
At the local level, union cooperation is often critical to us in obtaining
new management agreements and maintaining existing management agreements. In
many cases, we are able to implement the Edison curriculum and school design
only if we secure waivers of local union work rules. If we fail to achieve and
maintain cooperative relationships with local teachers' unions, we could lose
business and our ability to grow could suffer. 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.
For more information on our relationships with teachers' unions, see "Business
- -- Labor Relations."
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.
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 cannot be assured that these management agreements
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will be renewed at the end of their term. Management agreements representing 16
schools, accounting for 28.3% of our total revenue for fiscal 1998, will expire
at the end of the 1999-2000 school year, and management agreements representing
10 schools, accounting for 20.5% of our total revenue for fiscal 1998, will
expire at the end of the 2000-2001 school year. In addition, some of our
management agreements are terminable by the school district or charter board at
will, with or without good reason, and our management agreements may be
terminated for cause, including a failure to meet specified educational
standards. 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 business would suffer. For more information on our contract and
charter schools, see "Business -- Edison Solution Implemented."
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 NOT YET OPENED OR OPERATED A FOUR-YEAR HIGH SCHOOL
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. We
currently operate one high school through the 11th grade. We are scheduled to
add the senior year to that school as well as to open our first four-year high
school in the 1999-2000 school year. Because we have not yet operated 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.
Because in some cases we operate with the same per-pupil funding across all
grade levels, our success depends upon our ability to deliver our high school
design for the same per-pupil spending as in elementary schools. If we are
unable to successfully and profitably operate high schools, our business and
growth strategy will suffer.
OUR FINANCIAL RESULTS ARE SUBJECT TO PATTERNS THAT COULD AFFECT THE PERCEPTION
OF OUR FINANCIAL RESULTS
Because new schools are opened at the beginning of each school year,
incremental increases or decreases in student enrollment, and related revenue,
will first be reflected in our first fiscal quarter. Accordingly, trends in our
business, whether favorable or unfavorable, may not be as evident in our
quarterly financial results, but will be apparent primarily in year-to-year
comparisons. Our quarterly revenue and results of operations could, however,
fluctuate somewhat based on changes in school enrollment and administrative
expenses throughout the fiscal year. In addition, we generally recognize revenue
for each school ratably over the 11 months from August through June. We
recognize no school revenue in July. Similarly, we record most instructional
expenses over that 11 month period. For this reason, the first quarter of our
fiscal year has historically reflected less revenue and lower expenses than the
following three quarters, and we expect this pattern to continue. Recognition of
expenses in the first fiscal quarter is proportionally greater than the revenue
accrual resulting in lower gross site margins in the first fiscal quarter than
in the remaining fiscal quarters. Pre-opening costs further contribute to the
seasonality of financial results as they are incurred primarily in the fourth
and first quarters.
OUR LENGTHY SALES CYCLE COULD DELAY NEW BUSINESS
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. Similarly, we have a lengthy
sales cycle for charter schools for similar reasons, as well as the need to
arrange for facilities to house the school. The
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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. 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.
WE COULD UNDERESTIMATE THE REAL ESTATE COSTS ASSOCIATED WITH ACQUIRING OR
RENOVATING A CHARTER SCHOOL, CAUSING US TO LOSE MONEY, AND WE COULD BECOME
LIABLE FOR FINANCIAL OBLIGATIONS OF CHARTER BOARDS
If we incur unexpected real estate cost overruns in acquiring or renovating
a charter school, the charter school could be less profitable than we anticipate
or we could lose money in operating the school. Even though the charter board is
generally responsible for locating and financing its own school building, a
substantial real estate investment is often required to renovate an existing
facility or build a new facility to house the charter school. Typically, the
holders of school charters, which are often non-profit organizations, 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 several of our charter schools, we have entered
into a long-term lease for the school facility, which may exceed the term of the
management agreement. 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
$26.6 million, with varying maturities over the next 18 years. In a number 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.
The lenders under these facilities are not committed to release us from our
obligations unless replacement credit support is provided. For this reason, we
may remain obligated on financing for schools we no longer operate. 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. As of June 30,
1999, the amount of loans we had guaranteed and the loans we made directly to
charter boards totaled $13.4 million. For more information on our real estate
costs, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
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. For more
information on these competitors, see "Business -- Competition." 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. Furthermore,
school districts or private sector competitors could open public schools based
on our curriculum, school design and systems, many of which are public
knowledge. 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. If we are unable to compete
successfully against any of these existing or potential competitors, our
business and financial performance could suffer.
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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. For more information about our historic
and future capital needs, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources."
WE MUST RECOGNIZE A PORTION OF ANY LOSSES OF APEX ONLINE LEARNING INC.
In July 1999, we acquired an 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 a 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, which is currently 16.5%, 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.
For more information on our year 2000 compliance efforts, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000."
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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. For example, 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
8.0% 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.
- 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.
For further information on government education programs, see
"Business -- Government Laws and Regulations."
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
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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.
ANY REDUCTION IN GENERAL FUNDING LEVELS FOR EDUCATION COULD HURT OUR BUSINESS
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 introduced in state legislatures
to restrict or prohibit the management of public schools by private, for-profit
entities like us. If any of these proposals were to gain widespread acceptance,
the market for our services would suffer.
THE OPERATION OF OUR CHARTER SCHOOLS DEPENDS ON THE MAINTENANCE OF THE
UNDERLYING CHARTER GRANT
Our 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.
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
THE HOLDERS OF CLASS B COMMON STOCK WILL HAVE GREATER VOTING POWER THAN THE
PURCHASERS OF CLASS A COMMON STOCK IN THIS OFFERING AND WILL EXERT MORE
CONTROL OVER EDISON AND OUR ACTIONS THAN THE CLASS A COMMON STOCKHOLDERS
Holders of class A common stock are entitled to one vote per share and
holders of class B common stock are entitled to ten votes per share. Upon the
completion of this offering, the shares of class A common stock will represent
% of the total voting power of our common stock and the shares of class B
common stock will represent % of the total voting power of our common stock.
In addition, beginning with the first annual meeting of our 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 the holders of class A common stock will have the
right, 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 classes of directors. For more
information on these cumulative voting rights, see "Description of Capital
Stock -- Common Stock."
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
shares of class A common stock and shares of class B common stock. These
shares will represent approximately % of the voting power of the class A
common stock, including the ability to elect all of the seven class A directors;
approximately % of the voting power of the class B common stock, including the
ability to elect of the four class B directors; and
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approximately % of the combined voting power of the class A and class B common
stock. 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 shares of class A common stock and shares of
class B common stock. These shares will represent approximately % of the
voting power of the class A common stock, including the ability to elect of
the seven class A directors; approximately % of the voting power of the class
B common stock, including the ability to elect of the four class B directors;
and approximately % 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, shares of class A common stock and shares of class B
common stock are subject to options exercisable within 60 days of July 15, 1999.
Mr. Whittle and his affiliates also own options not exercisable within 60 days
of July 15, 1999 covering shares of class A common stock and
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.
PLEDGES OF SHARES OF OUR COMMON STOCK BY MR. WHITTLE COULD RESULT IN VOTING
POWER SHIFTING TO THE HANDS OF HIS LENDERS
Mr. Whittle and WSI Inc., a corporation controlled by Mr. Whittle, will
directly or indirectly own shares of class A common stock and
shares of class B common stock, including shares issuable upon the
exercise of options, following the completion of this offering. Mr. Whittle and
WSI have pledged to Morgan Guaranty Trust Company of New York and its affiliates
all of their direct and indirect interests in Edison to secure personal
obligations. These obligations become due at the end of August 1999 and interest
on these obligations is payable quarterly. If Mr. Whittle and WSI were to
default on their obligations and Morgan were to foreclose on this 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,
Morgan, together with its affiliates who are currently stockholders of Edison,
would control shares of class A common stock and shares of
class B common stock, representing % of the voting power of the class A
common stock, % of the voting power of the class B common stock and %
of the combined voting power. This would enable Morgan to exercise substantial
influence over corporate matters.
THERE HAS BEEN NO PRIOR MARKET FOR OUR CLASS A COMMON STOCK
Prior to this offering, you could not buy or sell our class A common stock
publicly. An active public market for our class A common stock may not develop
or be sustained after this offering. We will negotiate and determine the initial
public offering price with the representatives of the underwriters based on
several factors. This price may vary from the market price of the class A common
stock after this offering. You may be unable to sell your shares of class A
common stock at or above the offering price. For more information on the
determination of the initial public offering price, see "Underwriting."
19
<PAGE> 22
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.
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. For a description of shares of our class A common
stock that are available for future sale, see "Shares Eligible for Future Sale."
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 immediate and
substantial dilution. 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. For more information on dilution, see "Dilution."
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW COULD PREVENT OR DELAY A CHANGE IN
CONTROL
Provisions of Delaware law, could make it more difficult for a third party
to acquire us, even if doing so would be beneficial to our stockholders. For
more information concerning these provisions, see "Description of Capital
Stock -- Delaware Law and Anti-takeover Effects."
WE HAVE BROAD DISCRETION TO USE THE PROCEEDS FROM THIS OFFERING
We plan to use the proceeds from this offering to fund operating losses and
capital expenditures, and for general corporate purposes. Therefore, we will
have broad discretion as to how we will spend the proceeds, and stockholders may
not agree with the ways in which we use the proceeds. We may not be successful
in investing the proceeds from this offering, in our operations or external
investments, to yield a favorable return.
20
<PAGE> 23
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."
We are under no duty to update any of the forward-looking statements after
the date of this prospectus to conform these statements to actual results. In
light of these risks, uncertainties and assumptions, the forward-looking events
discussed in this prospectus might not occur. For more information on the risks
and uncertainties facing our business, see "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
shares of class A common stock will be approximately $ million,
assuming an initial public offering price of $ 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
$ million.
The principal purposes of this offering are to establish a public market
for our class A common stock, to increase our visibility in the marketplace, to
facilitate future access to public capital markets, to provide liquidity to
existing stockholders and to obtain additional working capital.
We expect to use the net proceeds to fund operating losses and capital
expenditures, and for anticipated working capital needs and general corporate
purposes. Although we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our business, we
have no specific acquisitions planned. Pending such uses, we plan to invest the
net proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business.
22
<PAGE> 25
CAPITALIZATION
The following table describes our capitalization as of March 31, 1999:
- on an actual basis;
- on a pro forma basis reflecting our June and July 1999 private placements
of preferred stock and the automatic conversion of all of our outstanding
shares of common stock and preferred stock, including the shares issued
in the June and July 1999 private placements, into shares of class A
common stock and class B common stock upon the closing of this offering;
and
- on a pro forma as adjusted basis reflecting also the sale of the shares
of class A common stock offered by us in this offering and our receipt of
the estimated net proceeds, after deducting the estimated underwriting
discount and the estimated offering expenses that we expect to pay in
connection with this offering.
You should read this table along with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our financial statements and
the related notes and the other financial information included in this
prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................... $ 7,702 $ 78,702 $ --
Current portion of long-term debt....................... 6,550 6,550 --
========= ========= ======
Long-term debt, less current portion.................... $ 9,390 $ 9,390 $ --
Stockholder notes payable............................... 6,611 6,611 --
Stockholders' equity:
Series A common stock, $.01 par value per share;
92,708,669 shares authorized, 6,214,704 shares
issued and outstanding (actual); no shares
authorized, issued or outstanding (pro forma and
pro forma as adjusted)............................. 62 -- --
Series B through I common stock, $.01 par value per
share; 7 shares authorized, issued and outstanding
(actual); no shares authorized, issued or
outstanding (pro forma and pro forma as
adjusted).......................................... 0 -- --
Class A common stock, $.01 par value per share; no
shares authorized, issued or outstanding (actual);
shares authorized (pro forma and pro
forma as adjusted); shares issued and
outstanding (pro forma); shares issued
and outstanding (pro forma as adjusted)............ -- 1,568
Class B common stock, $.01 par value per share; no
shares authorized, issued or outstanding (actual);
shares authorized, shares
issued and outstanding (pro forma and pro forma
adjusted).......................................... -- 174
Convertible preferred stock, series A through G, $.01
par value per share; 70,105,972 shares authorized,
47,393,513 shares issued and outstanding (actual);
no shares authorized, issued or outstanding (pro
forma and pro forma as adjusted)................... 1,564 -- --
Additional paid-in capital............................ 157,983 228,759
Unearned stock-based compensation..................... (2,399) (2,399)
Accumulated deficit................................... (112,219) (112,219)
Stockholder receivable................................ (2,141) (2,141)
--------- --------- ------
Total stockholders' equity....................... 42,850 113,741
--------- --------- ------
Total capitalization.................................... $ 65,400 $ 136,292 $
========= ========= ======
</TABLE>
23
<PAGE> 26
The number of shares of class A and class B common stock outstanding as of
March 31, 1999 does not reflect:
- shares of class A common stock and shares of class B
common stock that may be issued upon the exercise of outstanding options
as of March 31, 1999 at a weighted average exercise price of $ per
share, of which options to purchase shares of class A common stock
and shares of class B common stock were vested as of such date;
- shares of class A common stock and shares of class B
common stock that may be issued upon the exercise of warrants
outstanding as of March 31, 1999 at a weighted average exercise price of
$ per share;
- shares of class A common stock and shares of class B
common stock issuable under options issued after March 31, 1999 at an
exercise price of $ per share; and
- additional shares of class A common stock reserved for issuance
under our stock plans.
At March 31, 1999, there was one share authorized and one share issued and
outstanding of each of series B through H common stock.
At March 31, 1999, there were 31,000,000, 1,010,101, 6,258,608, 25,077,843
and 6,759,420 shares of series A, B, C, D and E preferred stock, respectively,
authorized. There were 30,294,435, 1,010,101, 6,258,608 and 14,101,721 shares of
series A, B, C and D preferred stock, respectively, issued and outstanding at
March 31, 1999 and no shares of series E preferred stock issued or outstanding
at March 31, 1999.
After March 31, 1999, we authorized one share of series I common stock,
11,757,476 shares of series F preferred stock and 3,667,606 shares of series G
preferred stock. In our June and July 1999 private placements, we issued one
share of series I common stock, 10,744,714 shares of series F preferred stock
and 800,000 shares of series G preferred stock.
There were no shares of series A, B, C, D, E, F and G preferred stock
authorized, issued or outstanding on a pro forma or a pro forma as adjusted
basis.
More detailed information about our series A through I common stock and
series A through G convertible preferred stock is included in note 9 to our
financial statements included in this prospectus. This table gives effect to a
change in the number of authorized shares of common stock and preferred stock
after March 31, 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 March 31, 1999 was
approximately $113.7 million or approximately $ per share of common stock.
The formula for calculating pro forma tangible book value per share is pro forma
total tangible assets less 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 June and July 1999 private placements and the conversion of our
common stock and preferred stock, including the preferred stock that was issued
in the June and July 1999 private placements, into class A common stock and
class B common stock. After giving effect to the issuance and sale of the
shares of class A common stock offered by us in this offering, at an
assumed initial public offering price of $
per share, and the receipt of the net proceeds from the sale of these shares,
our pro forma net tangible book value at March 31, 1999 would have been $
million, or $ per share. This represents an immediate increase in pro forma
net tangible book value to existing stockholders of $ per share and an
immediate dilution to new investors of $ per share. The following table
illustrates this per share dilution:
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book value per share before this
offering............................................... $
Increase in pro forma net tangible book value per share
attributable to new investors..........................
------
Pro forma net tangible book value per share after this
offering.................................................. $
------
Dilution per share to new investors.........................
======
</TABLE>
The following table summarizes, on the pro forma basis discussed above, as
of March 31, 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.................... % $ % $
New investors............................ $
-------- ----- ------ ------
Total............................... 100.0% 100.0%
======== ===== ====== ======
</TABLE>
If the underwriters exercise their over-allotment option in full, the
number of shares held by existing stockholders will decrease to ,
or % of the total shares outstanding, and the number of shares held by new
investors will increase to , or % of the total shares
outstanding.
The above computations exclude shares of class A common
stock and shares of class B common stock issuable upon the exercise
of options or warrants outstanding as of March 31, 1999 with a weighted average
exercise price of $ per share and shares of class A common stock
and shares of class B common stock issuable upon the exercise of
options granted after March 31, 1999 with a weighted average exercise price of
$ 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.
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, 1996,
1997 and 1998, and the balance sheet data as of June 30, 1997 and 1998, 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, 1994 and 1995 and the balance sheet data as of June 30, 1994,
1995 and 1996 are derived from our audited financial statements that are not
included in this prospectus. The balance sheet data as of March 31, 1999 and the
statement of operations data for the nine months ended March 31, 1998 and 1999
are derived from unaudited financial statements which appear elsewhere in this
prospectus. The unaudited financial statements have been prepared on the same
basis as the audited financial statements and, in the opinion of Edison's
management, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information set forth
therein. The results of operations for the nine months ended March 31, 1999 are
not necessarily indicative of the operating results to be expected for the full
year or for any future period. For fiscal 1994, 1995 and 1996, although Edison
was a partnership, we computed our earnings per share as if Edison were a
corporation.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------ ---------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue from educational services..... $ -- $ -- $ 11,773 $ 38,559 $ 69,407 $ 50,497 $ 95,971
Education and operating expenses:
Direct site expenses.............. -- -- 11,415 32,150 59,576 43,690 81,910
Curriculum, administration and
development..................... 14,009 14,286 7,717 12,755 18,258 12,455 22,855
Depreciation and amortization..... -- -- 1,166 3,552 7,232 5,197 9,265
Pre-opening expenses.............. -- -- 1,476 1,487 2,486 1,744 3,452
Design team compensation.......... -- -- -- -- 2,724 2,724 --
-------- -------- -------- --------- --------- --------- ---------
Total education and operating
expenses..................... 14,009 14,286 21,774 49,944 90,276 65,810 117,482
-------- -------- -------- --------- --------- --------- ---------
Loss from operations.................. (14,009) (14,286) (10,001) (11,385) (20,869) (15,313) (21,511)
Other income (expense), net........... (355) 161 (102) (137) (1,165) (732) 796
-------- -------- -------- --------- --------- --------- ---------
Net loss.............................. (14,364) (14,125) (10,103) (11,522) (22,034) (16,045) (20,715)
-------- -------- -------- --------- --------- --------- ---------
Dividends on preferred stock.......... -- -- -- -- (4,290) (4,290) --
Preferred stock accretion............. -- -- -- -- (278) (209) (770)
Net loss attributable to common
stockholders........................ $(14,364) $(14,125) $(10,103) $ (11,522) $ (26,602) $ (20,544) $ (21,485)
======== ======== ======== ========= ========= ========= =========
Basic and diluted net loss per share
attributable to common
stockholders........................ $ (2.31) $ (2.27) $ (1.63) $ (1.85) $ (4.28) $ (3.31) $ (3.46)
======== ======== ======== ========= ========= ========= =========
Weighted average number of common
shares outstanding used in computing
basic and diluted net loss per share
attributable to common
stockholders........................ 6,214,709 6,214,709 6,214,709 6,214,709 6,214,711 6,214,711 6,214,711
======== ======== ======== ========= ========= ========= =========
Pro forma basic and diluted net loss
per share........................... $ (0.57) $ (.38)
========= =========
Pro forma weighted average number of
shares outstanding used in computing
pro forma basic and diluted net loss
per share........................... 46,410,431 54,612,761
========= =========
</TABLE>
(continued on the following page)
26
<PAGE> 29
<TABLE>
<CAPTION>
NINE MONTHS ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 1998 1999
-------- -------- -------- -------- ----------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STUDENT AND PER STUDENT DATA:
Student enrollment................ 2,250 7,150 12,800 12,800 23,900
Total revenue per student......... $ 5,232 $ 5,393 $ 5,422
Loss from operations per
student......................... $ (4,445) $ (1,592) $ (1,630)
EBITDA, net of other charges, per
student......................... $ (3,927) $ (1,089) $(807)
OTHER OPERATING DATA:
Capital expenditures.............. $ 116 $ 233 $ 4,970 $ 9,090 $21,181 $11,302 $22,798
Gross site contribution........... $ 358 $ 6,409 $ 9,831 $ 6,807 $ 14,061
Gross site margin................. 3.0% 16.6% 14.2% 13.5% 14.7%
Curriculum, administration and
development expenses, net of
stock-based compensation........ $ 14,009 $ 14,286 $ 7,717 $ 12,710 $ 17,673 $ 12,017 $ 17,884
Curriculum, administration and
development expenses, net of
stock-based compensation, as a
percentage of total revenue..... 65.6% 33.0% 25.5% 23.8% 18.6%
Total number of schools........... 4 12 25 25 51
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF
--------------------------------------------------------- MARCH 31,
1994 1995 1996 1997 1998 1999
-------- -------- -------- ---------- ----------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....... $ 2,260 $ 2,710 $ 3,904 $ 15,741 $ 7,492 $7,702
Working capital................. 1,019 4,672 8,693 19,843 2,684 8,150
Total assets.................... 2,950 6,359 18,423 46,231 55,935 78,157
Total debt, including current
portion....................... -- -- 2,825 9,395 17,151 22,550
Accumulated deficit............. (33,720) (47,845) (57,215) (69,470) (91,504) (112,219)
Total stockholders' equity...... 1,626 5,474 12,539 31,573 26,831 42,850
</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, serving 23,900 students in 51 schools across the country in the
1998-1999 school year. We expect to operate 77 schools in the 1999-2000 school
year, which would bring the number of students we serve to approximately 37,000.
Our total revenue has increased from $11.8 million in fiscal 1996 to $96.0
million for the nine months ended March 31, 1999.
Prior to opening our first schools in fiscal 1996, we were a development
stage company focused on research and development of the Edison school design
and curriculum. 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. At March 31, 1999, we had an accumulated deficit
of $112.2 million. 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.
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; 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 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
operating each school depends on the number of students enrolled, achieving
nearly full enrollment 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,
28
<PAGE> 31
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
intended to reflect ongoing site-level cash flow from schools and, for that
reason, does not reflect all site-related costs, including depreciation and
amortization or interest expense related to site-level investments or on-site
pre-opening expenses, and accordingly gross site contribution does not represent
site-level profitability.
CURRICULUM, ADMINISTRATION AND DEVELOPMENT EXPENSES
Support from our central office is important for the successful delivery of
our curriculum and school design. Curriculum, administration 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, 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 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, 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.
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, 1998, our net loss was $22.0 million, and for the nine
months ended March 31, 1999, our net loss was $20.7 million. As of March 31,
1999, our accumulated deficit was approximately $112.2 million.
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The following table sets forth various financial data expressed as a
percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
FISCAL YEAR ENDED JUNE 30, MARCH 31,
-------------------------- --------------
1996 1997 1998 1998 1999
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Revenue from educational services................ 100.0% 100.0% 100.0% 100.0% 100.0%
----- ----- ----- ----- -----
Education and operating expenses:
Direct site expenses........................... 97.0 83.4 85.8 86.5 85.3
Curriculum, administration and development
expenses.................................... 65.6 33.1 26.3 24.7 23.8
Depreciation and amortization.................. 9.9 9.2 10.4 10.3 9.7
Pre-opening expenses........................... 12.5 3.9 3.6 3.5 3.6
Design team compensation....................... 0.0 0.0 3.9 5.4 0.0
----- ----- ----- ----- -----
Total education and operating expenses...... 185.0 129.6 130.0 130.4 122.4
----- ----- ----- ----- -----
Loss from operations............................. (85.0) (29.6) (30.0) (30.4) (22.4)
----- ----- ----- ----- -----
Other income (expense), net...................... (0.9) (0.4) (1.7) (1.4) 0.8
----- ----- ----- ----- -----
Net loss......................................... (85.9)% (30.0)% (31.7)% (31.8)% (21.6)%
===== ===== ===== ===== =====
</TABLE>
In order to achieve profitability, we believe it will be necessary both to
improve gross site margin while maintaining educational quality and to continue
to reduce central expenses as a percentage of total revenue from educational
services. The latter improvement is largely dependent on our ability to increase
our total revenue through expanded student enrollment while controlling central
costs.
CONTRACT SCHOOLS COMPARED TO CHARTER SCHOOLS
We operate two types of schools: contract and charter. Contract schools are
public schools we operate under a management agreement with local school boards.
Charter schools are schools we operate under a management agreement with a
charter holder, which is typically a community group or non-profit entity that
has been granted a state-authorized charter to create a public school. The cost
of operating a contract school and a charter school is similar, except that, in
the case of a charter school, we are typically required to arrange for a
facility. In some cases, we operate charter schools under a charter granted by
the local school board, which provides the facility. In these cases, we
categorize these schools as contract schools because the economics of these
arrangements closely resemble those of a contract school. Charter school
facilities that are not provided by a local school board are financed in a
variety of ways, including bank debt, sale/leaseback arrangements, third-party
ownership by real estate investment trusts and philanthropy. At times, we
advance funds or guarantee loans to our charter board clients to assist them in
arranging for facilities. 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.
EXPECTED NON-CASH, STOCK-BASED 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 expect to
recognize a one-time expense of approximately $18.0 million in the fourth
quarter of fiscal 1999, as well as additional expenses aggregating approximately
$5.6 million that will be recognized over the vesting periods of the individual
stock options. These additional expenses are expected to approximate $3.6
million for fiscal 2000, $958,000 for fiscal 2001, $696,000 for fiscal 2002 and
$354,000 for fiscal 2003.
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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 March
31, 1999. As of June 30, 1998, we had approximately $44.5 million of net
operating loss carryforwards for federal income tax purposes, expiring in 2013,
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
We believe our financial results are best analyzed on an annual basis.
Because new schools are opened in the first fiscal quarter of each year,
increases in student enrollment and related revenue and expenses will first be
reflected in that quarter. Because student enrollment tends to remain relatively
stable throughout a school year, trends in our business, whether favorable or
unfavorable, will tend not to be reflected in our quarterly financial results,
but will be more evident primarily in year-to-year comparisons. Our financial
results can vary, however, among the quarters within any fiscal year. We
recognize revenue for each school pro rata over the 11 months from August
through June and our operating expenses are generally incurred primarily over
those same 11 months. 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. Recognition of site-related
expenses in the first fiscal quarter is proportionally greater than the revenue
accrual, however, resulting in lower gross site margin in the first fiscal
quarter than in the remaining fiscal quarters. Pre-opening costs further
contribute to the seasonality of financial results because they are incurred
primarily in the fourth and first quarters. Our quarterly revenue and results of
operations could also fluctuate somewhat based on changes in school enrollment
throughout the fiscal year.
RESULTS OF OPERATIONS
NINE MONTH PERIOD ENDED MARCH 31, 1999 COMPARED TO NINE MONTH PERIOD ENDED
MARCH 31, 1998
REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $96.0 million for the nine months ended March 31, 1999 from $50.5
million for the same period one year earlier, an increase of 90.1%. The increase
was primarily due to the 86.7% increase in student enrollment from 12,800 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 $81.9 million
for the nine months ended March 31, 1999 from $43.7 million for the same period
one year earlier, an increase of 87.4%. Like revenue growth, the increase in
direct site expenses was primarily due to the 86.7% increase in student
enrollment. The largest element of direct site expenses is personnel costs.
Personnel costs included in direct site expenses increased to $64.6 million for
the nine months ended March 31, 1999 from $33.0 million for the nine months
ended March 31, 1998.
GROSS SITE MARGIN AND CONTRIBUTION. Our gross site margin increased to
14.7% for the nine months ended March 31, 1999 from 13.5% for the same period
one year earlier. This increase was due primarily to higher direct site expenses
per pupil in the nine months ended March 31, 1998. The increase in gross site
margin, coupled with higher total revenue, resulted in an increase in gross site
contribution to $14.1 million for the nine months ended March 31, 1999 from $6.8
million for the nine months ended March 31, 1998.
CURRICULUM, ADMINISTRATION AND DEVELOPMENT EXPENSES. Our curriculum,
administration and development expenses increased to $22.9 million for the nine
months ended March 31, 1999 from $12.5 million for the same period one year
earlier, an increase of 83.2%. A 55.7% increase in personnel costs represented
over half of the overall increase. This increase in personnel costs was
primarily attributable to a substantial increase in employees in our school
operations and curriculum and education divisions, an increase in our
professional marketing staff to support an expanded marketing program, an
increase in our
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central office administrative staff to enhance legal and contracting functions
and to expand financial reporting and support functions and an increase in
stock-based compensation expense resulting from an increase in the fair market
value of the underlying stock. The remainder was primarily attributable to
increased travel expenses and, to a lesser extent, greater rent expenses.
Curriculum, administration and development expenses as a percentage of total
revenue declined to 23.8% for the nine months ended March 31, 1999 from 24.7%
for the same period one year earlier.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $9.3 million for the nine months ended March 31, 1999 from $5.2 million for
the same period one year earlier, an increase of 78.8%. 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 the nine months ended March 31, 1999,
additions to property and equipment totaled $22.8 million, including $12.7
million for additional computers and equipment, $3.8 million for curriculum
materials and $6.3 million for new facilities and improvements. Such 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 $3.5 million
for the nine months ended March 31, 1999 from $1.7 million for the same period
one year earlier, an increase of 106%. 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 the nine months ended March 31, 1998, we incurred approximately $2.7
million of expense. We do not expect to recognize any similar expenses in the
future.
LOSS FROM OPERATIONS. Our loss from operations increased to $21.5 million
for the nine months ended March 31, 1999 from $15.3 million for the same period
one year earlier, an increase of 40.5%. The $6.2 million of additional loss
primarily reflects the growth in curriculum, administration and development
expenses and the absence of the $2.7 million design team compensation expense
from the prior period.
OTHER INCOME AND EXPENSE. We recognized $796,000 of other income, net, for
the nine month period ending March 31, 1999, compared to $732,000 of other
expense, net, for the same period one year earlier. The change was primarily
attributable to a significant increase in interest income, primarily due to the
recognition of interest income on capital commitments. This improvement was
substantially 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 $20.7 million for the nine months ended March 31, 1999 from $16.0
million for the same period one year earlier, an increase of 29.4%. During the
nine months ended March 31, 1998, we declared a $4.3 million dividend on
preferred stock, in the form of notes payable, in connection with an equity
financing, and recognized $770,000 and $209,000 of preferred stock accretion
during the nine months ended March 31, 1999 and March 31, 1998 respectively.
This resulted in net loss attributable to common stockholders of $21.5 million
and $20.5 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 79.0% to 12,800 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 $32.2 million for fiscal 1997, an increase of 85.1%. The
increase in direct site expenses was primarily due to
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<PAGE> 35
increased staffing to support the 79.0% 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%.
CURRICULUM, ADMINISTRATION AND DEVELOPMENT EXPENSES. Our curriculum,
administration 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 additional curriculum, administrative 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, curriculum, administration 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.
PRE-OPENING EXPENSES. Our pre-opening expenses increased to $2.5 million
for fiscal 1998 from $1.5 million for fiscal 1997, an increase of 66.7%. The
increase was a direct result of opening new schools and expanding existing
schools for the 1997-1998 school year. During fiscal 1998, we opened 13 new
schools.
DESIGN TEAM COMPENSATION. During fiscal 1998, we incurred approximately
$2.7 million of expenses that represented payments due to personnel who
participated in the creation of our curriculum and school design. We had no
similar expenses in fiscal 1997.
OTHER INCOME AND EXPENSE. Other expense, net, increased to $1.2 million in
fiscal 1998 from $137,000 in fiscal 1997. The increase was primarily due to
increased interest expense on additional debt incurred to finance technology and
other equipment investments at our schools. This increase was offset in part by
increased interest income on cash balances.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
increased to $22.0 million for fiscal 1998 from $11.5 million for fiscal 1997,
an increase of 91.3%. During fiscal 1998, because of our $4.3 million preferred
stock dividend and $278,000 of preferred stock accretion, we had net loss
attributable to common stockholders of $26.6 million for the period.
FISCAL YEAR ENDED JUNE 30, 1997 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1996
REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $38.6 million in fiscal 1997 from $11.8 million in fiscal 1996, an
increase of 227%. Most of the increase resulted from the addition of eight new
schools, with student enrollment increasing 218% to 7,150 for the 1996-1997
school year from 2,250 for the 1995-1996 school year.
DIRECT SITE EXPENSES. Our direct site expenses increased to $32.2 million
in fiscal 1997 from $11.4 million in fiscal 1996, an increase of 182%. This
$20.8 million increase was primarily attributable to the larger student
enrollment discussed above. Personnel costs included in direct site expenses
increased to $24.0 million for fiscal 1997 from $7.8 million for fiscal 1996.
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GROSS SITE MARGIN AND CONTRIBUTION. Our gross site margin increased to
16.6% in fiscal 1997 from 3.0% in fiscal 1996, and gross site contribution
increased to $6.4 million in fiscal 1997 from $358,000 in fiscal 1996.
CURRICULUM, ADMINISTRATION AND DEVELOPMENT EXPENSES. Our curriculum,
administration and development expenses increased to $12.8 million in fiscal
1997 from $7.7 million in fiscal 1996, an increase of 66.2%. The increase
reflected additional curriculum and administrative staff and expanding business
and financial services to support the new and growing operations and increased
marketing expenses. As a percentage of total revenue, curriculum, administration
and development expenses declined from 65.6% in fiscal 1996 to 33.1% in fiscal
1997.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $3.6 million in fiscal 1997 from $1.2 million in fiscal 1996, an increase of
200%. The increased depreciation and amortization resulted from additional
capital expenditures for our curriculum, computers and related technology and
facility improvements made in connection with the eight new schools opened in
the 1996-1997 school year. For fiscal 1997, additions to property and equipment
totaled $9.1 million, including $4.8 million for additional computers and
equipment, $1.4 million for curriculum materials and $2.9 million for new
facilities and improvements.
PRE-OPENING EXPENSES. Our pre-opening expenses remained unchanged for
fiscal 1997 from fiscal 1996.
LOSS FROM OPERATIONS. Our loss from operations increased to $11.4 million
for fiscal 1997 from $10.0 million for fiscal 1996, an increase of 14.0%.
OTHER INCOME AND EXPENSE. Other expense, net increased to $137,000 for
fiscal 1997 from $102,000 for fiscal 1996. Interest income increased to $391,000
for fiscal 1997 from $85,000 for fiscal 1996. Interest expense increased to
$527,000 for fiscal 1997 from $147,000 for fiscal 1996.
NET LOSS. Our net loss increased to $11.5 million for fiscal 1997 from
$10.1 million for fiscal 1996, an increase of 14.0%.
LIQUIDITY AND CAPITAL RESOURCES
We have operated, and expect to continue to operate, 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 March 31, 1999, we
had raised approximately $161 million of equity capital. In June 1999, we closed
on $29.3 million of new equity capital and issued 4,757,476 shares of preferred
stock, and in July 1999 an additional $41.7 million was contributed in exchange
for 6,787,238 shares of preferred stock. We have also utilized debt and
equipment leasing arrangements to finance computers and other technology
investments in our schools.
At March 31, 1999, our cash available for operations was approximately $7.7
million. We do not have a line of credit.
We expect that our available cash, together with the net proceeds of this
offering, will be sufficient to meet our anticipated cash needs for at least the
next 12 months. However, until we are able to achieve positive cash flow from
operations, we will continue to be dependent upon additional funds from
additional equity or debt financings. Depending on the terms available, such
funding may be dilutive to existing stockholders and we cannot be certain that
we will be able to obtain additional financing on favorable terms, if at all.
CASH USED IN OPERATING ACTIVITIES
For the nine months ended March 31, 1999, we used approximately $11.8
million for operating activities. This use primarily resulted from $20.7 million
of net loss, a $1.6 million increase in accounts receivable and a $234,000
increase in other current assets consisting mostly of prepaid rents. These
amounts were somewhat offset by depreciation and amortization totaling $8.5
million and an increase of
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$1.2 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. This use primarily resulted from $22.0 million of net loss
partially offset by current assets increase of approximately $422,000 and
depreciation and amortization totalling $7.2 million.
CASH USED IN INVESTING ACTIVITIES
For the nine months ended March 31, 1999, we used approximately $26.7
million in investing activities. During that period, we invested approximately
$22.8 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 to some of our charter board clients funds to help obtain,
renovate and complete school facilities. The amounts advanced during the nine
months ended March 31, 1999 approximated $15.0 million. 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 period.
The proceeds of the sales approximated $10.5 million and resulted in an
aggregate gain to us of approximately $51,000. For the nine months ended March
31, 1998, we used approximately $17.2 million in investing activities. These
investments were primarily for technology and equipment for our schools.
CASH FROM FINANCING ACTIVITIES
For the nine months ended March 31, 1999, we received approximately $38.7
million in our financing activities. The amounts received were from equity
contributions received during the period. In December 1997, we received a
commitment to purchase approximately $51.0 million, net of expenses, of
preferred stock. The first payment on the equity commitment was made in December
1997 with the remaining portion contributed during the nine months ended March
31, 1999. Additionally, stockholder notes payable totaling $1.6 million were
issued in connection with this equity financing, of which approximately $938,000
was issued during the nine months ended March 31, 1999. The amounts received
pursuant to the equity commitments were partially offset by payments on debt of
approximately $4.5 million. Cash generated from financing activities for the
nine months ended March 31, 1998 of $27.1 million was primarily from the
issuance of stock and debt totalling $29.5 million, net of issuance expenses,
partially offset by debt repayments of $2.4 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. Through the nine months ended March 31,
1999, an additional $8.9 million was financed through notes payable for
computers and other technology.
PHILANTHROPY
Philanthropic entities have supported seven of our 51 schools, focused
particularly in those areas where the per-pupil expenditures would otherwise
make it difficult to achieve satisfactory financial performance. Our initial
investments to open our six California schools were supported by philanthropic
entities, which made available to the school districts the amounts to cover the
cost of the items necessary to open the schools, including technology and
curriculum materials. In two of these schools, the philanthropic support also
includes funds for ongoing annual operations. In one other location, the support
helped fund the capital improvements to the buildings. Additionally,
philanthropic support has been used in Colorado to help fund a school building
and related renovations and construction. A philanthropic organization that has
supported some of our schools in California has indicated that it intends to
provide support up to $22.5 million primarily for California schools operated by
us, of which $4.6 million has been used to date and $3.3 million is expected to
be used for the 1999-2000 school year. Although some of our school district and
charter board clients have used philanthropic funds in the past and we expect
some of
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them to use philanthropic funds in the future, we do not rely on philanthropic
support significantly for our growth strategy. 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 with
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 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. 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 March 31,
1999, we had no direct obligations for charter school facility financings but
had guarantees and other contingent liabilities totaling $4.9 million related to
the school facilities.
INVESTMENT IN APEX ONLINE LEARNING INC.
In July 1999, we acquired an 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 controlling 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 a 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, which is currently 16.5%, 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.
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;
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<PAGE> 39
- INVENTORY: conducting a complete inventory of internal business systems
and their relative priority to continuing business operations. In
addition, this phase includes a complete inventory of critical vendors,
suppliers and service providers and their year 2000 compliance status;
- ASSESSMENT: assessing our internal business systems and the year 2000
compliance status of our important vendors, suppliers and service
providers;
- PLANNING: preparing the individual project plans and project teams and
other required internal and external resources to implement the solutions
for year 2000 compliance;
- EXECUTION: implementing the solutions and fixes; and
- VALIDATION: testing the solutions for year 2000 compliance.
Our year 2000 plan will apply to our internal business systems and compliance by
external customers and providers.
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 few legacy applications that will
need to be evaluated for year 2000 compliance.
We completed the organizational awareness, inventory and assessment phases
for substantially all critical internal business systems in the first quarter of
calendar 1999. We expect that the planning phase will be complete by August 1999
and the execution and validation phases will be completed by 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 $250,000 and will not have a material effect on our financial
position.
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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. National polls rank the quality
of K-12 public education, a $350 billion sector of the U.S. economy in the
1997-1998 school year, 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, serving 23,900 students in 51 schools across the
country in the 1998-1999 school year. This growth has been fueled by the
demonstrated success of our schools, as measured by significant improvements in
student academic performance, high levels of parental satisfaction and waiting
lists in many schools.
Our total revenue has grown from $11.8 million in fiscal 1996 to $96.0
million for the nine months ended March 31, 1999. We expect to operate 77
schools in the 1999-2000 school year, which would bring the number of students
we serve to approximately 37,000.
Our model offers public school authorities, who face widespread concern
about disappointing student achievement, the benefits of a large private sector
company with national scale. We believe those benefits include:
- the ability to create, implement and support a superior educational model
through focused research and development;
- the ability, through greater efficiencies, to drive a greater percentage
of educational expenditures to the classroom; and
- increased emphasis on accountability for achieving improved academic
performance.
These benefits contribute to an enhanced educational experience that has
proven attractive to public school authorities, parents and teachers alike.
Elements of that experience include:
- a rich and challenging curriculum based on clear standards and high
expectations for all students;
- a significantly longer school day and year;
- an enriched technology program characterized by computers 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 substantial levels of training, an explicit career ladder and a school
management structure that empowers teachers to participate in the
leadership of the school;
- a national support system focused on improving student achievement;
- early exposure to foreign language; 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 10 former public
school system superintendents.
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INDUSTRY BACKGROUND
OVERVIEW
The United States spent an estimated $580 billion on education in the
1997-1998 school year. This represents over 7% of the U.S. gross domestic
product, and makes education one of the largest sectors in the U.S. economy. Of
these expenditures, an estimated $350 billion was spent on K-12 education,
nearly double the inflation-adjusted level of spending for the 1987-1988 school
year. 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. In the United States, more is spent per pupil on
education than most other developed countries, but by the end of 12th grade,
U.S. student performance on standardized tests was among the lowest. For
example, in the Third International Mathematics and Science Study conducted in
1995, American twelfth-graders ranked 16th in science and 19th in mathematics
among 21 countries.
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. Most school districts are
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
national 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. 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
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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, specified
entities, such as the state board of education or a state university, are
authorized to grant a charter to a community group or non-profit entity
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. Currently, there
are over 1,200 charter schools in operation, with an estimated enrollment
of over 250,000 students in 27 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.
- 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, Florida has adopted legislation authorizing
a voucher program, and several states have legislation pending on voucher
programs. 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. During the 1998-1999 school
year, we operated 35 contract schools with a total enrollment of 16,900 students
and 16 charter schools with a total enrollment of 7,000 students. Of these
contract schools, 11 are operated under charters granted by school districts. 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 tested, research-backed curriculum and school design that we believe
yields superior academic results; 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.
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 retain local control of public
education while at the same time enjoying the resources, systems, continuity of
focus and commitment to ongoing research and development associated with a
national private sector company.
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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 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 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
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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. We
also administer our own annual assessments, 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 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.
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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. 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
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.
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
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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 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 an efficient and reliable delivery to each Edison school. To help
achieve this goal, beginning with the 1999-2000 school
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year, we are requiring each of our vendors to ship most orders to a central
warehouse where all curriculum will be repackaged into classroom boxes organized
by grade level and subject area and then reshipped to each school.
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
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
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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
During the 1998-1999 school year, we operated 51 schools in 11 states and
24 cities with a combined student enrollment of 23,900. We anticipate operating
77 schools for the 1999-2000 school year, which would increase our combined
student enrollment to approximately 37,000. We operate two types of schools:
contract and charter. In the case of most charter schools, we are required to
arrange for a facility. In some cases, however, we operate charter schools under
a charter granted by the local school board, which provides the facility. In
these cases, we categorize and count these schools as contract schools because
the economics of the arrangement more nearly resemble those of a contract
school. We 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.
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The following table provides information about the schools we operated for
the 1998-1999 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>
Battle Creek School
District Battle Creek, Michigan 2 1998 K-6 Contract 5 yrs June 2003
Boston Renaissance
Charter School Boston, Massachusetts 3 1995 K-9 Charter 5 yrs June 2000
Chula Vista Elementary
School District Chula Vista, California 1 1997 K-5 Contract* 5 yrs June 2002
Colorado Springs School
District Colorado Springs, Colorado 2 1996 K-7 Contract* 5 yrs June 2001
Academy School District Colorado Springs, Colorado 1 1998 K-6 Contract 5 yrs June 2003
Denver-Edison Charter
School Denver, Colorado 1 1998 K-6 Charter 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
Duluth Public Schools Duluth, Minnesota 3 1997 K-9 Contract* 3 yrs June 2000
Ravenswood City School
District East Palo Alto, California 2 1998 K-8 Contract* 5 yrs January 2003
Flint School District Flint, Michigan 3 1997 K-7 Contract 5 yrs June 2002
Wayne County Public
Schools Goldsboro, North Carolina 1 1998 K-4 Contract 5 yrs June 2003
Board of Area
Cooperative Ed
Services Hamden, Connecticut 1 1998 K-4 Contract 5 yrs June 2003
Mid-Michigan Public
School Academy Lansing, Michigan 3 1996 K-9 Charter 5 yrs June 2001
Dade County Public
Schools Miami, Florida 1 1996 K-5 Contract 5 yrs June 2001
Minneapolis School
District No. 1 Minneapolis, Minnesota 1 1998 K-5 Contract 5 yrs June 2003
Mt. Clemens School
District Mt. Clemens, Michigan 4 1995 K-11 Contract 5 yrs June 2000
Napa Unified School
District Napa, California 1 1998 K-6 Contract* 5 yrs June 2003
Board of Education of
Pontiac Pontiac, Michigan 1 1998 K-6 Contract 5 yrs June 2003
Southwest School
District San Antonio, Texas 3 1997 K-6 Contract 5 yrs June 2002
San Francisco School
District San Francisco, California 1 1998 K-5 Contract* 5 yrs June 2003
Sherman School District Sherman, Texas 2 1995 K-6 Contract 5 yrs June 2000
Granville Public Charter
School Trenton, New Jersey 1 1998 K-5 Charter 2 yrs June 2000
Friendship Public
Charter School Washington, D.C. 2 1998 K-5 Charter 5 yrs June 2003
West Covina School
District West Covina, California 1 1998 K-5 Contract* 5 yrs June 2003
Wichita School District
No. 259 Wichita, Kansas 4 1995 K-8 Contract 5 yrs June 2000
Seven Hills Charter
School Worcester, Massachusetts 2 1996 K-8 Charter 5 yrs June 2001
--
Total 51
==
</TABLE>
- ---------------
* Indicates charter schools operated under a charter granted by the local school
board.
GROWTH STRATEGY
We believe the approximately 1,800 medium and large independent school
districts nationwide, which we estimate collectively had operating budgets of
$190 billion in the 1998-1999 school year, represent a significant growth
opportunity. Our strategy is to grow within this market through the
establishment of expanded relationships with existing clients as well as new
relationships. Illustrating the magnitude of the overall market opportunity, we
estimate that just one percentage point market share nationwide within our
market of large and medium size school districts would represent approximately
$1.9 billion in annual revenue, based upon expenditures for the 1998-1999 school
year.
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<PAGE> 51
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. Furthermore, we expect our demonstrated success at our
existing schools will encourage school districts and charter boards to enter
into management agreements providing for us to establish multiple schools either
in the first year or over time. We have opened additional schools for 12 of our
first 13 clients. We expect to operate 77 schools across the country for the
1999-2000 school year, which will bring the total number of students served to
over 37,000.
COMPETITIVE STRENGTHS
We believe that the following factors will contribute to our continued
success and future growth:
- QUANTIFIABLE ACADEMIC IMPROVEMENT. Student achievement in our schools
has been substantial, as measured by a range of external assessments. On
average, in those schools that we have operated long enough to generate
trend data, our students have gained 5 percentage points per year against
state and national standards.
- PARENTAL SATISFACTION. Our schools enjoy high parental satisfaction.
According to a Gordon S. Black Corporation survey commissioned by us for
the 1997-1998 school year, in 20 of our schools, over 80% of the parents
of our students gave our schools grades from A to B, with over 50% giving
an A or A-. Parental satisfaction with our schools is also reflected in
the general pattern of oversubscription and the waiting lists to enter
many of our schools.
- 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 key districts. We have successfully opened
additional schools for 12 of our first 13 clients. By focusing on
expanding operations in existing markets, we believe we can better
capitalize on our relationships with the district, our knowledge of the
specific market and economies of scale in the provision of centralized
services.
- EXPERIENCED MANAGEMENT TEAM. We have an experienced 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 a noted author and
speaker on education. Our management team also has 10 former school
system
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<PAGE> 52
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 proven 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 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 nearly 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, the average annual improvement
in student achievement, taking into consideration gains, losses and instances of
no change, has been five percentage points on both national norm-referenced
tests and state criterion-referenced tests. These results compare favorably to
the only available national measure of achievement trends, known as the National
Assessment of Education 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 strictly comparable, all of the tests
attempt to measure essentially the same academic skills.
RELATIONSHIP WITH APEX ONLINE LEARNING INC.
In July 1999, we invested $5.0 million 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
controlling 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
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<PAGE> 53
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.
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;
- 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.
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.
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<PAGE> 54
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
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
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<PAGE> 55
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.
- 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.
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<PAGE> 56
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 a three-step program for ensuring
security at our schools. First, we are engaging 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. 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
Our 35 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 35 contract schools, 11 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. For
more information on the importance of facilities to our business, see "Risk
Factors -- We could underestimate the real estate costs associated with
acquiring or renovating a charter school, causing us to lose money, and we could
become liable for the financial obligations of charter boards." 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. For more information on our facility
financing arrangements, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Charter School Facility Financings" and
"-- Philanthropy."
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, The Leona
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<PAGE> 57
Group, National Heritage Academy and SABIS Educational Systems. In addition,
there are at least two companies that operate private schools with plans for
charter schools. The TesseracT Group is currently managing one charter school
and has been awarded several more charters. Nobel Learning Communities was
recently awarded its first charter to operate a school in Pennsylvania. In
addition, other private school operators, post-secondary education providers or
child care providers could possibly enter our market. For example, Bright
Horizons Family Solutions, a provider of corporate sponsored child care, just
opened its first private school and it or other child care providers could seek
opportunities in the charter or contract schools market as well.
LEGAL PROCEEDINGS
We are involved in various legal proceedings from time to time incidental
to the conduct of our business. We currently believe that any ultimate liability
arising out of such proceedings will not have a material adverse effect on our
financial condition or results of operations.
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<PAGE> 58
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of July 15, 1999 are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
H. Christopher Whittle.................... 51 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......................... 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......................... 48 Chief Information Officer and Executive
Vice President
Cheryl H. Wilhoyte, Ph.D.................. 53 Executive Vice President
Virginia G. Bonker(1)..................... 35 Director
John W. Childs(2)......................... 57 Director
Charles J. Delaney........................ 49 Director
Robert Finzi(2)........................... 45 Director
John B. Fullerton(1)...................... 39 Director
Janet A. Hickey(1)........................ 54 Director
Klas Hillstrom(1)......................... 32 Director
Bert E. Kolde............................. 55 Director
Jeffrey T. Leeds(2)....................... 43 Director
Brian P. Mathis........................... 33 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.
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
Yale University from 1986 to 1992. He is also a former Dean of the Columbia
University School of Law.
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
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<PAGE> 59
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. A senior
fellow at the Brookings Institution since 1984, Mr. Chubb has also taught at
Stanford University, Princeton University and Johns Hopkins University, and
served as an adviser, consultant, and speaker for the White House and for
several state governments, public and private school systems, and nonprofit
organizations. He has written and edited numerous books and articles on
education.
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.
Cheryl H. Wilhoyte has served as Executive Vice President since May 1998.
From 1992 to May 1998, she served as the Superintendent of the Madison,
Wisconsin public schools.
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.
Charles J. Delaney has served as a director since July 1999. Mr. Delaney
has served as President of UBS Capital LLC since 1989. 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-
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<PAGE> 60
owned subsidiary of Donaldson, Lufkin & Jenrette Inc. Mr. Finzi serves on the
Boards of Directors of Interdent, Inc. and Phase Metrics Inc.
John B. Fullerton has served as a director since January 1998. He has been
a managing director at J.P. Morgan Capital Corporation since 1991, and an
investment officer in Morgan Capital Corporation, the firm's merchant banking
arm, since January 1997.
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.
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 E. Kolde has served as a director since July 1999. Mr. Kolde has
served as Vice President of Vulcan Ventures Incorporated since 1994. Mr. Kolde
serves on the Boards of Directors of Asymetrix Learning Systems, Inc.,
Beyond.com Corporation, CyberSource Corporation and MetaCreations Corporation.
Jeffrey T. Leeds has served as a director since November 1996. He has been
a principal of Leeds Associates L.L.C., a private investment firm, since April
1999. He has also been a principal of Advance Capital Management L.L.C., a
private investment firm, since November 1995, and has served as President of
Leeds Group Inc., an investment banking firm, since January 1993. Mr. Leeds
serves on the Board of Directors of Elsinore Corporation.
Brian P. Mathis has served as a director since July 1999. Mr. Mathis has
served as a Vice President of J.P. Morgan Capital Corporation since January 1999
and was an associate with J.P. Morgan Securities Inc. from August 1995 to
January 1999. From 1993 to August 1995, Mr. Mathis held various positions in the
U.S. Treasury Department.
See "Related Party Transactions" and "Principal Stockholders" for certain
information concerning the Edison's directors and executive officers.
ELECTION OF DIRECTORS
Beginning with the first annual meeting of stockholders occurring after the
closing of this offering, the number of directors on our board of directors will
be fixed at 11. 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.
Many of our current directors were elected to the board under rights held
by the various classes of our existing stock. These rights will terminate upon
completion of this offering. 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, Ms. Eshbaugh and Mr. Delaney 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
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<PAGE> 61
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. 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.
BOARD COMMITTEES
The Board of Directors has established a Compensation Committee and an
Audit Committee. 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, 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.
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<PAGE> 62
EXECUTIVE COMPENSATION
The table below sets forth, for the year ended June 30, 1999, the cash
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 $ -- $ --
President and Chief Executive Officer
Benno C. Schmidt, Jr.................................... 296,636 -- --
Chairman of the Board of Directors
Christopher D. Cerf..................................... 225,631 50,000 --
Chief Operating Officer and General Counsel
James L. Starr.......................................... 225,000 40,000 12,500(1)
Executive Vice President and Chief Financial Officer
John E. Chubb........................................... 225,000 40,000 --
Executive Vice President and Chief Education Officer
</TABLE>
- ---------------
(1) Represents payment made pursuant to a relocation arrangement.
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....... -- -- -- -- -- --
Benno C. Schmidt............. -- -- -- -- -- --
Christopher D. Cerf(4).......
James L. Starr(5)............
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
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<PAGE> 63
or projection of the future trading prices of our class A common stock.
There can be no assurance that the actual stock price appreciation over the
ten-year option term will be at the assumed 5% and 10% levels or at any
other defined level. Actual gains, if any, on stock option exercises are
dependent on numerous factors, including our future performance, overall
market conditions and the option holder's continued employment with us
throughout the entire vesting period and the option term, which factors are
not reflected in this table. The potential realizable value is calculated by
multiplying the fair market value per share of the class A common stock on
the date of grant as determined by the board of directors, which is equal to
the exercise price per share, by the stated annual appreciation rate
compounded annually for the option term, subtracting the exercise price per
share from the product, and multiplying the remainder by the number of
shares underlying the option granted.
(4) This option vests over ten years, subject to acceleration.
(5) This option is fully vested.
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)...............
Benno C. Schmidt, Jr. ..................
Christopher D. Cerf.....................
James L. Starr..........................
John E. Chubb...........................
</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 $ per share, as determined by the Board of Directors, less
the aggregate exercise price.
EMPLOYMENT AGREEMENTS
Edison and H. Christopher Whittle entered into an agreement in March 1997,
which was later amended in December 1997 and July 1999, in which we agreed to
employ Mr. Whittle until July 2004, with an annual base salary of $276,000 and
subject to annual increases of 8% or more for successful achievement of our
fiscal year business plan. Mr. Whittle's salary for fiscal 1999 was $296,636.
Under this agreement, beginning in fiscal year 1998, Mr. Whittle became eligible
to receive an annual bonus of up to 50% of his current base salary. We also
agreed to maintain long-term disability insurance and term life insurance in the
amount of $800,000 for Mr. Whittle's benefit. If we terminate Mr. Whittle's
employment without cause or if Mr. Whittle terminates his employment for "good
reason," all of Mr. Whittle's unvested options will vest and Mr. Whittle will
receive as severance pay his then current base salary for two years following
the effective date of his termination and also the bonus he earned from the
prior fiscal year. 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
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<PAGE> 64
entitled to receive his then current base salary for twelve months following the
effective date of his termination less any amount he earns as a result of new
employment. Under this agreement, "good reason" is defined as Mr. Whittle's
assignment to materially less significant duties, our failure to reappoint Mr.
Whittle to his then current position or our failure to perform our material
obligations under this agreement. Mr. Whittle has agreed not to compete against
us during the term of his employment and for one year thereafter.
Edison and Benno C. Schmidt, Jr. entered into an agreement in March 1997,
which was later amended in December 1997, in which we agreed to employ Mr.
Schmidt until June 2000, with an annual base salary of $255,000 and subject to
annual increases of 8% or more for successful achievement of our fiscal year
business plan. Mr. Schmidt's salary for fiscal 1999 was $296,636. In fiscal
1997, Mr. Schmidt was eligible to receive an annual bonus of up to one-third of
his base salary and, beginning in fiscal 1998, Mr. Schmidt became eligible to
receive an annual bonus of up to 50% of his current base salary. We also agreed
to maintain term life insurance in the amount of $5.0 million for Mr. Schmidt's
benefit. Mr. Schmidt's termination provisions in this agreement are the same as
Mr. Whittle's described above, except we have also agreed to pay Mr. Schmidt a
lump sum of $2.5 million if he is terminated for any reason except death, though
this amount may be used to offset any outstanding balance on two loans we have
made to Mr. Schmidt. We also agreed to purchase from Mr. Schmidt the minimum
amount of Edison stock necessary to provide Mr. Schmidt with enough money to pay
the taxes associated with the lump sum payment. We will be unable to claim a
deduction for a portion of this lump sum if we pay the lump sum to Mr. Schmidt
in connection with the termination of his employment due to a change in control
of Edison. For more information on our loans to Mr. Schmidt, see "Related Party
Transactions -- Loans to Executive." Mr. Schmidt has agreed not to compete
against us during the term of his employment and for one year thereafter.
Edison and Christopher D. Cerf entered into an agreement in June 1997,
which was amended in July 1999, in which we agreed to employ Mr. Cerf until June
2000, 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 $222,165. 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
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<PAGE> 65
of termination. Mr. Chubb has agreed not to compete against us during his term
of employment and for one year thereafter.
BENEFIT PLANS
1998 SITE OPTION PLAN
Our 1998 Site Option Plan provided for the grant of incentive stock options
intended to qualify under Section 422 of the Internal Revenue Code of 1986 and
nonstatutory stock options. Options under this plan could be granted to all
persons who were performing services at an Edison school and were considered our
employees. As of June 30, 1999, options to purchase shares of
class A common stock and 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 shares of class A common stock and 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 shares of class A
common stock and 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 August 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 shares
of class A common stock under this plan. We are not authorized to issue class B
common stock under this plan. No options or other awards have been granted under
this plan.
401(k) PLAN
We have an employee savings and retirement plan qualified under Section 401
of the Internal Revenue Code and covering all of our employees. Pursuant to the
401(k) plan, employees may elect to reduce their current compensation by up to
the statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) plan. We may make matching or additional contributions
to the 401(k) plan in our discretion. Participants become fully vested in our
matching contribution after one year. We contributed to the 401(k) plan
approximately $9,000 in fiscal 1996, $19,000 in fiscal 1997 and $29,000 in
fiscal 1998.
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RELATED PARTY TRANSACTIONS
LOANS TO EXECUTIVE
Mr. Schmidt borrowed $1.6 million from us on June 5, 1992 and $200,000 from
us on January 23, 1996, as evidenced by promissory notes. The promissory notes,
as amended in March 1997, bear interest at an annual compound rate of 5.83%. The
loans are secured by a life insurance policy on Mr. Schmidt. All principal and
accrued interest payable under the notes is due on the earlier of February 15,
2000 or the termination of Mr. Schmidt's employment with us. 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 $2.1 million and $300,000,
respectively, as of March 31, 1999. Mr. Schmidt is our Chairman of the Board of
Directors. Prior to the March 1997 amendment, we forgave accrued interest of
$100,000 annually on the loans beginning on July 1, 1995 and ending on the date
of the amendment.
MANAGEMENT AGREEMENT WITH WSI INC.
On March 15, 1995, we entered into a five-year management agreement with
WSI Inc., one of our stockholders, 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. 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 and $65,123 in
fiscal 1998. Pursuant to this agreement, WSI was also granted options to
purchase 850,000 shares of series A common stock at an exercise price of $10.00
per share and 1,000,000 shares of series A common stock at an exercise price of
$20.00 per share. See "-- Option Amendments" below for a discussion of
subsequent amendments to these options. Mr. Whittle, our President and Chief
Executive Officer and one of our directors, is also the President and sole
stockholder of WSI.
OPTION AMENDMENTS
In June 1999, we amended 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 SERIES A COMMON
NAME GRANT DATE PER SHARE STOCK PURCHASABLE
---- ---------- ------------ -----------------
<S> <C> <C> <C>
H. Christopher Whittle...................... 3-1-97 $1.50 600,000
12-15-97 1.50 850,000
Benno C. Schmidt, Jr. ...................... 3-15-95 1.25 1,237,110
12-15-97 1.50 250,000
Christopher D. Cerf......................... 6-15-97 1.50 325,000
James L. Starr.............................. 4-20-98 4.00 275,000
John E. Chubb............................... 3-15-95 1.25 360,820
Laura K. Eshbaugh........................... 5-15-98 1.25 70,000
5-15-98 4.00 200,000
Michael Finnerty............................ 3-15-95 1.25 412,370
Deborah M. McGriff.......................... 3-15-95 1.25 82,530
5-5-98 4.00 118,000
Manuel Rivera............................... 3-15-95 1.25 154,640
12-15-97 1.50 145,360
Cheryl H. Wilhoyte.......................... 5-15-98 3.98 125,000
</TABLE>
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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 $8.00 per share and (3) Mr. Cerf's option was vested as to 71% of
the shares.
In July 1999, we amended the 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>
SERIES A
COMMON VESTING
OPTION STOCK EXERCISE ------------------------------------------------------------
GRANT DATE PURCHASABLE PRICE CURRENT AMENDED
- ---------- ----------- -------- ---------------------------- ----------------------------
<C> <C> <C> <S> <C>
3-95 850,000 $10.00 100% 100%
3-95 1,000,000 20.00 90% 90%
12-97 1,500,000 8.00 10 years, subject to 10 years, subject to
acceleration if shares trade acceleration upon IPO or
at $16 change in control
12-97 2,500,000 16.00 10 years, subject to 10 years, subject to
acceleration if shares trade acceleration if shares trade
at $32 at $25
12-97 2,800,000 28.00 10 years, subject to 10 years, subject to
acceleration if shares trade acceleration if shares trade
at $45 at $35
</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.
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 600,000 shares at $1.50 per share and his December 1997 option to
purchase 850,000 shares at $1.50 per share and to pay any related income tax
obligations. We currently estimate the aggregate loan obligation would be
approximately $5.6 million. These loans would bear interest at the prime rate in
effect from time to time and would become due in full on the fifth anniversary
of the loans.
Upon completion of this offering, each option to purchase series A common
stock will convert into an option to purchase shares of class A common
stock and shares of class B common stock.
ASSUMPTION OF PUT OBLIGATION OF EXECUTIVE
In May 1994, in connection with a financing transaction by Edison, Mr.
Whittle personally agreed to purchase from a third party on May 31, 2004, at the
election of the third party, a partnership interest in WPA Investment L.P., one
of our stockholders. The partnership interest currently represents an indirect
interest in approximately shares of class A common stock and
shares of class B common stock and the agreed-upon purchase price is
$11.4 million. In July 1999, our board of directors approved in concept our
assumption of this contingent obligation on Mr. Whittle's behalf.
INVESTMENT IN APEX ONLINE LEARNING INC.
In July 1999, we invested $5.0 million in APEX Online Learning Inc. 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 controlling stockholder of APEX. Mr. Kolde, one of our
directors, serves as Vice President of Vulcan Ventures Incorporated as well as
Chairman of the Board of Directors of APEX. For more information on our
investment in APEX Online Learning Inc., see "Risk
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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. In addition, 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 is the general partner of WEG L.P. and WEG II L.P. 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.
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 shares of class A common
stock and 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>
Mr. Whittle, our President, Chief Executive Officer and a director, is the
President and sole stockholder of WSI Inc., which 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 an equity investment in two installments, one of
series A convertible preferred stock on November 18, 1996 for a purchase price
of $1.50 per share and one of series C convertible exchangeable preferred stock
on May 1, 1997 for a purchase price of $2.90 per share. As part of this
transaction, WEG III L.P. purchased 1,010,101 shares of series B convertible
exchangeable preferred stock for $1.65 per share on February 28, 1997.
We also issued 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 for $1.50 per share. The shares of series C convertible exchangeable
66
<PAGE> 69
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 were issued on December
18, 1997 for no additional consideration. Upon completion of this offering, each
share of series B common stock, series C common stock, series D common stock,
series E common stock, series F common stock, series A convertible preferred
stock, series B convertible exchangeable preferred stock and series C
convertible exchangeable preferred stock will convert into shares of
class A common stock and shares of class B common stock.
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. Whittle, our President, Chief Executive Officer and a
director, and Mr. Leeds, one of our directors, share control 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., 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>
DECEMBER 1997 FINANCING. In December 1997, August 1998 and December 1998,
we issued units at a price of $3.98 per unit to certain of our existing
stockholders and several new investors. Each unit consisted of 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 shares of class A common stock and shares of class B
common stock, and each option to purchase series A common stock will convert
into an option to purchase shares of class A common stock and
shares of class B common stock.
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<PAGE> 70
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, LLC.... 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., the general partner of WEG IV L.P.
Mr. Fullerton and Mr. Mathis, our directors, are officers with 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, LLC.... 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 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., the general partner of WEG V L.P.
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, LLC.... 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 Company LLC.......... 150,561 2,889 2,889 4,334 17,196
</TABLE>
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-
68
<PAGE> 71
voting series G convertible preferred stock and series I common stock will
convert into shares of class A common stock and shares of class B
common stock.
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., the general partner of WEG VI L.P.
and WEG VII L.P. Mr. Delaney, one of our directors, is President of UBS Capital
LLC, which is the managing member of UBS Capital XV LLC. Mr. Whittle, our
President, Chief Executive Officer and a director, and Mr. Leeds, one of our
directors, share control of 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. Whittle and Mr. Leeds, one of our directors, share control
of Leeds III L.P.
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 continue to be on terms no less
favorable to us than could be obtained from unaffiliated third parties.
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<PAGE> 72
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership
of our common stock as of July 15, 1999 by:
- each person who owns beneficially more than 5% of the outstanding shares
of our common stock;
- each director and each executive officer named in the Summary
Compensation Table; and
- all of our directors and executive officers as a group.
Unless otherwise indicated below, to our knowledge, all persons named in
the table have sole voting and investment power with respect to their shares of
common stock, except to the extent authority is shared by spouses under
applicable law.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. The number of shares beneficially owned by a
person includes shares of common stock subject to options held by that person
that are currently exercisable or exercisable within 60 days of July 15, 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>
Entities associated with the Sprout
Group(2)..............................
277 Park Avenue, New York, NY 10172
Investor Investments AB(3)..............
320 Park Avenue, New York, NY 10022
J.P. Morgan Investment Corporation(4)...
60 Wall Street, New York, NY 10260
J.W. Childs Investments, L.L.C. ........
1 Federal Street, Boston, MA 02110
D2F2 Foundation(5)......................
268 Bush Street, PMB No. 4209,
San Francisco, CA 94104
Richmont Leeds Education Company,
LLC(6)................................
660 Madison Avenue, New York, NY
10021
WSI Inc.(7).............................
800 South Gay St., Knoxville, TN 37929
UBS Capital XV L.L.C. ..................
299 Park Avenue, New York, NY 10710
Vulcan Ventures Incorporated............
110 110th Avenue N.E.
Bellevue, WA 98004
Benno C. Schmidt, Jr.(8)................
H. Christopher Whittle(9)...............
John E. Chubb(10).......................
Christopher D. Cerf(11).................
James L. Starr(12)......................
Laura Eshbaugh(13)......................
Virginia G. Bonker(14)..................
John W. Childs(15)......................
Charles J. Delaney(16)..................
Robert Finzi(17)........................
John B. Fullerton(18)...................
Janet A. Hickey(19).....................
(continued on the following page)
</TABLE>
70
<PAGE> 73
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES PERCENTAGE OF SHARES
BENEFICIALLY OWNED BENEFICIALLY OWNED
SHARES BENEFICIALLY OWNED PRIOR TO THE OFFERING AFTER THE OFFERING
------------------------- --------------------- ---------------------
NAME AND ADDRESS OF BENEFICIAL OWNER(1) A SHARES B SHARES A SHARES B SHARES A SHARES B SHARES
- --------------------------------------- ----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Klas Hillstrom(20)......................
Bert E. Kolde(21).......................
Jeffrey T. Leeds(22)....................
Brian P. Mathis(23).....................
All executive officers and directors as
a group (20 persons)(24)..............
</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 shares of class A common stock and shares of
class B common stock held of record by DLJ Capital Corporation,
shares of class A common stock and shares of class B common stock
held of record by Sprout Capital VI, L.P., shares of class A
common stock and shares of class B common stock held of record by
Sprout Capital VII, L.P. and shares of class A common stock and
shares of class B common stock held of record by Sprout CEO Fund,
L.P. Of these shares, shares of class A common stock and
shares of class B common stock are subject to a voting trust
agreement and are held and voted by an independent third party,
, as voting trustee.
(3) Includes shares of class A common stock and shares of
class B common stock issuable upon exercise of options that will be
exercisable within 60 days of July 15, 1999.
(4) Includes shares of class A common stock and shares of
class B common stock held of record by Sixty Wall Street SBIC Fund, L.P.,
shares of class A common stock and shares of class B
common stock issuable upon exercise of an option that will be exercisable
within 60 days of July 15, 1999 and shares of class A common stock and
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 July 15, 1999. Does not include
shares of class A common stock and shares of class B
common stock pledged to Morgan Guaranty Trust Company of New York, a
of J.P. Morgan Investment Corporation, by WSI Inc. See
Footnote 9.
(5) Consists of shares of class A common stock and shares
of class B common stock issuable upon exercise of a warrant within 60 days
of July 15, 1999.
(6) Includes shares of class A common stock and shares of
class B common stock held of record by Leeds II L.P., shares of
class A common stock and shares of class B common stock held of
record by Leeds III L.P. and shares of class A common stock and
shares of class B common stock issuable upon exercise of an
option that will be exercisable within 60 days of July 15, 1999.
(7) Includes shares of class A common stock and shares of
class B common stock held of record by WPA Investment L.P.,
shares of class A common stock and shares of class B common stock
held of record by WEG L.P., shares of class A common stock and
shares of class B common stock held of record by WEG II L.P.,
shares of class A common stock and shares of class B
common stock held of record by WEG III L.P., shares of class A
common stock and shares of class B common stock held of record by
WEG IV L.P., shares of class A common stock and shares
of class B common stock held of record by WEG V L.P., shares of
class A common stock and shares of class B common stock held of
record by WEG VI L.P., shares of class A common stock and
shares of class B common stock held of record by WEG VII L.P.,
shares of class A common stock and shares of class B common stock
held of record by Richmont Leeds Education Company LLC, shares of
class A common stock and shares of class B common stock held of
record by Leeds II L.P.,
71
<PAGE> 74
shares of class A common stock and shares of class B common stock
held of record by Leeds III L.P., shares of class A common stock
and shares of class B common stock issuable upon exercise of
options that will be exercisable within 60 days of July 15, 1999,
shares of class A common stock and 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 July 15, 1999, shares of class A
common stock and 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 July 15, 1999, shares of class A common stock and
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
July 15, 1999 and shares of class A common stock and
shares of class B common stock issuable upon exercise of options held of
record by Richmont Leeds Education Company LLC that will be exercisable
within 60 days of July 15, 1999.
(8) Includes shares of class A common stock and 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 shares of class A common stock and shares of
class B common stock issuable upon exercise of options that will be
exercisable within 60 days of July 15, 1999. Does not include shares
of class A common stock and shares of class B common stock held
of record by Elizabeth H. Schmidt, shares of class A common stock
and shares of class B common stock held of record by Benno C.
Schmidt, III, shares of class A common stock and shares of
class B common stock held of record by John R. W. Schmidt, shares of
class A common stock and shares of class B common stock held of
record by Asher J. Liftin, shares of class A common stock and
shares of class B common stock held of record by Anne B.
McMillen,
shares of class A common stock and shares of class B common stock
held of record by Tess Lusher, shares of class A common stock and
shares of class B common stock held of record by Harold S.H.
Edgar and shares of class A common stock and shares of class
B common stock held of record by Alexandra L. McMillen.
(9) Consists of shares of class A common stock and shares
of class B common stock held of record by WSI Inc., shares of
class A common stock and shares of class B common stock held of
record by WPA Investment L.P., shares of class A common stock and
shares of class B common stock held of record by WEG L.P.,
shares of class A common stock and shares of class B
common stock held of record by WEG II L.P., shares of class A
common stock and shares of class B common stock held of record by
WEG III L.P., shares of class A common stock and shares
of class B common stock held of record by WEG IV L.P., shares of
class A common stock and shares of class B common stock held of
record by WEG V L.P., shares of class A common stock and
shares of class B common stock held of record by WEG VI L.P.,
shares of class A common stock and shares of class B
common stock held of record by WEG VII L.P., shares of class A
common stock and shares of class B common stock held of record by
Richmont Leeds Education Company LLC, shares of class A common
stock and shares of class B common stock held of record by Leeds
II L.P., shares of class A common stock and shares of
class B common stock held of record by Leeds III L.P., shares of
class A common stock and shares of class B common stock issuable
upon exercise of options that will be exercisable within 60 days of July
15, 1999, shares of class A common stock and 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 July 15, 1999,
shares of class A common stock and 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 July 15, 1999,
shares of class A common stock and 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 July 15, 1999 and shares of class A
common stock and shares of class B common stock issuable upon
exercise of options held of record by Richmont Leeds Education Company LLC
that will be exercisable within
72
<PAGE> 75
60 days of July 15, 1999. WSI Inc has pledged of its shares
of class A common stock and shares of class B common stock to
Morgan Guaranty Company of New York to secure personal obligations of Mr.
Whittle.
(10) Consists of shares of class A common stock and shares
of class B common stock issuable upon exercise of options that will be
exercisable within 60 days of July 15, 1999.
(11) Consists of shares of class A common stock and shares
of class B common stock issuable upon exercise of options that will be
exercisable within 60 days of July 15, 1999.
(12) Consists of shares of class A common stock and shares
of class B common stock issuable upon exercise of options that will be
exercisable within 60 days of July 15, 1999.
(13) Consists of shares of class A common stock and shares
of class B common stock issuable upon exercise of options that will be
exercisable within 60 days of July 15, 1999.
(14) Consists shares of class A common stock and shares of
class B common stock held of record by Blue Rock Capital, L.P.
(15) Includes shares of class A common stock and shares of
class B common stock held of record by J.W. Childs Investments, L.L.C.
(16) Consists of shares of class A common stock and shares
of class B common stock held of record by UBS Capital XV L.L.C.
(17) Consists of shares of class A common stock and shares of
class B common stock held of record by DLJ Capital Corporation,
shares of class A common stock and shares of class B common stock
held of record by Sprout Capital VI, L.P., shares of class A
common stock and shares of class B common stock held of record by
Sprout Capital VII, L.P. and shares of class A common stock and
shares of class B common stock held of record by Sprout CEO Fund,
L.P.
(18) Consists of shares of class A common stock and shares
of class B common stock held of record by J.P. Morgan Investment
Corporation, shares of class A common stock and shares
of class B common stock held of record by Sixty Wall Street SBIC Fund,
L.P., shares of class A common stock and 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 July 15, 1999 and shares of class A common stock and
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 July 15, 1999. Does not include
shares of class A common stock and shares of class B common stock
pledged to Morgan Guaranty Trust Company of New York, a of
J.P. Morgan Investment Corporation, by WSI Inc.
(19) Consists of shares of class A common stock and shares
of class B common stock held of record by DLJ Capital Corporation,
shares of class A common stock and shares of class B
common stock held of record by Sprout Capital VI, L.P., shares of
class A common stock and shares of class B common stock held of
record by Sprout Capital VII, L.P. and shares of class A common
stock and shares of class B common stock held of record by Sprout
CEO Fund, L.P.
(20) Consists of shares of class A common stock and shares
of class B common stock held of record by Investor Investments AB and
shares of class A common stock and 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 July 15, 1999.
(21) Consists of shares of class A common stock and shares
of class B common stock held of record by Vulcan Ventures Incorporated.
(22) Consists of shares of class A common stock and shares
of class B common stock held of record by Richmont Leeds Education Company,
L.L.C., shares class A common stock and shares of class
B common stock held of record by Leeds II L. P., shares of class
A common stock and shares of class B common stock held of record
by Leeds III L.P. and shares of class A common stock and
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 July 15, 1999.
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<PAGE> 76
(23) Consists of shares of class A common stock and shares
of class B common stock held of record by J.P. Morgan Investment
Corporation, shares of class A common stock and shares
of class B common stock held of record by Sixty Wall Street SBIC Fund,
L.P., shares of class A common stock and 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 July 15, 1999 and shares of class A common stock and
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 July 15, 1999. Does not include
shares of class A common stock and shares of class B common stock
pledged to Morgan Guaranty Trust Company of New York, a of
J.P. Morgan Investment Corporation, by WSI Inc.
(24) See footnotes 2 through 23 above.
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<PAGE> 77
DESCRIPTION OF CAPITAL STOCK
On the closing of this offering, our authorized capital stock will consist
of shares of class A common stock, $.01 par value per share,
shares of class B common stock, $.01 par value per share, and
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 after the closing of this offering,
filed as exhibits to the Registration Statement of which this prospectus is a
part.
COMMON STOCK
As of June 30, 1999, assuming the conversion of all outstanding shares of
our existing common stock and preferred stock into class A common stock and
class B common stock, there would have been shares of class A
common stock and shares of class B common stock outstanding held
of record by 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 shares of
class A common stock and 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
and estate-planning transfers and certain permitted pledges. 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
transfers securities valued at more than 51% of the economic value of the
transferring stockholder's aggregate securities holdings 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 and if the economic value of the transferring stockholder's
remaining securities, including shares purchasable upon exercise of options,
falls below $ . In addition, all remaining outstanding shares of
class B common stock will automatically convert into shares of class A common
stock on a one-for-one basis upon the earlier to occur of (1) the 12th
anniversary of the date of
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<PAGE> 78
this prospectus and (2) the date upon which fewer than 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 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
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<PAGE> 79
determine. These 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 AND OPTIONS
In March 1995, we issued an option to Dillon, Read & Co. Inc. which
currently represents the right to purchase up to shares of class A
common stock and shares of class B common stock at an exercise price
of $ 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
shares of class A common stock and shares of class B
common stock at a weighted average exercise price of $ 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 shares of class A common
stock and shares of class B common stock. Of these options, options to
purchase shares of class A common stock and shares of class
B common stock are currently exercisable, and options to purchase the remaining
shares of class A common stock and 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 shares of class A common
stock and shares of class B common stock. 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 shares of class A common
stock and 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 $16 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 shares of
class A common stock and shares of class B common stock at a
weighted average exercise price of $ 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 shares of class A
common stock and shares of class B common stock at an exercise price
of $ 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 shares
of class A common stock and shares of class B common stock at a
weighted average exercise price of $ per share. Each of these warrants
expires seven years after the date of issuance.
In July 1998, we issued a warrant to an equipment leasing firm which
currently represents the right to purchase up to shares of class A
common stock and shares of class B common stock at an exercise price
of $ per share. This warrant expires on July 16, 2003.
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<PAGE> 80
In November 1997, we issued a warrant to an equipment leasing firm. which
currently represents the right to purchase up to shares of class A
common stock and shares of class B common stock at an exercise price
of $ per share. The warrant expires on November 25, 2007.
In June 1998, we issued a warrant to a philanthropic foundation which
currently represents the right to purchase up to shares of class A
common stock and shares of class B common stock at an exercise price
of $ per share. This warrant expires on June 1, 2005.
DELAWARE LAW AND ANTI-TAKEOVER EFFECTS
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.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our amended and restated 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 Co.
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<PAGE> 81
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have shares of
class A common stock and shares of class B common stock outstanding
(assuming no exercise of outstanding options). Each share of class B common
stock is convertible at any time, at the option of the holder, into one share of
class A common stock. Each share of class B common stock shall convert
automatically into one share of class A common stock upon their transfer, with
limited exceptions for related party and estate planning transfers. Of these
shares, the 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.......................... Sold in offering or salable under
144(k) and not locked up
90 days................................... Shares salable under Rule 144 or
701 and not locked up
180 days.................................. Lockup released; shares salable
under Rule 144, 144(k) or 701
Thereafter................................ 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 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 June 30, 1999, approximately shares of class A common
stock and shares of class B common stock were issuable pursuant
to vested options or pursuant to other rights granted under our 1998 Site Option
Plan, 1999 Stock Option Plan, 1999 Key Stock Incentive Plan and 1999 Stock
Incentive Plan of which approximately shares of class A common
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stock and shares of 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
shares of class A common stock and shares of class B common stock
issuable under our 1998 Site Option Plan, 1999 Stock Option Plan, 1999 Key Stock
Incentive Plan and 1999 Stock Incentive Plan, including the
shares of class A common stock and shares of class B common stock
subject to outstanding options as of June 30, 1999. This registration statement
is expected to become effective upon filing.
LOCK-UP AGREEMENTS
Subject to certain exceptions, we and our executive officers, directors and
stockholders 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."
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 shares of class A and class B common stock 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 , 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 shares of our class A or class B
common stock, including shares of common stock issuable upon the exercise of
outstanding warrants, are entitled to notice of the registration and to include
shares of class A common stock in the registration at our expense. All of these
registration rights are subject to conditions and limitations, among them the
right of the underwriters to limit the number of shares included in the
registration. For more information on the lock-up agreements discussed above,
see "-- Lock-up Agreements."
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UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-U.S. HOLDERS
The following is a summary of certain United States federal income and
estate tax consequences of the ownership and disposition of our class A common
stock by non-U.S. holders. As used herein, "non-U.S. holder" means any person or
entity that holds our class A common stock, other than:
- an individual citizen or resident of the United States;
- a corporation created or organized in or under the laws of the United
States, or of any state of the United States or the District of Columbia;
or
- a partnership, trust or estate treated, for United States federal income
tax purposes, as a domestic partnership, trust or estate.
This summary is based on provisions of the U.S. Internal Revenue Code of
1986, as amended, existing, temporary and proposed United States Treasury
regulations promulgated thereunder and administrative and judicial
interpretations of each, all as of the date hereof and all of which are subject
to change, possibly on a retroactive basis.
This summary is for general information only. The tax treatment of a
particular non-U.S. holder may vary depending on the holder's particular
situation. In addition, this summary does not include any description of the tax
laws of any state, local or non-U.S. government that may be applicable to a
particular non-U.S. holder.
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS WITH
RESPECT TO THE PARTICULAR U.S. FEDERAL INCOME AND ESTATE TAX CONSEQUENCES TO
THEM OF THE OWNERSHIP AND DISPOSITION OF OUR CLASS A COMMON STOCK, AS WELL AS
THE TAX CONSEQUENCES UNDER STATE, LOCAL, NON-U.S. AND OTHER U.S. FEDERAL INCOME
TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN TAX LAWS.
INCOME TAX
DIVIDENDS
Generally, dividends paid on our class A common stock to a non-U.S. holder
will be subject to U.S. federal income tax. Except for dividends that are
effectively connected with a non-U.S. holder's conduct of a trade or business
within the United States, this tax is imposed and collected by withholding at
the rate of 30% of the amount of the dividend, unless reduced by an applicable
income tax treaty. Currently, dividends paid to an address in a country other
then the United States are presumed to be paid to a resident of that country in
determining whether a non-U.S. holder can benefit from a reduced withholding tax
rate pursuant to a tax treaty.
However, under United States Treasury regulations applicable to dividend
and other payments made after December 31, 2000, a non-U.S. holder who is the
beneficial owner (within the meaning of the regulations) of dividends paid on
our common stock and who wishes to claim the benefit of an applicable treaty is
generally required to satisfy certification and documentation requirements,
including (in certain cases) the need to make recertifications for periods after
December 31, 2000. Special rules apply to claims for treaty benefits made by
non-U.S. persons that are entities rather than individuals and to beneficial
owners (within the meaning of the regulations) of dividends paid to entities in
which the beneficial owners are interest holders.
Except as may be otherwise provided in an applicable income tax treaty,
dividends paid on our class A common stock to a non-U.S. holder that are
effectively connected with the holder's conduct of a trade or business within
the United States are subject to tax at ordinary U.S. federal income tax rates.
This tax is not collected by withholding (except as described below under
"-- Backup Withholding and Information Reporting"). All or part of any
effectively connected dividends received by a non-U.S. corporation may also,
under certain circumstances, be subject to an additional branch profits tax
which will be imposed at a 30% rate or, possibly, a reduced rate under an
applicable income tax treaty. A non-U.S. holder who wishes to claim an exemption
from withholding for effectively connected dividends is generally required to
satisfy certain certification and documentation requirements.
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A non-U.S. holder that is eligible for a reduced rate of U.S. withholding
tax pursuant to a tax treaty may obtain a refund of any excess amounts withheld
by filing an appropriate claim for refund with the Internal Revenue Service.
DISPOSITION OF OUR CLASS A COMMON STOCK
Generally, non-U.S. holders will not be subject to U.S. federal income tax
(or withholding thereof) in respect of gain recognized on a disposition of our
class A common stock unless:
(i) the gain is effectively connected with the holder's conduct of a trade
or business within the United States (in which case the branch profits
tax described above may also apply if the holder is a non-U.S.
corporation);
(ii) in the case of a holder who is a non-resident alien individual and
holds our class A common stock as a capital asset, the holder is
present in the United States for 183 or more days in the taxable year
of the sale and other conditions are met;
(iii) we are or have been a "United States real property holding
corporation" for the U.S. federal income tax purposes (which we do
not believe we are or have been and do not expect to become in the
future) and certain other conditions are met; or
(iv) the holder is subject to tax pursuant to United States federal income
tax provisions applicable to certain United States expatriates.
ESTATE TAX
If an individual non-U.S. holder owns, or is treated as owning, our class A
common stock at the time of his or her death, such stock would be includable in
the individual's gross estate for U.S. federal estate tax purposes and may be
subject to U.S. federal estate tax imposed on the estates of nonresident aliens,
in the absence of a contrary provision contained in an applicable tax treaty.
BACKUP WITHHOLDING AND INFORMATION REPORTING
DIVIDENDS
Under current law, dividends paid on our class A common stock to a non-U.S.
holder at an address outside the United States are generally exempt from backup
withholding tax and U.S. information reporting requirements (but not from
regular withholding tax as discussed above). Under the Treasury regulations that
are applicable to dividends paid after December 31, 2000, a non-U.S. person must
generally provide proper documentation indicating the person's non-U.S. status
to a withholding agent in order to avoid backup withholding tax; however,
dividends paid to certain exempt recipients (not including individuals) will not
be subject to backup withholding even if documentation is not provided if the
withholding agent is allowed to rely on presumptions concerning the recipient's
non-U.S. status (including payment to an address outside the United States).
BROKER SALES
Payments of proceeds from the sale of our class A common stock by a
non-U.S. holder made to or through a U.S. office of a broker are generally
subject to both information reporting and backup withholding at a rate of 31%
unless the holder certifies its non-U.S. status under penalties of perjury or
otherwise establishes entitlement to an exemption. Payments of proceeds from the
sale of our class A common stock by a non-U.S. holder made to or through a
non-U.S. office of a broker generally will not be subject to information
reporting or backup withholding. However, payments made to or through certain
non-U.S. offices, including the non-U.S. offices of a U.S. broker, are generally
subject to information reporting (but not backup withholding) unless the holder
certifies its non-U.S. status under penalties or perjury or otherwise
establishes entitlement to an exemption.
A non-U.S. holder may obtain a refund of any excess amounts withheld under
the backup withholding rules by filing an appropriate claim for refund with the
I.R.S.
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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 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..........................................
</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 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 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.
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
additional shares of class A common stock at
83
<PAGE> 86
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 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. 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..................................
Proceeds, before expenses, to Edison...................
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ million and are payable by Edison.
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 and certain other conditions. The underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
RESERVED SHARES
At Edison's request, the underwriters have reserved for sale, at the
initial public offering price, up to of the shares offered hereby
for employees, directors and other persons with relationships with Edison who
have expressed an interest in purchasing shares of class A common stock in the
offering. The number of shares of class A common stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered in this
prospectus.
NO SALES OF CLASS A COMMON STOCK OR SIMILAR SECURITIES
Edison and Edison's executive officers and directors and all existing
stockholders have agreed, subject to certain exceptions, 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 the
person executing the agreement or with respect to which the person
executing the agreement thereafter acquires 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,
84
<PAGE> 87
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."
NASDAQ NATIONAL MARKET LISTING
Application has been made to list the class A common stock on the Nasdaq
National Market under the trading symbol "EDSN."
Prior to the offering, there has been no public market for Edison's class A
common stock. The initial public offering price will be determined through
negotiations between Edison and the representatives and the lead managers. The
factors to be considered in determining the initial public offering price, in
addition to prevailing market conditions, are:
- price-earnings ratio of publicly traded companies that the
representatives and the lead managers believe to be comparable to Edison;
- certain financial information of Edison;
- the history of, and the prospects for, Edison and the industry in which
it competes; and
- an assessment of (1) Edison's management, (2) its past and present
operations, (3) the prospects for, and timing of, future revenue of
Edison, (4) the present state of Edison's developments and (5) the above
factors in relation to market values and various valuation measures of
other companies engaged in activities similar to Edison.
There can be no assurance that an active trading market will develop for
the class A common stock or that the class A common stock will trade in the
public market subsequent to the offering at or above the initial public offering
price.
The underwriters do not expect sales of the class A common stock to any
accounts over which they exercise discretionary authority to exceed 5% of the
number of shares being offered hereby. The underwriters will not confirm sales
of the class A common stock to any account over which they exercise
discretionary authority without the prior written specific approval of the
customer.
INTERSYNDICATE AGREEMENT
The U.S. underwriters and the international managers have entered into an
intersyndicate agreement that provides for the coordination of their activities.
Pursuant to the intersyndicate agreement, the U.S. underwriters and the
international managers are permitted to sell shares of class A common stock to
each other for purposes of resale at the initial public offering price, less an
amount not greater than the selling 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
85
<PAGE> 88
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 representatives and lead managers, respectively, may also impose a
penalty bid on certain underwriters and selling group members. This means that
if the representatives and lead managers, respectively, purchase shares of 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, they may reclaim the amount
of the selling concession from the underwriters and selling group members who
sold those shares.
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 shares of the outstanding class A common
stock and shares of the outstanding class B common stock, which represent
more than 10% of the outstanding class A and class B common stock. Of these
shares, shares of Class A common stock and shares of class B common
stock are subject to a voting trust agreement and are held and voted by an
independent third party, as voting trustee. For additional
information concerning the Sprout Entities' ownership of Edison's capital stock,
see "Related Party Transactions."
Because the Sprout Entities affiliated with Donaldson, Lufkin & Jenrette
Securities Corporation beneficially own more than 10% of the outstanding class A
and class B common stock, the offering will be conducted in accordance with
Conduct Rule 2720 of the National Association of Securities Dealers, Inc., which
requires that the public offering price of an equity security be no higher than
the price recommended by a Qualified Independent Underwriter which has
participated in the preparation of the Registration Statement and performed its
usual standard of due diligence with respect thereto. Merrill Lynch has agreed
to act as Qualified Independent Underwriter with respect to the U.S. offering
and the international offering, and the public offering price of the class A
common stock will be no higher than that recommended by Merrill Lynch. Edison
has agreed to indemnify Merrill Lynch in its capacity as Qualified Independent
Underwriter against certain liabilities including certain liabilities under the
Securities Act.
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.
See "Principal Stockholders" and "Related Party Transactions".
86
<PAGE> 89
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, 1997 and 1998 and for each of the
three years in the period ended June 30, 1998 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.
87
<PAGE> 90
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Consolidated Balance Sheets as of June 30, 1997, 1998 and
(unaudited) as of March 31, 1999.......................... F-3
Consolidated Statements of Operations for the years ended
June 30, 1996, 1997 and 1998 and (unaudited) for the nine
months ended March 31, 1998 and 1999...................... F-4
Consolidated Statements of Changes in Stockholders' Equity
for the years ended June 30, 1996, 1997 and 1998 and
(unaudited) for the nine months ended March 31, 1999...... F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 1996, 1997 and 1998 and (unaudited) for the nine
months ended March 31, 1998 and 1999...................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Edison Schools Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Edison Schools Inc. and subsidiaries (the "Company") at June 30, 1997 and
1998, and the results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, 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
October 5, 1998
F-2
<PAGE> 92
EDISON SCHOOLS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
---------------------------- MARCH 31,
1997 1998 1999
------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents..................... $ 15,741,360 $ 7,491,644 $ 7,701,719
Accounts receivable........................... 6,300,625 9,027,283 13,280,536
Notes and other receivables................... 5,080,675 712,325 4,897,860
Other current assets.......................... 370,912 816,164 1,050,324
------------ ------------ -------------
Total current assets.................. 27,493,572 18,047,416 26,930,439
Property and equipment, net..................... 17,855,692 31,642,444 36,062,118
Restricted cash................................. 472,000 3,972,000 2,431,171
Notes and other receivables, less current
portion....................................... 244,350 838,520 9,581,666
Other assets.................................... 165,295 1,434,487 3,151,507
------------ ------------ -------------
Total assets.......................... $ 46,230,909 $ 55,934,867 $ 78,156,901
============ ============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long term debt............. $ 2,388,044 $ 4,601,683 $ 6,549,630
Accounts payable.............................. 2,315,121 3,845,958 3,702,499
Accrued expenses.............................. 2,948,085 6,914,934 8,528,236
------------ ------------ -------------
Total current liabilities............. 7,651,250 15,362,575 18,780,365
Long term debt, less current portion............ 7,006,538 6,877,425 9,389,747
Stockholder notes payable....................... -- 5,672,155 6,610,594
Other liabilities............................... -- 1,191,864 526,127
------------ ------------ -------------
Total liabilities..................... 14,657,788 29,104,019 35,306,833
------------ ------------ -------------
Commitments and contingencies
Stockholders' equity:
Preferred stock:
Series A-E, par value $.01; 70,105,972
shares authorized; 36,505,671, 43,448,289
and 51,664,865 shares issued and
outstanding in 1997, 1998 and 1999,
respectively (aggregate liquidation
preference of $59,643,055, $85,219,974,
and $116,705,815 in 1997, 1998 and 1999,
respectively)............................ 365,057 712,177 1,564,189
Common stock:
Series A-H and non-voting common, par value
$.01; 99,468,096 shares authorized;
6,214,711 shares issued and outstanding
in 1997, 1998 and 1999................... 62,147 62,147 62,147
Additional paid-in capital.................... 102,877,265 120,575,885 157,983,248
Unearned stock-based compensation............. (120,429) (874,987) (2,399,842)
Accumulated deficit........................... (69,470,063) (91,503,518) (112,218,818)
Stockholder receivable........................ (2,140,856) (2,140,856) (2,140,856)
------------ ------------ -------------
Total stockholders' equity............ 31,573,121 26,830,848 42,850,068
------------ ------------ -------------
Total liabilities and stockholders'
equity.............................. $ 46,230,909 $ 55,934,867 $ 78,156,901
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 93
EDISON SCHOOLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------------------ ----------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue from educational services............. $ 11,772,704 $ 38,559,233 $ 69,406,841 $ 50,496,594 $ 95,971,094
------------ ------------ ------------ ------------ -------------
Education and operating expenses:
Direct site expenses........................ 11,415,075 32,149,738 59,576,224 43,690,395 81,910,839
Curriculum, administration and
development............................... 7,717,195 12,755,088 18,257,818 12,455,158 22,855,399
Depreciation and amortization............... 1,165,489 3,552,440 7,231,628 5,196,877 9,264,770
Preopening expenses......................... 1,476,303 1,486,740 2,485,813 1,743,890 3,451,746
Design team compensation.................... -- -- 2,723,902 2,723,902 --
------------ ------------ ------------ ------------ -------------
Total education and operating
expenses............................ 21,774,062 49,944,006 90,275,385 65,810,222 117,482,754
------------ ------------ ------------ ------------ -------------
Loss from operations.................. (10,001,358) (11,384,773) (20,868,544) (15,313,628) (21,511,660)
Other income (expense):
Interest income............................. 85,169 390,599 723,409 418,677 2,997,506
Interest expense............................ (147,042) (527,421) (1,761,821) (1,150,411) (2,149,883)
(Loss) gain on disposal of property and
equipment................................. (40,388) -- (126,499) (360) (51,263)
------------ ------------ ------------ ------------ -------------
Total other........................... (102,261) (136,822) (1,164,911) (732,094) 796,360
------------ ------------ ------------ ------------ -------------
Net loss...................................... $(10,103,619) $(11,521,595) $(22,033,455) $(16,045,722) $ (20,715,300)
============ ============ ============ ============ =============
Net loss attributable to common stockholders:
Net loss.................................... $(10,103,619) $(11,521,595) $(22,033,455) $(16,045,722) $ (20,715,300)
Dividends declared on preferred stock....... -- -- (4,290,200) (4,290,200) --
Preferred stock accretion................... -- -- (277,694) (208,271) (769,846)
------------ ------------ ------------ ------------ -------------
Net loss attributable to common
stockholders........................ $(10,103,619) $(11,521,595) $(26,601,349) $(20,544,193) $ (21,485,146)
============ ============ ============ ============ =============
Per common share data:
Basic and diluted net loss per share........ $ (1.63) $ (1.85) $ (4.28) $ (3.31) $ (3.46)
============ ============ ============ ============ =============
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share................ 6,214,709 6,214,709 6,214,711 6,214,711 6,214,711
============ ============ ============ ============ =============
Pro forma per share data:
Pro forma basic and diluted net loss per
share..................................... $ (0.47) $ (0.38)
============ =============
Pro forma weighted average shares
outstanding used in computing basic and
diluted net loss per share................ 46,410,431 54,612,761
============ =============
</TABLE>
F-4
<PAGE> 94
EDISON SCHOOLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1996, 1997 AND 1998 AND (UNAUDITED) FOR THE NINE
MONTHS ENDED MARCH 31, 1999
<TABLE>
<CAPTION>
PREFERRED STOCK
-----------------------------------------------------------------
SERIES A SERIES B SERIES C
PARTNERS' --------------------- ------------------- -------------------
CONTRIBUTIONS SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------- ---------- -------- --------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1995................. $55,231,094
Partner contributions -- Edison Project
LP,
net.................................... 16,645,976
Issuance of stockholder note
receivable.............................
Interest on stockholder note
receivable.............................
Net loss for the year ended June 30,
1996...................................
----------- ---------- -------- --------- ------- --------- -------
Balances, June 30, 1996................. 71,877,070
Partner contributions -- Edison Project
LP..................................... 1,224,965
Effect of reorganization................ (73,102,035) 21,149,993 $211,500
Issuance of Series A, B and C preferred
stock, net............................. 9,144,442 91,445 1,010,101 $10,101 5,201,135 $52,011
Deferred compensation related to stock
options................................
Stock-based compensation................
Interest on stockholder note
receivable.............................
Net loss for the year ended June 30,
1997...................................
----------- ---------- -------- --------- ------- --------- -------
Balances, June 30, 1997................. 0 30,294,435 302,945 1,010,101 10,101 5,201,135 52,011
Issuance of Series D preferred stock,
net....................................
Issuance of stock warrants..............
Issuance of Series C preferred stock as
purchase price adjustment.............. 1,057,473 10,575
Deferred compensation related to stock
options................................
Stock-based compensation................
Dividends declared......................
Accretion of Series D preferred PIK
dividend...............................
Net loss for the year ended June 30,
1998...................................
----------- ---------- -------- --------- ------- --------- -------
Balances, June 30, 1998................. 0 30,294,435 302,945 1,010,101 10,101 6,258,608 62,586
Issuance of Series D preferred stock,
net (unaudited)........................
Deferred compensation related to stock
options
(unaudited)............................
Stock-based compensation (unaudited)....
Accretion of Series D preferred PIK
dividend (unaudited)...................
Net loss for the nine months ended March
31, 1999 (unaudited)...................
----------- ---------- -------- --------- ------- --------- -------
Balances, March 31, 1999 (unaudited).... $ 0 30,294,435 $302,945 1,010,101 $10,101 6,258,608 $62,586
=========== ========== ======== ========= ======= ========= =======
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------- ---------------------------------------
SERIES D SERIES A SERIES B-H ADDITIONAL
----------------------- ------------------- ----------------- PAID IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
---------- ---------- --------- ------- ------ -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1995.................
Partner contributions -- Edison Project
LP,
net....................................
Issuance of stockholder note
receivable.............................
Interest on stockholder note
receivable.............................
Net loss for the year ended June 30,
1996...................................
---------- ---------- --------- ------- --- -------- ------------
Balances, June 30, 1996.................
Partner contributions -- Edison Project
LP.....................................
Effect of reorganization................ 6,214,704 $62,147 5 $ 0 $ 72,828,388
Issuance of Series A, B and C preferred
stock, net............................. 29,883,106
Deferred compensation related to stock
options................................ 165,771
Stock-based compensation................
Interest on stockholder note
receivable.............................
Net loss for the year ended June 30,
1997...................................
---------- ---------- --------- ------- --- -------- ------------
Balances, June 30, 1997................. 6,214,704 62,147 5 0 102,877,265
Issuance of Series D preferred stock,
net.................................... 5,885,145 $ 58,851 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
Stock-based compensation................
Dividends declared...................... (5,000,000)
Accretion of Series D preferred PIK
dividend............................... 277,694 (277,694)
Net loss for the year ended June 30,
1998...................................
---------- ---------- --------- ------- --- -------- ------------
Balances, June 30, 1998................. 5,885,145 336,545 6,214,704 62,147 7 0 120,575,885
Issuance of Series D preferred stock,
net (unaudited)........................ 8,216,576 82,166 31,681,398
Deferred compensation related to stock
options
(unaudited)............................ 6,495,811
Stock-based compensation (unaudited)....
Accretion of Series D preferred PIK
dividend (unaudited)................... 769,846 (769,846)
Net loss for the nine months ended March
31, 1999 (unaudited)...................
---------- ---------- --------- ------- --- -------- ------------
Balances, March 31, 1999 (unaudited).... 14,101,721 $1,188,557 6,214,704 $62,147 7 $ 0 $157,983,248
========== ========== ========= ======= === ======== ============
<CAPTION>
UNEARNED
STOCK-BASED ACCUMULATED STOCKHOLDER
COMPENSATION DEFICIT RECEIVABLE TOTAL
------------ ------------- ----------- -----------
<S> <C> <C> <C> <C>
Balances, June 30, 1995................. $ (47,844,849) $(1,911,878) $ 5,474,367
Partner contributions -- Edison Project
LP,
net.................................... 16,645,976
Issuance of stockholder note
receivable............................. (200,000) (200,000)
Interest on stockholder note
receivable............................. (10,378) (10,378)
Net loss for the year ended June 30,
1996................................... (10,103,619) (10,103,619)
------------ ------------- ----------- -----------
Balances, June 30, 1996................. (57,948,468) (2,122,256) 11,806,346
Partner contributions -- Edison Project
LP..................................... 1,224,965
Effect of reorganization................ --
Issuance of Series A, B and C preferred
stock, net............................. 30,036,663
Deferred compensation related to stock
options................................ (165,771) --
Stock-based compensation................ 45,342 45,342
Interest on stockholder note
receivable............................. (18,600) (18,600)
Net loss for the year ended June 30,
1997................................... (11,521,595) (11,521,595)
------------ ------------- ----------- -----------
Balances, June 30, 1997................. (120,429) (69,470,063) (2,140,856) 31,573,121
Issuance of Series D preferred stock,
net.................................... 19,206,622
Issuance of stock warrants.............. 2,500,000
Issuance of Series C preferred stock as
purchase price adjustment.............. --
Deferred compensation related to stock
options................................ (1,339,118) --
Stock-based compensation................ 584,560 584,560
Dividends declared...................... (5,000,000)
Accretion of Series D preferred PIK
dividend...............................
Net loss for the year ended June 30,
1998................................... (22,033,455) (22,033,455)
------------ ------------- ----------- -----------
Balances, June 30, 1998................. (874,987) (91,503,518) (2,140,856) 26,830,848
Issuance of Series D preferred stock,
net (unaudited)........................ 31,763,564
Deferred compensation related to stock
options
(unaudited)............................ (6,495,811) --
Stock-based compensation (unaudited).... 4,970,956 4,970,956
Accretion of Series D preferred PIK
dividend (unaudited)................... --
Net loss for the nine months ended March
31, 1999 (unaudited)................... (20,715,300) (20,715,300)
------------ ------------- ----------- -----------
Balances, March 31, 1999 (unaudited).... (2,399,842) $(112,218,818) $(2,140,856) $42,850,068
============ ============= =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 95
EDISON SCHOOLS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED JUNE 30, ENDED MARCH 31,
------------------------------------------ ---------------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss..................................... $(10,103,619) $(11,521,595) $(22,033,455) $(16,045,722) $(20,715,300)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property
and equipment............................ 1,165,489 3,552,440 7,231,628 5,196,877 8,483,630
Stock-based compensation................... -- 45,342 584,560 438,420 4,970,956
Amortization of discount................... -- -- -- -- (883,731)
Loss (gain) on disposition of property and
equipment................................ 40,388 -- 126,500 360 51,263
Issuance of note receivable in lieu of
interest income.......................... (10,378) (18,600) -- -- --
Changes in operating assets and
liabilities:
Accounts receivable...................... (1,221,534) (5,079,091) (2,726,658) (5,711,574) (1,576,577)
Other current assets..................... (50,706) (334,238) (422,429) 247,967 (234,160)
Accounts payable and accrued expenses.... 1,964,164 2,414,428 5,497,686... 2,583,602 (1,206,833)
Other liabilities........................ -- -- 1,191,864 1,988,165 (665,737)
------------ ------------ ------------ ------------ ------------
Cash used in operating activities...... (8,216,196) (10,941,314) (10,550,304) (11,301,905) (11,776,489)
------------ ------------ ------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment.......... (4,970,071) (9,090,450) (21,180,550) (19,192,875) (22,797,645)
Proceeds from disposition of property and
equipment, net............................. 23,073 -- 35,670 5,109 10,537,786
Proceeds from notes receivable and advances
due from charter schools................... -- -- -- 3,522,238 156,563
Notes receivable and advances due from
charter schools............................ -- (3,858,238) 2,331,667 (163,000) (15,011,742)
Other assets................................. (8,507) (81,762) (1,269,192) (1,323,042) 398,502
------------ ------------ ------------ ------------ ------------
Cash used in investing activities...... (4,955,505) (13,030,450) (20,082,405) (17,151,570) (26,716,536)
------------ ------------ ------------ ------------ ------------
Cash flows from financing activities:
Proceeds from partner contributions.......... 11,667,000 7,557,965 -- -- --
Proceeds from issuance of stock and
warrants................................... -- 30,466,663 25,251,971 22,751,971 31,763,564
Costs in connection with equity financing.... (1,354,024) (430,000) (3,545,349) (3,525,347) --
Proceeds from stockholder notes payable...... -- -- 672,155 672,155 938,439
Proceeds from notes payable.................. 1,698,095 -- 10,797,304 9,580,367 8,938,711
Payment on notes payable and capital
leases..................................... (359,238) (1,313,145) (7,293,088) (2,396,969) (4,478,443)
Increase in note receivable due from
stockholder................................ (200,000) -- -- -- --
Restricted cash.............................. 2,913,169 (472,000) (3,500,000) -- 1,540,829
------------ ------------ ------------ ------------ ------------
Cash provided by financing
activities........................... 14,365,002 35,809,483 22,382,993 27,082,177 38,703,100
------------ ------------ ------------ ------------ ------------
Increase (decrease) in cash and cash
equivalents.................................. 1,193,301 11,837,719 (8,249,716) (1,371,298) 210,075
Cash and cash equivalents at beginning of
period....................................... 2,710,340 3,903,641 15,741,360 15,741,360 7,491,644
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period..... $ 3,903,641 $ 15,741,360 $ 7,491,644 $ 14,370,062 $ 7,701,719
============ ============ ============ ============ ============
Supplemental disclosure of cash flow
information:
Cash paid during the periods for:
Interest..................................... $ 178,977 $ 527,421 $ 1,761,821 $ 1,051,389 $ 1,817,760
------------ ------------ ------------ ------------ ------------
Supplemental disclosure of non-cash investing
and financing activities:
Capital contribution receivable credited to
partners' contributions.................... $ 6,333,000
------------
Dividends declared and settled with notes in
lieu of cash to stockholders............... $ 5,000,000 $ 5,000,000
------------ ------------
Capitalized obligations incurred............. $ 1,486,494 $ 6,462,686
------------ ------------
Amounts due from bank under note payable
incurred................................... $ 1,419,690
------------
Accretion of Series D preferred PIK
dividend................................... $ 277,694 $ 208,271 $ 769,846
------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 96
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information pertaining to the interim financial statements as of March 31, 1999
and for the nine months ended March 31, 1998 and 1999 are unaudited)
1. DESCRIPTION OF BUSINESS:
Edison Schools Inc., formerly known as The Edison Project Inc. and
subsidiaries (the "Company") manages elementary and secondary public schools
under contracts with school districts and charter schools located in 13 states.
The Company opened its first four schools in the fall of 1995, and, as of March
31, 1999, operated 51 schools with approximately 23,900 students.
At each school it manages, the Company provides the education program,
recruits and manages school personnel, and maintains and operates the school
facilities. The Company also assists charter school clients 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
this 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of its two subsidiaries. All intercompany balances and transactions have been
eliminated in consolidation.
INTERIM BASIS OF PRESENTATION
The interim financial statements as of March 31, 1999 and for the nine
months ended March 31, 1998 and 1999 are unaudited and reflect adjustments,
consisting only of normal recurring accruals, which are, in the opinion of the
Company's management, necessary for a fair presentation of the financial
position and results of operations for the periods presented. Operating results
for any interim period are not necessarily indicative of the results for the
full year.
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, the Company minimizes the 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).
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. To date no such impairment has
F-7
<PAGE> 97
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
been indicated. 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 fair value of the asset. Fair value is determined
primarily using the anticipated cash flows, discounted at a rate commensurate
with the risk involved.
RESTRICTED CASH
Restricted cash consists of cash held in escrow in compliance with certain
debt agreements, credit issued for the benefit of certain technology suppliers
and certain amounts restricted for use in the start-up of future Edison schools.
REVENUE RECOGNITION
The Company recognizes revenue for each school ratably as earned over the
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 No. 20 "Accounting Changes"
("APB No. 20"), and retroactively expensed all start-up costs that had
previously been deferred.
UNAMORTIZED DISCOUNT
Unamortized discount is amortized on the interest method over the term of
the non-interest bearing note receivable (see Note 3).
STOCK-BASED EMPLOYEE COMPENSATION
For financial reporting purposes, the Company accounts for stock-based
compensation in accordance with the intrinsic value method of accounting
prescribed by Accounting Principles Board No. 25 ("APB No. 25"). 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. However, the fair value of options
granted to non-employees 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 No. 123 ("SFAS No. 123")
in accounting for stock-based compensation, have been included in Note 10.
F-8
<PAGE> 98
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996, 1997 and 1998 and (unaudited) for the
nine months ended March 31, 1998 and 1999 amounted to approximately $110,000,
$113,000, $265,000, $140,000 and $347,000, 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, 1998.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS No. 128").
SFAS No. 128 replaced primary and fully diluted earnings per share with basic
and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effect of options, warrants and
convertible securities. Diluted earnings per share is very similar to fully
diluted earnings per share. Basic earnings per share is computed using the
weighted-average number of common shares outstanding during the period. Diluted
earnings per share is computed using the weighted-average number of common and
common stock equivalent shares outstanding during the period. Common stock
equivalent shares, such as convertible preferred stock, stock options, and
warrants, have been excluded from the computation, as their effect is
antidilutive for all periods presented.
During the year ended June 30, 1996, although then a partnership, the
Company computed its earnings per share as if the Company was a corporation
under the ownership which existed on November 18, 1996.
The pro forma basic and diluted net loss per share is computed by dividing
the net loss by the sum of the weighted average number of shares of common stock
including the shares issued as a result of the assumed conversion of all
outstanding shares of convertible preferred stock.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include,
F-9
<PAGE> 99
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
among other things, useful lives, recoverability of equipment, deferred income
tax valuation allowance, certain medical accruals and expenses in connection
with stock options and warrants; actual results could differ from those
estimates.
SEGMENTS
The Company operates in one industry segment. Operations are only conducted
within the United States.
IMPACT OF THE ADOPTION OF RECENTLY ISSUED ACCOUNTING STANDARD
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133") 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.
RECLASSIFICATIONS
Certain reclassifications have been made to the financial statements to
conform with the current presentation.
3. NOTES AND OTHER RECEIVABLES:
Notes and other receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes receivable due from charter
schools(a).................................. $ 350,000 $1,526,571 $ 6,277,675
Advances due from charter schools(b).......... 3,508,238 -- 5,883,999
Unbilled reimbursable costs(c)................ -- -- 2,317,852
Amounts due from bank under note payable
incurred(d)................................. 1,419,690 -- --
Other receivables............................. 47,097 24,274 --
---------- ---------- -----------
5,325,025 1,550,845 14,479,526
Less, current portion......................... 5,080,675 712,325 4,897,860
---------- ---------- -----------
$ 244,350 $ 838,520 $ 9,581,666
========== ========== ===========
</TABLE>
- ---------------
(a) Notes receivable due from charter schools consist of non-interest bearing
notes with an aggregate face value of $839,093 and $7,227,259 at June 30,
1998 and (unaudited) at March 31, 1999, respectively, less unamortized
original issue discount of $1,680,887 (unaudited) at March 31, 1999.
Interest is imputed on the notes at 12% per annum. The notes mature at
various times in the future through the year 2002.
Notes receivable due from charter schools also consist of interest bearing
notes at 8.8% per annum. The notes amounted to $350,000, $687,478, and
$731,303 at June 30, 1997, 1998 and (unaudited) at March 31, 1999 and mature
at various times in the future through the year 2002.
F-10
<PAGE> 100
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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% and
regular amortization. The advances have been discounted at a rate of 12%
over an expected period of refinancing. The face value of the advances
(unaudited) at March 31, 1999 was $6,129,610, less unamortized discount of
$245,611.
(c) Unbilled reimbursable costs are due from a philanthropic foundation.
(d) Amounts due from bank under note payable incurred with a finance company.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
--------------------------- MARCH 31,
1997 1998 1999
----------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
Land and buildings........................ $ 2,500,000 $ 3,161,019 $ --
Leasehold improvements.................... 4,274,973 11,748,747 10,824,472
Furniture, fixtures and equipment......... 13,894,021 24,199,478 36,566,807
Educational software and textbooks........ 2,255,544 4,109,888 7,903,330
----------- ------------ ------------
22,924,538 43,219,132 55,294,609
Accumulated depreciation and
amortization............................ (5,068,846) (11,576,688) (19,232,491)
----------- ------------ ------------
Property and equipment, net.......... $17,855,692 $ 31,642,444 $ 36,062,118
=========== ============ ============
</TABLE>
Assets under capital leases at June 30, 1997 and 1998, and (unaudited) at
March 31, 1999 totaled $7,949,180, $5,449,180 and $5,449,180, respectively, and
related accumulated amortization totaled $1,419,286, $3,021,407, and $4,231,243,
respectively. Amortization expense for each of the three years ended June 30,
1996, 1997 and 1998 and (unaudited) for the nine months ended March 31, 1998 and
1999, related to assets under capital leases amounted to $319,000, $1,100,286,
$1,602,121, $1,201,591 and $1,209,836, respectively.
In March 1998, the Company purchased an office building in Trenton, New
Jersey for approximately $618,000 for use as a charter school building. In
September 1998, the Company began leasing the facility to the charter school for
which the Company provides services (see Note 15(b)).
In June 1998, the Company exercised an option to purchase for $2,500,000 a
school building in Detroit, Michigan, 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 realized a loss of approximately $79,000. At the closing, the Company
received approximately $4,400,000 in cash and a non-interest bearing
subordinated note approximating $1,900,000, which is due on June 30, 2002 (see
Note 3(a)).
F-11
<PAGE> 101
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Accrued payroll and benefits.................. $1,943,537 $4,801,481 $ 5,842,402
Accrued taxes other than income............... 1,004,548 932,633 1,624,380
Design team compensation payable.............. -- 796,300 796,300
Accrued other................................. -- 384,520 265,154
---------- ---------- -----------
$2,948,085 $6,914,934 $ 8,528,236
========== ========== ===========
</TABLE>
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------ MARCH 31,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Notes payable(a).............................. $2,676,683 $8,870,955 $14,618,195
Capital leases (Note 7)....................... 6,717,899 2,608,153 1,321,182
---------- ---------- -----------
9,394,582 11,479,108 15,939,377
Current portion............................... (2,388,044) (4,601,683) (6,549,630)
---------- ---------- -----------
Total long-term debt..................... $7,006,538 $6,877,425 $ 9,389,747
========== ========== ===========
</TABLE>
- ---------------
(a) Notes payable, at June 30, 1997 and 1998 and (unaudited) at March 31, 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 $20,000 to $260,000.
Certain notes also provide for a final installment of up to 15% of the
original principal amount. Interest rates range from 15.0% to 20.4%.
In connection with amounts currently outstanding under the notes payable
and capital lease agreements (see Note 7), as of June 30, 1997, the Company had
outstanding stock purchase warrants to lenders that provide for the purchase of
up to 670,133 shares of Series A common stock with prices ranging from $1.00 to
$2.00 per share. As of June 30, 1998, the Company had outstanding stock purchase
warrants to lenders that provide for the purchase of up to 1,151,762 shares of
Series A common stock at purchase prices ranging from $1.00 to $3.98 per share.
The stock purchase warrants are exercisable either 100% at the date of grant, or
50% at the date of grant and the remainder vest ratably over the next five
years. The stock purchase warrants expire at various times in the future.
During July 1998, the Company issued to a financial institution a warrant
to purchase 100,000 shares of Series A common stock at an exercise price of
$4.00 per share. The warrant was exercisable immediately on the date of grant.
The warrant expires on July 16, 2003. This warrant was issued in connection with
equipment financing.
The fair value of such stock purchase warrants at the date of issuance was
not considered material and, therefore, the Company has allocated all of the
proceeds from the related borrowings to the debt instruments.
F-12
<PAGE> 102
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company is subject to certain financial and reporting debt covenants,
the most restrictive of which at June 30, 1998 required maintenance of a
specified tangible net worth. The Company received waivers from each of two
lenders for non-compliance with certain covenants.
Aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Fiscal Year Ending June 30,
1999.................................................... $ 4,601,683
2000.................................................... 4,292,627
2001.................................................... 2,450,668
2002.................................................... 134,130
-----------
Total.............................................. $11,479,108
===========
</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 a
school site in Lansing, Michigan.
At June 30, 1998, 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>
Fiscal Year Ending June 30,
1999.................................................... $1,795,501 $1,085,825
2000.................................................... 989,523 1,023,507
2001.................................................... -- 639,875
2002.................................................... -- 625,198
2003.................................................... -- 586,575
Thereafter.............................................. -- 2,598,350
---------- ----------
Total commitments....................................... 2,785,024 $6,559,330
==========
Less amount representing interest....................... (176,871)
----------
Present value of minimum lease payments................. 2,608,153
Less current installments of capital lease obligation... (1,588,455)
----------
Capital lease obligations, excluding current
installments.......................................... $1,019,698
==========
</TABLE>
Total rental expense for each of the three years ended June 30, 1996, 1997
and 1998 and (unaudited) for the nine months ended March 31, 1998 and 1999
related to operating leases amounted to approximately $233,000, $524,000,
$1,652,000, $1,219,000 and $2,108,000, respectively.
8. RELATED PARTY TRANSACTIONS:
STOCKHOLDER RECEIVABLE
The stockholder receivable reflected as a reduction in stockholders' equity
consists of two notes from the Chairman of the Company. The note agreements, as
amended March 1, 1997, bear interest at 5.83%
F-13
<PAGE> 103
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
annually and are collateralized by a life insurance policy. The receivable is
due on the earlier of February 15, 2000, or the date on which employment of the
Chairman is terminated the Company.
Prior to the aforementioned amendment, accrued interest of $100,000
annually was forgiven by the Company beginning on July 1, 1995 through the date
of the amendment.
STOCKHOLDER 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 promissory notes to stockholders
dated December 30, 1997 for $611,025, January 28, 1998 for $61,130 and August
24, 1998 for $487,844.
The principal for each of the aforementioned notes is payable on the tenth
anniversary dates of each note. 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, and 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, 1996, 1997 and 1998 and
(unaudited) for the nine months ended March 31, 1998 and 1999 relating to the
management agreement amounted to $141,400, $867,619, $65,123, $48,288 and
$2,746, respectively.
The Chief Executive Officer of the Company is also the sole shareholder of
WSI.
9. COMMON AND PREFERRED STOCK:
PREFERRED STOCK
Preferred stock is as follows by series:
<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
----------
70,105,972
==========
</TABLE>
F-14
<PAGE> 104
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COMMON STOCK
Common Stock is as follows by series:
<TABLE>
<CAPTION>
AUTHORIZED PAR
DESCRIPTION SHARES VALUE
----------- ---------- -----
<S> <C> <C>
Series A Common Stock ("Series A Common")................... 92,708,669 $.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..................................... 6,759,420 $.01
----------
99,468,096
==========
</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 or
about December 11, 1997 and payable in the form of interest bearing notes (see
Note 8) on or about December 15, 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.
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. 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.
F-15
<PAGE> 105
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 vest
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. However, these options vest immediately upon a successful
initial public offering, as defined. 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.
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.
As of June 30, 1998, stock options issued and outstanding in conjunction
with the Series D preferred private placement entitled the holders to purchase
395,282 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. 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.
In August 1998, additional stock options were issued in conjunction with
the issuance of Series D Preferred units, which entitled the holders to purchase
286,878 shares of Series A Common.
F-16
<PAGE> 106
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. STOCK OPTIONS:
Employee Stock Options
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED STOCK WEIGHTED
AVERAGE OF OPTIONS AVERAGE OF
SHARES EXERCISE PRICES EXERCISABLE EXERCISE PRICE
---------- --------------- ----------- --------------
<S> <C> <C> <C> <C>
Under option at June 30, 1996.............. 3,194,419 $ 1.24 709,877 $1.22
Options granted in 1997.................... 945,000 $ 1.50
Options exercised in 1997.................. -- --
Options cancelled in 1997.................. (17,690) $ 1.25
---------- ---------
Under option at June 30, 1997.............. 4,121,729 $ 1.30 1,276,425 $1.25
--
Options granted in 1998.................... 9,566,220 $14.14
Options exercised in 1998.................. -- --
Options cancelled in 1998.................. (20,954) $ 1.25
---------- ---------
Under option at June 30, 1998.............. 13,666,995 $10.26 2,506,918 $1.28
Options granted in 1999.................... 166,291 $ 5.72
Options exercised in 1999..................
Options cancelled in 1999.................. (237,509) $ 1.71
---------- ---------
Under option at March 31, 1999
(unaudited).............................. 13,595,777 $10.53 3,210,316 $1.47
========== =========
</TABLE>
The following table summarizes information about stock options outstanding
at June 30, 1998:
<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..................... 6,866,995 2.9 $ 1.72 2,506,918 $1.22
$8.00 - $28.00.................... 6,800,000 3.8 $19.18 --
---------- ---------
13,666,995 2,506,918
========== =========
</TABLE>
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, 1996, 1997 and 1998 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,
------------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Net loss attributable to common stockholders -- as
reported......................................... $(10,103,619) $(11,521,595) $(26,601,349)
Net loss attributable to common stockholders -- pro
forma............................................ $(10,169,730) $(11,631,534) $(26,926,825)
Basic and diluted net loss attributable to common
stockholders per share -- as reported............ $ (1.63) $ (1.85) $ (4.28)
Basic net loss attributable to common stockholders
per share -- pro forma........................... $ (1.64) $ (1.87) $ (4.33)
</TABLE>
F-17
<PAGE> 107
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1996,
1997 and 1998; zero dividend yield; no volatility (all options were issued prior
to the effectiveness of the Company's initial public offering described in Note
15(m)); a weighted average risk-free interest rate of 5.48%, 6.33% and 5.69%,
respectively; and expected lives of 4.9, 5.3 and 3.0 years, respectively.
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, 1996, 1997 and 1998 and (unaudited)
for the nine months ended March 31, 1998 and 1999 since the Company has incurred
operating losses and 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.
The components of net deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1997 1998
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................ $ 5,400,000 $ 16,938,000
Accrued liabilities.................................... 164,000 --
Partnership investment................................. 373,000 --
Organizational costs................................... -- 18,000
----------- ------------
Total deferred tax assets........................... 5,937,000 16,956,000
----------- ------------
Deferred tax liabilities:
Partnership investment................................. -- 4,651,000
----------- ------------
Total deferred tax liabilities...................... -- 4,651,000
----------- ------------
Net benefit for income taxes............................. 5,937,000 12,305,000
Valuation allowance...................................... (5,937,000) (12,305,000)
----------- ------------
Net deferred tax asset.............................. $ -- $ --
=========== ============
</TABLE>
At June 30, 1998, the Company had approximately $44,523,000 of net
operating loss carryforwards available to reduce its future taxable income.
Under current Federal income tax law, such carryforwards will expire in 2013.
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, 1996, 1997 and 1998 and (unaudited) for the nine months ended
March 31, 1998 and 1999 related to the 401(k) Plan amounted to $9,390, $19,179,
$28,936, $23,539 and $49,911, respectively.
F-18
<PAGE> 108
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES:
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, 1998, the aggregate termination benefits of the
executives and certain other employees approximated $3,900,000.
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, which triggered 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 also guaranteed certain debt obligations of charter school
boards with which it has management agreements. As of June 30, 1998, the Company
had provided guarantees totaling approximately $4,000,000. An additional
guarantee of approximately $900,000 was provided in September 1998 in connection
with the sale of the Detroit facility (see Note 4).
As guarantor, the Company is required to maintain minimum cash balances
that may increase under certain circumstances due to the Company's guarantor
agreements with the lending financial institutions.
14. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents 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.
F-19
<PAGE> 109
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Notes receivable from charter schools are both short-term and long-term
from certain charter schools. 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 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 (UNAUDITED):
(a) On December 14, 1998, in conjunction with the Series D Preferred private
placement offering, the Company issued 3,945,224 shares of Series D
Preferred for $15,211,958, interest bearing promissory notes for $450,595
and stock options to purchase 264,979 shares of Series A Common.
(b) In December 1998, the Company sold the building that housed a charter school
in Trenton to a real estate investment trust, and simultaneously entered
into an 18 year operating lease for the building. At closing the Company
received approximately $6,000,000 in cash and realized a gain of
approximately $28,000 on the sale of the building. The initial rent expense
under the lease is approximately $640,000 per year subject to annual
inflationary increases. Under the lease, the Company is responsible for the
maintenance, taxes and utilities on the building.
(c) On June 4, 1999 and on July 2, 1999, the Company filed amendments to its
Certificate of Incorporation with the state of Delaware. Under the amended
certificate, there were changes to the capitalization structure. The
authorized capital stock subsequent to the amended articles consist 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 15,425,083 shares of Common
Stock and an additional 15,425,082 shares of Preferred Stock. Of the total
increase in Common Stock, 11,757,476 shares were designated as Series A
Common, one share of Series I Common Stock was authorized, and an additional
4,212,322 shares were designated as Non-Voting Common Stock. Two new classes
of Preferred Stock were authorized including 11,757,476 shares of Series F
Convertible Preferred Stock and 3,667,606 shares of Non-Voting Series G
Convertible Preferred Stock. The Series F Convertible Preferred Stock and
the Non-Voting Series G Preferred Stock rank prior to the Series A, B and C
Preferred Stock and the Common Stock.
(d) In June 1999, the Company completed an equity private placement financing
transaction for total proceeds of $29,258,477 in exchange for 3,957,476
shares of Series F Convertible Preferred Stock, par value $0.01 per share,
and 800,000 shares of Non-Voting Series G Preferred Stock, par value $0.01
per share. The purchase price was $6.15 per share.
(e) The board of directors approved on October 20, 1998, then 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 perform services at the Company's
school. The options granted are intended to qualify under section 422 of the
Internal Revenue Code of 1986 as nonstatutory 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, but they only become exercisable on the earlier of an initial
public offering or February 16, 2006. The options expire ten years after the
date of grant. As of March 31, 1999, the Company has granted 126,217 of
these options. On July 9, 1999, the Company granted options to purchase
808,731 shares of Series A Common.
(f) 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 qualify under Section
422 of the Internal Revenue Code of 1986 as nonstatutory options. Options
granted will
F-20
<PAGE> 110
EDISON SCHOOLS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 but they only become exercisable on the earlier of an initial
public offering 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. On July 9, 1999, the Company granted
options to purchase 399,500 shares of Series A Common.
(g) 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 qualify under section 422 of the Internal Revenue Code
of 1986 as nonstatutory stock 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 and
included in each option agreement. On June 30, 1999, the Company granted
options to purchase 876,000 shares of Series A Common.
(h) In July 1999, the Company completed a private placement financing
transaction for total proceeds of $41,741,518 in exchange for 6,787,238
shares of Series F Convertible Preferred Stock, par value $0.01 per share
and one share of Series I Common Stock.
(i) In July 1999, the Company entered into a preferred stock purchase agreement
with an unrelated corporation providing for the purchase of up to 2,000,000
shares of the other 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 a 16.5% ownership in the unrelated corporation.
Under the agreement, if the unrelated corporation sells additional shares of
its preferred stock prior to the second anniversary of the closing, the
Company will be required to purchase up to $5,000,000 of additional shares
of preferred stock.
(j) 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 representing the difference between the
exercise price of the options and the deemed fair market value at that time
will be recorded. In this regard, we expect to recognize a one-time expense
of approximately $18,000,000 in the fourth quarter of fiscal 1999, as well
as additional expenses aggregating approximately $5,600,000 that will be
recognized over the vesting periods of the individual stock options.
(k) On June 29, 1999, the Company received a non-interest bearing note with a
face value of $2,639,000 due on June 30, 2002. The note covers advances due
from the Detroit charter school.
(l) On July 20, 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 of up to $172,500,000 of its Common Stock.
F-21
<PAGE> 111
DESCRIPTION OF GRAPHICAL MATERIAL ON INSIDE OF BACK COVER:
PHOTOGRAPH OF FLOWER ABOVE THE NAME EDISON SCHOOLS.
<PAGE> 112
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
SHARES
[LOGO]
EDISON SCHOOLS INC.
CLASS A COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH & CO.
BANC OF AMERICA SECURITIES LLC
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
J.P. MORGAN & CO.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 113
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 2, 1999
PROSPECTUS
SHARES [LOGO]
EDISON SCHOOLS INC.
CLASS A COMMON STOCK
----------------------
This is Edison Schools Inc.'s initial public offering of class A common
stock. The international managers will offer shares of class A
common stock outside the United States and Canada and the U.S. underwriters will
offer shares of class A common stock in the United States and
Canada.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the class A common stock. After
pricing of the offering, we expect that the class A common stock will trade on
the Nasdaq National Market under the symbol "EDSN."
We have two classes of common stock, class A common stock and class B
common stock. Holders of class A common stock generally have the same rights as
holders of class B common stock, except that holders of class A common stock
have one vote per share, while holders of class B common stock have ten votes
per share. In addition, holders of class B common stock will be able to elect
four of the 11 members of our board of directors and the holders of class A
common stock will be able 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.
INVESTING IN THE CLASS A COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED
IN THE "RISK FACTORS" SECTION BEGINNING ON PAGE 11 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public offering price...................................... $ $
Underwriting discount...................................... $ $
Proceeds, before expenses, to Edison Schools Inc. ......... $ $
</TABLE>
The international managers may also purchase up to an additional
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 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.
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.
ALT-1
<PAGE> 114
[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 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..........................................
</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 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 shares of class A common
stock. The initial public offering price per share and the total underwriting
discount per share of class A common stock are identical under the international
purchase agreement and the U.S. purchase agreement.
In the international purchase agreement and the U.S. purchase agreement,
the several international managers and the several U.S. underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of class A common stock being sold
pursuant to each such agreement if any of the shares of class A common stock
being sold pursuant to such agreement are purchased. In the event of a default
by an underwriter, the international purchase agreement and the U.S. purchase
agreement provide that, in specified circumstances, the purchase commitments of
non-defaulting underwriters may be increased or the purchase agreements may be
terminated. The closings with respect to the sale of shares of class A common
stock to be purchased by the international managers and the U.S. underwriters
are conditioned upon one another.
The lead managers have advised Edison that the international managers
propose initially to offer the shares of class A common stock to the public at
the initial public offering price set forth on the cover page of this prospectus
and to certain dealers at such price less a concession not in excess of
$ per share of class A common stock. The international managers may allow,
and such dealers may reallow, a discount not in excess of $ per share of
class A common stock to certain other dealers. After the initial public
offering, the public offering price, concession and discount may change.
OVER-ALLOTMENT OPTION
Edison has granted options to the international managers, exercisable for
30 days after the date of this prospectus, to purchase up to an aggregate of
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
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<PAGE> 115
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
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
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. 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..................................
Proceeds, before expenses, to Edison...................
</TABLE>
The expenses of the offering, exclusive of the underwriting discount, are
estimated at $ million and are payable by Edison.
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 and certain other conditions. The underwriters reserve the right to
withdraw, cancel or modify such offer and to reject orders in whole or in part.
RESERVED SHARES
At Edison's request, the underwriters have reserved for sale, at the
initial public offering price, up to of the shares offered hereby
for employees, directors and other persons with relationships with Edison who
have expressed an interest in purchasing shares of class A common stock in the
offering. The number of shares of class A common stock available for sale to the
general public will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered in this
prospectus.
NO SALES OF CLASS A COMMON STOCK OR SIMILAR SECURITIES
Edison and Edison's executive officers and directors and all existing
stockholders have agreed, subject to certain exceptions, 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 the
person executing the agreement or with respect to which the person
executing the agreement thereafter acquires 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,
ALT-3
<PAGE> 116
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
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."
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.
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
ALT-4
<PAGE> 117
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
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 lead managers and representatives, respectively, may also impose a
penalty bid on certain underwriters and selling group members. This means that
if the lead managers and representatives, respectively, purchase shares of 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, they may reclaim the amount
of the selling concession from the underwriters and selling group members who
sold those shares.
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 shares of the outstanding class A common
stock and shares of the outstanding class B common stock, which represent
more than 10% of the outstanding class A and class B common stock. Of these
shares, shares of class A common stock and shares of class B
common stock are subject to a voting trust agreement and are held and voted by
an independent third party, , as voting trustee. For additional
information concerning the Sprout Entities' ownership of Edison's capital stock,
see "Related Party Transactions".
Because the Sprout Entities affiliated with Donaldson, Lufkin & Jenrette
Securities Corporation beneficially own more than 10% of the outstanding class A
and class B common stock, the 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.
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.
See "Principal Stockholders" and "Related Party Transactions".
ALT-5
<PAGE> 118
[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.
SHARES
[LOGO]
EDISON SCHOOLS INC.
CLASS A COMMON STOCK
----------------------
PROSPECTUS
----------------------
MERRILL LYNCH INTERNATIONAL
BANK OF AMERICA INTERNATIONAL LIMITED
CREDIT SUISSE FIRST BOSTON
DONALDSON, LUFKIN & JENRETTE
J.P. MORGAN SECURITIES LTD.
, 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ALT-7
<PAGE> 119
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........................................ $47,955
NASD filing fee............................................. 17,750
Nasdaq National Market listing fee.......................... *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses (including legal fees)........... *
Transfer agent and registrar fees and expenses.............. *
Miscellaneous............................................... *
-------
Total............................................. $ *
=======
</TABLE>
- ---------------
* To be filed by amendment
The Company will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Fifth Amended and Restated Certificate of Incorporation
(the "Restated Certificate"), which will be in effect following this offering,
provides that, except to the extent prohibited by the Delaware General
Corporation Law (the "DGCL"), the Registrant's directors shall not be personally
liable to the Registrant or its stockholders for monetary damages for any breach
of fiduciary duty as directors of the Registrant. Under the DGCL, the directors
have a fiduciary duty to the Registrant which is not eliminated by this
provision of the Restated Certificate and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of nonmonetary relief will
remain available. In addition, each director will continue to be subject to
liability under the DGCL for breach of the director's duty of loyalty to the
Registrant, for acts or omissions which are found by a court of competent
jurisdiction to be not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are prohibited by the DGCL. This provision also does not affect
the directors' responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws. The Registrant has
obtained liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL including
for an unlawful payment of dividend or unlawful stock purchase or redemption, or
(iv) for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's by-laws, any agreement, a vote
of stockholders or otherwise. The Restated Certificate eliminates the personal
liability of directors to the fullest extent permitted by the DGCL and, together
with the Registrant's Second Amended and Restated
II-1
<PAGE> 120
By-Laws (the "Restated By-Laws"), which will be in effect following this
offering, provides that the Registrant shall fully indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding (whether civil, criminal, administrative or
investigative) by reason of the fact that such person is or was a director or
officer of the Registrant, or is or was serving at the request of the Registrant
as a director or officer of another corporation, partnership, joint venture,
trust, employee benefit plan or other enterprise, against expenses (including
attorney's fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding. Reference is made to the Registrant's Form of Amended and Restated
Certificate of Incorporation and Form of Amended and Restated By-Laws filed as
Exhibits 3.2 and 3.4 hereto, respectively.
Two of the directors of the Registrant are also officers of DLJ Capital
Corporation ("DLJCC"), and are serving on the Registrant's Board of Directors at
the request of Sprout Capital VI, L.P., Sprout Capital VII, L.P. and Sprout CEO
Fund, L.P. (collectively, the "Sprout Partnerships") and DLJCC. Pursuant to the
partnership agreements of each of the Sprout Partnerships, each Sprout
Partnership will indemnify officers of DLJCC when they are representing such
Sprout Partnership on the board of directors of a corporation of which such
Sprout Partnership is an investor, provided that such officers acted in good
faith and in the manner such officers reasonably believed to be in the best
interests of such Sprout Partnership.
The U.S. Purchase Agreement and the International Purchase Agreement
provide that the Underwriters are obligated, under certain circumstances, to
indemnify directors, officers and controlling persons of the Registrant against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Act"). Reference is made to the forms of the U.S. Purchase
Agreement and the International Purchase Agreement to be filed as Exhibits 1.1
and 1.2 hereto.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Restated Certificate. The Registrant is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since June 30, 1996, the Registrant has issued the following securities
that were not registered under the Securities Act as summarized below.
(a) Issuances of Capital Stock and Warrants.
In July 1996, the Registrant, which was then a partnership, issued
partnership interests to private investors in return for capital contributions
aggregating $12.3 million.
In November 1996, the Registrant converted from a partnership to a
corporation and issued 6,214,704 shares of series A common stock and 21,149,993
shares of series A convertible preferred stock in exchange for partnership
interests of existing investors. In November 1996, the Registrant also sold
9,144,442 shares of series A convertible preferred stock, one share of series B
common stock, one share of series C common stock, one share of series D common
stock, one share of series E common stock and one share of series F common stock
to a group of private investors for an aggregate sale price of $13,716,663.
In February 1997, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 213,333 shares
of series A convertible preferred stock.
In March 1997, the Registrant sold 1,010,101 shares of series B convertible
exchangeable preferred stock to a private investor for an aggregate sale price
of $1,666,666.
In May 1997, the Registrant sold 5,201,135 shares of series C convertible
exchangeable preferred stock to a group of private investors for an aggregate
sale price of $15,083,291.
In June 1997, (i) in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant which currently represents the
right to purchase up to 50,000 shares of series A 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.
II-2
<PAGE> 121
In August 1997, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 77,000 shares
of series A common stock.
In October 1997, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant which currently represents the
right to purchase up to 250,000 shares of series A common stock.
In November 1997, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 129,504 shares
of series A common stock.
In December 1997, as a purchase price adjustment for the group of private
investors who participated in the May 1997 sale of series C convertible
exchangeable preferred stock, the Registrant issued 1,057,473 shares of series C
convertible exchangeable preferred stock to such investors for no additional
consideration.
In December 1997, the Registrant also sold 5,885,145 shares of series D
convertible preferred stock, one share of series G common stock, one share of
series H common stock, options to purchase 395,280 shares of series A common
stock and promissory notes in the aggregate principal amount of $1,908,429 to a
group of private investors for an aggregate sale price of $23,422,877.
In January 1998, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 25,125 shares
of series A common stock.
In June 1998, in connection with an investment a philanthropic foundation,
the Registrant issued to the foundation a warrant to purchase up to 3,775,000
shares of series D convertible preferred common stock.
In July 1998, in connection with an equipment financing, the Registrant
issued to an equipment financing firm a warrant to purchase up to 100,000 shares
of series A common stock.
In August 1998, the Registrant also sold 4,271,352 shares of series D
convertible preferred stock, options to purchase 286,878 shares of series A
common stock and promissory notes in the aggregate principal amount of $487,843
to a group of private investors for an aggregate sale price of $17 million.
In December 1998, the Registrant also sold 3,945,224 shares of series D
convertible preferred stock, options to purchase 264,979 shares of series A
common stock and promissory notes in the aggregate principal amount of $450,595
to a group of private investors for an aggregate sale price of $15,702,003.
In June 1999, the Registrant sold 3,957,476 shares of series F convertible
preferred stock and 800,000 shares of non-voting series G convertible preferred
stock to a group of private investors for an aggregate sale price of
$29,258,477.
In July 1999, the Registrant sold 6,787,238 shares of Series F Convertible
Preferred Stock and one share of series I common stock to a group of private
investors for an aggregate sale price of $41,741,518.
Upon the closing of this offering, each share of common stock and each
share of preferred stock will convert, automatically and without additional
consideration, into shares of class A common stock and 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 126,217 shares of series A
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 June 1999 shares of 397,000 series A 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 by the stockholders in July 1999. As of June 30, 1999,
options to purchase 876,000 shares of series A common stock were outstanding
under the Key Stock Plan.
Prior to adoption of Edison's stock option plans, Edison granted stock
options to employees from time to time. Options to purchase an aggregate of
13,469,560 shares have been granted in this manner.
II-3
<PAGE> 122
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* Fifth Amended and Restated Certificate of Incorporation of
the Registrant, to be filed prior to 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, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-Laws of the Registrant
defining the rights of holders of 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 July 29,
1999, 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 Transamerican Business Credit Corporation
10.20 Stock Subscription Warrant, dated as of July 17, 1998,
issued to TBCC Trust Funding II
</TABLE>
II-4
<PAGE> 123
<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 Letter Agreement, dated as of March 1, 1997, between the
Registrant and H. Christopher Whittle, as amended on
December 15, 1997
10.25 Letter Agreement, dated as of June 16, 1997, between the
Registrant and Christopher D. Cerf
10.26 Letter Agreement, dated as of March 15, 1995, between the
Registrant and John E. Chubb
10.27 Letter Agreement, dated as of April 20, 1998, between the
Registrant and James L. Starr.
10.28 Preferred Stock Purchase Agreement, dated as of July 2,
1999, between the Registrant and Apex Online Learning Inc.
10.29 Shareholders Agreement, dated as of July 2, 1999, between
the Registrant and Apex Online Learning Inc.
10.30 Lease Agreement, dated as of April 4, 1995, between the
Registrant and 521 Fifth Avenue Associates, as amended on
June 6, 1996 and December 8, 1997
10.31 Office Lease, dated as of March 19, 1999, between the
Registrant and 529 Fifth Company
10.32 Management Agreement, dated as of March 14, 1995, between
the Registrant and WSI Inc., as amended on November 15,
1996, March 1, 1997 and December 31, 1997.
10.33 Promissory note, dated as of June 5, 1992, from Benno C.
Schmidt, Jr. to the Registrant
10.34 Promissory note, dated as of January 23, 1996, from Benno C.
Schmidt to the Registrant
10.35* Amendment to Letter Agreement between the Registrant and H.
Christopher Whittle
10.36* Amendment to Letter Agreement between the Registrant and
Christopher D. Cerf
10.37* Series F Subscription Agreement, dated as of June 4, 1999,
between the Registrant and certain stockholders
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 (see page II-7)
27.1 Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
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
II-5
<PAGE> 124
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purpose of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4), or 497(h) under the Act shall be deemed to be part
of this Registration Statement as of the time it was declared
effective.
(2) For purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be
deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 125
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in New York, New York, on this 30th day
of July, 1999.
EDISON SCHOOLS INC.
By: /s/ H. CHRISTOPHER WHITTLE
------------------------------------
H. Christopher Whittle
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers, directors and authorized representatives of
Edison Schools Inc. hereby severally constitute and appoint H. Christopher
Whittle, James L. Starr, Christopher D. Cerf and David Sylvester, and each of
them singly, our true and lawful attorneys with full power to them, and each of
them singly, with full powers of substitution and resubstitution, to sign for us
and in our names in the capacities indicated below, the Registration Statement
on Form S-1 filed herewith and any and all pre-effective and post-effective
amendments to said Registration Statement, and any subsequent Registration
Statement for the same offering which may be filed under Rule 462(b), and
generally to do all such things in our names and on our behalf in our capacities
as officers and directors to enable Edison Schools Inc. to comply with the
provisions of the Securities Act of 1933, as amended, and all requirements of
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or any of them, or their
substitute or substitutes, to said Registration Statement and any and all
amendments thereto or to any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b).
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ BENNO C. SCHMIDT, JR. Chairman of the Board of Directors July 30, 1999
- ---------------------------------------------------
Benno C. Schmidt, Jr.
/s/ H. CHRISTOPHER WHITTLE President, Chief Executive Officer July 30, 1999
- --------------------------------------------------- and Director (Principal Executive
H. Christopher Whittle Officer)
/s/ JAMES L. STARR Executive Vice President and Chief July 30, 1999
- --------------------------------------------------- Financial Officer (Principal
James L. Starr Financial and Accounting Officer)
/s/ LAURA K. ESHBAUGH Executive Vice President and July 30, 1999
- --------------------------------------------------- Director
Laura K. Eshbaugh
/s/ VIRGINIA G. BONKER Director July 30, 1999
- ---------------------------------------------------
Virginia G. Bonker
</TABLE>
II-7
<PAGE> 126
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ JOHN W. CHILDS Director July 30, 1999
- ---------------------------------------------------
John W. Childs
/s/ CHARLES J. DELANEY Director July 30, 1999
- ---------------------------------------------------
Charles J. Delaney
/s/ ROBERT FINZI Director July 30, 1999
- ---------------------------------------------------
Robert Finzi
/s/ JOHN B. FULLERTON Director July 30, 1999
- ---------------------------------------------------
John B. Fullerton
/s/ JANET A. HICKEY Director July 30, 1999
- ---------------------------------------------------
Janet A. Hickey
/s/ KLAS HILLSTROM Director July 30, 1999
- ---------------------------------------------------
Klas Hillstrom
/s/ BERT E. KOLDE Director July 30, 1999
- ---------------------------------------------------
Bert E. Kolde
/s/ JEFFREY T. LEEDS Director July 30, 1999
- ---------------------------------------------------
Jeffrey T. Leeds
/s/ BRIAN P. MATHIS Director July 30, 1999
- ---------------------------------------------------
Brian P. Mathis
</TABLE>
II-8
<PAGE> 127
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* Fifth Amended and Restated Certificate of Incorporation of
the Registrant, to be filed prior to 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, 3.2, 3.3 and 3.4 for provisions of the
Certificate of Incorporation and By-Laws of the Registrant
defining the rights of holders of 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 July 29,
1999, between the Registrant and the DZFZ 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 Transamerican 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> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C> <C>
10.23 Letter Agreement, dated as of March 1, 1997, between the
Registrant and Benno C. Schmidt, Jr., as amended on December
15, 1997....................................................
10.24 Letter Agreement, dated as of March 1, 1997, between the
Registrant and H. Christopher Whittle, as amended on
December 15, 1997...........................................
10.25 Letter Agreement, dated as of June 16, 1997, between the
Registrant and Christopher D. Cerf..........................
10.26 Letter Agreement, dated as of March 15, 1995, between the
Registrant and John E. Chubb................................
10.27 Letter Agreement, dated as of April 20, 1998, between the
Registrant and James L. Starr.
10.28 Preferred Stock Purchase Agreement, dated as of July 2,
1999, between the Registrant and Apex Online Learning
Inc. .......................................................
10.29 Shareholders Agreement, dated as of July 2, 1999, between
the Registrant and Apex Online Learning Inc. ...............
10.30 Lease Agreement, dated as of April 4, 1995, between the
Registrant and 521 Fifth Avenue Associates, as amended on
June 6, 1996 and December 8, 1997...........................
10.31 Office Lease, dated as of March 19, 1999, between the
Registrant and 529 Fifth Company............................
10.32 Management Agreement, dated as of March 14, 1995, between
the Registrant and WSI Inc., as amended on November 15,
1996, March 1, 1997 and December 31, 1997. .................
10.33 Promissory note, dated as of June 5, 1992 from Benno C.
Schmidt, Jr. to the Registrant..............................
10.34 Promissory note, dated as of January 23, 1996, from Benno C.
Schmidt to the Registrant...................................
10.35* Amendment to Letter Agreement between the Registrant and H.
Christopher Whittle.........................................
10.36* Amendment to Letter Agreement between the Registrant and
Christopher D. Cerf.........................................
10.37* Series F Subscription Agreement, dated as of June 4, 1999,
between the Registrant and certain stockholders.............
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 (see page II-7)..........................
27.1 Financial Data Schedule.....................................
</TABLE>
- ---------------
* To be filed by amendment.
<PAGE> 1
Exhibit 10.1
THE EDISON PROJECT INC.
1998 SITE OPTION PLAN
1. Purpose
The purpose of this 1998 Site Option Plan (the "Plan") of The Edison
Project Inc., a Delaware corporation (the "Company"), is to enhance the
Company's ability to attract, retain and motivate persons who make important
contributions to the schools managed or operated by the Company (the "Edison
Schools") by providing such persons with equity ownership opportunities. Except
where the context otherwise requires, the term "Company" shall include any of
the Company's present or future wholly-owned subsidiary corporations of the
Company as defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended, and any regulations promulgated thereunder (the "Code").
2. Eligibility
All of the persons considered employees of the Company who are performing
services at any Edison School, whether or not also employees of another entity,
are eligible to be granted options (an "Option") under the Plan. The Options
shall be granted exclusively for the performance of those services the eligible
persons already are performing or reasonably may be expected to perform in their
respective positions within or for the Edison Schools, and not for any other or
additional services. Each person who has been granted an Option under the Plan
shall be deemed a "Participant".
3. Administration, Delegation
(a) Administration by Board of Directors. The Plan will be administered by
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Options and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Option. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(b) Delegation to Executive Officers. To the extent permitted by applicable
law, the Board may delegate to one or more executive officers of the Company the
power to make Options and exercise such other powers under the Plan as the Board
<PAGE> 2
may determine, provided that the Board shall fix the maximum number of shares
subject to Options and the maximum number of shares for any one Participant to
be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). All references in the
Plan to the "Board" shall mean the Board or a Committee of the Board or the
executive officer referred to in Section 3(b) to the extent that the Board's
powers or authority under the Plan have been delegated to such Committee or
executive officer.
4. Stock Available for Options
Subject to adjustment under Section 7, Options may be granted under the
Plan for up to 1,500,000 shares of Series A Common Stock, $.01 par value per
share, of the Company (the "Common Stock"). If any Option expires or is
terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not being issued,
the unused Common Stock covered by such Option shall again be available for the
grant of Options under the Plan, subject, however, in the case of Incentive
Stock Options (as hereinafter defined), to any limitation required under the
Code. Shares issued under the Plan may consist in whole or in part of authorized
but unissued shares or treasury shares.
5. Stock Options
(a) General. Subject to any limitations set forth in the Plan, the Board
may grant Options to purchase Common Stock and determine the number of shares of
Common Stock to be covered by each Option, the exercise price of each Option and
the conditions and limitations applicable to the exercise of each Option,
including conditions relating to applicable federal or state securities laws, as
it considers necessary or advisable. An Option which is not intended to be an
Incentive Stock Option (as hereinafter defined) shall be designated a
"Nonstatutory Stock Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to individuals who are employees of the
Company for these purposes of granting options and shall be subject to and shall
be construed consistently with the requirements of Section 422 of the Code. The
Company shall have no liability to a Participant, or any other party, if an
Option (or any part thereof) which is intended to be an Incentive Stock Option
is not an Incentive Stock Option.
(c) Exercise Price and Vesting. The Board shall establish the exercise
price at the time each Option is granted and specify it in the applicable
written instrument, provided, however, that the exercise price shall not be less
than 100% of the fair
2
<PAGE> 3
market value of the Common Stock, as determined by the Board, at the time the
Option is granted. Each Option shall vest as specified in the applicable written
instrument. The vesting shall be based on time and in no event on the basis of
the economic performance of the Edison School or of the Company.
(d) Exercisability of Options. Options that are vested are only exercisable
on or after the date (the "Exercisability Date") that is the earliest to occur
of (i) 90 days after the date on which the Company completes an underwritten
initial public offering (the "Initial Public Offering") of its Common Stock
pursuant to an effective registration statement filed with the Securities and
Exchange Commission (the "Commission") in accordance with the Securities Act of
1933, as amended (the "Securities Act"), (ii) February 16, 2006, (iii) the
proposed liquidation or dissolution of the Company as provided in paragraph 7(b)
below, or (iv) the occurrence of an Acquisition Event (as defined below) in
connection with which the Board accelerates the exercisability of Options.
(e) Duration of Options.
(1) Duration. Except as otherwise provided in this paragraph, a
Participant's right to exercise his or her option terminates on the date ten
(10) years from the Grant Date (the "Final Exercise Date").
(2) Relationship with the Company Required. Except as otherwise
provided in this paragraph (e) (e.g., the ability of a Participant to exercise
an Option for at least three months after cessation of employment pursuant to
clause (3) below and for at least one year after disability pursuant to clause
(5) below), an Option may not be exercised unless a Participant, at the time he
or she exercises an Option held by such Participant, is, and has been at all
times since the date of grant of such Option (the "Grant Date"), an employee of
the Company (an "Eligible Participant"). A Participant's right to exercise his
or her Option(s) terminates upon cessation of employment to the extent the
Option was not vested on the date of such cessation.
(3) Relationship with the Company. If a Participant ceases to be an
Eligible Participant prior to the effective date (the "Registration Date") of a
registration statement filed with the Commission to register the Common Stock
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for
any reason, then, except as provided in clauses (4), (5) and (6) below, the
Participant's right to exercise his or her Option shall terminate upon the later
to occur of (i) three months after such cessation or (ii) three months after the
Exercisability Date (but in no event after the Final Exercise Date), provided
that an Option shall be exercisable only to the extent that it was vested on the
date of such cessation. If a Participant ceases to be an Eligible Participant
subsequent to the Registration Date for any reason, then, except as provided in
clauses (4), (5) and (6) below, the Participant's right to exercise his or her
option terminates three months after such cessation provided that an
3
<PAGE> 4
Option shall be exercisable only to the extent that it was vested on the date of
such cessation.
(4) Termination Upon Death. If a Participant dies prior to the Final
Exercise Date while he or she is an eligible Participant and prior to the
Registration Date, the Participant's right to exercise his or her Option shall
automatically terminate, provided that the Company may, at its sole option, make
a payment to the estate of such Participant, in such form of payment as the
Company may determine, other than securities of the Company, equal to the
difference between the fair market value of the Common Stock at the time of
death and the exercise price of the Option multiplied by the number of shares of
such Option that are vested at the time of death. If a Participant dies prior to
the Final Exercise Date while he or she is an Eligible Participant and
subsequent to the Exercisability Date and/or the Registration Date and the
Company has not terminated such relationship for "cause" as specified in clause
(6) below, the Participant's right to exercise his or her Option shall terminate
eighteen months following the date of death of the Participant provided that
such Option shall be exercisable only to the extent that such Option was vested
on the date of his or her death, and further provided that such Option shall not
be exercisable after the Final Exercise Date.
(5) Exercise Period Upon Disability. If a Participant becomes disabled
(within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise
Date while he or she is an Eligible Participant and the Company has not
terminated such relationship for "cause" as specified in clause (6) below, the
Participant's right to exercise his or her Option shall terminate upon the later
to occur of (i) one year following the date of disability of the Participant or
(ii) three months after the Exercisability Date (but in no event after the Final
Exercise Date), provided that such Option shall be exercisable only to the
extent that such Option was vested on the date of his or her disability, and
further provided that such Option shall not be exercisable after the Final
Exercise Date.
(6) Discharge for Cause; Termination for Breach. If a Participant,
prior to the Final Exercise Date, is discharged by the Company for "cause" (as
defined below), the right to exercise an Option held by such Participant shall
terminate immediately upon the effective date of such discharge. "Cause" shall
mean the conviction of the Participant of, or the entry of a pleading of guilty
of or nolo contendere by the Participant to, any crime involving any felony. A
Participant shall be considered to have been discharged for "Cause" if the
Company determines, within 30 days after a Participant's resignation, that
discharge for cause was warranted. In addition, the right to exercise an Option
held by a Participant shall terminate immediately upon (i) the violation by the
Participant of the confidentiality provision contained in any grant of or
written instrument for Options, employment contract, confidentiality and
non-disclosure agreement or other such agreement between the Participant and the
Company or (ii) upon the disclosure by a Participant
4
<PAGE> 5
of any financial information concerning the Company provided to the Participant
by or on behalf of the Company in confidence.
(f) Exercise of Option. Each election to exercise an Option may be
exercised by delivery to the Company at its principal office of a written notice
of exercise signed by the proper person or by any other form of notice
(including electronic notice) approved by the Board together with payment in
full as specified in Section 5(g) for the number of shares for which the Option
is exercised. The Participant may purchase less than the number of shares
covered hereby, provided that no partial exercise of this option may be for any
fractional share or for fewer than ten whole shares. The right of exercise shall
be cumulative so that to the extent the Option is not exercised in any period to
the maximum extent permissible it shall continue to be exercisable, in whole or
in part, with respect to all shares for which it is vested until the earlier of
the Final Exercise Date or the termination of the Option under the Plan.
(g) Payment Upon Exercise. Common Stock purchased upon the exercise of an
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may, in its sole discretion, otherwise provide
in an option agreement, by (i) delivery of an irrevocable and unconditional
undertaking by a creditworthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price or (ii) delivery by the Participant
to the Company of a copy of irrevocable and unconditional instructions to a
creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price;
(3) when the Common Stock is registered under Exchange Act, by delivery
of shares of Common Stock owned by the Participant valued at their fair market
value as determined by (or in a manner approved by) the Board in good faith
("Fair Market Value"), which Common Stock was owned by the Participant at least
six months prior to such delivery; or
(4) by any combination of the above permitted forms of payment.
6. Public Offering
In connection with a public offering of securities of the Company, a
Participant (i) may not sell, make short sale of, loan, grant any options for
the purchase of, or otherwise dispose of any shares of Common Stock held by the
Participant (other than those shares included in the offering) without the prior
written consent of the Company or the underwriters managing such public offering
of the Company's securities for a period of 180 days from the effective date of
such registration
5
<PAGE> 6
statement, and (ii) will execute any agreement reflecting clause (i) above as
may be requested by the Company or the managing underwriters at the time of such
offering.
7. Adjustments for Changes in Common Stock and Certain Other Events
(a) Changes in Capitalization. In the event of any stock split, reverse
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the number and class of securities and exercise price per share subject to
each outstanding Option, and (iii) the terms of each other outstanding Option
shall be appropriately adjusted by the Company (or substituted Options may be
made, if applicable) to the extent the Board shall determine, in good faith,
that such an adjustment (or substitution) is necessary and appropriate. If this
Section 7(a) applies and Section 7(c) also applies to any event, Section 7(c)
shall be applicable to such event, and this Section 7(a) shall not be
applicable.
(b) Liquidation or Dissolution. Upon the adoption by the Board of a
resolution to liquidate or dissolve the Company, the Board shall give written
notice to the Participants providing that all then unexercised Options will (i)
become exercisable in full as of a specified time at least 10 business days
prior to the effective date of such liquidation or dissolution and (ii)
terminate effective upon such liquidation or dissolution, except to the extent
exercised before such effective date. Subsequent to the Registration Date, the
Board may specify the effect of a liquidation or dissolution on any other Option
granted under the Plan at the time of the grant of such Option.
(c) Acquisition Events
(1) Definition. An "Acquisition Event" shall mean: (a) any merger or
consolidation of the Company with or into another entity as a result of which
the Common Stock is converted into or exchanged for the right to receive cash,
securities or other property or (b) any exchange of shares of the Company for
cash, securities or other property pursuant to a statutory share exchange
transaction.
(2) Consequences of an Acquisition Event. Upon the occurrence of an
Acquisition Event, or the execution by the Company of any agreement with respect
to an Acquisition Event, the Board shall provide that all outstanding Options
shall be assumed, or equivalent options shall be substituted, by the acquiring
or succeeding corporation (or an affiliate thereof). For purposes hereof, an
Option shall be considered to be assumed if, following consummation of the
Acquisition Event, the Option confers the right to purchase, for each share of
Common Stock subject to
6
<PAGE> 7
the Option immediately prior to the consummation of the Acquisition Event, the
consideration (whether cash, securities or other property) received as a result
of the Acquisition Event by holders of Common Stock for each share of Common
Stock held immediately prior to the consummation of the Acquisition Event (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding shares of Common Stock);
provided, however, that if the consideration received as a result of the
Acquisition Event is not solely common stock of the acquiring or succeeding
corporation (or an affiliate thereof), the Company may, with the consent of the
acquiring or succeeding corporation, provide for the consideration to be
received upon the exercise of Options to consist solely of common stock of the
acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair
market value to the per share consideration received by holders of outstanding
shares of Common Stock as a result of the Acquisition Event.
Notwithstanding the foregoing, if the acquiring or succeeding
corporation (or an affiliate thereof) does not agree to assume, or substitute
for, such Options, then the Board shall, upon written notice to the
Participants, provide that all then unexercised Options will become exercisable
in full as of a specified time prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Participants before the consummation of such Acquisition
Event; provided, however, that in the event of an Acquisition Event under the
terms of which holders of Common Stock will receive upon consummation thereof a
cash payment for each share of Common Stock surrendered pursuant to such
Acquisition Event (the "Acquisition Price"), then the Board may instead provide
that all outstanding Options shall terminate upon consummation of such
Acquisition Event and that each Participant shall receive, in exchange therefor,
a cash payment equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such outstanding
Options (whether or not then exercisable), exceeds (B) the aggregate exercise
price of such Options.
8. General Provisions Applicable to Options
(a) Transferability of Options. Prior to the Registration Date, Options
shall not be sold, assigned, transferred, pledged, gifted or otherwise
encumbered by the person to whom they are granted, either voluntarily or by
operation of law and shall be exercisable only by the Participant. Subsequent to
the Registration Date, except as the Board may otherwise determine or provide in
an Option, Options shall not be sold, assigned, transferred, pledged, gifted or
otherwise encumbered by the person to whom they are granted, either voluntarily
or by operation of law, except by will or the laws of descent and distribution,
and, during the life of the Participant, shall be exercisable only by the
Participant. References to a Participant, to the extent relevant in the context,
shall include references to authorized transferees. An Option transferred in
contravention of the provisions of this Plan shall be void ab initio.
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(b) Documentation. Each Option shall be evidenced by a written instrument
in such form as the Board shall determine, such written instrument which may be
in the form of an agreement signed by the Company and the Participant, or a
written instrument, confirming memorandum or notice to the Participant from the
Company. Subject to the provisions of Section 5(e) and Section 8(a), each Option
may contain terms and conditions relating to vesting, exercise price and
duration of exercisability in addition to, but not inconsistent with, those set
forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each Option
may be made alone or in addition or in relation to any other Option. Pursuant to
paragraph (b) above, the terms of each Option need not be identical, and the
Board need not treat Participants uniformly.
(d) Status. Subsequent to the Registration Date, the Board shall determine
the effect on an Option of the retirement or authorized leave of absence in the
employment or other status of a Participant and the extent to which, and the
period during which, the Participant, the Participant's legal representative,
conservator, guardian or, if the Participant has died, the beneficiary
designated, in a manner determined by the Board, by a Participant to receive
amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary") may exercise rights under the
Option.
(e) Withholding. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Options to such Participant no later than the
date of the event creating the tax liability. When the Common Stock is
registered under the Exchange Act, Participants may satisfy such tax obligations
in whole or in part by delivery of shares of Common Stock, including shares
retained from the Option creating the tax obligation, valued at their Fair
Market Value. The Company may, to the extent permitted by law, deduct any such
tax obligations from any payment of any kind otherwise due to a Participant. No
shares of Common Stock will be issued pursuant to the exercise of an Option
unless and until the Participant pays to the Company, or makes provision
satisfactory to the Company for payment of, any federal, state or local
withholding taxes required by law to be withheld in respect of such Option.
(f) Amendment of Option. Subject to the provisions of Section 5 and Section
7, prior to the Registration Date, the Board may not amend, modify or terminate
any outstanding Option, provided that the Board may modify any outstanding
Option without the consent of the Participant in order to obtain an exemption or
no-action relief for the Company under Section 12(h) of the Exchange Act.
Subsequent to the Registration Date, the Board may amend, modify or terminate
any outstanding Option, including but not limited to, changing the date of
exercise or
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realization and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares of Common Stock previously delivered under the Plan
until (i) all conditions of the Option have been met or removed to the
satisfaction of the Company, (ii) in the opinion of the Company's counsel, all
other legal matters in connection with the issuance and delivery of such shares
have been satisfied, including any applicable securities laws and any applicable
stock exchange or stock market rules and regulations, and (iii) the Participant
has executed and delivered to the Company such representations or agreements as
the Company may consider appropriate to satisfy the requirements of any
applicable laws, rules or regulations.
(h) Acceleration. Subsequent to the Registration Date, the Board may at any
time provide that any options shall become immediately vested in full or in
part.
(i) Investment Representations. The Company may require any person to whom
an Option is granted, as a condition of exercising such Option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option for his or her
own account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws.
9. Miscellaneous
(a) No Right To Employment or Other Status. No person shall have any claim
or right to be granted an Option, and the grant of an Option shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Option.
(b) No Rights As Stockholder. No Participant shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Option until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend),
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then an optionee who exercises an Option between the record date and the
distribution date for such stock dividend shall be entitled to receive, on the
distribution date, the stock dividend with respect to the shares of Common Stock
acquired upon such Option exercise, notwithstanding the fact that such shares
were not outstanding as of the close of business on the record date for such
stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on the
date on which it is adopted by the Board. No Options shall be granted under the
Plan after the completion of ten years from the earlier of (i) the date on which
the Plan was adopted by the Board or (ii) the date the Plan was approved by the
Company's stockholders, but Options previously granted may extend beyond that
date.
(d) Amendment of Plan. Prior to the Registration Date, the Board may amend,
suspend, modify or terminate the Plan, any portion thereof or any outstanding
Option in order to obtain an exemption for the Company under Section 12(h) of
the Exchange Act. Subsequent to the Registration Date, the Board may amend,
suspend, modify or terminate the Plan or any portion thereof at any time.
(e) Governing Law. The provisions of the Plan and all Options made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
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Exhibit 10.2
THE EDISON PROJECT INC.
1999 STOCK OPTION PLAN
1. Purpose
The purpose of this 1999 Stock Option Plan (the "Plan") of The Edison
Project Inc., a Delaware corporation (the "Company"), is to enhance the
Company's ability to attract, retain and motivate persons who make important
contributions to the Company by providing such persons with equity ownership
opportunities. Except where the context otherwise requires, the term "Company"
shall include any of the Company's present or future subsidiary corporations of
the Company as defined in Section 424(f) of the Internal Revenue Code of 1986,
as amended, and any regulations promulgated thereunder (the "Code").
2. Eligibility
All of the Company's employees who are not senior executives are eligible
to be granted options (an "Option") under the Plan. The Options shall be granted
exclusively for the performance of those services the eligible persons already
are performing or reasonably may be expected to perform in their respective
positions within the Company and not for any other or additional services. Each
person who has been granted an Option under the Plan shall be deemed a
"Participant".
3. Administration, Delegation
(a) Administration by Board of Directors. The Plan will be administered by
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Options and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Option in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Option. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(b) Delegation to Executive Officers. To the extent permitted by applicable
law, the Board may delegate to one or more executive officers of the Company the
power to make Options and exercise such other powers under the Plan as the Board
may determine, provided that the Board shall fix the maximum number of shares
<PAGE> 2
subject to Options and the maximum number of shares for any one Participant to
be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). All references in the
Plan to the "Board" shall mean the Board or a Committee of the Board or the
executive officer referred to in Section 3(b) to the extent that the Board's
powers or authority under the Plan have been delegated to such Committee or
executive officer.
4. Stock Available for Options
Subject to adjustment under Section 7, Options may be granted under the
Plan for up to 1,000,000 shares of Series A Common Stock, $.01 par value per
share, of the Company (the "Common Stock"). If any Option expires or is
terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not being issued,
the unused Common Stock covered by such Option shall again be available for the
grant of Options under the Plan, subject, however, in the case of Incentive
Stock Options (as hereinafter defined), to any limitation required under the
Code. Shares issued under the Plan may consist in whole or in part of authorized
but unissued shares or treasury shares.
5. Stock Options
(a) General. Subject to any limitations set forth in the Plan, the Board
may grant Options to purchase Common Stock and determine the number of shares of
Common Stock to be covered by each Option, the exercise price of each Option and
the conditions and limitations applicable to the exercise of each Option,
including conditions relating to applicable federal or state securities laws, as
it considers necessary or advisable. An Option which is not intended to be an
Incentive Stock Option (as hereinafter defined) shall be designated a
"Nonstatutory Stock Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price and Vesting. The Board shall establish the exercise
price at the time each Option is granted and specify it in the applicable
written instrument, provided, however, that the exercise price shall not be less
than 100% of the fair market value of the Common Stock, as determined by the
Board, at the time the
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Option is granted. Each Option shall vest as specified in the applicable written
instrument. The vesting shall be based on time and in no event on the basis of
the economic performance of the Company.
(d) Exercisability of Options. Options that are vested are only exercisable
on or after the date (the "Exercisability Date") that is the earliest to occur
of (i) 90 days after the date on which the Company completes an underwritten
initial public offering (the "Initial Public Offering") of its Common Stock
pursuant to an effective registration statement filed with the Securities and
Exchange Commission (the "Commission") in accordance with the Securities Act of
1933, as amended (the "Securities Act"), (ii) February 16, 2006, (iii) the
proposed liquidation or dissolution of the Company as provided in paragraph 7(b)
below, or (iv) the occurrence of an Acquisition Event (as defined below) in
connection with which the Board accelerates the exercisability of Options.
(e) Duration of Options.
(1) Duration. Except as otherwise provided in this paragraph, a
Participant's right to exercise his or her option terminates on the date ten
(10) years from the Grant Date (the "Final Exercise Date").
(2) Relationship with the Company Required. Except as otherwise
provided in this paragraph (e) (e.g., the ability of a Participant to exercise
an Option for at least three months after cessation of employment pursuant to
clause (3) below and for at least one year after disability pursuant to clause
(5) below), an Option may not be exercised unless a Participant, at the time he
or she exercises an Option held by such Participant, is, and has been at all
times since the date of grant of such Option (the "Grant Date"), an employee of
the Company (an "Eligible Participant"). A Participant's right to exercise his
or her Options terminates upon cessation of employment to the extent the Option
was not vested on the date of such cessation.
(3) Relationship with the Company. If a Participant ceases to be an
Eligible Participant prior to the effective date (the "Registration Date") of a
registration statement filed with the Commission to register the Common Stock
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), for
any reason, then, except as provided in clauses (4), (5) and (6) below, the
Participant's right to exercise his or her Option shall terminate upon the later
to occur of (i) three months after such cessation or (ii) three months after the
Exercisability Date (but in no event after the Final Exercise Date), provided
that an Option shall be exercisable only to the extent that it was vested on the
date of such cessation. If a Participant ceases to be an Eligible Participant
subsequent to the Registration Date for any reason, then, except as provided in
clauses (4), (5) and (6) below, the Participant's right to exercise his or her
Option terminates three months after such cessation provided that an
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Option shall be exercisable only to the extent that it was vested on the date of
such cessation.
(4) Termination Upon Death. If a Participant dies prior to the Final
Exercise Date while he or she is an eligible Participant and prior to the
Registration Date, the Participant's right to exercise his or her Option shall
automatically terminate, provided that the Company may, at its sole option, make
a payment to the estate of such Participant, in such form of payment as the
Company may determine, other than securities of the Company, equal to the
difference between the fair market value of the Common Stock at the time of
death and the exercise price of the Option multiplied by the number of shares of
such Option that are vested at the time of death. If a Participant dies prior to
the Final Exercise Date while he or she is an Eligible Participant and
subsequent to the Exercisability Date and/or the Registration Date and the
Company has not terminated such relationship for "cause" as specified in clause
(6) below, the Participant's right to exercise his or her Option shall terminate
eighteen months following the date of death of the Participant provided that
such Option shall be exercisable only to the extent that such Option was vested
on the date of his or her death, and further provided that such Option shall not
be exercisable after the Final Exercise Date.
(5) Exercise Period Upon Disability. If a Participant becomes disabled
(within the meaning of Section 22(e)(3) of the Code) prior to the Final Exercise
Date while he or she is an Eligible Participant and the Company has not
terminated such relationship for "cause" as specified in clause (6) below, the
Participant's right to exercise his or her Option shall terminate upon the later
to occur of (i) one year following the date of disability of the Participant or
(ii) three months after the Exercisability Date (but in no event after the Final
Exercise Date), provided that such Option shall be exercisable only to the
extent that such Option was vested on the date of his or her disability, and
further provided that such Option shall not be exercisable after the Final
Exercise Date.
(6) Discharge for Cause; Termination for Breach. If a Participant,
prior to the Final Exercise Date, is discharged by the Company for "cause" (as
defined below), the right to exercise an Option held by such Participant shall
terminate immediately upon the effective date of such discharge. "Cause" shall
mean the conviction of the Participant of, or the entry of a pleading of guilty
of or nolo contendere by the Participant to, any crime involving any felony. A
Participant shall be considered to have been discharged for "Cause" if the
Company determines, within 30 days after a Participant's resignation, that
discharge for cause was warranted. In addition, the right to exercise an Option
held by a Participant shall terminate immediately upon (i) the violation by the
Participant of the confidentiality provision contained in any grant of or
written instrument for Options, employment contract, confidentiality and
non-disclosure agreement or other such agreement between the Participant and the
Company or (ii) upon the disclosure by a Participant
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<PAGE> 5
of any financial information concerning the Company provided to the Participant
by or on behalf of the Company in confidence.
(f) Exercise of Option. Each election to exercise an Option may be
exercised by delivery to the Company at its principal office of a written notice
of exercise signed by the proper person or by any other form of notice
(including electronic notice) approved by the Board together with payment in
full as specified in Section 5(g) for the number of shares for which the Option
is exercised. The Participant may purchase less than the number of shares
covered hereby, provided that no partial exercise of this option may be for any
fractional share or for fewer than ten whole shares. The right of exercise shall
be cumulative so that to the extent the Option is not exercised in any period to
the maximum extent permissible it shall continue to be exercisable, in whole or
in part, with respect to all shares for which it is vested until the earlier of
the Final Exercise Date or the termination of the Option under the Plan.
(g) Payment Upon Exercise. Common Stock purchased upon the exercise of an
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may, in its sole discretion, otherwise provide
in an option agreement, by (i) delivery of an irrevocable and unconditional
undertaking by a creditworthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price or (ii) delivery by the Participant
to the Company of a copy of irrevocable and unconditional instructions to a
creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price;
(3) when the Common Stock is registered under Exchange Act, by delivery
of shares of Common Stock owned by the Participant valued at their fair market
value as determined by (or in a manner approved by) the Board in good faith
("Fair Market Value"), which Common Stock was owned by the Participant at least
six months prior to such delivery; or
(4) by any combination of the above permitted forms of payment.
6. Public Offering
In connection with a public offering of securities of the Company, a
Participant (i) may not sell, make short sale of, loan, grant any options for
the purchase of, or otherwise dispose of any shares of Common Stock held by the
Participant (other than those shares included in the offering) without the prior
written consent of the Company or the underwriters managing such public offering
of the Company's securities for a period of 180 days from the effective date of
such registration
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statement, and (ii) will execute any agreement reflecting clause (i) above as
may be requested by the Company or the managing underwriters at the time of such
offering.
7. Adjustments for Changes in Common Stock and Certain Other Events
(a) Changes in Capitalization. In the event of any stock split, reverse
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the number and class of securities and exercise price per share subject to
each outstanding Option, and (iii) the terms of each other outstanding Option
shall be appropriately adjusted by the Company (or substituted Options may be
made, if applicable) to the extent the Board shall determine, in good faith,
that such an adjustment (or substitution) is necessary and appropriate. If this
Section 7(a) applies and Section 7(c) also applies to any event, Section 7(c)
shall be applicable to such event, and this Section 7(a) shall not be
applicable.
(b) Liquidation or Dissolution. Upon the adoption by the Board of a
resolution to liquidate or dissolve the Company, the Board shall give written
notice to the Participants providing that all then unexercised Options will (i)
become exercisable in full as of a specified time at least 10 business days
prior to the effective date of such liquidation or dissolution and (ii)
terminate effective upon such liquidation or dissolution, except to the extent
exercised before such effective date. Subsequent to the Registration Date, the
Board may specify the effect of a liquidation or dissolution on any other Option
granted under the Plan at the time of the grant of such Option.
(c) Acquisition Events
(1) Definition. An "Acquisition Event" shall mean: (a) any merger or
consolidation of the Company with or into another entity as a result of which
the Common Stock is converted into or exchanged for the right to receive cash,
securities or other property or (b) any exchange of shares of the Company for
cash, securities or other property pursuant to a statutory share exchange
transaction.
(2) Consequences of an Acquisition Event. Upon the occurrence of an
Acquisition Event, or the execution by the Company of any agreement with respect
to an Acquisition Event, the Board shall provide that all outstanding Options
shall be assumed, or equivalent options shall be substituted, by the acquiring
or succeeding corporation (or an affiliate thereof). For purposes hereof, an
Option shall be considered to be assumed if, following consummation of the
Acquisition Event, the Option confers the right to purchase, for each share of
Common Stock subject to
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the Option immediately prior to the consummation of the Acquisition Event, the
consideration (whether cash, securities or other property) received as a result
of the Acquisition Event by holders of Common Stock for each share of Common
Stock held immediately prior to the consummation of the Acquisition Event (and
if holders were offered a choice of consideration, the type of consideration
chosen by the holders of a majority of the outstanding shares of Common Stock);
provided, however, that if the consideration received as a result of the
Acquisition Event is not solely common stock of the acquiring or succeeding
corporation (or an affiliate thereof), the Company may, with the consent of the
acquiring or succeeding corporation, provide for the consideration to be
received upon the exercise of Options to consist solely of common stock of the
acquiring or succeeding corporation (or an affiliate thereof) equivalent in fair
market value to the per share consideration received by holders of outstanding
shares of Common Stock as a result of the Acquisition Event.
Notwithstanding the foregoing, if the acquiring or succeeding
corporation (or an affiliate thereof) does not agree to assume, or substitute
for, such Options, then the Board shall, upon written notice to the
Participants, provide that all then unexercised Options will become exercisable
in full as of a specified time prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Participants before the consummation of such Acquisition
Event; provided, however, that in the event of an Acquisition Event under the
terms of which holders of Common Stock will receive upon consummation thereof a
cash payment for each share of Common Stock surrendered pursuant to such
Acquisition Event (the "Acquisition Price"), then the Board may instead provide
that all outstanding Options shall terminate upon consummation of such
Acquisition Event and that each Participant shall receive, in exchange therefor,
a cash payment equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such outstanding
Options (whether or not then exercisable), exceeds (B) the aggregate exercise
price of such Options.
8. General Provisions Applicable to Options
(a) Transferability of Options. Prior to the Registration Date, Options
shall not be sold, assigned, transferred, pledged, gifted or otherwise
encumbered by the person to whom they are granted, either voluntarily or by
operation of law and shall be exercisable only by the Participant. Subsequent to
the Registration Date, except as the Board may otherwise determine or provide in
an Option, Options shall not be sold, assigned, transferred, pledged, gifted or
otherwise encumbered by the person to whom they are granted, either voluntarily
or by operation of law, except by will or the laws of descent and distribution,
and, during the life of the Participant, shall be exercisable only by the
Participant. References to a Participant, to the extent relevant in the context,
shall include references to authorized transferees. An Option transferred in
contravention of the provisions of this Plan shall be void ab initio.
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(b) Documentation. Each Option shall be evidenced by a written instrument
in such form as the Board shall determine, such written instrument which may be
in the form of an agreement signed by the Company and the Participant, or a
written instrument, confirming memorandum or notice to the Participant from the
Company. Subject to the provisions of Section 5(e) and Section 8(a), each Option
may contain terms and conditions relating to vesting, exercise price and
duration of exercisability in addition to, but not inconsistent with, those set
forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each Option
may be made alone or in addition or in relation to any other Option. Pursuant to
paragraph (b) above, the terms of each Option need not be identical, and the
Board need not treat Participants uniformly.
(d) Status. Subsequent to the Registration Date, the Board shall determine
the effect on an Option of the retirement or authorized leave of absence in the
employment or other status of a Participant and the extent to which, and the
period during which, the Participant, the Participant's legal representative,
conservator, guardian or, if the Participant has died, the beneficiary
designated, in a manner determined by the Board, by a Participant to receive
amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary") may exercise rights under the
Option.
(e) Withholding. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Options to such Participant no later than the
date of the event creating the tax liability. When the Common Stock is
registered under the Exchange Act, Participants may satisfy such tax obligations
in whole or in part by delivery of shares of Common Stock, including shares
retained from the Option creating the tax obligation, valued at their Fair
Market Value. The Company may, to the extent permitted by law, deduct any such
tax obligations from any payment of any kind otherwise due to a Participant. No
shares of Common Stock will be issued pursuant to the exercise of an Option
unless and until the Participant pays to the Company, or makes provision
satisfactory to the Company for payment of, any federal, state or local
withholding taxes required by law to be withheld in respect of such Option.
(f) Amendment of Option. Subject to the provisions of Section 5 and Section
7, prior to the Registration Date, the Board may not amend, modify or terminate
any outstanding Option, provided that the Board may modify any outstanding
Option without the consent of the Participant in order to obtain an exemption or
no-action relief for the Company under Section 12(h) of the Exchange Act.
Subsequent to the Registration Date, the Board may amend, modify or terminate
any outstanding Option, including but not limited to, changing the date of
exercise or
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realization and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares of Common Stock previously delivered under the Plan
until (i) all conditions of the Option have been met or removed to the
satisfaction of the Company, (ii) in the opinion of the Company's counsel, all
other legal matters in connection with the issuance and delivery of such shares
have been satisfied, including any applicable securities laws and any applicable
stock exchange or stock market rules and regulations, and (iii) the Participant
has executed and delivered to the Company such representations or agreements as
the Company may consider appropriate to satisfy the requirements of any
applicable laws, rules or regulations.
(h) Acceleration. Subsequent to the Registration Date, the Board may at any
time provide that any Options shall become immediately vested in full or in
part.
(i) Investment Representations. The Company may require any person to whom
an Option is granted, as a condition of exercising such Option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option for his or her
own account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws.
9. Miscellaneous
(a) No Right To Employment or Other Status. No person shall have any claim
or right to be granted an Option, and the grant of an Option shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Option.
(b) No Rights As Stockholder. No Participant shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Option until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend),
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then an optionee who exercises an Option between the record date and the
distribution date for such stock dividend shall be entitled to receive, on the
distribution date, the stock dividend with respect to the shares of Common Stock
acquired upon such Option exercise, notwithstanding the fact that such shares
were not outstanding as of the close of business on the record date for such
stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on the
date on which it is adopted by the Board. No Options shall be granted under the
Plan after the completion of ten years from the earlier of (i) the date on which
the Plan was adopted by the Board or (ii) the date the Plan was approved by the
Company's stockholders, but Options previously granted may extend beyond that
date.
(d) Amendment of Plan. Prior to the Registration Date, the Board may amend,
suspend, modify or terminate the Plan, any portion thereof or any outstanding
Option in order to obtain an exemption or no-action relief for the Company under
Section 12(h) of the Exchange Act. Subsequent to the Registration Date, the
Board may amend, suspend, modify or terminate the Plan or any portion thereof at
any time.
(e) Governing Law. The provisions of the Plan and all Options made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
10
<PAGE> 1
Exhibit 10.3
THE EDISON PROJECT INC.
1999 KEY STOCK INCENTIVE PLAN
1. Purpose
The purpose of this 1999 Key Stock Incentive Plan (the "Plan") of The
Edison Project Inc. a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's stockholders.
Except where the context otherwise requires, the term "Company" shall include
any of the Company's present or future subsidiary corporations of as defined in
Section 424(f) of the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder (the "Code") and any other business venture
(including, without limitation, joint venture or limited liability company) in
which the Company has a significant interest, as determined by the Board of
Directors of the Company (the "Board").
2. Eligibility
All of the Company's senior executives (those persons who make or are
expected to make significant contributions to the business of the Company),
officers and directors (and any individuals who have accepted an offer for
employment as such) are eligible to be granted options, restricted stock awards,
or other stock-based awards (each, an "Award") under the Plan. Each person who
has been granted an Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
(a) Administration by Board of Directors. The Plan will be administered by
the Board. The Board shall have authority to grant Awards and to adopt, amend
and repeal such administrative rules, guidelines and practices relating to the
Plan as it shall deem advisable. The Board may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Award in the manner
and to the extent it shall deem expedient to carry the Plan into effect and it
shall be the sole and final judge of such expediency. All decisions by the Board
shall be made in the Board's sole discretion and shall be final and binding on
all persons having or claiming any interest in the Plan or in any Award. No
director or person acting pursuant to the
<PAGE> 2
authority delegated by the Board shall be liable for any action or determination
relating to or under the Plan made in good faith.
(b) Delegation to Executive Officers. To the extent permitted by applicable
law, the Board may delegate to one or more executive officers of the Company the
power to make Awards and exercise such other powers under the Plan as the Board
may determine, provided that the Board shall fix the maximum number of shares
subject to Awards and the maximum number of shares for any one Participant to be
made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). All references in the
Plan to the "Board" shall mean the Board or a Committee of the Board or the
executive officer referred to in Section 3(b) to the extent that the Board's
powers or authority under the Plan have been delegated to such Committee or
executive officer. If and when the Series A Common Stock, $.01 par value per
share, of the Company (the "Common Stock") is registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), the Board shall appoint one such
Committee of not less than two members, each member of which shall be an
"outside director" within the meaning of Section 162(m) of the Code and a
"non-employee director" as defined in Rule 16b-3 promulgated under the Exchange
Act.
4. Stock Available for Awards
Subject to adjustment under Section 8, Awards may be made under the Plan
for up to 1,000,000 shares of Common Stock. If any Award expires or is
terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not being issued,
the unused Common Stock covered by such Award shall again be available for the
grant of Awards under the Plan, subject, however, in the case of Incentive Stock
Options (as hereinafter defined), to any limitation required under the Code.
Shares issued under the Plan may consist in whole or in part of authorized but
unissued shares or treasury shares.
5. Stock Options
(a) General. The Board may grant options to purchase Common Stock (each,
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
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<PAGE> 3
(b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
time each Option is granted and specify it in the applicable option agreement,
provided, however, that the exercise price shall not be less than 100% of the
fair market value of the Common Stock, as determined by the Board, at the time
the Option is granted.
(d) Duration of Options. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Board may specify in the applicable
option agreement.
(e) Exercise of Option. Options may be exercised by delivery to the Company
of a written notice of exercise signed by the proper person or by any other form
of notice (including electronic notice) approved by the Board together with
payment in full as specified in Section 5(f) for the number of shares for which
the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may, in its sole discretion, otherwise provide
in an option agreement, by (i) delivery of an irrevocable and unconditional
undertaking by a creditworthy broker to deliver promptly to the Company
sufficient funds to pay the exercise price or (ii) delivery by the Participant
to the Company of a copy of irrevocable and unconditional instructions to a
creditworthy broker to deliver promptly to the Company cash or a check
sufficient to pay the exercise price;
(3) when the Common Stock is registered under the Exchange Act, by
delivery of shares of Common Stock owned by the Participant valued at their fair
market value as determined by (or in a manner approved by) the Board in good
faith ("Fair Market Value"), which Common Stock was owned by the Participant at
least six months prior to such delivery;
(4) to the extent permitted by the Board, in its sole discretion by (i)
delivery of a promissory note of the Participant to the Company on terms
determined
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<PAGE> 4
by the Board, or (ii) payment of such other lawful consideration as the Board
may determine; or
(5) by any combination of the above permitted forms of payment.
6. Restricted Stock
(a) Grants. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, a "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. Other Stock-Based Awards
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions and the grant of securities
convertible into Common Stock.
8. Adjustments for Changes in Common Stock and Certain Other Events
(a) Changes in Capitalization. In the event of any stock split, reverse
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the number and class of securities and exercise price per share subject to
each outstanding Option, (iii) the repurchase price
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<PAGE> 5
per share subject to each outstanding Restricted Stock Award, and (iv) the terms
of each other outstanding Award shall be appropriately adjusted by the Company
(or substituted Awards may be made, if applicable) to the extent the Board shall
determine, in good faith, that such an adjustment (or substitution) is necessary
and appropriate. If this Section 8(a) applies and Section 8(c) also applies to
any event, Section 8(c) shall be applicable to such event, and this Section 8(a)
shall not be applicable.
(b) Liquidation or Dissolution. In the event of a proposed liquidation or
dissolution of the Company, the Board shall upon written notice to the
Participants provide that all then unexercised Options will (i) become
exercisable in full as of a specified time at least 10 business days prior to
the effective date of such liquidation or dissolution and (ii) terminate
effective upon such liquidation or dissolution, except to the extent exercised
before such effective date. The Board may specify the effect of a liquidation or
dissolution on any Restricted Stock Award or other Award granted under the Plan
at the time of the grant of such Award.
(c) Acquisition Events
(1) Definition. An "Acquisition Event" shall mean: (a) any merger or
consolidation of the Company with or into another entity as a result of which
the Common Stock is converted into or exchanged for the right to receive cash,
securities or other property or (b) any exchange of shares of the Company for
cash, securities or other property pursuant to a statutory share exchange
transaction.
(2) Consequences of an Acquisition Event on Options. Upon the
occurrence of an Acquisition Event, or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall provide that all
outstanding Options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof). For purposes hereof, an Option shall be considered to be assumed if,
following consummation of the Acquisition Event, the Option confers the right to
purchase, for each share of Common Stock subject to the Option immediately prior
to the consummation of the Acquisition Event, the consideration (whether cash,
securities or other property) received as a result of the Acquisition Event by
holders of Common Stock for each share of Common Stock held immediately prior to
the consummation of the Acquisition Event (and if holders were offered a choice
of consideration, the type of consideration chosen by the holders of a majority
of the outstanding shares of Common Stock); provided, however, that if the
consideration received as a result of the Acquisition Event is not solely common
stock of the acquiring or succeeding corporation (or an affiliate thereof), the
Company may, with the consent of the acquiring or succeeding corporation,
provide for the consideration to be received upon the exercise of Options to
consist solely of common stock of the acquiring or succeeding corporation (or an
affiliate thereof) equivalent in fair market value to the
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<PAGE> 6
per share consideration received by holders of outstanding shares of Common
Stock as a result of the Acquisition Event.
Notwithstanding the foregoing, if the acquiring or succeeding
corporation (or an affiliate thereof) does not agree to assume, or substitute
for, such Options, then the Board shall, upon written notice to the
Participants, provide that all then unexercised Options will become exercisable
in full as of a specified time prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Participants before the consummation of such Acquisition
Event; provided, however, that in the event of an Acquisition Event under the
terms of which holders of Common Stock will receive upon consummation thereof a
cash payment for each share of Common Stock surrendered pursuant to such
Acquisition Event (the "Acquisition Price"), then the Board may instead provide
that all outstanding Options shall terminate upon consummation of such
Acquisition Event and that each Participant shall receive, in exchange therefor,
a cash payment equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such outstanding
Options (whether or not then exercisable), exceeds (B) the aggregate exercise
price of such Options.
(3) Consequences of an Acquisition Event on Restricted Stock Awards.
Upon the occurrence of an Acquisition Event, the repurchase and other rights of
the Company under each outstanding Restricted Stock Award shall inure to the
benefit of the Company's successor and shall apply to the cash, securities or
other property which the Common Stock was converted into or exchanged for
pursuant to such Acquisition Event in the same manner and to the same extent as
they applied to the Common Stock subject to such Restricted Stock Award.
(4) Consequences of an Acquisition Event on Other Awards. The Board
shall specify the effect of an Acquisition Event on any other Award granted
under the Plan at the time of the grant of such Award.
9. General Provisions Applicable to Awards
(a) Transferability of Awards. Except as the Board may otherwise determine
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award shall be evidenced by a written instrument in
such form as the Board shall determine. Such written instrument may
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<PAGE> 7
be in the form of an agreement signed by the Company and the Participant or a
written confirming memorandum to the Participant from the Company. Each Award
may contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each Award
may be made alone or in addition or in relation to any other Award. The terms of
each Award need not be identical, and the Board need not treat Participants
uniformly.
(d) Termination of Status. The Board shall determine the effect on an Award
of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) Withholding. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, when the Common Stock is registered under the Exchange Act,
Participants may satisfy such tax obligations in whole or in part by delivery of
shares of Common Stock, including shares retained from the Award creating the
tax obligation, valued at their Fair Market Value. The Company may, to the
extent permitted by law, deduct any such tax obligations from any payment of any
kind otherwise due to a Participant.
(f) Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or
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<PAGE> 8
agreements as the Company may consider appropriate to satisfy the requirements
of any applicable laws, rules or regulations.
(h) Acceleration. The Board may at any time provide that any Options shall
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of restrictions in full or in part or that any other Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
10. Miscellaneous
(a) No Right To Employment or Other Status. No person shall have any claim
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the record date and
the distribution date for such stock dividend shall be entitled to receive, on
the distribution date, the stock dividend with respect to the shares of Common
Stock acquired upon such Option exercise, notwithstanding the fact that such
shares were not outstanding as of the close of business on the record date for
such stock dividend.
(c) Effective Date and Term of Plan. The Plan shall become effective on the
date on which it is adopted by the Board. No Awards shall be granted under the
Plan after the completion of ten years from the earlier of (i) the date on which
the Plan was adopted by the Board or (ii) the date the Plan was approved by the
Company's stockholders, but Awards previously granted may extend beyond that
date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time.
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<PAGE> 9
(e) Governing Law. The provisions of the Plan and all Awards made hereunder
shall be governed by and interpreted in accordance with the laws of the State of
Delaware, without regard to any applicable conflicts of law.
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<PAGE> 1
Exhibit 10.5
THE EDISON PROJECT INC.
THIRD AMENDED AND RESTATED
SHAREHOLDERS' AGREEMENT
SHAREHOLDERS' AGREEMENT dated as of July 2, 1999 (the
"Agreement") by and among The Edison Project Inc. (the "Company"), WSI Inc.
("WSI"), WPA Investment L.P. ("WPA"), WEG L.P. ("WEG I"), WEG II L.P. ("WEG
II"), WEG III L.P. ("WEG III"), WEG IV L.P., ("WEG IV"), WEG V L.P. ("WEG V") ,
WEG VI L.P. ("WEG VI"), WEG VII L.P. ("WEG VII," and together with WSI, WPA and
WEG I, WEG II, WEG III, WEG IV, WEG V, and WEG VI, the "WSI Stockholders"),
Sprout Capital VI, L.P., Sprout CEO Fund, L.P., Sprout Capital VII, L.P., DLJ
Capital Corporation (Delaware) (together, the "Sprout Stockholders"), Blue Rock
Capital, L.P. ("Blue Rock"), Benno C. Schmidt, Jr. ("BCS"), John R. Schmidt
("JRS"), Edward V. Ryan, trustee fbo Elizabeth H. Schmidt, Edward V. Ryan,
trustee fbo Benno C. Schmidt, III, Edward V. Ryan, trustee fbo Christina W.
Schmidt (together, "Ryan"), Elizabeth H. Schmidt, Custodian for Asher J. Liftin
("Schmidt"), Anne B. McMillen and Anne B. McMillen CFBO Alexandra L. McMillen
("McMillen"), Tess Lusher ("Lusher"), Harold S.H. Edgar ("Edgar"), Joel E.
Smilow ("Smilow"), John W. Childs ("Childs"), J.W. Childs Investments, L.L.C.
("JWC"), Richmont Leeds Education Company L.L.C. ("RLEC"), Leeds II L.P. ("Leeds
II"), John C. Reid ("Reid"), Alexandra O. Bjorklund ("AOB"), each of the certain
investors set forth on Schedule I hereto (collectively, the "Zesiger Group"),
J.P. Morgan Investment Corporation ("JPMIC"), Sixty Wall Street SBIC Fund, L.P.
("Sixty Wall" and together with JPMIC, the "JPM Investors"), Investor
Investments AB ("Investor AB"), ABS Employees' Venture Fund L.P. ("ABS
Ventures"), Greenwood Partners ("Greenwood"), Forum Partners ("Forum" and
together with Greenwood, the "Mullen Partners"), Progressive Investment Company,
Inc. ("Progressive"), James A. Haslam, III ("JAH"), Yale University ("Yale"),
UBS Capital XV LLC ("UBS") and Vulcan Ventures Incorporated ("Vulcan"). The WSI
Stockholders, the Sprout Stockholders, Blue Rock, BSC, JRS, Ryan, Schmidt,
McMillen, Lusher, Edgar, Smilow, Childs, JWC, RLEC, Leeds II, Reid, AOB, the
Zesiger Group, the JPM Investors, Investor AB, ABS Ventures, the Mullen
Partners, Progressive, JAH, Yale, UBS and Vulcan are sometimes hereinafter
referred to individually as a "Stockholder" and collectively as "Stockholders,"
which term shall include any permitted transferee of any Shares (as defined
below) of a Stockholder who agrees in writing to become bound by the terms of
this Agreement).
WHEREAS, certain of the Stockholders wish to amend and restate
the Second Amended and Restated Stockholders' Agreement, dated June 4, 1999, as
amended;
WHEREAS, simultaneously with the execution and delivery of
this Agreement, the Company and certain other parties named herein will execute
and deliver a Series F Subscription Agreement dated as of the date hereof (the
"Subscription
<PAGE> 2
Agreement") which provides for the purchase and sale of certain stock of the
Company subject to the terms and conditions contained therein;
WHEREAS, simultaneously with the execution and delivery of
this Agreement and in accordance with the Subscription Agreement, each of Vulcan
and the other Purchasers named therein (together, the "Investors") will purchase
the number of shares of Series F Convertible Preferred Stock, $.01 par value per
share, and/or NonVoting Series G Convertible Preferred Stock of the Company
shown next to its, his or her name on Exhibit A thereto (the occurrence of the
foregoing events, the "Closing");
WHEREAS, immediately following the Closing, the parties
hereto, other than the Company, will be the holders of all of the issued and
outstanding capital stock of the Company; and
WHEREAS, the Company and the Stockholders desire to provide
for certain matters concerning the management of the Company and the ownership
and transfer of the Shares;
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Stock Ownership. Upon consummation of the Closing, (a) each
of the Stockholders will own the Series A Common Stock ("Common Shares") and/or
convertible and/or exchangeable preferred stock (each series thereof,
collectively, the "Preferred Shares") shown next to its name on Exhibit A
hereto, (b) WSI will own one share of Series B Common Stock, (c) the Sprout
Stockholders (collectively) will own one share of Series C Common Stock, (d) JWC
will own one share of Series D Common Stock, (e) Blue Rock will own one share of
Series E Common Stock, (f) RLEC will own one share of Series F Common Stock, (g)
JPMIC will own one share of Series G Common Stock, (h) Investor AB will own one
share of Series H Common Stock and (i) Vulcan will own one share of Series I
Common Stock (each such Series described in clauses (b)-(i), collectively, the
"Special Common Stock"). Each such Common Share and Preferred Share and the
Special Common Stock shall have the rights and attributes ascribed to it in the
Company's Amended and Restated Certificate of Incorporation (the "Certificate")
set forth as Exhibit B to the Subscription Agreement and the Amended and
Restated ByLaws set forth as Exhibit B hereto (collectively, the "Constitutional
Documents") and as provided herein.
2. Certain Definitions.
2.1. "Affiliate" of any individual, partnership, joint
venture, corporation, limited liability company, trust or unincorporated
association (a "Person") means (i) any other Person which directly or indirectly
through one or more intermediaries controls, is controlled by, or is under
common control with, such Person, and (ii) in the case of any Person who is an
individual, any parent, child, sibling or spouse (or parent, child
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<PAGE> 3
or sibling of such spouse) of such Person, or any trust for the benefit of any
of the Persons described in this clause (ii). For purposes of this definition
the term "control" (including the correlative meanings of the terms "controlled
by" and "under common control with"), as used with respect to any Person, shall
mean the possession, directly or indirectly, of the power to direct or cause the
direction of management or investment policies of such Person, whether through
the ownership of voting securities or by contract or otherwise.
2.2. "Qualified Public Offering" has the same meaning as in
the Certificate.
2.3 "Shares" means (i) any and all Common Shares, Special
Common Stock and Preferred Shares of the Company, (ii) any and all Common Shares
of the Company or other securities directly or indirectly issuable or issued
upon conversion or exchange of any of the Preferred Shares (without regard to
any restriction on conversion or exercise that may be applicable to any
particular holder) and (iii) any securities issuable or issued or distributed in
respect of any of the securities identified in any of the foregoing clauses (i),
(ii) or (iii) by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, reorganization, merger, consolidation
or otherwise.
3. Management.
3.1. Except as provided below, the Board of Directors of the
Company (the "Board") shall consist of sixteen individuals: (a) two directors to
be elected by the holders of Series C Common Stock, (b) two directors to be
elected by the holder of Series D Common Stock, (c) five directors to be elected
by the holder of Series B Common Stock (one of which such directors (the
"Special Class B Director") shall be the president of WSI (currently H.
Christopher Whittle ("Whittle"))), (d) one director to be elected by the holder
of Series E Common Stock, (e) one director to be elected by the holder of Series
F Common Stock, (f) two directors to be elected by the holder of Series G Common
Stock, (g) one director to be elected by the holder of Series H Common Stock,
(h) one director to be elected by the holder of Series I Common Stock, and (i)
one director to be elected by a majority of the directors elected pursuant to
clauses (a) through (h) above with BCS to be such director for so long as BCS
remains the chairman of the Company (the "Chairman") and thereafter such
directors shall have no right or obligation to elect a director under this
clause (i). No holder of Special Common Stock shall be obligated to elect a
director (notwithstanding that such holder is entitled to do so), provided, that
in accordance with the provisions of the Certificate, if any of the holders of
Series B Common Stock, Series C Common Stock, Series D Common Stock or Series G
Common Stock determine to elect fewer directors than the number specified in the
previous sentence (but at least one such director), such lesser number of
directors so elected shall be entitled as set forth in the Certificate to cast
the same number of votes with respect to Board decisions as if such holder had
appointed the number of directors
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<PAGE> 4
specified in the previous sentence (subject, in the case of the holder of Series
B Common Stock, to the proviso in Section 3.5(iii) below).
3.2. Any member of the Board may resign at any time by giving
written notice to the Company pursuant to Section 9.1. Such resignation shall
take effect upon receipt thereof by the Company, unless otherwise specified
therein. Any member may be removed for cause by action of a majority of the
votes held by the members of the Board; provided if the member so removed was
elected or appointed by the holders of 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 or Series I Common Stock, then no
action taken by the Board of Directors after such removal and prior to the
election or appointment of a replacement director for such removed director
shall take effect unless both (i) the stockholder entitled to elect or appoint
such removed director has been given notice in writing of the action and (ii)
within ten (10) days after receipt of such notice any one of the following three
events or actions shall not have occurred or been taken: (A) such stockholder
shall have elected or appointed a replacement director for such removed
director; (B) such replacement director shall have indicated in writing to the
Company that he or she would have voted against such action; and (C) treating
such written indication as a vote against such action by such replacement
director as if he or she had been duly elected to the Board prior to such
action, such action would not have been approved by the Board. Cause for removal
shall exist only if the member whose removal is proposed shall have been
convicted of a felony by a court of competent jurisdiction or shall have been
adjudged by a court of competent jurisdiction to be liable for gross negligence
or willful misconduct in the performance of his or her duties to the Company in
a matter of substantial importance to the Company. A member of the Board may be
removed at any time without cause by the stockholder entitled to elect such
director.
3.3. Any vacancy created by the death, resignation, retirement
or removal of a member of the Board other than BCS shall be filled by the
designee of the stockholder of the Company entitled to elect the member whose
absence created such vacancy. Except as provided in this Section 3.3 or in the
event a Stockholder entitled to elect a member of the Board notifies the Company
in writing that it will not be electing such member at such time, a vacancy
occurring for any reason and newly created directorships resulting from an
increase in the authorized number of directors may be filled by the vote of a
majority of the directors then in office, although less than a quorum or by the
sole remaining director, and any directors so chosen shall hold office until the
next election of the series or class for which such directors shall have been
chosen and until their successors shall be elected and qualified.
3.4. A majority of the entire number of votes which the
members of the entire Board are entitled to cast shall constitute a quorum at
any meeting of the Board. If at any meeting of the Board there shall not be a
quorum present, the members present thereat shall adjourn the meeting until a
quorum shall have been obtained. Unless
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otherwise provided herein or in the Constitutional Documents, the vote of a
majority of the entire number of votes which the members of the entire Board are
entitled to cast shall be the vote of the Board. Members of the Board shall
receive reasonable notice of meetings of the Board.
3.5. The affirmative votes of each of (a) the Special Series B
Director, (b) the director or directors appointed by the holders of Series C
Common Stock, (c) the director or directors appointed by the holder of Series D
Common Stock, and (d) the director or directors appointed by the holder of the
Series G Common Stock, shall be required to authorize: (i) any indebtedness
(including funded debt, capitalized leases and material operating leases) of the
Company or any subsidiaries of the Company, other than (x) trade debt and
accounts payable containing customary payment terms and incurred in the ordinary
course of business and (y) working capital credit facilities not exceeding
$1,000,000 in the aggregate, (ii) the authorization or issuance of any shares of
capital stock of any class or series or other equity securities of the Company
(or any change or amendment to the attributes or preferences of any such
securities, whether or not issued), granting of registration rights (other than
as permitted by this Agreement), redemption of Shares, granting or redemption of
stock options or approval of performance standards for vesting of options
granted to executives of the Company, options issued to employees of the
Company, or the sale or issuance of any securities by the Company (provided,
however, that after January 1, 1999, such votes shall not be required to
authorize the issuance of securities of the Company in an initial public
offering, and at any time after January 1, 2000, any one of (I) the Special
Class B Director, (II) the director(s), acting together, appointed by the
holders of Series C Common Stock, (III) the directors, acting together,
appointed by the holder of Series D Common Stock, or (IV) the director(s),
acting together, appointed by the holder of the Series G Common Stock may
require that the Company undertake an initial public offering), (iii) the
appointment, removal, replacement or reduction in compensation or
responsibilities of any of the Chairman, the Chairman of the Board, the
President, the Chief Executive Officer, the Chief Operating Officer, or the
Chief Financial Officer or any other officer (or other similar position) of the
Company or any subsidiary of either thereof with authority, responsibilities and
duties equivalent to such officers (each, a "Senior Officer"), provided that if
the Special Series B Director is at such time a Senior Officer, the affirmative
vote of the Special Series B Director shall not be required to authorize his
removal as a Senior Officer (or a reduction in his responsibilities or
compensation as such) and the directors appointed by the Series B Common Stock
shall be limited to two votes on such removal or reduction and (iv) the approval
or disapproval of any merger, consolidation, recapitalization, reorganization,
sale of all or substantially all of the assets, dissolution or winding up of the
Company or any subsidiary thereof. No matter requiring the vote of any Board
member as stated above shall be determined at a meeting from which such Board
member is absent unless the holder of the relevant series of Special Common
Stock shall have notified the Company in writing that it is not, at such time,
electing a member to the Board. In addition, the Company shall not amend the
Certificate to increase the number of authorized shares
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of Special Common Stock without the unanimous consent of the then current
holders of such Stock. Notwithstanding anything herein to the contrary, the
issuance of any stock, options or other securities under the terms of the
Subscription Agreement shall not require a vote of the Board of Directors.
3.6. The Company may enter into transactions otherwise
requiring the approval of the Board in which any of the WSI Stockholders, the
Sprout Stockholders, JWC, Blue Rock, RLEC, BCS, the JPM Investors, Investor AB,
UBS or Vulcan have an interest only if a majority of the votes of directors
elected by Stockholders not party to or otherwise having an interest in such
transaction are cast in favor thereof. Unless a holder of Common Shares or
Preferred Shares otherwise agrees, such holder shall not be required to receive
in any merger, consolidation, recapitalization, reorganization or liquidation
of, or declaration or payment of dividends or stock buy-back by, the Company,
consideration other than the consideration each other holder of such holder's
particular series of Common Shares or Preferred Shares, as the case may be,
receives in such transaction and the Company will not engage in any such
dividend or buy-back without the consent of the holders of a majority of the
shares held by non-participating Stockholders (measured, with respect to the
outstanding Preferred Stock, on an as-converted to Common Shares basis), voting
as a class.
3.7. The Company shall furnish to each holder of Special
Common Stock and to UBS (unless any such stockholder requests that such
information not be furnished to it): (a) within thirty (30) days after the end
of each month (i) the unaudited balance sheet of the Company at the end of such
month, (ii) the unaudited statement of income of the Company for the year
through the end of such month, (iii) a comparison of actual results with the
budget for such period and (iv) an unaudited cash flow statement with a
comparison to budget for such period and (b) any other information which any
such Stockholder may reasonably request.
3.8. Each Stockholder shall vote its Shares and take all other
actions as may be necessary or desirable to cause the Board and its members to
be constituted and to have the rights and powers as set forth in this Article 3,
including promptly executing and delivering any consent or other document
reasonably required to do so.
3.9. "Option Plan" means the employee stock option plans
implemented by the Company and shall include any options issued to employees of
the Company.
3.10. The Stockholders agree not to vote to amend Sections
3.3, 3.4, 3.5 and 4.5 of the Company's Amended and Restated By-Laws without the
unanimous consent of the holders of the Company's Special Common Stock. In
addition, the Stockholders agree, if required by the managing underwriters in
connection with a Qualified Public Offering or other public offering or any
stock exchange or quotation system on which the Company desires its Shares to be
listed or quoted, to vote their shares to amend the Constitutional Documents to
increase the number of members of
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the Board of Directors of the Company to provide for the addition of two outside
directors.
3.11 The Board shall establish an Audit and Finance Committee
to be co-chaired by one director elected by the holder of the Series G Common
Stock (if at such time such holder has elected at least one director that has
agreed to be on such Committee) and one director appointed by a majority of the
directors elected by the other holders of the Special Common Stock.
4. Transfer of Shares.
4.1. General. (a) No Stockholder or transferee thereof shall
directly or indirectly sell, assign, transfer, pledge or otherwise encumber or
dispose of ("Transfer") all or any part of its Shares in the Company or any
rights appurtenant thereto except as permitted by this Agreement.
Notwithstanding anything to the contrary herein, none of (i) the pledge by WSI
of its Shares to Morgan Guaranty Trust Company (or in connection with any
replacement financing related thereto), (ii) the agreement by WSI and Whittle to
elect a designee of UBS as director elected by the holder of Series B Common
Stock pursuant to an Agreement dated as of June 4, 1999 by and among WSI,
Whittle and UBS (the "UBS Agreement"), (iii) the transfers by WSI to Progressive
Investment Company, Inc. ("Progressive") and to James Haslam as described in the
Notice to the Company dated as of January 14, 1998 (the "Notice"), nor (iv) the
transfer by BCS to Progressive as described in the Notice, shall be a "Transfer"
hereunder or a transaction requiring compliance with Sections 4.2, 4.4 or 4.5.
Notwithstanding anything to the contrary herein, none of the transfers by WSI
and RLEC of the Company's capital stock to WEG VI, Leeds II and UBS under those
certain Purchase Agreements dated June 4, 1999 (the "Purchase Agreements"),
shall be a transaction requiring compliance with Sections 4.2, 4.4 or 4.5.
(b) If any Shares cease to be "restricted securities", as that
term is defined in the Securities Act of 1933, as amended (the "Securities
Act"), or cease to be subject to any and all of the restrictions on transfer set
forth in this Agreement, the Company shall, upon written request of the holder
thereof, issue to such holder a new certificate evidencing such Shares without a
legend evidencing such restrictions.
4.2. Prior to any proposed Transfer of Shares in accordance
with this Agreement, the Stockholder(s) proposing such Transfer shall give at
least fifteen (15) business days' prior written notice to the Company. The
notice shall specify the number of Shares proposed to be Transferred and
describe briefly the manner of the proposed Transfer. Upon the request of the
Company following receipt of such notice, the Stockholder(s) proposing such
Transfer shall provide an opinion of counsel satisfactory to the Company that
the proposed Transfer may be effected without registration under the Securities
Act and applicable state securities or blue sky laws. If, in the opinion of such
counsel, no registration under the Securities Act or any applicable state
securities
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<PAGE> 8
or blue sky laws is or will be necessary in connection therewith, the
Stockholder(s) shall be entitled to Transfer such Shares in the manner described
in the notice given to the Company if such Transfer is otherwise in accordance
with this Agreement (including, to the extent applicable, Sections 4.3, 4.4 and
4.5).
4.3. Permitted Transfers. Each Stockholder may Transfer its
Shares as follows:
(a) to one or more Affiliates of such Stockholder, so long as
such transferee shall have agreed in a writing to be bound by the terms of this
Agreement, without the consent of any other Stockholder, the Company or the
Board of Directors and without compliance with Sections 4.4 or 4.5 or the
opinion requirement of Section 4.2;
(b) if such Stockholder is a partnership or limited liability
company, to its partners or members, respectively, in a distribution without
consideration in accordance with the terms of its partnership agreement or
operating agreement (as applicable), so long as such partners or members (as
applicable) shall have agreed in writing to be bound by the terms of this
Agreement, without the consent of any other Stockholder, the Company, or the
Board of Directors and without compliance with Section 4.4 or 4.5;
(c) in the case of the Zesiger Group, to any Person who at the
time of Transfer is a pre-existing client of Zesiger Capital Group LLC, so long
as such transferee shall have agreed in writing to be bound by the terms of this
Agreement, without the consent of any other Stockholder, the Company, or the
Board of Directors and without compliance with Section 4.4 or 4.5;
(d) in an aggregate cumulative amount of up to 15% of the sum
of (i) its Shares held on December 31, 1997 and (ii) its Shares purchased since
December 31, 1997 (including Shares to be purchased under the Subscription
Agreement and Purchase Agreements), so long as such transferee shall have agreed
in writing to be bound by the terms of this Agreement, without the consent of
any other Stockholder, the Company or the Board of Directors and without
compliance with Sections 4.4 or 4.5;
(e) in a Transfer made in compliance with Section 4.4 and, if
applicable, 4.5;
(f) in a public offering in connection with the exercise of
its rights under Article 5 hereof, without compliance with Section 4.2, 4.4 or
4.5; or
(g) following a public offering, in open market sales under
Rule 144 under the Securities Act, without giving effect to paragraph (k) of
such rules without the
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<PAGE> 9
consent of any other Stockholder, the Company or the Board of Directors and
without compliance with Sections 4.4 or 4.5.
(h) Notwithstanding anything to the contrary contained herein,
in no event shall any Transfer pursuant to Section 4.3(a) - (e) be made to a
Person that the Company reasonably determines is a competitor of the Company
without the Company's prior written consent. This Section 4.3(h) shall not
restrict a Transfer otherwise permitted under Sections 4.3(a) - (e) to a Person
that is a financial or institutional investor or a diversified holding company,
or an Affiliate of any of the foregoing, that owns securities of a competitor
for investment purposes.
4.4. Right of First Offer. (a) If a Stockholder (the
"Prospective Seller") desires to sell all or part of its Shares, other than its
Special Common Stock (the "Offered Shares") in a Transfer not otherwise
permitted by this Article 4, the Prospective Seller shall first provide written
notice to the Company and each other Stockholder (the "Offer Notice") of its
desire to sell the Offered Shares, which notice shall describe (i) the series,
class and number of Shares proposed to be sold, (ii) the cash price per share
(the "Offer Price") for each class and series of Shares proposed to be sold and
(iii) all other material terms and conditions of the proposed sale.
(b) The Offer Notice shall constitute an offer by the
Prospective Seller to sell, to the Stockholders (other than the Prospective
Seller), the Offered Shares on the terms and conditions set forth in the Offer
Notice and on the terms and provisions contained in this Agreement.
(c) Each Stockholder shall have twenty (20) business days from
the date such notice is deemed given as herein provided to elect to purchase its
pro rata portion (based on the number of Shares held by Stockholders other than
the Prospective Seller, measured on an as-converted to Common Shares basis) of
the Offered Shares on the same terms and conditions as set forth in the Offer
Notice by giving written notice as herein provided (the "Response Notice")
within such 20-business day period to the Prospective Seller and the Company of
its desire to do so, which notice shall constitute the irrevocable agreement of
such Stockholder to so purchase such pro rata portion.
(d) If any Stockholder fails to deliver a timely Response
Notice (or otherwise notifies the Prospective Seller and the Company that it
does not elect to participate in the purchase of Offered Shares), the
Prospective Seller shall, within one (1) business day after the expiration of
the 20-business day period, give to each other Stockholder which shall have
timely delivered a Response Notice, a written notice that additional Offered
Shares are available, and each such other Stockholder timely delivering a
Response Notice may increase the number of Offered Shares to be purchased by it,
pro rata (based on the number of Shares held by Stockholders delivering a
Response Notice, measured on an as-converted to Common Shares basis), by
delivering a second Response Notice in the manner set forth above, provided that
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each Response Notice delivered after the initial Response Notice shall be
delivered within five (5) business days after a Stockholder receives notice from
the Prospective Seller that additional Offered Shares are available and shall
constitute the irrevocable agreement of such Stockholder to purchase its pro
rata portion of such additional Offered Shares. Any Offered Shares not subject
to a Response Notice shall be offered successively, on a pro rata basis (based
on the number of Shares held by Stockholders delivering a Response Notice,
measured on an as-converted to Common Shares basis), in accordance with the
procedures set forth in this Section 4.4(d), to all Stockholders which shall
have timely delivered a Response Notice until (i) a timely Response Notice has
been delivered in respect of all Offered Shares or (ii) no timely Response
Notice has been delivered in respect of any remaining Offered Shares.
(e) If a Prospective Seller proposes to sell Shares of
different classes or series, each Stockholder that elects to purchase a portion
of such Shares shall purchase its proportionate share of each class and/or
series of such Shares based upon the aggregate number of Shares of each such
class and/or series proposed to be sold by the Prospective Seller.
(f) If Stockholders (other than the Prospective Seller) do not
elect to purchase all of the Offered Shares available for purchase under the
Offer Notice, the Prospective Seller (i) shall be under no obligation to sell
any of the Offered Shares to any Stockholder under this Section 4.4, unless the
Prospective Seller so elects, and (ii) subject to Section 4.5 below (if
applicable), may, within a period of four (4) months from the date of the Offer
Notice, sell the Offered Shares to one or more third parties for cash per share
of not less than 95% of the Offer Price and on such other terms and conditions
as are not materially more favorable to such transferee than those specified in
the Offer Notice. Upon a sale of Offered Shares, the purchaser of such Offered
Shares shall execute an agreement pursuant to which such purchaser agrees that
the Shares it acquired from the Prospective Seller are subject to the provisions
of this Agreement. Any purchaser to whom Shares are sold pursuant to and in
compliance with this Section 4.4 shall, upon the consummation of such purchase
and sale, be deemed a "Stockholder" under this Agreement. If a Prospective
Seller does not complete the sale of the Offered Shares within such four (4)
month period, the provisions of this Section 4.4 shall again apply, and no sale
of Shares shall be made other than in accordance with this Agreement.
(g) The closing of purchases of Offered Shares by the
Stockholders (other than the Prospective Seller) pursuant to this Section 4.4
shall take place within 20 business days after the delivery of the last received
Response Notice (provided that if such day is not a business day in New York,
New York, then the closing shall occur prior to the next succeeding such
business day) such date to be specified by the Prospective Seller, at 11:00 A.M.
local time at the principal offices of the Company, or at such other date, time
or place as the parties to the sale may agree, provided, however, that if the
purchase and sale of the Shares is subject to any regulatory approval, the time
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period during which such purchase and sale may be consummated shall be extended
until the expiration of five (5) business days after all such regulatory
approvals shall have been obtained. At least five (5) business days prior to
such closing, the Prospective Seller shall notify each purchaser in writing of
the name and number of purchasers and the portion of the Offered Shares to be
purchased by each, and the date of the closing. At such closing, the Prospective
Seller shall sell, transfer and deliver to each purchaser full right, title and
interest in and to the Offered Shares so purchased by such purchaser, free and
clear of all liens, security interests or adverse claims of any kind and nature
(except as otherwise set forth in this Agreement), and shall deliver to each
purchaser a certificate or certificates representing the Offered Shares sold to
such purchaser, in each case duly endorsed for transfer or accompanied by
appropriate stock transfer powers duly endorsed with signatures guaranteed by a
commercial bank, trust company or registered broker dealer. Upon surrender of
the certificate(s) representing the Offered Shares purchased, or to be
purchased, by purchasers pursuant to this Section 4.4, the Company shall
promptly issue new certificates representing such Offered Shares in the name(s)
of such purchaser(s) and representing the appropriate number, class and series
of Stock. Simultaneously with delivery of appropriate certificates, each
purchaser of the Offered Shares shall deliver to the Prospective Seller, by wire
transfer of immediately available funds to such bank and account as the
Prospective Seller shall designate, a cash amount equal to the product of the
purchase price (for each applicable class and/or series) and the number of
Offered Shares (of each applicable class and/or series) being acquired by such
purchaser, in full payment of the purchase price of the Offered Shares
purchased.
(h) The provisions of this Section 4.4 shall not apply to any
Transfer by a Stockholder pursuant to the exercise of such Stockholder's rights
under Section 4.5.
(i) For the purposes of this Section 4.4, a Transfer of a
Stockholder's Shares shall be deemed to include the sale, assignment, transfer
or other disposition (other than pledges or other encumbrances) of any equity
interest in the Stockholder owning such Shares ("Stockholder Equity"), if (i)
the percentage of Stockholder Equity transferred exceeds 15% of the Total
Stockholder Equity (as defined below) of such Stockholder and (ii) a principal
purpose of the Transfer is to avoid or circumvent the provisions of this Article
4.
(j) "Total Stockholder Equity" of a Stockholder for purposes
of this Section 4.4 means the total Stockholder Equity of such Shareholder
immediately following the Closing as adjusted to reflect the effect of any stock
dividend, stock split, or other binding transaction or recapitalization,
reorganization, merger, consolidation or other similar transaction affecting the
Company.
4.5. Right to Participate in Transfers. (a) In the event any
Prospective Seller or group of Prospective Sellers acting together, after
complying with the provisions of Section 4.4 hereof (if applicable), shall be
entitled to sell Offered Shares in
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an aggregate amount greater than five percent (5%) of the then outstanding
Shares (measured, with respect to all outstanding Preferred Shares, on an
as-converted to Common Shares basis) to any Person or Persons in any transaction
or series of related transactions (each a "Third Party"), such Prospective
Seller(s) shall give notice thereof (the "Third Party Notice") to each other
Stockholder, describing the kind and number of Shares to be sold, the price per
share and all other material terms and conditions of the proposed sale. Each
other Stockholder shall have the right and option, for a period of twenty (20)
business days after the Third Party Notice is deemed given as herein provided,
by giving the Prospective Seller(s) written notice (the "Notice of Election"),
to sell to the Third Party(ies) a pro rata portion of its Shares (based on the
number of Shares then outstanding measured, with respect to all outstanding
Preferred Shares, on an as-converted to Common Shares basis) for the same
consideration and otherwise on the same terms and conditions as contained in the
Third Party Notice. If a Stockholder shall not have given as provided herein a
Notice of Election pursuant to this Section 4.5 with respect to any Third Party
Notice, such Stockholder will be deemed to have waived all its rights under this
Section 4.5 with respect to the transaction specified in such Third Party
Notice. If the Third Party is unwilling to purchase all Shares proposed to be
sold hereunder, the amount of Shares to be sold by any Prospective Seller(s) and
each other Stockholder that has delivered a Notice of Election shall be reduced
to the extent necessary to provide for the sale of Shares by the Prospective
Seller(s) and each of the other Stockholders that has delivered a Notice of
Election, pro rata based upon the number of Shares held by each such Person
(measured, with respect to all outstanding Preferred Shares, on an as-converted
to Common Shares basis) participating in the proposed sale.
(b) At the closing of any proposed Transfer subject to this
Section 4.5, the Prospective Seller(s), together with all other Stockholders
that have elected to exercise their rights hereunder in connection with such
Transfer, shall deliver to the Third Party(ies) certificates and/or other
instruments representing the subject Shares to be sold, free and clear of all
liens and encumbrances (except as provided in this Agreement), together with
stock or other appropriate powers duly endorsed therefor, and shall receive in
exchange therefor the consideration to be paid or delivered by the Third Party
in respect of such Shares as described in the Third Party Notice.
(c) Notwithstanding anything herein to the contrary, in the
event a Prospective Seller(s), under this Section 4.5 is selling Series D
Preferred Shares (or NonVoting Series E Preferred Shares) for consideration per
share of less than $6.00 (adjusted for any stock splits, stock dividends (other
than P.I.K. Dividends), stock combinations or similar events), only Stockholders
holding and desiring to sell Series D Preferred Shares (or Non-Voting Series E
Preferred Shares) shall be entitled to exercise the tagalong rights provided
herein and each such Stockholder's pro rata rights shall be measured by
reference to only the Series D Preferred Shares and Non-Voting Series E
Preferred Shares held by such Stockholder. Any capitalized term used in this
Section
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4.5(c) and not otherwise defined in this Agreement shall have the same meaning
as in the Certificate.
(d) The Prospective Seller(s) and each other Stockholder
participating in the Third Party Offer each shall bear their respective expenses
(including, without limitation, legal expenses) incurred in connection with such
sale.
(e) Except as expressly provided in this Section 4.5, the
Prospective Seller(s) shall not have any obligation to any Stockholder with
respect to the sale of any Shares owned by such Stockholder in connection with
this Section 4.5. Anything herein to the contrary notwithstanding and
irrespective of whether any Notice of Election shall have been given as herein
provided, the Prospective Seller(s) shall not have any obligation to any
Stockholder to sell any Shares to the proposed Third Party(ies) pursuant to this
Section 4.5 if such Prospective Seller(s) decides not to accept or consummate
any proposed Transfer of its Shares (it being understood that any and all such
decisions shall be made by such Prospective Seller(s) in its sole discretion).
4.6. Purchase of Pledged Shares. In the event WSI (the
"Pledgor") has pledged its Shares (the "Pledged Shares") to a third party (the
"Secured Party") as permitted pursuant to Section 4.1 hereof, and the Secured
Party at any time exercises any voting rights with respect to the Pledged
Shares, the Company, in its sole discretion (but subject to the provisions of
the Certificate and of Section 3.5 above), shall have the right to purchase the
Pledged Shares from the Secured Party for an amount equal to the fair market
value of such Pledged Shares as determined by a nationally recognized investment
bank. If the Company chooses to exercise such right, the Company shall give
notice thereof to the Secured Party (in accordance with Section 9.2 as if the
Secured Party were a party hereto). Within 10 business days after such notice
shall be deemed given as herein provided, the Secured Party shall give notice to
the Company and the Pledgor of the Secured Party's selection of an investment
bank, which selection shall be reasonably acceptable to Pledgor. The investment
bank so selected shall deliver to the Secured Party and the Company such
investment bank's fair market value determination within thirty (30) business
days. If the Company does not exercise its right to purchase the Pledged Shares
within twenty (20) business days after the Company's receipt of such investment
bank's determination, the Secured Party shall succeed, on the twenty-first
business day after such determination, to all rights of the Pledgor hereunder
notwithstanding any other provisions herein to the contrary and shall cause to
be delivered to the Company an instrument signed by the Secured Party evidencing
such Secured Party's acknowledgment of and agreement to be bound by the terms of
this Agreement. At the time of the execution of this Agreement, in the case of
any existing Pledged Shares, or at the time WSI pledges its Shares pursuant to
Section 4.1 and this Section 4.6, the Pledgor shall cause to be delivered to the
Company an instrument signed by the Secured Party evidencing such Secured
Party's acknowledgment of and agreement to the terms of the preceding sentence.
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4.7. Preemptive Rights. If the Company desires to issue and
sell any additional shares of common stock or preferred stock, or any rights,
options or warrants to purchase said common or preferred stock, or securities
that are, or may become, convertible into said common or preferred stock, in
exchange for cash (other than (i) in or following a Qualified Public Offering,
(ii) shares of common stock or preferred stock to be issued upon conversion or
exchange of Preferred Shares or Common Shares or any other convertible or
exercisable security (which issuance was subject to the provisions of this
Section 4.7), or (iii) shares of common stock to be issued or other securities
issuable or issued upon the exercise of any of the options or warrants described
in Section 2.2 of the Subscription Agreement dated December 30, 1997, as
amended, or similar options or warrants for the purchase of up to a maximum of
four million (4,000,000) shares of Series A Common Stock, the Company shall give
written notice thereof (the "Transaction Notice") to each Stockholder,
describing the kind and number of securities to be issued, the price and all
other material terms and conditions of the issuance and sale not later than
twenty (20) business days prior to the consummation of such proposed issuance
and sale. Each Stockholder shall have fifteen (15) business days from the date
the Transaction Notice is deemed given as herein provided to agree to purchase
or obtain on the same terms and conditions as the issuance and sale described in
the Transaction Notice such amount of common stock or preferred stock, as the
case may be, as will permit such Stockholder to maintain its respective
percentage ownership of Shares (measured on an as-converted to Common Shares
basis) prior to such issuance and sale by giving as herein provided written
notice within such 15-business day period to the Company of its desire to do so,
which notice shall constitute the irrevocable agreement of such Stockholder to
so purchase or obtain, subject to the consummation of the transaction described
in the Transaction Notice. Any purchase pursuant to such notice shall be
consummated simultaneously with and subject to the consummation of the
transaction described in the Transaction Notice, provided, however, that in the
event the purchase of such securities is subject to any regulatory approval, the
purchase and sale shall not be consummated until five business days following
the date on which such approval shall have been obtained. Any Stockholder that
shall fail to deliver a timely notice indicating its desire to purchase Shares
pursuant to this Section 4.7 or shall fail to consummate the purchase in
accordance with the preceding sentence, shall be deemed to have waived all
pre-emptive rights under this Section 4.7 with respect to the issuance and sale
described in the Transaction Notice. Notwithstanding anything to the contrary
herein, each Stockholder hereby waives any and all pre-emptive or similar rights
it, he or she may have pursuant to the Constitutional Documents or this
Agreement or otherwise with respect to the issuance of up to 7,000,000 Shares
pursuant to the Subscription Agreement or pursuant to the Company's Series F
Subscription Agreement dated June 4, 1999. The Company shall cause any
purchasers of any equity securities (or securities convertible into or
exchangeable for equity securities) of the Company which may be issued prior to
or after the Closing to waive such purchaser's pre-emptive rights with respect
to the transactions contemplated by the Subscription Agreement (including with
respect to any Common Shares or Preferred Shares issuable upon the
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conversion or exchange of any Shares issued thereunder or upon the exercise of
any options issued thereunder).
4.8 Restriction on Transfer of Special Common Stock.
Notwithstanding anything to the contrary herein, until December 30, 2000, no
holder may Transfer shares of Special Common Stock except (i) to the Company (in
which event such Transferred shares shall be canceled by the Company), (ii)
pursuant to a pledge described in Sections 4.1 or 4.6, provided, that in
connection with any transfer pursuant to Section 4.6, the special voting rights
as described in Section 3.5 shall not be transferable (and shall terminate with
respect to such Stockholder upon such Transfer pursuant to Section 4.6), (iii)
to an Affiliate on the terms and conditions set forth in Section 4.3(a) hereof,
provided, that in the event an Affiliate transferee under this clause (iii) does
not at the time of such Transfer own Shares of the Company (other than the share
of Special Common Stock to be transferred), such Transfer shall require the
consent of the Company, which consent shall not be unreasonably withheld.
Following December 31, 2000, a holder may transfer its Special Common Stock as
permitted by the immediately preceding sentence and to any one transferee of at
least 75% of the Shares of the Company held by such holder (measured immediately
following the Closing) (a "75% Transferee"), provided, that a 75% Transferee
(other than an Affiliate) shall not be entitled to the special voting rights
described in Section 3.5 and such holder's special voting rights shall terminate
upon the consummation of any Transfer (other than to an Affiliate) described in
this sentence. The right of first offer and tagalong rights provided herein
shall not apply to any transfer of Special Common Stock permitted under this
Section 4.8.
4.9. Aggregation. For purposes of this Section 4, and Sections
5.1 and 5.2, (i) the WSI Shareholders, (ii) the Sprout Shareholders, (iii) the
Zesiger Group, (iv) the JPM Investors, and (v) any Stockholder and any
Affiliate(s) of such Stockholder, shall in each case be deemed to be one
Stockholder.
4.10. Transfer of Right to Receive Dividends. Nothing herein
contained shall prohibit any of the Stockholders from Transferring its right to
receive any or all dividends to which it may be entitled with respect to the
Shares.
4.11. Additional Purchases by WSI Stockholders.
Notwithstanding any other provision of this Article 4, except for purchases
under the Subscription Agreement and the Purchase Agreements, prior to a
Qualified Public Offering none of (i) the WSI Shareholders, (ii) Whittle, (iii)
any Person which has a written or verbal agreement with any of the WSI
Shareholders or Whittle (other than this Agreement) relating to the control of
the Company or (iv) any Affiliate of any of the foregoing shall purchase
additional Shares without the prior written consent of JPMIC except that such
restriction shall not apply in any transaction where (a) one or more of the WSI
Shareholders, Whittle or their Affiliates is exercising a pre-emptive right or
right of first offer of the WSI Shareholders under this Agreement or the
Constitutional Documents or (b) any
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<PAGE> 16
Person or Persons other than a WSI Shareholder or their Affiliates is at the
same time offering to purchase from or purchasing from more than one Stockholder
in a single transaction or series of related transactions such that following
the consummation of such transaction or transactions such Person will hold an
aggregate of 35% or more of the Company's shares. Each Stockholder (other than
the WSI Stockholders) represents and warrants, as of the date hereof, to each
other Stockholder hereunder that it does not have an agreement under clause
(iii) of this Section 4.11, except, in the case of UBS, WSI and Whittle, the UBS
Agreement.
5. Registration Rights.
5.1. Demand Registration. (a) Following the consummation of a
public offering of the Company's equity securities, if any one of the WSI
Stockholders, the Sprout Stockholders, JWC, the JPM Investors, Investor AB, UBS
and/or Vulcan (each, a "Demand Stockholder") desires to Transfer a number of
Shares (x) equal to or greater than 5% of the outstanding Shares or (y) with an
aggregate proposed offering price of $10,000,000 or more, each such
Stockholder(s) (the "Demanding Stockholder(s)") shall have the right (subject to
its obligations under any underwriters' lock-up agreements entered into in
connection with any public offering) on an unlimited number of occasions to
require the Company to, upon written notice describing the proposed Transfer,
effect as soon as practicable the registration under the Securities Act,
including filing an appropriate Registration Statement (including any Prospectus
therein, a "Registration Statement") under the Securities Act with the
Securities and Exchange Commission (the "Commission" or the "SEC") with respect
to such proposed Transfer of the Company's Shares; provided, however, in no
event shall the Company be obligated to effect more than one registration
pursuant to this Section 5.1(a) within any ninety day period. The notice by such
Demanding Stockholder(s) for the first such Registration Statement may be
delivered to the Company at any time after such Demanding Stockholders'
obligations under any lock-up agreements entered into in connection with the
initial public offering of the Company's equity securities (an "IPO") shall have
expired. If Shares to be included in a Registration Statement pursuant to this
Section 5.1 are to be Transferred by Demanding Stockholder(s) in an underwritten
public offering, then the Demanding Stockholder(s) holding a majority of the
Shares proposed to be Transferred shall in their written demand for registration
name the managing underwriter or underwriters, subject to the reasonable
approval of the Company.
(b) After receipt of each such notice from Demanding
Stockholder(s), the Company shall, within ten (10) days of the receipt thereof,
give written notice of such request to all Demand Stockholders and shall as soon
as practicable but not later than sixty (60) days after receipt of any such
notice, file a Registration Statement with the Commission to register the Shares
which the Demanding Stockholder(s) and the other Demand Stockholders request to
be registered within twenty (20) days of the mailing of such notice by the
Company (the Demand Stockholder(s) so requesting to be
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<PAGE> 17
registered, together with the Demanding Stockholder(s), the "Participating
Stockholders").
(c) After filing any Registration Statement pursuant to this
Section 5.1, the Company shall use its reasonable best efforts to cause such
Registration Statement to become effective as soon as practicable, which efforts
shall include entering into customary agreements with underwriters. After such
Registration Statement becomes effective, the Company shall use reasonable
efforts to maintain the effectiveness of such Registration Statement for such
reasonable period as each of the Participating Stockholders may require to
complete its contemplated sales in compliance with the Securities Act. So long
as such Registration Statement or a Registration Statement under Section 5.2
remains in effect, the Company shall furnish to the Participating Stockholders
and their underwriters and to the other holders of Shares covered by such
Registration Statement such quantities of each prospectus included in the
Registration Statement, any revised or supplemental prospectus filed, and other
documents as they may reasonably request. Upon the request of any Participating
Stockholder, the Company shall file post-effective amendments or supplements to
such Registration Statement for a reasonable period of time in order that the
Registration Statement may be effective at all times during such period and
shall at all times comply with applicable federal, state securities or blue sky
laws and deliver copies of the prospectus contained therein as provided above.
(d) A registration requested pursuant to this Section 5.1
shall not be deemed to be "effected" for purposes of this Section 5.1 (i) if it
has not been declared effective by the SEC and become effective in accordance
with the Securities Act, (ii) if it shall not have remained effective for a
period of at least 180 days (or such shorter period in which all Shares of the
Stockholders included in such registration have actually been sold thereunder),
(iii) if after it has become effective, such registration is materially
interfered with by any stop order, injunction or similar order or requirement of
the SEC or other governmental agency or court for any reason other than any
action or omission of a Participating Stockholder, or (iv) if the conditions to
closing specified in the underwriting agreement, if any, entered into in
connection with such registration are not satisfied or waived other than by
reason of a breach of such agreement by a Participating Stockholder.
(e) Should a Registration Statement filed pursuant to this
Section 5.1 not become effective due to the failure of a Participating
Stockholder to perform its obligations under this Agreement or the inability of
a Participating Stockholder to reach agreement with the underwriters on price or
other customary terms for such transaction, or in the event a Participating
Stockholder determines to withdraw or not to pursue a request for registration
pursuant to this Article 5 (in each of the foregoing cases, provided that at
such time the Company is in compliance in all material respects with its
obligations under this Agreement), then (subject to the last sentence of this
paragraph) such registration shall be deemed to have been "effected" for
purposes of
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this Section 5.1. In such event, the Participating Stockholders may reimburse
the Company for all of the Company's reasonable out-of-pocket expenses incurred
in the preparation, filing and processing of the Registration Statement. If such
reimbursement is made within thirty (30) business days following a request
therefor, such registration shall not be deemed to have been effected for
purposes of this Section 5.1.
(f) If the lead managing underwriter of an underwritten
offering made pursuant to this Section 5.1 shall advise the Company in writing
(with a copy to the Participating Stockholders) that, in such underwriter's
opinion, the number of Shares requested to be included in such registration
exceeds the number which can be sold in such offering within a price range
acceptable to the Participating Stockholders, the Company will reduce the number
of Shares requested to be included in such offering, pro rata based upon the
number of Shares held by each Participating Stockholder (measured on an
as-converted to Common Shares basis), to the number which the Company is so
advised can be sold in such offering within such price range, provided, that all
Shares proposed to be included in such offering other than Shares held by
Participating Stockholders shall be reduced pro rata as provided above (to zero
if required) before any reduction in the number of Shares to be sold by the
Participating Stockholders. If, as a result of any such reduction, the number of
Shares requested to be included in such registration by the Participating
Stockholders is reduced by fifty percent (50%) or more, then notwithstanding
anything herein to the contrary, a registration will not be deemed to have been
effected for purposes of this Section 5.1, provided, however, that the
provisions of this sentence shall apply only to the first request made by each
of JWC, the WSI Stockholders, the Sprout Stockholders, the JPM Stockholders,
Investor AB, UBS and/or Vulcan, as the case may be, for a registration pursuant
to this Section 5.1. In the case of such a registration which would have been
deemed to be a registration for purposes of this Section 5.1 but for the
application of the immediately preceding sentence, the Company nonetheless shall
pay the Registration Expenses in connection with such registration.
5.2. Piggy-Back Registration. (a) If at any time the Company
determines that the Company will file a Registration Statement with respect to
any securities of the Company of any class, whether such securities are to be
offered for the Company's own account or the account of any holder, other than a
registration statement on Form S-4 or Form S-8 or a registration statement filed
in connection with an exchange offer or an offering of equity securities solely
to the Company's existing Stockholders, then the Company shall, in each case,
give at least fifteen (15) business days' prior written notice to each
Stockholder (other than, in the case of a filing under Section 5.1 above, the
Demanding Stockholder) of such proposed filing and such notice shall offer each
Stockholder the opportunity to register such number of Shares as such
Stockholder may specify.
(b) In the event that any offering of securities with respect
to which a Registration Statement is filed as described in Section 5.2(a) is to
be an underwritten
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<PAGE> 19
public offering, the Company shall, if a Stockholder so requests, use reasonable
efforts to cause the managing underwriter or underwriters of such underwritten
public offering to permit such number of Shares as the Stockholder may specify
to be included in such underwritten public offering on no less favorable terms
and conditions to the Stockholder than the terms and conditions applicable to
any similar securities included therein for the account of the Company (or other
Stockholders). Notwithstanding the foregoing, if the lead managing
underwriter(s) of such offering deliver(s) a written opinion to the Company that
marketing factors require a limitation on the number of Shares or other
securities of the Company to be offered and sold in such offering, then there
shall be included in the offering, first, all securities proposed by the Company
to be sold for its account and second, only that number of Shares, if any,
requested to be included in such Registration Statement by Stockholders
requesting registration pursuant to this Section 5.2 that such lead managing
underwriter reasonably and in good faith believes will not substantially
interfere with (including, without limitation, adversely affecting the pricing
of) the offering of securities proposed to be sold by the Company for its own
account. In such event and provided the managing underwriter has so notified the
Company in writing, the number of Shares to be offered and sold by Stockholders
desiring to participate in such offering shall be allocated among such
Stockholders in accordance with the terms of the immediately preceding sentence
and otherwise on a pro rata basis based upon the number of shares of Common
Stock (assuming conversion of the Preferred Stock and other securities
convertible into or exchangeable for Common Stock held by such Stockholders)
each such Stockholder beneficially owns, provided, that all Shares proposed to
be included in such offering other than Shares held by Participating
Stockholders shall be reduced pro rata as provided above (to zero if required)
before any reduction in the number of Shares to be sold by the Participating
Stockholders.
(c) To the extent that the registration of any Shares pursuant
to Section 5.1 or 5.2 is not to be included in an underwritten public offering,
each Registration Statement which includes such Shares shall permit any
Stockholder to sell the Shares in such lawful manner as a Stockholder may
request in accordance with this Section 5, provided, however, that the Company
may elect to file an additional Registration Statement to cover Shares on any
occasion when the Stockholder requests inclusion of Shares in a Registration
Statement to be filed by the Company. Each Stockholder acknowledges that its
right to cause Shares to be included in any underwritten public offering will be
subject to its entering into (i) an underwriting agreement, on terms and
conditions no less favorable to the Stockholder than are offered to the Company
in such underwritten public offering and (ii) other customary arrangements with
the underwriters of such offering; provided, however, that no Stockholder shall
be required to make any representations, warranties or indemnities except as
they relate to such Stockholder's ownership of shares and authority to enter
into the underwriting agreement and to such Stockholder's intended method of
distribution, and the liability of each such Stockholder shall be limited to an
amount equal to the net proceeds from the offering received by such Stockholder.
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(d) To the extent not inconsistent with applicable law, in the
event that the Company effects an underwritten public offering of the Shares
pursuant to Section 5.1 or 5.2, each Stockholder agrees not to effect any public
sale or distribution of any Shares during a reasonable period not to exceed (i)
180 days following the effective date of the initial public offering and (ii) 90
days following the effective date of any other public offering, in each case,
if, and to the extent, such "lock-up" is requested by the underwriter(s) of the
offering.
5.3. Listing. If, in the case of any Transfer of Shares by or
for the account of a Stockholder pursuant to Section 5.1 or 5.2 hereof, such
Shares meet the criteria for listing on any exchange on which the Shares are
then listed, then the Company shall apply for and use its reasonable commercial
efforts to obtain a listing of all such Shares on such exchange.
5.4. State Securities or Blue Sky Laws. In connection with the
registration under the Securities Act of any Transfer of Shares by or for the
account of a Stockholder pursuant to Section 5.1 or 5.2 hereof, the Company
shall file on a timely basis all requisite applications or other instruments to
register, qualify or obtain exemptions for the Transfer under such state
securities or blue sky laws as the managing underwriter shall reasonably
specify, in the case of an underwritten offering, or as each Stockholder may
reasonably specify. The Company shall use reasonable efforts in good faith to
obtain and maintain for a reasonable period, up to the period during which the
Company maintains the effectiveness of the related Registration Statement under
Section 5.1 or 5.2 hereof, an effective registration, qualification or exemption
under the applications or other instruments filed by the Company.
5.5. Certain Other Registration Matters. The Company shall:
(a) notify each holder of any Shares covered by such
Registration Statement, at any time when a prospectus relating thereto is
required to be delivered under the Securities Act within the appropriate time
period of the Company's becoming aware that the prospectus included in such
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omits to state a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of the
circumstances then existing, and at the request of any such holder, prepare and
furnish to such holder a reasonable number of copies of an amendment or
supplement to such Registration Statement or related prospectus as may be
necessary so that, as thereafter delivered to the purchasers of such Shares,
such prospectus shall not include 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 in light of the circumstances then existing;
(b) notify each holder of Shares covered by such Registration
Statement at any time:
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(i) when the prospectus or any prospectus supplement
or post-effective amendment has been filed, and, with respect to the
registration statement or any post-effective amendment, when the same
has become effective;
(ii) of any request by the SEC for amendments or
supplements to the registration statement or the prospectus or for
additional information;
(iii) of the issuance by the SEC of or any threat to
institute any stop order suspending the effectiveness of the
Registration Statement or any order preventing the use of a related
prospectus, or the initiation (or any overt threats) of any proceedings
for such purposes; and
(iv) of the receipt by the Company of any written
notification of the suspension of the qualification of any of the
Shares for sale in any jurisdiction or the initiation (or overt
threats) of any proceeding for that purpose;
(c) otherwise use its best efforts to comply with all
applicable rules and regulations of the SEC, and as soon as practicable after
the effective date of the Registration Statement, but in any event within
sixteen (16) months thereafter make available to its security holders an earning
statement that shall satisfy the provisions of Section 11(a) of the Securities
Act, provided that the Company shall be deemed to have complied with this
paragraph if it has complied with Rule 158 of the Securities Act;
(d) use its best efforts to provide a transfer agent and
registrar for the Shares covered by such Registration Statement no later than
the effective date of such Registration Statement;
(e) enter into agreements (including an underwriting agreement
in the form customarily entered into by the Company in a comparable underwritten
offering) and take all other appropriate and all commercially reasonable actions
in order to expedite or facilitate the disposition of such Shares and in such
connection, whether or not an underwriting agreement is entered into and whether
or not the registration is an underwritten registration:
(i) provide the indemnification in accordance with
the provisions and procedures of Section 5.8 hereof to all parties to
be indemnified pursuant to such Section; and
(ii) deliver such documents and certificates as may
be reasonably requested by the Demanding Stockholder, if any, and, if
there is no Demanding Stockholder, the holders of a majority in number
of the Shares being sold and the managing underwriters, if any, to
evidence compliance with Section 5.5(b) above
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and with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company;
(f) cooperate with the holders of Shares covered by such
Registration Statement and the managing underwriter or underwriters to
facilitate, to the extent reasonable under the circumstances, the timely
preparation and delivery of certificate (not bearing any restrictive legends)
representing the securities to be sold under such Registration Statement, and
enable such securities to be in such denominations and registered in such names
as the managing underwriter or underwriters, if any, or such holders may request
and/or in a form eligible for deposit with the Depository Trust Company;
(g) make available for inspection by any holder included in
such Registration Statement, any underwriter participating in any disposition
pursuant to such Registration Statement, and any attorney, accountant or other
agent retained by any such holder or underwriter (collectively, the
"Inspectors"), reasonable access to appropriate officers of the Company and the
Company's subsidiaries to ask questions and to obtain information reasonably
requested by such Inspector and all financial and other records and other
information, pertinent corporate documents and properties of any of the Company
and its subsidiaries and affiliates (collectively, the "Records"), as shall be
reasonably necessary to enable them to exercise their due diligence
responsibility; provided, however, that the Records that the Company determined,
in good faith, to be confidential and which it notifies the Inspectors in
writing are confidential shall not be disclosed to any Inspector unless such
Inspector signs a confidentiality agreement reasonably satisfactory to the
Company or either (i) the disclosure of such Records is necessary to avoid or
correct a misstatement or omission of a material fact in such Registration
Statement or (ii) the release of such Records is ordered pursuant to a subpoena
or other order from a court of competent jurisdiction; provided, further, that
any decision regarding the disclosure of information pursuant to subclause (i)
shall be made only after consultation with counsel for the applicable
Inspectors; and provided, further, that each holder agrees that it will,
promptly after learning that disclosure of such Records is sought in a court
having jurisdiction, give notice to the Company and allow the Company, at the
Company's expense, to undertake appropriate action to prevent disclosure of such
Records;
(h) in the event of the issuance of any stop order suspending
the effectiveness of the Registration Statement or of any order suspending or
preventing the use of any related prospectus or suspending the qualification of
any Shares included in the Registration Statement for sale in any jurisdiction,
the Company will use all commercially reasonable efforts promptly to obtain its
withdrawal;
(i) prepare and file with the SEC such amendments and
supplements to such Registration Statement and the prospectus used in connection
with such Registration Statement as may be necessary to comply with the
provisions of the
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Securities Act with respect to the disposition of all securities covered by such
Registration Statement;
(j) furnish to the Participating Stockholders such number of
copies of such Registration Statement and of each amendment and supplement
thereto (in each case including all exhibits), such number of copies of the
prospectus contained in such Registration Statement (including each preliminary
prospectus and any summary prospectus) and any other prospectus filed under Rule
424 under the Securities Act, in conformity with the requirements of the
Securities Act, and such other documents as the Participating Stockholders may
reasonably request in order to facilitate the disposition of the Shares covered
by such registration;
(k) use its best efforts to cause all Shares covered by such
Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary by virtue of the
Company's business or operations to enable the seller or sellers thereof to
consummate the disposition of such Shares;
(l) furnish, at the request of any Participating Stockholder,
(i) on the date that the Shares to be registered are delivered to the
underwriters for sale in connection with a registration pursuant to this
Agreement, if such securities are being sold through underwriters, or, if such
securities are not being sold through underwriters, on the date that the
Registration Statement with respect to such securities becomes effective, an
opinion, dated such date, of the counsel representing the Company for the
purposes of such registration, in form and in substance as is customarily given
to underwriters in an underwritten public offering, addressed to the
underwriters, if any, and to the Participating Stockholders and (ii) on the date
that the Registration Statement with respect to such securities becomes
effective, a "comfort" letter dated such date, from the independent certified
public accountants of the Company, in form and substance as is customarily given
by independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, if any, and to the Participating
Stockholders, and, if such securities are being sold through underwriters, a
reaffirmation of such letter on the date that the Shares are delivered to the
underwriters for sale; and
(m) provide each Participating Stockholder with drafts of any
Registration Statement or amendment or supplement thereto prior to their filing.
Each holder agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 5.5(a),
such holder shall forthwith discontinue disposition of Shares pursuant to the
prospectus or Registration Statement covering such Shares until such holder's
receipt of the copies of the supplemented or amended prospectus contemplated by
Section 5.5(a) and, if so directed by the Company, such holder will deliver to
the Company (at the Company's expense)
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<PAGE> 24
all copies, other than permanent file copies then in such holder's possession,
of the prospectus covering such Shares current at the time of receipt of such
notice.
The Company agrees that it shall use all reasonable efforts to
timely file the reports required to be filed by it under the Securities Act and
the Securities and Exchange Act of 1934, as amended from time to time (the
"Exchange Act") (including, without limitation, the reports under Sections 13
and 15(d) of the Exchange Act referred to in paragraph (c)(1) of Rule 144 under
the Securities Act), and shall take such further actions as any Stockholder may
reasonably request, all to the extent required to enable Stockholders to sell
Shares, from time to time, pursuant to the resale limitations of (a) Rule 144
under the Securities Act, as such rule may be hereafter amended, or (b) any
similar rules or regulations hereafter adopted by the SEC. Upon the written
request of any Stockholder, the Company shall deliver to such Stockholder a
written statement verifying that it has complied with such requirements.
Notwithstanding anything herein to the contrary, if the
provisions of this Article 5 conflict with the provisions of any underwriting
agreement or similar agreement entered into by the Company in connection with an
IPO, the provisions of such underwriting or similar agreement shall govern the
IPO, provided, that the Company shall not enter into any such agreement which
adversely affects the rights of any Demand Stockholder without the consent of
such Demand Stockholder.
5.6. Customary Agreements. The Company and any Stockholders
selling Shares under this Section 5 shall enter into customary underwriting and
other related agreements (which agreements will include provisions for
indemnification and the delivery of certain closing documents) and will deliver
such other documents in connection with the consummation of an IPO as are
customary for such transactions; provided, however, that no Stockholder shall be
required to make any representations, warranties or indemnities except as they
relate to such Stockholder's ownership of shares and authority to enter into the
underwriting agreement and to such Stockholder's intended method of
distribution, and the liability of each such Stockholder shall be limited to an
amount equal to the net proceeds from the offering received by such Stockholder.
5.7. Registration Expenses. Except as may be otherwise
required by law, regulation or administrative interpretations of applicable laws
and regulations, all of the costs, fees, disbursements and expenses incurred in
connection with the Registration Statements filed or prepared for filing
pursuant to Sections 5.1 and 5.2 hereof and in connection with compliance with
all related listing requirements and federal, state securities or blue sky laws
and regulations and all applications or other instruments, including without
limitation all registration, filing and qualification fees, printing expenses,
fees and disbursements of counsel for the Company (and, if the Company also
sells securities under any such Registration Statements, reasonable fees of one
counsel for any Participating Stockholders) and fees and expenses of accountants
incidental to
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<PAGE> 25
such Registration Statements, shall be borne by the Company, provided, however,
that each Stockholder shall pay all fees of its separate counsel retained in
connection with any Transfer in connection with a registration of any of its
Shares pursuant to Section 5.2. Notwithstanding any other provision of this
Section 5.7, each Stockholder shall bear the entire amount of any discount or
commission allowed or paid to any underwriter in connection with any Transfer of
Shares by or for its own account.
5.8. Indemnifications. (a) (i) In connection with any
Registration Statement filed pursuant to Section 5.1 or 5.2 hereof, the Company
shall indemnify and hold harmless each Stockholder (and its respective
employees, affiliates, trustees, partners, officers and directors) whose shares
are being registered and any agent or investment advisor thereof, each
underwriter who may purchase from or sell any Shares for such Stockholders and
their agents and each person who controls the Stockholders or underwriter,
within the meaning of the Securities Act (and its respective employees,
affiliates, trustees, partners, offices and directors), from and against any and
all losses, claims, damages, expenses and liabilities caused by or arising out
of any untrue statement or alleged untrue statement of a material fact contained
in such Registration Statement, prospectus, preliminary prospectus, or any
amendment or supplement to any of the foregoing, or in any related state
securities or blue sky applications or other instruments or caused by or arising
out of any omission or alleged omission to state in such Registration Statement,
prospectus, preliminary prospectus, or any amendment or supplement to any of the
foregoing, or any related state securities or blue sky applications or other
instruments any material fact required to be stated therein or necessary to make
the statements which are made not misleading, except insofar as such losses,
claims, damages, expenses or liabilities are caused by or arise out of any such
untrue statement or by any such omission that was made in reliance upon and in
strict conformity with information that was furnished in writing to the Company
by such Stockholder (or its officers or directors), underwriter or controlling
person expressly for use in such Registration Statement or any related state
securities or blue sky applications or other instruments and was used in
accordance with such writing, and the Company will pay to each such indemnified
party, as incurred, any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage, expense
or liability; provided, however, that the indemnity agreement contained in this
Section 5.8(a)(i) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld).
(ii) If Shares are included by a Stockholder in any
Registration Statement filed pursuant to Section 5.1 or 5.2 hereof, then such
Stockholder shall indemnify the Company, its directors, each officer signing
such Registration Statement, each other person whose securities are included in
such Registration Statement, each underwriter who may purchase from or sell any
securities for the Company or any other person pursuant to such Registration
Statement and each person, if any, who controls the
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<PAGE> 26
Company, any such other person or any such underwriter, within the meaning of
the Securities Act, from and against any and all losses, claims, damages,
expenses and liabilities caused by any untrue statement of a material fact
furnished in writing to the Company by such Stockholder expressly for use in
such Registration Statement or any related state securities or blue sky
applications or other instruments and used in accordance with such writing and
from any omission therefrom of a material fact needed to be furnished or
necessary to make the information not misleading and each such Stockholder will
pay, as incurred, any legal or other expenses reasonably incurred by the Company
pursuant to this Section 5.8(a)(ii), in connection with investigating or
defending any such loss, claim, damage, expense or liability; provided, however,
that the indemnity agreement contained in this Section 5.8(a)(ii) shall not
apply to amounts paid in settlement of any such loss, claim, damage, expense or
liability if such settlement is effected without the consent of the Stockholder,
which consent shall not be unreasonably withheld; and provided further, that, in
no event shall the liability of any Stockholder under this Section 5.8(a)(ii)
exceed the net proceeds from the offering received by such Stockholder.
(b) Promptly after receipt by an indemnified party under this
Section 5.8 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 5.8, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the indemnified party under this Section 5.8 except if, and only to
the extent that, the indemnifying party is actually prejudiced thereby; and such
failure to deliver written notice to the indemnifying party will not relieve it
of any liability that it may have to any indemnified party otherwise than under
this Section 5.8.
(c) Contribution. If the indemnification from the indemnifying
party provided for in this Section 5.8 is unavailable to an indemnified party
hereunder in respect of any losses, claims, damages, liabilities or expenses
referred to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages, liabilities and
expenses in such proportion as is appropriate to reflect the relative fault of
the indemnifying party and indemnified party in connection with the
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<PAGE> 27
actions which resulted in such losses, claims, damages, liabilities and
expenses, and the relative benefits received by the indemnified party and
indemnifying party (taking into consideration the fact that the provision of the
registration rights and indemnification hereunder is a material inducement to
the Stockholders to purchase Shares pursuant to the Subscription Agreement) as
well as any other relevant equitable considerations. The relative fault of such
indemnifying party and indemnified party shall be determined by reference to,
among other things, whether any action in question, including any untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact, has been made by, or relates to information supplied by,
such indemnifying party or indemnified party, and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
action. The amount paid or payable by a party as a result of the losses, claims,
damages, liabilities and expenses referred to above shall be deemed to include
any legal and other fees and expenses reasonably incurred by such indemnified
party in connection with any investigation or proceeding.
The parties hereto agree that it would not be just and
equitable if contribution pursuant to this Section 5.8(c) were determined by pro
rata allocation or by any other method of allocation which does not take account
of the equitable considerations referred to in the immediately preceding
paragraph. No Stockholder shall be required to contribute any amount in excess
of the amount by which the total price at which the Shares of such holder were
offered to the public exceeds the amount of any damages which such holder has
otherwise been required to pay by reason of 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 Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
If indemnification is available under this Section 5.8, the
indemnifying parties shall indemnify each indemnified party to the fullest
extent provided in Section 5.8(a), as the case may be, without regard to the
relative fault of such indemnifying parties or indemnified party or any other
equitable consideration provided for in this Section 5.8(c).
(d) The provisions of this Section 5.8 shall be in addition to
any liability which any party may have to any other party and shall survive any
termination of this Agreement. The indemnification provided by this Section 5.8
shall remain in full force and effect irrespective of any investigation made by
or on behalf of an indemnified party, so long as the actions of such indemnified
party resulting in indemnification hereunder were not fraudulent, reckless or
grossly negligent.
5.9. Other Provisions Relating to Registration Rights. If
Shares are included by a Stockholder in any Registration Statement filed
pursuant to Section 5.1 or 5.2, then such Stockholder shall furnish to the
Company at the Company's request such
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<PAGE> 28
information regarding the Stockholder and the Transfer proposed by the
Stockholder as may be required for inclusion in such Registration Statement or
any related state securities or blue sky applications or other instruments, as
may be necessary to provide supplemental information to the Commission, the
National Association of Securities Dealers, Inc., any national securities
exchange or any administrator of any state securities or blue sky law, or as the
Company or any underwriter may reasonably request. If any registration statement
or comparable statement under the Securities Act refers to a Demanding
Stockholder or any of its Affiliates, by name or otherwise, as the holder of any
securities of the Company then, unless counsel to the Company advises the
Company that the Securities Act requires that such reference be included in any
such statement, each such Stockholder shall have the right to require the
deletion of such reference to itself and its Affiliates.
5.10. Transferability. The rights and obligations of a
Stockholder under this Article 5 shall be transferable in connection with any
Transfer of such Stockholder's Shares (including Shares to be purchased under
the Subscription Agreement and the Purchase Agreements) permitted under this
Agreement, provided, that notwithstanding the foregoing, (i) the rights of a
Stockholder to request a registration under Section 5.1(a) shall be transferable
only to any Affiliate or 75% Transferee of such Stockholder (which Affiliate or
75% Transferee shall assume any concomitant obligations of such rights) and (ii)
none of the such rights and obligations under this Article 5 shall be
transferable in a Transfer of Shares in a public offering or following a public
offering in an open market sale under Rule 144K.
5.11. Changes in Registrable Securities. If, and as often as,
there are any changes in the registrable securities by way of stock split, stock
dividend, combination or reclassification, or through merger, consolidation,
reorganization or recapitalization, or by any other means, appropriate
adjustment shall be made in the provisions of this Agreement, as may be
required, so that the rights and privileges granted hereby shall continue with
respect to the registrable securities as so changed. Without limiting the
generality of the foregoing, the Company will require any successor by merger or
consolidation to assume and agree to be bound by the terms of this Agreement, as
a condition to any such merger or consolidation.
6. Legend. The parties agree that the certificates
representing the Shares shall be legended as follows:
"This certificate and the shares represented hereby are
subject to The Edison Project Inc. Third Amended and Restated
Shareholders' Agreement dated as of July 2, 1999 as amended
from time to time, by and among the parties named therein, a
copy of which is available for inspection at the office of the
Secretary of The Edison Project Inc."
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<PAGE> 29
7. Termination. Except as provided below, the provisions of
Article 4 and Article 3 shall terminate upon the consummation of a Qualified
Public Offering, provided, that notwithstanding the foregoing, (x) in connection
with any public offering, Section 3.5 shall terminate in any event if both (i)
requested in writing by the managing underwriter of such offering and (ii)
consented to by each of the holders of the Series B Common Stock, Series C
Common Stock, Series D Common Stock and Series G Common Stock and (y) the
provisions of Section 4.5 (and all related provisions of this Agreement
necessary to give effect to Section 4.5 which modify or limit such Section 4.5)
shall not terminate until two years after the consummation of a Qualified Public
Offering. The Company shall further amend or amend and restate the Amended and
Restated Certificate of Incorporation, this Agreement and the Amended and
Restated ByLaws to the extent necessary to reflect such terminations, and each
Stockholder agrees to vote its Shares to consent and approve any such amendments
or amendments and restatements.
8. Further Assurances. Each party to this Agreement shall
execute, acknowledge, deliver, file and record such further certificates,
amendments, instruments and documents, and do all such other acts and things as
may be required by law, or as may in the opinion of the Board or counsel to the
Company, be necessary or advisable to carry out the intents and purposes of this
Agreement.
9. Notices.
9.1. Unless otherwise specified in this Agreement, all
notices, demands, elections, requests or other communications which any party to
this Agreement may desire or be required to give hereunder shall be in writing
and shall be given by personal delivery, recognized overnight delivery service,
telecopy, receipt confirmed, or by mailing (by registered or certified first
class mail, postage prepaid, return receipt requested) addressed as provided on
Schedule II hereto. Neither the Company nor any Stockholder will be under any
obligation to communicate with or otherwise deal with in any manner any present
or future member of the Zesiger Group or any Affiliate thereof other than
Zesiger Capital Group LLC.
9.2. A notice shall be deemed to have been given (i) if
delivered personally, on the date so delivered (or, if not a business day, on
the next following business day), (ii) if sent by recognized overnight delivery
service or by registered or certified first class mail, postage prepaid, return
receipt requested, on the day after the day sent, or (iii) if sent by telecopy,
upon electronic confirmation of receipt.
9.3. Whenever notice is required to be given by statute, the
Constitutional Documents or this Agreement, a waiver thereof in writing, signed
by the person or persons entitled to such notice whether before or after the
time stated therein, shall be deemed equivalent to the giving of such notice.
Attendance of a person at a meeting of the Board shall constitute a waiver of
notice of such meeting, except where
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<PAGE> 30
the person is attending for the express purposes of objecting, at the beginning
of the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
10. Captions; Contents. All section and article titles or
captions contained in this Agreement, and the table of contents, are for
convenience only and shall not be deemed part of this Agreement.
11. Variation of Pronouns. All pronouns and all variations
thereof shall be deemed to refer to the masculine, feminine or neuter, and all
words in the singular or plural number shall be deemed to refer to both, as the
context shall require.
12. Counterparts. This Agreement may be executed in
counterparts, each of which shall constitute an original and all of which, taken
together, shall constitute one agreement, and any party hereto may execute this
Agreement by signing one or more counterparts thereof.
13. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to conflicts of laws provisions thereof.
14. Successors and Assigns. This Agreement shall be binding
upon the parties hereto and upon their respective successors, executors,
administrators, legal representatives, heirs and any person who receives shares
in a Transfer permitted by Section 4.3(a) - (e) of this Agreement and shall
inure to the benefit of the parties hereto and, except as otherwise provided
herein, their respective successors, executors, administrators, legal
representatives, heirs and any person who receives shares in a Transfer
permitted by Section 4.3(a) - (e) this Agreement. Except as otherwise provided
herein, a Stockholder may not assign any of its rights or obligations under this
Agreement without the prior written consent of the Company, which shall not be
unreasonably withheld. Any and all transferees of Shares in a Transfer permitted
by Section 4.3(a) - (e) this Agreement shall execute this Stockholders'
Agreement or otherwise agree to be bound by its terms.
15. Entire Agreement, Amendments. This Agreement contains the
entire agreement among the parties hereto relative to the subject matter hereof
and may not be amended except in writing signed by each holder of the Company's
Special Common Stock and any Regulation Y Stockholder as defined in the
Certificate (and, in the event all of the Special Common Stock has been
converted to Series A Common Stock, each of the Demand Stockholders) and notice
to each other party hereto.
16. No Third Party Beneficiaries. No provisions in this
Agreement shall be for the benefit of (except as otherwise specifically provided
herein) or enforceable by any third party.
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<PAGE> 31
17. Arbitration. Except as may be otherwise provided herein,
disputes arising under this Agreement shall be arbitrated in New York City in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association by three arbitrators, one selected by the party raising such
dispute, one selected by a majority (based upon the number of shares held at the
time of such dispute) of the other parties hereto (other than the party raising
such dispute and the Company), and the third selected by the others so selected.
Any judgment on the award rendered by the arbitrators may be entered in any
court of competent jurisdiction. The arbitrators shall have no authority to
amend this Agreement. The costs of such arbitration, including expenses of the
other parties thereto, shall be borne by the party against whom the arbitrators'
resolution is rendered. The parties hereto agree that any proceedings pursuant
to this Section 17 shall be kept strictly confidential and shall not be
disclosed to any third party except pursuant to court order.
18. Specific Performance. Each party hereto recognizes and
agrees that (i) its breach of the provisions of this Agreement would cause
irreparable harm to the other parties hereto and (ii) each such other party's
remedy at law for any breach of the provisions of this Agreement would be
inadequate, and (iii) for breach of such provisions, such party shall, in
addition to such other remedies as may be available to it at law or in equity or
as provided in this Agreement, be entitled to injunctive relief and to enforce
its rights by an action for specific performance to the extent permitted by
applicable law. Each party hereto hereby waives any requirement for security or
the posting of any bond or other surety in connection with any temporary or
permanent award of injunctive, mandatory or other equitable relief. Nothing
herein contained shall be construed as prohibiting a party from pursuing any
other remedies available to such party for any breach of threatened breach
hereof or failure to take or refrain from any action as required hereunder.
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<PAGE> 32
IN WITNESS WHEREOF, the parties hereto have entered into this
agreement as of the day and year first above written.
THE EDISON PROJECT INC.
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
WSI INC.
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
WPA INVESTMENT L.P.
By WSI Inc., its General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
WEG L.P.
By WSI Inc., its General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
-32-
<PAGE> 33
WEG II L.P.
By WSI Inc., its General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
WEG III L.P.
By WSI Inc., its General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
WEG IV L.P.
By WSI Inc., its General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
WEG V L.P.
By WSI Inc., its General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
-33-
<PAGE> 34
WEG VI L.P.
By WSI Inc., its General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
WEG VII L.P.
By WSI Inc., its General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
SPROUT CAPITAL VI, L.P.
By: DLJ Capital Corporation
Its: Managing General Partner
By: /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Its: Attorney-in-Fact
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Its: Managing General Partner
By: /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Its: Attorney-in-Fact
-34-
<PAGE> 35
SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its: General Partner
By: /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Its: Attorney-in-Fact
DLJ CAPITAL CORPORATION (Delaware)
By: /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Its: Attorney-in-Fact
BLUE ROCK CAPITAL, L.P.
By Blue Rock Partners, L.P., its General
Partner
By Blue Rock, Inc., its General Partner
By: /s/ Virginia G. Bonker
-------------------------------
Name: Virginia G. Bonker
Title: President
/s/ Benno C. Schmidt, Jr.
---------------------------------------
BENNO C. SCHMIDT, JR.
/s/ John R. Schmidt
---------------------------------------
JOHN R. SCHMIDT
-35-
<PAGE> 36
/s/ Edward V. Ryan
--------------------------------------
EDWARD V. RYAN
Trustee fbo Elizabeth H. Schmidt
/s/ Edward V. Ryan
--------------------------------------
EDWARD V. RYAN
Trustee fbo Benno C. Schmidt, III
/s/ Edward V. Ryan
--------------------------------------
EDWARD V. RYAN
Trustee fbo Christina W. Schmidt
/s/ Elizabeth H. Schmidt
--------------------------------------
ELIZABETH H. SCHMIDT
Custodian for Asher J. Liftin
/s/ Joel E. Smilow
--------------------------------------
JOEL E. SMILOW
/s/ John W. Childs
--------------------------------------
JOHN W. CHILDS
J.W. CHILDS INVESTMENTS, L.L.C.
By J.W. Childs Associates, Inc.
its Manager
By: /s/ Adam Suttin
-------------------------------
Name: Adam Suttin
Title: Vice President
-36-
<PAGE> 37
RICHMONT LEEDS EDUCATION
COMPANY L.L.C.
By: /s/ Jeffrey T. Leeds
-------------------------------
Name: Jeffrey T. Leeds
Title: Member
By: /s/ Robert A. Bernstein
-------------------------------
Name: Robert A. Bernstein
Title: Member
LEEDS II L.P.
By Leeds Associates L.L.C., its General
Partner
By: /s/ Jeffrey T. Leeds
-------------------------------
Name: Jeffrey T. Leeds
Title: Member
/s/ John C. Reid
---------------------------------------
JOHN C. REID
/s/ Alexandra O. Bjorklund
---------------------------------------
ALEXANDRA O. BJORKLUND
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<PAGE> 38
EACH OF THE INVESTORS SET FORTH ON
SCHEDULE I HERETO
By Zesiger Capital Group
LLC, as Agent and
Attorney-in-Fact for each
of the Investors set forth
on Schedule I hereto
By /s/ Albert L. Zesiger
---------------------------------
Name: Albert L. Zesiger
Title: Managing Director
J.P. MORGAN INVESTMENT
CORPORATION
By /s/ John B. Fullerton
------------------------------------
Name: John B. Fullerton
Title: Managing Director
SIXTY WALL STREET SBIC FUND, L.P.
By: Sixty Wall Street SBIC Corporation
By /s/ John B. Fullerton
-------------------------------------
Name: John B. Fullerton
Title: Managing Director
INVESTOR INVESTMENTS AB
By /s/ Claes Dahlback /s/ Kristiana Larsson
-----------------------------------------
Name: Claes Dahlback & Kristina Larsson
Title:
-38-
<PAGE> 39
ABS EMPLOYEES' VENTURE FUND L.P.,
a Maryland limited partnership
By Alex. Brown Investments Inc.,
By: /s/
-------------------------------------
Name:
Title:
GREENWOOD PARTNERS
By: /s/ Arnold Mullen
-----------------------------------------
Arnold Mullen, its General Partner
FORUM PARTNERS
By: /s/ Arnold Mullen
-----------------------------------------
Arnold Mullen, its General Partner
PROGRESSIVE INVESTMENT
COMPANY, INC.
By: /s/
-----------------------------------------
Name:
Title:
/s/ James A. Haslam
--------------------------------------------
JAMES A. HASLAM, III
-39-
<PAGE> 40
YALE UNIVERSITY
By:
-------------------------------------
Name:
Title:
UBS CAPITAL XV LLC
By:
-------------------------------------
Name:
Title:
VULCAN VENTURES INCORPORATED
By: /s/ Ed Harris
-------------------------------------
Name:
Title:
ANNE B. MCMILLEN
/s/ Anne B. McMillen
---------------------------------------
ANNE B. MCMILLEN
Custodian fbo Alexandra L. McMillen
/s/ Tess Lusher
----------------------------------------
TESS LUSHER
/s/ Harold S.H. Edgar
---------------------------------------
HAROLD S.H. EDGAR
-40-
<PAGE> 41
SCHEDULE I
ZESIGER INVESTORS
THE ZESIGER CAPITAL GROUP LLC
Alan Mandell, TTEE 1982 E.H. Mandell Trust
Albert L. Zesiger
Alza Corporation Retirement Plan
Arthur D. Little Emp. Private Placements
Barrie Ramsay Zesiger
Brearley School Endowment Fund
City of Milford Employee Pension Fund
City of Stamford Firemen's Pension Fund
Domenic J. Mizio
Estate of Robert J. Suslow
Harold & Grace Willens JTWROS
HBL Charitable Unitrust
Helen Hunt
Jeanne L. Morency
Leonard Kingsley
Mary Ann S. Hamilton Trust for Self
Meehan Investment Partnership I, L.P.
Morgan Trust Co. of the Bahamas Ltd.
Murray Capital LLC
NFIB Employee Pension Trust
Norwalk Employee's Pension Plan
Public Employee Ret. System of Idaho
Psychology Associates
Roanoke College
State of Oregon/ZCG
Tab Products Co. Pension Fund
The Dean Witter Foundation
The Ferris F. Hamilton Family Trust
The Jenifer Altman Foundation
The Lazar Foundation
Trustees of Amherst College
Van Loben Sels Charitable Foundation
Warren Investment Group Ltd. LLC
Warren Otologic Profit Sharing Trust
William B. Lazar
Wolfson Investment Partners LP
<PAGE> 42
SCHEDULE II
STOCKHOLDERS
Name Address
- ---- -------
The Edison Project Inc. 521 Fifth Avenue
Sprout Edison Project Inc. 15th Floor
New York, NY 10175
Attention: Christopher Cerf, Esq.
Telecopy: (212) 419-1604
with a copy to: The Edison Project Inc.
First Tennessee Plaza
800 South Gay Street
Suite 1230
Knoxville, TN 37292
Attention: Laura Eshbaugh
Telecopy: (423) 546-1090
Hale and Dorr LLP
The Willard Office Building
1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attention: David Sylvester, Esq.
Telecopy: (202) 942-8484
WSI Inc. First Tennessee Plaza
WPA Investment L.P. 800 South Gay Street
WEG L.P. Suite 1230
WEG II L.P. Knoxville, TN 37929
WEG III L.P. Attention: Laura Eshbaugh
WEG IV L.P. Telecopy: (423) 546-1090
WEG V L.P.
WEG VI L.P.
WEG VII L.P.
with a copy to: Hale and Dorr LLP
The Willard Office Building
1455 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
Attention: David Sylvester, Esq.
Telecopy: (202) 942-8484
<PAGE> 43
The Sprout Stockholders The Sprout Group
c/o DLJ Capital Corporation
277 Park Avenue
New York, NY 10172
Attention: Janet Hickey
Benno C. Schmidt, Jr. c/o The Edison Project Inc.
521 Fifth Avenue
15th Floor
New York, NY 10175
Telecopy: (212) 419-1604
with a copy to: c/o Edward V. Ryan
J.H. Whitney & Company
630 Fifth Avenue, 32nd Floor
New York, NY
John R. Schmidt 4570 Delafield Avenue
Riverdale, NY 10471
with a copy to: c/o Edward V. Ryan
J.H. Whitney & Company
630 Fifth Avenue, 32nd Floor
New York, NY 10111
Edward V. Ryan c/o Edward V. Ryan
Trustee fbo Elizabeth H. Schmidt J.H. Whitney & Co.
Trustee fbo Benno C. Schmidt, III 630 Fifth Avenue, 32nd Floor
Trustee fbo Christina W. Schmidt New York, NY 10111
Elizabeth H. Schmidt c/o Edward V. Ryan
Custodian for Asher J. Liftin J.H. Whitney & Co.
630 Fifth Avenue, 32nd Floor
New York, NY 10111
Anne B. McMillen 121 East 91st Street
New York, NY 10128
Tess Lusher c/o Anne B. McMillen
121 East 91st Street
New York, NY 10128
Harold S.H. Edgar 1158 Fifth Avenue
New York, NY 10128
2
<PAGE> 44
John W. Childs c/o J.W. Childs Associates, L.P.
1 Federal Street
21st Floor
Boston, MA 02110
Attention: John W. Childs
Joel E. Smilow 315 Post Road West
Westport, CT 06880
Blue Rock Capital, L.P. c/o Virginia G. Bonker
511 Twaddell Mill Road
Wilmington, DE 19807
J.W. Childs Investments, L.L.C. c/o J.W. Childs Associates, L.P.
1 Federal Street
21st Floor
Boston, MA 02110
Attention: Adam Suttin
Richmont Leeds Education Leeds Group, Inc.
Company L.L.C. 660 Madison Avenue
Leeds II L.P. 15th Floor
New York, NY 10021
Attention: Robert A. Bernstein
John C. Reid 154 Beach Avenue
Larchmont, NY 10538
Telecopy: (212) 419-1604
Alexandra O. Bjorklund c/o J. Geddes Parsons
Parsons Capital
10 Weybosset Street
Suite 106
Providence, RI 02903-2808
The Investors Set Forth Zesiger Capital Group LLC
on Schedule I Hereof 320 Park Avenue, 30th Floor
New York, NY 10022
Attention: Albert L. Zesiger
J.P. Morgan Investment Corporation 60 Wall Street
14th Floor
New York, NY 10260-0060
Attention: Mr. John B. Fullerton and
J. Edmund Colloton, Esq.
with a copy to: Proskauer Rose LLP
1585 Broadway
3
<PAGE> 45
New York, NY 10036-8299
Attention: Bruce L. Lieb, Esq.
Telecopy: (212) 969-2900
Sixty Wall Street SBIC Fund, L.P. 60 Wall Street
14th Floor
New York, NY 10260-0060
Attention: Mr. John B. Fullerton and
J. Edmund Colloton, Esq.
with a copy to: Proskauer Rose LLP
1585 Broadway
New York, NY 10036
Attention: Bruce L. Lieb, Esq.
Telecopy: (212) 969-2900
Investor Investments AB Attn: Klas Hillston
12 East 49th Street, 27th Floor
New York, NY 10017
with a copy to: Davis, Polk & Wardwell
450 Lexington Avenue
New York, NY 10017
Attention:
Greenwood Partners c/o Arnold Mullen
PFP Associates
1601 Forum Place, Suite 905
W. Palm Beach, FL 33401-8105
Telecopy: (561) 684-2168
Forum Partners c/o Arnold Mullen
PFP Associates
1601 Forum Place, Suite 905
W. Palm Beach, FL 33401-8105
Telecopy: (561) 684-2168
ABS Employees' Venture Fund L.P. c/o Rick O'Connell, Administrator
375 West Padonia Road
M.S. 22
Timonium, MD 21093
Telecopy: (410) 308-6840
Progressive Investment c/o Anthony Grandolfo
Company, Inc. 3 Parklands Dr.
Darien, CT 06820
4
<PAGE> 46
James A. Haslam, III c/o Pilot Corporation
5508 Lonas Drive
Knoxville, TN 37909
Yale University c/o Charles Pagnam
265 Church Street
One Century Tower
15th Floor
New Haven, CT 06520
UBS Capital XV LLC c/o UBS Capital LLC
299 Park Avenue
New York, NY 10710
Attention: Charles Delaney
Telecopy: (212) 821-6333
with a copy to: Kaye, Scholer, Fierman, Hays &
Handler, LLP
425 Park Avenue
New York, NY 10021
Attention: Nancy E. Fuchs, Esq.
Telecopy: (212) 836-8689
Vulcan Ventures Incorporated 110 110th Avenue N.E.
Suite 550
Bellevue, WA 98004
Attention: Ed Harris
Telecopy: (425) 453-1985
with a copy to: Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067-4276
Attention: Alvin G. Segel, Esq.
Telecopy: (310) 203-7199
5
<PAGE> 47
THE EDISON PROJECT INC.
FIRST AMENDMENT TO THIRD AMENDED AND RESTATED
SHAREHOLDERS' AGREEMENT
This First Amendment (the "Amendment") to Third Amended and Restated
Shareholders' Agreement is made as of July 28, 1999 by and among The Edison
Project Inc., a Delaware corporation (the "Company"), the Stockholders whose
names are signed below and the New Investors listed on Exhibit A hereto (the
"New Investors").
WITNESSETH
WHEREAS, the Company and certain of its Stockholders (the "Stockholders")
are parties to that certain Third Amended and Restated Shareholders' Agreement
dated as of July 2, 1999 (the "Shareholders' Agreement");
WHEREAS, the Company and the Stockholders desire that the New Investors be
made parties to the Shareholders' Agreement;
WHEREAS, pursuant to Section 15 thereof, the Shareholders' Agreement may
be amended with the consent of each holder of the Company's Special Common
Stock and each Regulation Y Stockholder of the Company;
WHEREAS, the Company and Stockholders required to amend the Shareholders'
Agreement hereby consent in writing to this Amendment.
NOW, THEREFORE, for good and better consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree
as follows:
1. For all purposes of the Shareholders' Agreement (as amended by this
Amendment), the term "Stockholders" shall include the New Investors.
2. Except as amended hereby, the Shareholders' Agreement shall remain in
full force and effect.
3. Capitalized terms used but not defined herein shall have the
respective meanings given to such terms in the Shareholders' Agreement.
4. This Amendment may be executed in any number of counterparts, each of
which shall be an original, but all of which together shall constitute one
instrument.
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of the
date set forth above.
1
<PAGE> 48
THE COMPANY:
THE EDISON PROJECT INC.
By: /s/ H. Christopher Whittle
-----------------------------
Name: H. Christopher Whittle
Title: President
2
<PAGE> 1
EXHIBIT 10.6
SUBSCRIPTION AGREEMENT
dated as of November 18, 1996,
among
THE EDISON PROJECT INC.
and
THE OTHER PARTIES LISTED HEREIN
<PAGE> 2
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C> <C>
SECTION 1 Sale and Purchase of the Investor Shares .............................................................. 3
1.1 Transfer of the Investor Shares ....................................................................... 3
1.2 First Closing ......................................................................................... 4
1.3 Second Closing ........................................................................................ 5
1.4 WSI Subscription Right and Obligation ................................................................. 6
1.5 Issuance of Additional Shares following the Second Closing Date ....................................... 9
1.6 Company Option to Replace Investors ................................................................... 11
1.7 Waiver of Pre-emptive Rights .......................................................................... 12
SECTION 2 Representations, Warranties and Covenants of the Company and the Partnership .......................... 12
2.1 Organization .......................................................................................... 12
2.2 Qualification; Good Standing .......................................................................... 13
2.3 Authorization; Enforceability ......................................................................... 13
2.4 No Conflict ........................................................................................... 14
2.5 Company Stock; Partnership Interests .................................................................. 15
2.6 Securities Laws ....................................................................................... 17
2.7 Equity Investments .................................................................................... 17
2.8 Compliance with Laws; Governmental Authorizations ..................................................... 17
2.9 Small Business Concern ................................................................................ 17
2.10 Activities and Proceeds ............................................................................... 18
2.11 Additional Information ................................................................................ 19
2.12 Access ................................................................................................ 20
2.13 Financial Information ................................................................................. 20
2.14 Absence of Undisclosed Liabilities .................................................................... 21
2.15 Litigation ............................................................................................ 21
2.16 Brokers and Finders ................................................................................... 22
2.17 Tax Matters ........................................................................................... 22
2.18 ERISA ................................................................................................. 23
2.19 Changes in Condition .................................................................................. 24
2.20 Agreements ............................................................................................ 24
2.21 Related Party Transactions ............................................................................ 26
2.22 Absence of Sensitive Payments ......................................................................... 26
2.23 Insurance ............................................................................................. 27
SECTION 3 Representations and Warranties of WSI ................................................................. 27
3.1 Organization .......................................................................................... 27
3.2 Authorization; Enforceability ......................................................................... 27
3.3 No Conflict ........................................................................................... 28
</TABLE>
(i)
<PAGE> 3
<TABLE>
<S> <C> <C>
3.4 WSI Stock and Partnership Interests .......................................... 28
SECTION 4 Representations and Warranties of Sprout and the Sprout Shareholders ......... 29
4.1 Organization ................................................................. 30
4.2 Authorization; Enforceability ................................................ 30
4.3 No Conflict .................................................................. 30
4.4 Sprout Stock and Partnership Interests ....................................... 31
4.5 Assets and Liabilities ....................................................... 32
SECTION 5 Representations and Warranties of Certain Investors .......................... 32
5.1 Organization ................................................................. 33
5.2 Authorization; Enforceability ................................................ 33
5.3 No Conflict .................................................................. 33
5.4 Investor Stock and Partnership Interest ...................................... 34
5.5 Investment Representations and Warranties .................................... 34
5.6 Brokers and Finders .......................................................... 35
5.7 Certain Representations and Warranties of the Zesiger Group .................. 36
SECTION 6 Conditions to First Closing; Certain Covenants ............................... 36
6.1 Conditions Precedent to Obligations of Investors ............................. 36
6.2 Conditions Precedent to Obligations of the Company Parties ................... 38
6.3 Certain Covenants ............................................................ 40
SECTION 7 Conditions to Second Closing ................................................. 40
7.1 Conditions Precedent to Obligations of Investors ............................. 40
7.2 Conditions Precedent to Obligations of Company Parties ....................... 41
</TABLE>
(ii)
<PAGE> 4
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 8. Survival of Representations and Warranties...................................... 42
SECTION 9. Indemnification................................................................. 42
SECTION 10. Fees and Expenses............................................................... 44
SECTION 11. Assignment; Parties in Interest................................................. 45
SECTION 12. Entire Agreement................................................................ 45
SECTION 13. Notices......................................................................... 45
SECTION 14. Amendments...................................................................... 46
SECTION 15. Counterparts.................................................................... 46
SECTION 16. Headings........................................................................ 46
SECTION 17. Governing Law................................................................... 46
SECTION 18. Arbitration..................................................................... 46
</TABLE>
(iii)
<PAGE> 5
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C> <C>
Exhibit A-1 - Form of Secured Note of Reid
Exhibit A-2 - Form of Stock Power of Reid
Exhibit B-1 - Certificate of Designation for Series A Preferred
Exhibit B-2 - Certificate of Designation for Series B Preferred
Exhibit B-3 - Certificate of Designation for Series C Preferred
Exhibit B-4 - Certificate of Amendment to Certificate of Designation for Series B Preferred
Exhibit B-5 - Certificate of Amendment to Certificate of Designation for Series C Preferred
SCHEDULES
- ---------
Schedule 1.1 - Investors and Share Amounts and Price
Schedule 1.1(a) Zesiger Group Investors
Schedule 1.5 - Certain Defined Terms
Schedule 2.1(a) - Amended and Restated Certificate of Incorporation and Amended and Restated
By-laws of the Company
Schedule 2.5 - Options
Schedule 2.13(a) - Financial Statements
Schedule 2.14 - Undisclosed Liabilities
Schedule 2.15 - Litigation
Schedule 2.17 - Tax Matters
Schedule 2.19 - Changes in Condition
Schedule 2.20 - Agreements
Schedule 2.21 - Related Party Transactions
Schedule 2.23 - Insurance
Schedule 4.1 - Certificate of Incorporation and By-laws of Sprout
Schedule 7.1 - Preliminary Financial Results
Schedule 13 - Addresses for Notices
</TABLE>
(iv)
<PAGE> 6
SUBSCRIPTION AGREEMENT dated as of November 18, 1996 (the "Agreement"),
among THE EDISON PROJECT INC., a Delaware corporation (the "Company"), THE
EDISON PROJECT L.P., a Delaware limited partnership (the "Partnership"), WSI
INC., a Delaware corporation ("WSI"), WPA INVESTMENT L.P., a Delaware limited
partnership ("WPA"), WEG L.P., a Delaware limited partnership ("WEG I"), WEG II
L.P., a Delaware limited partnership ("WEG II"), and together with WSI, WPA and
WEG I, the "WSI Shareholders"), SPROUT EDISON PROJECT, INC., a Delaware
corporation ("Sprout"), SPROUT CAPITAL VI, L.P., a Delaware limited partnership,
SPROUT CAPITAL VII, L.P., a Delaware limited partnership, DLJ CAPITAL
CORPORATION (DELAWARE), a Delaware corporation, AND SPROUT CEO FUND, L.P., a
Delaware limited partnership (together, the "Sprout Shareholders"), BLUE ROCK
CAPITAL, L.P., a Delaware limited partnership ("Blue Rock"), BENNO C. SCHMIDT,
SR. ("BCS"), JOHN R. SCHMIDT ("JRS"), JOEL E. SMILOW ("Smilow"), JOHN W. CHILDS
("Childs"), J.W. CHILDS INVESTMENTS, L.L.C., a Delaware limited liability
company ("JWC"), RICHMONT LEEDS EDUCATION COMPANY L.L.C., a Delaware limited
liability company ("RLEC"), JOHN C. REID ("Reid"), and EACH OF THE CERTAIN
INVESTORS SET FORTH ON SCHEDULE 1.1(A) HEREOF (collectively, the "Zesiger
Group", and together with the WSI Shareholders, the Sprout Shareholders, Blue
Rock, BCS, JRS, Smilow, Childs, JWC, Reid and RLEC, collectively, the
"Investors").
WHEREAS, in accordance with Section 15 of the Partnership's Amended and
Restated Agreement of Limited Partnership dated as of March 14, 1995 (as
heretofore
<PAGE> 7
amended, the "1995 Partnership Agreement"), WSI and Sprout as the sole general
partners of the Partnership desire to "convert" the Partnership into a
corporation as provided herein; and
WHEREAS, following such conversion the Company will, directly or
indirectly, own 100% of the Partnership; and
WHEREAS, the parties hereto are entering into this Agreement in order
to effect a tax free transfer under Section 351 of the Internal Revenue Code of
1986, as amended, pursuant to which each of the Investors will transfer its or
his respective partnership interest in the Partnership and/or other assets to
the Company in exchange for shares of common and preferred stock of the Company
(collectively, the "Shares") as shown next to its or his name on Schedule 1.1.
Notwithstanding the foregoing, the term "Shares" shall include, without
limitation, (i) any and all shares of any series of common stock of the Company
issued to any Investor pursuant to the Subscription Agreement at the First
Closing, (ii) any and all shares of any series of preferred stock of the Company
issued to any Investor pursuant to the Subscription Agreement at the First
Closing or the Second Closing, (iii) any and all shares of common stock of the
Company or other securities of the Company issuable or issued upon conversion or
exchange of any of the shares of preferred stock issued pursuant to the
Subscription Agreement at the First Closing or the Second Closing, (iv) any
shares of common stock of the Company issuable upon the exercise of the options
described in Section 2.5 hereof, and (v) any securities issuable or issued or
distributed in respect of any of the securities identified in clauses (i), (ii),
(iii) or (iv) by way of stock dividend or stock split or in connection with a
combination of shares, recapitalization, reorganization, merger, consolidation
or otherwise.
-2-
<PAGE> 8
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and covenants contained herein, the parties hereto
hereby agree as follows:
SECTION 1. SALE AND PURCHASE OF THE INVESTOR SHARES.
1.1. TRANSFER OF THE INVESTOR SHARES. Subject to the terms and
conditions hereof, (a) the Company hereby agrees to issue, sell, assign and
transfer to each Investor the Shares, free and clear of all liens and
encumbrances, in the amounts and in the classes indicated next to such
Investor's name on Schedule 1.1 under the headings "First Closing Shares" and
"First Closing Date" or in the footnote with respect thereto (such Shares, the
"First Closing Shares") and under the headings "Second Closing Shares" and
"Second Closing Date" (such Shares, the "Second Closing Shares", and together
with the First Closing Shares) and (b) each Investor hereby agrees to subscribe
for and purchase on the First Closing Date (as defined below) the Shares
indicated next to such Investor's name on Schedule 1.1 under the headings "First
Closing Shares" and "First Closing Date" and to purchase on the Second Closing
Date (as defined below) the Shares indicated next to such Investor's name on
Schedule 1.1 under the headings "Second Closing Shares" and "Second Closing
Date," in each case for the consideration described in Sections 1.2, 1.3 and 1.4
below, the consideration for which shall consist of the common stock of Sprout,
cash, a Partnership Interest (as defined below), both cash and a Partnership
Interest, or, in the case of Reid, a secured note substantially in the form of
Exhibit A-1 hereto accompanied by a duly executed stock power substantially in
the form of Exhibit A-2 hereto, in each case as set forth on Schedule 1.1. The
Investor Shares shall consist of shares of one or more series of the Company's
common stock, par value $.01 per share ("Common Stock"), and convertible
exchangeable preferred stock, par value $.01 per share (the
-3-
<PAGE> 9
"Preferred Stock"), all as set forth on Schedule 1.1, having the preferences,
limitations, and rights set forth in the Constitutional Documents (defined
below) and certificates of designation set forth as Exhibits B-1, B-2, B-3, B-4
and B-5 (the "Certificates of Designation"). The Shares will be subject to the
Edison Project Inc. Shareholders' Agreement dated the date hereof (the
"Shareholders' Agreement"). "Operative Documents" means (i) this Agreement, (ii)
the Shareholders' Agreement and (iii) the Partnership Agreement (as defined
below).
1.2. FIRST CLOSING. Subject to the conditions set forth in Section 6
below, the closing of the purchase and sale of the First Closing Shares (the
"First Closing") shall take place on the date of execution and delivery of this
Agreement (the "First Closing Date") at the offices of Cadwalader, Wickersham &
Taft, 100 Maiden Lane, New York, New York.
On the First Closing Date:
(a) each Investor other than the Sprout Shareholders will (i)
contribute to the capital of the Company all of such Investor's right, title and
interest in and to the Partnership (each a "Partnership Interest") and/or (ii)
pay the Company such amounts, in immediately available funds (other than Reid,
who will pay by secured note), as is set forth next to such Investor's name on
Schedule 1.1 under the heading "Assets Contributed" with respect to First
Closing Shares, and upon receipt of such Partnership Interests and/or funds or
secured note, the Company shall deliver to each such Investor share certificates
representing the First Closing Shares thereby purchased by such Investor, duly
registered in the name of the applicable Investor;
(b) each of the Sprout Shareholders, as the owners of all of the issued
and outstanding stock of Sprout (the "Sprout Shares"), will contribute to the
capital of the Company
-4-
<PAGE> 10
all of such Sprout Shareholder's right, title and interest in and to the Sprout
Shares owned by it, and upon receipt of such Sprout Shares, the Company shall
transfer to the applicable Sprout Shareholder share certificates representing
the First Closing Shares to be received in exchange for such Sprout Shares, duly
registered in the name of such shareholder;
(c) the Company and the Investors shall enter into the Shareholders'
Agreement;
(d) the Company and Sprout, as the sole partners of the Partnership,
shall amend and restate the 1995 Partnership Agreement pursuant to the Amended
and Restated Partnership Agreement of the Partnership dated as of the date
hereof (as so amended and restated, the "Partnership Agreement"); and
(e) the options to purchase interests in the Partnership or rights to
receive options to purchase interests in the Partnership issued or reserved for
issuance immediately prior to the First Closing shall convert to options to
purchase 6,561,800 shares of Series A Common Stock of the Company, par value
$.01 per share.
The execution and delivery of this Agreement and the First Closing
shall be simultaneous in that neither the execution and delivery of this
Agreement nor any event required by the terms of this Agreement to occur at the
First Closing shall be deemed to have occurred until such execution and delivery
and all such events shall have occurred and when such execution and delivery and
all such events have occurred, they shall be deemed to have occurred
simultaneously.
1.3. SECOND CLOSING. Subject to the conditions set forth in Section 1.6
and Section 7 below, the closing of the purchase and sale of the Second Closing
Shares (the
-5-
<PAGE> 11
"Second Closing") as set forth on Schedule 1.1 shall take place on May 1, 1997
(the "Second Closing Date") at the offices of Cadwalader, Wickersham & Taft, 100
Maiden Lane, New York, New York. On the Second Closing Date, each of the
Investors other than the Sprout Shareholders, Blue Rock, JRS, Childs, Reid, WPA,
WEG I and WEG II shall pay the Company such amount, in immediately available
funds, as is set forth next to such Investor's name on Schedule 1.1 under the
heading "Assets Contributed" with respect to Second Closing Shares. Upon receipt
of such funds, the Company shall deliver to each Investor so paying share
certificates representing the Second Closing Shares purchased by such Investor,
duly registered in the name of the applicable Investor.
1.4. WSI SUBSCRIPTION RIGHT AND OBLIGATION.
(a) Subject to the Shareholders' Agreement, WSI may assign its right
and obligation to purchase all or a portion of the Shares it has agreed to
purchase on the Second Closing Date (the "WSI Second Closing Shares") to one or
more of (i) any third party provided that WSI shall provide to the other parties
to the Shareholders' Agreement the rights of first refusal provided in Section
4.4 thereof with respect thereto, (ii) Blue Rock or (iii) an Affiliate (as
defined in the Shareholders' Agreement) of WSI ("Assigns"). Any Assign of WSI
shall execute and deliver the Shareholders' Agreement and be an "Shareholder"
for all purposes of the Shareholders' Agreement, and, in the event any such
assign is an Affiliate of WSI controlled by WSI, such assign shall be a "WSI
Shareholder" for all purposes of such agreement. Any failure of WSI or any of
its Assigns to purchase all or any portion of the WSI Second Closing Shares
shall not affect the rights of WSI or any WSI Shareholder under the
Shareholders' Agreement.
-6-
<PAGE> 12
(b) The per share price for the shares of the Company's Series B
Convertible Exchangeable Preferred Stock which WSI has agreed to purchase on the
Second Closing Date (the "WSI Series B Preferred") shall be $1.65 provided that
not less than ten (10) business days prior to the Second Closing, the Company
reasonably estimates, subject to the review of the Board of Directors, that at
least 13,427 students will enroll in Edison schools for the 1997-1998 school
year (the "Enrollment Test"). If the Company does not reasonably so estimate,
the per share price for the WSI Series B Preferred shall be $1.95, subject to
adjustment pursuant to the next sentence. If the Adjusted Series C Purchase
Price is less than $1.95 but equal to or greater than $1.65, then the per share
price for the WSI Series B Preferred (as finally determined, the "Adjusted
Series B Purchase Price") shall equal the Adjusted Series C Purchase Price;
provided, however, that if the Adjusted Series C Purchase Price is below $1.65,
then the Adjusted Series B Purchase Price shall be $1.65. On or prior to the
10th business day following the determination of the Adjusted Series C Purchase
Price (as set forth below), if the Adjusted Series B Purchase Price is greater
than the greater of (i) $1.65 and (ii) the Adjusted Series C Purchase Price, the
Company will issue to WSI or its Assigns such number of WSI Series B Preferred
(the "Series B Preferred Adjustment Shares") as required such that the result of
(i) (A) the aggregate purchase price paid on the Second Closing Date by WSI or
its Assigns for the WSI Series B Preferred, divided by (B) the aggregate number
of WSI Series B Preferred shares purchased plus such additional number of Series
B Preferred Adjustment Shares issued to WSI or its Assigns, equals (iii) the
Adjusted Series B Purchase Price.
(c) Notwithstanding anything herein to the contrary, WSI may, at its
option, purchase some or all of the WSI Series B Preferred on any date prior to
the Second Closing Date
-7-
<PAGE> 13
subject to the terms and conditions otherwise set forth herein. If the
Enrollment Test, as determined on or prior to the applicable purchase date as
otherwise provided in subsection 1.4(b) has been met, then the purchase price in
such WSI Series B Preferred will be $1.65 per share. If the Enrollment Test has
not been so met and if the date of purchase thereof is (i) on or prior to March
1, 1997, then the purchase price for the WSI Series B Preferred will be $1.65
per share, (ii) following March 1, 1997 but on or prior to April 1, 1997, then
the purchase price for the WSI Series B Preferred will be $1.80 per share, and
(iii) following April 1, 1997, then the purchase price for the WSI Series B
Preferred will be $1.95 per share; provided with respect to purchases described
in clauses (ii) and (iii) the purchase price therefor will be adjusted with
respect to the Adjusted Series C Purchase Price in the manner provided in
subsection 1.4(b).
(d) If WSI or its Assigns do not purchase all of the WSI Series B
Preferred on or prior to the Second Closing Date, then the Company shall, upon
written notice (a "WSI Redemption Notice"), redeem from WSI for no consideration
(i) if WSI or its Assigns have not so purchased any shares of WSI Series B
Preferred, 222,222 shares of the Common Stock held by WSI (the "Penalty
Shares"); such number of shares being equal to the result of (A) (I) 20%
multiplied by (II) $1,666,667, divided by (B) $1.50 per share); or (ii) if WSI
or its Assigns have purchased some, but not all, of the shares of WSI Series B
Preferred, a portion of the Penalty Shares equal to 222,222 times the product of
(A) the number of shares of WSI Series B Preferred not purchased by WSI or its
Assigns divided by (B) the aggregate number of shares of WSI Series B Preferred
that WSI has agreed to purchase on the Second Closing Date. Promptly following
receipt of a WSI Redemption Notice, (x) WSI shall deliver share certificates
representing the Penalty Shares so redeemed to the Company together with stock
powers therefor
-8-
<PAGE> 14
duly executed in blank, (y) WSI shall no longer have any rights in or to such
Penalty Shares and (z) the Company's books and records shall be amended
accordingly.
1.5. ISSUANCE OF ADDITIONAL SHARES FOLLOWING THE SECOND CLOSING DATE.
(a) On or prior to the date (the "Calculation Date") which is thirty
(30) days after the issuance of the Company's audited financial statements for
the 1996-1997 fiscal year, the Company will prepare and distribute to each
Investor which will have purchased at the Second Closing shares of the Company's
Series C Convertible Exchangeable Preferred Stock (the "Series C Preferred" and
such Investors, the "Series C Investors"), a certificate setting forth the
Company's good faith determination of the Gross Site Contribution, Total
Contracted Revenues and Central Expenses (as each such term is defined on
Schedule 1.5) for the Company and the Partnership, taken as a whole, for the
relevant period referred to in such Schedule 1.5. If, on or prior to the date
(the "Determination Date") which is ten (10) business days after the Calculation
Date, no Series C Investor has delivered to the Company a notice of disagreement
(a "Notice of Disagreement") with the determination of Gross Site Contribution,
Total Contracted Revenues and Central Expenses for the applicable period, then
the determination of such by the Company will be definitive, final and binding.
Any Notice of Disagreement shall specify in reasonable detail the nature of any
disagreement asserted. If the Company has received a Notice of Disagreement from
a Series C Investor on or prior to the Determination Date, then (i) the Company
and the Series C Investors will seek in good faith to resolve in writing such
matters of disagreement specified in such notice for a period of 15 days after
delivery of such notice; and (ii) if no such resolution has been reached at the
end of such 15-day period, the parties hereto will submit any matters remaining
in disagreement to an independent certified public accountant mutually selected
by the Company and any Series C Investors that shall have delivered a Notice
-9-
<PAGE> 15
of Disagreement for review and final resolution. Determinations made with
respect to Gross Site Contribution, Total Contracted Revenues and Central
Expenses pursuant to either clause (i) or (ii) above will be definitive, final
and binding. The definitive, final and binding determinations of Gross Site
Contribution, Total Contracted Revenues and Central Expenses as provided for
herein, will be referred to as the "Adjustment Figures." For the purposes of
this Agreement, "business day" shall mean each Monday, Tuesday, Wednesday,
Thursday and Friday which is not a day on which banking institutions in the City
of New York are required or authorized by law or executive order to be closed.
(b) On or prior to the 10th business day following the determination of
the Adjustment Figures, the Company will issue to each Series C Investor such
additional number of shares of Series C Preferred (the "Series C Preferred
Adjustment Shares") as required such that the result of (i) (A) the aggregate
purchase price paid on the Second Closing Date by such Series C Investor for the
Series C Preferred, divided by (B) the aggregate number of Series C Preferred
shares purchased by such Series C Investor plus such additional number of Series
C Preferred Adjustment Shares issued to such Series C Investor equals (iii) the
Adjusted Series C Purchase Price per share. The "Adjusted Series C Purchase
Price" per share shall equal (i) $1.50 per share of Series C Preferred plus (ii)
an additional $.035 per share of Series C Preferred for every $100,000 by which
the Gross Site Contribution for the period from July 1, 1996 through June 30,
1997 exceeds $2,064,000 up to a maximum increase of $.70 per share, plus (ii) an
additional $.035 per share of Series C Preferred for every $1,000,000 by which
Total Contracted Revenue for the period from July 1, 1997 through June 30, 1998
exceeds $53,900,000, up to a maximum increase of $.70 per share, minus (iii)
$.10 per share of Series C Preferred for every $100,000 by which the Central
Expenses for the applicable period exceeds $11,844,903.40; provided
-10-
<PAGE> 16
however, in no event shall the Adjusted Series C Purchase Price be less than
$1.50 or exceed $2.90 per share of Series C Preferred. Notwithstanding the
foregoing, the Adjusted Series C Purchase Price will be adjusted proportionately
for every portion of $100,000, or $1,000,000, as the case may be, that the
thresholds set forth in the preceding sentence have been exceeded.
(c) Promptly upon determination of the Adjustment Figures and prior to
the issuances of any Series B Preferred Adjustment Shares or Series C Preferred
Adjustment Shares, the Company will file with the Secretary of State of the
State of Delaware the Certificate of Amendment to the Certificate of Designation
of Series B Preferred and the Certificate of Amendment to the Certificate of
Designation of Series C Preferred (the "Certificates of Amendment"),
substantially in the form attached hereto as Exhibits B-4 and B-5, provided that
the Adjusted Series B Purchase Price or Adjusted Series C Purchase Price, as
applicable, be inserted in the blank in Section 4 thereof. The Investors, as
holders of all issued and outstanding voting securities of the Company, hereby
give to the Board of Directors of the Company the irrevocable proxy of each
respective Investor to consent to and approve such Certificates of Amendment
together with such insertions, pursuant to Sections 228 and 242 of the General
Corporation Law of the State of Delaware, and waive any requirement for notice
of stockholder meeting in connection therewith.
1.6. COMPANY OPTION TO REPLACE INVESTORS.
Notwithstanding anything to the contrary, the Company may elect, upon
notice delivered to the Investors on or prior to fifteen (15) business days
prior to the date of the Second Closing, if directed to do so by both WSI and
the Sprout Shareholders, acting together in their sole discretion, to terminate
the issuance or sale of Shares described herein which is to occur on the Second
Closing Date (other than the WSI Series B Preferred), in whole, but not in part,
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without penalty or any preemptive rights on behalf of the Investors, if WSI and
the Sprout Shareholders acting together have identified other investors willing
to invest $15,000,000 in the Company at a per-share price of at least $4.00.
Such a termination is referred to as a "Second Closing Termination." If a Second
Closing Termination occurs, all obligations of the Second Closing Investors
(other than WSI with respect to the WSI Series B Preferred) or the Company
relating to the Second Closing shall be null and void.
1.7. WAIVER OF PRE-EMPTIVE RIGHTS. Notwithstanding anything to the
contrary, each Investor hereby waives any and all pre-emptive or similar rights
it, he or she may have pursuant to the Constitutional Documents, the Operative
Documents or otherwise with respect to the issuance of shares in connection with
the First and Second Closing (including, without limitation, any issuance of WSI
Series B Preferred, Series B Preferred Adjustment Shares or Series C Preferred
Adjustment Shares or any shares issued upon conversion or exchange thereof or
any shares to any replacement investors as provided in Section 1.6) or in each
case any shares issued upon any conversion or exchange of any of the foregoing
or upon the exercise of any of the options described in Section 2.5 or listed on
Schedule 2.5.
SECTION 2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE COMPANY AND
THE PARTNERSHIP. The Company and the Partnership, jointly and severally, hereby
represent and warrant to each of Blue Rock, Smilow, JWC, RLEC, Reid, the Zesiger
Group (each a "Specified Investor"), the WSI Shareholders, Sprout, the Sprout
Shareholders, JRS and Childs, as follows:
2.1. ORGANIZATION. (a) The Company is a corporation duly organized,
validly existing and in good standing under the laws of Delaware and has all
requisite corporate power
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and authority to own, lease and operate the assets used in its business, to
carry on its business as now being conducted, to enter into the Operative
Documents, to perform its obligations thereunder, and to consummate the
transactions contemplated thereby. Attached hereto as Schedule 2.1(a) is a true
and complete copy of the Amended and Restated Certificate of Incorporation of
the Company in effect on the date hereof, which Certificate has not been amended
since November 18, 1996, and a true and complete copy of the By-laws of the
Company as in effect on the date hereof. (The Amended and Restated Certificate
of Incorporation, By-laws, and Certificates of Designation (as may be amended)
of the Company are collectively referred to as the "Constitutional Documents".)
(b) The Partnership is a limited partnership duly organized, validly
existing and in good standing under the laws of Delaware and has all requisite
partnership power and authority to own, lease and operate the assets used in its
business, to carry on its business as now being conducted, to enter into the
Operative Documents, to perform its obligations thereunder, and to consummate
the transactions contemplated thereby.
2.2. QUALIFICATION; GOOD STANDING. Each of the Company and the
Partnership is authorized or qualified to do business and in good standing as a
foreign corporation or limited partnership, as the case may be, in any
jurisdiction where failure to be so authorized or qualified would have a
material adverse effect on the Company or the Partnership.
2.3. AUTHORIZATION; ENFORCEABILITY. Each of the Company and the
Partnership has all requisite power and authority to execute, deliver and
perform its obligations under the Operative Documents. Each of the Company and
the Partnership has taken all
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necessary action to authorize its execution and delivery of the Operative
Documents to which it is a party, the performance of its obligations thereunder
and the consummation of the transactions contemplated thereby. Each Operative
Document to which the Company or the Partnership is a party has been duly
executed and delivered by an authorized officer of the Company or the
Partnership, as the case may be, and assuming due execution and delivery by each
other party thereto, constitutes the legal, valid and binding obligation of the
Company or the Partnership, enforceable against such party in accordance with
its terms.
2.4. NO CONFLICT. The execution and delivery by the Company and the
Partnership of each Operative Documents to which it is a party, consummation of
the transactions contemplated thereby, and compliance with the provisions
thereof, will not (i) violate or conflict with any of the Operative Documents or
the Constitutional Documents, (ii) violate, conflict with, or give rise to any
right of termination, cancellation, or acceleration under any agreement, lease,
security, license, permit, or instrument to which the Company or the Partnership
is a party, or to which it or any of its assets is subject, (iii) result in the
imposition of any lien or other encumbrance on any asset of the Company or the
Partnership, other than the restrictions set forth in the Operative Documents or
the Constitutional Documents, (iv) violate or conflict with any Laws, or (v)
require any consent, approval or other action of, notice to, or filing with any
entity or person (governmental or private), except for those that have been made
or obtained. "Laws" means all laws, statutes, codes, common law, rules,
regulations, ordinances, orders, judgments, injunctions, decrees and other
legislative, administrative or judicial restrictions and requirements.
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2.5. COMPANY STOCK; PARTNERSHIP INTERESTS. (a) The authorized capital
stock of the Company consists of 60,000,000 shares of Common Stock and
50,000,000 shares of preferred stock, $.01 par value per share. Upon the
consummation of the transactions contemplated to be consummated on the First
Closing Date, the Company will have 6,214,704 shares of Common Stock issued and
outstanding and 30,294,435 shares of its Series A Convertible Exchangeable
Preferred Stock issued and outstanding. In addition, the Company will have
granted the options set forth on Schedule 2.5 and have reserved for issuance
6,561,800 shares of its Series A Common Stock, par value $.01 per share, for
issuance with respect thereto. Except as set forth above and for the Second
Closing Shares, the Series B Preferred Adjustment Shares, the Series C Preferred
Adjustment Shares and other shares issuable with respect to the adjustment
provisions provided for herein and in the Shareholders Agreement, as of the date
hereof, the Company is not a party to any other option or other commitment to
issue securities. Subject to the provisions of Section 1.7 hereof, no share of
Common Stock or Preferred Stock has been or, pursuant to the terms hereof, will
be issued in violation of preemptive rights of the stockholders of the Company,
the Securities Act of 1933, as amended (the "Securities Act") or any state
securities or blue sky laws.
(b) Immediately following the First Closing and giving effect to the
First Closing and upon receipt by the Company of the consideration therefor as
provided herein, the First Closing Shares shall be issued as set forth on
Schedule 1.1 and shall be validly issued, fully paid and non-assessable.
Immediately following the Second Closing and giving effect to the Second Closing
and upon receipt by the Company of the consideration therefor as provided
herein, the Second Closing Shares shall be issued as set forth on Schedule 1.1
and the shares issuable upon conversion or exchange of First Closing Shares or
Second Closing Shares, when
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issued, shall be validly issued, fully paid and non-assessable. The rights and
obligations of the Shareholders with respect to the Shares are as set forth in
the Constitutional Documents, the Certificates of Designation and Shareholders'
Agreement.
(c) Immediately following the First Closing, (i) the Company will own
approximately 70% of the Partnership as its General Partner, (ii) Sprout will
own approximately 30% of the Partnership as its Limited Partner and (iii) the
Company will own 100% of the Sprout Shares. No other person will own any
interest in the Partnership. The rights of the Company and Sprout as Partners of
the Partnership will be governed by the Partnership Agreement.
(d) Except for the Shareholders' Agreement, the Partnership Agreement,
the WPA Partnership Agreement (the "WPA Agreement"), the WEG Partnership
Agreement (the "WEG I Agreement") and the WEG II Partnership Agreement (the "WEG
II Agreement"), there are no voting trusts, voting agreements, proxies or other
agreements, instruments or understandings with respect to the voting of the
Shares or Partnership Interests to or by which the Company or the Partnership,
or to the best knowledge of the Company and the Partnership, any other person is
a party or is bound other than (A) agreements among H. Christopher Whittle
("Whittle"), WSI and Morgan Guaranty Trust Company of New York ("Morgan")
pursuant to which (i) WSI has agreed not to amend the Shareholders' Agreement,
the Constitutional Documents, the WPA Agreement, the WEG I Agreement or the WEG
II Agreement, without Morgan's consent and (ii) WSI's Shares and Partnership
Interests in WPA, WEG I and WEG II are pledged to Morgan, (B) the limited
liability company agreement of RLEC, and (C) the limited liability company
agreement of JWC. Other than as provided in the Shareholders'
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Agreement, no person or entity has any right to cause the Company or the
Partnership to effect a registration under the Securities Act of any Shares or
Partnership Interests.
2.6. SECURITIES LAWS. The offering, sale and purchase of the Investor
Shares contemplated hereby are exempt from registration under the Securities Act
and all applicable state securities and blue sky laws.
2.7. EQUITY INVESTMENTS. Other than the Company's interest in Sprout
and the Partnership, neither the Company nor the Partnership, directly or
indirectly, owns any partnership interest, capital stock or other proprietary
interest in any corporation, partnership, association, joint venture, or other
entity.
2.8. COMPLIANCE WITH LAWS; GOVERNMENTAL AUTHORIZATIONS. Each of the
Company and the Partnership is in compliance with all applicable Laws. Each of
the Company and the Partnership holds all material licenses and permits
necessary in the conduct of the business of the Partnership as presently
conducted and as proposed to be conducted in the Company's Business Plan.
2.9. SMALL BUSINESS CONCERN. Each of the Company and the Partnership,
taken together with its respective "affiliates" (as that term is defined in
Section 121.401 of Title 13 of the Code of Federal Regulations), is a "Small
Business Concern" within the meaning of Section 103(5) of the Small Business
Investment Act of 1958, as amended, and the regulations thereunder including
Title 13, Code of Federal Regulations, Section 121.3 (collectively, the "SBIC
Act"), and meets the applicable size eligibility criteria set forth in Title 13,
Code of Federal Regulations, Section 121.3.01(c)(1). None of the Company, the
Partnership, nor any of their
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respective subsidiaries presently engages in any activities for which a small
business investment corporation or partnership, as the case may be, is
prohibited from providing funds by the SBIC Act.
2.10. ACTIVITIES AND PROCEEDS. (a) Neither the Company nor the
Partnership (nor any subsidiaries thereof) will engage in any activities or use
directly or indirectly the proceeds from the purchase of the Shares for any
purpose for which a small business investment company is prohibited from
providing funds by the SBIC Act.
(b) The Company will deliver within ninety (90) days of the date of
this Agreement to Blue Rock a written report, certified as correct by the
Company's chief financial officer, verifying the purposes and the amounts for
which proceeds from the purchase of the Shares have been disbursed, and, if the
proceeds have not been fully disbursed within that 90-day period, an additional
report also so certified, delivered not later than the end of each succeeding
90-day period, verifying the purposes and the amounts for which such proceeds
have been disbursed. The Company will supply to the Investors such additional
information and documents as any Investor reasonably requests with respect to
use of proceeds and will permit such Investor to have access to any and all
Company or Partnership records and information and personnel as such Investor
reasonably deems necessary to verify how proceeds have been or are being used
and to assure that the proceeds have been used for the purposes specified. The
Company agrees that any diversion by the Company of the proceeds of the purchase
of the Shares for any purpose other than those permitted by the SBIC Act,
without the prior written consent of the Investors, will constitute a breach of
the covenants of the Company under this Agreement (a "Proceeds Event of
Default").
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<PAGE> 24
(c) The Company will not, without obtaining the prior written approval
of the Investors, within one year of the purchase of the Shares by the Investors
change the Company's business activity from the current business activity
conducted by the Company to a business activity to which a small business
investment company is prohibited from providing funds by the SBIC Act. The
Company agrees that any such change in its business activity without such prior
written consent of the Investors will constitute a breach of the covenants of
the Company under this Agreement (an "Activity Event of Default").
(d) If either a Proceeds Event of Default or an Activity Event of
Default occurs, Blue Rock will have the right to demand immediate repayment of
the purchase price theretofore paid by Blue Rock for the Shares theretofore
purchased by Blue Rock, together with interest thereon at The Chase Manhattan
Bank's publicly announced prime rate per annum from time to time in effect from
the date of investment until the date of repayment, and the Company will make
such payment within three days of receipt of a demand.
2.11. ADDITIONAL INFORMATION. The Company and the Partnership will
promptly deliver to the Investors such information as an Investor may reasonably
request in order to complete accurately and fully any and all reports which a
government or governmental regulatory agency may require, including but not
limited to information assessing the economic impact of the financing of the
Company by the Investors (specifying the full-time equivalent jobs created or
retained, the impact of the financing on the business in terms of expanded
revenue and taxes, and other appropriate economic benefits, such as technology
development or commercialization, minority business development, urban or rural
business development, exchange of exports, and assistance to manufacturing
firms).
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2.12. ACCESS. The Company shall grant to Blue Rock and to examiners of
the U.S. Small Business Administration certain rights of access to the Company
or the Partnership as shall be reasonably necessary to obtain and verify
information concerning the financial condition, continued eligibility of the
Company or the Partnership as a small business concern, and other matters, in
each case as required under the SBIC Act.
2.13. FINANCIAL INFORMATION. (a) Schedule 2.13(a) sets forth the
Partnership's audited balance sheet as of June 30, 1995 and the related audited
statements of operations and partners' capital and cash flows for the year ended
June 30, 1995, including related schedules (if any) and notes (collectively, the
"1995 Financial Statements") and a copy of the audit report thereon prepared by
Coopers & Lybrand L.L.P. The 1995 Financial Statements (i) present fairly, in
all material respects, the financial position of the Partnership at June 30,
1995 and the results of the operations of the Partnership for the year then
ended, (ii) are in accordance with the books and records of the Partnership, and
(iii) have been prepared in conformity with generally accepted accounting
principles.
(b) Schedule 2.13(b) sets forth the Partnership's preliminary unaudited
balance sheet as of June 30, 1996 and the related preliminary and unaudited
statement of operations for the year ended June 30, 1996 (collectively, the
"1996 Financial Statements"). Subject to audit adjustments which in the
aggregate do not materially and adversely affect the financial position or
results of the operations of the Partnership as presented therein, the 1996
Financial Statements (i) present fairly, in all material respects, the financial
position of the Partnership at June 30, 1996 and the results of the operations
of the Partnership for the year then ended, (ii) are in accordance with the
books and records of the Partnership, and (iii) have
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been prepared in conformity with generally accepted accounting principles. The
1996 Financial Statements are currently being audited, and the Company shall
cause the Partnership to furnish such audited financial statements to each
Investor promptly upon their issuance.
2.14. ABSENCE OF UNDISCLOSED LIABILITIES. Other than as set forth in
Schedule 2.14 and the 1996 Financial Statements and for obligations incurred in
the ordinary course of business of the Partnership (which singly or in the
aggregate would not result in a material adverse effect to the Partnership), at
the Closing Date the Partnership had no obligation of any nature, whether or not
accrued and whether or not contingent, disputed, absolute, determined or
determinable, nor any material loss contingency (as such term is used in the
Statement of Accounting Standards No. 5 issued by the Financial Accounting
Standards Board in March 1975) which, singly or in the aggregate, has or would
have a material adverse effect on the Partnership.
2.15. LITIGATION. (a) Except as set forth on Schedule 2.15, there are
no (i) actions, suits, claims, investigations or other proceedings by or before
any governmental authority or arbitrator pending or, to the knowledge of the
Company or the Partnership (which, singly or in the aggregate, if adversely
determined would cause a material adverse effect to the Company and the
Partnership taken as a whole), threatened against the Company or the
Partnership, or (ii) judgments, decrees, injunctions or orders of any
governmental authority or arbitrator against the Company or the Partnership
(which, singly or in the aggregate, if adversely determined would cause a
material adverse effect to the Company and the Partnership taken as a whole).
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(b) There are no civil, criminal, administrative, arbitration or other
actions, suits or proceedings or investigations pending or, to the best
knowledge of the Company or the Partnership, threatened against or by the
Company or the Partnership (i) which challenge, seek to restrain or seek damages
with respect to the execution or performance of any of the Operative Documents
or any of the transactions or events contemplated thereby or (ii) which could
result in any of the Operative Documents being declared unlawful, cause the
recission of any of the transactions thereunder or materially limit the ability
of the Company or the Partnership to fulfill its obligations under the Operative
Documents to which it is a party.
2.16. BROKERS AND FINDERS. No person or entity acting on behalf or
under the authority of the Company or the Partnership is or will be entitled to
any broker's, finder's, or similar fee or commission in connection with the
transactions contemplated hereby.
2.17. TAX MATTERS. (a) Except as set forth on Schedule 2.17 (i) the
Partnership has filed or been included in all required returns, declarations of
estimated tax, reports, and statements (collectively, the "Returns") relating to
income Taxes and any other material Taxes; (ii) all such Returns were correct
and complete in all material respects as of the time of filing; (iii) the
Partnership has timely paid all material Taxes required to be paid by it through
the date hereof; (iv) the Partnership has made adequate provision on its books
for all material Taxes payable by it for all periods for which no Returns have
yet been filed; (v) the Partnership is not delinquent in the payment of any
material Taxes nor has it requested any extension of time within which to file
any Return, which Return has not since been filed; (vi) there are no pending tax
audits of any Returns; (vii) no deficiency of or addition to any Taxes or
interest or penalty for any Taxes has been proposed, asserted or assessed in
writing against the Partnership; and
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(viii) the Partnership is, and always has been, taxable as a partnership for
federal and state income tax purposes.
(b) "Taxes" means, with respect to any person or entity all Federal,
state, local, and foreign taxes, including, without limitation, all taxes on or
based upon net income, gross income, income as specially defined, earnings,
profits or selected items of income, earnings, or profits, and all gross
receipts, sales, use, ad valorem, transfer, franchise, license, withholding,
payroll, employment, excise, severance, stamp, occupation, premium, property, or
windfall profits taxes, alternative or add-on minimum taxes, customs duties, or
other taxes, fees, assessments or charges of any kind, together with any
interest, penalties, additions to tax or additional amounts imposed by any
taxing authority on such person or entity.
2.18. ERISA. With respect to each employee benefit plan, arrangement or
agreement that is maintained, contributed to or that was maintained or
contributed to, any time during the five (5) calendar years preceding the date
of this Agreement (the "Plans"), by the Partnership or by any trade or business,
whether or not incorporated (an "ERISA Affiliate"), which together with the
partnership would be deemed a "single employer" within the meaning of section
4001 of the Employees Retirement Income Security Act of 1974, as amended
("ERISA"):
(a) Each of the Plans that are subject to ERISA is in compliance in all
material respects with ERISA; each of the Plans intended to be "qualified"
within the meaning of section 401(a) of the Code is so qualified (and each trust
created under such Plan is exempt from tax under Section 501(a) of the Internal
Revenue Code of 1986, as amended, and has been so exempt since its creation);
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(b) No Plan is subject to Title IV of ERISA; neither the Partnership
nor an ERISA Affiliate has incurred, directly or indirectly, any liability
(including any material contingent liability) pursuant to Title IV of ERISA; and
no condition exists that presents a material risk to the Company of incurring a
liability pursuant to Title IV or ERISA; and
(c) No Plan is a multiemployer plan (within the meaning of Sections
3(37) and 4001(a)(3) of ERISA) and no Plan is a multiple employer plan as
defined in Section 413 of the Code; there are no pending, threatened or
anticipated claims (other than routine claims for benefits) by, on behalf of or
against any of the Plans or any trust related thereto.
2.19. CHANGES IN CONDITION. Except as set forth on Schedule 2.19
hereto, since June 30, 1996, there has been no material adverse effect on the
business, operations, financial condition or prospects of the Company and the
Partnership, taken as a whole. There is no event known to the Company which
materially adversely affects, or (so far as the Company or the Partnership can
now reasonably foresee) is reasonably likely to materially adversely affect the
business, operations, financial condition or prospects of the Company and the
Partnership, except to the extent specifically described on Schedule 2.19
hereto.
2.20. AGREEMENTS. (a) Schedule 2.20 sets forth all written and oral
agreements or understandings of the Company or the Partnership as of the date
hereof that:
(i) provide for purchases by the Company or the Partnership of
products or services in excess of $50,000 per year;
(ii) provide for the employment by the Company or the Partnership of
any director, officer, key employee or key consultant;
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(iii) provide for the borrowing of money or a line of credit by the
Company or the Partnership or a leasing transaction of a type required
to be capitalized by the Company or the Partnership in accordance with
generally accepted accounting principles;
(iv) provide for the sale, assignment, license, or other disposition
of any asset with a value in excess of $50,000 or any material right of
the Company or the Partnership;
(v) provide for the lease by the Company or the Partnership of any
real property involving lease payments in excess of $25,000 per year;
(vi) provide for the lease by the Company or the Partnership of any
personal property involving lease payments in excess of $25,000 per
year;
(vii) provide for the management or opening of any school; or
(viii) are otherwise material to the Company or the Partnership or
either of their assets, business or property and not disclosed elsewhere
in this Agreement, including the exhibits and schedules thereto.
(b) Each agreement set forth on Schedule 2.20 is in full force and
effect and constitutes the valid and binding obligation of the Company and the
Partnership, as the case may be, and, to the best of the Company's or the
Partnership's knowledge (as the case may be), constitutes the valid and binding
obligation of all other parties thereto. The Company and/or the Partnership has
in all material respects performed the obligations required to be performed
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by it and is not in default or alleged to be in default in any material respect
under any such agreement, and there exists no event or condition which, after
notice or lapse of time, or both, would constitute such a default under any such
agreement. There are no material defaults by any other party to any such
agreement.
2.21. RELATED PARTY TRANSACTIONS. Except as set forth on Schedule 2.21,
neither the Company nor the Partnership is a party or subject to any contractual
obligation relating to the ownership and operation of its assets or the conduct
of its business between the Company or the Partnership and any of their
respective officers, directors, stockholders, partners, employees or, to the
knowledge, information and belief of the Company and the Partnership, any
affiliate of any thereof, including without limitation any contractual
obligation providing for the furnishing of services to or by, providing for
rental of property, real, personal or mixed, to or from, or providing for the
lending or borrowing of money to or from or otherwise requiring payments to or
from, any such person, other than employee agreements that individually are not
material to the Partnership or Company or which are disclosed on Schedule 2.20.
2.22. ABSENCE OF SENSITIVE PAYMENTS. Neither the Company nor the
Partnership nor, to the knowledge, information and belief of the Company and the
Partnership, any of their respective officers, directors, general partners,
employees, agents or other representatives, has (a) made any contributions,
payments or gifts to or for the private use of any governmental official,
employee or agent where either the payment or the purpose of such contribution,
payment or gift is illegal under the laws of the United States or the
jurisdiction in
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which made or (b) established or maintained any unrecorded fund or asset for any
purpose or made any false or artificial entries on its books.
2.23. INSURANCE. Schedule 2.23 hereto contains a complete and correct
list in all material respects of all policies of insurance of any kind or nature
covering the Company and the Partnership, including, without limitation,
policies of life, fire, theft, workers' compensation, employee fidelity and
other casualty and liability insurance, and such policies are in full force and
effect. All premiums due on such insurance policies have been paid and there is
no default by the Company or the Partnership under any such insurance policy.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF WSI. WSI and the other WSI
Shareholders, jointly and severally, hereby represent and warrant to the
Company, the Partnership, each Specified Investor as follows:
3.1. ORGANIZATION. (a) Each of WSI and the WSI Shareholders is duly
organized, validly existing and in good standing under the laws of Delaware and
has all requisite corporate power and authority to own, lease and operate the
assets used in its business, to carry on its business as now being conducted and
as proposed to be conducted, to enter into the Operative Documents, to perform
its obligations thereunder, and to consummate the transactions contemplated
thereby.
3.2. AUTHORIZATION; ENFORCEABILITY. Each of WSI, on its own behalf and
as General Partner of the WSI Shareholders, and the WSI Shareholders has all the
requisite power and authority to execute, deliver and perform its obligations
under the Operative Documents. WSI has taken all necessary action to authorize
the execution and delivery of the Operative
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Documents to which WSI or any of the WSI Shareholders is a party, the
performance of their obligations thereunder and the consummation of the
transactions contemplated thereby. Each Operative Document to which WSI or any
WSI Shareholder is a party has been duly executed and delivered by an authorized
officer of WSI and, assuming due execution and delivery by each other party
thereto, constitutes the valid and binding obligation of WSI or such WSI
Shareholder, enforceable against such party in accordance with its terms.
3.3. NO CONFLICT. The execution and delivery by each of WSI and the WSI
Shareholders of the Operative Documents to which it is a party, the consummation
of the transactions contemplated thereby, and the compliance with the provisions
thereof, will not (i) violate or conflict with the organizational documents of
WSI (including its certificate of incorporation and by-laws) or any WSI
Shareholder (including its agreement of limited partnership and certificate of
limited partnership), (ii) violate, conflict with, or give rise to any
termination, cancellation, or acceleration under any agreement, lease, security,
license, permit, or instrument to which WSI or any of the WSI Shareholders is a
party, or to which it or any of its assets is subject, (iii) result in the
imposition of any lien or encumbrance on any asset of WSI or any of the WSI
Shareholders, other than the restrictions acknowledged in the Operative
Documents, (iv) violate or conflict with any Laws, or (v) require any consent,
approval or other action of, notice to, or filing with any entity or person
(government or private), except for those that have been obtained or made.
3.4. WSI STOCK AND PARTNERSHIP INTERESTS. WSI is the record and
beneficial owner of all right, title and interest in and to the Partnership
Interests set forth opposite its name in Schedule 1.1 hereto under the heading
"Edison Interests," free and clear of
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all liens and encumbrances except as set forth below. Immediately following each
of the First Closing and the Second Closing, there will be no outstanding (i)
options, warrants or other rights to purchase or otherwise acquire (together,
"Options") from WSI or any WSI Shareholder any interest in the Company or the
Partnership or (ii) contracts, agreements or commitments (together,
"Commitments") binding on WSI or any WSI Shareholder relating to the issuance by
WSI or such WSI Shareholder of any shares, options, warrants or similar rights
in the Company or the Partnership, other than Options and Commitments to
purchase less than 15% in the aggregate of the WSI and WSI Shareholders' Shares
(determined as if all shares of Preferred Stock had been converted into shares
of Common Stock) and otherwise subject to the terms and conditions of the
Shareholders' Agreement. Except for the Shareholders' Agreement and the
Partnership Agreement, the WPA Agreement, the WEG I Agreement and the WEG II
Agreement, there are no voting trusts, voting agreements, proxies or other
agreements, instruments or understandings with respect to the voting of the
Shares to which WSI or the WSI Shareholders or, to the best knowledge of WSI,
any other person is a party other than agreements among Whittle, WSI and Morgan
pursuant to which (i) WSI has agreed not to amend the Shareholders' Agreement,
the Constitutional Documents, the WPA Agreement, the WEG I Agreement or the WEG
II Agreement without Morgan's consent, and (ii) WSI's Shares and Partnership
Interests in WPA, WEG I and WEG II are pledged to Morgan. WSI is the sole
general partner of each of the WSI Shareholders.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF SPROUT AND THE SPROUT
SHAREHOLDERS. Sprout and the Sprout Shareholders, jointly and severally, hereby
represent and warrant to the Company, the Partnership and each Specified
Investor as follows:
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4.1. ORGANIZATION. (a) Each of Sprout and the Sprout Shareholders is
duly organized, validly existing and in good standing under the laws of Delaware
and has all requisite power and authority to own, lease and operate the assets
used in its business, to carry on its business as now being conducted and as
proposed to be conducted, to enter into the Operative Documents, to perform its
obligations thereunder, and to consummate the transactions contemplated thereby.
Attached hereto as Schedule 4.1 is a true and complete copy of the Certificate
of Incorporation of Sprout in effect on the date hereof, which Certificate has
not been amended since the date hereof, and a true and complete copy of the
By-laws of Sprout as in effect on the date hereof.
4.2. AUTHORIZATION; ENFORCEABILITY. Each of Sprout and the Sprout
Shareholders has all the requisite power and authority to execute, deliver and
perform its obligations under the Operative Documents. Each of Sprout and the
Sprout Shareholders has taken all necessary action to authorize its execution
and delivery of the Operative Documents to which it is a party, the performance
of its obligations thereunder and the consummation of the transactions
contemplated thereby. Each Operative Document to which Sprout or any Sprout
Shareholder is a party has been duly executed and delivered by an authorized
officer and, assuming due execution and delivery by each other party thereto,
constitutes the valid and binding obligation of Sprout or such Sprout
Shareholder, enforceable against such party in accordance with its terms.
4.3. NO CONFLICT. The execution and delivery by each of Sprout and the
Sprout Shareholders of the Operative Documents to which it is a party, the
consummation of the transactions contemplated thereby, and the compliance with
the provisions thereof, will not
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(i) violate or conflict with its organizational documents (including its
certificate of incorporation and by-laws or agreement of limited partnership and
certificate of limited partnership, as the case may be), (ii) violate, conflict
with, or give rise to any termination, cancellation, or acceleration under any
agreement, lease, security, license, permit, or instrument to which it is a
party, or to which it or any of its assets is subject, (iii) result in the
imposition of any lien or encumbrance on any of its assets, other than the
restrictions set forth in the Operative Documents, (iv) violate or conflict with
any Laws, or (v) require any consent, approval or other action of, notice to, or
filing with any entity or person (government or private), except for those that
have been obtained or made.
4.4. SPROUT STOCK AND PARTNERSHIP INTERESTS. The authorized capital
stock of Sprout consists of 10,000 shares of common stock, $0.01 par value per
share, of which 1,216.7001 shares are issued and outstanding. The Sprout
Shareholders are the record and beneficial owners of 100% of the Sprout Shares,
free and clear of all liens and encumbrances. Each of the Sprout Shares is
validly issued, fully paid and non-assessable. Sprout is the record and
beneficial owner of the Partnership Interest set forth opposite its name on
Schedule 1.1 hereto under the heading "Edison Interests," free and clear of all
liens and encumbrances. Immediately following each of the First Closing and the
Second Closing, there will be no outstanding (i) Options to acquire from Sprout
or the Sprout Shareholders any interest in Sprout, the Company or the
Partnership or (ii) Commitments binding on Sprout or any of the Sprout
Shareholders relating to the issuance by the Sprout Shareholders, Sprout, the
Company or the Partnership of any shares, partnership interests, options,
warrants or similar rights or interests in Sprout, the Company or the
Partnership, other than Options and Commitments to
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purchase less than 15% in the aggregate of the Sprout Shareholders' Shares
(determined as if all shares of Preferred Stock had been converted into shares
of Common Stock) and otherwise subject to the terms and conditions of the
Shareholders' Agreement. Except for the Shareholders' Agreement, the Partnership
Agreement, the WPA Agreement, the WEG I Agreement, the WEG II Agreement, there
are no voting trusts, voting agreements, proxies or other agreements,
instruments or understandings with respect to the voting of the Shares or
Partnership Interests to which the Sprout Shareholders, Sprout or, to the best
knowledge of the Sprout Shareholders and Sprout, any other person is a party
other than agreements among Whittle, WSI and Morgan pursuant to which (i)
Whittle has agreed not to amend the Shareholders' Agreement, the Constitutional
Documents, the WPA Agreement, the WEG I Agreement or the WEG II Agreement
without Morgan's consent, and (ii) WSI's Shares and Partnership Interests in
WPA, WEG I and WEG II are pledged to Morgan. Since its organization, Sprout has
not engaged in any business or activity other than holding a general partnership
interest in the Partnership or as a general partner of the Partnership.
Following the First Closing, Sprout will have no obligations or commitments
other than as a limited partner of the Partnership or as described in the
Operative Documents.
4.5. ASSETS AND LIABILITIES Sprout has no assets other than the
Partnership Interests and no liabilities other than those arising under such
Partnership Interests.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF CERTAIN INVESTORS.
(A) Each of the Specified Investors, severally and only with respect to itself
or himself, represents and warrants to the Company, the Partnership, WSI, the
WSI Shareholders, Sprout, the Sprout Shareholders (together, the "Company
Parties"), BCS, JRS, Childs and to each other
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Specified Investor; and BCS, JRS and Childs, severally and only with respect to
himself, represents and warrants to the Company, the Partnership and to each
Specified Investor and to each other, as follows:
5.1. ORGANIZATION. Such Investor (if not a natural person) is duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its organization and has all requisite power and authority to
own, lease and operate the assets used in its business as now being conducted,
to enter into the Operative Documents, to perform its obligations thereunder,
and to consummate the transactions contemplated thereby.
5.2. AUTHORIZATION; ENFORCEABILITY. Each such Investor which is not a
natural person has all requisite power and authority, and each such Investor
which is a natural person has the requisite capacity, to execute, deliver and
perform such Investor's obligations under the Operative Documents. Such Investor
has taken all necessary action to authorize its execution and delivery of the
Operative Documents to which such Investor is a party, the performance of such
Investor's obligations thereunder and the consummation of the transactions
contemplated thereby. Each Operative Document to which such Investor is a party
has been duly executed and delivered by such Investor or by an authorized
officer, partner or agent of such Investor and, assuming due execution and
delivery by each other party thereto, constitutes the legal, valid and binding
obligation of such Investor, enforceable against such Investor in accordance
with its terms.
5.3. NO CONFLICT. The execution and delivery by such Investor of the
Operative Documents to which it is a party, the consummation of the transactions
contemplated thereby, and compliance with the provisions thereof, will not (i)
violate or conflict with such
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Investor's organizational documents, if any, (ii) violate, conflict with, or
give rise to any right of termination, cancellation, or acceleration under any
agreement, lease, security, license, permit, or instrument to which such
Investor is a party, or to which such Investor or any of such Investor's assets
is subject, (iii) result in the imposition of any lien or other encumbrance on
any asset of such Investor, other than the restrictions set forth in the
Operative Documents, (iv) violate or conflict with any Laws, or (v) require any
consent, approval or other action of, notice to, or filing with any entity or
person (governmental or private), except for those that have been made or
obtained.
5.4. INVESTOR STOCK AND PARTNERSHIP INTEREST. Each such Investor is the
record and beneficial owner of all right, title and interest in and to any
Partnership Interest set forth next to such Investor's name on Schedule 1.1
hereto under the heading "Edison Interests," free and clear of all liens and
encumbrances. Immediately after each of the First Closing Date and the Second
Closing Date, there will be no outstanding (i) Options from such Investor to
acquire any interest in the Company or the Partnership or (ii) Commitments
binding on such Investor relating to the issuance by the Company or the
Partnership of any shares, partnership interests, options, warrants or similar
rights or interests, other than Options or Commitments with respect to less than
15% of the Shares (determined as if all shares of Preferred Stock had been
converted into shares of Common Stock) of such Investor and otherwise subject to
the terms and conditions of the Shareholders' Agreement.
5.5. INVESTMENT REPRESENTATIONS AND WARRANTIES. (a) Such Investor is
acquiring the Shares to be purchased by such Investor on the date hereof and,
should such Investor acquire any additional Shares or other interest in the
Company after the date hereof
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pursuant to the terms hereof or the Shareholders' Agreement, such Investor will
acquire such additional Shares or other interest, for such Investor's own
account, for investment and not with a view to the distribution thereof, nor
with any present intention of distributing the same.
(b) Such Investor understands that the Shares have not been and any
additional Shares will not be registered under the Securities Act, by reason of
their issuance in a transaction exempt from the registration requirements of the
Securities Act, and that they must be held indefinitely unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from
registration.
(c) Such Investor understands that the exemption from registration
afforded by Rule 144 (the provisions of which are known to such Investor)
promulgated under the Securities Act depends on the satisfaction of various
conditions and that, if applicable, Rule 144 may afford the basis for sales only
under certain circumstances and in limited amounts.
(d) Such Investor is an "accredited investor" as such term is defined
in Rule 501 (the provisions of which are known to such Investor) promulgated
under the Securities Act.
Notwithstanding anything herein to the contrary, the representations
and warranties contained in this Section 5.5 are made only to the Company.
5.6. BROKERS AND FINDERS. No person or entity acting on behalf or under
the authority of such Investor is or will be entitled to any broker's, finder's,
or similar fee or commission in connection with the transactions contemplated
hereby.
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(B) Each Investor set forth on Schedule 1.1(a) hereof, jointly and severally,
and no other Specified Investor, hereby represents and warrants to the Company
Parties, BCS, JRS, Childs and to each other Specified Investor, as follows:
5.7 CERTAIN REPRESENTATIONS AND WARRANTIES OF THE ZESIGER GROUP. The
Zesiger Capital Group LLC has the requisite power and authority pursuant to a
duly executed, valid and binding power of attorney to execute and deliver for
and on behalf of each of the Investors set forth on Schedule 1.1(a) this
Agreement and each of the other documents executed and delivered by the Zesiger
Capital Group LLC in connection with the transactions contemplated hereby.
SECTION 6. CONDITIONS TO FIRST CLOSING; CERTAIN COVENANTS.
6.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF INVESTORS. The obligation
of each Investor to effect the First Closing is conditioned upon satisfaction,
fulfillment or waiver of all of the following conditions:
(a) Partnership Agreement. The Partnership Agreement shall have been
executed and delivered by all parties thereto.
(b) Amended and Restated Certificate of Limited Partnership. The
Amended and Restated Certificate of Limited Partnership of the Partnership shall
have been executed and delivered by Sprout, WSI and the Company. Promptly
following the First Closing, the Company shall cause such certificate to be
filed with the Secretary of State of the State of Delaware.
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(c) Shareholders' Agreement. The Shareholders' Agreement shall have
been executed and delivered by all parties thereto other than such Investor.
(d) Required Consents. All consents, approvals and other actions of,
and notices and filings with, all entities and persons as may be necessary or
required with respect to the execution and delivery by each party to the
Operative Documents other than such Investor, and the consummation by such
parties of the transactions contemplated thereby, shall have been made or
obtained.
(e) Representations and Warranties Accurate; Covenants Performed. Each
of the representations and warranties contained in the Operative Documents,
other than the representations and warranties of such Investor, shall be true,
correct and not misleading and each of the covenants set forth therein to be
performed by each other party to the Operative Documents, other than such
Investor, by the First Closing Date shall have been performed.
(f) Litigation. (i) No Law shall have been enacted, entered or deemed
applicable by any domestic or foreign government or governmental or
administrative agency or court which would make any transaction contemplated by
the Operative Documents illegal.
(ii) No complaint shall have been filed by any person or entity and be
pending which seeks to enjoin the transactions contemplated by the Operative
Documents, or to impose conditions or restrictions upon the ability of the
Company or the Partnership to operate on substantially the same basis as
presently operated, unless such complaint is dismissed, withdrawn, set-aside or
otherwise eliminated.
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(iii) No injunction, restraining order, or other order of a court of
competent jurisdiction shall be in effect which restrains, prohibits, or
invalidates any of the transactions contemplated by the Operative Documents.
(g) Small Business Administration Documentation. Prior to the First
Closing, Blue Rock shall have received SBA Form 480 (Size Status Declaration)
and SBA Form 652 (Assurance of Compliance) which have been completed and
executed by the Company and SBA Form 1031 (Portfolio Finance Report), Part A of
which shall have been completed by the Company.
(h) Opinion. The Shareholders shall have received an opinion from
Cadwalader, Wickersham & Taft, counsel to the Company, the Partnership and the
WSI Shareholders, in form and substance reasonably satisfactory to the
Investors.
6.2. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE COMPANY PARTIES. The
obligations of each of the Company Parties to effect the First Closing is
conditioned upon satisfaction, fulfillment or waiver of all of the following
conditions:
(a) Partnership Agreement. The New Partnership Agreement shall have
been executed and delivered by each other party thereto.
(b) Amended and Restated Certificate of Limited Partnership. The
Amended and Restated Certificate of Limited Partnership of the Partnership shall
have been executed and delivered by each other party thereto. Promptly following
the First Closing, the Company shall cause such Certificate to be filed with the
Secretary of State of the State of Delaware.
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(c) Shareholders' Agreement. The Shareholders' Agreement shall have
been executed and delivered by each other party thereto.
(d) Required Consents. All consents, approvals and other actions of,
and notices and filings with, all entities and persons as may be necessary or
required with respect to the execution and delivery by each other party to the
Operative Documents, and the consummation by such parties of the transactions
contemplated thereby, shall have been made or obtained.
(e) Representations and Warranties Accurate; Covenants Performed. Each
of the representations and warranties of each other party contained in the
Operative Documents shall be true, correct and not misleading and each of the
covenants set forth therein to be performed by each other party by the First
Closing Date shall have been performed.
(f) Litigation. (i) No Law shall have been enacted, entered or deemed
applicable by any domestic or foreign government or governmental or
administrative agency or court which would make any transaction contemplated by
the Operative Documents illegal.
(ii) No complaint shall have been filed by any person or entity and be
pending which seeks to enjoin the transactions contemplated by the Operative
Documents, or to impose conditions or restrictions upon the ability of the
Company or the Partnership to operate on substantially the same basis as
presently operated, unless such complaint is dismissed, withdrawn, set-aside or
otherwise eliminated.
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(iii) No injunction, restraining order, or other order of a court of
competent jurisdiction shall be in effect which restrains, prohibits, or
invalidates any of the transactions contemplated by the Operative Documents.
6.3. CERTAIN COVENANTS. Each of the Company, WSI and the other WSI
Shareholders, Sprout and the Sprout Shareholders and each other Investor (which
is not a natural person) shall deliver to each other Investor and the Company
(not later than ten (10) business days after the First Closing) certified copies
of all requisite resolutions or other actions of the Company, WSI and the other
WSI Shareholders, Sprout and the Sprout Shareholders and each other Investor
(which is not a natural person), as the case may be, authorizing such party's
execution and delivery of the Operative Documents and consummation of the
transactions contemplated thereby, a certificate of the Secretary of such party
certifying the incumbency of officers and genuineness of signatures of all
officers executing any document delivered by such party at the First Closing.
SECTION 7. CONDITIONS TO SECOND CLOSING.
7.1. CONDITIONS PRECEDENT TO OBLIGATIONS OF INVESTORS. The obligation
of each applicable Investor to effect the Second Closing is conditioned upon
satisfaction, fulfillment or waiver of the following conditions:
(a) The First Closing shall have occurred and each of the conditions
set forth therefor in Section 6.1 shall have been satisfied or waived.
(b) The conditions set forth in subsections 6.1 (d), (e), (f), (g) and
(h) shall have been met as if they were to be performed on or prior to the
Second Closing except to the
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extent that such provisions apply to each of WPA, WEG I, WEG II, the Sprout
Shareholders, Blue Rock, Reid, JRS and Childs.
(c) The Certificates of Designation attached hereto as Exhibit B-2 and
Exhibit B-3 shall have been filed with the Secretary of State of the State of
Delaware.
(d) Except with respect to the WSI Series B Preferred as provided in
subsection 1.4(d), each other Investor required hereunder to participate in the
Second Closing shall make as of the Second Closing Date the applicable
investments required by Section 1.3.
(e) The financial results of the Partnership as of June 30, 1996 as
presented in the Partnership's audited financial statements for the fiscal year
ended June 30, 1996 shall not be materially different from the preliminary
financial results set forth on Schedule 2.13(b) and no circumstance shall have
arisen or event shall have occurred since June 30, 1996 which is reasonably
likely to have a materially adverse effect on the business, operations,
financial condition or prospects of the Partnership and which is not set forth
on Schedules 2.14 or 2.19.
7.2. CONDITIONS PRECEDENT TO OBLIGATIONS OF COMPANY PARTIES. The
obligation of the Company Parties to effect the Second Closing is conditioned
upon satisfaction, fulfillment or waiver of the following conditions:
(a) The First Closing shall have occurred and each of the conditions
set forth therefor in Section 6.2 shall have been satisfied or waived.
(b) The conditions set forth in subsections 6.2 (d), (e) and (f) shall
have been met as if they were to be performed on or prior to the Second Closing
except to the extent that
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such provisions apply to each of WPA, WEG I, WEG II, the Sprout Shareholders,
Blue Rock, Reid, JRS and Childs.
(c) No Second Closing Termination shall have occurred.
(d) The Certificates of Designation attached hereto as Exhibits B-2 and
B-3 shall have been filed with the Secretary of State of the State of Delaware.
SECTION 8. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All
representations and warranties contained herein shall survive the closing
hereunder except for those contained in Sections 2.13, 2.14, 2.15, 2.18, 2.19,
2.20, 2.21, 2.22 and 2.23 which will survive until the date which is 18 months
following the Second Closing.
SECTION 9. INDEMNIFICATION.
9.1. The Company and the Partnership shall, jointly and severally,
indemnify, defend and hold harmless each of the WSI Shareholders, Sprout, the
Sprout Shareholders, each of the Specified Investors, JRS, BCS and Childs (the
"Indemnified Investors") against all liability, loss or damage, together with
all reasonable costs and expenses related thereto (including reasonable legal
fees and expenses), relating to or arising from the untruth, inaccuracy or
breach of any of the representations or warranties of the Company or the
Partnership made to such Indemnified Investor contained in any of the Operative
Documents or the failure of the Company or the Partnership to perform in
accordance with any covenant made to such Investor contained therein, unless
such untruth, inaccuracy or breach was caused by any action or omission of such
Indemnified Investor or any one or more of the other Investors. The
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Indemnified Investors may pursue their rights hereunder against the Company and
the Partnership as each Investor shall determine.
9.2. WSI and the other WSI Shareholders, jointly and severally, shall
indemnify and hold harmless each of the Company, the Partnership and each
Specified Investor against all liability, loss or damage, together with all
reasonable costs and expenses related thereto (including reasonable legal fees
and expenses), relating to or arising from the untruth, inaccuracy or breach of
any of the representations or warranties made by WSI or any other WSI
Shareholder to such party contained in the Operative Documents or the failure of
WSI or any other WSI Shareholder to perform in accordance with any covenant made
to such party contained therein, unless such untruth, inaccuracy or breach was
caused by any action or omission of such indemnified party or any one or more of
the other Investors.
9.3. The Sprout Shareholders shall, jointly and severally, indemnify
and hold harmless each of the Company, the Partnership and each Specified
Investor against all liability, loss or damage, together with all reasonable
costs and expenses related thereto (including reasonable legal fees and
expenses), relating to or arising from the untruth, inaccuracy or breach of any
of the representations or warranties made by Sprout or the Sprout Shareholders
to such party contained in the Operative Documents or the failure of the Sprout
Shareholders to perform in accordance with any covenant made to such party
contained therein, unless such untruth, inaccuracy or breach was caused by any
action or omission of such indemnified party or any one or more of the other
Investors.
9.4. Each Specified Investor shall, severally and not jointly,
indemnify and hold the harmless each Company Party, BCS, JRS, Childs and each
other Specified Investor
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against all liability, loss or damage, together with all reasonable costs and
expenses related thereto (including reasonable legal fees and expenses),
relating to or arising from the untruth, inaccuracy or breach of any of the
representations, warranties or agreements of such Specified Investor made to
such party contained in the Operative Documents or the failure of such Specified
Investor to perform in accordance with any covenant made to such party contained
therein, unless such untruth, inaccuracy or breach was caused by any action or
omission of such indemnified party or any one or more of the other Investors.
9.5 Each of BCS, JRS and Childs shall, severally and not jointly,
indemnify and hold harmless the Company, the Partnership, each Specified
Investor, and each other against all liability, loss or damage, together with
all reasonable costs and expenses related thereto (including reasonable legal
fees and expenses), relating to or arising from the untruth, inaccuracy or
breach of any of his representations, warranties or agreements made to such
party contained in the Operative Documents or his failure to perform in
accordance with any covenant made to such party contained therein, unless such
untruth, inaccuracy or breach was caused by any action or omission of such
indemnified party or any one or more of the other Investors.
SECTION 10. FEES AND EXPENSES. The Company shall pay or reimburse the
Investors for up to $180,000 in the aggregate for reasonable fees, expenses of
counsel and accountants, and other reasonable out-of-pocket expenses in
connection with the preparation, execution, and delivery of the Operative
Documents and the consummation of the transactions contemplated thereby. Such
reimbursement shall be on a pro rata basis according to the cash purchase price
paid or to be paid by such Investor under the terms hereof and shall be paid
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promptly after receipt by the Company of an appropriately detailed invoice
therefor from each Investor or an indication that no payment will be required.
SECTION 11. ASSIGNMENT; PARTIES IN INTEREST. Except as provided herein,
this Agreement and the rights and obligations of the parties hereunder shall not
be assignable. This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and permitted assigns.
SECTION 12. ENTIRE AGREEMENT. This Agreement contains the entire
understanding of the parties hereto 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.
SECTION 13. NOTICES. All notices, claims, certificates, requests,
demands and other communications hereunder shall be in writing and shall be
deemed to have been duly given if personally delivered or if sent by
nationally-recognized overnight courier, by telecopy, or by registered or
certified mail, return receipt requested and postage prepaid, addressed to the
address or fax number set forth for each party on Schedule 13 hereto or to such
other address as the party to whom notice is to be given may have furnished to
the other parties in writing in accordance herewith, provided, that any such
notice or communication for any of the Investors set forth on Schedule 1.1(a)
shall be deemed to have been given to such Investor in accordance herewith if
addressed to Zesiger Capital Group LLC as provided on Schedule 13. Any notice or
communication hereunder shall be deemed to have been received (a) in the case of
personal delivery, on the date of such delivery, (b) in the case of
nationally-recognized overnight courier, on the next business day after the date
when sent, (c) in the case of telecopy transmission, when
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received, and (d) in the case of mailing, on the third business day following
that on which the piece of mail containing such communication is posted.
SECTION 14. AMENDMENTS. The terms and provisions of this Agreement may
not be modified or amended, except pursuant to an instrument signed by all
parties hereto.
SECTION 15. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, and each such counterpart shall be deemed to be an original
instrument, but all such counterparts together shall constitute but one
agreement.
SECTION 16. HEADINGS. The section and paragraph headings contained in
this Agreement are for reference purposes only and shall not affect in any way
the meaning or interpretation of this Agreement.
SECTION 17. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflicts of laws provisions thereof.
SECTION 18. ARBITRATION. Except as may be otherwise provided herein,
disputes arising under this Agreement shall be arbitrated in New York City in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association by three arbitrators, one selected by the party raising such
dispute, one selected by a majority (based upon aggregate number of shares
subscribed for hereunder) of the other parties hereto (other than the party
raising such dispute, the Company and the Partnership), and the third selected
by the others so selected. Any judgment on the award rendered by the arbitrators
may be entered in any court of competent jurisdiction. The arbitrators shall
have no authority to amend this Agreement. The costs of such arbitration,
including expenses of the other parties thereto, shall be borne by the
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party against whom the arbitrators' resolution is rendered. The parties hereto
agree that any proceedings pursuant to this Section 18 shall be kept strictly
confidential and shall not be disclosed to any third party except pursuant to
court order.
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IN WITNESS WHEREOF, the parties have executed and delivered this
Subscription Agreement on the date first above written.
THE EDISON PROJECT INC.
By: /s/ Laura Eshbaugh
-------------------------------
Name: Laura Eshbaugh
Title: President
THE EDISON PROJECT L.P.
By WSI Inc., General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
By SPROUT EDISON
PROJECT INC., General Partner
By: /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Title: President
WSI INC.
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
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WPA INVESTMENT L.P.
By WSI Inc., General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
WEG L.P.
By WSI Inc., General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
WEG II L.P.
By WSI Inc., General Partner
By: /s/ H. Christopher Whittle
-------------------------------
Name: H. Christopher Whittle
Title: President
SPROUT EDISON PROJECT INC.
By: /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Title: President
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SPROUT CAPITAL VI, L.P.
By: DLJ Capital Corporation
Its: Managing General Partner
By /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Its: Attorney-in-Fact
SPROUT CAPITAL VII, L.P.
By: DLJ Capital Corporation
Its: Managing General Partner
By /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Its: Attorney-in-Fact
SPROUT CEO FUND, L.P.
By: DLJ Capital Corporation
Its: General Partner
By /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Its: Attorney-in-Fact
DLJ CAPITAL CORPORATION (Delaware)
By: /s/ Janet A. Hickey
-------------------------------
Name: Janet A. Hickey
Its: Attorney-in-Fact
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/s/ Edward V. Ryan, attorney-in-fact
------------------------------------
BENNO C. SCHMIDT, SR.
/s/ John R. Schmidt
------------------------------------
JOHN R. SCHMIDT
/s/ Joel E. Smilow
------------------------------------
JOEL E. SMILOW
/s/ John W. Childs
------------------------------------
JOHN W. CHILDS
J.W. CHILDS INVESTMENTS, L.L.C.
By J.W. Childs Associates, Inc.
its Manager
By: /s/ Adam Suttin
-------------------------------
Name: Adam Suttin
Title: Vice President
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<PAGE> 57
BLUE ROCK CAPITAL, L.P.
By: BLUE ROCK PARTNERS, L.P., its
general partner
By: BLUE ROCK, INC., its general
partner
By: /s/ Virginia G. Bonker
----------------------
Virginia G. Bonker
President
RICHMONT LEEDS EDUCATION
COMPANY L.L.C.
By: /s/ Jeffrey T. Leeds
--------------------------
Name: Jeffrey T. Leeds
Title: Member
By: /s/ Robert A. Bernstein
----------------------------
Name: Robert A. Bernstein
Title: Member
/s/ John C. Reid
---------------------------
JOHN C. REID
EACH OF THE INVESTORS SET
FORTH ON SCHEDULE 1.1(a) HEREOF
By: ZESIGER CAPITAL GROUP LLC
as Agent and Attorney-in-Fact
for each of the Investors set forth
on Schedule 1.1(a) hereof
By: /s/ Albert L. Zesiger
-----------------------------------
Albert L. Zesiger
Managing Director
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<PAGE> 58
SCHEDULE 13
ADDRESSES FOR NOTICES
---------------------
<TABLE>
<CAPTION>
Name Address
- ---- -------
<S> <C>
The Edison Project Inc. 521 Fifth Avenue
The Edison Project L.P. 16th Floor
Sprout Edison Project Inc. New York, New York 10175
Attention:
with a copy to: WSI Inc.
366 NationsBank Center
550 Main Street
Knoxville, TN 37902
Attention: Laura Eshbaugh
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: John F. Fritts
WSI Inc. 366 NationsBank Center
WPA Investment L.P. 550 Main Street
WEG L.P. Knoxville, TN 37902
WEG II L.P. Attention: Laura Eshbaugh
with a copy to: Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: John F. Fritts
The Sprout Shareholders The Sprout Group
c/o DLJ Capital Corporation
277 Park Avenue
New York, New York 10172
Attention: Janet Hickey
Benno C. Schmidt, Sr. c/o Edward V. Ryan
J.H. Whitney & Company
630 Fifth Avenue, 32nd Floor
New York, New York
John R. Schmidt 4570 Delafield Avenue
Riverdale, New York 10470
</TABLE>
<PAGE> 59
<TABLE>
<CAPTION>
<S> <C>
with a copy to: c/o Edward V. Ryan
J.H. Whitney & Company
630 Fifth Avenue, 32nd Floor
New York, New York
John W. Childs c/o J.W. Childs Associates, L.P.
1 Federal Street
21st Floor
Boston, MA 02110
Attention: John W. Childs
Joel E. Smilow 315 Post Road West
Westport, CT 06880
Blue Rock Capital, L.P. c/o Virginia G. Bonker
511 Twaddell Mill Road
Wilmington, DE 19807
J.W. Childs Investments, L.L.C. c/o J.W. Childs Associates, L.P.
1 Federal Street
21st Floor
Boston, MA 02110
Attention: Adam Suttin
Richmont Leeds Education Leeds Group Inc.
Company L.L.C. 200 Park Avenue
58th Floor
New York, New York 10166
Attention: Robert A. Bernstein
John C. Reid c/o The Edison Project Inc.
521 Fifth Avenue
16th Floor
New York, New York 10175
The Investors Set Forth Zesiger Capital Group LLC
on Schedule 1.1(a) Hereof 320 Park Avenue, 30th Floor
New York, New York 10022
Attention: Albert L. Zesiger
</TABLE>
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<PAGE> 60
EXHIBIT A-1
SECURED NOTE
November 18, 1996
FOR VALUE RECEIVED, JOHN C. REID ("Reid") promises to pay to
the order of The Edison Project Inc. (the "Corporation") the principal amount of
Three Hundred Thousand U.S. Dollars ($300,000), and to pay interest on such
principal amount in accordance with the provisions below.
Interest shall accrue, from the date hereof to but not
including the date of payment, on the outstanding principal amount at six
percent per annum, provided, however, that the rate of interest provided herein
shall not exceed the highest rate of interest permitted by law.
The principal amount together with interest accrued thereon
shall be repaid in full on February 28, 1997. Reid may prepay the outstanding
principal amount and any interest accrued thereon at any time without premium or
penalty.
As collateral security for this Secured Note, Reid hereby
grants to Corporation a first priority security interest in and to 200,000
Shares of Series A Preferred Stock of the Corporation (the "Collateral"), the
certificate representing which is registered in the name of Reid and is
simultaneously herewith being delivered by Reid to the Corporation with a duly
executed stock power in respect thereof.
Reid's obligations hereunder are with full recourse to Reid,
and the remedies of the Corporation hereunder shall not be limited to satisfying
such obligations out of the Collateral. Upon (i) Reid's failure to pay any
amount of principal or interest when due hereunder (ii) the termination of
Reid's employment with the Corporation or any of its affiliates, or (iii) Reid's
commencement of a voluntary proceeding under applicable bankruptcy, insolvency
or other similar law now or hereafter in effect or Reid's consent to the entry
of an order for relief in an involuntary case under any such law, any unpaid
principal and interest owing hereunder shall automatically become due and
payable immediately without further notice or demand, and the Corporation shall
have all the rights and remedies of secured creditors under the Uniform
Commercial Code as in effect in the State of New York and any and all other
rights and remedies available at law or in equity, all of which rights and
remedies are cumulative and without prejudice to the rights of the Corporation
to exercise other or further rights or remedies.
This Secured Note contains the entire understanding of the
parties with respect to the subject matter hereof and shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, successor
and assigns. All payments made hereunder or notices required or authorized
hereby shall be made or given as each party may from time to time direct by
written notice to the other party hereto. All amounts payable hereunder are
payable by wire transfer in immediately available funds to the account number
specified by the Corporation, in lawful money of the United States. This Secured
Note shall be governed by and construed under the laws of the State of New York,
without regard to the conflicts of laws provisions thereof.
<PAGE> 61
IN WITNESS WHEREOF, the undersigned has executed this Secured
Note on the date first above written.
JOHN C. REID
-------------------------------
AGREED AND ACKNOWLEDGED:
THE EDISON PROJECT INC.
By:
-----------------------------
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<PAGE> 62
SCHEDULE 1.5
CERTAIN DEFINED TERMS
For purposes of the Agreement, Gross Site Contribution, Total Contracted
Revenue, and Central Expenses shall be defined as follows.
GROSS SITE CONTRIBUTION
Gross Site Contribution is (i) revenue of the Partnership for
the 1996-1997 fiscal year from school contracts minus (ii) operating expenses
associated with the individual schools managed by the Partnership for the
1996-1997 fiscal year minus (iii) technology lease payments for the 1996-1997
fiscal year, each of revenue, operating expenses, and technology lease payments
being calculated in the same way such items were calculated in the Partnership's
Five-Year Business Plan for 1997-2001 (the "Business Plan").
In the Business Plan, technology lease payments for the
1996-1997 fiscal year were projected by adding (i) one-fifth of the sum of (a)
the actual cost of technology equipment acquired for school and home use for
schools which opened in the 1995-1996 fiscal year under lease or loan
agreements, (b) total interest expense under the terms of the respective
leases/loans, and (c) required end-of-term payments, and (ii) one-fifth of the
sum of (a) total anticipated cost of technology equipment to be acquired for
school and home use for schools which opened in the 1996-1997 fiscal year under
lease or loan agreements, (b) total interest expense under the terms of the
anticipated leases/loans, and (c) anticipated required end-of-term payments. For
calculations under this Agreement, technology lease payments for schools which
opened in the 1996-1997 fiscal year will reflect actual technology equipment
costs, interest rates, and end-of-term payments. Should any part of the school
or home technology equipment not be financed under lease/loan arrangements,
technology lease payments with respect to the equipment not so financed will be
deemed to be (i) for technology equipment used in schools, one-fifth of the sum
of (a) the actual cost of such equipment, (b) deemed financing costs over 42
months at 9.5% interest, and (c) a deemed final payment equal to 12% of the
total equipment costs, and (ii) for technology equipment used in homes,
one-fifth of the sum of (a) the actual cost of such equipment, (b) deemed
financing costs over 42 months at 10.5% interest, and (c) a deemed final payment
equal to 15% of the total equipment costs.
Gross Site Contribution shall be determined by the
Partnership's financial staff after the close of the 1996-1997 fiscal year and
in conjunction with the preparation of the Partnership's audited financial
statements.
TOTAL CONTRACTED REVENUE
Total Contracted Revenue is the sum of anticipated revenue for
each school to be operated during the 1997-1998 fiscal year, with revenue for
each school calculated by adding (1) base per-pupil revenue for such school for
the 1997-1998 school year as provided under the
<PAGE> 63
relevant school contract times the number of pupils for whom the Partnership
expects in good faith to be paid; (2) anticipated categorical revenue for such
school for the 1997-1998 school year (Title One, special education, etc.) as
provided under the relevant school contract; and (3) any other revenue for such
school as provided under the relevant school contract. Total Contracted Revenue
shall be calculated by the Partnership's financial staff as soon as determinable
following the start of the 1997-1998 school year.
CENTRAL EXPENSES
Central Expenses are the actual operating expenses of the
Partnership's headquarters staff for the 1996-1997 fiscal year, calculated in
the same manner as projected in the Business Plan (and detailed in the
Partnership's Central Support Budget for the 1996-1997 fiscal year dated August
18, 1996) and shall specifically exclude (1) any costs associated with this
transaction or any previous capital transaction (e.g., the outstanding payment
due to Dillon Read and professional fees and expenses) and (2) the services fee
being paid to WSI at the First Closing. Central Expenses shall be determined by
the Partnership's financial staff after the close of the 1996-1997 fiscal year
and in conjunction with preparation of the audited financial statements of the
Partnership.
The calculation of each of the above defined terms shall be in accordance with
Generally Accepted Accounting Principles (GAAP) as used in the Partnership's
audited financial statements for the 1996-1997 fiscal year except that
technology lease payments shall be calculated as in the Business Plan.
-2-
<PAGE> 1
EXHIBIT 10.7
WARRANT PURCHASE AGREEMENT
THIS WARRANT PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of January 15, 1998, by and between The Edison Project Inc., a Delaware
corporation with its principal place of business at 521 Fifth Avenue, 16th
Floor, New York, NY 10175 (the "Company"), Phoenix Leasing Incorporated, a
California corporation (the "Purchaser").
The Company desires to sell, and the Purchaser desires to purchase, a
warrant to purchase 25,125 shares of the Company's Series A Common Stock, par
value $0.01 per share (the "Warrant Shares"), at a price per share of $3.98 in
the form attached hereto as Exhibit A and on the terms and conditions set forth
herein (the "Warrant"), in connection with Purchaser's extension of a credit
facility to the Company pursuant to the Senior Loan and Security Agreement,
dated as of the date hereof (the "Financing").
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties hereto agree as follows:
A. PURCHASE TERMS
1. Purchase of the Warrant. The purchase and sale of the Warrant shall
take place at the offices of the Purchaser, at such place as the Company and the
Purchaser shall agree, on January 15, 1998 (the "Closing") pursuant to the
Financing.
2. Access To Information. The Purchaser acknowledges that it has had
access to all material information concerning the Company which it has
requested. The Purchaser also acknowledges that it has had the opportunity to,
and has to its satisfaction, questioned the officers of the Company with respect
to its investment hereunder.
3. Representations of the Purchaser.
(a) Disclosure: Sophistication. The Purchaser represents that it
understands that the Warrant, and the Warrant Shares issuable upon exercise
thereof, are speculative investments, that it is aware of the Company's business
affairs and financial condition and that it has acquired sufficient information
about the Company to reach an informed and knowledgeable decision to acquire the
Warrant. The Purchaser is purchasing the Warrant and any Warrant Shares issued
upon exercise thereof for investment for its own account only and not with a
view to, or for resale in connection with, any "distribution" thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
applicable state securities laws. The Purchaser further represents that it
understands that the Warrant and Warrant Shares have not been registered under
the Securities Act or applicable state securities laws by reason of specific
exemptions therefrom, which exemptions depend upon, among other things, the bona
fide nature of the Purchaser's investment intent as expressed
<PAGE> 2
herein. The Purchaser understands that the Warrant and any Warrant Shares
purchased upon exercise thereof must be held indefinitely unless such securities
are subsequently registered under the Securities Act and all applicable state
securities laws and regulations or an exemption from such registration or
qualification is available, and that the Company is under no obligation to
register or qualify such securities except as expressly set forth herein. The
Purchaser is an "accredited investor" as defined in Regulation D promulgated
under the Securities Act. The Purchaser's corporate headquarters and principal
place of business is located in the State of California.
(b) Disposition of the Purchaser's Rights. In no event will the
Purchaser make a disposition of any of its rights to acquire the Warrant Shares
unless and until the Purchaser 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 Purchaser)
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
Purchaser at the request of the Purchaser by the staff of the SEC or a ruling
shall have been issued to the Purchaser 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 Purchaser 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.
(c) Financial Risk. The Purchaser 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.
(d) Risk of No Registration. The Purchaser understands that the
Company Shares have not been reviewed or approved by the SEC or any similar
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<PAGE> 3
body not registered under the Securities Exchange Act of 1934, as amended (the
"1934 Act") and, as of the date of execution hereof, the Company has no
obligation to so register the Company Shares, 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 Warrant, or (ii) the Warrant Shares issuable upon
exercise of the Warrant, it may be required to hold such securities for an
indefinite period.
4. Confidential Information. The Purchaser will not use or divulge any
nonpublic information provided by or developed for the Purchaser in connection
with this Agreement ("Company Proprietary Information") whether or not this
Agreement remains in effect, except as may be required by law.
5. Legends. The Purchaser acknowledges and understands that the
instrument evidencing the Warrant and any Warrant Shares issuable pursuant
thereto shall bear the legends as specified in the Warrant (and any other
legends required under state or federal securities laws in the opinion of legal
counsel for the Company).
B. REGISTRATION AGREEMENT
The Company hereby grants to the Purchaser with respect to the Warrant
Shares the "piggy-back" registration rights granted to other holders of Company
stock (the "Other Holders"), as set forth in the terms and provisions of Annex I
hereto (the "Annex Registration Rights"). The Purchaser's "piggy-back"
registration rights with respect to the Warrant Shares shall at all times be the
same as the "piggy-back" registration rights of the Other Holders,
notwithstanding any changes to the stockholder's agreement from which the Annex
Registration Rights is derived; provided, that in the event that the number of
shares to be included in a Registration Statement (as defined in Annex I) filed
for an underwritten public offering is limited by the lead managing underwriter,
Warrant Shares may not be included in such offering unless all Shares (as
defined in Annex I) desired by Shareholders (as defined in Annex I) to be
included therein have been so included, and in the event the Warrant Shares are
to be included, they shall be included on a pro rata basis based on the number
of shares the holders of which are similarly situated (including, without
limitation, warrantholders which lease computer equipment to the Company or
extended loans to the Company secured by computer equipment). The Company
represents and warrants to the Purchaser it has taken all action necessary,
including, if required, obtaining the consent of the Other Holders, to grant the
Purchaser the registration rights described herein. The Company further
represents and warrants that the Company's issuance of the Warrant to the
Purchaser does not violate or conflict with any rights of first refusal granted
to any other person, including any of the Other Holders.
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<PAGE> 4
C. GENERAL PROVISIONS
1. Representations and Warranties of the Company. As a material
inducement to the Purchaser to enter into this Agreement and purchase the
Warrant hereunder, the Company hereby represents and warrants that:
(a) Organization, Corporate Power and Licenses. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of its incorporation described above and is qualified to do
business in every jurisdiction in which the failure to so qualify has had or
would reasonably be expected to have a material adverse effect on the financial
condition, operating results, assets, operations or business prospects of the
Company and its subsidiaries taken as a whole. The Company possesses all
requisite corporate power and authority and all material licenses, permits and
authorizations necessary to own and operate its properties, to carry on its
businesses as now conducted and presently proposed to be conducted and to carry
out the transactions contemplated by this Agreement. The copies of any existing
Stock Purchase Agreements and the Stockholders Agreements and the Company's
charter documents and bylaws which have been furnished to Purchaser or the
Purchaser's special counsel reflect all amendments made thereto at any time
prior to the date of this Agreement and are correct and complete.
(b) Capital Stock and Related Matters.
(i) As of the Closing and immediately thereafter, the
authorized capital stock of the Company shall be as stated on the attached
"Capitalization Schedule". As of the Closing, the Company shall not have
outstanding any stock or securities convertible or exchangeable for any shares
of its capital stock or containing any profit participation features, nor shall
it have outstanding any rights, warrants or options to subscribe for or to
purchase its capital stock or any stock or securities convertible into or
exchangeable for its capital stock or any stock appreciation rights or phantom
stock plans, except for the Warrant, and except as set forth on the attached
"Option Schedule". The Option Schedule accurately sets forth the information set
forth thereon. As of the Closing, the Company shall not be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any warrants, options or other rights
to acquire its capital stock, except as set forth on the Capitalization
Schedule. As of the Closing, all of the outstanding shares of the Company's
capital stock shall be validly issued, fully paid and nonassessable.
(ii) Except for those rights contained in any Stock Purchase
Agreements, the Company's Amended and Restated Articles of Incorporation and
those contained in any Stockholders Agreements (which rights have been waived),
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<PAGE> 5
there are no statutory or, to the best of the Company's knowledge, contractual
stockholders, preemptive rights or rights of refusal with respect to the
issuance of the Warrant hereunder of the issuance of the Warrant Shares upon
exercise of the Warrant. The Company has not violated any applicable federal or
state securities laws in connection with the offer, sale or issuance of any of
its capital stock, and the offer, sale and issuance of the Warrant hereunder
does not require registration under the Securities Act or any applicable state
securities laws.
(c) Authorization; No Breach. The execution, delivery and
performance of this Agreement, the Warrant and all other agreements contemplated
hereby to which the Company is a party have been duly authorized by the Company.
This Agreement, the Warrant and all other agreements contemplated hereby to
which the Company is a party each constitutes a valid and binding obligation of
the Company, enforceable in accordance with their respective terms. The
execution and delivery by the Company of this Agreement, the Warrant and all
other agreements contemplated hereby to which the Company is a party, the
offering, sale and issuance of the Warrant hereunder, the issuance of the
Warrant Shares upon exercise of the Warrant, and the fulfillment of and
compliance with the respective terms hereof and thereof by the Company, do not
and shall not (i) conflict with or result in a breach of the terms, conditions
or provisions of, (ii) constitute a default under, (iii) result in the creation
of any lien, security interest, charge or encumbrance upon the Company's capital
stock or assets pursuant to, (iv) give any third party the right to modify,
terminate or accelerate any obligation under, (v) result in a violation of, or
(vi) require any authorization, consent, approval, exemption or other action by
or notice or declaration to, or filing with, any court or administrative or
governmental body or agency pursuant to, the charter or bylaws of the Company or
any subsidiary, or any law, statute, rule or regulation to which the Company or
any subsidiary is subject, or any agreement, instrument, order, judgment or
decree to which the Company or any subsidiary is subject, except for any such
filings required under applicable "blue sky" or state securities laws or
required under Regulation D promulgated under the Securities Act.
2. Miscellaneous.
(a) No Inconsistent Agreements. The Company shall not hereafter
enter into any agreement with respect to its securities which is inconsistent
with or violates the rights granted to the Purchaser hereunder.
(b) Remedies. Any Person having rights under any provisions of this
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or
-5-
<PAGE> 6
equity of competent jurisdiction (without posting any bond or other security)
for specific performance and for other injunctive relief in order to enforce or
prevent violation of the provisions of this Agreement.
(c) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and the Purchaser.
(d) Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
Purchaser are also for the benefit of, and enforceable by, any subsequent holder
of the Warrant Shares.
(e) Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(f) Counterparts. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together shall constitute
one and the same Agreement.
(g) Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(h) Governing Law. The corporation laws of the State of the
Company's incorporation identified above shall govern all issues concerning the
relative rights of the company and its stockholders. All other issues and
questions concerning the construction, validity, interpretation and enforcement
of this Agreement and the exhibits and schedules hereto shall be governed by,
and construed in accordance with , the laws of the State of California, without
giving effect to any choice of law or conflict of law rules or provisions
(whether of the State of California or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the state of
California.
(i) Notices. All notices, demands or other communications to be
given or delivered under or by reason of the provisions of this Agreement shall
be in writing and shall be deemed to have been given when delivered personally
to the
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<PAGE> 7
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid, or by confirmed facsimile. Such notices,
demands and other communications shall be sent to the Purchaser and to the
Company at the respective addresses indicated below:
The Edison Project, Inc.
521 Fifth Avenue, 16th Floor
New York, NY 10175
Attention: Chief Financial Officer
Telephone: (212) 309-1600
Facsimile: (212) 309-1604
with a copy to:
The Edison Project
c/o WSI Inc.
366 NationsBank Center
550 Main Street
Knoxville, Tennessee 37902
Attention: Laura Eshbaugh
Telephone: (423) 546-0999
Facsimile: (423) 546-1090
and to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: John F. Fritts
Telephone: (212) 504-6000
Facsimile: (212) 504-6666
Phoenix Leasing Incorporated
2401 Kerner Boulevard
San Rafael, California 94901
Attention:
Telephone: (415) 485-4500
Facsimile: (415) 485-4891
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
-7-
<PAGE> 8
(j) Attorneys' Fees. In the event of an action, suit or proceeding
brought under or in connection with this Agreement, the prevailing party therein
shall be entitled to recover from, and the other party hereto agrees to pay, the
prevailing party's costs and expenses in connection therewith, including
reasonable attorneys' fees.
(k) Arbitration. Disputes arising under or in any respect in
connection with this Agreement, including in respect of the execution, delivery
or performance hereof (but excluding disputes as to the compliance by the
arbitrators under the provisions of this paragraph applicable to them), shall be
arbitrated in Chicago in accordance with the Commercial Arbitration Rules of the
American Arbitration Association by three arbitrators, one selected by each
party hereto and the third selected by the two so selected (or, in the absence
of agreement, the third arbitrator shall be selected by the President of the
Association of the Bar of The City of Chicago at the time sitting), and with all
decisions of the arbitrators requiring the affirmative vote of at least two of
the arbitrators. Any judgment on any award rendered by the arbitrators in
accordance with such rules may be entered in any court of competent
jurisdiction. The parties intend to confer on the arbitrators the authority to
resolve disputes between the parties in respect of this Agreement and agree that
no decision by the arbitrators shall have the effect of amending this Agreement
in any respect. The costs of any such arbitration, including expenses (and legal
fees) of the other party thereto, shall be borne by the party which is the
losing party in the arbitration or, if the arbitrators' decision is unclear in
that regard, as the arbitrators shall determine in accordance with the purpose
of this provision to achieve the result that arbitrations be commenced hereunder
in circumstances of actual disputes and not frivolously or for harassment
purposes. The parties hereto agree that any proceedings pursuant to this
paragraph shall be kept strictly confidential and shall not be disclosed to any
third party except pursuant to court order.
-8-
<PAGE> 9
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first set forth above.
The Edison Project Inc.
a Delaware corporation
Attest:
/s/ Laura Eshbaugh By: /s/ Laura Eshbaugh
- ----------------------------- -------------------------------------------
Secretary Name: Laura Eshbaugh
Title: President
(Corporate Seal)
Phoenix Leasing Incorporated
a California corporation
By: /s/ N. H. Nelson
---------------------------------------
Its: Vice President
--------------------------------------
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<PAGE> 1
EXHIBIT 10.8
NEITHER THIS WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NO
SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SAID SHARES MAY BE
EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR (ii)
AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED, EXCEPT THAT NO SUCH OPINION SHALL BE
REQUIRED IF SUCH SALE IS PURSUANT TO RULE 144 PROMULGATED UNDER THE ACT.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
THIS CERTIFIES THAT, for value received PHOENIX LEASING INCORPORATED, a
California corporation ("Warrantholder") is entitled to subscribe for and
purchase up to Twenty-Five Thousand One Hundred Twenty-Five (25,125) shares (as
adjusted pursuant to provisions hereof, the "Shares") of the fully paid and
non-assessable Series A Common Stock (the "Common Stock") of The Edison Project
Inc., a Delaware corporation with its principal place of business at 521 Fifth
Avenue, 16th Floor, New York, NY 10175 (the "Company"), at the per share price
of Three Dollars Ninety-Eight Cents ($3.98) (such price and such other price as
shall result, from time to time, from adjustments specified herein is herein
referred to as the "Warrant Price") subject to the provisions and upon the terms
and conditions hereinafter set forth. The Warrant Price and the Shares
purchasable hereunder are subject to adjustment in certain events, all as more
fully set forth under Sections 4 and 5 herein. As used herein, the term "Grant
Date" shall mean January 15, 1998.
1. Term. The purchase rights represented by this Warrant are
exercisable, in whole or in part, at any time and from time to time from and
after the Grant Date and on or prior to the later of (i) five (5) years after
the Borrower's initial public offering or (ii) ten (10) years from the date of
the final loan made to the Company by Warrantholder under the Senior Loan and
Security Agreement dated as of June 30, 1997, between Phoenix Leasing
Incorporated and the Company (the "Loan Agreement").
2. Method of Exercise; Net Issue Exercise.
2.1 Method of Exercise; Payment Issuance of New Warrant. The
purchase rights represented by this Warrant may be exercised by Warrantholder,
in whole or in part and from time to time, by the surrender of this Warrant
(with the notice of exercise form attached hereto as Annex A duly executed) at
the principal office of the Company and by the payment to the Company, by wire
transfer or cashier's check, of an amount equal to the then applicable Warrant
Price per share multiplied by the number of Shares then being purchased.
Warrantholder may make any exercise of this Warrant contingent upon the
consummation of a public offering
<PAGE> 2
of the Company's Common Stock under the Securities Act of 1933, as amended (the
"Act"). The Warrantholder shall be deemed to have become the holder of record
of, and shall be treated for all purposes as the record holder of, the Shares
represented thereby (and such Shares shall be deemed to have been issued)
immediately prior to the close of business on the date or dates upon which this
Warrant is exercised. In the event of any exercise of the rights represented by
this Warrant, certificates for the Shares so purchased shall be delivered to the
Warrantholder as soon as possible (and in any event within five business days of
receipt of such notice) and, unless this Warrant has been fully exercised or
expired, a new Warrant representing the portion of the Shares, if any, with
respect to which this Warrant shall not then have been exercised shall also be
issued to the Warrantholder as soon as possible (and in any event within such
five business day period).
2.2 Non-Cash Exercise.
(a) In lieu of payment in cash, the rights represented by this
Warrant may also be exercised by a written notice of exercise in the form of
Annex A attached hereto specifying that Warrantholder wishes to convert all or
any portion of this Warrant (the "Conversion Right") into a number of Shares
equal to the quotient obtained by dividing (x) the value of the Shares subject
to the portion of this Warrant being exercised (determined by subtracting the
aggregate Warrant Price for such Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value of the
Shares issuable upon exercise of such portion of this Warrant immediately prior
to the exercise of the Conversion Right) by (y) the Fair Market Value of one
share of Common Stock immediately prior to the exercise of the Conversion Right.
(b) For purposes of this Section 2.2, the "Fair Market Value" of
the Company's Common Stock shall be equal to the number of shares of Common
Stock multiplied by (i) if the exercise of this Warrant occurs in connection
with an initial public offering of the Company, the "initial price to public"
specified in the final prospectus with respect to the initial public offering or
(ii) if the exercise of this warrant occurs after or not in connection with an
initial public offering of the Company, the average of the closing bid and asked
prices of the Company's Common Stock quoted in the Over-The-Counter Market
Summary on the Nasdaq National Market or the dosing price quoted on any exchange
on which the Common Stock is listed, whichever if applicable, as published in
The Wall Street Journal for the fifteen trading days prior to the date of
determination of Fair Market Value. If the Common Stock is not traded
Over-The-Counter or on an exchange, the Fair Market Value shall be determined in
good faith by the Company. Notwithstanding the foregoing two sentences, if the
Company is party to a merger or sale of all or substantially all of the
Company's assets, "Fair Market Value" shall mean the value that would have been
received in respect of a Warrant Share had this Warrant been exercised prior to
such merger or sale.
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<PAGE> 3
3. Stock Fully Paid; Reservation of Shares. All Shares that may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and non-assessable, issued in compliance
with all applicable federal and state securities laws, and free from all taxes,
liens and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant may be exercised, the Company will
at all times have authorized and reserved for the purpose of issuance upon
exercise of the purchase rights evidenced by this Warrant, a sufficient number
of shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number of
Shares purchasable upon the exercise of this Warrant and the Warrant Price shall
be subject to adjustment from time to time upon the occurrence of certain
events, as follows:
(a) Reclassification or Merger, etc.. In case of any
reclassification, change or conversion of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any consolidation or merger of the Company with
or into another corporation or entity (other than a merger with another
corporation or entity in which the Company is the Surviving corporation and
which does not result in any reclassification or change of outstanding
securities issuable upon exercise of this Warrant), or in case of any sale of
all or substantially all of the assets of the Company, the Company, or such
successor or purchasing corporation, as the case may be, shall execute a new
Warrant (in form and substance satisfactory to Warrantholder) providing that
Warrantholder shall have the right to exercise such new Warrant and upon such
exercise to receive, in lieu of each share of Common Stock theretofore issuable
upon exercise of this Warrant, the kind and amount of shares of stock, other
securities, money and property receivable upon such reclassification, change,
consolidation, sale of all or substantially all of the Company's assets or
merger by a holder of one share of Common Stock. Such new Warrant shall provide
for adjustments that shall be as nearly equivalent as may be practicable to the
adjustment provided for in this Section 4. The provisions of this section (a)
shall similarly apply to successive reclassifications, changes, consolidations,
mergers, sales of assets and transfers.
(b) Subdivisions or Combination of Shares; Stock Dividends. In the
event that the Company shall at any time subdivide the outstanding shares of
Common Stock, or shall issue a stock dividend on its outstanding shares of
Common Stock, the number of Shares issuable upon exercise of this Warrant
immediately prior to such subdivision or immediately prior to the issuance of
such stock dividend shall be proportionately increased, and the Warrant Price
shall be proportionately
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<PAGE> 4
decreased, and in the event that the Company shall at any time combine the
outstanding shares of Common Stock, the number of Shares issuable upon exercise
of this Warrant immediately prior to such combination shall be proportionately
decreased, and the Warrant Price shall be proportionately increased, effective
at the dose of business on the date of such subdivision, stock dividend or
combination, as the case may be.
(c) No Impairment. The Company will not, by amendment of its Amended
and Restated Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be reasonably requested by the Warrantholder in order to
protect the rights of Warrantholder against impairment.
(d) Notices of Record Date. In case at any time: (i) the Company
shall declare any dividend upon its Common Stock payable in cash or stock or
make any other distribution to the holders of its Common Stock; (ii) the Company
shall offer for subscription pro rata to the holders of its Common Stock any
additional shares of stock of any class, or other rights; (iii) there shall be
any capital reorganization or reclassification of the capital stock of the
Company, or a consolidation or merger of the Company with or into, or a sale of
all or substantially all its assets to another entity or entities; or (iv) there
shall be a voluntary or involuntary dissolution, liquidation or winding up of
the Company; then, in any one or more of said cases, the Company shall give, by
first class mail, postage prepaid, or by telex or telecopier, addressed to
Warrantholder at the address of such holder as shown on the books of the
Company, (A) at least ten (10) days' prior written notice of the date on which
the books of the Company shall dose or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, and (B) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least ten (10) days' prior written notice of the
date when the same shall take place. Such notice in accordance with the
foregoing clause (A) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and such notice in accordance with the
foregoing clause (B) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be.
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<PAGE> 5
5. Adjustment of Warrant Price and Shares Purchasable.
(a) Adjustment of Warrant Price. If the Company issues any
Additional Stock for no consideration or a consideration per share less than the
Warrant Price in effect immediately prior to the time of such issuance, then the
Warrant Price shall be reduced to the price determined by dividing:
(i) an amount equal to the sum of (A) the number of shares of
Common Stock Outstanding immediately prior to such issue or sale multiplied by
the then existing Warrant Price, and (B) an amount equal to the aggregate
"consideration actually received" by the Company upon such issue or sale, by
(ii) the sum of the number of shares of Common Stock Outstanding
immediately after such issue or sale.
For purposes of this subsection (a):
(A) In the case of an issue or sale for cash of shares of Common
Stock, the "consideration actually received" by the Company therefor shall be
deemed to be the amount of cash received, before deducting therefrom any
commissions or expenses paid by the Company.
(B) In case of the issuance (other than upon conversion or exchange
of obligations or shares of stock of the Company) of additional shares of Common
Stock for a consideration other than cash or a consideration partly other than
cash, the amount of the consideration other than cash received by the Company
for such shares shall be deemed to be the fair market value of such
consideration as determined in good faith by the Company's Board of Directors.
(C) In case of the issuance by the Company in any manner of any
Options, all shares of Common Stock or Convertible Securities to which the
holders of such Options shall be entitled to subscribe for or purchase pursuant
to such Options shall be deemed issued as of the date of the offering of such
Options, and the minimum aggregate consideration named in such Options for the
shares of Common Stock or Convertible Securities covered thereby, plus the
consideration, if any, received by the Company for such Options, shall be deemed
to be the "consideration actually received" by the Company (as of the date of
the granting of such Options) for the issuance of such Options.
(D) In case of the issuance or issuances by the Company in any
manner of any Convertible Securities, all shares of Common Stock issuable upon
the conversion or exchange of such Convertible Securities shall be deemed issued
as of the date such Convertible Securities are issued, and the amount of the
"consideration
-5-
<PAGE> 6
actually received" by the Company for such Convertible Securities shall be
deemed to be the total of (x) the amount of consideration received by the
Company upon the issuance of such Convertible Securities, plus (y) the minimum
aggregate consideration, if any, other than such Convertible Securities,
receivable by the Company upon conversion or exchange of such Convertible
Securities, except in adjustment of dividends.
(E) The amount of the "consideration actually received" by the
Company upon the issuance of any Options referred to in subparagraph (C) above
or upon the issuance of any Convertible Securities as described in subparagraph
(D) above, and the amount of the consideration, if any, other than such
Convertible Securities, receivable by the Company upon the exercise, conversion
or exchange thereof shall be determined in the same manner provided in
subparagraphs (A) and (B) above with respect to the consideration received by
the Company in case of the issuance of additional shares of Common Stock;
provided, however, that if such Convertible Securities are issued in payment or
satisfaction of any dividend upon any stock of the Company other than Common
Stock, the amount of the "consideration actually received" by the Company upon
the original issuance of such Convertible Securities shall be deemed to be the
value of such obligations or shares of stock, as of the date of the adoption of
the resolution declaring such dividend, as determined by the Company's Board of
Directors at or as of that date.
(F) On the expiration of any Options referred to in subparagraph
(C), or the termination of any right of conversion with respect to Convertible
Securities referred to in subparagraph (D), or any damage in the number of
shares of Common Stock deliverable upon exercise of such Options or upon
conversion of or exchange of such Convertible Securities, the Exercise Price
then in effect shall forthwith be readjusted to such Exercise Price as would
have obtained had the adjustments made upon the issuance of such Options or
Convertible Securities been made upon the basis of the delivery of only the
adjusted number of shares of Common Stock actually delivered or to be delivered
upon the exercise of such Options or upon the conversion or exchange of such
Convertible Securities.
(G) Anything herein to the contrary notwithstanding, the Company
shall not be required to make any adjustment of the Exercise Price in the case
of issuances of any shares of Common Stock or any Options or any Convertible
Securities to officers, directors, employees or consultants of the Company and
its subsidiaries pursuant to stock options or stock purchase plans or
agreements, whether "qualified" for tax purposes or not, issued on or after the
Grant Date.
(H) "Additional Stock" means (i) Common Stock issued by the Company
after the Grant Date, (ii) Common Stock issuable upon conversion of Convertible
Securities issued by the Company after the Grant Date, and (iii) Common Stock
issuable upon exercise of Options issued by the Company after the Grant Date
-6-
<PAGE> 7
(for purposes of this clause (iii), if the Option is to acquire Convertible
Securities, the Common Stock issuable upon conversion of such Convertible
Securities shall be deemed issued).
(I) "Common Stock" means, for purposes of this Section 5, any series
of the Company's Common Stock.
(J) "Common Stock Outstanding" means at any time all shares of
Common Stock that are then outstanding, plus all shares of Common Stock issuable
upon conversion of the Convertible Securities and all shares of Common Stock
issuable upon exercise of the Options (assuming for this purpose that the
securities acquirable upon exercise of the Options are converted into Common
Stock).
(K) "Convertible Securities" means evidences of indebtedness, shares
of stock or other securities which are convertible into or exchange able for,
with or without payment of additional consideration, shares of Common Stock,
either immediately or upon the arrival of a specified date or the happening of a
specified event or both.
(L) "Option" means any right, warrant or option to subscribe for or
purchase shares of Common Stock or Convertible Securities.
(b) Adjustment of Number of Shares Purchasable. Upon any
adjustment of the Warrant Price under subsection (a) of this Section 5, the
number of shares of Common Stock issuable upon exercise of this Warrant shall
equal the number of shares determined by dividing (i) the aggregate Warrant
Price payable for the purchase of all shares issuable upon exercise of this
Warrant immediately prior to such adjustment by (ii) the Warrant Price per share
in effect immediately after such adjustment.
6. Notice of Adjustments. Whenever the Warrant Price shall be adjusted
pursuant to the provisions hereof, the Company shall within ten (10) business
days of such adjustment deliver a certificate signed by its chief financial
officer to Warrantholder setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, and the Warrant Price after giving effect to such
adjustment.
7. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor upon the basis of the
Warrant Price then in effect.
-7-
<PAGE> 8
8. Compliance with Securities Act; Disposition of Warrant or Shares of
Common Stock.
(a) Compliance with Securities Act. Warrantholder, by acceptance
hereof, agrees that this Warrant, and the Common Stock to be issued upon
exercise hereof are being acquired for investment purposes only and that such
holder will not offer, sell or otherwise dispose of this Warrant or any shares
of Common Stock to be issued upon exercise hereof except under circumstances
which will not result in a violation of the Act and as permitted by subsection
(b) of this section. This Warrant and all shares of Common Stock issued upon
exercise of this Warrant (unless registered under the Act) shall be stamped or
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"). NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT
(i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR (ii) AN
OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, EXCEPT THAT NO SUCH
OPINION SHALL BE REQUIRED IF SUCH SALE IS PURSUANT TO RULE 144
PROMULGATED UNDER THE ACT, AND THE TRANSFER OF THIS SECURITY IS SUBJECT
TO THE CONDITIONS SPECIFIED IN THE WARRANT TO PURCHASE SHARES OF COMMON
STOCK, DATED AS OF JUNE 30, 1997, BETWEEN PHOENIX LEASING INCORPORATED
AND THE EDISON PROJECT INC.
(b) Disposition of Warrant and Shares. With respect to any
offer, sale or other disposition of this Warrant or any shares of Common Stock
acquired pursuant to the exercise of this Warrant prior to registration of such
shares, the Warrantholder and each subsequent holder of this Warrant agrees to
give written notice to the Company prior thereto, describing briefly the manner
thereof, together with a written opinion of such holder's counsel, if reasonably
requested by the Company, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the Act
as then in effect) of this Warrant or such shares of Common Stock and indicating
whether or not under the Act certificates for this Warrant or such shares of
Common Stock to be sold or otherwise disposed of require any restrictive legend
as to applicable restrictions on transferability in order to insure compliance
with the Act. Each certificate representing this Warrant or the shares of Common
Stock thus transferred (except a transfer pursuant to Rule 144) shall bear a
legend as to the applicable restrictions on transferability in order to insure
compliance with the Act, unless in the aforesaid opinion of counsel for the
Warrantholder, such legend is not required in order to insure compliance with
the Act. Nothing herein shall restrict the transfer of this Warrant or any
portion hereof by the initial Warrantholder or any successor holder to
-8-
<PAGE> 9
any affiliate of such holder, to any partnership affiliated with such holder, or
to any partner of any such partnership, provided such transfer may be made in
compliance with applicable federal and state securities laws and provided,
further, that any other transfer will require the Company's prior written
consent, which consent shall not be unreasonably withheld. The Company may issue
stop transfer instructions to its transfer agent in connection with the
foregoing restrictions.
9. Rights as Shareholders. No holder of this Warrant, as such, shall
be entitled to vote or receive dividends or be deemed the holder of Common
Stock, or otherwise be entitled to any voting or other rights as a shareholder
of the Company, until this Warrant shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein; provided that the Company shall deliver to the Warrantholder prior
written notice of any of the foregoing in accordance with the provisions of
Section 4(d) above.
10. Information Rights. The Company shall deliver to the Warrantholder:
(a) within thirty (30) days after the end of each calendar month,
an unaudited balance sheet of the Company as of the end of such month, cash flow
statements and an unaudited statement of operations of the Company for the
portion of the Fiscal Year ended with such month prepared and certified by the
chief financial officer of the Company, subject, however, to the exclusion of
footnotes and to normal year-end audit adjustments;
(b) as soon as practicable after the end of each Fiscal Year, a
copy of its audited financial statements accompanied by a report thereon by a
from of independent certified public accountants selected by the Company, which
report shall state that such financial statements fairly present the Company's
financial position at the end of such Fiscal Year;
(c) promptly upon their becoming available, one copy of each report
or proxy statement sent by the Company to its shareholders generally and of each
regular or periodic report or registration statement, prospectus or written
communication (other than transmittal letters) filed by the Company with the
Securities and Exchange Commission or any securities exchange on which shares of
Common Stock are listed; and
(d) with reasonable promptness, such other information as from time
to time may be reasonably requested by the Warrantholder.
11. Issuance Tax. The issuance of certificates for shares of Common
Stock upon exercise of this Warrant shall be made without charge to the
Warrantholder for any issuance tax in respect hereof, provided that the Company
shall not be required
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<PAGE> 10
to pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that of
Warrantholder.
12. Modification and Waiver. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the Company and the Warrantholder.
13. Notices. Any notice, request or other document required or
permitted to be given or delivered to the Warrantholder or the Company shall be
delivered, or shall be sent by certified or registered mail, postage prepaid, to
such holder at its address as shown on the books of the Company or to the
Company at the address indicated therefore on the signature page of this
Warrant.
14. Binding Effect on Successors. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets. The Company will, at the
time of the exercise of this Warrant, in whole or in part, upon request of the
Warrantholder but at the Company's expense, acknowledge in writing its
continuing obligation to the Warrantholder in respect of any rights (including,
without limitation, any right to registration of the shares of Registrable
Shares) to which the Warrantholder shall continue to be entitled after such
exercise in accordance with this Warrant; provided that the failure of the
Warrantholder to make any such request shall not affect the continuing
obligation of the Company to the Warrantholder in respect of such rights.
15. Lost Warrants or Stock Certificates. The Company covenants to the
Warrantholder that upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction, or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, or like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.
16. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
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<PAGE> 11
17. Governing Law. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF
THE STATE OF NEW YORK.
The Edison Project Inc.
By: /s/ Laura Eshbaugh
------------------------------------------
Name: Laura Eshbaugh
Its: President
Address: 521 Fifth Avenue, 16th Floor
New York, NY 10175
Date: January 15, 1998
Phoenix Leasing Incorporated
By: /s/ N. H. Nelson
------------------------------------------
Name: N. H. Nelson
Its: Vice President
Address: 2401 Kerner Boulevard
San Rafael, CA 94901
Date: January 15, 1998
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<PAGE> 1
EXHIBIT 10.10
THIS WARRANT AND THE WARRANT SHARES HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR ANY APPLICABLE STATE SECURITIES LAW AND
MAY NOT BE OFFERED, SOLD OR TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SO
REGISTERED OR AN EXEMPTION THEREFROM IS AVAILABLE.
THE WARRANT SHARES ARE ALSO SUBJECT TO THE PROVISIONS OF A CERTAIN WARRANT
PURCHASE AGREEMENT DATED AS OF THE DATE HEREOF, INCLUDING CERTAIN RESTRICTIONS
ON TRANSFER SET FORTH THEREIN. A COMPLETE AND CORRECT COPY OF SUCH AGREEMENT IS
AVAILABLE FOR INSPECTION AT THE PRINCIPAL OFFICE OF THE COMPANY AND WILL BE
FURNISHED UPON WRITTEN REQUEST AND WITHOUT CHARGE.
Date of Issuance: November 25, 1997
WARRANT
TO PURCHASE SERIES A COMMON STOCK OF
THE EDISON PROJECT INC
THIS CERTIFIES that for good and valuable consideration, the receipt
and sufficiency of which are hereby acknowledged, BANKBOSTON, N.A. or its
successors or assigns (herein called the "Holder"), is entitled to purchase from
THE EDISON PROJECT INC., a corporation duly organized and existing under the
laws of the State of Delaware (the "Company"), at any time after the date hereof
until 5:00 p.m. (Eastern time) on November 25, 2007 (the "Expiration Time"),
129,504 shares of Series A Common Stock, par value $.01 per share ("Series A
Common Stock"), of the Company for an exercise price of $2.50 per share. This
Warrant and the Warrant Shares are being or will be issued pursuant to, and are
subject to the terms and provisions of, that certain Warrant Purchase Agreement
of even date herewith between the Company and the Holder (the "Agreement"). The
number of shares of Common Stock purchasable hereunder and the Exercise Price
shall be subject to adjustment as set forth below.
Section 1. Definitions. As used herein:
"Business Day" means any day on which national banks are open for
business, or the Warrant Shares are registered under the Securities Act, then
any day on which the principal national securities exchange or market on which
the Warrant Shares is listed or admitted to trading is open for business.
"Common Stock" means the (i) Series A Common Stock and (ii) any other
stock of any class or classes of the Company authorized after the date hereof,
the holders of which shall have the right, without limitation as to amount,
either to all or a share of the balance of current dividends and liquidating
dividends or other similar distributions
<PAGE> 2
declared by the Company on any shares of the Company's issued and outstanding
preferred stock after the payment of such dividends, liquidating dividends or
similar distributions to all applicable holders of preferred stock, provided,
that in no event shall "Common Stock" include any classes or series of preferred
stock of the Company.
"Convertible Securities" means securities or obligations that are
exercisable for, convertible into or exchangeable for shares of Common Stock.
The term includes options, warrants or other rights to subscribe for or purchase
Common Stock or to subscribe for or purchase other Convertible Securities.
"Exercise Form" means the Exercise Form attached hereto.
"Exercise Price" means the price per share at which shares of Common
Stock of the Company are purchasable hereunder, as such price may be adjusted
from time to time as provided herein.
"Expiration Time" has the meaning assigned to it in the opening
paragraph of this Warrant.
"Holder" means the holder or holders of the Warrants and/or the Warrant
Shares.
"GAAP" means generally accepted accounting principles, consistently
applied.
"Market Price" of a Warrant share means:
(a) if the Common Stock is listed on a national securities exchange or
admitted to unlisted trading privileges on such exchange or listed for trading
on the NASDAQ National Market System, the Market Price shall be the last
reported sale price of the Common Stock on such exchange or system on the last
Business Day prior to the date of the exercise of this Warrant giving rise to
the determination of the Market Price, or if no such sale is made on such day,
the average of the closing bid and asked prices of the Common Stock for such day
on such exchange or system; or
(b) if the Common Stock is not so listed or admitted to unlisted
trading privileges, the Market Price shall be the mean of the last reported bid
and asked prices reported by the National Quotation Bureau, Inc., on the last
Business Day prior to the date of the exercise of this Warrant giving rise to
the determination of the Market Price, or
(c) if the Common Stock is not so listed or admitted to unlisted
trading privileges and bid and asked prices are not so reported, the Market
Price shall be, as of the date of the exercise of this Warrant giving rise to
the determination of the Market Price, the fair salable value per share of
Common Stock reasonably determined in good faith by the Board of Directors of
the Company without giving effect to the discount for
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<PAGE> 3
(i) a minority interest or (ii) any lack of liquidity of the Common Stock, but
after giving effect to the exercise of this Warrant. Whenever the Board of
Directors of the Company shall make a determination of the Market Value of
Warrant Shares under this paragraph (c), such determination may be challenged in
good faith by the Holder, and any dispute shall be resolved by an investment
banking firm of recognized national standing selected by the Company and
acceptable to the Holder, the expenses of such firm to be shared equally by the
Company and the Holder.
"Partnership" means The Edison Project L.P.
"Principal Office" has the meaning given to such term in Section 2(a).
"Purchase Price" means, for any exercise of this Warrant, the product
of the Exercise Price multiplied by the number of shares of Common Stock to be
purchased upon such exercise of this Warrant.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute thereto, and the rules and regulations of the United States
Securities and Exchange Commission promulgated thereunder, all as the same shall
be in effect at the time.
"Warrants" means, collectively, this Warrant issued to BankBoston, N.A.
with respect to 129,504 shares of Series A Common Stock and any additional
Warrants as hereafter issued to BankBoston, N.A with respect to Series A Common
Stock.
"Warrant Shares" means shares of Series A Common Stock issued or
issuable upon exercise of this Warrant.
Section 2. Exercise of Warrant.
(a) This Warrant may be exercised in whole or in part on any Business
Day on or before the Expiration Time by presentation and surrender hereof to the
Company at its principal office at 521 Fifth Avenue, 16th Floor, New York, New
York 10175 or at such other address as the Company may hereafter notify the
Holder in writing (the "Principal Office"), with the Exercise Form annexed
hereto as Exhibit A duly executed and accompanied by proper payment of the
Purchase Price in lawful money of the United States of America in the form of a
check, subject to collection, or by wire transfer of immediately available
funds, for the number of shares of Common Stock specified in the Exercise Form.
If this Warrant shall be exercised in part only, the Company shall, upon
surrender of this Warrant, execute and deliver a new Warrant evidencing the
right of the Holder to purchase the balance of the shares of Common Stock
purchasable hereunder. Upon receipt by the Company of this Warrant and such
Exercise Form, together with proper payment of the Purchase Price, at such
office, the Holder shall be deemed to be the holder of record of the shares of
Common Stock, notwithstanding that
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<PAGE> 4
the stock transfer books of the Company shall then be closed or that
certificates representing such shares of Common Stock shall not then have been
actually delivered to the Holder. The Company shall pay any and all documentary
stamp or similar issue or transfer taxes payable in respect of the issue or
delivery of the shares of Common Stock, provided, that the Company shall not be
required to pay any tax that may be payable in respect of any transfer involved
in the issuance and delivery of any certificates for shares of Common Stock
registered in a name other than that of the Holder.
(b) In addition to the rights of the Holder under subsection (a) of
this Section 2, the Holder shall have the right, upon its written request, to
exercise this Warrant in whole or in part by instructing the Company to reduce
the number of shares of Common Stock thereafter eligible to be purchased
hereunder in accordance with the following formula in lieu of paying the
Purchase Price in accordance with subsection (a) of this Section 2:
P
N = -----------------------------
M
where:
N = number of shares of Series A Common Stock to be
subtracted from remaining number of Warrant Shares
that may be acquired upon exercise of this Warrant
P = aggregate Purchase Price payable for all of the
Warrant Shares upon exercise of this Warrant
M = Market Price per Warrant Share on the date of
exercise of this Warrant
(c) The right to exercise this Warrant shall not be suspended during
any period that the stock transfer books of the Company for its Series A Common
Stock may be closed.
Section 3. Exchange; Transfer.
(a) This Warrant is exchangeable, upon its surrender by the Holder to
the Company at its Principal Office, for new Warrants of like tenor registered
in the Holder's name and representing in the aggregate the right to purchase the
same number of shares purchasable hereunder, each of such new Warrants to
represent the right to purchase such number of shares as shall be designated by
the Holder at the time of such surrender.
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<PAGE> 5
(b) Subject to subsection (c), this Warrant is transferable, in whole
or in part, at the Principal Office by the Holder hereof, in person or by its
duly authorized attorney, upon presentation of this Warrant, properly endorsed,
for transfer. In the event of a partial transfer, new Warrants of like tenor
shall be issued to each party for the portion to which it is then entitled.
(c) This Warrant and the Warrant Shares may be transferred only in
compliance with the Agreement and applicable federal and state securities laws,
and the Company shall have the right to require evidence of such compliance
reasonably satisfactory to it as a condition of registering or otherwise giving
effect to any transfer of this Warrant or any of the Warrant Shares.
Notwithstanding the foregoing, in no event will the Holder make a disposition of
any of its rights to acquire the Warrant Shares 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) reasonably 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.
Section 4. Certain Covenants of the Company. The Company covenants and
agrees as follows:
(a) All shares of Series A Common Stock issued upon the exercise of
this Warrant will, upon issuance, be duly and validly issued, fully paid and
non-assessable and free from all taxes, liens and charges;
(b) The Company shall from time to time take all such action as may be
required to assure that the par value, if any, per share of the Series A Common
Stock is at all times not greater than the Exercise Price.
(c) During the period within which this Warrant may be exercised, the
Company will at all times have authorized and reserved for the purpose of
issuance upon exercise of this Warrant a sufficient number of shares of Series A
Common Stock to provide for the exercise hereof in full.
Section 5. Loss, Theft, Destruction or Mutilation. Upon receipt by the
Company of evidence reasonably satisfactory to it of the ownership of and the
loss, theft, destruction or mutilation of this Warrant and (in the case of loss,
theft or destruction) of reasonable indemnity (which in the case of an
institutional Holder shall be an unsecured indemnity agreement) and (in case of
mutilation) upon surrender and cancellation hereof, the Company will execute and
deliver, in lieu hereof, a new warrant of like tenor representing the same
rights as the lost, stolen, destroyed or mutilated Warrant.
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<PAGE> 6
Section 6. Dilution Adjustments. The number of shares of Series A
Common Stock purchasable upon the exercise of each Warrant and the Exercise
Price shall be subject to adjustment from time to time upon the occurrence of
certain events, as follows:
(a) Adjustment for Change in Capital Stock. If at any time after the
date hereof, the Company takes any of the following actions:
(1) pays a dividend or makes a distribution on its Series A
Common Stock in shares of its Series A Common Stock;
(2) subdivides its outstanding shares of Series A Common Stock
into a greater number of shares;
(3) combines its outstanding shares of Series A Common Stock
into a smaller number of shares;
(4) makes a distribution on its Series A Common Stock in
shares of its capital stock other than Series A Common Stock; or
(5) issues by reclassification of its Series A Common Stock
any shares of its capital stock;
then the number of shares of Series A Common Stock purchasable hereunder and the
Exercise Price, as in effect immediately prior to such action, shall be adjusted
so that the Holder may receive upon exercise of this Warrant and payment of the
same aggregate consideration the number of shares of capital stock of the
Company which the Holder would have owned immediately following such action if
the Holder had exercised this Warrant immediately prior to such action. Such
adjustment shall become effective immediately after the record date in the case
of a dividend or distribution and immediately prior to the effective date in the
case of a subdivision, combination or reclassification.
The adjustment contemplated by this Section 6(a) shall be made
successively whenever any such dividend, distribution, payment or loan is made
and shall become effective immediately after the record date for the
determination of shareholders entitled to receive the dividend or distribution
(or, if there is no record date, on the date of the dividend, distribution,
payment or loan). Each adjustment of the Exercise Price shall be made to the
nearest tenth of a cent.
(b) Adjustment for Common Stock Issuances. If at any time after the
Closing Date the Company issues shares of Common Stock (other than in respect of
reasonable issuances of options, warrants or similar rights granted to employees
or management of the Company including, without limitation, the options and
warrants
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<PAGE> 7
set forth on Exhibit C to the Agreement) for a consideration per share less than
the Exercise Price, the Exercise Price shall be reduced (but shall not be less
than $0.01) in accordance with the following formula:
P
---
O + E
E' = E x ----------------------------
O'
where: E' = the adjusted Exercise Price.
E = the Exercise Price in effect immediately
prior to the adjustment.
O = the number of shares of Common Stock
outstanding immediately prior to the
issuance of such additional shares.
P = the aggregate consideration
received by the Company for the
issuance of such additional shares.
O' = the number of shares of Common Stock
outstanding immediately after the issuance
of such additional shares.
The adjustment contemplated by this Section 6(b) shall be made
successively whenever any such issuance occurs, and shall become effective
immediately after such issuance. Each adjustment of the Exercise Price shall be
made to the nearest tenth of a cent.
(c) Adjustment for Convertible Securities Issuance. If at any time
after the date hereof the Company issues any Convertible Securities (other than
in respect of reasonable issuances of options, warrants or similar rights
granted to employees or management of the Company including, without limitation,
the options and warrants set forth on Exhibit C to the Agreement) for an
aggregate consideration that, when added to the aggregate consideration payable
for the number of shares of Common Stock initially deliverable upon conversion,
exchange or exercise of such Convertible
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<PAGE> 8
Securities, is less than the product of such number of shares of Common Stock
and the Exercise Price, the Exercise Price shall be reduced (but shall not be
less than $0.01) in accordance with the following formula:
P
---
O + E
E' = E x --------------------
O + D
where: E' = the adjusted Exercise Price.
E = the Exercise Price in effect
immediately prior to the adjustment.
O = the number of shares of Common
Stock outstanding immediately prior
to the issuance of such Convertible
Securities.
P = the sum of the aggregate
consideration received by the
Company for the issuance of such
Convertible Securities plus the
additional consideration, if any,
payable to the Company upon
conversion, exchange or exercise of
such Convertible Securities at the
initial conversion, exchange or
exercise rate.
D = the maximum number of shares of
deliverable upon conversion,
exchange or exercise of such
Convertible Securities at the
initial conversion, exchange or
exercise rate.
The adjustment contemplated by this Section 6(c) shall be made
successively whenever any such issuance occurs, and shall become effective
immediately after such issuance. Each adjustment of the Exercise Price shall be
made to the nearest tenth of a cent. If all of the Common Stock deliverable upon
conversion, exchange or exercise of such Convertible Securities has not been
issued when such Convertible Securities are no longer outstanding, then the
Exercise Price shall promptly be readjusted to the Exercise Price which would
then be in effect had the adjustment upon the issuance of such securities been
made on the basis or the actual number of shares of Common Stock issued upon
conversion, exchange or exercise of such Convertible Securities.
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<PAGE> 9
(d) Adjustment for Dividends or Distributions. If at any time after the
date hereof, the Company pays any dividend or makes any distribution of any
kind, in cash, property or otherwise (other than in respect of reasonable
issuances of options, warrants or similar rights granted to employees or
management of the Company including, without limitation, the options and
warrants set forth on Exhibit C to the Agreement) to any holder of its Common
Stock, then the Exercise Price following the record date for such dividend or
distribution or, if there is no record date, following the date such dividend,
distribution, payment or loan is made, shall be reduced (but shall not be less
than $0.01) in accordance with the following formula:
(E-F)
-----
E' = E x E
where: E' = the adjusted Exercise Price.
E = the Exercise Price in effect
immediately prior to the adjustment.
F = (1) the sum of (A) the aggregate
fair market value (as conclusively
determined by the board of directors
of the Company in good faith based
on such factors as it believes to be
reasonable, provided, that in the
event such determination is not
reasonably acceptable to a majority
in interest of the Holder(s), the
Company's board of directors and a
representative designated by a
majority in interest of the
Holder(s) shall negotiate the
aggregate fair market value in good
faith; provided, further, that in
the event the Company's board, on
the one hand, and the majority in
interest of the Holder(s), on the
other hand, are unable to mutually
agree on fair market value, then
aggregate fair market value shall be
determined by an independent
investment banking firm satisfactory
to the Holder, engaged by the
Company, the expenses of such firm
to be paid by the Company) on the
record date (or, if there is no
record date, on the date of the
dividend, distribution payment or
loan) of the assets (other than
cash) distributed or paid and (B)
the amount of cash distributed or
paid, divided by (2) the number of
shares of Common Stock outstanding
on the record date for the dividend
or distribution or, if there is no
record date, on the date of the
dividend, distribution, payment or
loan.
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<PAGE> 10
The adjustment shall be made successively whenever any such dividend,
distribution, payment or loan is made and shall become effective immediately
after the record date for the determination of shareholders entitled to receive
the dividend or distribution (or, if there is no record date, on the date of the
dividend, distribution, payment or loan). Each adjustment of the Exercise Price
shall be made to the nearest tenth of a cent.
(e) Adjustment in Number of Warrant Shares. Upon each adjustment in the
Exercise Price pursuant to any provision of this Section, the number of shares
of Series A Common Stock purchasable hereunder shall be adjusted, to the nearest
one hundredth of a whole share, to the product obtained by multiplying such
number of shares purchasable immediately prior to such adjustment in the
Exercise Price by a fraction, the numerator of which shall be the Exercise Price
immediately prior to such adjustment and the denominator or which shall be the
Exercise Price in effect immediately thereafter.
(f) Notice of Certain Actions. In the event that the Company shall take
any of the following actions:
(1) the Company shall authorize the issuance (other than in respect of
any issuances of options, warrants or similar rights granted to employees or
management of the Company provided, that such issuances shall not represent, in
the aggregate, more than five percent (5%) of the outstanding capital stock of
the Company) to holders of its Common Stock of rights, warrants, options or
Convertible Securities to subscribe for or purchase shares of its Common Stock
or of any other subscription rights, warrants, options or Convertible
Securities; or
(2) the Company shall authorize the payment of dividends on or with
respect to any shares of its Common Stock or the distribution to holders of its
Common Stock or any evidences of its indebtedness or assets; or
(3) the Company shall authorize any capital reorganization or
reclassification of the Common Stock or authorize or enter into any contract
providing for any consolidation or merger to which the Company is a party for
which approval of any stockholders of the Company is required; or
(4) the Company shall authorize or enter into any contract providing
for the conveyance or transfer of all or substantially all of the Company's
properties and assets; or
(5) the Company is the subject of a voluntary or involuntary
bankruptcy, insolvency, dissolution, liquidation or winding-up procedure; or
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<PAGE> 11
(6) the Company proposes to take any action that would require any
adjustment of the Exercise Price pursuant to this Section;
then the Company shall cause to be mailed by first-class mail to the Holder, at
least ten (10) days prior to the applicable record or effective date, a notice
stating (A) the date as of which the holders of Common Stock of record to be
entitled to receive any such rights, warrants, options or convertible securities
or distributions referred to in clauses (1) and (2) above are to be determined,
or (B) the date on which any such reorganization, reclassification,
consolidation, merger, conveyance, transfer, dissolution, liquidation or
winding-up, source or other event referred to in clauses (3), (4) and (5) above
is expected to become effective, and the date as of which it is expected that
holders of Common Stock of record will be entitled to exchange their shares of
Common Stock for securities or other property, if any, deliverable upon such
reorganization, reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding-up.
Whenever the Exercise Price or the number of shares of Common Stock
purchasable under the terms of this Warrant shall be adjusted pursuant to this
Section, the Company shall promptly prepare a certificate signed by its
President or a Vice President and by its Treasurer or Assistant Treasurer or its
Secretary or Assistant Secretary, setting forth in reasonable detail the event
requiring the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated (including a description of the basis on which the
Company's board of directors made any determination hereunder), and the Market
Price (if applicable) and number of shares of Common Stock purchasable after
giving effect to such adjustment, and shall promptly cause copies of such
certificate to be mailed (by first-class, postage prepaid) to the registered
Holder of this Warrant.
(g) Other Action Affecting Common Stock. If, after the date hereof, the
Company shall take any action affecting the outstanding number of shares of
Common Stock, other than an action described in the other subsections of this
Section, which would have a materially adverse effect upon the rights of the
Holder, the Exercise Price and the number of Warrant Shares shall be adjusted in
such manner and at such time as may be equitable in the circumstances.
Section 7. Reclassification, Reorganization, Consolidation or Merger.
In the event of any reclassification, capital reorganization or other similar
change of outstanding shares of Common Stock of the Company (other than a
subdivision or combination of the outstanding Common Stock and other than a
change in the par value of the Common Stock) or in the event of any
consolidation or merger of the Company with or into another corporation (other
than a merger in which the Company is the continuing corporation and that does
not result in any reclassification, capital reorganization or other change of
outstanding shares of Common Stock) or in the event of any sale, lease, transfer
or conveyance to another
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<PAGE> 12
corporation of the property and assets of the Company as an entirety or
substantially as an entirety, the Company shall, as a condition precedent to
such transaction, use best efforts to cause effective provisions to be made so
that the Holder shall have the right thereafter, by exercising this Warrant, to
purchase the kind and amount of shares of stock and other securities and
property (including cash) receivable upon such reclassification, capital
reorganization and other change, consolidation, merger, sale or conveyance by a
holder of the number of shares of Common Stock that might have been received
upon exercise of this Warrant immediately prior to such reclassification,
capital reorganization, change, consolidation, merger, sale or conveyance. Any
such provision shall include provisions for adjustments in respect of such
shares of stock and other securities and property that shall be as nearly
equivalent as may be reasonably practicable to the adjustments provided for in
this Warrant. The foregoing provisions of this Section shall similarly apply to
successive reclassification, capital reorganizations and similar changes of
shares of Common Stock and to successive consolidations, mergers, sales or
conveyances. In the event that in connection with any such capital
reorganization, classification, consolidation, merger, sale or conveyance,
additional shares of Common Stock shall be issued in exchange, conversion,
substitution or payment, in whole or in part, for, or of, a security of the
Company other than Common Stock, any such issuance shall be treated as an
issuance of Common Stock covered by the provisions of Section 6.
Section 8. Miscellaneous.
(a) Specific Performance. The Company acknowledges that there may be no
adequate remedy at law if it fails to perform any of its obligations hereunder
and that the Holder may be irreparably harmed by any such failure, and
accordingly agrees that the Holder, in addition to any other remedy to which the
Holder may be entitled at law or in equity, shall be entitled to compel specific
performance of the Company's obligations under this Warrant in accordance with
the terms hereof in any court of the United States or of any state having
jurisdiction.
(b) Amendments and Waivers. No amendment or waiver of any provision of
this Warrant shall be effective unless and until it shall be set forth in
writing and signed by the Company and the Holder.
(c) Notice. All notices, requests, consents and other communications
hereunder shall be in writing and shall be personally delivered or sent by
facsimile machine (with a confirmation copy sent by one of the other methods
authorized in this Section), commercial (including Federal Express) or U.S.
Postal Service overnight delivery service or, deposited with the U.S. Postal
Service mailed first class, registered or certified mail, postage prepaid, to
the address of the recipient thereof set forth below:
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<PAGE> 13
(i) to the Holder:
BankBoston, N.A.
100 Federal Street
Boston, MA 02110
Attention: Steven M. Nocka, Assistant Vice President
Facsimile No.: (617) 434-3852
(ii) to the Company:
The Edison Project Inc.
521 Fifth Avenue
16th Floor
New York, New York 10175
Attention: Chief Financial Officer
Facsimile No.: (212) 309-1604
and to:
(iii) Edwards & Angell
101 Federal Street
Boston, MA 02110
Attention: Elizabeth H. Munnell, Esq.
Facsimile No.: (617) 439-4170
with copies to:
The Edison Project L.P.
366 NationsBank Center
550 Main Street
Knoxville, Tennessee 37902
Attention: Laura Eshbaugh
Facsimile No.: (423) 546-1090
and to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: John F. Fritts, Esq.
Facsimile No.: (212) 504-6666
Notices shall be deemed given upon the earlier to occur of (i) receipt by the
party to whom such notice is directed; (ii) if sent by facsimile machine, on the
day (other than
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<PAGE> 14
a Saturday, Sunday or legal holiday in the jurisdiction to which such notice is
directed) such notice is sent if sent (as evidenced by the facsimile confirmed
receipt) prior to 5:00 p.m. Eastern Time and, if sent after 5:00 p.m. Eastern
Time, on the day (other than a Saturday, Sunday or legal holiday in the
jurisdiction to which such notice is directed) after which such notice is sent;
(iii) on the first business day (other than a Saturday, Sunday or legal holiday
in the jurisdiction to which such notice is directed) following the day the same
is deposited with the commercial carrier if sent by commercial overnight
delivery service; or (iv) the fifth day (other than a Saturday, Sunday or legal
holiday in the jurisdiction to which such notice is directed) following deposit
thereof with the U.S. Postal Service as aforesaid. The Company and the Holder by
notice duly given in accordance herewith, may specify a different address for
the giving of any notice hereunder.
Section 9. No Rights as Shareholder. Prior to the exercise of this
Warrant, the Holder shall not be entitled to any rights of a shareholder of the
Company, including, without limitation, the right to vote, the right to receive
dividends and the right to receive other distributions.
Section 10. Fractional Shares. No fractional shares of Common Stock
will be issued in connection with any exercise of this Warrant, but in lieu of
such fractional shares, the Company shall make a cash payment therefor equal in
amount to the product of the applicable fraction multiplied by the Exercise
Price per share paid by the holder for its Warrant Shares upon such exercise.
Section 11. Registration. The Holder hereof shall be entitled to the
registration rights set forth in Section 4 of the Agreement.
Section 12. Headings. The descriptive headings of the several sections
of this Warrant are inserted for convenience only and do not constitute a part
of this Warrant.
Section 13. Governing Law. This Warrant shall be deemed to be a
contract made under seal and shall be construed in accordance with and governed
by the laws of the State of Delaware (without giving effect to any conflicts of
laws provisions contained therein).
SECTION 14. WAIVER OF JURY TRIAL. THE COMPANY AGREES THAT NEITHER IT
NOR ANY ASSIGNEE OR SUCCESSOR SHALL (A) SEEK A JURY TRIAL IN ANY LAWSUIT,
PROCEEDING, COUNTERCLAIM OR ANY OTHER ACTION BASED UPON, OR ARISING OUT OF, THIS
AGREEMENT, OR THE DEALINGS OR THE RELATIONSHIP BETWEEN THE COMPANY AND THE
HOLDER, OR (B) SEEK TO CONSOLIDATE ANY SUCH ACTION WITH ANY OTHER ACTION IN
WHICH A JURY TRIAL CANNOT BE OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS
SECTION HAVE BEEN FULLY
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<PAGE> 15
DISCUSSED BY THE COMPANY AND THE HOLDER, AND THESE PROVISIONS SHALL BE SUBJECT
TO NO EXCEPTIONS. THE COMPANY AND THE HOLDER HAVE NOT AGREED WITH OR REPRESENTED
TO THE OTHER THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN
ALL INSTANCES.
SECTION 15. CONSENT TO JURISDICTION. THE COMPANY HEREBY SUBMITS TO THE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES
DISTRICT COURT FOR THE SOUTHERN DISTRICT OF NEW YORK, AS WELL AS TO THE
JURISDICTION OF ALL COURTS FROM WHICH AN APPEAL MAY BE TAKEN OR OTHER REVIEW
SOUGHT FROM THE AFORESAID COURTS, FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER
PROCEEDING ARISING OUT OF ANY OF THE COMPANY'S OBLIGATIONS UNDER OR WITH RESPECT
TO THIS WARRANT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREBY, AND EXPRESSLY
WAIVES ANY AND ALL OBJECTIONS IT MAY HAVE AS TO VENUE IN ANY OF SUCH COURTS.
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<PAGE> 16
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer under its corporate seal on November 25, 1997.
ATTEST: THE EDISON PROJECT INC.
/s/ Vicki Mayfield By: /s/ Laura Eshbaugh
Laura Eshbaugh, President
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<PAGE> 1
EXHIBIT 10.11
THE WARRANTS REPRESENTED BY THIS AGREEMENT AND THE SHARES OF STOCK
ISSUABLE UPON EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE TRANSFERRED, SOLD,
OFFERED FOR SALE, PLEDGED, OR OTHERWISE DISPOSED OF IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SUCH ACT AND THE
RULES AND REGULATIONS PROMULGATED THEREUNDER.
WARRANT AGREEMENT
WARRANT AGREEMENT, dated as of February 1, 1997, between THE
EDISON PROJECT INC., a Delaware corporation (the "Company") and COMDISCO, INC.,
a Delaware corporation (the "Warrantholder"), for the purchase of Series A
Convertible Exchangeable Preferred Stock of the Company.
WHEREAS, The Edison Project L.P. (the "Partnership") and the
Warrantholder have entered into a Master Lease Agreement dated as of June 19,
1995, together with Equipment Schedule No. VL-3 and VL-4, and related Summary
Equipment Schedules (collectively, the "Leases"), pursuant to which the
Warrantholder has leased certain computers and related equipment to the
Partnership; and
WHEREAS, the Partnership is a subsidiary of the Company; and
WHEREAS, the Company desires to grant to the Warrantholder and
the Warrantholder desires to receive, in consideration for such Leases, a
warrant (the "Warrant") to purchase shares of Series A Convertible Exchangeable
Preferred Stock of the Company (the "Company Shares");
NOW, THEREFORE, in consideration of the Warrantholder
executing and delivering such Leases and in consideration of mutual covenants
and agreements contained herein, the Company and the Warrantholder certify and
agree as follows:
Section 1. Grant of Warrant for Company Shares; Term.
For value received, the Company hereby grants to the
Warrantholder, and the Warrantholder is entitled, upon the terms and subject to
the conditions hereof, to subscribe for and purchase from the Company, at a
price of $1.50 per share (the "Exercise Price"), an aggregate of up to 213,333
Company Shares (the "Warrant Shares"). The Warrantholder shall have the right to
purchase at the Exercise Price all or any portion (but not as to a fractional
Company Share) of the Warrant Shares, at any time and from time to time after
the date hereof (the "Effective Date") and on or prior to the earlier of (i)
February 1, 2007, (ii) five (5) years from the effective date of the Company's
first sale of Company Shares to the public pursuant to a
<PAGE> 2
registration statement under the Securities Act of 1933, as amended (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"), or (iii) the date on which
this Warrant shall have been fully exercised (the earlier of (i), (ii) and
(iii), the "Expiration Date").
Section 2. Redemption.
Notwithstanding anything herein to the contrary, the Company may redeem
the Warrant from the Warrantholder, if and to the extent not previously
exercised, upon the occurrence of any of the following events (collectively,
"Redemption Events"):
(i) 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's
properties and assets (a "Sale").
Prior to any such redemption, the Company shall give the Warrantholder
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 Exercise Price and (i) if the
Redemption Event is a Merger or Sale, the per-share price of Company Shares in
such Merger or Sale or (ii) if the Redemption Event is the Initial Public
Offering, the public offering price of Company Shares, multiplied by the number
of Warrant Shares the Warrantholder is then entitled to purchase hereunder.
Notwithstanding the foregoing, the Warrantholder 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. Exercise of the Warrant; Issuance of Shares.
(a) The rights represented by this Warrant may be exercised by
the Warrantholder, in whole or in part (but not as to a fractional Company
Share), at any time or from time to time prior to the Expiration Date, by
tendering to the Company at The Edison Project Inc., 529 Fifth Avenue, 16th
Floor, New York, NY 10175 (the Company's principal place of business), or such
other address which the Company may designate by notice in writing to the
Warrantholder, (i) a duly executed notice of exercise substantially in the form
attached hereto as Exhibit I (the "Notice of Exercise"), specifying the number
of Warrant Shares to be purchased (the "Designated Number of Shares"), (ii) this
Warrant Agreement properly endorsed and
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<PAGE> 3
surrendered for cancellation and (iii) payment of the Exercise Price multiplied
by the Designated Number of Shares (the "Purchase Price") payable in accordance
with Section 3(c) below.
(b) The Warrant Shares purchased upon exercise of this Warrant
shall be deemed to be issued to the Warrantholder as the record owner of such
shares as of the close of business on the date on which this Warrant Agreement
shall have been surrendered and payment made for such shares. Certificates for
the Warrant Shares so purchased shall be delivered to the Warrantholder within
ten (10) days after the Company's receipt of the Purchase Price. Upon any
exercise hereunder, the number of Warrant Shares shall be reduced by the
Designated Number of Shares and, if a balance of Warrant Shares remains after
such exercise and such exercise occurred prior to the Expiration Date, the
Company shall promptly and in any event within twenty-one (21) days after
receipt of the Purchase Price execute and deliver to the Warrantholder a new
Warrant Agreement for such balance of shares on terms and conditions identical
to those contained herein, including, without limitation, the Effective Date.
(c) The Exercise Price may be paid at the Warrantholder's
election either (i) in cash, by check or by wire transfer, (ii) by cancellation
by the Warrantholder of indebtedness of the Partnership to the Warrantholder
under the Leases or otherwise, or (iii) by any combination of (i) and (ii). In
the event that the Warrantholder elects to pay any part of the Exercise Price
pursuant to clause (ii) of the previous sentence, the date the Exercise Price
shall be deemed to have been paid to the Company shall be the date the Company
receives evidence of the cancellation of indebtedness representing the amount of
the Purchase of the Company to the Warrantholder.
(d) In addition to and without limiting the rights of the
Warrantholder under Section 3(a), at the Warrantholder's option, this Warrant
may be exercised with respect to a Designated Number of Shares by being
exchanged, in whole or in part, at any time or from time to time on or prior to
the Expiration Date, for a number of Warrant Shares having an aggregate Fair
Market Value (as hereinafter defined) on the date of such exercise equal to the
difference between (x) the Fair Market Value of such Designated Number of Shares
and (y) the Purchase Price for such Designated Number of Shares in effect at
such time.
No payment of any cash or other consideration to the Company
shall be required from the Warrantholder in connection with any exercise of this
Warrant to the extent of exchange pursuant to this Section 3(d). Such exchange
shall be effective upon the date of receipt by the Company from the
Warrantholder of this Warrant Agreement surrendered for cancellation and the
Notice of Exercise requesting that exchange be made pursuant to this Section
3(d). No fractional shares arising out of the above formula for determining the
number of shares issuable in such exchange shall be issued, and the Company
shall in lieu thereof make payment to the Holder of cash in the amount of such
fraction multiplied by the Fair Market Value of a Warrant Share on the date of
the exchange.
"Fair Market Value" means with respect to a Warrant Share:
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(i) if the exercise of this Warrant is in connection with
the Initial Public Offering, the "initial price to
public" specified in the final prospectus with
respect to the Initial Public Offering; or
(ii) if the exercise of this Warrant occurs after and not
in connection with the Initial Public Offering:
(A) if the Company Shares are actively traded on
a national securities exchange, the average
of the closing prices over a twenty-one (21)
day period ending three days before the date
of this determination; or
(B) if the Company Shares are actively traded
over-the-counter, the average of the closing
bid and asked prices of the traded security
quoted on the NASDAQ system (or similar
system) over the twenty-one (21) day period
ending three days before the date of this
determination; or
(iii) if at any time the Company Shares are not listed on
any securities exchange or quoted over-the-counter or
are not actively traded, as determined in good faith
by the Company's board of directors; or
(iv) notwithstanding the provisions of Sections 3(d)(i),
(ii) and (iii), if the Company is party to a Merger
or a Sale, the value that would have been received in
respect of a Warrant Share had the Warrant been
exercised prior to the Merger or Sale.
Section 4. Reservation of Stock.
The Company shall at all times keep reserved, out of the
authorized and unissued Company Shares, a number of shares sufficient to provide
for the exercise of the Warrant, and the transfer agent for the Company Shares
issuable upon exercise of the Warrant is hereby irrevocably authorized and
directed at all times to reserve such number of authorized and unissued shares
as may be necessary for such purpose. The Company agrees that all Company Shares
issued upon exercise of the Warrant shall be, at the time of delivery of the
certificates for such shares, validly issued and outstanding, fully paid and
nonassessable.
Section 5. Fractional Interests.
The Company shall not be required to issue fractional shares
of Company Shares on the exercise of the Warrant and the Company will pay the
cash value (based on the Exercise Price then in effect) of any fractional shares
otherwise issuable.
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Section 6. No Voting Rights.
This Warrant Agreement does not entitle the Warrantholder to
any voting rights or other rights as a shareholder of the Company prior to the
Warrantholder's exercise of the Warrant.
Section 7. Registry.
The Company shall maintain a registry showing the name and
address of the registered holder of this Warrant Agreement.
Section 8. Adjustments to Warrant Shares; Notices.
(a) Adjustment for Change in Capital Stock.
If the Company:
(i) subdivides the outstanding Company Shares into a greater
number of shares;
(ii) combines the outstanding Company Shares into a smaller
number of shares; or
(iii) issues any shares of its capital stock by
reclassification of Company Shares;
then the number of Warrant Shares issuable upon exercise of the Warrant
immediately prior to such action shall be proportionately adjusted so
that the Warrantholder may receive the aggregate number and kind of
shares of capital stock of the Company that the Warrantholder would
have owned immediately following such action if the Warrant had been
exercised immediately prior to such action.
The adjustment shall become effective immediately after the
record date in the case of a dividend or distribution and immediately
after the effective date in the case of a subdivision, combination or
reclassification.
(b) Notices. In the event (i) that the Company declares any
distribution upon Company Shares, whether in cash, property, stock or other
securities, (ii) that the Company offers for subscription pro rata to holders of
Company Shares any additional equity interests in the Company, (iii) of a Merger
or Sale, or (iv) of any voluntary or 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 Warrantholder:
(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
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<PAGE> 6
(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 Company Shares shall be entitled to
exchange their Company Shares or other securities for securities or other
property deliverable upon such Merger, Sale or Dissolution Event).
Each such written notice shall set forth, in reasonable detail
(i) any increase or decrease in the number of Warrant Shares pursuant to this
Section 8 together with the calculation of such adjustment and (ii) the number
of Warrant Shares or other securities subject to purchase hereunder after giving
effect to such adjustment, and shall be given by first class mail, postage
prepaid, addressed to the Warrantholder at the address as shown on the books of
the Company.
(c) Timely Notice. Failure to timely provide such notice
required by Section 8(b) above shall entitle the Warrantholder to retain the
benefit of the applicable notice period notwithstanding anything to the contrary
contained in any insufficient notice received by the Warrantholder. The notice
period shall begin on the date of the Warrantholder's receipt of the notice
provided as specified in Section 8(b).
Section 9. Representations, Warranties and Covenants of the Company and the
Partnership.
The Company hereby represents, warrants and covenants to the
Warrantholder that as of April 15, 1997:
(a) Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Delaware,
has all requisite corporate power and authority to own and operate its
properties and assets and carry on its business as now conducted and proposed to
be conducted. The Partnership is a limited partnership duly organized, validly
existing and in good standing under the laws of the State of Delaware, has all
requisite partnership power and authority to own, lease and operate its
properties and assets and carry on its business as now conducted and proposed to
be conducted. Each of the Company and the Partnership is duly qualified to
transact business and is in good standing in all jurisdictions in which the
failure to so qualify would have a material adverse effect on its business,
properties, prospects or financial condition.
(b) Due Authority. The execution and delivery by the
Partnership of the Leases and by the Company of this Agreement and the
performance of all obligations of the Partnership thereunder and the Company
hereunder, including the grant to the Warrantholder of the Warrant, have been
duly authorized by all necessary action on the part of the Company and the
Leases and this Warrant Agreement are not inconsistent with the Partnership
Agreement or the Company's Amended and Restated Articles of Incorporation and
By-Laws, do not contravene in any material respect any law or governmental rule,
regulation or order applicable to the Partnership or the Company, do not and
will not contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument to which the Partnership or
the Company is a party or by which either is bound, and the Leases and this
Agreement constitute legal, valid and binding agreements of the Partnership and
the Company, respectively, enforceable in accordance with their respective
terms. The Company agrees to execute and issue the necessary share certificates
or other documents upon the exercise of the Warrant.
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<PAGE> 7
(c) Consents and Approvals. No consent or approval of, giving
of notice to, registration with, or taking of any other action in respect of any
state, federal or other governmental authority or agency is required with
respect to the execution, delivery and performance by the Company of its
obligations under this Agreement.
(d) Litigation. There are no actions, suits, audits,
investigations or proceedings pending or, to the knowledge of the Company or the
Partnership, threatened against or affecting the Company or the Partnership in
any court or before any governmental commission, board or authority which, if
adversely determined, will have a material adverse effect on the ability of the
Partnership to perform its obligations under the Leases or the Company to
perform its obligations under this Agreement.
(e) Subsidiaries or Affiliates. Other than the Partnership (of
which the Company is the general partner) and Sprout Edison Project, Inc. (of
which the Company is the sole stockholder), the Company has no subsidiaries or
affiliated companies and does not otherwise own or control, directly or
indirectly, any other corporation, association or business entity. The
Partnership has no subsidiaries or affiliated companies and does not otherwise
own or control, directly or indirectly, any other corporation, association or
business entity.
(f) Financial Statements. The Company has delivered to the
Warrantholder the Partnership's audited financial statements for Fiscal Year
1996 (the "Financial Statements").
The Company shall deliver to the Warrantholder any and all
financial statements which the Company delivers to all holders of Company
Shares.
(g) Contingent and Absolute Liabilities. Except as disclosed
in the Financial Statements and for obligations incurred in the ordinary course
of business of the Partnership, neither the Partnership nor the Company has any
material liabilities or obligations, absolute or contingent, which would result
in a material adverse effect to the Partnership or the Company, as the case may
be.
(h) Insurance. The Partnership has in full force and effect
insurance policies, with extended coverage, insuring the Partnership and its
property and business against such losses and risks, and in such amounts, as are
customary for entities engaged in a similar business and similarly situated and
as otherwise may be required pursuant to the terms of any other contract or
agreement.
(i) Other Commitments to Register Securities. Except as set
forth in this Agreement and disclosed on Schedule 9(i), the Company is not,
pursuant to the terms of any other agreement currently in existence, under any
obligation to register under the Securities Act any of its presently outstanding
securities or any of its securities which may hereafter be issued.
(j) Exempt Transaction. Subject to the accuracy of the
Warrantholder's representations in Section 10 hereof, the issuance of the
Company Shares to the Warrantholder upon exercise of the Warrant will constitute
a transaction exempt from (i) the registration
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<PAGE> 8
requirements of Section 5 of the Securities Act, in reliance upon Section 4(2)
thereof, and (ii) the qualification requirements of any applicable state
securities laws.
(k) Compliance with Rule 144. From and after the date that the
Company shall have publicly traded securities, at the written request of the
Warrantholder proposing to sell the Company Shares in compliance with Rule 144
promulgated by the SEC under the Securities Act, the Company shall furnish to
the Warrantholder, within ten business days after receipt of such request, a
written statement confirming the Company's compliance with the filing
requirements of the SEC as set forth in such Rule as then in effect.
(l) No Events of Default, Material Contracts. All material
contracts, agreements and instruments to which the Company or the Partnership is
a party are in full force and effect in all material respects, and are valid,
binding and enforceable by the Company or the Partnership, as the case may be,
in accordance with their respective terms, subject to the effect of applicable
bankruptcy and other similar laws affecting the rights of creditors generally,
and rules of law concerning equitable remedies and no event of default.
(m) Brokers' Fees. Neither the Company nor the Partnership has
incurred, and will not incur, directly or indirectly, any liability for
brokerage or finders' fees or agents' commissions or any similar charges in
connection with this Agreement or any transaction contemplated thereby.
(n) Taxes. (i) Each of the Company and the Partnership has
filed all material tax returns and reports as required by law, (ii) such returns
and reports were true and correct in all material respects when filed, and (iii)
the Partnership has withheld or collected from each payment made to its
employees, the amount of all taxes, including, but not limited to, federal
income taxes, Federal Insurance Contribution Act taxes and Federal Unemployment
Tax Act taxes, required to be withheld or collected therefrom, and has paid the
same to the proper tax receiving officers or authorized depositaries.
(o) Issued Securities. All issued and outstanding shares of
Company Shares or any other securities of the Company have been duly authorized
and validly issued and are fully paid and nonassessable. All outstanding Company
Shares and other securities of the Company were issued in full compliance with
all federal and state securities laws. In addition:
(i) The authorized capital stock of the Company consists of
(A) 60,000,005 shares of Series A Common Stock, of which 6,214,704 shares are
issued and outstanding, (B) one share of Series B Common Stock, of which one
share is issued and outstanding, (C) one share of Series C Common Stock, of
which one share is issued and outstanding, (D) one share of Series D Common
Stock, of which one share is issued and outstanding, (E) one share of Series E
Common Stock, of which one share is issued and outstanding, (F) one share of
Series F Common Stock, of which one share is issued and outstanding, and (G)
50,000,000 shares of preferred stock, of which 31,304,536 shares are issued and
outstanding and are convertible into 31,304,536 shares of Series A Common Stock.
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<PAGE> 9
(ii) The Company has reserved 7,811,800 Company Shares for
issuance with respect to the options set forth on Schedule 9(o).1 hereto. There
are no other options, warrants, conversion privileges or other rights presently
outstanding to purchase or otherwise acquire any authorized but unissued shares
of the Company's capital stock or securities of the Company other than in
respect of "Second Closing Shares" as set forth on Schedule 9(o).2 hereto.
Section 10. Representations, Warranties and Covenants of the
Warrantholder.
The Warrantholder hereby represents, warrants and covenants to
the Company:
(a) Investment Purpose. Neither the Warrant nor the Company
Shares 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
Warrantholder has no present intention of selling or engaging in any public
distribution of the same.
(b) Private Issue. The Warrantholder understands (i) that the
Company Shares are 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
10.
(c) Disposition of the Warrantholder's Rights. In no event
will the Warrantholder make a disposition of any of its rights to acquire the
Company Shares unless and until the Warrantholder 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 Warrantholder) 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 Warrantholder at the request of the Warrantholder by the
staff of the SEC or a ruling shall have been issued to the Warrantholder 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 Warrantholder 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 Warrant Agreements.
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<PAGE> 10
(d) Financial Risk. The Warrantholder 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 Warrantholder understands
that the Company Shares have 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 Company Shares, 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 Company Shares
(or other securities) pursuant to this Warrant Agreement, or (ii) the Company
Shares (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 Warrantholder will not use
or divulge any non-public information provided by or developed for the
Warrantholder in connection with this Agreement ("Company Proprietary
Information") whether or not this Agreement remains in effect, except as may be
required by law.
Section 11. Legend; Transfers.
(a) It is understood that the Company will cause to be placed
upon certificates for shares of Company Shares issued upon the exercise hereof,
a legend referring to the conditions contained in this Warrant applicable to the
disposition of such shares.
Such legend shall read substantially as follows:
"The shares represented by this certificate have not
been registered under the Securities Act of 1933, as amended, and the
transfer of such shares is subject to the conditions specified in the
Warrant Agreement dated as of February 1, 1997 between The Edison
Project Inc. (the "Company") and Comdisco, Inc., and no transfer of
such shares shall be valid or effective until such conditions have been
fulfilled with respect to such transfer. A copy of such Warrant
Agreement will be furnished by the Company to the holder of this
certificate upon written request."
(b) Transfers Generally. Subject to the terms and conditions
contained in Section 10 hereof, this Warrant Agreement and all rights hereunder
are transferable in whole or in part by the Warrantholder and any successor
transferee. The transfer shall be recorded on the books of the Company upon
receipt by the Company of a notice of transfer in the form attached hereto as
Exhibit II (the "Transfer Notice") and the payment to the Company of all
transfer taxes and other governmental charges imposed on such transfer.
(c) Exchange of Warrant Agreement Upon a Transfer. On
surrender of this Warrant Agreement for exchange, properly endorsed and subject
to the limitations on
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<PAGE> 11
assignments and transfers and contained in this Section 11, the Company shall
issue to or on the order of the Warrantholder a new Warrant Agreement(s), in the
name of the Warrantholder or as the Warrantholder may direct, for the number of
Warrant Shares issuable upon exercise hereof in accordance with the provisions
of Section 3(b) hereof.
Section 12. Registration Rights.
Upon exercise of this Warrant Agreement, the Warrantholder
shall be entitled to "piggy-back" rights similar to those granted to other
holders of Company Shares.
Section 13. Issue Tax.
The issuance of certificates for Company Shares upon the
exercise of this Warrant shall be made without charge to the Warrantholder for
any issuance or stamp tax in respect thereof, provided, that the Company shall
not be required to pay any tax that may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other than
that of the Warrantholder.
Section 14. Miscellaneous.
(a) Attorneys' Fees. In any litigation, arbitration or court
proceeding between the Company and the Warrantholder relating hereto, the
prevailing party shall be entitled to attorneys' fees and expenses and all costs
of proceedings incurred in enforcing this Warrant Agreement.
(b) Successors and Assigns. This Warrant Agreement shall be
binding upon any successors or assigns of the Company.
(c) Governing Law. This Warrant Agreement shall be governed by
and construed for all purposes under and in accordance with the laws of the
State of New York.
(d) Counterparts. This Warrant Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
(e) Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience only and are not to be
considered in construing this Agreement.
(f) Notices. Any notice required or permitted hereunder shall
be given in writing and shall be deemed effectively given upon personal delivery
or upon deposit in the United States mail, by registered or certified mail, or
upon confirmed facsimile transmission addressed as set forth below, or at such
other address as any such party may subsequently designate by written notice to
the other party:
(i) to the Warrantholder:
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<PAGE> 12
Comdisco, Inc.
6111 North River Road
Rosemont, Illinois 60018
Attention: Venture Leasing Department, cc: Legal
Department
Facsimile: (847) 518-5088
(ii) to the Company:
The Edison Project Inc.
c/o WSI Inc.
366 NationsBank Center
550 Main Street
Knoxville, Tennessee 37902
Attn: Laura Eshbaugh
Facsimile: (423) 546-1090
with copies to:
The Edison Project L.P.
529 Fifth Avenue
16th Floor
New York, New York 10175
Attention: Michael Finnerty
Facsimile: (212) 309-1604
and to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attn: John F. Fritts, Esq.
Facsimile: (212) 504-6666
(g) Remedies. In the event of any default hereunder, the
non-defaulting party may proceed to protect and enforce its rights either by
suit in equity and/or by action at law, including but not limited to an action
for damages as a result of any such default, and/or an action for specific
performance for any default where the non-defaulting party would not have an
adequate remedy at law and where damages will not be readily ascertainable. Each
of the Company and the Warrantholder expressly agrees that it shall not oppose
an application by the Warrantholder or any other person entitled to the benefit
of this Warrant, or the Company, as the case may be, requiring specific
performance of any or all provisions hereof or enjoining the Warrantholder or
the Company, as the case may be, from continuing to commit any such breach of
this Agreement.
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<PAGE> 13
(h) No Impairment of Rights. The Company will not, by
amendment of the Company's Amended and Restated Articles of Incorporation or
through any other means, avoid or seek to avoid the observance or performance of
any of the terms of this Warrant Agreement, but will at all times in good faith
assist in the carrying out of all such terms and in the taking of all such
actions as may be necessary or appropriate in order to protect the rights of the
Warrantholder against impairment.
(i) Survival. The representations, warranties, covenants and
conditions of the respective parties contained herein or made pursuant to this
Agreement shall survive the execution and delivery of this Warrant Agreement and
shall be binding upon the parties hereto until the Expiration Date.
(j) Severability. In the event any one or more of the
provisions of this Warrant Agreement shall for any reason be held invalid,
illegal or unenforceable, the remaining provisions of this Warrant Agreement
shall be unimpaired, and the invalid, illegal or unenforceable provision shall
be replaced by a mutually acceptable valid, legal and enforceable provision,
which comes closest to the intention of the parties underlying the invalid,
illegal or unenforceable provision.
(k) Amendments. This Warrant Agreement may be amended only in
writing signed by the Company and the Warrantholder.
(l) Business Days. In the event that the Warrantholder's
rights hereunder would otherwise terminate on a Saturday, Sunday or other day
which is a legal or bank holiday in the State of Illinois and/or the State of
New York, then the Warrantholder's rights hereunder shall continue until the
next succeeding business day.
(m) Lost, Stolen, Destroyed or Mutilated Warrants. In case
this Warrant shall be mutilated, lost, stolen or destroyed, the Company will
issue a new Warrant of like date, tenor and denomination and deliver the same in
exchange and substitution for and upon surrender and cancellation of any
mutilated Warrant, or in lieu of any Warrant lost, stolen or destroyed, upon
receipt of evidence satisfactory to the Company of the loss, theft or
destruction of such Warrant, and upon receipt of reasonable indemnity
satisfactory to the Company.
IN WITNESS WHEREOF, the parties hereto have caused this
Warrant Agreement to be executed as of the date first above written.
THE EDISON PROJECT INC.
By: /s/ Laura Eshbaugh
--------------------------------
Name: Laura Eshbaugh
Title: President
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<PAGE> 14
COMDISCO, INC.
By: /s/ James P. Labe
-----------------------------------
Name: James P. Labe
Title: President
Comdisco Ventures Division
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<PAGE> 15
EXHIBIT I
NOTICE OF EXERCISE
TO: THE EDISON PROJECT INC. DATED:____________
(1) The undersigned hereby elects to purchase ______________ shares (the
"Warrant Shares") of Series A Convertible Exchangeable Preferred Stock
of The Edison Project Inc. (the "Company Shares") pursuant to the terms
of the Warrant Agreement dated as of February 1, 1997 (the "Warrant
Agreement") between The Edison Project Inc. (the "Company") and
Comdisco, Inc. (the "Warrantholder"), and tenders herewith payment of
the purchase price for such shares in full, together with all
applicable transfer taxes, if any ($____________).
(2) In exercising its rights to purchase the Warrant Shares, the
undersigned hereby confirms and acknowledges the investment
representations and warranties made in Section __ of the Warrant
Agreement.
(3) By exercising its rights to purchase the Warrant Shares, the
undersigned agrees to execute and deliver such additional documents as
the Company may reasonably request in connection with the issuance to
the undersigned of the Warrant Shares.
(4) Please issue a replacement Warrant Agreement representing the
Warrantholder's right to purchase ______ Company Shares, based upon the
original grant of the right to purchase 213,333 Company Shares, as
adjusted to date.
(5) The undersigned desires to have the provisions of Section 3(d) of the
Warrant Agreement apply to the exercise hereunder. Yes ___ No ___
Note: Item (5) above is to elect cashless exercise by exchange.
[_________________________]
By: _____________________
Name:
Address:
WARRANTHOLDER:
COMDISCO, INC.
By: _____________________
Name:
Title:
-15-
<PAGE> 16
EXHIBIT II
TRANSFER NOTICE
(To transfer or assign the foregoing Warrant Agreement execute this
form and supply required information. Do not use this form to
purchase Warrant Shares.)
FOR VALUE RECEIVED, the foregoing Warrant Agreement and all rights
evidenced thereby are hereby transferred and assigned to
- --------------------------------------------------------------------------------
(Please Print)
whose address is _______________________________________________________________
_______________________________________________________________
Dated ___________________________________________________
Holder's Signature ______________________________________
Holder's Address ________________________________________
_________________________________________________________
Signature Guaranteed: __________________________________
NOTE: The signature to this Transfer Notice must correspond with the
name as it appears on the face of the Warrant Agreement,
without alteration or enlargement or any change whatever.
Officers of corporations and those acting in a fiduciary or
other representative capacity should file proper evidence of
authority to assign the foregoing Warrant Agreement.
-16-
<PAGE> 17
SCHEDULE 9(i)
1. Obligation of the Company to register equity obtained by WSI Inc.
("WSI") or its assignees upon exercise of options granted to WSI pursuant to the
Management Agreement between WSI and the Partnership dated as of March 14, 1995.
2. Obligation of the Company to register equity held by (i) WSI, WPA
Investment L.P., WEG L.P., WEG II L.P., or WEG III L.P., acting together, (ii)
Sprout Capital VI, L.P., Sprout CEO Fund, L.P., Sprout Capital VII, L.P. or DLJ
Capital Corporation (Delaware), acting together, and (iii) J.W. Childs
Investments L.L.C., upon request of any such party in certain circumstances.
3. Obligation of the Company to register equity held by Blue Rock
Capital, L.P., Benno C. Schmidt, Sr., John R. Schmidt, Joel E. Smilow, John W.
Childs, Richmont Leeds Education Company L.L.C., or John C. Reid, or any of the
parties set forth in paragraph 2 above upon exercise of such party's
"piggy-back" rights in connection with a registration by the Company.
4. Obligation of the Company to register equity obtained by Lessor upon
exercise of warrants granted to Lessor pursuant to the Warrant Agreement between
the Partnership and the Lessor dated as of July 5, 1995 and the Warrant
Agreement between the Partnership and the Lessor dated as of January 1, 1996.
<PAGE> 18
SCHEDULE 9(o).1
THE EDISON PROJECT INC.
SHARE OPTIONS AS OF 4/14/97
<TABLE>
<CAPTION>
Total
Share Exercise
# Shares Price Price
-------------------------- ----------------- --------------------------
<S> <C> <C> <C>
Employee Option Plan:
Executives 2,659,840 * $ 1.25 $ 3,324,800
General Employees 461,360 * $ 1.25 576,700
Unissued but Reserved for 651,980 TBD TBD
Employees
Former Executives 226,820 $ 1.00 226,820
-------------------------- --------------------------
Total Employee Options 4,000,000 4,128,320
Performance Option Pool 1,250,000 * $ 1.50 1,875,000
Comdisco A 225,000 $ 1.00 225,000
Comdisco B 136,800 $ 1.25 171,000
Dillon Read 200,000 $ 0.25 50,000
WSI A 1,000,000 * $10.00 10,000,000
WSI B 1,000,000 * $20.00 20,000,000
-------------------------- --------------------------
TOTAL 7,811,800 $36,449,320
</TABLE>
*Subject to relevant vesting provisions.
<PAGE> 1
Exhibit 10.13
EXECUTION COPY
OPTION AGREEMENT
This Option Agreement (the "Agreement"), dated as of March 14,
1995, between Dillon, Read & Co. Inc., 535 Madison Avenue, New York, New York
10022 ("Holder") and The Edison Project L.P., formerly Whittle Schools L.P. (the
"Partnership") is entered into pursuant to the Letter Agreement between Holder
and the Partnership dated as of March 14, 1995. Capitalized terms used but not
defined herein are used as defined in the Partnership's Amended and Restated
Agreement of Limited Partnership dated as of March 14, 1995, among WSI Inc., a
Delaware corporation ("WSI"), and Sprout Edison Project, Inc., a Delaware
corporation, as general partners, and the persons listed on Schedule 1 thereto,
as limited partners, as amended from time to time (as so amended, the
"Partnership Agreement").
Holder and the Partnership hereby agree as follows:
1. Issuance. The Partnership hereby grants to Holder the
option (the "Option") to purchase the Interest (defined below) from the
Partnership. The Option is exercisable in whole or in part in accordance with
this Agreement.
2. Exercise. Except as provided below, Holder may exercise the
Option in whole at any time or in part from time to time, on or before July 2,
2002 following at least 5 Business Days written notice to the Partnership
specifying the portion of the Option to be exercised and the date of exercise,
by transfer, on the day specified in such notice, of immediately available funds
in the amount of the Exercise Price (defined below) or portion thereof related
to the portion of the Option to be exercised, to account number 5000245941 at
First American National Bank, Nashville, Tennessee (for further transfer to the
Knoxville office), ABA # 064-000017, or such other account as the Partnership
may designate by written notice to Holder, failing which the Option shall expire
unexercised and the Partnership shall have no further obligation hereunder. Upon
the exercise of any portion of the Option, the books and records of the
Partnership shall be appropriately amended to reflect Holder's acquisition of
the Interest.
3. Definitions.
(a) "Interest" means a limited partnership interest in the
Partnership having a 1.574803% Percentage Interest on March 14, 1995 (assuming
all other options granted or reserved by the Partnership to be granted have not
been exercised and subject to dilution and other adjustment and amendment as
provided in paragraph 4 below). In the event of any transaction in which the
Partnership and/or the Partnership's business is reorganized as a corporation,
Holder shall upon the exercise of the Option be entitled to receive common
voting stock of such corporation in an amount equal to the amount of such stock
Holder would have received had the Option been exercised immediately prior to
the occurrence of such reorganization as determined by the Partnership's Board
of Directors in accordance with the Partnership Agreement. Such stock shall be
the "Interest" for all purposes of this Agreement and be subject to further
dilution, adjustment or amendment following such event as provided in paragraph
4 below.
<PAGE> 2
(b) "Exercise Price" means $50,000.00.
4. Dilution, Adjustment and Amendment. The Percentage Interest
and other attributes of the Interest are subject to dilution and other
adjustment and amendment from time to time in the same manner as the Partnership
Interest in the Partnership purchased by WSI on March 14, 1995. The Partnership
will notify Holder at least 10 Business Days prior to the closing of any
material capital transaction or reorganization of the Partnership or the
Partnership's business and will provide Holder with information describing the
transaction (including valuation information) and copies of any amendments to
the Partnership Agreement not previously provided to Holder. Nothing herein
shall limit the power and authority of the General Partners of the Partnership
to amend the Partnership Agreement.
5. Redemption.
(a) IPO. Upon the closing of an initial public offering
("IPO") by the Partnership (or successor corporation), the Partnership may
redeem the Option, if not previously exercised, if in connection with such IPO
the Partnership (or its successor) is redeeming all of the other options (or
similar rights) to purchase an interest in the Partnership (or its successor)
then outstanding. In the event of an IPO by the Partnership (or successor
corporation) where the Partnership is not entitled to or does not exercise this
redemption right, Holder shall agree to such "lock-up" restrictions, if any,
requested by the underwriters of the IPO, which restriction is also agreed to by
the officers, directors and principal owners of the Partnership.
(b) Merger or Consolidation. Upon the closing of a merger or
consolidation of the Partnership (or a successor corporation) with or into
another entity when the Partnership (or its successor) is not the surviving
entity, the Partnership (or its successor) may redeem the Option, if not
previously exercised, if in connection with such merger or consolidation the
Partnership (or its successor) is redeeming all of the other options (or similar
rights) to purchase an interest in the Partnership (or its successor) then
outstanding. If the Partnership is not entitled to or does not exercise this
redemption right, Holder shall upon the exercise of the option following the
closing of such transaction, in accordance with the terms and conditions of this
Agreement and in lieu of the Interest then acquirable and receivable upon the
exercise of the Option, be entitled to receive such shares of stock, securities
or other property as Holder would have received had Holder exercised the Option
immediately before the closing of such transaction and subject to further
dilution, adjustment or amendment following such transaction as provided in
paragraph 4 above and the other terms and conditions of this Agreement.
(c) Prior to any redemption under (a) or (b) above, the
Partnership (or its successor) shall give Holder no less than 10 Business Days
prior written notice of its intent to redeem the Option. Such notice shall
contain information with respect to the event giving rise to such redemption,
the redemption date and the redemption price. The redemption price shall be the
difference between the exercise price hereunder and in the case of (a) an
initial public offering, the public offering price for the number of shares of
stock Holder would then be entitled to purchase hereunder or (b) any merger or
consolidation in connection with which redemption is permitted hereunder, the
price that is being paid for all Partnership Interests multiplied by the
Percentage Interest Holder is then entitled to purchase hereunder (or in the
event the Partnership has converted to a corporation, the number of shares of
stock Holder is then entitled to purchase)
-2-
<PAGE> 3
as determined by the Partnership's Board of Directors in accordance with the
Partnership Agreement.
(d) Sale of Assets. Upon the closing of a sale of all or
substantially all of the Partnership's assets, the Partnership (or its
successor) shall redeem the Option for a redemption price equal to the
difference between the exercise price hereunder and the amount that would have
been paid to Holder on the liquidation of the Partnership (or its successor) had
the Option been exercised immediately before the closing of such transaction.
6. No Rights as a Limited Partner or Shareholder. This Option
Agreement does not entitle Holder to any voting rights or other rights as a
Limited Partner of the Partnership or as a shareholder of any successor entity
to the Partnership's business prior to the exercise of Holder's rights to
purchase the Interest or any shares of a successor.
7. Representations, Warranties and Covenants of the
Partnership. The Partnership represents and warrants to Holder as follows:
(a) Organization. The Partnership is a limited partnership
duly organized, validly existing and in good standing under the laws of Delaware
and has all requisite power and authority to carry on its business as presently
being conducted and proposed to be conducted, to execute and deliver this
Agreement, to perform its obligations hereunder, and to consummate the
transactions contemplated hereby. The Partnership has delivered to Holder a
true, complete and correct copy of the Partnership Agreement and such Agreement
is in full force and effect.
(b) Qualification; Good Standing. The Partnership is duly
qualified or authorized to do business and in good standing as a foreign limited
partnership in any jurisdiction where the failure to be so authorized or
qualified would have a material adverse affect on the Partnership or its
business.
(c) Authorization. The Partnership has taken all partnership
action necessary to authorize the execution and delivery of this Agreement,
performance of its obligations hereunder and consummation of the transactions
contemplated hereby. This Agreement has been duly executed and delivered by the
Partnership and, assuming due execution and delivery by Holder, constitutes a
valid and binding obligation of the Partnership, enforceable against the
Partnership in accordance with its terms (subject to applicable bankruptcy and
similar laws).
(d) No Conflict. The execution and delivery by the Partnership
of this Agreement, its consummation of the transactions contemplated hereby and
compliance with the provisions hereof, will not (i) violate or conflict with the
Partnership Agreement, (ii) violate, conflict with, or give rise to any right of
termination, cancellation, or acceleration under any agreement or other
instrument to which the Partnership is a party or to which it or any of its
assets is subject, (iii) violate or conflict with any Laws, or (iv) require any
consent, approval or other action of, notice to, or filing with any entity or
person (governmental or private), except those, if any, that have been obtained
or made. "Laws" means all laws, rules, regulations, ordinances, orders,
judgments, injunctions, decrees and other legislative, administrative or
judicial restrictions.
-3-
<PAGE> 4
8. Representations, Warranties and Covenants of Holder. Holder
represents, warrants and covenants to the Partnership that:
(a) Holder has such knowledge and experience in financial and
business matters as to be capable of evaluating the merits and risks of the
Option and the Interest and has the ability to bear the economic risks
associated therewith. Holder has carefully reviewed this Agreement and the
Partnership Agreement and any other information provided by the Partnership to
Holder in connection with the Option or the Partnership's business. Holder has
had a reasonable opportunity to ask questions of and receive answers from the
Partnership, or a person or persons acting on its behalf, concerning the terms
and conditions of the Option, and to obtain additional information, to the
extent possessed by the Partnership or obtainable by it without unreasonable
effort or expense. All such questions have been answered to the full
satisfaction of the Holder. No oral or written representations or warranties
have been made or oral or written information furnished or oral or written
promises made to Holder in connection with the Partnership, the Option or the
Interest which were in any way inconsistent with this Agreement or the
Partnership Agreement.
(b) Holder understands that an investment in the Partnership
involves a high degree of risk and that the Option and the Interest may prove to
be valueless.
(c) Holder acknowledges that upon exercise of the Option in
exchange for a Partnership Interest, Holder will be a Limited Partner of the
Partnership and will thereafter be subject to the Partnership Agreement.
(d) Holder understands that (i) the Interest is transferable
only in accordance with the restrictions in the Partnership Agreement and
applicable law (it being understood that the foregoing prohibitions on transfer
apply to any transfer by way of pledge, assignment, sale or any other means of
disposition), (ii) the issuance of the Option to Holder has not been, and the
issuance of the Interest will not be, registered under the Securities Act of
1933, as amended (the "1933 Act"), nor has or will either of such issuance been
or be registered or qualified under any state securities or "Blue Sky" law,
(iii) the issuance of the Option has not been, and the issuance of the
Partnership Interest will not be, reviewed, approved or otherwise passed upon by
the U.S. Securities and Exchange Commission, any state securities administrator,
the National Association of Securities Dealers, Inc., any securities or
commodities exchange, or any other governmental agency or self-regulatory
authority on the ground that the issuance contemplated by this Option Agreement
will be exempt from the registration and qualification requirements thereof, and
the Partnership's reliance on such exemption is predicated on the
representations set forth in this paragraph 7, and (iv) the Partnership is under
no obligation to register the Option or the Interest or to assist Holder in
complying with any exemption from registration.
(e) Holder is validly existing and in good standing under the
laws of its jurisdiction of organization, has its principal place of business in
the state set forth on the first page of this Agreement, has no present
intention to relocate to any other state or jurisdiction, is authorized to enter
into this Agreement, and the person executing this Agreement is authorized to do
so on behalf of Holder.
-4-
<PAGE> 5
(f) Holder is acquiring the Option solely for Holder's own
account for investment purposes only and not for the account of any other person
and not with a view to or for, in whole or in part, distribution, assignment or
resale to others of the Option or the Interest, and no other person has or will
have a direct or indirect beneficial interest in the Option or the Interest.
(g) Holder will notify the Partnership at least 10 business
days prior to any transfer, pledge, assignment or other disposition of the
Option. In no event will Holder make a disposition of the Option or securities
issuable upon exercise of the Option unless and until (i) Holder shall have
notified the Partnership of the proposed disposition, and (ii) if requested by
the Partnership, Holder shall have furnished the Partnership with an opinion of
counsel satisfactory to the Partnership and its counsel to the effect that an
exemption from the registration requirements of the 1933 Act and any applicable
state law is available.
9. Confidentiality. To the extent Holder acquires non-public
information with respect to the Partnership, including, without limitation,
technical, financial, competitive, marketing, sales, and business information,
documents and tangible items (collectively, the "Information"), Holder shall
keep such Information strictly confidential and not any time hereafter disclose
or divulge such Information to any person, firm or corporation or otherwise use
such Information for any purpose without the prior written consent of the
Partnership, provided that Holder may disclose such information to Holder's
advisors, including its counsel, for the purpose of advising Holder in
connection with this Agreement, provided such advisors shall agree to keep such
Information confidential as provided herein. "Information" shall not include
information which (a) becomes generally available to the public or (b) Holder is
legally compelled to disclose (by deposition, interrogatories, requests for
information or documents in legal proceedings, subpoena, civil investigative
demand or other similar process).
10. Indemnification. Holder agrees to indemnify and hold
harmless the Partnership and its respective officers, directors and affiliates
from and against all damages, losses, costs and expenses (including reasonable
attorneys' fees and expenses) which they may incur by reason of Holder's failure
to fulfill any of the terms or conditions of this Agreement, or by reason of any
breach of the representations and warranties made by Holder herein or in any
document provided by Holder to the Partnership. The Partnership agrees to
indemnify and hold harmless Holder and its respective officers, directors and
affiliates from and against all damages, losses, costs and expenses (including
reasonable attorneys' fees and expenses) which they may incur by reason of any
breach of the representations and warranties made by the Partnership herein.
11. Satisfaction of Letter Agreement. Holder hereby
acknowledges that (i) the issuance of the Option satisfies the obligation of the
Partnership under the letter agreement dated as of March 14, 1995 between the
Holder and the Partnership to grant to Holder an option to purchase a limited
Partnership Interest in the Partnership, and (ii) Holder has no right to acquire
any equity interest in the Partnership (or any successor) other than the Option.
12. Governing Law. This Option Agreement is governed by the
substantive laws of the State of New York, without regard to the choice of law
principles thereof.
-5-
<PAGE> 6
13. Miscellaneous. (a) All notices, demands, elections,
requests or other communications which any party to this Option Agreement may
desire or be required to give hereunder shall be in writing and shall be given
by personal delivery, recognized overnight delivery service, telecopy or by
mailing (by registered or certified first class mail, postage prepaid, return
receipt requested) addressed as follows:
if to the Partnership, at:
The Edison Project L.P.
521 Fifth Avenue
16th Floor
New York, New York 10175
Telecopy: 212-309-1604
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Telecopy: 212-504-6666
Attention: John F. Fritts, Esq.
if to Holder, at the address first shown above,
with a copy to:
Cahill, Gordon & Reindel
80 Pine Street
New York, New York 10005
Attention: Bart Friedman, Esq.
or at such other address or telecopy number as may be designated by one party by
notice given as provided herein to the other party. A notice shall be deemed to
have been given (i) if delivered personally, on the date so delivered (or, if
not a Business Day, on the next following Business Day), (ii) if sent by
recognized overnight delivery service, on the Business Day following the date
sent, (iii) if sent by telecopy, upon electronic confirmation of receipt, or
(iv) if sent by registered or certified first class mail, postage prepaid,
return receipt requested, five Business Days following the date sent.
(b) This Agreement may not be changed orally, but only by an
agreement in writing signed by the Partnership and Holder.
(c) This Agreement constitutes the entire agreement between
the parties hereto with respect to the subject matter hereof.
(d) Within five days after receipt of a written request from
the Partnership, Holder agrees to provide such information and to execute and
deliver such documents as
-6-
<PAGE> 7
reasonably may be necessary to comply with any and all laws, rules, regulations
and ordinances to which the Partnership is subject.
(e) The representations and warranties of Holder and the
Partnership set forth herein shall survive the exercise of the Option and
purchase of the Interest provided for in this Agreement.
-7-
<PAGE> 8
IN WITNESS WHEREOF, the parties hereto have executed and
delivered this Option Agreement as of the date set forth above.
THE EDISON PROJECT L.P.
BY WSI INC.,
as General Partner
By /s/ H. Christopher Whittle
------------------------------
BY SPROUT EDISON PROJECT, INC.,
as General Partner
By /s/ Janet A. Hickey
------------------------------
DILLON, READ & CO. INC.
By /s/ John G. Bri (sp)
------------------------------
Name: John G. Bri (sp)
Title:Managing Director
-8-
<PAGE> 1
EXHIBIT 10.14
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH
MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
WARRANT AGREEMENT
To Purchase Limited Partnership Interest in
The Edison Project L.P., a Delaware Limited Partnership
Dated as of January 1, 1996
WHEREAS, The Edison Project L.P., a Delaware Limited Partnership (the
"Partnership or the Company") has entered into a Loan Agreement and Note (the
"Loan") with Comdisco, Inc., a Delaware corporation (the "Warrantholder"); and
WHEREAS, the Partnership desires to grant to Warrantholder and
Warrantholder desires to receive, in consideration for such Loan, the right to
purchase an ownership interest in the Partnership ("Partnership Interest") and
to be admitted as a limited partner of the Partnership upon exercise of that
right;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Loan and in consideration of mutual covenants and agreements
contained herein, the Partnership and Warrantholder certify and agree as
follows:
1. GRANT OF THE RIGHT TO PURCHASE UNITS.
For value received, the Partnership hereby grants to the Warrantholder,
and the Warrantholder is entitled, upon the terms and subject to the conditions
hereinafter set forth, to subscribe for and purchase from the Partnership, as a
Limited Partner, a Partnership Interest in the Partnership. Warrantholder shall
have the right to purchase a Partnership Interest constituting up to 1.08255%
percentage interest subject to dilution pursuant to the Partnership Agreement
(the "Percentage Interest") in the Partnership for an aggregate $171,000, or any
portion thereof, in $12.50 increments (the "Exercise Price"), which increments
shall be referred to herein as "Units". The initial Percentage Interest was
determined as if the Warrant Agreement was exercised on the date hereof based
upon the following assumptions: (1) no other options granted by the Partnership
have been exercised; and (2) the percentage interests of the Partners are as in
effect immediately following the Round One Closing Date (as set forth on Exhibit
1 to the Partnership Agreement). A Unit shall initially represent the right to
purchase a Partnership Interest of .00007913% (1.08255% / 13,680) and such
percentage shall be subject to dilution and other adjustments in the same manner
provided in the Amended
<PAGE> 2
and Restated Agreement of Limited Partnership of Edison Project L.P. of March
14, 1995, as amended from time to time (the "Partnership Agreement") with
respect to the Partnership Interests outstanding immediately following the Round
One Closing Date. By way of example, assuming that no other options granted by
the Partnership are exercised and no other Partnership Interests are issued
other than as set forth on Exhibits 2 and 3 to the Partnership Agreement as in
effect on March 14, 1995, the Percentage Interest will be 0.8168% after the
Round Two Closing Date and 0.5474% after the Round Three Closing Date
(including, without limitation, dilution which has occurred after March 14, 1995
and prior to the date hereof). The percentages set forth above do not reflect
the dilutive effect of the issuance of Partnership Interests between March 14,
1995 and the date hereof. Upon exercise of the Warrant Agreement, the
Warrantholder shall have no obligation to make any capital contribution to the
Partnership other than payment of the exercise price hereunder.
2. TERM OF THE WARRANT AGREEMENT.
Except as otherwise provided for herein, the term of Warrant Agreement
and the right to purchase a Partnership Interest as granted herein shall
commence on the date of execution hereof and shall be exercisable for a period
of (i) ten (10) years after the date of execution hereof, or (ii) five (5) years
from the effective date of the Partnership's initial public offering, whichever
occurs first.
Notwithstanding the term of this Warrant Agreement fixed pursuant to
this Section, the right to purchase Units as granted herein may be redeemed by
the Company, if not previously exercised immediately upon any of the following
events (collectively, "Redemption Events"):
(i) immediately upon the closing of the issuance and sale of
shares of Common Stock of the Company in the Company's first
public offering of Securities for its own account pursuant to
an effective registration statement under the Securities Act
of 1933, as amended (the "Initial Public Offering") and
provided that the underwriters request such exercise;
(ii) immediately upon the closing of a merger or consolidation of
the Company with or into another entity when the Company is
not the surviving entity, or the sale of all or substantially
all of the Company's properties and assets to any other person
(the "Merger").
Prior to any such redemption, the Partnership or its successor shall
give the holder of this Warrant no less than twenty (20) days prior written
notice of its intent to redeem this Warrant. Such notice shall contain
information with respect to the Redemption Event giving rise to such redemption,
the redemption date and the redemption price together with a description of the
terms of the redemption of the Management Options. The redemption price shall be
the difference between the exercise
-2-
<PAGE> 3
price hereunder and (1) in any acquisitive transaction, the price that is being
paid for a partnership interest with the same percentage interest the
Warrantholder is then entitled to purchase hereunder (or in the event the
Partnership has converted to a corporation, the number of shares of stock the
Warrantholder is then entitled to purchase), or (2) if the transaction involves
a public offering, the public offering price for the number of shares of stock
the Warrantholder is then entitled to purchase hereunder. The holder of this
Warrant shall be entitled to exercise this Warrant and receive the Units as
described in Section 1 hereof up to and including the redemption date.
3. EXERCISE OF THE PURCHASE RIGHTS.
(a) The purchase rights set forth in this Warrant Agreement are
exercisable by the Warrantholder, in whole or in part, at any time, or from time
to time, prior to the expiration of the term set forth in Section 2 above, by
tendering to the Partnership at The Edison Project L.P., 529 Fifth Avenue, 12th
Floor, New York, NY 10012 (the Partnership's principal place of business), or
such other address of which Warrantholder is given notice by the Partnership, a
notice of exercise duly completed and executed in the form attached hereto as
Exhibit I (the "Notice of Exercise"), together with the Exercise Price (which
may be paid as provided in Section 3(b) below). This Warrant Agreement shall be
deemed to have been exercised immediately prior to the close of business on the
date upon which the Exercise Price is received by the Partnership as provided
herein, and the Warrantholder (or such other person as the Warrantholder shall
designate to receive the shares issuable upon exercise, but not the Partnership
Interests) shall be treated as the holder of record of the interest purchased
upon exercise of the Warrant as of the close of business on that date. If (prior
to March 31, 1996) the exercise of the Warrant, other than pursuant to a
Redemption Event, could result in a termination of the Partnership within the
meaning of Section 708 of the Internal Revenue Code of 1986, as amended from
time to time (the "Code"), the exercise shall be automatically delayed until
such time as it will not result in a termination. Within ten (10) days of
receipt of the Notice of Exercise, the Partnership shall deliver to
Warrantholder the acknowledgment of exercise duly completed and executed in the
form attached hereto as Exhibit II (the "Acknowledgment of Exercise"). Within
ten (10) days of receipt of the Exercise Price in accordance with the terms set
forth below, (i) the General Partners shall execute an amendment to the
Partnership Agreement indicating Warrantholder's Percentage Interest in the
Partnership and Warrantholder's admission to the Partnership as Limited Partner;
or, (ii) if another entity (a "Successor") has succeeded to the Partnership's
business as contemplated by Section 15 of the Partnership Agreement, the
Successor shall take such steps as are necessary and proper to issue such
interests in Successor as Warrantholder is entitled upon exercise of this
Warrant Agreement. If the Board of Directors determines pursuant to Section
15.00 of the Partnership Agreement to incorporate the Partnership, this Warrant
Agreement shall without any further action become a Warrant Agreement to
purchase that amount of equity of such corporation that would have been issued
to the holder of this Warrant if the Warrant had been exercised immediately
prior to such conversion. The Partnership shall give written notification to the
holder of this
-3-
<PAGE> 4
Warrant of such incorporation no less than twenty (20) days prior to the
effective date of such incorporation which notice shall set forth the relevant
information with respect to such incorporation. The holder of the Warrant agrees
to be bound by the terms of Section 15.00 with respect to such incorporation and
shall execute the shareholder agreement referred to therein. Promptly following
receipt of the Notice of Exercise and the payment of the Exercise Price in
accordance with the terms set forth below, and in no event later than twenty-one
(21) days after payment of the Exercise Price, the Partnership shall issue to
the Warrantholder, if Warrantholder has only partially exercised this Warrant
Agreement, a new Warrant Agreement pursuant to Section 3(d) and such other
documents evidencing ownership of the securities issuable upon exercise hereof.
(b) The Exercise Price may be paid at the Warrantholder's election
either (i) in cash, by check or by wire transfer, (ii) by cancellation by
Warrantholder of indebtedness of the Partnership under the Loan, or otherwise,
to Warrantholder, (iii) in the manner provided by Section 3(c) of this Warrant
Agreement or (iv) by any combination of (i), (ii) and (iii). In the event that
the Warrantholder elects to pay any part of the Exercise Price other than as
provided in clause (i) of the previous sentence, the date the Exercise Price
shall be deemed to have been paid to the Partnership shall be (a) in the case of
any payment made under clause (ii) above, the date the Partnership receives
evidence of the cancellation of indebtedness of the Partnership to the
Warrantholder in an amount equal to the Exercise Price, and (b) in the case of
any payment under clause (iii) above, the date the Warrantholder surrenders this
Agreement at the office of the Partnership together with a properly endorsed
Notice of Exercise.
(c) Notwithstanding anything to the contrary contained herein, if the
fair market value of one Unit is greater than $12.50 (at the date of calculation
as set forth below), in lieu of exercising this Warrant Agreement for cash, the
Warrantholder may elect to receive a Partnership Interest with a percentage
interest equal to the fair market value (as determined below) of this Warrant
Agreement (or the portion thereof being cancelled) by surrender of this Warrant
Agreement at the principal office of the Partnership together with the properly
endorsed Notice of Exercise, in which event the Partnership shall issue to the
Warrantholder Limited Partnership interests with a percentage interest equal to
the number of Units the Warrantholder is entitled to, using the following
formula:
X = Y(A-B)
------
A
Where: X = the number of Units to be used in calculating the
Warrantholder's percentage interest
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<PAGE> 5
Y = the number of unexercised Units requested
to be exercised under this Warrant Agreement
or portion thereof to be cancelled
A = the fair market value of one (1) Unit (at the date of
calculation)
B = $12.50.
For purposes of the above calculation, the fair market value of a Unit
shall mean with respect to each Unit:
(i) if the exercise is in connection with an Initial Public
Offering, and if the Partnership's, or a Successor's,
Registration Statement relating to such Initial Public
Offering has been declared effective by the Securities and
Exchange Commission (the "Commission"), then the fair market
value per Unit shall be the product of (x) the "Initial Price
to Public" specified in the final prospectus with respect to
the Initial Public Offering and (y) the number of shares of
Common Stock or other security into which a Unit is
convertible, at the time of such exercise;
(ii) if this Warrant Agreement is exercised after, and not in
connection with an Initial Public Offering, and:
(A) if the Partnership's or a Successor's Common Stock or
other securities into which Units are convertible is
actively traded on a national securities exchange,
the fair market value shall be deemed to be the
product of (x) the average of the closing prices over
a twenty-one (21) day period ending three days before
the day the fair market value of the securities is
being determined and (y) the number of shares of
Common Stock or other securities into which a Unit is
convertible, at the time of such exercise;
(B) if the Partnership's or a Successor's Common Stock or
other security is actively traded over-the-counter;
the fair market value shall be deemed to be the
product of (x) the average of the closing bid and
asked prices of the traded security quoted on the
NASDAQ system (or similar system) over the twenty-one
(21) day period ending three days before the day the
fair market value of the securities is being
determined and (y) the number of shares of Common
Stock or other securities into which a Unit is
convertible, at the time of such exercise;
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<PAGE> 6
(iii) if at any time the Common Stock or other security is not
listed on any securities exchange or quoted over-the-counter
or is not actively traded, the fair market value shall be the
product of (x) the fair market value of a share of Common
Stock or other security, as determined in good faith by the
General Partners, and (y) the number of shares of Common Stock
or other securities into which a Unit is convertible, at the
time of such exercise; or
(iv) notwithstanding the provisions of Section 3(c)(i), (ii) and
(iii), if the Partnership shall become subject to a merger,
consolidation or sales of all or substantially all of the
Partnership's business (other than to or with a Successor) in
which the Partnership is not the surviving party, the current
fair market value of a Unit shall be deemed to be the value
that would have been received in respect of the Partnership
Interest or other security into which the Partnership Interest
may be converted equivalent to a Unit had the Warrant
Agreement been exercised prior to the Merger.
(d) Upon partial exercise by any method, the Partnership, at its
expense, shall promptly but not more than ten (10) days after surrender of the
Warrant Agreement, issue an amended Warrant Agreement to Warrantholder
representing the remaining number of Units purchasable hereunder. All other
terms and conditions of such amended Warrant Agreement shall be identical to
those contained herein, including, but not limited to the Effective Date hereof.
4. RESERVATION OF UNITS.
If upon exercise the holder of the Warrant Agreement shall be entitled
to receive stock, the Partnership and Successor shall reserve for purposes of
exercise of the Warrant Agreement such equity interests from time to time
issuable hereunder upon exercise of the Warrantholder's rights, and, when issued
in accordance with the provisions of this Warrant Agreement, such interests will
be, upon payment of the then applicable Exercise Price, validly issued, fully
paid and non-assessable, and will be free of any taxes, liens, charges or
encumbrances of any nature whatsoever (other than taxes in respect of any
transfer occurring contemporaneously or otherwise specified herein). The
Warrantholder shall be required to pay any tax which may be payable in respect
of any transfer involved and the issuance and delivery of any certificate in a
name other than that of the Warrantholder.
5. FRACTIONAL INTERESTS, SHARES OR SCRIP.
As long as Warrantholder's rights hereunder permit Warrantholder, upon
exercise hereof, to receive a Partnership Interest, such Partnership Interest,
when expressed as a Percentage Interest shall be expressed in up to six decimal
places (e.g., 1.000001%). In the event there is a Successor to the Partnership,
the Successor shall not be required to
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<PAGE> 7
issue fractional shares or scrip representing fractional shares upon the
exercise of the Warrant Agreement, but in lieu of such fractional shares the
Successor shall make a cash payment to Warrantholder therefor upon the basis of
the Exercise Price then in effect.
6. NO RIGHTS AS A LIMITED PARTNER OR SHAREHOLDER.
This Warrant Agreement does not entitle the Warrantholder to any voting
rights or other rights as a Limited Partner of the Partnership or as a
shareholder of any Successor prior to the exercise of the Warrantholder's rights
to purchase a Partnership Interest or any shares of a Successor as provided for
herein.
7. WARRANTHOLDER REGISTRY.
The Partnership shall maintain a registry showing the name and address
of the registered holder of this Warrant Agreement.
8. ADDITIONAL PROVISIONS.
The Exercise Price and the number of Units purchasable hereunder are
subject to adjustment from time to time, as follows:
(a) Preemptive Rights. Warrantholder shall be diluted in the same
manner as the Limited Partners in future financings and shall have the same
preemptive rights regarding future dilutive rounds of financing as granted to
the Limited Partners pursuant to the Partnership Agreement.
(b) Notice. In the event that: (i) the Partnership or Successor shall
declare any distribution upon its Units or such interests in Successor into
which the Units are convertible, whether in cash, property, stock or other
securities; (ii) the Partnership or Successor shall offer for subscription pro
rata to the Partners any additional interest in the Partnership or other rights;
(iii) there shall be any merger, consolidation or sale of all or substantially
all of the assets of the Partnership or Successor other than to or with
Successor (a "Merger Event"); or (iv) there shall be any voluntary or
involuntary dissolution, liquidation or winding up of the Partnership or
Successor; then, in connection with each such event, the Partnership or
Successor shall send to the Warrantholder:
(i) At least twenty (20) days' prior written notice of the date on
which the books of the Partnership or Successor shall close or
a record shall be taken for such dividend, distribution,
subscription rights (specifying the date on which the Partners
shall be entitled thereto) or for determining rights to vote
in respect of such Merger Event, dissolution, liquidation or
winding up; and
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<PAGE> 8
(ii) In the case of any such Merger Event, dissolution, liquidation
or winding up, at least twenty (20) days' prior written notice
of the date when the same shall take place (and specifying the
date on which the Partners shall be entitled to exchange their
Partnership Interests or other securities for securities or
other property deliverable upon such Merger Event,
dissolution, liquidation or winding up).
Each such written notice shall set forth, in reasonable detail, (i) the
percentage into which this Warrant Agreement is exercisable together with the
calculation, and (ii) the number of Units or other securities subject to
purchase hereunder after giving effect to such adjustment, and shall be given by
first class mail, postage prepaid, addressed to the Warrantholder at the address
as shown on the books of the Partnership.
(c) Timely Notice. Failure to timely provide such notice required by
Section 8(b) above shall entitle Warrantholder to retain the benefit of the
applicable notice period notwithstanding anything to the contrary contained in
any insufficient notice received by Warrantholder. The notice period shall begin
on the date Warrantholder actually receives a written notice containing all the
information specified above.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE
PARTNERSHIP.
(a) Organization. The Partnership is a limited partnership duly
organized, validly existing and in good standing under the laws of the State of
Delaware, has all requisite Partnership power and authority to own and operate
its properties and assets and carry on its business as now conducted and
proposed to be conducted. The Partnership is duly qualified to transact business
and is in good standing in all jurisdictions in which the failure to so qualify
would have a material adverse effect on its business, properties, prospects or
financial condition.
(b) Due Authority; Successor Bound. The execution and delivery by the
Partnership of the Loan and this Warrant Agreement and the performance of all
obligations of the Partnership hereunder and thereunder, including the grant to
Warrantholder of the right to acquire the Partnership Interest set forth in
Section 1 above (the size of which Partnership Interest may be from time to time
adjusted pursuant to the terms of Section 1 above), have been duly authorized by
all necessary action on the part of the Partnership, the General Partners and
the Loan and this Warrant Agreement are not inconsistent with the Partnership
Agreement, do not contravene in any material respect any law or governmental
rule, regulation or order applicable to it, do not and will not contravene any
provision of, or constitute a default under, any indenture, mortgage, contract
or other instrument to which it is a party or by which it is bound, and the Loan
and this Warrant Agreement constitute legal, valid and binding agreements of the
Partnership, enforceable in accordance with their respective terms and shall be
binding upon any Successor as a condition of succession to the business of the
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<PAGE> 9
Partnership. The General Partners agree to execute and issue the necessary
Partnership Agreement amendment, share certificates or other documents upon the
exercise of this Warrant Agreement.
(c) Consents and Approvals. No consent or approval of, giving of notice
to, registration with, or taking of any other action in respect of any state,
federal or other governmental authority or agency is required with respect to
the execution, delivery and performance by the Partnership of its obligations
under this Warrant Agreement, and such consents of the Partners as are specified
in the Partnership Agreement, which consents will be effective by the time
required thereby.
(d) Litigation. There are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Partnership, threatened against
or affecting the Partnership in any court or before any governmental commission,
board or authority which, if adversely determined, will have a material adverse
effect on the ability of the Partnership to perform its obligations under the
Loan and this Warrant Agreement.
(e) Subsidiaries or Affiliates. The Partnership has no subsidiaries or
affiliated companies and does not otherwise own or control, directly or
indirectly, any other corporation, association or business entity.
(f) Financial Statements. The Partnership has delivered to the
Warrantholder the Unaudited Balance Sheet and Income Statement for the period
ending March 31, 1995; Proforma Income Statements and Cash Flow Statements
through June 1998; and Working Draft Budgets for Fiscal Year 1996.
The Partnership shall deliver to the Warrantholder any and all
financial statements to which Limited Partners are entitled pursuant to the
Partnership Agreement.
(g) Contingent and Absolute Liabilities. Except as disclosed on
Schedule A (g), the Partnership has no material liabilities or obligations,
absolute or contingent except the liabilities and obligations of the Partnership
as set forth in the Financial Statements and liabilities and obligations which
have occurred in the ordinary course of business, and which have not been
materially adverse.
(h) Insurance. The Partnership has in full force and effect insurance
policies, with extended coverage, insuring the Partnership and its property and
business against such losses and risks, and in such amounts, as are customary
for entities engaged in a similar business and similarly situated and as
otherwise may be required pursuant to the terms of any other contract or
agreement.
(i) Other Commitments to Register Securities. Except as set forth in
this Warrant Agreement and the Partnership Agreement and disclosed on Schedule A
(i), the
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<PAGE> 10
Partnership is not, pursuant to the terms of any other agreement currently in
existence, under any obligation to register under the 1933 Act any of its
presently outstanding securities or any of its securities which may hereafter be
issued.
(j) Exempt Transaction. Subject to the accuracy of the Warrantholder's
representations in Section 10 hereof, the issuance of the Partnership Interest
upon exercise of the Warrantholder's right to purchase a Partnership Interest
will constitute a transaction exempt from (i) the registration requirements of
Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the
qualification requirements of any applicable state securities laws.
(k) Compliance with Rule 144. From and after the date that the
Partnership or its Successor shall have publicly traded securities, at the
written request of the Warrantholder, who proposes to sell its Partnership
Interest or other securities issuable upon the exercise of the Warrant Agreement
in compliance with Rule 144 promulgated by the Commission under the 1933 Act,
the Partnership or Successor shall furnish to the Warrantholder, within ten days
after receipt of such request, a written statement confirming the Partnership's
or Successor's (i) compliance with the filing requirements of the Commission as
set forth in such Rule as then in effect or (ii) filing with the Commission of a
no action letter regarding permissibility of Warrantholder "tacking" holding
period of Partnership Interest with holding period of interests in Successor.
(l) No Events of Default, Material Contracts. All material contracts,
agreements and instruments to which the Partnership is a party are in full force
and effect in all material respects, and are valid, binding and enforceable by
the Partnership in accordance with their respective terms, subject to the effect
of applicable bankruptcy and other similar laws affecting the rights of
creditors generally, and rules of law concerning equitable remedies and no event
of default.
(m) Brokers' Fees. The Partnership has not incurred, and will not
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with the Warrant
Agreement or any other transaction contemplated thereby.
(n) Taxes. The Partnership has filed all material tax returns and
reports as required by law, (ii) these returns and reports are true and correct
in all material respects, and (iii) the Partnership has withheld or collected
from each payment made to each of its employees, the amount of all taxes,
including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositaries.
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER.
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<PAGE> 11
This Warrant Agreement has been entered into by the Partnership in
reliance upon the following representations and covenants of the Warrantholder,
which by its execution hereof the Warrantholder hereby confirms:
(a) Investment Purpose. The right to the Partnership Interest or other
securities issuable upon exercise of the Warrantholder's rights contained herein
will not be acquired with a view to the sale or distribution of any part
thereof, and the Warrantholder has no present intention of selling or engaging
in any public distribution of the same.
(b) Private Issue. The Warrantholder understands (i) that the
Partnership Interest issuable upon exercise of the Warrantholder's rights
contained herein is not registered under the 1933 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 Partnership's reliance on such exemption
is predicated on the representations set forth in this Section 10.
(c) Disposition of Warrantholder's Rights. In no event will the
Warrantholder make a disposition of any of its rights to acquire the Partnership
Interest or any securities issuable upon exercise of such rights unless and
until (i) it shall have notified the Partnership of the proposed disposition,
and (ii) if requested by the Partnership, it shall have furnished the
Partnership with an opinion of counsel (which counsel may either be inside or
outside counsel to the Warrantholder) satisfactory to the Partnership and its
counsel to the effect that (A) appropriate action necessary for compliance with
the 1933 Act has been taken, or (B) an exemption from the registration
requirements of the 1933 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 1933 Act and sold by the holder thereof in accordance with such registration
or (2) such security shall have been sold without registration in compliance
with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the
Warrantholder at its request by the staff of the Commission or a ruling shall
have been issued to the Warrantholder at its request by such Commission stating
that no action shall be recommended by such staff or taken by such Commission,
as the case may be, if such security is transferred without registration under
the 1933 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 Warrantholder or holder of any
Securities issuable hereunder then outstanding as to which such restrictions
have terminate shall be entitled to receive from the Partnership or Successor,
without expense to such holder, one or more new certificates for the Warrant
Agreement or for such
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<PAGE> 12
Units not bearing any restrictive legend. Prior to March 31, 1996, no transfer
shall be permitted if such transfer could result in a termination of the
Partnership within the meaning of Section 108 of the Code.
(d) Financial Risk. The Warrantholder 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 Warrantholder understands that the
Partnership Interest which the Warrantholder has the right to purchase hereunder
has not been reviewed or approved by the U.S. Securities and Exchange Commission
or any similar body not registered under the Securities Exchange Act of 1934
and, as of the date of execution of this Warrant, the Partnership has no
obligation to so register such Partnership Interest (or the shares of any
corporation into which the Partnership may convert), and if the Partnership does
not register with the Commission pursuant to Section 12 or Section 15(d) of the
Securities Exchange Act of 1934 (the "1934 Act"), or file reports pursuant to
Section 13 of the 1934 Act, or if a registration statement covering the
securities under the 1933 Act is not in effect when it desires to sell (i) the
rights to purchase the Partnership Interest (or other securities) pursuant to
this Warrant Agreement, or (ii) the Partnership Interest (or other securities
into which the Units are convertible) issuable upon exercise of the right to
purchase, it may be required to hold such securities for an indefinite period.
(f) Subject to Limited Partnership Agreement. Warrantholder
acknowledges that, upon exercise of the Warrant Agreement, it will be a Limited
Partner of the Partnership and will thereafter be subject to the Partnership
Agreement
11. TRANSFERS.
(a) Generally. Subject to the terms and conditions contained in Section
10 hereof, this Warrant Agreement and all rights hereunder are transferable in
whole or in part by the Warrantholder and any successor transferee. The transfer
shall be recorded on the books of the Partnership upon receipt by the
Partnership of a notice of transfer in the form attached hereto as Exhibit III
(the "Transfer Notice"), at its principal offices and the payment to the
Partnership of all transfer taxes and other governmental charges imposed on such
transfer.
(b) Exchange of Warrant Agreement Upon a Transfer. On surrender of this
Warrant Agreement for exchange, properly endorsed and subject to the limitations
on assignments and transfers and contained in this Section 11, the Partnership
or Successor shall issue to or on the order of the Warrantholder a new Warrant
Agreement(s), in the name of the Warrantholder or as the Warrantholder may
direct, for the number of shares issuable upon exercise hereof in accordance
with the provisions of Section 3(d) hereof.
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<PAGE> 13
12. REGISTRATION RIGHTS.
Upon exercise of this Warrant Agreement, the Warrantholder shall be
entitled to "piggy-back" rights similar to those granted to other equity holders
in the Partnership.
13. MISCELLANEOUS.
(a) Effective Date. The provisions of this Warrant Agreement shall be
construed and shall be given effect in all respects as if it had been executed
and delivered by the Partnership on the date hereof. This Warrant Agreement
shall be binding upon any successors or assigns of the Partnership.
(b) Attorneys' Fees. In any litigation, arbitration or court proceeding
between the Partnership and the Warrantholder relating hereto, the prevailing
party shall be entitled to attorneys' fees and expenses and all costs of
proceedings incurred in enforcing this Warrant Agreement
(c) Governing Law. This Warrant Agreement shall be governed by and
construed for all purposes under and in accordance with the laws of the State of
Illinois.
(d) Counterparts. This Warrant Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) Titles and Subtitles Definitions. The titles of the paragraphs and
subparagraphs of this Warrant Agreement are for convenience and are not to be
considered in construing this Agreement. Capitalized terms used herein and not
defined shall have the same meaning as in the Partnership Agreement
(f) Notices. Any notice required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail, by registered or certified mail, addressed
(i) to the Warrantholder at 6111 North River Road, Rosemont, Illinois 60018,
attention: Venture Leasing Department, cc: Legal Department (and/or if by
facsimile: (847) 518-5088), and (ii) to the Partnership at The Edison Project,
529 Fifth Avenue, 16th Floor, New York, New York 10175 (and/or if by facsimile:
(212) 309-1600) or at such other address as any such party may subsequently
designate by written notice to the other party.
(g) Remedies. In the event of any default hereunder; the non-defaulting
party may proceed to protect and enforce its rights either by suit, in equity
and/or by action at law, including but not limited to an action for damages as a
result of any such default, and/or an action for specific performance for any
default where non-defaulting party will not have an adequate remedy at law and
where damages will not be readily ascertainable. The Partnership expressly
agrees that it shall not oppose an application
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<PAGE> 14
by the Warrantholder or any other person entitled to the benefit of this
Agreement requiring specific performance of any or all provisions hereof or
enjoining the Partnership from continuing to commit any such breach of this
Agreement.
(h) No Impairment of Rights. The Partnership will not, by amendment of
the Partnership Agreement or through any other means, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant Agreement, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such actions as may be necessary or appropriate in order to
protect the rights of the Warrantholder against impairment.
(i) Survival. The representation, warranties, covenants and conditions
of the respective parties contained herein or made pursuant to this Warrant
Agreement shall survive the execution and delivery of this Warrant Agreement and
shall be binding upon the Partnership and Successor until the term of the
Warrant Agreement expires or is fully exercised.
(i) Severability. In the event any one or more of the provisions of
this Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision, which
comes closest to the intention of the parties underlying the invalid, illegal or
unenforceable provision.
(k) Amendments. Any provision of this Warrant Agreement may be amended
by a written instrument signed by the Partnership (in accordance with the
provisions of the Partnership Agreement) and by the Warrantholder.
(l) Additional Documents. The Partnership, upon execution of this
Warrant Agreement, shall provide the Warrantholder with certified resolutions
and an opinion from the Partnership's counsel addressed to the Warrantholder in
the form attached hereto as Exhibit 1.
(m) Business Days. In the event that the Warrantholder's rights
hereunder would otherwise terminate on a Saturday, Sunday or other day which is
a legal or bank holiday in the State of Illinois and/or the State of New York,
then the Warrantholder's rights hereunder shall continue until the next
succeeding business day.
(n) Lost, Stolen, Destroyed or Mutilated Warrants. In case this Warrant
shall be mutilated, lost, stolen or destroyed, the Company will issue a new
Warrant of like date, tenor and denomination and deliver the same in exchange
and substitution for and upon surrender and cancellation of any mutilated
Warrant, or in lieu of any Warrant lost, stolen or destroyed, upon receipt of
evidence satisfactory to the Company of the
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<PAGE> 15
loss, theft or destruction of such Warrant, and upon receipt of reasonable
indemnity satisfactory to the Company.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be executed by its officers thereunto duly authorized.
Dated:___________, 19
Partnership: THE EDISON PROJECT L.P.
by its General Partners
WSI Inc.
By: /s/ H. Christopher Whittle
---------------------------------------
Date: March 15, 1996
-------------------------------------
SPROUT EDISON PROJECT INC.
By: /s/ Janet A. Hickey
---------------------------------------
Date: March 15, 1996
-------------------------------------
Warrantholder: COMDISCO, INC.
By: /s/ James P. Labe
---------------------------------------
Title: President, Venture Lease Division
------------------------------------
Date:
-------------------------------------
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<PAGE> 1
EXHIBIT 10.15
THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY
MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, OR HYPOTHECATED IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL (WHICH
MAY BE COMPANY COUNSEL) REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT OF 1933.
WARRANT AGREEMENT
To Purchase Limited Partnership Interest in
The Edison Project L.P., a Delaware Limited Partnership
Dated as of July 5, 1995
WHEREAS, The Edison Project L.P., a Delaware Limited Partnership (the
"Partnership or the Company") has entered into a Master Lease Agreement dated as
of June 19, 1995, as amended by the Addendum to the Master Lease Agreement dated
June 19, 1995, Equipment Schedule No. VL-1 and VL-2, and related Summary
Equipment Schedules (the "Leases") with Comdisco, Inc., a Delaware corporation
(the "Warrantholder"); and
WHEREAS, the Partnership desires to grant to Warrantholder and
Warrantholder desires to receive, in consideration for such Leases, the right to
purchase an ownership interest in the Partnership ("Partnership Interest") and
to be admitted as a limited partner of the Partnership upon exercise of that
right;
NOW, THEREFORE, in consideration of the Warrantholder executing and
delivering such Leases and in consideration of mutual covenants and agreements
contained herein, the Partnership and Warrantholder certify and agree as
follows:
1. GRANT OF THE RIGHT TO PURCHASE UNITS.
For value received, the Partnership hereby grants to the Warrantholder,
and the Warrantholder is entitled, upon the terms and subject to the conditions
hereinafter set forth, to subscribe for and purchase from the Partnership, as a
Limited Partner, a Partnership Interest in the Partnership. Warrantholder shall
have the right to purchase a Partnership Interest constituting up to a one and
seven hundred sixty-eight thousandths percent (1.768%) percentage interest
subject to dilution pursuant to the Partnership Agreement (the "Percentage
Interest") in the Partnership for an aggregate $225,000, or any portion thereof,
in $10 increments (the "Exercise Price"), which increments shall be referred to
herein as "Units". The initial Percentage Interest was determined as if the
Warrant Agreement was exercised on the date hereof based upon the following
assumptions: (1) no other options granted by the Partnership have been
exercised; and (2) the percentage interests of the Partners are as in effect
immediately
<PAGE> 2
following the Round One Closing Date (as set forth on Exhibit 1 to the
Partnership Agreement). A Unit shall initially represent the right to purchase a
Partnership Interest of .00007858% (1.768%/22,500) and such percentage shall be
subject to dilution and other adjustments in the same manner provided in the
Amended and Restated Agreement of Limited Partnership of Edison Project L.P. of
March 14, 1995, as amended from time to time (the "Partnership Agreement") with
respect to the Partnership Interests outstanding immediately following the Round
One Closing Date. By way of example, assuming that no other options granted by
the Partnership are exercised and no other Partnership Interests are issued
other than as set forth on Exhibits 2 and 3 to the Partnership Agreement, the
Percentage Interest will be 1.334% after the Round Two Closing Date and 0.897%
after the round Three Closing Date. Upon exercise of the Warrant Agreement, the
Warrantholder shall have no obligation to make any capital contribution to the
Partnership other than payment of the exercise price hereunder.
2. TERM OF THE WARRANT AGREEMENT.
Except as otherwise provided for herein, the term of Warrant Agreement
and the right to purchase a Partnership Interest as granted herein shall
commence on the date of execution hereof and shall be exercisable for a period
of (i) ten (10) years after the date of execution hereof, or (ii) five (5) years
from the effective date of the Partnership's initial public offering, whichever
occurs first.
Notwithstanding the term of this Warrant Agreement fixed pursuant to
this Section, the right to purchase Units as granted herein may be redeemed by
the Company, if not previously exercised immediately upon any of the following
events (collectively, "Redemption Events"):
(i) immediately upon the closing of the issuance and sale of
shares of Common Stock of the Company in the Company's first
public offering of securities for its own account pursuant to
an effective registration statement under the Securities Act
of 1933, as amended (the "Initial Public Offering") and
provided that the underwriters request such exercise;
(ii) immediately upon the closing of a merger or consolidation of
the Company with or into another entity when the Company is
not the surviving entity, or the sale of all or substantially
all of the Company's properties and assets to any other person
(the "Merger").
Prior to any such redemption, the Partnership or its successor shall
give the holder of this Warrant no less than twenty (20) days prior written
notice of its intent to redeem this Warrant. Such notice shall contain
information with respect to the Redemption Event giving rise to such redemption,
the redemption date and the redemption price together with a description of the
terms of the redemption of the Management Options. The redemption price shall be
the difference between the exercise
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<PAGE> 3
price hereunder and (1) in any acquisitive transaction, the price that is being
paid for a partnership interest with the same percentage interest the
Warrantholder is then entitled to purchase hereunder (or in the event the
Partnership has converted to a corporation, the number of shares of stock the
Warrantholder is then entitled to purchase), or (2) if the transaction involves
a public offering, the public offering price for the number of shares of stock
the Warrantholder is then entitled to purchase hereunder. The holder of this
Warrant shall be entitled to exercise this Warrant and receive the Units as
described in Section 1 hereof up to and including the redemption date.
3. EXERCISE OF THE PURCHASE RIGHTS.
(a) The purchase rights set forth in this Warrant Agreement are
exercisable by the Warrantholder, in whole or in part, at any time, or from time
to time, prior to the expiration of the term set forth in Section 2 above, by
tendering to the Partnership at The Edison Project L.P., 529 Fifth Avenue, 12th
Floor, New York, NY 10012 (the Partnership's principal place of business), or
such other address of which Warrantholder is given notice by the Partnership, a
notice of exercise duly completed and executed in the form attached hereto as
Exhibit I (the "Notice of Exercise"), together with the Exercise Price (which
may be paid as provided in Section 3(b) below). This Warrant Agreement shall be
deemed to have been exercised immediately prior to the close of business on the
date upon which the Exercise Price is received by the Partnership as provided
herein, and the Warrantholder (or such other person as the Warrantholder shall
designate to receive the shares issuable upon exercise, but not the Partnership
Interests) shall be treated as the holder of record of the interest purchased
upon exercise of the Warrant as of the close of business on that date. If (prior
to March 31, 1996) the exercise of the Warrant, other than pursuant to a
Redemption Event, could result in a termination of the Partnership within the
meaning of Section 708 of the Internal Revenue Code of 1986, as amended from
time to time (the "Code"), the exercise shall be automatically delayed until
such time as it will not result in a termination. Within ten (10) days of
receipt of the Notice of Exercise, the Partnership shall deliver to
Warrantholder the acknowledgment of exercise duly completed and executed in the
form attached hereto as Exhibit II (the "Acknowledgment of Exercise"). Within
ten (10) days of receipt of the Exercise Price in accordance with the terms set
forth below, (i) the General Partners shall execute an amendment to the
Partnership Agreement indicating Warrantholder's Percentage Interest in the
Partnership and Warrantholder's admission to the Partnership as Limited Partner;
or, (ii) if another entity (a "Successor") has succeeded to the Partnership's
business as contemplated by Section 15 of the Partnership Agreement, the
Successor shall take such steps as are necessary and proper to issue such
interests in Successor as Warrantholder is entitled upon exercise of this
Warrant Agreement. If the Board of Directors determines pursuant to Section
15.00 of the Partnership Agreement to incorporate the Partnership, this Warrant
Agreement shall without any further action become a Warrant Agreement to
purchase that amount of equity of such corporation that
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<PAGE> 4
would have been issued to the holder of this Warrant if the Warrant had been
exercised immediately prior to such conversion. The Partnership shall give
written notification to the holder of this Warrant of such incorporation no less
than twenty (20) days prior to the effective date of such incorporation which
notice shall set forth the relevant information with respect to such
incorporation. The holder of the Warrant agrees to be bound by the terms of
Section 15.00 with respect to such incorporation and shall execute the
shareholder agreement referred to therein. Promptly following receipt of the
Notice of Exercise and the payment of the Exercise Price in accordance with the
terms set forth below, and in no event later than twenty-one (21) days after
payment of the Exercise Price, the Partnership shall issue to the Warrantholder,
if Warrantholder has only partially exercised this Warrant Agreement, a new
Warrant Agreement pursuant to Section 3(d) and such other documents evidencing
ownership of the securities issuable upon exercise hereof.
(b) The Exercise Price may be paid at the Warrantholder's election
either (i) in cash, by check or by wire transfer, (ii) by cancellation by
Warrantholder of indebtedness of the Partnership under the Leases, or otherwise,
to Warrantholder, (iii) in the manner provided by Section 3(c) of this Warrant
Agreement or (iv) by any combination of (i), (ii) and (iii). In the event that
the Warrantholder elects to pay any part of the Exercise Price other than as
provided in clause (i) of the previous sentence, the date the Exercise Price
shall be deemed to have been paid to the Partnership shall be (a) in the case of
any payment made under clause (ii) above, the date the Partnership receives
evidence of the cancellation of indebtedness of the Partnership to the
Warrantholder in an amount equal to the Exercise Price, and (b) in the case of
any payment under clause (iii) above, the date the Warrantholder surrenders this
Agreement at the office of the Partnership together with a properly endorsed
Notice of Exercise.
(c) Notwithstanding anything to the contrary contained herein, if the
fair market value of one Unit is greater than $10.00 (at the date of calculation
as set forth below), in lieu of exercising this Warrant Agreement for cash, the
Warrantholder may elect to receive a Partnership Interest with a percentage
interest equal to the fair market value (as determined below) of this Warrant
Agreement (or the portion thereof being canceled) by surrender of this Warrant
Agreement at the principal office of the Partnership together with the properly
endorsed Notice of Exercise, in which event the Partnership shall issue to the
Warrantholder Limited Partnership interests with a percentage interest equal to
the number of Units the Warrantholder is entitled to, using the following
formula:
X = Y(A-B)
------
A
Where: X = The number of Units to be used in calculating the
Warrantholder's percentage interest
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<PAGE> 5
Y = the number of unexercised Units requested to be
exercised under this Warrant Agreement or portion
thereof to be cancelled
A = the fair market value of one (1) Unit (at the date of
calculation)
B = $10.00
For purposes of the above calculation, the fair market value of a Unit
shall mean with respect to each Unit:
(i) if the exercise is in connection with an Initial Public
Offering, and if the Partnership's, or a Successor's,
Registration Statement relating to such Initial Public
Offering has been declared effective by the Securities and
Exchange Commission (the "Commission"), then the fair market
value per Unit shall be in the product of (x) the "Initial
Price to Public" specified in the final prospectus with
respect to the Initial Public Offering and (y) the number of
shares of Common Stock or other security into which a Unit is
convertible, at the time of such exercise;
(ii) if this Warrant Agreement is exercised after, and not in
connection with an Initial Public Offering, and:
(A) if the Partnership's or a Successor's Common Stock or
other securities into which Units are convertible is
actively traded on a national securities exchange,
the fair market value shall be deemed to be the
product of (x) the average of the closing prices over
a twenty-one (21) day period ending three days before
the day the fair market value of the securities is
being determined and (y) the number of shares of
Common Stock or other securities into which a Unit is
convertible, at the time of such exercise;
(B) if the Partnership's or a Successor's Common Stock or
other security is actively traded over-the-counter,
the fair market value shall be deemed to be the
product of (x) the average of the closing bid and
asked prices of the traded security quoted on the
NASDAQ system (or similar system) over the twenty-one
(21) day period ending three days before the day the
fair market value of the securities is being
determined and (y) the number of shares of Common
Stock or other securities into which a Unit is
convertible, at the time of such exercise;
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<PAGE> 6
(iii) if at any time the Common Stock or other security is not
listed on any securities exchange or quoted over-the-counter
or is not actively traded, the fair market value shall be the
product of (x) the fair market value of a share of Common
Stock or other security, as determined in good faith by the
General Partners, and (y) the number of shares of Common Stock
or other securities into which a Unit is convertible, at the
time of such exercise; or
(iv) Notwithstanding the provisions of Section 3(c)(i), (ii) and
(iii), if the Partnership shall become subject to a merger,
consolidation or sales of all or substantially all of the
Partnership's business (other than to or with a Successor) in
which the Partnership is not the surviving party, the current
fair market value of a Unit shall be deemed to be the value
that would have been received in respect of the Partnership
Interest or other security into which the Partnership Interest
may be converted equivalent to a Unit had the Warrant
Agreement been exercised prior to the Merger.
(d) Upon partial exercise by any method, the Partnership, at its
expense, shall promptly but not more than ten (10) days after surrender of the
Warrant Agreement, issue an amended Warrant Agreement to Warrantholder
representing the remaining number of Units purchasable hereunder. All other
terms and conditions of such amended Warrant Agreement shall be identical to
those contained herein, including, but not limited to the Effective Date hereof.
4. RESERVATION OF UNITS.
If upon exercise the holder of the Warrant Agreement shall be entitled
to receive stock, the Partnership and Successor shall reserve for purposes of
exercise of the Warrant Agreement such equity interests from time to time
issuable hereunder upon exercise of the Warrantholder's rights, and, when issued
in accordance with the provisions of this Warrant Agreement, such interests will
be, upon payment of the then applicable Exercise Price, validly issued, fully
paid and non-assessable, and will be free of any taxes, liens, charges or
encumbrances of any nature whatsoever (other than taxes in respect of any
transfer occurring contemporaneously or otherwise specified herein). The
Warrantholder shall be required to pay any tax which may be payable in respect
of any transfer involved and the issuance and delivery of any certificate in a
name other than that of the Warrantholder.
5. FRACTIONAL INTERESTS, SHARES OR SCRIP.
As long as Warrantholder's rights hereunder permit Warrantholder, upon
exercise hereof, to receive a Partnership Interest, such Partnership Interest,
when expressed as a Percentage Interest shall be expressed in up to six decimal
places (e.g., 1.000001%). In the event there is a Successor to the Partnership,
the Successor shall not be required
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<PAGE> 7
to issue fractional shares or scrip representing fractional shares upon the
exercise of the Warrant Agreement, but in lieu of such fractional shares the
Successor shall make a cash payment to Warrantholder therefor upon the basis of
the Exercise Price then in effect.
6. NO RIGHTS AS A LIMITED PARTNER OR SHAREHOLDER.
This Warrant Agreement does not entitle the Warrantholder to any voting
rights or other rights as a Limited Partner of the Partnership or as a
shareholder of any Successor prior to the exercise of the Warrantholder's rights
to purchase a Partnership Interest or any shares of a Successor as provided for
herein.
7. WARRANTHOLDER REGISTRY.
The Partnership shall maintain a registry showing the name and address
of the registered holder of this Warrant Agreement.
8. ADDITIONAL PROVISIONS.
The Exercise Price and the number of Units purchasable hereunder are
subject to adjustment from time to time, as follows:
(a) Preemptive Rights. Warrantholder shall be diluted in the same
manner as the Limited Partners in future financings and shall have the same
preemptive rights regarding future dilutive rounds of financing as granted to
the Limited Partners pursuant to the Partnership Agreement.
(b) Notice. In the event that: (i) the Partnership or Successor shall
declare any distribution upon its Units or such interests in Successor into
which the Units are convertible, whether in cash, property, stock or other
securities; (ii) the Partnership or Successor shall offer for subscription pro
rata to the Partners any additional interest in the Partnership or other rights;
(iii) there shall be any merger, consolidation or sale of all or substantially
all of the assets of the Partnership or Successor other than to or with
Successor (a "Merger Event"); or (iv) there shall be any voluntary or
involuntary dissolution, liquidation or winding up of the Partnership or
Successor; then, in connection with each such event, the Partnership or
Successor shall send to the Warrantholder:
(i) At least twenty (20) days' prior written notice of the date on
which the books of the Partnership or Successor shall close or a record shall be
taken for such dividend, distribution, subscription rights (specifying the date
on which the Partners shall be entitled thereto) or for determining rights to
vote in respect of such Merger Event, dissolution, liquidation or winding up;
and
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<PAGE> 8
(ii) In the case of any such Merger Event, dissolution, liquidation
or winding up, at least twenty (20) days' prior written notice of the date when
the same shall take place (and specifying the date on which the Partners shall
be entitled to exchange their Partnership Interests or other securities for
securities or other property deliverable upon such Merger Event, dissolution,
liquidation or winding up).
Each such written notice shall set forth, in reasonable detail, (i) the
percentage into which this Warrant Agreement is exercisable together with the
calculation, and (ii) the number of Units or other securities subject to
purchase hereunder after giving effect to such adjustment, and shall be given by
first class mail, postage prepaid, addressed to the Warrantholder, at the
address as shown on the books of the Partnership.
(c) Timely Notice. Failure to timely provide such notice required by
Section 8(b) above shall entitle Warrantholder to retain the benefit of the
applicable notice period notwithstanding anything to the contrary contained in
any insufficient notice received by Warrantholder. The notice period shall begin
on the date Warrantholder actually receives a written notice containing all the
information specified above.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS OF
THE PARTNERSHIP.
(a) Organization. The Partnership is a limited partnership duly
organized, validly existing and in good standing under the laws of the State of
Delaware, has all requisite Partnership power and authority to own and operate
its properties and assets and carry on its business as now conducted and
proposed to be conducted. The Partnership is duly qualified to transact business
and is in good standing in all jurisdictions in which the failure to so qualify
would have a material adverse effect on its business, properties, prospects or
financial condition.
(b) Due Authority; Successor Bound. The execution and delivery by the
Partnership of the Leases and this Warrant Agreement and the performance of all
obligations of the Partnership hereunder and thereunder, including the grant to
Warrantholder of the right to acquire the Partnership Interest set forth in
Section 1 above (the size of which Partnership Interest may be from time to time
adjusted pursuant to the terms of Section 1 above), have been duly authorized by
all necessary action on the part of the Partnership, the General Partners and
the Leases and this Warrant Agreement are not inconsistent with the Partnership
Agreement, do not contravene in any material respect any law or governmental
rule, regulation or order applicable to it, do not and will not contravene any
provision of, or constitute a default under, any indenture, mortgage, contract
or other instrument to which it is a party or by which it is bound, and the
Leases and this Warrant Agreement constitute legal, valid and binding agreements
of the Partnership, enforceable in accordance with their respective terms and
shall be binding upon any Successor as a condition of succession to the business
of the Partnership. The General Partners agree to execute and issue the
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<PAGE> 9
necessary Partnership Agreement amendment, share certificates or other documents
upon the exercise of this Warrant Agreement.
(c) Consents and Approvals. No consent or approval of, giving of notice
to, registration with, or taking of any other action in respect of any state,
federal or other governmental authority or agency is required with respect to
the execution, delivery and performance by the Partnership of its obligations
under this Warrant Agreement, and such consents of the Partners as are specified
in the Partnership Agreement, which consents will be effective by the time
required thereby.
(d) Litigation. There are no actions, suits, audits, investigations or
proceedings pending or, to the knowledge of the Partnership, threatened against
or affecting the Partnership in any court or before any governmental commission,
board or authority which, if adversely determined, will have a material adverse
effect on the ability of the Partnership to perform its obligations under the
Leases and this Warrant Agreement.
(e) Subsidiaries or Affiliates. The Partnership has no subsidiaries or
affiliated companies and does not otherwise own or control, directly or
indirectly, any other corporation, association or business entity.
(f) Financial Statements. The Partnership has delivered to the
Warrantholder the Unaudited Balance Sheet and Income Statement for the period
ending March 31, 1995; Proforma Income Statements and Cash Flow Statements
through June 1998; and Working Draft Budgets for Fiscal Year 1996.
The Partnership shall deliver to the Warrantholder any and all
financial statements to which Limited Partners are entitled pursuant to the
Partnership Agreement.
(g) Contingent and Absolute Liabilities. Except as disclosed on
Schedule A (g), the Partnership has no material liabilities or obligations,
absolute or contingent except the liabilities and obligations of the Partnership
as set forth in the Financial Statements and liabilities and obligations which
have occurred in the ordinary course of business, and which have not been
materially adverse.
(h) Insurance. The Partnership has in full force and effect insurance
policies, with extended coverage, insuring the Partnership and its property and
business against such losses and risks, and in such amounts, as are customary
for entities engaged in a similar business and similarly situated and as
otherwise may be required pursuant to the terms of any other contract or
agreement.
(i) Other Commitments to Register Securities. Except as set forth in
this Warrant Agreement and the Partnership Agreement and disclosed on Schedule A
(i), the Partnership is not, pursuant to the terms of any other agreement
currently in existence,
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<PAGE> 10
under any obligation to register under the 1933 Act any of its presently
outstanding securities or any of its securities which may hereafter be issued.
(j) Exempt Transaction. Subject to the accuracy of the Warrantholder's
representations in Section 10 hereof, the issuance of the Partnership Interest
upon exercise of the Warrantholder's right to purchase a Partnership Interest
will constitute a transaction exempt from (i) the registration requirements of
Section 5 of the 1933 Act, in reliance upon Section 4(2) thereof, and (ii) the
qualification requirements of any applicable state securities laws.
(k) Compliance with Rule 144. From and after the date that the
Partnership or its Successor shall have publicly traded securities, at the
written request of the Warrantholder, who proposes to sell its Partnership
Interest or other securities issuable upon the exercise of the Warrant Agreement
in compliance with Rule 144 promulgated by the Commission under the 1933 Act,
the Partnership or Successor shall furnish to the Warrantholder, within ten days
after receipt of such request, a written statement confirming the Partnership's
or Successor's (i) compliance with the filing requirements of the Commission as
set forth in such Rule as then in effect or (ii) filing with the Commission of a
no action letter regarding permissibility of Warrantholder "tacking" holding
period of Partnership Interest with holding period of interests in Successor.
(l) No Events of Default, Material Contracts. All material contracts,
agreements and instruments to which the Partnership is a party are in full force
and effect in all material respects, and are valid, binding and enforceable by
the Partnership in accordance with their respective terms, subject to the effect
of applicable bankruptcy and other similar laws affecting the rights of
creditors generally, and rules of law concerning equitable remedies and no event
of default.
(m) Brokers' Fees. The Partnership has not incurred, and will not
incur, directly or indirectly, any liability for brokerage or finders' fees or
agents' commissions or any similar charges in connection with the Warrant
Agreement or any other transaction contemplated thereby.
(n) Taxes. The Partnership has filed all material tax returns and
reports as required by law, (ii) these returns and reports are true and correct
in all material respects, and (iii) the Partnership has withheld or collected
from each payment made to each of its employees, the amount of all taxes,
including, but not limited to, federal income taxes, Federal Insurance
Contribution Act taxes and Federal Unemployment Tax Act taxes required to be
withheld or collected therefrom, and has paid the same to the proper tax
receiving officers or authorized depositaries.
10. REPRESENTATIONS AND COVENANTS OF THE WARRANTHOLDER.
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<PAGE> 11
This Warrant Agreement has been entered into by the Partnership in
reliance upon the following representations and covenants of the Warrantholder,
which by its execution hereof the Warrantholder hereby confirms:
(a) Investment Purpose. The right to the Partnership Interest or other
securities issuable upon exercise of the Warrantholder's rights contained herein
will not be acquired with a view to the sale or distribution of any part
thereof, and the Warrantholder has no present intention of selling or engaging
in any public distribution of the same.
(b) Private Issue. The Warrantholder understands (i) that the
Partnership Interest issuable upon exercise of the Warrantholder's rights
contained herein is not registered under the 1933 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 Partnership's reliance on such exemption
is predicated on the representations set forth in this Section 10.
(c) Disposition of Warrantholder's Rights. In no event will the
Warrantholder make a disposition of any of its rights to acquire the Partnership
Interest or any securities issuable upon exercise of such rights unless and
until (i) it shall have notified the Partnership of the proposed disposition,
and (ii) if requested by the Partnership, it shall have furnished the
Partnership with an opinion of counsel (which counsel may either be inside or
outside counsel to the Warrantholder) satisfactory to the Partnership and its
counsel to the effect that (A) appropriate action necessary for compliance with
the 1933 Act has been taken, or (B) an exemption from the registration
requirements of the 1933 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 1933 Act and sold by the holder thereof in accordance with such registration
or (2) such security shall have been sold without registration in compliance
with Rule 144 under the 1933 Act, or (3) a letter shall have been issued to the
Warrantholder at its request by the staff of the Commission or a ruling shall
have been issued to the Warrantholder at its request by such Commission stating
that no action shall be recommended by such staff or taken by such Commission,
as the case may be, if such security is transferred without registration under
the 1933 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 Warrantholder or holder of any
Securities issuable hereunder then outstanding as to which such restrictions
have terminated shall be entitled to receive from the Partnership or Successor,
without expense to such holder, one or more new certificates for the Warrant
Agreement or for
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<PAGE> 12
such Units not bearing any restrictive legend. Prior to March 31, 1996, no
transfer shall be permitted if such transfer could result in a termination of
the Partnership within the meaning of Section 708 of the Code.
(d) Financial Risk. The Warrantholder 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 Warrantholder understands that the
Partnership Interest which the Warrantholder has the right to purchase hereunder
has not been reviewed or approved by the U. S. Securities and Exchange
Commission or any similar body not registered under the Securities Exchange Act
of 1934 and, as of the date of execution of this Warrant, the Partnership has no
obligation to so register such Partnership Interest (or the shares of any
corporation into which the Partnership may convert), and if the Partnership does
not register with the Commission pursuant to Section 12 or Section 15(d) of the
Securities Exchange Act of 1934 (the "1934 Act"), or file reports pursuant to
Section 13 of the 1934 Act, or if a registration statement covering the
securities under the 1933 Act is not in effect when it desires to sell (i) the
rights to purchase the Partnership Interest (or other securities) pursuant to
this Warrant Agreement, or (ii) the Partnership Interest (or other securities
into which the Units are convertible) issuable upon exercise of the right to
purchase, it may be required to hold such securities for an indefinite period.
(f) Subject to Limited Partnership Agreement. Warrantholder
acknowledges that upon exercise of the Warrant Agreement, it will be a Limited
Partner of the Partnership and will thereafter be subject to the Partnership
Agreement.
11. TRANSFERS.
(a) Generally. Subject to the terms and conditions contained in Section
10 hereof, this Warrant Agreement and all rights hereunder are transferable in
whole or in part by the Warrantholder and any successor transferee. The transfer
shall be recorded on the books of the Partnership upon receipt by the
Partnership of a notice of transfer in the form attached hereto as Exhibit III
(the "Transfer Notice"), at its principal offices and the payment to the
Partnership of all transfer taxes and other governmental charges imposed on such
transfer.
(b) Exchange of Warrant Agreement Upon a Transfer. On surrender of this
Warrant Agreement for exchange, properly endorsed and subject to the limitations
on assignments and transfers and contained in this Section 11, the Partnership
or Successor shall issue to or on the order of the Warrantholder a new Warrant
Agreement(s), in the name of the Warrantholder or as the Warrantholder may
direct, for the number of shares issuable upon exercise hereof in accordance
with the provisions of Section 3(d) hereof.
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<PAGE> 13
12. REGISTRATION RIGHTS.
Upon exercise of this Warrant Agreement, the Warrantholder shall be
entitled to "piggy-back" rights similar to those granted to other equity holders
in the Partnership.
13. MISCELLANEOUS.
(a) Effective Date. The provisions of this Warrant Agreement shall be
construed and shall be given effect in all respects as if it had been executed
and delivered by the Partnership on the date hereof. This Warrant Agreement
shall be binding upon any successors or assigns of the Partnership.
(b) Attorneys' Fees. In any litigation, arbitration or court proceeding
between the Partnership and the Warrantholder relating hereto, the prevailing
party shall be entitled to attorneys' fees and expenses and all costs of
proceedings incurred in enforcing this Warrant Agreement.
(c) Governing Law. This Warrant Agreement shall be governed by and
construed for all purposes under and in accordance with the laws of the State of
Illinois.
(d) Counterparts. This Warrant Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(e) Titles and Subtitles Definitions. The titles of the paragraphs and
subparagraphs of this Warrant Agreement are for convenience and are not to be
considered in construing this Agreement. Capitalized terms used herein and not
defined shall have the same meaning as in the Partnership Agreement.
(f) Notices. Any notice required or permitted hereunder shall be given
in writing and shall be deemed effectively given upon personal delivery or upon
deposit in the United States mail, by registered or certified mail, addressed
(i) to the Warrantholder at 6111 North River Road, Rosemont, Illinois 60018,
attention: Venture Leasing Department, cc: Legal Department (and/or if by
facsimile: (708) 517-5088), and (ii) to the Partnership at The Edison Project,
529 Fifth Avenue, 16th Floor, New York, New York 10175 (and/or if by facsimile:
(212) 309-1600) or at such other address as any such party may subsequently
designate by written notice to the other party.
(g) Remedies. In the event of any default hereunder, the nondefaulting
party may proceed to protect and enforce its rights either by suit in equity
and/or by action at law, including but not limited to an action for damages as a
result of any such default, and/or an action for specific performance for any
default where non-defaulting party will not have an adequate remedy at law and
where damages will not be readily
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<PAGE> 14
ascertainable. The Partnership expressly agrees that it shall not oppose an
application by the Warrantholder or any other person entitled to the benefit of
this Agreement requiring specific performance of any or all provisions hereof or
enjoining the Partnership from continuing to commit any such breach of this
Agreement.
(h) No Impairment of Rights. The Partnership will not, by amendment of
the Partnership Agreement or through any other means, avoid or seek to avoid the
observance or performance of any of the terms of this Warrant Agreement, but
will at all times in good faith assist in the carrying out of all such terms and
in the taking of all such actions as may be necessary or appropriate in order to
protect the rights of the Warrantholder against impairment.
(i) Survival. The representations, warranties, covenants and conditions
of the respective parties contained herein or made pursuant to this Warrant
Agreement shall survive the execution and delivery of this Warrant Agreement and
shall be binding upon the Partnership and Successor until the term of the
Warrant Agreement expires or is fully exercised.
(j) Severability. In the event any one or more of the provisions of
this Warrant Agreement shall for any reason be held invalid, illegal or
unenforceable, the remaining provisions of this Warrant Agreement shall be
unimpaired, and the invalid, illegal or unenforceable provision shall be
replaced by a mutually acceptable valid, legal and enforceable provision, which
comes closest to the intention of the parties underlying the invalid, illegal or
unenforceable provision.
(k) Amendments. Any provision of this Warrant Agreement may be amended
by a written instrument signed by the Partnership (in accordance with the
provisions of the Partnership Agreement) and by the Warrantholder.
(l) Additional Documents. The Partnership, upon execution of this
Warrant Agreement, shall provide the Warrantholder with certified resolutions
and an opinion from the Partnership's counsel addressed to the Warrantholder in
the form attached hereto as Exhibit 1.
(m) Business Days. In the event that the Warrantholder's rights
hereunder would otherwise terminate on a Saturday, Sunday or other day which is
a legal or bank holiday in the State of Illinois and/or the State of New York,
then the Warrantholder's rights hereunder shall continue until the next
succeeding business day.
(n) Lost, Stolen, Destroyed or Mutilated Warrants. In case this Warrant
shall be mutilated, lost, stolen or destroyed, the Company will issue a new
Warrant of like date, tenor and denomination and deliver the same in exchange
and substitution for and upon surrender and cancellation of any mutilated
Warrant, or in lieu of any Warrant lost, stolen or destroyed, upon receipt of
evidence satisfactory to the Company of the
-14-
<PAGE> 15
loss, theft or destruction of such Warrant, and upon receipt of reasonable
indemnity satisfactory to the Company.
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be executed by its officers thereunto duly authorized.
Dated: ____________________, 19__
Partnership: THE EDISON PROJECT L.P.
by its General Partners
WSI Inc.
By: /s/ Christopher Whittle
------------------------
Date: August 18, 1995
---------------------
SPROUT EDISON PROJECT INC.
By: /s/ Janet A. Hickey
-----------------------
Date: August 17, 1995
---------------------
Warrantholder: COMDISCO, INC.
By: /s/ James P. Labe
-----------------------
Title: President
--------------------
Date: 8/22/95
---------------------
-15-
<PAGE> 1
Exhibit 10.16
WARRANT PURCHASE AGREEMENT
THIS WARRANT PURCHASE AGREEMENT (this "Agreement ") is made and entered
into as of June 30, 1997, by and between THE EDISON PROJECT INC., a Delaware
corporation with its principal place of business at 521 Fifth Avenue, 16th
Floor, New York, NY 10175 (the "Company"), PHOENIX LEASING INCORPORATED, a
California corporation (the "Purchaser").
The Company desires to sell, and the Purchaser desires to purchase, a
warrant to purchase 50,000 shares of the Company's Series A Common Stock, par
value $0.01 per share (the "Warrant Shares"), at a price per share of $2.00 in
the form attached hereto as Exhibit A and on the terms and conditions set forth
herein (the "Warrant"), in connection with Purchaser's extension of a credit
facility to the Company pursuant to the Senior Loan and Security Agreement,
dated as of the date hereof (the "Financing").
NOW, THEREFORE in consideration of the mutual promises contained
herein, the parties hereto agree as follows:
A. PURCHASE TERMS
1. Purchase of the Warrant. The purchase and sale of the Warrant shall
take place at the offices of the Purchaser, at such place as the Company and the
Purchaser shall agree, on June 30, 1997 (the "Closing") pursuant to the
Financing.
2. Access To Information. The Purchaser acknowledges that it has had
access to all material information concerning the Company which it has
requested. The Purchaser also acknowledges that it has had the opportunity to,
and has to its satisfaction, questioned the officers of the Company with respect
to its investment hereunder.
3. Representations of the Purchaser.
(a) Disclosure; Sophistication. The Purchaser represents that it
understands that the Warrant, and the Warrant Shares issuable upon exercise
thereof, are speculative investments, that it is aware of the Company's business
affairs and financial condition and that it has acquired sufficient information
about the Company to reach an informed and knowledgeable decision to acquire the
Warrant. The Purchaser is purchasing the Warrant and any Warrant Shares issued
upon exercise thereof for investment for its own account only and not with a
view to, or for resale in connection with, any "distribution" thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
applicable state securities laws. The Purchaser further represents that it
understands that the Warrant and Warrant Shares have not been registered under
the Securities Act or applicable state securities laws by reason of specific
exemptions therefrom, which exemptions depend upon, among other things, the bona
fide nature of the Purchaser's investment intent as expressed herein.
<PAGE> 2
The Purchaser understands that the Warrant and any Warrant Shares purchased upon
exercise thereof must be held indefinitely unless such securities are
subsequently registered under the Securities Act and all applicable state
securities laws and regulations or an exemption from such registration or
qualification is available, and that the Company is under no obligation to
register or qualify such securities except as expressly set forth herein. The
Purchaser is an "accredited investor" as defined in Regulation D promulgated
under the Securities Act. The Purchaser's corporate headquarters and principal
place of business is located in the State of California.
(b) Disposition of the Purchaser's Rights. In no event will the
Purchaser make a disposition of any of its rights to acquire the Warrant Shares
unless and until the Purchaser 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 Purchaser)
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
Purchaser at the request of the Purchaser by the staff of the SEC or a ruling
shall have been issued to the Purchaser 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 Purchaser 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.
(c) Financial Risk. The Purchaser 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.
(d) Risk of No Registration. The Purchaser understands that the
Company Shares have 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 hereof, the Company has no obligation to
so register the Company Shares, 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
<PAGE> 3
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 Warrant, or (ii) the Warrant Shares issuable upon exercise of the Warrant,
it may be required to hold such securities for an indefinite period.
4. Confidential Information. The Purchaser will not use or divulge any
non-public information provided by or developed for the Purchaser in connection
with this Agreement ("Company Proprietary Information") whether or not this
Agreement remains in effect, except as may be required by law.
5. Legends. The Purchaser acknowledges and understands that the
instrument evidencing the Warrant and any Warrant Shares issuable pursuant
thereto shall bear the legends as specified in the Warrant (and any other
legends required under state or federal securities laws in the opinion of legal
counsel for the Company).
B. REGISTRATION AGREEMENT
The Company hereby grants to the Purchaser with respect to the Warrant
Shares the "piggy-back" registration rights granted to other holders of Company
stock (the "Other Holders"), as set forth in the terms and provisions of Annex I
hereto (the "Annex Registration Rights"). The Purchaser's "piggy-back"
registration rights with respect to the Warrant Shares shall at all times be the
same as the "piggy-back" registration rights of the Other Holders,
notwithstanding any changes to the stockholder's agreement from which the Annex
Registration Rights is derived; provided, that in the event that the number of
shares to be included in a Registration Statement (as defined in Annex I) filed
for an underwritten public offering is limited by the lead managing underwriter,
Warrant Shares may not be included in such offering unless all Shares (as
defined in Annex I) desired by Shareholders (as defined in Annex I) to be
included therein have been so included, and in the event the Warrant Shares are
to be included, they shall be included on a pro rata basis based on the number
of shares the holders of which are similarly situated (including, without
limitation, warrantholders which lease computer equipment to the Company or
extended loans to the Company secured by computer equipment). The Company
represents and warrants to the Purchaser it has taken all action necessary,
including, if required, obtaining the consent of the Other Holders, to grant the
Purchaser the registration rights described herein. The Company further
represents and warrants that the Company's issuance of the Warrant to the
Purchaser does not violate or conflict with any rights of first refusal granted
to any other person, including any of the Other Holders.
C. GENERAL PROVISIONS
1. Representations and Warranties of the Company. As a material
inducement to the Purchaser to enter into this Agreement and purchase the
Warrant hereunder, the Company hereby represents and warrants that:
<PAGE> 4
(a) Organization, Corporate Power and Licenses. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of its incorporation described above and is qualified to do
business in every jurisdiction in which the failure to so qualify has had or
would reasonably be expected to have a material adverse effect on the financial
condition, operating results, assets, operations or business prospects of the
Company and its subsidiaries taken as a whole. The Company possesses all
requisite corporate power and authority and all material licenses, permits and
authorizations necessary to own and operate its properties, to carry on its
businesses as now conducted and presently proposed to be conducted and to carry
out the transactions contemplated by this Agreement. The copies of any existing
Stock Purchase Agreements and the Stockholders Agreements and the Company's
charter documents and bylaws which have been furnished to Purchaser or the
Purchaser's special counsel reflect all amendments made thereto at any time
prior to the date of this Agreement and are correct and complete.
(b) Capital Stock and Related Matters.
(i) As of the Closing and immediately thereafter, the
authorized capital stock of the Company shall be as stated on the attached
"Capitalization Schedule". As of the Closing, the Company shall not have
outstanding any stock or securities convertible or exchangeable for any shares
of its capital stock or containing any profit participation features, nor shall
it have outstanding any rights, warrants or options to subscribe for or to
purchase its capital stock or any stock or securities convertible into or
exchangeable for its capital stock or any stock appreciation rights or phantom
stock plans, except for the Warrant, and except as set forth on the attached
"Option Schedule." The Option Schedule accurately sets forth the information set
forth thereon. As of the Closing, the Company shall not be subject to any
obligation (contingent or otherwise) to repurchase or otherwise acquire or
retire any shares of its capital stock or any warrants, options or other rights
to acquire its capital stock, except as set forth on the Capitalization
Schedule. As of the Closing, all of the outstanding shares of the Company's
capital stock shall be validly issued, fully paid and nonassessable.
(ii) Except for those rights contained in any Stock Purchase
Agreements, the Company's Amended and Restate Articles of Incorporation and
those contained in any Stockholders Agreements (which rights have been waived),
there are no statutory or, to the best of the Company's knowledge, contractual
stockholders preemptive rights or rights of refusal with respect to the issuance
of the Warrant hereunder of the issuance of the Warrant Shares upon exercise of
the Warrant. The Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any of its
capital stock, and
<PAGE> 5
the offer, sale and issuance of the Warrant hereunder does not require
registration under the Securities Act or any applicable state securities laws.
(c) Authorization; No Breach. The execution, delivery and performance
of this Agreement, the Warrant and all other agreements contemplated hereby to
which the Company is a party have been duly authorized by the Company. This
Agreement, the Warrant and all other agreements contemplated hereby to which the
Company is a party each constitutes a valid and binding obligation of the
Company, enforceable in accordance with their respective terms. The execution
and delivery by the Company of this Agreement, the Warrant and all other
agreements contemplated hereby to which the Company is a party, the offering,
sale and issuance of the Warrant hereunder, the issuance of the Warrant Shares
upon exercise of the Warrant, and the fulfillment of and compliance with the
respective terms hereof and thereof by the Company, do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrance upon the Company's capital stock or
assets pursuant to, (iv) give any third party the right to modify, terminate or
accelerate any obligation under, (v) result in a violation of, or (vi) require
any authorization, consent, approval, exemption or other action by or notice or
declaration to, or filing with, any court or administrative or governmental body
or agency pursuant to, the charter or bylaws of the Company or any subsidiary,
or any law, statute, rule or regulation to which the Company or any subsidiary
is subject, or any agreement, instrument, order, judgment or decree to which the
Company or any subsidiary is subject, except for any such filings required under
applicable "blue sky" or state securities laws or required under Regulation D
promulgated under the Securities Act.
2. Miscellaneous.
(a) No Inconsistent Agreements. The Company shall not hereafter enter
into any agreement with respect to its securities which is inconsistent with or
violates the rights granted to the Purchaser hereunder.
(b) Remedies. Any Person having rights under any provisions of this
Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement
<PAGE> 6
(c) Amendments and Waivers. Except as otherwise provided herein, the
provisions of this Agreement may be amended or waived only upon the prior
written consent of the Company and the Purchaser.
(d) Successors and Assigns. All covenants and agreements in this
Agreement by or on behalf of any of the parties hereto shall bind and inure to
the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
Purchaser are also for the benefit of, and enforceable by, any subsequent holder
of the Warrant Shares.
(e) Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(f) Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, any one of which need not contain the signatures of more
than one party, by all such counterparts taken together shall constitute on and
the same Agreement.
(g) Descriptive Headings. The descriptive headings of this Agreement
are inserted for convenience only and do not constitute a part of this
Agreement.
(h) Governing Law. The corporation laws of the State of the Company's
incorporation identified above shall govern all issues concerning the relative
rights of the company and its stockholders. All other issues and questions
concerning the construction, validity, interpretation and enforcement of this
Agreement and the exhibits and schedules hereto shall be governed by, and
construed in accordance with, the laws of the State of California, without
giving effect to any choice of law of conflict of law, rules or provisions
(whether of the State of California or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the state of
California.
(i) Notices. All notices, demands or other communications to be given
or delivered under or by reason of the provisions of this Agreement shall be in
writing and shall be deemed to have been given when delivered personally to the
recipient, sent to the recipient by reputable overnight courier service (charges
prepaid) or mailed to the recipient by certified or registered mail, return
receipt requested and postage prepaid, of by confirmed facsimile. Such notices,
demands
<PAGE> 7
and other communications shall be sent to the Purchaser and to the Company at
the respective addresses indicated below:
The Edison Project Inc.
521 Fifth Avenue, 16th Floor
New York, New York 10175
Attention: Chief Financial Officer
Telephone: (212) 309-1600
Facsimile: (212) 309-1604
with a copy to:
The Edison Project
c/o WSI Inc.
366 NationsBank Center
550 Main Street
Knoxville, Tennessee 37902
Attention: Laura Eshbaugh
Telephone: (423) 546-0999
Facsimile: (423) 546-1090
and to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: John F. Fritts
Telephone: (212) 504-6000
Facsimile: (212) 504-6666
Phoenix Leasing Incorporated
2401 Kerner Boulevard
San Rafael, California 94901
Attention:
Telephone: (415) 485-4500
Facsimile: (415) 485-4891
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(j) Attorneys' Fees. In the event of an action, suit or proceeding
brought under or in connection with this Agreement, the prevailing party therein
shall be entitled to recover from, and the other party hereto agrees to pay, the
<PAGE> 8
prevailing party's costs and expenses in connection therewith, including
reasonably attorneys' fees.
(k) Arbitration. Disputes arising under or in any respect in connection
with this Agreement, including in respect of the execution, delivery or
performance hereof (but excluding disputes as to the compliance by the
arbitrators under the provisions of this paragraph applicable to them), shall be
arbitrated in Chicago in accordance with the Commercial Arbitration Rules of the
American Arbitration Association by three arbitrators, one selected by each
party hereto and the third selected by the two so selected (or, in the absence
of agreement, the third arbitrator shall be selected by the President of the
Association of the Bar of The City of Chicago at the time sitting), and with all
decisions of the arbitrators the authority to resolve disputes between the
parties in respect of this Agreement and agree that no decision by the
arbitrators shall have the effect of amending this Agreement in any respect. The
costs of any such arbitration, including expenses (and legal fees) of the other
party thereto, shall be borne by the party which is the losing party in the
arbitration or, if the arbitrators' decision is unclear in that regard, as the
arbitrators shall determined in accordance with the purpose of this provision to
achieve the result that arbitrations be commenced hereunder in circumstances of
actual disputes and not frivolously or for harassment purposes. The parties
hereto agree that any proceedings pursuant to this paragraph shall be kept
strictly confidential and shall not be disclosed to any third party except
pursuant to court order.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first set forth above.
The Edison Project Inc.
a Delaware corporation
Attest:
/s/ Laura Eshbaugh By: /s/ Laura Eshbaugh
- ------------------------ ------------------------
Secretary Name: Laura Eshbaugh
Title: President
(Corporate Seal)
Phoenix Leasing Incorporated
a California corporation
By: /s/ N. H. Nelson
---------------------
Its: Vice President
---------------------
<PAGE> 9
Options Schedule
THE EDISON PROJECT INC.
SHARE OPTIONS AS OF 5/1/97
<TABLE>
<CAPTION>
Total
Share Exercise
# Shares Price Price
<S> <C> <C> <C>
Employee Option Plan:
Executives 2,659,840 * $ 1.25 $ 3,324,800
General Employees 461,360 * $ 1.25 576,700
Unissued but Reserved 651,980 TBD TBD
for Employees
Former Executives 226,820 $ 1.00 226,820
----------- -----------
Total Employee Options 4,000,000 4,128,320
Performance Option Pool 1,250,000 * $ 1.50 1,875,000
Comdisco A 225,000 $ 1.00 225,000
Comdisco B 136,800 $ 1.25 171,000
Comdisco C 213,333 $ 1.50 319,999.50
Dillon Read 200,000 $ 0.25 50,000
WSI A 1,000,000 * $ 10.00 10,000,000
WSI B 1,000,000 * $ 20.00 20,000,000
----------- -----------
TOTAL 8,025,133 $ 36,766,319.50
</TABLE>
*Subject to relevant vesting provisions.
<PAGE> 10
NEITHER THIS WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NO
SALE, TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SAID SHARES MAY BE
EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR (ii)
AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED, EXCEPT THAT NO SUCH OPINION SHALL BE
REQUIRED IF SUCH SALE IS PURSUANT TO RULE 144 PROMULGATED UNDER THE ACT.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
THIS CERTIFIES THAT, for value received PHOENIX LEASING INCORPORATED,
a California corporation ("Warrantholder"), is entitled to subscribe for and
purchase up to Fifty Thousand (50,000) shares (as adjusted pursuant to
provisions hereof, the "Shares") of the fully paid and non-assessable Series A
Common Stock (the "Common Stock") of THE EDISON PROJECT INC., a Delaware
corporation with its principal place of business at 521 Fifth Avenue, 16th
Floor, New York, NY 10175 (the "Company"), at the per share of Two Dollars
($2.00) (such price and such other price as shall result, from time to time,
from adjustments specified herein is herein referred to as the "Warrant Price")
subject to the provisions and upon the terms and conditions hereinafter set
forth. The Warrant Price and the Shares purchasable hereunder are subject to
adjustment in certain events, all as more fully set forth under Sections 4 and 5
herein. As used herein, the term "Grant Date" shall mean June 30,1997.
1. Term. The purchase rights represented by this Warrant are
exercisable, in whole or in part, at any time and from time to time from and
after the Grant Date and on or prior to the later of (i) five (5) years after
the Borrower's initial public offering or (ii) ten (10) years from the date of
the final loan made to the Company by Warrantholder under the Senior Loan and
Security Agreement, dated as of the Grant Date, between Phoenix Leasing
Incorporated and the Company (the "Loan Agreement").
2. Method of Exercise; Net Issue Exercise.
2.1 Method of Exercise; Payment; Issuance of New Warrant. The
purchase rights represented by this Warrant may be exercised by Warrantholder,
in whole or in part and from time to time, by the surrender of this Warrant
(with the notice of exercise form attached hereto as Annex A duly executed) at
the principal office of the Company and by the payment to the Company, by wire
transfer or cashier's check, of an amount equal to the then applicable Warrant
Price per share multiplied by the number of Shares then being purchased.
Warrantholder may make any exercise of this Warrant contingent upon the
consummation of a public offering of the Company's Common Stock under the
Securities Act of 1933, as amended (the
<PAGE> 11
"Act"). The Warrantholder shall be deemed to have become the holder of record
of, and shall be treated for all purposes as the record holder of, the Shares
represented thereby (and such Shares shall be deemed to have been issued)
immediately prior to the dose of business on the date or dates upon which this
Warrant is exercised. In the event of any exercise of the rights represented by
this Warrant, certificates for the Shares so purchased shall be delivered to the
Warrantholder as soon as possible (and in any event within five business days of
receipt of such notice) and, unless this Warrant has been fully exercised or
expired, a new Warrant representing the portion of the Shares, if any, with
respect to which this Warrant shall not then have been exercised shall also be
issued to the Warrantholder as soon as possible (and in any event within such
five business day period).
2.2 Non-Cash Exercise
(a) In lieu of payment in cash, the rights represented by this
Warrant may also be exercised by a written notice of exercise in the form of
Annex A attached hereto specifying that Warrantholder wishes to convert all or
any portion of this Warrant (the "Conversion Right") into a number of Shares
equal to the quotient obtained by dividing (x) the value of the Shares subject
to the portion of this Warrant being exercised (determined by subtracting the
aggregate Warrant Price for such Shares in effect immediately prior to the
exercise of the Conversion Right from the aggregate Fair Market Value of the
Shares issuable upon exercise of such portion of this Warrant immediately prior
to the exercise of the Conversion Right) by (y) the Fair Market Value of one
share of Common Stock immediately prior to the exercise of the Conversion Right.
(b) For purposes of this Section 2.2, the "Fair Market Value" of the
Company's Common Stock shall be equal to the number of shares of Common Stock
multiplied by (i) if the exercise of this Warrant occurs in connection with an
initial public offering of the Company, the "initial price to public" specified
in the final prospectus with respect to the initial public offering or (ii) if
the exercise of this warrant occurs after or not in connection with an initial
public offering of the Company, the average of the closing bid and asked prices
of the Company's Common Stock quoted in the Over-The-Counter Market Summary on
the Nasdaq National Market or the closing price quoted on any exchange on which
the Common Stock is listed, whichever if applicable, as published in The Wall
Street Journal for the fifteen trading days prior to the date of determination
of Fair Market Value. If the Common Stock is not traded Over-The-Counter or on
an exchange, the Fair Market Value shall be determined in good faith by the
Company. Notwithstanding the foregoing two sentences, if the Company is party to
a merger or sale of all or substantially all of the Company's assets, "Fair
Market Value" shall mean the value that would have
<PAGE> 12
been received in respect of a Warrant Share had this Warrant been exercised
prior to such merger or sale.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and non-assessable, issued in compliance
with all applicable federal and state securities laws, and free from all taxes,
liens and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant may be exercised, the Company will
at all times have authorized and reserved for the purpose of issuance upon
exercise of the purchase rights evidenced by this Warrant, a sufficient number
of shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number of
Shares purchasable upon the exercise of this Warrant and the Warrant Price shall
be subject to adjustment from time to time upon the occurrence of certain
events, as follows:
(a) Reclassification or Merger, etc. In case of any
reclassification, change or conversion of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any consolidation or merger of the Company with
or into another corporation or entity (other than a merger with another
corporation or entity in which the Company is the surviving corporation and
which does not result in any reclassification or change of outstanding
securities issuable upon exercise of this Warrant), or in case of any sale of
all or substantially all of the assets of the Company, the Company, or such
successor or purchasing corporation, as the case may be, shall execute a new
Warrant (in form and substance satisfactory to Warrantholder) providing that
Warrantholder shall have the right to exercise such new Warrant and upon such
exercise to receive, in lieu of each share of Common Stock theretofore issuable
upon exercise of this Warrant, the kind and amount of shares of stock, other
securities, money and property receivable upon such reclassification, change,
consolidation, sale of all or substantially all of the Company's assets or
merger by a holder of one share of Common Stock. Such new Warrant shall provide
for adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 4. The provisions of this Section (a)
shall similarly apply to successive reclassifications, changes, consolidations,
mergers, sales of assets and transfers.
(b) Subdivisions or Combination of Shares; Stock Dividends. In the
event that the Company shall at any time subdivide the outstanding shares of
Common Stock, or shall issue a stock dividend on its outstanding shares of
<PAGE> 13
Common Stock, the number of Shares issuable upon exercise of this Warrant
immediately prior to such subdivision or immediately prior to the issuance of
such stock dividend shall be proportionately increased, and the Warrant Price
shall be proportionately decreased, and in the event that the Company shall at
any time combine the outstanding shares of Common Stock, the number of Shares
issuable upon exercise of this Warrant immediately prior to such combination
shall be proportionately decreased, and the Warrant Price shall be
proportionately increased, effective at the close of business on the date of
such subdivision, stock dividend or combination, as the case may be.
(c) No Impairment. The Company will not, by amendment of its Amended
and Restated Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be reasonably requested by the Warrantholder in order to
protect the rights of Warrantholder against impairment.
(d) Notices of Record Date. In case at any time: (i) the Company shall
declare any dividend upon its Common Stock payable in cash or stock or make any
other distribution to the holders of its Common Stock; (ii) the Company shall
offer for subscription prorata to the holders of its Common Stock any additional
shares of stock of any class, or other rights; (iii) there shall be any capital
reorganization or reclassification of the capital stock of the Company, or a
consolidation or merger of the Company with or into, or a sale of all or
substantially all its assets to another entity or entities; or (iv) there shall
be a voluntary or involuntary dissolution, liquidation or winding up of the
Company; then, in any one or more of said cases, the Company shall give, by
first class mail, postage prepaid, or by telex or telecopier, addressed to
Warrantholder at the address of such holder as shown on the books of the
Company, (A) at least ten (10) days' prior written notice of the date which the
books of the Company shall close or a record shall be taken for such dividend,
distribution or subscription rights or for determining rights to vote in respect
of any such reorganization, reclassification, consolidation, merger, sale,
dissolution, liquidation or winding up, and (B) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least ten (10) days' prior written notice of the
date when the same shall take place. Such notice in accordance with the
foregoing clause (A) shall also specify, in the case of any such dividend,
distribution or subscription rights, the date on which the holders of Common
Stock shall be entitled thereto, and such notice in accordance with the
foregoing clause (B) shall also specify the date on which the holders of Common
Stock shall be entitled to exchange their Common Stock for securities or other
<PAGE> 14
property deliverable upon such reorganization, reclassification, consolidation,
merger, sale, dissolution, liquidation or winding up, as the case may be.
5. Adjustment of Warrant Price and Shares Purchasable.
(a) Adjustment of Warrant Price. If the Company issues any
Additional Stock for no consideration or a consideration per share less than the
Warrant Price in effect immediately prior to the time of such issuance, then the
Warrant Price shall be reduced to the price determined by dividing:
(i) an amount equal to the sum of (A) the number of shares of
Common Stock Outstanding immediately prior to such issue or sale multiplied by
the then existing Warrant Price, and (B) an amount equal to the aggregate
"consideration actually received" by the Company upon such issue or sale, by
(ii) the sum of the number of shares of Common Stock
Outstanding immediately after such issue or sale.
For purposes of this subsection (a):
(A) In the case of an issue or sale for cash of shares of
Common Stock, the "consideration actually received" by the Company therefor
shall be deemed to be the amount of cash received, before deducting therefrom
any commissions or expenses paid by the Company.
(B) In case of the issuance (other than upon conversion or
exchange of obligations or shares of stock of the Company) of additional shares
of Common Stock for a consideration other than cash or a consideration partly
other than cash, the amount of the consideration other than cash received by the
Company for such shares shall be deemed to be the fair market value of such
consideration as determined in good faith by the Company's Board of Directors.
(C) In case of the issuance by the Company in any manner of
any Options, all shares of Common Stock or Convertible Securities to which the
holders of such Options shall be entitled to subscribe for or purchase pursuant
to such Options shall be deemed issued as of the date of the offering of such
Options, and the minimum aggregate consideration named in such Options for the
shares of Common Stock or Convertible Securities covered thereby, plus the
consideration, if any, received by the Company for such Options, shall be deemed
to be the "consideration actually received" by the Company (as of the date of
the granting of such Options) for the issuance of such Options.
(D) In case of the issuance or issuances by the Company in
any manner of any Convertible Securities, all shares of Common Stock issuable
upon
<PAGE> 15
the conversion or exchange of such Convertible Securities shall be deemed issued
as of the date such. Convertible Securities are issued, and the amount of the
"consideration actually received" by the Company for such Convertible Securities
shall be deemed to be the total of (x) the amount of consideration received by
the Company upon the issuance of such Convertible Securities, plus (y) the
minimum aggregate consideration, if any, other than such Convertible Securities,
receivable by the Company upon conversion or exchange of such Convertible
Securities, except in adjustment of dividends.
(E) The amount of the "consideration actually received" by
the Company upon the issuance of any Options referred to in subparagraph (C)
above or upon the issuance of any Convertible Securities as described in
subparagraph (D) above, and the amount of the consideration, if any, other than
such Convertible Securities, receivable by the Company upon the exercise,
conversion or exchange thereof shall be determined in the same manner provided
in subparagraphs (A) and (B) above with respect to the consideration received by
the Company in case of the issuance of additional shares of Common Stock;
provided, however, that if such Convertible Securities are issued in payment or
satisfaction of any dividend upon any stock of the Company other than Common
Stock, the amount of the "consideration actually received" by the Company upon
the original issuance of such Convertible Securities shall be deemed to be the
value of such obligations or shares of stock, as of the date of the adoption of
the resolution declaring such dividend, as determined by the Company's Board of
Directors at or as of that date.
(F) On the expiration of any Options referred to in
subparagraph (C), or the termination of any right of conversion with respect to
Convertible Securities referred to in subparagraph (D), or any change in the
number of shares of Common Stock deliverable upon exercise of such Options or
upon conversion of or exchange of such Convertible Securities, the Exercise
Price then in effect shall forthwith be readjusted to such Exercise Price as
would have obtained had the adjustments made upon the issuance of such Options
or Convertible Securities been made upon the basis of the delivery of only the
adjusted number of shares of Common Stock actually delivered or to be delivered
upon the exercise of such Options or upon the conversion or exchange of such
Convertible Securities.
(G) Anything herein to the contrary notwithstanding, the
Company shall not be required to make any adjustment of the Exercise Price in
the case of issuances of any shares of Common Stock or any Options or any
Convertible Securities to, officers, directors, employees or consultants of the
Company and its subsidiaries pursuant to stock options or stock purchase plans
or agreements, whether "qualified" for tax purposes or not, issued on or after
the Grant Date.
<PAGE> 16
(H) "Additional Stock" means (i) Common Stock issued by the
Company after the Grant Date, (ii) Common Stock issuable upon conversion of
Convertible Securities issued by the Company after the Grant Date, and (iii)
Common Stock issuable upon exercise of Options issued by the Company after the
Grant Date (for purposes of this clause (iii), if the Option is to acquire
Convertible Securities, the Common Stock issuable upon conversion of such
Convertible Securities shall be deemed issued).
(I) "Common Stock" means, for purposes of this Section 5, any
series of the Company's Common Stock.
(J) "Common Stock Outstanding" means at any time all shares
of Common Stock that are then outstanding, plus all shares of Common Stock
issuable upon conversion of the Convertible Securities and all shares of Common
Stock issuable upon exercise of the Options (assuming for this purpose that the
securities acquirable upon exercise of the Options are converted into Common
Stock).
(K) "Convertible Securities" means evidences of indebtedness,
shares of stock or other securities which are convertible into or exchangeable
for, with or without payment of additional consideration, shares of Common
Stock, either immediately or upon the arrival of a specified date or the
happening of a specified event or both.
(L) "Option" means any right, warrant or option to subscribe
for or purchase shares of Common Stock or Convertible Securities.
(b) Adjustment of Number of Shares Purchasable. Upon any
adjustment of the Warrant Price under subsection (a) of this Section 5, the
number of shares of Common Stock issuable upon exercise of this Warrant shall
equal the number of shares determined by dividing (i) the aggregate Warrant
Price payable for the purchase of all shares issuable upon exercise of this
Warrant immediately prior to such adjustment by (ii) the Warrant Price per share
in effect immediately after such adjustment.
8. Notice of Adjustments. Whenever the Warrant Price shall be adjusted
pursuant to the provisions hereof, the Company shall within ten (10) business
days of such adjustment deliver a certificate signed by its chief financial
officer to Warrantholder setting forth, in reasonable detail, the event
requiring the adjustment, the amount of the adjustment, the method by which such
adjustment was calculated, and the Warrant Price after giving effect to such
adjustment.
9. Fractional Shares. No fractional shares of Common Stock win be
issued in connection with any exercise hereunder, but in lieu of such fractional
<PAGE> 17
shares the Company shall make a cash payment therefor upon the basis of the
Warrant Price then in effect.
10. Compliance with Securities Act; Disposition of Warrant or Shares of
Common Stock.
(a) Compliance with Securities Act. Warrantholder, by acceptance
hereof, agrees that this Warrant, and the Common Stock to be issued upon
exercise hereof are being acquired for investment purposes only and that such
holder will not offer, sell or otherwise dispose of this Warrant or any shares
of Common Stock to be issued upon exercise hereof except under circumstances
which will not result in a violation of the Act and as permitted by subsection
(b) of this section. This Warrant and all shares of Common Stock issued upon
exercise of this Warrant (unless registered under the Act) shall be stamped or
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"). NO SALE OR DISPOSITION MAY BE EFFECTED WITHOUT
(i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR (ii) AN
OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE
COMPANY, THAT SUCH REGISTRATION IS NOT REQUIRED, EXCEPT THAT NO SUCH
OPINION SHALL BE REQUIRED IF SUCH SALE IS PURSUANT TO RULE 144
PROMULGATED UNDER THE ACT, AND THE TRANSFER OF THIS SECURITY IS SUBJECT
TO THE CONDITIONS SPECIFIED IN THE WARRANT TO PURCHASE SHARES OF COMMON
STOCK, DATED AS OF JUNE 30,1997, BETWEEN PHOENIX LEASING INCORPORATED
AND THE EDISON PROJECT INC.
(b) Disposition of Warrant and Shares. With respect to any offer,
sale or other disposition of this Warrant or any shares of Common Stock acquired
pursuant to the exercise of this Warrant prior to registration of such shares,
the Warrantholder and each subsequent holder of this Warrant agrees to give
written notice to the Company prior thereto, describing briefly the manner
thereof, together with a written opinion of such holder's counsel, if reasonably
requested by the Company, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the Act
as then in effect) of this Warrant or such shares of Common Stock and indicating
whether or not under the Act certificates for this Warrant or such shares of
Common Stock to be sold or otherwise disposed of require any restrictive legend
as to applicable restrictions on transferability in order to insure compliance
with the Act. Each certificate representing this Warrant or the shares of Common
Stock thus transferred (except a transfer pursuant to Rule 144) shall bear a
legend as to the applicable restrictions on transferability in order to insure
compliance with the Act, unless in the aforesaid opinion of counsel for the
Warrantholder, such legend is not required in order to
<PAGE> 18
insure compliance with the Act. Nothing herein shall restrict the transfer of
this Warrant or any portion hereof by the initial Warrantholder or any successor
holder to any affiliate of such holder, to any partnership affiliated with such
holder, or to any partner of any such partnership, provided such transfer may be
made in compliance with applicable federal and state securities laws and
provided, further, that any other transfer will require the Company's prior
written consent, which consent shall not be unreasonably withheld. The Company
may issue stop transfer instructions to its transfer agent in connection with
the foregoing restrictions.
11. Rights as Shareholders. No holder of this Warrant, as such, shall
be entitled to vote or receive dividends or be deemed the holder of Common
Stock, or otherwise be entitled to any voting or other rights as a shareholder
of the Company, until this Warrant shall have been exercised and the Shares
purchasable upon the exercise hereof shall have become deliverable, as provided
herein; provided that the Company shall deliver to the Warrantholder prior
written notice of any of the foregoing in accordance with the provisions of
Section 4(d) above.
12. Information Rights. The Company shall deliver to the Warrantholder:
(a) within thirty (30) days after the end of each calendar month, an
unaudited balance sheet of the Company as of the end of such month, cash flow
statements and an unaudited statement of operations of the Company for the
portion of the Fiscal Year ended with such month prepared and certified by the
chief financial officer of the Company, subject, however, to the exclusion of
footnotes and to normal year-end audit adjustments;
(b) as soon as practicable after the end of each Fiscal Year, a copy
of its audited financial statements accompanied by a report thereon by a firm of
independent certified public accountants selected by the Company, which report
shall state that such financial statements fairly present the Company's
financial position at the end of such Fiscal Year;
(c) promptly upon their becoming available, one copy of each report
or proxy statement sent by the Company to its shareholders generally and of each
regular or periodic report or registration statement, prospectus or written
communication (other than transmittal letters) filed by the Company with the
Securities and Exchange Commission or any securities exchange on which shares of
Common Stock are listed; and
(d) with reasonable promptness, such other information as from time
to time may be reasonably requested by the Warrantholder.
13. Issuance Tax. The issuance of certificates for shares of Common
Stock upon exercise of this Warrant shall be made without charge to the
Warrantholder
<PAGE> 19
for any issuance tax in respect hereof, provided that the Company shall not be
required to pay any tax which may be payable in respect of any transfer involved
in the issuance and delivery of any certificate in a name other than that of
Warrantholder.
14. Modification and Waiver. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the Company and the Warrantholder.
15. Notices. Any notice, request or other document required or
permitted to be given or delivered to the Warrantholder or the Company shall be
delivered, or shall be sent by certified or registered mail, postage prepaid, to
such holder at its address as shown on the books of the Company or to the
Company at the address indicated therefore on the signature page of this
Warrant.
16. Binding Effect on Successors. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets. The Company will, at the
time of the exercise of this Warrant, in whole or in part, upon request of the
Warrantholder but at the Company's expense, acknowledge in writing its
continuing obligation to the Warrantholder in respect of any rights (including,
without limitation, any right to registration of the shares of Registrable
Shares) to which the Warrantholder shall continue to be entitled after such
exercise in accordance with this Warrant; provided that the failure of the
Warrantholder to make any such request shall not affect the continuing
obligation of the Company to the Warrantholder in respect of such rights.
17. Lost Warrants or Stock Certificates. The Company covenants to the
Warrantholder that upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction, or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, or like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.
18. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
19. Governing Law. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF
THE STATE OF NEW YORK.
<PAGE> 20
THE EDISON PROJECT INC.
By: /s/ Laura Eshbaugh
----------------------------
Name: Laura Eshbaugh
Its: President
Address: 521 Fifth Avenue, 16th Floor
New York, NY 10175
Date: June 30, 1997
PHOENIX LEASING INCORPORATED
By: /s/ N. H. Nelson
----------------------------
Name: N. H. Nelson
Its: Vice President
Address: 2401 Kerner Boulevard
San Rafael, CA 94901
Date: June 30, 1997
<PAGE> 1
Exhibit 10.17
WARRANT PURCHASE AGREEMENT
THIS WARRANT PURCHASE AGREEMENT (this "Agreement") is made and entered
into as of JUNE 30, 1997, by and between THE EDISON PROJECT, INC., a Delaware
corporation with its principal place of business at 521 FIFTH AVENUE, 16TH
FLOOR, NEW YORK, NY 10175 (the "Company"), and LINC Capital Management, a
division of LINC Capital, Inc., a Delaware corporation (the "Purchaser").
The Company desires to sell, and the Purchaser desires to purchase, a
warrant to purchase 45,000 shares of the Company's Series A Common Stock, par
value $0.01 per share (the "Company Stock"), at a price per share of $2.00 in
the form attached hereto as Exhibit A and on the terms and conditions set forth
herein (the "Warrant").
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties hereto agree as follows:
A. PURCHASE TERMS
1. Purchase of the Warrant.
(a) Subject to the terms and conditions of this Agreement, the
Purchaser agrees to purchase the Warrant from the Company and the Company agrees
to sell and issue the Warrant to the Purchaser for an aggregate purchase price
of $100.00 (the"Purchase Price").
(b) The purchase and sale of the Warrant shall take place at
the offices of the Purchaser, at 303 E. Wacker Drive, Suite 1000, Chicago,
Illinois 60601, or at such other place as the Company and the Purchaser shall
agree, on JUNE 30, 1997 (the "Closing") pursuant to the EQUIPMENT NOTE LOAN AND
SECURITY AGREEMENT, (the "Financing"). At the Closing, the Company shall deliver
the Warrant to the Purchaser, against delivery to the Company of a check in the
amount of the Purchase Price.
2. Access To Information. The Purchaser acknowledges that it has had
access to all material information concerning the Company which it has
requested. The Purchaser also acknowledges that it has had the opportunity to,
and has to its satisfaction, questioned the officers of the Company with respect
to its investment hereunder.
3. Representations of the Purchaser.
(a) The Purchaser represents that it understands that the
Warrant and the shares of Common Stock issuable upon exercise thereof (the
"Warrant Shares"), are speculative investments, that it is aware of the
Company's business affairs and financial condition and that it has acquired
sufficient information about the Company to reach an informed and knowledgeable
decision to acquire the
<PAGE> 2
Warrant. The Purchaser is purchasing the Warrant and any Warrant Shares issued
upon exercise thereof for investment for its own account only and not with a
view to, or for resale in connection with, any "distribution" thereof in
violation of the Securities Act of 1933, as amended (the "Securities Act"), or
applicable state securities laws . The Purchaser further represents that it
understands that the Warrant and Warrant Shares have not been registered under
the Securities Act or applicable state securities laws by reason of specific
exemptions therefrom, which exemptions depend upon, among other things, the bona
fide nature of the Purchaser's investment intent as expressed herein. The
Purchaser understands that the Warrant and any Warrant Shares purchased upon
exercise thereof must be held indefinitely unless such securities are
subsequently registered under the Securities Act and all applicable state
securities laws and regulations or an exemption from such registration or
qualification is available, and that the Company is under no obligation to
register or qualify such securities except as expressly set forth herein. The
Purchaser is an "accredited investor" as defined in Regulation D promulgated
under the Securities Act. The Purchaser's corporate headquarters and principal
place of business is located in the State of Illinois.
(b) Disposition of the Warrantholder's Rights. In no event
will the Warrantholder make a disposition of any of its rights to acquire the
Warrant Shares unless and until the Warrantholder 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 Warrantholder) 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 Warrantholder at the request of the Warrantholder by the
staff of the SEC or a ruling shall have been issued to the Warrantholder 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 Warrantholder 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 Warrant Agreements.
-2-
<PAGE> 3
(c) Financial Risk. The Warrantholder 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.
(d) Risk of No Registration. The Warrantholder understands that the
Company Shares have 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 Company Shares, 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 Company Shares (or other
securities) pursuant to this Warrant Agreement, or (ii) the Company Shares (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.
4. Confidential Information. The Warrantholder will not use or divulge
any nonpublic information provided by or developed for the Warrantholder in
connection with this Agreement ("Company Proprietary Information") whether or
not this Agreement remains in effect, except as may be required by law.
5. Legends. The Purchaser acknowledges and understands that the
instrument evidencing the Warrant and any Company Stock issuable pursuant
thereto shall bear the legends as specified in the Warrant (and any other
legends required under state or federal securities laws in the opinion of legal
counsel for the Company).
6. Conditions of the Purchaser's Obligation at the Closing. The
obligation of the Purchaser to purchase and pay for the Warrant at the Closing
is subject to the satisfaction as of the Closing of the following conditions:
(a) Financing. The Financing shall have been consummated on terms
and conditions satisfactory to the Purchaser.
(b) Representations and Warranties; Covenants. The representations
and warranties contained herein shall be true and correct in all respects at and
as of the Closing as though then made, except to the extent of changes caused by
the transactions expressly contemplated herein, and except to the extent such
representations and warranties relate to an earlier date, in which event such
representations and warranties were true and correct as of such earlier date and
the
-3-
<PAGE> 4
Company shall have performed in all material respects all of the covenants
required to be performed by it hereunder prior to the Closing.
(c) Securities Law Compliance. The Company shall have made all
filings under all filings under all applicable federal and state securities laws
necessary to consummate the issuance of the Warrant pursuant to this Agreement
in compliance with such laws.
(d) Opinion of the Company's Counsel. The Purchaser shall have
received from legal counsel for the Company, an opinion in connection with the
issuance of the Warrant and the consummation of the transactions contemplated
thereby, which shall be addressed to the Purchaser, dated the date of the
Closing and in form and substance reasonably satisfactory to the Purchaser.
(e) Closing Documents. The Company shall have delivered to the
Purchaser all of the following documents:
(i) an Officer's Certificate, dated the date of the Closing,
stating that the conditions specified in this Section have been fully satisfied;
(ii) certified copies of the resolutions duly adopted by the
Company's board of directors authorizing the execution, delivery and performance
of this Agreement and each of the other agreements contemplated hereby, the
issuance and sale of the Warrant, the reservation of the Warrant Shares for
issuance upon exercise of the Warrant, and the consummation of all other
transactions contemplated by this Agreement;
(iii) photocopies of certified copies of the Company's
Certificate of Incorporation and bylaws;
(iv) copies of all third party and governmental consents,
approvals and filings required in connection with the consummation of the
transactions hereunder (including, without limitation, all blue sky law filings
and waivers of all preemptive rights and rights of first refusal); and
(v) such other documents relating to the transactions
contemplated by this Agreement as the Purchaser or its special counsel may
reasonably request.
(f) Proceedings. All corporate and other proceedings taken or
required to be taken by the Company in connection with the transactions
contemplated hereby to be consummated at or prior to the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to the Purchaser and its special counsel.
-4-
<PAGE> 5
B. REGISTRATION AGREEMENT
1. Registrations. Upon exercise of the Warrant, the Purchaser shall be
entitled to "piggy-back" registration rights granted to other holders of Company
Stock, as set forth in the terms and provisions of Annex I hereto, provided,
that in the event that the number of shares to be included in a Registration
Statement (as defined in Annex I) filed for an underwritten public offering is
limited by the lead managing underwriter, Warrant Shares may not be included in
such offering unless all Shares (as defined in Annex I) desired by Shareholders
(as defined in Annex I) to be included therein have been so included, and in the
event the Warrant Shares are to be included, they shall be included on a pro
rata basis based on the number of shares the holders of which are similarly
situated (including, without limitation, warrantholders which lease computer
equipment to the Company or extend loans to the Company secured by computer
equipment.)
C. GENERAL PROVISIONS
1. Representations and Warranties of the Company. As a material inducement
to the Purchaser to enter into this Agreement and purchase the Warrants
hereunder, the Company hereby represents and warrants that:
(a) Organization, Corporate Power and Licenses. The Company is a
corporation duly organized, validly existing and in good standing under the laws
of the State of its incorporation described above and is qualified to do
business in every jurisdiction in which the failure to so qualify has had or
would reasonably be expected to have a material adverse effect on the financial
condition, operating results, assets, operations or business prospects of the
Company and its subsidiaries taken as a whole. The Company possesses all
requisite corporate power and authority and all material licenses, permits and
authorizations necessary to own and operate its properties, to carry on its
businesses as now conducted and presently proposed to be conducted and to carry
out the transactions contemplated by this Agreement. The copies of any existing
Stock Purchase Agreements and the Stockholders Agreements and the Company's
charter documents and bylaws which have been furnished to Purchaser or the
Purchaser's special counsel reflect all amendments made thereto at any time
prior to the date of this Agreement and are correct and complete.
(b) Capital Stock and Related Matters.
(i) As of the Closing and immediately thereafter, the authorized
capital stock of the Company shall be as stated on the attached "Capitalization
Schedule". As of the Closing, the Company shall not have outstanding any stock
or securities convertible or exchangeable for any shares of its
-5-
<PAGE> 6
capital stock or containing any profit participation features, nor shall it have
outstanding any rights, warrants or options to subscribe for or to purchase its
capital stock or any stock or securities convertible into or exchangeable for
its capital stock or any stock appreciation rights or phantom stock plans,
except for the Warrant, and except as set forth on the attached Capitalization
Schedule." The Capitalization Schedule accurately sets forth the following
information with respect to all outstanding options and rights to acquire the
Company's capital stock: the holder, the number of shares covered, the exercise
price and the expiration date. As of the Closing, the Company shall not be
subject to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of its capital stock or any warrants, options or
other rights to acquire its capital stock, except as set forth on the
Capitalization Schedule. As of the Closing, all of the outstanding shares of the
Company's capital stock shall be validly issued, fully paid and nonassessable.
(ii) Except for those rights contained in any Stock Purchase
Agreements, the Company's Amended and Restated Articles of Incorporation, and
those contained in any Stockholders Agreements (which rights have been waived),
there are no statutory or, to the best of the Company's knowledge, contractual
stockholders preemptive rights or rights of refusal with respect to the issuance
of the Warrant hereunder of the issuance of the Warrant Shares upon exercise of
the Warrant. The Company has not violated any applicable federal or state
securities laws in connection with the offer, sale or issuance of any of its
capital stock, and the offer, sale and issuance of the Warrant hereunder does
not require registration under the Securities Act or any applicable state
securities laws. To the best of the Company's knowledge, there are no agreements
between the Company and its stockholders with respect to the voting or transfer
of the Company's capital stock or with respect to any other aspect of the
Company's affairs, except for any Stock Purchase Agreements and any Stockholders
Agreement identified on the attached "Capitalization Schedule."
(c) Authorization; No Breach. The execution, delivery and performance
of this Agreement, the Warrant and all other agreements contemplated hereby to
which the Company is a party have been duly authorized by the Company. This
Agreement, the Warrant and all other agreements contemplated hereby to which the
Company is a party each constitutes a valid and binding obligation of the
Company, enforceable in accordance with their respective terms. The execution
and delivery by the Company of this Agreement, the Warrant and all other
agreements contemplated hereby to which the Company is a party, the offering,
sale and issuance of the Warrant hereunder, the issuance of the Warrant Shares
upon exercise of the Warrant, and the fulfillment of and compliance with the
respective terms hereof and thereof by the Company, do not and shall not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrance upon the Company's capital stock or
assets pursuant to, (iv) give any third party the right to modify,
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<PAGE> 7
terminate or accelerate any obligation under, (v) result in a violation of, or
(vi) require any authorization, consent, approval, exemption or other action by
or notice or declaration to, or filing with, any court or administrative or
governmental body or agency pursuant to, the charter or bylaws of the Company or
any subsidiary, or any law, statute, rule or regulation to which the Company or
any subsidiary is subject, or any agreement, instrument, order, judgment or
decree to which the Company or any subsidiary is subject, except for any such
filings required under applicable "blue sky" or state securities laws or
required under Regulation D promulgated under the Securities Act.
2. Covenants.
(a) Until such time as the Purchaser shall have exercised the
Warrant for all of the Company Stock issuable thereunder, the Company shall
deliver to the Purchaser (so long as the Purchaser holds all or any portion of
the Warrant or any Warrant Shares and each other holder of all or any portion of
the Warrant or any Warrant Shares all of the financial and other information
required to be delivered to LINC Capital, Inc. ("LINC") pursuant to the
Equipment Note Loan and Security Agreement, dated as of June 30, 1997, between
LINC and The Edison Project L.P. and, if applicable, SEC, together with any
other information or data generally provided by the Company to its stockholders.
All such financial and other information shall be delivered pursuant to this
Section 2(a) on a timely basis.
(b) The Company shall use the proceeds from the Financing and
from the issuance and sale of the Warrant hereunder (collectively, the
"Proceeds") to finance business expansion, to make capital purchases and for the
working capital purposes of the Company.
3. Miscellaneous.
(a) No Inconsistent Agreements. The Company shall not
hereafter enter into any agreement with respect to its securities which is
inconsistent with or violates the rights granted to the holders of Registrable
Securities in this Agreement.
(b) Remedies. Any Person having rights under any provisions of
this Agreement shall be entitled to enforce such rights specifically to recover
damages caused by reason of any breach of any provision of this Agreement and to
exercise all other rights granted by law. The parties hereto agree and
acknowledge that money damages may not be an adequate remedy for any breach of
the provisions of this Agreement and that any party may in its sole discretion
apply to any court of law or equity of competent jurisdiction (without posting
any bond or other security) for specific performance and for other injunctive
relief in order to enforce or prevent violation of the provisions of this
Agreement.
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<PAGE> 8
(c) Amendments and Waivers. Except as otherwise provided
herein, the provisions of this Agreement may be amended or waived only upon the
prior written consent of the Company and the Purchaser.
(d) Successors and Assigns. All covenants and agreements in
this Agreement by or on behalf of any of the parties hereto shall bind and inure
to the benefit of the respective successors and assigns of the parties hereto
whether so expressed or not. In addition, whether or not any express assignment
has been made, the provisions of this Agreement which are for the benefit of
purchasers or holders of Registrable Securities are also for the benefit of, and
enforceable by, any subsequent holder of Registrable Securities.
(e) Severability. Whenever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement is held to be prohibited
by or invalid under applicable law, such provision shall be ineffective only to
the extent of such prohibition or invalidity, without invalidating the remainder
of this Agreement.
(f) Counterparts. This Agreement may be executed
simultaneously in two or more counterparts, any one of which need not contain
the signatures of more than one party, by all such counter parts taken together
shall constitute on and the same Agreement.
(g) Descriptive Headings The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
(h) Governing Law. The corporation laws of the State of the
Company's incorporation identified above shall govern all issues concerning the
relative rights of the company and its stockholders. All other issues and
questions concerning the construction, validity, interpretation and enforcement
of this Agreement and the exhibits and schedules hereto shall be governed by,
and construed in accordance with, the laws of the State of Illinois, without
giving effect to any choice of law of conflict of law rules or provisions
(whether of the State of Illinois or any other jurisdiction) that would cause
the application of the laws of any jurisdiction other than the state of
Illinois.
(i) Notices. All notices, demands or other communications to
be given or delivered under or by reason of the provisions of this Agreement
shall be in writing and shall be deemed to have been given when delivered
personally to the recipient, sent to the recipient by reputable overnight
courier service (charges prepaid) or mailed to the recipient by certified or
registered mail, return receipt requested and postage prepaid, or by confirmed
facsimile. Such notices, demands
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<PAGE> 9
and other communications shall be sent to the Purchaser and to the Company at
the respective addresses indicated below:
THE EDISON PROJECT, INC.
521 FIFTH AVENUE, 16TH FLOOR
NEW YORK, NY 10175
ATTENTION: CHIEF FINANCIAL OFFICER
TELEPHONE: (212) 309-1600
FACSIMILE: (212) 309-1604
with a courtesy copy to:
THE EDISON PROJECT
C/O WSI INC.
366 NATIONSBANK CENTER
550 MAIN STREET
KNOXVILLE, TENNESSEE 37902
TELEPHONE: (423)546-0999
FACSIMILE: (423)546-1090
ATTENTION: LAURA ESHBAUGH
and to:
CADWALADER, WICKERSHAM & TAFT
100 MAIDEN LANE
NEW YORK, NEW YORK 10038
TELEPHONE : (212) 504-6000
FACSIMILE: (212)504-6666
ATTENTION: JOHN F. FRITTS
LINC CAPITAL MANAGEMENT,
A DIVISION OF LINC CAPITAL, INC.
303 EAST WACKER DRIVE, SUITE 1000
CHICAGO, IL 60601
TELEPHONE : (312) 946-1000
FACSIMILE: (312) 938-4290
ATTENTION: TREASURER
or to such other address or to the attention of such other person as the
recipient party has specified by prior written notice to the sending party.
(j) Attorneys' Fees. In the event of an action, suit or
proceeding brought under or in connection with this agreement, the prevailing
party therein shall be entitled to recover from, and the other party hereto
agrees to pay, the prevailing
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<PAGE> 10
party's costs and expenses in connection therewith, including reasonably
attorneys' fees.
(k) Disputes arising under or in any respect in connection
with this Agreement including in respect of the execution, delivery or
performance hereof (but excluding disputes as to the compliance by the
arbitrators under the provisions of this paragraph applicable to them), shall be
arbitrated in Chicago in accordance with the Commercial Arbitration Rules of the
American Arbitration Association by three arbitrators knowledgeable on
securities issues, one selected by each party hereto and the third selected by
the two so selected (or, in the absence of agreement, the third arbitrator shall
be selected by the President of the Chicago Bar Association at the time
sitting), and with all decisions of the arbitrators requiring the affirmative
vote of at least two of the arbitrators. Any judgment on any award rendered by
the arbitrators in accordance with such rules may be entered in any court of
competent jurisdiction. The parties intend to confer on the arbitrators the
authority to resolve disputes between the parties in respect of this Agreement
and agree that no decision by the arbitrators shall have the effect of amending
this Agreement in any respect. The costs of any such arbitration, including
expenses (and legal fees) of the other party thereto, shall be borne by the
party which is the losing party in the arbitration or, if the arbitrators'
decision is unclear in that regard, as the arbitrators shall determine in
accordance with the purpose of this provision to achieve the result that
arbitrations be commenced hereunder in circumstances of actual disputes and not
frivolously or for harassment purposes. The parties hereto agree that any
proceedings pursuant to this Paragraph shall be kept strictly confidential and
shall not be disclosed to any third party except pursuant to court order.
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<PAGE> 11
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the
day and year first set forth above.
The Edison Project Inc.
____________ A Delaware corporation
Attest: /s/ Laura Eshbaugh
Secretary Name: /s/ Laura Eshbaugh
-----------------------------
Title: President
(Corporate Seal)
LINC CAPITAL MANAGEMENT,
a division of LINC CAPITAL, INC.,
a Delaware corporation
By: /s/ Steven E. Byrnes
-------------------------------
Its: Vice President
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<PAGE> 12
THE EDISON PROJECT INC.
-----------------------
Certificate of Assistant Secretary
I, the undersigned Assistant Secretary of The Edison Project Inc., a
Delaware corporation (the "CORPORATION"), Do Hereby Certify That:
1. The following person is a duly authorized officer of the
Corporation; the person named as an officer holds on the date hereof the offices
set forth opposite her name; and the signature set forth below is the true
signature of such person. Such officer is duly authorized to execute and deliver
to LINC CAPITAL MANAGEMENT, a division of LINC CAPITAL, INC. ("LINC") in the
name of the Corporation in its own capacity and as General Partner of The Edison
Project L.P. ("EDISON L.P."), the Equipment Note Loan and Security Agreement,
dated as of June 30, 1997, between LINC and Edison L.P., the related Equipment
Notes issued thereunder, the Warrant Purchase Agreement, dated as of June 30,
1997, between the Corporation and LINC, the Warrant To Purchase Shares of Common
Stock, dated June 30, 1997, made by the Corporation to LINC, and any ancillary
documents delivered by the Corporation or Edison L.P. to LINC relating to any of
the foregoing.
Name Office Signature
/s/ Laura Eshbaugh
------------------------
Laura Eshbaugh President and Secretary
IN WITNESS WHEREOF, the undersigned has signed this Certificate as of
this 30th day of June, 1997.
/s/ Vicki Mayfield
----------------------------
Name: Vicki Mayfield
Title: Assistant Secretary
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<PAGE> 13
NEITHER THIS WARRANT NOR THE SHARES OF STOCK ISSUABLE UPON EXERCISE HEREOF HAVE
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). NO
SALE. TRANSFER OR OTHER DISPOSITION OF THIS WARRANT OR SAID SHARES MAY BE
EFFECTED WITHOUT (i) AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR (ii)
AN OPINION OF COUNSEL FOR THE HOLDER, REASONABLY SATISFACTORY TO THE COMPANY,
THAT SUCH REGISTRATION IS NOT REQUIRED, EXCEPT THAT NO SUCH OPINION SHALL BE
REQUIRED IF SUCH SALE IS PURSUANT TO RULE 144 PROMULGATED UNDER THE ACT.
WARRANT TO PURCHASE
SHARES OF COMMON STOCK
THIS CERTIFIES THAT, for value received LINC CAPITAL MANAGEMENT, a
division of LINC CAPITAL, INC., ("Warrantholder") is entitled to subscribe for
and purchase 45,000 shares (as adjusted pursuant to provisions hereof, the
"Shares") of the fully paid and nonassessable Series A Common Stock (the "Common
Stock") of THE EDISON PROJECT, INC., a Delaware corporation with its principal
place of business at 521 FIFTH AVENUE, 16TH FLOOR, NEW YORK, NY 10175 (the
"Company"), at a price per share of $2.00 (such price and such other price as
shall result, from time to time, from adjustments specified herein is herein
referred to as the "Warrant Price") subject to the provisions and upon the terms
and conditions hereinafter set forth. As used herein, the term "Grant Date"
shall mean JUNE 30, 1997.
1. Term. The purchase rights represented by this Warrant are
exercisable, in whole or in part, at any time and from time to time from and
after the Grant Date and on or prior to the earlier of (i) not less than five
(5) years nor more than seven (7) years after the Borrower's initial public
offering or (ii) ten (10) years from the date of the final loan made to the
Company by Warrantholder under the Equipment Note Loan and Security Agreement,
dated as of the date hereof, between Warrantholder and The Edison Project L.P.
(the "Loan Agreement").
2. Method of Exercise; Net Issue Exercise.
2.1 Method of Exercise; Payment; Issuance of New Warrant. The
purchase rights represented by this Warrant may be exercised by the holder of
this Warrant, in whole or in part and from time to time, by the surrender of
this Warrant (with the notice of exercise form attached hereto as Annex A duly
executed) at the principal office of the Company and by the payment to the
Company, by wire transfer or cashier's check, of an amount equal to the then
applicable Warrant Price per share multiplied by the number of Shares then being
purchased. The holder of this Warrant may make any exercise of this Warrant
contingent upon the consummation of a public offering of the Company's Common
Stock under the Securities Act of 1933, as amended (the "Act"). The
Warrantholder shall be deemed
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<PAGE> 14
to have become the holder(s) of record of, and shall be treated for all purposes
as the record holder(s) of, the Shares represented thereby (and such Shares
shall be deemed to have been issued) immediately prior to the close of business
on the date or dates upon which this Warrant is exercised. In the event of any
exercise of the rights represented by this Warrant, certificates for the Shares
so purchased shall be delivered to the holder hereof as soon as possible (and in
any event within five business days of receipt of such notice) and, unless this
Warrant has been fully exercised or expired, a new Warrant representing the
portion of the Shares, if any, with respect to which this Warrant shall not then
have been exercised shall also be issued to the holder hereof as soon as
possible (and in any event within such five business day period).
2.2 Non-Cash Exercise.
Until the Company has registered the Shares issuable upon exercise of
this Warrant under the Act:
(a) In lieu of payment in cash, the rights represented by this
Warrant may also be exercised by a written notice of exercise in the form of
Annex A attached hereto specifying that the holder of this Warrant wishes to
convert all or any portion of this Warrant (the "Conversion Right") into a
number of Shares equal to the quotient obtained by dividing (x) the value of the
Shares subject to the portion of this Warrant being exercised (determined by
subtracting the aggregate Warrant Price for such Shares in effect immediately
prior to the exercise of the Conversion Right from the aggregate Fair Market
Value of the Shares issuable upon exercise of such portion of this Warrant
immediately prior to the exercise of the Conversion Right) by (y) the Fair
Market Value of one share of Common Stock immediately prior to the exercise of
the Conversion Right.
(b) For purposes of this Section 2.2, the "Fair Market Value"
of the Company's Common Stock shall be equal to the number of shares of Common
Stock multiplied by (i) if the exercise of this Warrant occurs in connection
with an initial public offering if the Company, the "initial price to public"
specified in the final prospectus with respect to the Initial Public Offering or
(ii) if the exercise of this warrant occurs after or not in connection with an
initial public offering of the Company, the average of the closing bid and asked
prices of the Company's Common Stock quoted in the Over-The-Counter Market
Summary on the Nasdaq National Market or the closing price quoted on any
exchange on which the Common Stock is listed, whichever if applicable, as
published in The Wall Street Journal for the fifteen trading days prior to the
date of determination of Fair Market Value. Notwithstanding the foregoing
sentence, if the Company is party to a merger or sale of all or substantially
all of the Company's assets, "Fair Market Value" shall mean the value that would
have been received in respect of a Warrant Share had the Warrant been exercised
prior to such merger or sale. If the Common Stock is not traded
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<PAGE> 15
Over-The-Counter or on an exchange, or the Company is not a party to a merger or
sale of all or substantially all of its assets, the Fair Market Value shall be
determined in good faith by the Company's board of directors upon a review of
all factors relevant to the value of the Company as a going concern without
applying any minority or illiquidity discounts. If the holder hereof does not
believe the determination of Fair Market Value has been determined by the
Company's board of directors in a manner consistent with the criteria as
provided above the holder hereof shall request the Company to re-determine Fair
Market Value or request that the Fair Market Value shall be determined based on
the factors described above by an investment banker of national reputation
selected by the Company and reasonably acceptable to the holder of this Warrant.
The fees and expenses of such investment banker shall be shared equally between
the Company and the holder hereof.
3. Stock Fully Paid; Reservation of Shares. All Shares that may be
issued upon the exercise of the rights represented by this Warrant will, upon
issuance, be validly issued, fully paid and non-assessable, issued in compliance
with all applicable federal and state securities laws, and free from all taxes,
liens and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant may be exercised, the Company will
at all times have authorized and reserved for the purpose of issuance upon
exercise of the purchase rights evidenced by this Warrant, a sufficient number
of shares of its Common Stock to provide for the exercise of the rights
represented by this Warrant.
4. Adjustment of Warrant Price and Number of Shares. The number of
Shares purchasable upon the exercise of this Warrant and the Warrant Price shall
be subject to adjustment from time to time upon the occurrence of certain
events, as follows:
(a) Reclassification or Merger, etc.. In case of any
reclassification, change or conversion of securities of the class issuable upon
exercise of this Warrant (other than a change in par value, or from par value to
no par value, or from no par value to par value, or as a result of a subdivision
or combination), or in case of any consolidation or merger of the Company with
or into another corporation or entity (other than a merger with another
corporation or entity in which the Company is the surviving corporation and
which does not result in any reclassification or change of outstanding
securities issuable upon exercise of this Warrant), or in case of any sale of
all or substantially all of the assets of the Company, the Company, or such
successor or purchasing corporation, as the case may be, shall execute a new
Warrant (in form and substance satisfactory to the holder of this Warrant)
providing that the holder of this Warrant shall have the right to exercise such
new Warrant and upon such exercise to receive, in lieu of each share of Common
Stock theretofore issuable upon exercise of this Warrant, the kind and amount of
shares of stock, other securities, money and property receivable upon such
reclassification, change, consolidation, sale of all or substantially all of the
Company's assets or merger by a
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<PAGE> 16
holder of one share of Common Stock. Such new Warrant shall provide for
adjustments that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 4. The provisions of this section (a)
shall similarly apply to successive reclassifications, changes, consolidations,
mergers, sales of assets and transfers.
(b) Subdivisions or Combination of Shares, Stock Dividends. In
the event that the Company shall at any time subdivide the outstanding shares of
Common Stock, or shall issue a stock dividend on its outstanding shares of
Common Stock, the number of Shares issuable upon exercise of this Warrant
immediately prior to such subdivision or immediately prior to the issuance of
such stock dividend shall be proportionately increased, and the Warrant Price
shall be proportionately decreased, and in the event that the Company shall at
any time combine the outstanding shares of Common Stock, the number of Shares
issuable upon exercise of this Warrant immediately prior to such combination
shall be proportionately decreased, and the Warrant Price shall be
proportionately increased, effective at the close of business on the date of
such subdivision, stock dividend or combination, as the case may be.
(c) No Impairment. The Company will not, by amendment of its
Amended and Restates Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Company, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 4 and in the taking of all
such action as may be reasonably requested by the Warrantholder in order to
protect the rights of the holder of this Warrant against impairment.
(d) Notices of Record Date. In case at any time: (i) the
Company shall declare any dividend upon its Common Stock payable in cash or
stock or make any other distribution to the holders of its Common Stock; (ii)
the Company shall offer for subscription pro rata to the holders of its Common
Stock any additional shares of stock of any class, or other rights; (iii) there
shall be any capital reorganization or reclassification of the capital stock of
the Company, or a consolidation or merger of the Company with or into, or a sale
of all or substantially all its assets to another entity or entities; or (iv)
there shall be a voluntary or involuntary dissolution, liquidation or winding up
of the Company; then, in any one or more of said cases, the Company shall give,
by first class mail, postage prepaid, or by telex or telecopier, addressed to
the holder of this Warrant at the address of such holder as shown on the books
of the Corporation, (A) at least 10 business 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 or subscription rights or for determining rights
to vote in respect of any such reorganization, reclassification,
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<PAGE> 17
consolidation, merger, sale, dissolution, liquidation or winding up, and (B) in
the case of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, at least 10 business days' prior
written notice of the date when the same shall take place. Such notice in
accordance with the foregoing clause (A) shall also specify, in the case of any
such dividend, distribution or subscription rights, the date on which the
holders of Common Stock shall be entitled thereto, and such notice in accordance
with the foregoing clause (B) shall also specify the date on which the holders
of Common Stock shall be entitled to exchange their Common Stock for securities
or other property deliverable upon such reorganization, reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up, as the case
may be.
5. Notice of Adjustments. Whenever the Warrant Price shall be adjusted
pursuant to the provisions hereof, the Company shall within ten (10) business
days of such adjustment deliver a certificate signed by its chief financial
officer to the holder of this Warrant setting forth, in reasonable detail, the
event requiring the adjustment, the amount of the adjustment, the method by
which such adjustment was calculated, and the Warrant Price after giving effect
to such adjustment.
6. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder, but in lieu of such fractional
shares the Company shall make a cash payment therefor upon the basis of the
Warrant Price then in effect.
7. Compliance with Securities Act; Disposition of Warrant or Shares of
Common Stock.
(a) Compliance with Securities Act. The holder of this
Warrant, by acceptance hereof, agrees that this Warrant, and the Common Stock to
be issued upon exercise hereof are being acquired for investment purposes only
and that such holder will not offer, sell or otherwise dispose of this Warrant
or any shares of Common Stock to be issued upon exercise hereof except under
circumstances which will not result in a violation of the Act and as permitted
by Section 7(b) below. This Warrant and all shares of Common Stock issued upon
exercise of this Warrant (unless registered under the Act) shall be stamped or
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"). NO SALE OR DISPOSITION MAY
BE EFFECTED WITH OUT (i) AN EFFECTIVE REGISTRATION STATEMENT
RELATED THERETO OR (ii) AN OPINION OF COUNSEL FOR THE HOLDER,
REASONABLY SATISFACTORY TO THE COMPANY, THAT SUCH REGISTRATION IS NOT
REQUIRED, EXCEPT THAT NO SUCH OPINION SHALL BE REQUIRED IF SUCH SALE IS
PURSUANT TO RULE
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<PAGE> 18
144 PROMULGATED UNDER THE ACT, AND THE TRANSFER OF THIS SECURITY IS
SUBJECT TO THE CONDITIONS SPECIFIED IN THE WARRANT TO PURCHASE SHARES
OF COMMON STOCK, DATED AS OF JUNE 30, 1997, BETWEEN LINC CAPITAL
MANAGEMENT AND THE EDISON PROJECT INC.
(b) Disposition of Warrant and Shares. With respect to any
offer, sale or other disposition of this warrant or any shares of Common Stock
acquired pursuant to the exercise of this Warrant prior to registration of such
shares, the holder hereof and each subsequent holder of this Warrant agrees to
give written notice to the Company prior thereto, describing briefly the manner
thereof, together with a written opinion of such holder's counsel, if reasonably
requested by the Company, to the effect that such offer, sale or other
disposition may be effected without registration or qualification (under the Act
as then in effect) of this Warrant or such shares of Common Stock and indicating
whether or not under the Act certificates for this Warrant or such shares of
Common Stock to be sold or otherwise disposed of require any restrictive legend
as to applicable restrictions on transferability in order to insure compliance
with the Act. Each certificate representing this Warrant or the shares of Common
Stock thus transferred (except a transfer pursuant to Rule 144) shall bear a
legend as to the applicable restrictions on transferability in order to insure
compliance with the Act, unless in the aforesaid opinion of counsel for the
holder, such legend is not required in order to insure compliance with the Act.
Nothing herein shall restrict the transfer of this Warrant or any portion hereof
by the initial holder hereof or any successor holder to any affiliate of such
holder, to any partnership affiliated with such holder, or to any partner of any
such partnership, provided such transfer may be made in compliance with
applicable federal and state securities laws provided, further, that any such
transferee shall be a financial institution. The Company may issue stop transfer
instructions to its transfer agent in connection with the foregoing
restrictions.
8. Rights as Shareholders. No holder of this Warrant. as such, shall be
entitled to vote or receive dividends or be deemed the holder of Common Stock
hereof or otherwise be entitled to any voting or other rights as a shareholder
of the Company, until this Warrant shall have been exercised and the Shares
purchasable upon the exercise shall have become deliverable, as provided herein.
9. Issuance Tax. The issuance of certificates for shares of Common
Stock upon exercise of this Warrant shall be made without charge to the holder
hereof for any issuance tax in respect hereof, provided that the Company shall
not be required to pay any tax which may be payable in respect of any transfer
involved in the issuance and delivery of any certificate in a name other than
that of the holder of this Warrant.
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<PAGE> 19
10. Modification and Waiver. This Warrant and any provision hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the Company and the holder of this Warrant.
11. Notices. Any notice, request or other document required or
permitted to be given or delivered to the holder hereof or the Company shall be
delivered, or shall be sent by certified or registered mail, postage prepaid, to
such holder at its address as shown on the books of the Company or to the
Company at the address indicated therefore on the signature page of this
Warrant.
12. Binding Effect on Successors. This Warrant shall be binding upon
any corporation succeeding the Company by merger, consolidation or acquisition
of all or substantially all of the Company's assets, and all of the obligations
of the Company relating to the Common Stock issuable upon the exercise of this
Warrant shall survive the exercise and termination of this Warrant and all of
the covenants and agreements of the Company shall inure to the benefit of the
successors and assigns of the holder hereof. The Company will, at the time of
the exercise of this Warrant, in whole or in part, upon request of the holder
hereof but at the Company's expense, acknowledge in writing its continuing
obligation to the holder hereof in respect of any rights (including, without
limitation, any right to registration of the shares of Registrable Shares) to
which the holder hereof shall continue to be entitled after such exercise in
accordance with this Warrant; provided that the failure of the holder hereof to
make any such request shall not affect the continuing obligation of the Company
to the holder hereof in respect of such rights.
13. Lost Warrants or Stock Certificates. The Company covenants to the
holder hereof that upon receipt of evidence reasonably satisfactory to the
Company of the loss, theft, destruction, or mutilation of this Warrant or any
stock certificate and, in the case of any such loss, theft or destruction, upon
receipt of an indemnity reasonably satisfactory to the Company, or in the case
of any such mutilation upon surrender and cancellation of such Warrant or stock
certificate, the Company will make and deliver a new Warrant or stock
certificate, or like tenor, in lieu of the lost, stolen, destroyed or mutilated
Warrant or stock certificate.
14. Descriptive Headings. The descriptive headings of the several
paragraphs of this Warrant are inserted for convenience only and do not
constitute a part of this Warrant.
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<PAGE> 20
15. Governing Law. THIS WARRANT SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, AND THE RIGHTS OF THE PARTIES SHALL BE GOVERNED BY, THE LAWS OF
THE STATE OF NEW YORK.
The Edison Project, Inc.
By: /s/ Laura Eshbaugh
-----------------------
Name: Laura Eshbaugh
Its: President
Date: JUNE 30, 1997
Accepted and Agreed:
LINC Capital, Inc.
By: /s/ Steven E. Byrnes
-----------------------
Name: Steven E. Byrnes
Its: Vice President
-8-
<PAGE> 21
ANNEX A
Notice of Exercise
To:
THE EDISON PROJECT INC.
521 FIFTH AVENUE, 16th FLOOR
NEW YORK, NY 10175
Attention: Chief Financial Officer
[1. The undersigned hereby elects to purchase shares of Common
Stock of THE EDISON PROJECT INC. pursuant to the terms of the attached Warrants,
and tenders herewith payment of the purchase price of such shares in full.]
[1. The undersigned hereby elects to purchase shares of Common
Stock of THE EDISON PROJECT INC. pursuant to an non-cash conversion of the
Warrant as provided in Section 2.2 of the Warrant.*]
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name or names as are specified
below:
LINC CAPITAL MANAGEMENT,
a division of LINC CAPITAL, INC.
303 EAST WACKER DRIVE, SUITE 1000
CHICAGO, ILLINOIS 60601-5212
3. The undersigned represents that the aforesaid shares are being
acquired for the account of the undersigned for investment and not with a view
to, or for resale in connection with, the distribution thereof and that the
undersigned has no present intention of distributing such shares.
LINC CAPITAL MANAGEMENT,
a division of LINC CAPITAL, INC.
By: /s/ Steven E. Byrnes
-----------------------
(Signature)
Its: Vice President
-----------------------
- -----------------------
(Date)
- -----------------------
* Alternative for non-cash exercise pursuant to Section 2.2.
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<PAGE> 1
Exhibit 10.18
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.
STOCK SUBSCRIPTION WARRANT
To Purchase Series A Common Stock of
The Edison Project Inc. (the "Company")
DATE OF INITIAL ISSUANCE: August 20, 1997
THIS CERTIFIES THAT for value received, TRANSAMERICA BUSINESS CREDIT
CORPORATION or its registered assigns (hereinafter called the "Holder") is
entitled to purchase from the Company, at any time during the Term of this
Warrant, Seventy-seven thousand (77,000) 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 August 31, 2004.
WARRANT PRICE - $2.00 per share, subject to adjustment in accordance
with Section 5 hereof.
WARRANT - this Warrant, issued in connection with a Commitment Letter
dated July 28, 1997 executed by the Company and Transamerica Business Credit
<PAGE> 2
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.
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)
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<PAGE> 3
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 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
-3-
<PAGE> 4
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 Company Shares, 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 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
-4-
<PAGE> 5
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 spilt-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
-5-
<PAGE> 6
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.
(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
-6-
<PAGE> 7
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 maybe, 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.
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
-7-
<PAGE> 8
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
Warrant 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.
-8-
<PAGE> 9
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.
-9-
<PAGE> 10
(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, 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 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
-10-
<PAGE> 11
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, c/o WSI Inc., 366 NationsBank Center, 550 Main Street, Knoxville,
Tennessee 37902, Telephone: (423) 546-0999, Facsimile: (423) 546-1090,
Attention: Laura Eshbaugh, and to Cadwalader, Wickersham & Taft, 100 Maiden
Lane, New York, New York 10038, Telephone: (212) 504-600, Facsimile: (212)
504-6666, Attention: John F. Fritts, 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 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.
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<PAGE> 12
IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by
its duly authorized officer this 15th day of August, 1997.
THE EDISON PROJECT INC.
[CORPORATE SEAL]
By: /s/ Laura Eshbaugh
-----------------------------
Title: President
--------------------------
For purposes of Section 9 hereof, the Holder has caused this Warrant
to be signed by its duly authorized officer.
TRANSAMERICA BUSINESS
CREDIT CORPORATION
By: /s/ Robert D. Pomeroy, Jr.
-----------------------------
Title: Executive Vice President
--------------------------
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<PAGE> 1
EXHIBIT 10.19
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.
STOCK SUBSCRIPTION WARRANT
To Purchase Series A Common Stock of
The Edison Project Inc. (the "Company")
DATE OF INITIAL ISSUANCE: October 30,1997
THIS CERTIFIES THAT for value received, TRANSAMERICA BUSINESS CREDIT
CORPORATION or its registered assigns (hereinafter called the "Holder") is
entitled to purchase from the Company, at any time during the Term of this
Warrant, Two Hundred Fifty Thousand (250,000) 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 31, 2004.
Warrant Price - $2.30 per share, subject to adjustment in accordance
with Section 5 hereof.
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Warrant - this Warrant, issued in connection with a Commitment Letter
dated October 2, 1997 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
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 1.1
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
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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 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 or
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
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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 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 stocks 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
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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.
(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 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
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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 even requiring such adjustment.
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
s 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 thereof, provided that the Holder shall not transfer this
Warrant 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,
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<PAGE> 7
theft or destruction or 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 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.
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 the
counsel (which counsel may be inside counsel to the Holder) satisfactory to the
Company's counsel to the affect 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 or 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
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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, 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 nor 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.
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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, c/o WSI Inc., 366 NationsBank Center, 550 Main Street, Knoxville,
Tennessee 37902, Telephone: (423) 546-0999, Facsimile: (423) 546- 1090,
Attention: Laura Eshbaugh and to Cadwalader, Wickersham & Taft, 100 Maiden Lane,
New York, New York 10038, Telephone: (212) 504-600, Facsimile: (212) 304-6666,
Attention: John F. Fritts, 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 provisions
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 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 of
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 30th day of October, 1997.
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THE EDISON PROJECT INC.
By: The Edison Project Inc.,
------------------------
Its General Partner
[CORPORATE SEAL]
By: /s/ Laura Eshbaugh
------------------------
Name: Laura Eshbaugh
Title: President
TRANSAMERICA BUSINESS
CREDIT CORPORATION
By: /s/ Gary P. Moro
----------------------
Name: Gary P. Moro
Title: Vice President
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EXHIBIT 10.20
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.
STOCK SUBSCRIPTION WARRANT
To Purchase Series A Common Stock of
The Edison Project Inc. (the "Company")
DATE OF INITIAL ISSUANCE: July 17,1998
THIS CERTIFIES THAT for value received, TBCC FUNDING TRUST 11 or its
registered assigns (hereinafter called the "Holder") is entitled to purchase
from the Company, at any time during the Term of this Warrant, One Hundred
Thousand (100,000) 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 July 16, 2003.
Warrant Price - $4.00 per share, subject to adjustment in accordance
with Section 5 hereof.
Warrant - this Warrant, issued in connection with a Commitment Letter
dated October 2, 1997 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.
<PAGE> 2
Warrant Shares - shares of Common Stock purchased or purchasable by the
Holder of this Warrant upon the exercise hereof.
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: (1)
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)
CMT 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
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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 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
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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 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.
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(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.
(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
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<PAGE> 6
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.
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
Warrant 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
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<PAGE> 7
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.
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)
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<PAGE> 8
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 me-its 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, 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.
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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, c/o WSI Inc., 366 NationsBank Center, 550 Main Street, Knoxville,
Tennessee 37902, Telephone: (423) 546-0999, Facsimile: (423) 546- 1090,
Attention: Laura Eshbaugh, and to Cadwalader, Wickersham & Taft, 100 Maiden
Lane, New York, New York 10038, Telephone: (212) 504-6000, Facsimile: (212)
504-6666, Attention: John F. Fritts, 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 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
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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 17th day of July, 1998.
THE EDISON PROJECT INC.
[CORPORATE SEAL]
By: /s/ Laura Eshbaugh
-------------------------------------
Title: President
TRANSAMERICA BUSINESS
CREDIT CORPORATION
By: /s/ Robert D. Pomeroy, Jr.
- -----------------------------------
Name: Robert D. Pomeroy, Jr.
Title: Executive Vice President
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<PAGE> 1
Exhibit 10.21
THE EDISON PROJECT INC.
SERIES F SUBSCRIPTION AGREEMENT
This Agreement dated as of July 2, 1999 is entered into by and among
The Edison Project Inc., a Delaware corporation (the "Company"), and the
individuals and entities listed on Exhibit A hereto (the "Purchasers").
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. Authorization and Sale of Shares.
1.1 Authorization. The Company has duly authorized the sale
and issuance, pursuant to the terms of this Agreement, of 4,878,048 shares of
its Series F Convertible Preferred Stock, $.01 par value per share (the "Series
F Preferred"), and one (1) share of its Series I Common Stock, $.01 par value
(the "Series I Common"), each having the rights, restrictions, privileges and
preferences set forth in the Fourth Amended and Restated Certificate of
Incorporation attached hereto as Exhibit B (the "Certificate"). The Company has,
or before the First Closing (as defined below) will have, adopted and filed the
Certificate with the Secretary of State of the State of Delaware.
1.2 Sale of Shares. Subject to the terms and conditions of
this Agreement, at the First Closing the Company will sell and issue to each of
the Purchasers, and each of the Purchasers will purchase, 4,878,048 shares of
Series F Preferred, and at the Second Closing the Company will sell and issue to
one Purchaser, Vulcan Ventures Incorporated ("Vulcan"), and such Purchaser will
purchase, one share of Series I Common, at the purchase price of $6.15 per share
(the "Purchase Price"). All of the shares of Series F Preferred and Series I
Common, being sold by the Company under this Agreement are referred to as the
"Preferred Shares" and "Common Share", respectively, and collectively as the
"Shares."
1.3 Use of Proceeds. The Company will use the proceeds from
the sale of the Shares for general corporate purposes. No portion of such
proceeds will be used (a) to purchase stock in, provide capital to, or repay any
indebtedness incurred for the purpose of investing in, a company licensed under
the Small Business Investment Act of 1958, as amended (the "Small Business
Investment Act"), (b) to acquire realty or to discharge an obligation relating
to the prior acquisition of realty (except that a portion of the proceeds may be
used (i) to acquire an existing property, provided that at least 51% of the
usable square footage of such property will be used for an eligible business
purpose and (ii) to build or renovate a building, provided that at least 67% of
the usable square footage of such property will be used
<PAGE> 2
for an eligible business purpose), (c) outside the United States (except to
acquire abroad materials and equipment or property rights for use or sale in the
United States), or (d) for any purpose contrary to the public interest
(including but not limited to activities which are in violation of law) or
inconsistent with free competitive enterprise, in each case, within the meaning
of Section 107.720 of the United States Code of Federal Regulations.
2. The Closings.
(a) The closing of the sale and purchase of the Preferred
Shares under this Agreement (the "First Closing") shall take place at the
offices of Hale and Dorr LLP, The Willard Office Building, 1455 Pennsylvania
Avenue, N.W., Washington, D.C. at 9:00 a.m. on July 2, 1999, or at such other
time, date and place as are mutually agreeable to the Company and the
Purchasers, but in no event later than July 31, 1999. The closing of the sale
and purchase of the Common Share under this Agreement (the "Second Closing")
shall take place at said offices of Hale and Dorr LLP at 9:00 a.m. two business
days following the termination or expiration of waiting periods under the HSR
Act (as defined herein), or at such other time, date and place as are mutually
agreeable to the Company and Vulcan. At each Closing, the Company shall deliver
to each of the Purchasers or Vulcan, as the case may be, one or more
certificates for the number of Shares being purchased at such Closing by such
Purchaser, registered in the name of such Purchaser, against payment to the
Company of the Purchase Price, by wire transfer, check, cancellation of
indebtedness or other method acceptable to the Company. The dates of the
Closings are hereinafter referred to as the "First Closing Date" and the "Second
Closing Date". If at the Closings any of the conditions specified in Sections 5,
6, 7 or 8, as applicable, shall not have been fulfilled, each of the Purchasers
shall, at his, her or its election, be relieved of all of his, her or its
obligations under this Agreement without thereby waiving any other rights he,
she or it may have by reason of such failure or such non-fulfillment.
(b) The Company may sell, at any time prior to July 31, 1999,
in one or more closings (each, a "Subsequent Closing"), up to 2,121,952
additional Preferred Shares at the Purchase Price, to such purchasers (each, an
"Additional Purchaser") as may be approved by the Board of Directors of the
Company. At each Subsequent Closing, (i) the Company and each Additional
Purchaser shall execute and deliver a counterpart signature page hereto,
whereupon such Additional Purchaser shall become a "Purchaser" hereunder and the
Preferred Shares purchased by such Additional Purchaser shall be deemed to be
"Preferred Shares" for purposes of this Agreement, and (ii) the Company shall
cause Exhibit A hereto be amended to reflect the purchases made by the
Additional Purchasers at each Subsequent Closing. At each Subsequent Closing,
the Company shall deliver to each Additional Purchaser a certificate for the
number of Preferred Shares being purchased at the Subsequent Closing by such
Additional Purchaser, registered in the name of such Additional Purchaser,
against payment to the Company of the Purchase Price in the manner
2
<PAGE> 3
specified above. The Company shall deliver to each Purchaser, within 15 days
after any Subsequent Closing, written notice of such Subsequent Closing (which
notice shall specify the names of each Additional Purchaser and the number of
Preferred Shares issued to each).
3. Representations of the Company. Except as disclosed by the Company
in Exhibit C hereto, the Company hereby represents and warrants to each of the
Purchasers that the statements contained in this Section 3 are true, complete
and correct as of the date hereof.
3.1 Organization and Standing. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has all requisite corporate power and authority to conduct
its business as presently conducted and to enter into, deliver and perform this
Agreement, the Shareholders' Agreement (as defined below) and each other
document or instrument executed by it, or any of its officers, in connection
herewith (together, the "Transaction Agreements") and to carry out the
transactions contemplated by the Transaction Agreements. The Company is duly
qualified to do business in every jurisdiction in which the failure so to
qualify would have a material adverse effect on the business, operations, assets
or condition (financial or otherwise) of the Company (a "Company Material
Adverse Effect"). The Company has at all times complied with all provisions of
its Amended and Restated Certificate of Incorporation, as amended, and By-laws
and is not in default under, or in violation of, any such provision.
3.2 Capitalization. The authorized capital stock of the
Company (immediately prior to the First Closing) consists of 200,424,233 shares
consisting only of (A) 114,893,179 shares of Common Stock, par value $.01 per
share (the "Common Stock"), consisting of: (i) 104,466,145 shares of Series A
Common Stock, par value $.01 per share (the "Series A Common Stock"), of which
6,214,704 shares are issued and outstanding, of which 75,104,028 are reserved
for the conversion of the Preferred Stock (as defined below) and of which
23,147,413 shares have been reserved for issuance pursuant to outstanding stock
options and outstanding warrants of the Company; (ii) one share of Series B
Common Stock, par value $.01 per share, which one share is issued and
outstanding; (iii) one share of Series C Common Stock, par value $.01 per share,
which one share is issued and outstanding; (iv) one share of Series D Common
Stock, par value $.01 per share, which one share is issued and outstanding; (v)
one share of Series E Common Stock, par value $.01 per share, which one share is
issued and outstanding; (vi) one share of Series F Common Stock, par value $.01
per share, which one share is issued and outstanding; (vii) one share of Series
G Common Stock, par value $.01 per share, which one share is issued and
outstanding; (viii) one share of Series H Common Stock, par value $.01 per
share, which one share is issued and outstanding; (ix) one share of Series I
Common Stock, par value $.01 per share, which share is not issued or
outstanding; and (x) 9,827,026 shares of Non-Voting Common Stock, par value $.01
per share, of which no shares are issued and outstanding, and (B) 85,531,054
shares of Preferred Stock, par value
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$.01 per share, consisting of: (i) 31,000,000 shares of Series A Convertible
Preferred Stock, par value $0.01 per share, of which 30,294,435 shares are
issued and outstanding; (ii) 1,010,101 shares of Series B Convertible
Exchangeable Preferred Stock, par value $0.01 per share, of which 1,010,101
shares are issued and outstanding; (iii) 6,258,608 shares of Series C
Convertible Exchangeable Preferred Stock, par value $0.01 per share, of which
6,258,608 shares are issued and outstanding; (iv) 25,077,843 shares of Series D
Convertible Preferred Stock par value $0.01 per share, of which 14,101,721
shares are issued and outstanding; (v) 6,759,420 shares of Non-Voting Series E
Convertible Preferred Stock, par value $0.01 per share, of which no shares are
issued and outstanding; (vi) 11,757,476 shares of Series F Convertible Preferred
Stock, $.01 par value per share, of which 4,757,476 shares are issued and
outstanding; and (vii) 3,667,606 shares of Non-Voting Series G Convertible
Preferred Stock, par value $0.01 per share, of which 800,000 shares are issued
and outstanding. The rights, privileges and preferences of the Common Stock and
the Preferred Stock are as set forth in the Certificate. All of the issued and
outstanding shares of capital stock of the Company have been duly authorized and
validly issued and are fully paid and nonassessable and were issued in
compliance with all applicable federal and state securities laws. Except as
provided in this Agreement or disclosed on Exhibit C, (i) no subscription,
warrant, option, convertible security or other right (contingent or otherwise)
to purchase or acquire any shares of capital stock of the Company is authorized
or outstanding, (ii) the Company has no obligation (contingent or otherwise) to
issue capital stock or any subscription, warrant, option, convertible security
or other such right or to issue or distribute to holders of any shares of its
capital stock any evidences of indebtedness or assets of the Company, (iii) the
Company has no obligation (contingent or otherwise) to purchase, redeem or
otherwise acquire any shares of its capital stock or any interest therein or to
pay any dividend or make any other distribution in respect thereof, and (iv)
there are no outstanding or authorized stock appreciation, phantom stock or
similar rights with respect to the Company.
3.3 Subsidiaries, Etc. The Company has no subsidiaries and
does not own or control, directly or indirectly, any shares of capital stock of
any other corporation or any interest in any partnership, joint venture or other
non-corporate business enterprise or other Person (as defined). In connection
with the merger of Sprout Edison Project, Inc. with and into the Company, and
with the dissolution and winding up of The Edison Project L.P., all material
assets of Sprout Edison Project, Inc. and The Edison Project L.P. were
transferred to the Company as of January 4, 1999 without any distributions to
equity holders other than the Company or to any other person or entity.
3.4 Securityholder Lists. Attached as Exhibit D is a true and
complete list of the securityholders of the Company, showing the number of
shares of Common Stock or other securities of the Company held by each
securityholder as of the date of this Agreement and, in the case of options,
warrants and other convertible securities, the exercise price thereof and the
number and type of securities issuable
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thereunder. Except as provided in this Agreement or disclosed on Exhibit C,
there are no agreements, written or oral, between the Company and any holder of
its securities, or, to the best of the Company's knowledge, among any holders of
its securities, relating to the acquisition (including without limitation rights
of first refusal, anti-dilution or pre-emptive rights), disposition,
registration under the Securities Act of 1933, as amended (the "Securities
Act"), or voting of the capital stock of the Company.
3.5 Issuance of Shares. The issuance, sale and delivery of the
Shares in accordance with this Agreement, and the issuance and delivery of the
shares of Common Stock and Series F Preferred or Series G Preferred (as
applicable) issuable upon conversion or exchange of the Shares, have been, or
will be on or prior to the Closings, duly authorized by all necessary corporate
action on the part of the Company, and all such shares have been duly reserved
for issuance. The Shares when so issued, sold and delivered against payment
therefor in accordance with the provisions of this Agreement, and the shares of
Common Stock and Series F Preferred or Series G Preferred (as applicable)
issuable upon conversion or exchange of the Shares, when issued upon such
conversion or exchange, will be duly and validly issued, fully paid and
nonassessable. The Shares, when so issued, sold and delivered against payment
therefor in accordance with the provisions of this Agreement will be free and
clear of all Security Interests (as defined below) and other restrictions other
than those contemplated by the Shareholders' Agreement (as defined below) and
will not have been issued in violation of the preemptive or similar rights of
any Person.
3.6 Authority; No Conflict. The execution, delivery and
performance by the Company of the Transaction Agreements and the consummation by
the Company of the transactions contemplated thereby, including, without
limitation, the adoption and filing of the Certificate, have been duly
authorized by all necessary corporate and stockholder action. The Transaction
Agreements have each been duly executed and delivered by the Company and each
constitutes a valid and binding obligation of the Company enforceable in
accordance with its terms, subject as to enforcement of remedies to applicable
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
generally the enforcement of creditors' rights and subject to a court's
discretionary authority with respect to the granting of a decree ordering
specific performance or other equitable remedies. The execution and delivery of
the Transaction Agreements and the performance by the Company of the
transactions contemplated thereby (including, without limitation, the adoption
and filing of the Certificate) and compliance with their respective provisions
by the Company will not (a) conflict with or violate any provision of the
Certificate of Incorporation or By-laws of the Company, (b) except for filings
required to comply with the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR Act"), require on the part of the Company any filing
with, or any permit, authorization, consent or approval of, any court,
arbitrational tribunal, administrative agency or commission or other
governmental or regulatory authority or agency (each
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of the foregoing is hereafter referred to as a "Governmental Entity"), (c)
conflict with, result in a breach of, constitute (with or without due notice or
lapse of time or both) a default under, result in the acceleration of, create in
any party the right to accelerate, terminate, modify or cancel, or require any
notice, consent or waiver under, any contract, lease, sublease, license,
sublicense, franchise, permit, indenture, agreement or mortgage for borrowed
money, instrument of indebtedness, Security Interest (as defined below) or other
arrangement to which the Company is a party or by which the Company is bound or
to which its assets are subject, other than any of the foregoing events listed
in this clause (c) which do not and will not, individually or in the aggregate,
result in a Company Material Adverse Effect, (d) result in the imposition of any
Security Interest upon any assets of the Company or (e) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Company or any
of its properties or assets. For purposes of this Agreement, "Security Interest"
means any mortgage, pledge, security interest, encumbrance, charge, or other
lien (whether arising by contract or by operation of law).
3.7 Consents. No consent, approval, waiver, permit, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any governmental authority or any other individual, partnership,
corporation, unincorporated organization or association, limited liability
company, trust or other entity (collectively, a "Person") is required on the
part of the Company in connection with the execution and delivery of the
Transaction Agreements, the offer, issuance, sale and delivery of the Shares,
the issuance and delivery of the shares of Common Stock of the Company issuable
upon conversion or exchange of the Shares or consummation by the Company of the
other transactions to be consummated at the Closings, as contemplated by the
Transaction Agreements (including, without limitation, the adoption and filing
of the Certificate), except such as shall have been made or obtained prior to
and shall be effective on and as of the Closings and such filings required to be
made after the Closings under applicable federal and state securities laws, all
of which filings are specified in Exhibit C. Based on the representations made
by each of the Purchasers in Section 4 of this Agreement, the offer and sale of
the Shares to each of the Purchasers will be in compliance with applicable
federal and state securities laws.
3.8 Litigation. There is no action, suit or proceeding, or
governmental inquiry or investigation, pending, or, to the best of the Company's
knowledge, threatened, against the Company, or, to the best of the Company's
knowledge, any director, executive officer or key employee of the Company, or
affecting any of the Company's assets or properties, which questions the
validity of the Transaction Agreements or the right of the Company to enter into
and perform the transactions contemplated by the Transaction Agreements or
otherwise seeks to enjoin or challenges such transactions, or which might
result, either individually or in the aggregate, in a Company Material Adverse
Effect.
3.9 Financial Statements; No Undisclosed Liabilities.
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(a) The Company has furnished to each of the
Purchasers a complete and correct copy of (i) the audited balance sheet of the
Company at June 30, 1998 and the related audited statements of operations and
cash flows for the fiscal year then ended, and (ii) the unaudited balance sheet
of the Company (the "Balance Sheet") at March 31, 1999 (the "Balance Sheet
Date") and the related statements of operations and cash flow for the nine
months then ended, (collectively, the "Financial Statements"). Except as
otherwise previously disclosed to the Purchasers in writing, the Financial
Statements are complete and correct, are in accordance with the books and
records of the Company and present fairly the financial condition and results of
operations and cash flows of the Company, as at the dates and for the periods
indicated, and have been prepared in accordance with generally accepted
accounting principles consistently applied, except that the unaudited Financial
Statements may not be in accordance with generally accepted accounting
principles only with respect to the absence of footnotes normally contained
therein and are subject to normal year-end audit adjustments which in the
aggregate will not be material.
(b) Since the Balance Sheet Date, except as
previously disclosed in writing to the Purchasers the Company has not incurred
any liabilities or obligations of any nature (whether accrued, absolute,
contingent or otherwise) which would be required by generally accepted
accounting principles to be reflected on a consolidated balance sheet of the
Company (including the notes thereto), other than in the ordinary course of
business, consistent with past practice.
3.10 Taxes. The amount shown on the Balance Sheet as provision
for taxes is sufficient in all material respects for payment of all accrued and
unpaid federal, state, county, local and foreign taxes for the period then ended
and all prior periods. The Company has timely filed or has obtained presently
effective extensions with respect to all federal, state, county, local and
foreign tax returns which are required to be filed by it, such returns are true
and correct and all taxes shown thereon to be due have been timely paid,
together with any related interest, fees, penalties or other charges, with
exceptions not material, individually or in the aggregate, to the Company.
Federal income tax returns of the Company have not been audited by the Internal
Revenue Service, and no controversy with respect to taxes of any type is pending
or, to the best of the Company's knowledge, threatened, and there are in effect
no waivers of the applicable statute of limitations for taxes in any
jurisdiction for any period. The Company has withheld or collected from each
payment made to its employees the amount of all taxes required to be withheld or
collected therefrom and has paid all such amounts to the appropriate taxing
authorities when due. The Company was not included and is not includible in the
tax return of any affiliated, consolidated, combined, unitary or similar group
of which the Company is or was a member, with any corporation other than such a
return of which the company is the common parent corporation. The Company is not
a party to or bound by any obligations under any tax sharing, tax allocation,
tax indemnity or similar agreement or arrangement.
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3.11 Insurance. The Company maintains valid policies of
workers' compensation insurance and of insurance with respect to its properties
and business of the kinds and in the amounts not less than is customarily
obtained by corporations of established reputation engaged in the same or
similar business or may otherwise be required by law, including, without
limitation, insurance against loss, damage, fire, theft, public liability and
other risks.
3.12 Compliance. The Company (and its predecessors) has
complied with all laws, regulations and orders applicable to its present and
proposed business and has all authorizations, permits and licenses required
thereby, except for those the absence of which would not have a Company Material
Adverse Effect. No violations or notices of failure to comply have been issued
or recorded in respect of such authorizations, permits and licenses, and the
Company has no knowledge of any reason why such authorizations, permits and
licenses may be revoked or suspended. With respect to any such required
authorizations, permits and licenses, applications for which are either pending
or contemplated to be made pursuant to the business strategy of the Company, the
Company does not know of any reason why such authorizations, permits and
licenses should not be approved and granted by the appropriate Governmental
Entity. To the best of the Company's knowledge, there is no provision of any
state or federal judgment, decree, order, statute, rule or regulation applicable
to or binding upon the Company, which materially adversely affects or, so far as
the Company may now foresee, in the future is reasonably likely to result in or
have a Company Material Adverse Effect.
3.13 Absence of Changes. Since the Balance Sheet Date (i) the
business of the Company has been operated only in the ordinary course,
consistent with past practice, and other than as previously disclosed in writing
to the Purchasers there has been no material adverse change in the business,
operations, condition (financial or otherwise), or results of operations of the
Company, other than changes occurring in the ordinary course of business (which
ordinary course changes have not, individually or in the aggregate had a Company
Material Adverse Effect); (ii) except as reflected in the unaudited Financial
Statements or as described on Exhibit C, the Company has not authorized or made
any distributions, or declared or paid any dividends, upon or with respect to
any of its capital stock, or other equity interests, nor has the Company
redeemed, purchased or otherwise acquired, or issued or sold, any of its capital
stock or other equity interests; and (iii) there has been no material change in
any compensation, arrangement or agreement with any key employee, director,
stockholder or Affiliate (as defined below). "Affiliate" of a specified person
or entity shall mean a person or entity that directly, or indirectly through one
or more intermediaries, controls or is controlled by, or is under common control
with, the person or entity specified, provided, however, that the Purchasers
acknowledge that the Company has continued to incur losses since the Balance
Sheet Date.
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3.14 Books and Records. The minute books of the Company
contain complete and accurate records of all actions taken by its stockholders
and its Board of Directors and committees thereof. The stock ledger of the
Company is complete in all material respects and reflects all issuances,
transfers, repurchases and cancellations of shares of capital stock of the
Company.
3.15 Contracts. Except as set forth in Exhibit C, all of the
contracts and agreements which are material to the business, assets, operations
or condition (financial or otherwise) of the Company are in full force and
effect and constitute valid and binding obligations of the Company; neither the
Company, nor, to the best knowledge of the Company, any other party thereto, is
in default of any of its obligations under any such contracts or agreements in a
manner which could reasonably be expected to have a Company Material Adverse
Effect; and none of such contracts or agreements is currently being
renegotiated.
3.16 Stockholder Notice. The Company has given the requisite
notice, subject only to the expiration or waiver of applicable notice periods,
to all stockholders with preemptive rights as required in connection with the
transactions contemplated by this Agreement.
3.17 Disclosures. Subject to the next sentence, neither this
Agreement nor any exhibit hereto, nor any report, certificate, or instrument
furnished to the Purchasers or their special counsel in connection with the
transactions contemplated by this Agreement, when read together, contains or
will contain any untrue statement of a material fact or omits to state any
material fact necessary in order to make the statements contained herein or
therein, in light of the circumstances under which they were made, not
misleading. The Private Placement Memorandum dated March 17, 1999 relating to an
offering by WEG VI L.P. and Leeds II L.P., including the "Risk Factors" section
thereof, insofar as such Memorandum described the Company, did not as of such
date contain any untrue statement of a material fact or omit to state any
material fact necessary in order to make the statements contained therein not
misleading; provided, however, that no representation of any kind is made
concerning the "Use of Proceeds", "Distributions and Dividend Policy" and "Tax
Considerations" sections of such Memorandum.
4. Representations of the Purchasers. Each of the Purchasers severally
represents and warrants to the Company as follows:
4.1 Investment. Such Purchaser is acquiring the Shares, and
the shares of Common Stock into which the Shares may be converted, for his, her
or its own account, for investment and not with a view to, or for sale in
connection with, any distribution thereof, nor with any present intention of
distributing or selling the same; and, except as contemplated by this Agreement
and the Exhibits hereto, such Purchaser has no present or contemplated
agreement, undertaking, arrangement, obligation, indebtedness or commitment
providing for the disposition thereof
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provided, however, that the Company acknowledges that JP Morgan Investment
Corporation ("JP") and Sixty Wall Street SBIC Fund ("SW") will make transfers of
such securities to each other. Such Purchaser is an "accredited investor" as
defined in Rule 501(a) under the Securities Act.
4.2 Authority. Such Purchaser has full power and authority to
enter into and to perform this Agreement in accordance with its terms. Any
Purchaser which is a corporation, partnership or trust represents that it has
not been organized, reorganized or recapitalized specifically for the purpose of
investing in the Company.
4.3 Experience. Such Purchaser has carefully reviewed the
representations concerning the Company contained in this Agreement and has made
detailed inquiry concerning the Company, its business and its personnel; the
officers of the Company have made available to such Purchaser any and all
written information which he, she or it has requested and have answered to such
Purchaser's satisfaction all inquiries made by such Purchaser; and such
Purchaser has sufficient knowledge and experience in finance and business that
he, she or it is capable of evaluating the risks and merits of his, her or its
investment in the Company and such Purchaser is able financially to bear the
risks thereof.
Nothing contained in this Section 4 shall in any respect limit or
modify the representations and warranties of the Company in Section 3 of this
Agreement or the right of each of the Purchasers to rely thereon.
5. Conditions to the Obligations of the Purchasers at the First
Closing. The obligation of each of the Purchasers to purchase Preferred Shares
at the First Closing is subject to the fulfillment, or the waiver by such
Purchaser, of each of the following conditions on or before the First Closing:
5.1 Accuracy of Representations and Warranties. Each
representation and warranty contained in Section 3 shall be true on and as of
the First Closing Date with the same effect as though such representation and
warranty had been made on and as of that date.
5.2 Performance. The Company shall have performed and complied
with all agreements and conditions contained in this Agreement required to be
performed or complied with by the Company prior to or at the First Closing.
5.3 Certificates and Documents. The Company shall have
delivered to each of the Purchasers:
(a) The Certificate of the Company, as in effect as
of the First Closing Date certified by the Secretary of State of the State of
Delaware;
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(b) A certificate, as of a recent practicable date,
as to the corporate good standing of the Company issued by the Secretary of
State of the State of Delaware;
(c) By-laws of the Company, certified by its
Secretary as of the Closing Date;
(d) Resolutions of the Board of Directors and
stockholders of the Company, authorizing and approving all matters in connection
with this Agreement and the transactions contemplated hereby, certified by the
Secretary of the Company as of the Closing Date; and
(e) stock certificates representing the Preferred
Shares, for delivery upon payment in full therefor in accordance with the
provisions of this Agreement.
5.4 Compliance Certificate. The Company shall have delivered
to the Purchasers a certificate, executed by the President of the Company, dated
the First Closing Date, certifying to the fulfillment of the conditions
specified in Sections 5.1, 5.2, 5.3, 5.5, 5.6 and 5.8 of this Agreement.
5.5 No Actions. No action, proceeding, investigation,
regulation or legislation shall have been instituted before any court,
governmental agency or authority or legislative body to enjoin, restrain,
prohibit, or obtain substantial damages in respect of, this Agreement or the
consummation of the transactions contemplated by this Agreement.
5.6 Shareholders' Agreement. The Third Amended and Restated
Shareholders' Agreement in the form attached hereto as Exhibit E the
("Shareholders' Agreement") shall have been executed and delivered by each of
the Purchasers, the Company and by such number of the Shareholders (as defined
therein) as to cause it to be effective.
5.7 Legal Opinion. The Purchasers shall have received an
opinion of Hale and Dorr LLP, counsel to the Company, in the form attached as
Exhibit F to this Agreement.
5.8 Minimum Investment. Purchasers shall have tendered at the
Closing aggregate consideration of not less than $29,999,995.20 for the purchase
of the Shares.
6. Conditions to the Obligations of the Company at the First Closing.
The obligations of the Company under Section 1.2 of this Agreement are subject
to fulfillment, or the waiver by the Company of the following conditions on or
before the First Closing:
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6.1 Accuracy of Representations and Warranties. The
representations and warranties of the Purchasers contained in Section 4 shall be
true on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of that date.
6.2 Performance. The Purchasers shall have performed and
complied with all agreements and conditions contained in this Agreement required
to be performed or complied with by the Purchasers prior to or at the Closing.
6.3 Shareholders' Agreement. The Shareholders' Agreement shall
have been executed and delivered by each of the Purchasers, the Company and by
such number of the Shareholders (as defined therein) as to cause it to be
effective.
7. Conditions to the Obligations of Vulcan at the Second Closing. The
obligation of Vulcan to purchase the Common Share at the Second Closing is
subject to the fulfillment, or the waiver by Vulcan, of each of the following
conditions on or before the Second Closing;
7.1 HSR Compliance. All filings required to be made under the
HSR Act in connection with the transactions contemplated by this Agreement shall
have been made and the waiting period under the HSR Act shall have thereafter
expired or been terminated.
7.2 Stock Certificates. The Company shall have tendered to
Vulcan for delivery upon payment in full therefor in accordance with the
provisions of this Agreement, a stock certificate representing the Common Share.
7.3 No Actions. No action, proceeding, investigation,
regulation or legislation shall have been instituted before any court,
governmental agency or authority or legislative body to enjoin, restrain,
prohibit, or obtain substantial damages in respect of, this Agreement or the
consummation of the transactions contemplated by this Agreement.
7.4 APEX. The Company shall simultaneously with the First
Closing purchase shares of Series B Preferred Stock of APEX Online Learning Inc.
for an aggregate purchase price of $5,000,000.
8. Conditions to the Obligations of the Company at the Second Closing.
The obligations of the Company under Section 1.2 of this Agreement are subject
to fulfillment, or the waiver, of the following conditions on or before the
Second Closing:
8.1 HSR Compliance. All filings required to be made under the
HSR Act in connection with the transactions contemplated by this Agreement shall
have
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been made and the waiting period under the HSR Act shall have thereafter expired
or been terminated.
8.2 Performance. Vulcan shall have performed and complied with
all agreements and conditions contained in this Agreement required to be
performed or complied with by Vulcan prior to or at the Second Closing.
9. Certain Pre-Closing and Post-Closing Covenants.
9.1 HSR Act. The Company and Vulcan shall use their reasonable
best efforts to file as soon as practicable notifications under the HSR Act in
connection with the transactions contemplated hereby, and to respond as promptly
as practicable to any inquiries received from the Federal Trade Commission and
the Antitrust Division of the Department of Justice for additional information
or documentation and to respond as promptly as practicable to all inquiries and
requests received from any State Attorney General or other governmental
authority in connection with antitrust matters. The Company will reimburse
Vulcan for its filing fee in connection with its submission.
9.2 Appointment of Board Designee. Immediately following the
Second Closing, the Company shall cause the Board of Directors to take all
necessary action (a) to increase the authorized number of directors by one
additional member and (b) to fill the new directorship created in connection
with the sale of the Common Share herein with the designee of Vulcan entitled to
elect such director.
10. Provisions Relating to Certain Purchasers.
10.1 Use of Proceeds. The Company will use the proceeds from
the sale of the Shares as provided in the first sentence of Section 1.3, and no
portion of such proceeds shall be applied to any prohibited use described in the
second sentence of Section 1.3. The Company will provide to JP and SW (the "JPM
Investors") and the U.S. Small Business Administration access to its books and
records for the purpose of confirming the use of the proceeds and for all other
purposes required by the U.S. Small Business Administration. Upon the request of
any JPM Investor at any time or from time to time, the Company will provide a
certificate of its chief financial officer (or other executive officer) (a)
describing the use of such proceeds and (b) certifying compliance by the Company
with this Section 10 and Section 1.3.
10.2 Non-Discrimination Compliance. The Company will at all
times comply with the non-discrimination requirements of Title 13 of the United
States Code of Federal Regulations Parts 112, 113 and 117.
10.3 Information. Upon request, the Company promptly (and in
any event within twenty (20) days of such request) will provide to each JPM
Investor an assessment, in form and substance satisfactory to such JPM Investor,
of the economic
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impact of its financing, specifying the full-time equivalent jobs created or
retained, the impact of the financing on the Company's business, in terms of
expanded revenue and profits, and on taxes paid by the business and its
employees. Upon request, the Company promptly (and in any event within twenty
(20) days of such request) will furnish to each JPM Investor all information
requested or required by any governmental agency asserting jurisdiction over
such JPM Investor.
10.4 Transfers by Certain Investors to Affiliates. The Company
and each of the Purchasers hereby covenant and agree that, upon the request of a
JPM Investor in connection with a proposed transfer of shares of capital stock
of the Company from such JPM Investor to one or more of its Affiliates that is
subject to the provisions of Regulation Y of the Board of Governors of the
Federal Reserve System (12 C.F.R. Part 225) or any successor to such regulation
(any such transferee, a "Regulation Y Shareholder"), the Company and the
Purchasers will take such commercially reasonable actions (including, without
limitation, voting all shares of stock of the Company held by them in favor of
such actions) as such JPM Investor and any such transferee may reasonably
request in order to permit such Regulation Y Shareholder to comply with
regulatory limitations applicable to it, including, without limitation, taking
such actions as may be required in order:
(a) to amend this Agreement and the Shareholders' Agreement so
that (x) at the election of such JPM Investor, any covenant in favor of and any
right afforded to such JPM Investor, shall run in favor of and be afforded to
such Regulation Y Shareholder (including, without limitation, registration
rights, tag-along rights, preemptive rights and informational rights), (y) the
covenants and agreements contained in Sections 1.3, 10.1 and 10.2 of this
Agreement and Sections 3.5, 3.11 and 4.11 of the Shareholders' Agreement shall
terminate with respect to such JPM Investor and shall not apply to such
Regulation Y Shareholder, and neither such JPM Investor nor such Regulation Y
Shareholder shall be a party to or bound by or have the right to enforce, amend
or waive such provisions and (z) such Agreements are consistent with the
Regulation Y Term Sheet (as defined below); and
(b) to cause the Company and the Purchasers to enter into an
agreement with the Regulation Y Shareholder providing for the matters referred
to in the term sheet attached hereto as Exhibit G (the Regulation Y Term
Sheet"). Without limiting the generality of the foregoing, in connection with
any such transfer by a JPM Investor to a Regulation Y Shareholder, the Company
and the Purchasers shall take such other actions and enter into such further
agreements as such Investor or such Regulation Y Shareholder may reasonably
request in order to permit such transfer and to permit such Regulation Y
Shareholder to comply with regulatory limitations applicable to it; provided
that, no Purchaser shall be obligated to take any action pursuant to this
sentence which would adversely affect such Purchaser's rights under this
Agreement and the Shareholders' Agreement, as the same may be amended from time
to time.
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11. Affirmative Covenants of the Company.
11.1 Inspection. The Company shall permit each Purchaser, or
any authorized representative thereof, to visit and inspect the properties of
the Company, including its corporate and financial records, and to discuss its
business and finances with officers of the Company, during normal business hours
following reasonable notice and as often as may be reasonably requested.
11.2 Financial Statements and Other Information.
(a) The Company shall deliver to each Major Purchaser (as
defined in paragraph (c) below):
(i) within 90 days after the end of each
fiscal year of the Company, an audited balance sheet of the Company as at the
end of such year and audited statements of income and of cash flows of the
Company for such year, certified by certified public accountants of established
national reputation selected by the Company, and prepared in accordance with
generally accepted accounting principles;
(ii) within 45 days after the end of each
fiscal quarter of the Company, an unaudited balance sheet of the Company as at
the end of such quarter, and unaudited statements of income and of cash flows of
the Company for such fiscal quarter and for the current fiscal year to the end
of such fiscal quarter;
(iii) within 45 days after the end of each
month, an unaudited balance sheet of the Company as at the end of such month and
unaudited statements of income and of cash flows of the Company for such month
and for the current fiscal year to the end of such month, setting forth in
comparative form the Company's projected financial statements for the
corresponding periods for the current fiscal year;
(iv) as soon as available, but in any
event prior to the commencement of each new fiscal year, a business plan and
projected financial statements for such fiscal year;
(v) such other notices, information and
data with respect to the Company as the Company delivers to any holders of its
capital stock at the same time it delivers such items to such holders; and
(vi) with reasonable promptness, such other
information and data as such Major Purchaser may from time to time reasonably
request.
(b) The foregoing financial statements shall be
prepared on a consolidated basis if the Company then has any subsidiaries. The
financial
15
<PAGE> 16
statements delivered pursuant to clauses (i), (ii) and (iii) of paragraph (a)
shall be accompanied by a certificate of the chief financial officer of the
Company stating that such statements have been prepared in accordance with
generally accepted accounting principles consistently applied (except as noted)
and fairly present the financial condition and results of operations and cash
flows of the Company at the date thereof and for the periods covered thereby.
(c) For purposes of this Agreement, the term "Major
Purchaser" shall mean a Purchaser purchasing not less than 400,000 Shares so
long as such Purchaser continues to own not less than 200,000 Shares. For
purposes of determining the number of Shares held by a Purchaser: (i) the
foregoing numbers shall be adjusted for any stock splits, stock dividends,
recapitalizations or similar events; (ii) Shares shall include Shares which have
been converted into Common Stock so long as such Common Stock is held by such
Purchaser; and (iii) Shares shall include Shares held by affiliates of such
Purchaser and, with respect to a Purchaser that is a corporation or partnership,
Shares distributed to and held by its shareholders and partners.
11.3 Reservation of Common Stock and Preferred Stock. The
Company shall reserve and maintain a sufficient number of shares of Common Stock
and Series F Preferred or Series G Preferred, as applicable, for issuance upon
conversion or exchange of all of the outstanding Shares.
11.4 Requested Information. During any period in which the
Company is not subject to Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, the Company shall make available information required to be
provided by Rule 144A(d)(4) upon written request therefor by a Purchaser.
11.5 Termination of Covenants. The covenants of the Company
contained in Section 9.2, Sections 10.1 through 10.4 and Sections 11.1 through
11.4 shall terminate, and be of no further force or effect, upon the closing of
the Company's first public offering of Common Stock pursuant to an effective
registration statement under the Securities Act, resulting in gross proceeds to
the Company of at least $50,000,000, at a price to the public of at least $7.00
per share (as adjusted for stock splits, stock dividends, recapitalizations and
similar events).
12. Transfer of Shares.
12.1 Restricted Shares. "Restricted Shares" means (i) the
Shares, (ii) the shares of Common Stock issued or issuable upon conversion of
the Preferred Shares, (iii) any shares of capital stock of the Company acquired
by the Purchasers pursuant to the Shareholders' Agreement, and (iv) any other
shares of capital stock of the Company issued in respect of such shares (as a
result of stock splits, stock dividends, reclassifications, recapitalizations,
or similar events); provided, however, that shares of Common Stock which are
Restricted Shares shall cease to be Restricted
16
<PAGE> 17
Shares (x) upon any sale pursuant to the Shareholders' Agreement, Section 4(1)
of the Securities Act or Rule 144 under the Securities Act or (y) at such time
as they become eligible for sale under Rule 144(k) under the Securities Act.
12.2 Requirements for Transfer.
(a) Restricted Shares shall not be sold or
transferred unless either (i) they first shall have been registered under the
Securities Act, or (ii) the Company first shall have been furnished with an
opinion of legal counsel, reasonably satisfactory to the Company, to the effect
that such sale or transfer is exempt from the registration requirements of the
Securities Act.
(b) Notwithstanding the foregoing, no registration or
opinion of counsel shall be required for (i) a transfer by a Purchaser which is
a corporation to a wholly owned subsidiary (whether a corporation, limited
liability company, limited partnership or other entity) or Affiliate of such
corporation, a transfer by a Purchaser which is a partnership to a partner of
such partnership or a retired partner of such partnership who retires after the
date hereof, or to the estate of any such partner or retired partner, a transfer
by a Purchaser which is a limited liability company to a member of such limited
liability company or a retired member who resigns after the date hereof or to
the estate of any such member or retired member or transfer by a Purchaser who
is an individual to such individual's spouse, or to such individual's lineal
descendants or ancestors or their spouses, or to a trustee of a trust for the
principal benefit of any of such persons; provided that the transferee in each
case agrees in writing to be subject to the terms of this Section 12 to the same
extent as if it were the original Purchaser hereunder, (ii) a transfer between
JP and SW or (iii) a transfer made in accordance with Rule 144 under the
Securities Act.
12.3 Legend. Each certificate representing the Shares shall
bear a legend substantially in the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be offered, sold or otherwise transferred, pledged or
hypothecated unless and until such shares are registered under
such Act or an opinion of counsel satisfactory to the Company
is obtained to the effect that such registration is not
required."
The foregoing legend shall be removed from the certificates
representing any Shares, at the request of the holder thereof, at such time as
they become eligible for resale pursuant to Rule 144(k) under the Securities
Act.
12.4 Legend Related to the Shareholders' Agreement.
Notwithstanding the provisions of this Section 12, any transfers of Shares shall
be subject to the provisions of the Shareholders Agreement. In addition to the
legend
17
<PAGE> 18
described in Section 12.3 above, each certificate representing the Shares shall
bear a legend substantially in the following form:
"The shares represented by this certificate are subject to
restrictions on transfer set forth in a certain Third Amended
and Restated Shareholders' Agreement between the Company and
the Shareholders (as defined therein), as amended from time to
time, a copy of which is available for inspection at the
office of the Secretary of the Company."
13. Miscellaneous.
13.1 Successors and Assigns. This Agreement and all the
provisions hereof shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and assigns, except that neither
this Agreement nor any rights or obligations hereunder shall be assigned or
delegated by the Company without the prior written consent of the Purchasers.
After the Closing, a Purchaser may assign this Agreement and such Purchaser's
rights hereunder, in whole or in part without the consent of the Company or any
other Purchaser (i) to an Affiliate of such Purchaser, provided, an Affiliate
shall only have the right to receive financial statements and reports under
Section 11.2 above if it is a transferee identified in clause (ii) below and
holds at least 200,000 Shares or (ii) any other transferee of at least 25% of
the Shares acquired and to be acquired by such Purchaser, provided that, all
such transfers of Shares shall be subject to the Shareholders' Agreement. For
the purposes of clause (ii) above, those Purchasers that are Affiliates of WSI
Inc. shall be treated as one Purchaser.
13.2 Publicity. Except as may be required by law, the Company
shall not use the name of, or make reference to, any Purchaser or any of its
Affiliates in any press release or in any public manner without such Purchaser's
prior written consent. Except as required in furtherance of the Company's
activities or as otherwise required by law or regulation or requested by
regulatory agencies, each Purchaser shall treat, and shall cause its
representatives to treat, as confidential all confidential and proprietary
information regarding the Company which such Purchaser receives from the Company
as a Purchaser or Stockholder of the Company.
13.3 Survival of Representations and Warranties. All
representations and warranties contained herein shall survive the execution and
delivery of this Agreement and the closing of the transactions contemplated
hereby for a period of 18 months following the Closing; provided, however, that
the representations and warranties of the Company set forth in Sections 3.1,
3.2, 3.5, 3.6, 3.7 and 3.10 shall survive the execution and delivery of this
Agreement and the closing of the transactions contemplated hereby until the
expiration of the applicable statute of limitations; provided further, however,
that no representation or warranty shall terminate until after the final
non-appealable resolution of any claim relating to such
18
<PAGE> 19
representation or warranty, which claim shall have been made prior to the
expiration of such representation or warranty.
13.4 Brokers. Except as otherwise disclosed on Schedule 13.4
hereto, the Company and each Purchaser (i) represents and warrants to the other
parties hereto that he, she or it has not retained a finder or broker in
connection with the transactions contemplated by this Agreement, and (ii) will
indemnify and save the other parties harmless from and against any and all
claims, liabilities or obligations with respect to brokerage or finders' fees or
commissions, or consulting fees in connection with the transactions contemplated
by this Agreement asserted by any person on the basis of any statement or
representation alleged to have been made by such indemnifying party.
13.5 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
13.6 Specific Performance. In addition to any and all other
remedies that may be available at law in the event of any breach of this
Agreement, each Purchaser shall be entitled to specific performance of the
agreements and obligations of the Company hereunder and to such other injunctive
or other equitable relief as may be granted by a court of competent
jurisdiction.
13.7 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Delaware (without
reference to the conflicts of law provisions thereof).
13.8 Notices. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be deemed
delivered (i) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to the Company, at The Edison Project Inc., 521 Fifth Avenue, 15th
Floor, New York, New York 10175, Attention: President, Telecopy: (212) 419-1604,
and The Edison Project Inc., First Tennessee Plaza, 800 South Gay Street, Suite
1230, Knoxville, Tennessee 37929, Attention: Secretary, Telecopy: (423)
546-1090, or at such other address or addresses as may have been furnished in
writing by the Company to the Purchasers, with a copy to David Sylvester, Esq.,
Hale and Dorr LLP, The Willard Office Building, 1455 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004, Telecopy: (202) 942-8484.
19
<PAGE> 20
If to a Purchaser, at the address set forth on Exhibit A for such
Purchaser, or at such other address or addresses as may have been furnished to
the Company in writing by such Purchaser.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal delivery, messenger service, telecopy, first class mail or electronic
mail), but no such notice, request, consent or other communication shall be
deemed to have been duly given unless and until it is actually received by the
party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section.
13.9 Complete Agreement. This Agreement (including its
Exhibits) and the Shareholders' Agreement constitute the entire agreement and
understanding of the parties hereto with respect to the acquisition of the
Shares and supersedes all prior agreements and understandings relating to such
subject matter including without limitation any Response Form or other
correspondence submitted by a Purchaser to the Company.
13.10 Amendments and Waivers. Except as otherwise expressly
set forth in this Agreement, any term of this Agreement may be amended or
terminated and the observance of any term of this Agreement may be waived
(either generally or in a particular instance and either retroactively or
prospectively), with the written consent of the Company and the holders of at
least 75% of the shares of Common Stock issued or issuable upon conversion of
the Preferred Shares. Notwithstanding the foregoing, if this Agreement is
amended pursuant to the preceding sentence with the consent of the holders of
less than all of the shares of Common Stock issued or issuable upon conversion
of the Preferred Shares, then such amendment may only be in a manner which
affects all such holders in the same fashion. Any amendment, termination or
waiver effected in accordance with this Section 13.10 shall be binding upon each
holder of any Shares (including shares of Common Stock into which such Shares
have been converted) even if they do not execute such consent, each future
holder of all such securities and the Company. No waivers of or exceptions to
any term, condition or provision of this Agreement, in any one or more
instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
13.11 Pronouns. Whenever the context may require, any pronouns
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns and pronouns shall include the
plural, and vice versa.
13.12 Counterparts; Facsimile Signatures. This Agreement may
be executed in any number of counterparts, each of which shall be deemed to be
an
20
<PAGE> 21
original, and all of which shall constitute one and the same document. This
Agreement may be executed by facsimile signatures.
13.13 Section Headings. The section headings are for the
convenience of the parties and in no way alter, modify, amend, limit, or
restrict the contractual obligations of the parties.
13.14 Expenses. The Company shall pay the reasonable fees and
disbursements of counsel to the Purchasers, not to exceed $75,000, upon receipt
of reasonable documentation therefor, in connection with the preparation of this
Agreement and the other agreements contemplated hereby and the closing of the
transactions contemplated hereby.
21
<PAGE> 22
EXECUTED as of the date first written above.
COMPANY:
THE EDISON PROJECT, INC.
By: /s/H. Christopher Whittle
PURCHASERS:
VULCAN VENTURES INCORPORATED
By: /s/William D. Savoy
Name: William D. Savoy
Title: Vice President
22
<PAGE> 23
EXHIBIT A
List of Purchasers
<TABLE>
<CAPTION>
Name and Address No. of Shares of Aggregate
of Purchaser Series F Preferred Purchase Price
- ------------------------------------ ------------------------------- -------------------------------------
<S> <C> <C>
Vulcan Ventures Incorporated 4,878,048 $29,999,995.20
110 110th Avenue N.E.
Suite 550
Bellevue, WA 98004
Attention: Ed Harris
Telecopy: (425) 453-1985
with a copy to:
Irell & Manella LLP
1800 Avenue of the Stars
Suite 900
Los Angeles, CA 90067-4276
Attention: Alvin G. Segel, Esq.
Telecopy: (310) 203-7199
</TABLE>
1
<PAGE> 1
EXHIBIT 10.22
THE EDISON PROJECT INC.
SUBSCRIPTION AGREEMENT
DECEMBER 30, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
<S> <C>
1. Purchase and Sale of Series D Convertible Preferred Stock,
Options, Notes, Series G Common Stock and Series H
Common Stock.............................................................................................1
1.1 Sale and Issuance of Series D Convertible Preferred Stock,
Options, Notes. Series G Common Stock and Series H
Common Stock at First Closing...................................................................1
1.2 Sale and Issuance of Series D Convertible Preferred Stock.
Options and Notes at Subsequent Closings........................................................3
1.3 Certain Definitions Several Obligations.........................................................6
1.4 First Closing...................................................................................6
1.5 Subsequent Closings.............................................................................7
1.6 JPMIC Fee.......................................................................................7
2. Representations and Warranties of the Company............................................................8
2.1 Organization, Good Standing and Qualification...................................................8
2.2 Capitalization..................................................................................8
2.3 Authority; Execution and Delivery: Requisite Consents,
Nonviolation...................................................................................10
2.4 Subsidiaries...................................................................................11
2.5 Financial Information..........................................................................11
2.6 Certain Changes or Events......................................................................12
2.7 Title to Assets................................................................................13
2.8 Contracts......................................................................................13
2.9 Intellectual Property..........................................................................14
2.10 Insurance......................................................................................16
2.11 Labor Union Activities Employee Relation.......................................................16
2.12 ERISA..........................................................................................17
2.13 Litigation.....................................................................................18
2.14 Compliance with Laws; Permits..................................................................18
2.15 Taxes..........................................................................................19
2.16 Books and Records..............................................................................19
2.17 Environmental Matters..........................................................................19
2.18 Transactions with Affiliates...................................................................20
2.19 Registration Rights............................................................................20
2.20 No Brokers or Finders..........................................................................20
2.21 Investment Company Act.........................................................................20
2.22 Confidential Information Memorandum............................................................21
2.23 Employee Confidentiality Agreement.............................................................21
2.24 Disclosure.....................................................................................21
2.25 Small Business.................................................................................21
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
2.26 Use of Proceeds................................................................................21
2.27 Business Activity..............................................................................22
2.28 Acknowledgment of JPM Investors as SBICs.......................................................22
3. Representations and Warranties of the Investors.........................................................22
3.1 Organization...................................................................................22
3.2 Authorization..................................................................................22
3.3 No Intended Resale.............................................................................22
3.4 No Agency Relationship.........................................................................22
3.5 Investment Experience..........................................................................23
3.6 Memorandum and Agreements......................................................................23
3.7 Opportunity to Ask Questions...................................................................23
3.8 Access.........................................................................................23
3.9 Own Investigation..............................................................................23
3.10 Securities Registration........................................................................23
3.11 Restricted Securities..........................................................................23
3.12 No Brokers or Finders..........................................................................24
3.13 Pre-emptive Rights.............................................................................24
4. Conditions of Investors' Obligations at First Closing...................................................24
4.1 Representations and Warranties.................................................................24
4.2 Performance....................................................................................24
4.3 Stock Certificates. Etc........................................................................24
4.4 No Material Adverse Change.....................................................................25
4.5 Consents.......................................................................................25
4.6 No Actions.....................................................................................25
4.7 Opinion of Counsel.............................................................................25
4.8 Compliance Certificate.........................................................................25
4.9 Directors......................................................................................25
4.10 Related Documents..............................................................................25
4.11 Proceedings and Documents......................................................................26
5. Conditions of Investors' Obligations at Subsequent Closings.............................................26
5.1 HSR Compliance.................................................................................26
5.2 Stock Certificates. Etc........................................................................26
5.3 No Actions.....................................................................................26
6. Conditions of the Company's Obligations at First Closing................................................26
6.1 Representations and Warranties.................................................................26
6.2 Payment of Purchase Price......................................................................27
6.3 No Actions.....................................................................................27
6.4 Proceedings and Documents......................................................................27
6.5 Consents.......................................................................................27
6.6 Related Documents..............................................................................27
</TABLE>
<PAGE> 4
<TABLE>
<S> <C>
7. Conditions of the Company's Obligations at Subsequent Closings..........................................27
7.1 HSR Compliance.................................................................................27
7.2 Payment of Purchase Price......................................................................28
7.3 No Actions.....................................................................................28
8. Certain Post-Closing Covenants..........................................................................28
8.1 Observer Rights................................................................................28
8.2 Information....................................................................................29
8.3 Annual Meetings................................................................................32
8.4 Exemption from Investment Company Act..........................................................32
8.5 Accounting and Reserves........................................................................32
8.6 Transactions with Affiliates...................................................................32
8.7 Provisions Relating to JPM Investors...........................................................32
8.8 Assistance in Sales............................................................................34
8.9 Additional Covenants...........................................................................35
8.10 HSR Compliance.................................................................................35
9. Miscellaneous...........................................................................................35
9.1 Expenses.......................................................................................35
9.2 J.P. Morgan Fee................................................................................35
9.3 Publicity......................................................................................36
9.4 Indemnification................................................................................36
9.5 Survival.......................................................................................36
9.6 Assignment.....................................................................................37
9.7 Amendment Waiver...............................................................................37
9.8 APPLICABLE LAW.................................................................................37
9.9 DISPUTE RESOLUTION.............................................................................37
9.10 Notices........................................................................................38
9.11 Integration....................................................................................39
9.12 Severability...................................................................................39
9.13 Descriptive Headings...........................................................................39
9.14 Counterparts...................................................................................39
9.15 Understanding Among Investors..................................................................40
</TABLE>
<PAGE> 5
EXHIBIT LIST
Exhibit A Amended and Restated Certificate of Incorporation
Exhibit B-1 Form of WSI A Option
Exhibit B-2 Form of Tranche 1 Option
Exhibit B-3 Form of Tranche 2 Option
Exhibit C Form of Promissory Note
Exhibit D [Intentionally Omitted]
Exhibit E Shareholders Agreement
Exhibit F Financial Statements
Exhibit G By-Laws
Exhibit H Opinion of Counsel
Exhibit I Regulation Y Term Sheet
Exhibit J Employee Confidentiality Agreements
SCHEDULE LIST
Schedule A Schedule of Investors
Schedule I Schedule of Exceptions
Schedule 2 Names of Stockholders and holders of Options and/or
Warrants, etc.
Schedule 3 Subsidiaries
Schedule 4 Directors
<PAGE> 6
CROSS REFERENCES TO
SELECTED DEFINITIONS
Term Section Location
Actions Section 2.13
Affiliate Section 2.6
Aggregate Remaining Commitments Section 1.2(b)(iii)
Agreement Prefatory Language
Amended and Restated By-laws Section 4.6
Audited Financials Section 2.5
Certificate Section 1.1(a)
Code Section 2.12(a)
Common Stock Section 2.2
Companies Section 2.1
Company Prefatory Language
Company's Documents Section 2.3
Condition Section 2.1
Contracts Section 2.8
Conversion Stock Section 1.3
Conversion Series A Common Stock Section 1.3
Conversion Non-Voting Common Stock Section 1.3
Defaulting Investor Section 1.2(d)
Environmental Laws Section 2.17
ERISA Section 2.12(2)
ERISA Affiliate Section 2.12(a)
Financial Statements Section 2.5
First Closing Section 1.4
Governmental Authority Section 2.3
HSR Act Section 2.3
IAB Prefatory Language
Intellectual Property Section 2.9
Intellectual Property Licenses Section 2.9
Investor Notice Section 1.5
Investors Prefatory Language
JPM Investors Prefatory Language
JPMIC Prefatory Language
Laws Section 2.14
LIBOR Accrual Section 1.2(b)(iii)
Liens Section 2.7
Memorandum Section 2.1
Non-Voting Common Stock Section 1.3
Non-Voting Series E Stock Section 1.3
Note Section 1.1(b)(v)
<PAGE> 7
Options Section 1.1(b)(iv)
Order Section 2.13
Other Investors Prefatory Language
Patents and Applications Section 2.9(d)(i)
Permits Section 2.14
Person Section 2.3
Plan(s) Section 2.12(a)
Preferred Stock Section 2.2
Principal Owner Section 2.8(d)
Purchased Securities Section 1.3
Ratable Share Section 1.2(b)(iii)
Regulation Y Investor Section 7.7(e)
Regulation Y Term Sheet Section 7.7(e)(ii)
Remaining Commitment Section 1.2(b)(iii)
Returns Section 2.15
RLEC Prefatory Language
Scheduled Contracts Section 2.8
Securities Section 1.3
Securities Act Section 2.19
Series A Common Stock Section 1.1(b)(ii)
Series A Stock Section 2.2
Series B Stock Section 2.2
Series C Stock Section 2.2
Series D Stock Section 1.1(b)(i)
Series G Common Share Section 1.1(b)(vi)
Series H Common Share Section 1.1(b)(vii)
Shareholders Agreement Section 2.2
Shares Section 1.3
Sixty Wall Prefatory Language
Small Business Investment Act Section 2.25
Stock Option Plans Section 2.2
Subsequent Closing Section 1.5
Subsequent Closing Notice Section 1.5
Subsequent Closing Request Section 1.2(a)
Subsidiaries Section 2.1
Taxes Section 2.15
Tranche 1 Options Section 1.1(b)(iii)
Tranche 2 Options Section 1.1(b)(iv)
Unaudited Financials Section 2.5
Unit Section 1.1(b)
WEG III Prefatory Language
WEG IV Prefatory Language
WSI Prefatory Language
WSI Investors Prefatory Language
WSI A Options Section 1.1(b)(ii)
<PAGE> 8
SUBSCRIPTION AGREEMENT
This Subscription Agreement (this "Agreement") is made as of the 30th
day of December, 1997 by and among THE EDISON PROJECT INC., a Delaware
corporation (the "Company"), J.P. MORGAN INVESTMENT CORPORATION, a Delaware
corporation ("JPMIC"), SIXTY WALL STREET SBIC FUND, L.P. ("Sixty Wall", and
together with JPMIC, the "JPM Investors"), INVESTOR INVESTMENTS AB, a
corporation organized under the laws the of the Kingdom-of Sweden ("IAB"), WSI
INC., a Delaware corporation ("WSI"), WEG III L.P., a Delaware limited
partnership ("WEG III"), WEG IV L.P., a Delaware limited partnership ("WEG IV"),
and together with WEG III and WSI, the ("WSI Investors"), Richmont Leeds
Education Company L.L.C. ("RLEC") (if RLEC elects to commit to purchase Units
pursuant to Section 1.1(c) below) and each of the other investors identified on
the signature pages hereto under the caption "Other Investors" (collectively,
the "Other Investors", and collectively with the JPM Investors, IAB, the WSI
Investors and (if applicable) RLEC, the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Series D Convertible Preferred Stock, Options,
Notes, Series G Common Stock and Series H Common Stock.
1.1 Sale and Issuance of Series D Convertible Preferred Stock,
Options, Notes. Series G Common Stock and Series H Common Stock at First
Closing.
(a) The Company shall adopt and file with the
Secretary of State of the State of Delaware on or before the First Closing (as
defined below) an Amended and Restated Certificate of Incorporation in the form
attached hereto as Exhibit A (the "Certificate").
(b) Subject to the terms and conditions of this
Agreement, each Investor, severally and not jointly, agrees to purchase at the
First Closing, and the Company agrees to sell and issue to each Investor at the
First Closing, the following:
(i) that number of shares of Series D
Convertible Preferred Stock of the Company, par value $0.01 per share
(the "Series D Stock"), set forth opposite such Investor's name in
Column A on Schedule A attached hereto;
(ii) an option in the form attached hereto
as Exhibit B-1 entitling the holder thereof to purchase, at an initial
exercise price of $10.00 per share, that number of shares of Series A
Common Stock, par value $0.01 per share, of the Company (the "Series A
Common Stock") set forth opposite such Investor's name in Column B on
Schedule A attached hereto (each a "WSI A Option" and collectively, the
"WSI Options");
<PAGE> 9
(iii) an option in the form attached hereto
as Exhibit B-2, entitling the holder thereof to purchase, at an initial
exercise price of $1.50 per share, that number of shares of Series A
Common Stock set forth opposite such Investor's name in Column C on
Schedule A attached hereto (each a "Tranche 1 Option" and collectively
the "Tranche 1 Options");
(iv) an option in the form attached hereto
as entitling the holder thereof to purchase, at an initial exercise
price of $8.00 per share, that number of shares of Series A Common
Stock set forth opposite such Investor's name in Column D on Schedule A
attached hereto (each a "Tranche 2 Option" and collectively the
"Tranche 2 Options" and collectively with the WSI A Options and the
Tranche 1 Options, the "Options"); and
(v) a Promissory Note in the form attached
hereto as Exhibit C in the principal amount set forth opposite such
Investor's name in Column E on Schedule A attached hereto (each a
"Notes" and collectively the "Notes");
(vi) in the case of JPMIC only, one (1)
share of Series G Common Stock of the Company, par value $.01 per share
(the "Series G Common Share"); and
(vii) in the case of IAB only, one (1) share
of Series H Common Stock of the Company, par value $.01 per share (the
"Series H Common Share");
at a price of $3.98 per unit (a "Unit") consisting of (I) one share of Series D
Stock, (II) a WSI A Option to purchase 0.019191 of a share of Series A Common
Stock, (III) a Tranche 1 Option to purchase 0.019191 of a share of Series A
Common Stock, (IV) a Tranche 2 Option to purchase 0.028786 of a share of Series
A Common Stock and (V) a Note in the principal amount of $0.114213, for an
aggregate purchase price set forth opposite such Investor's name in Column F on
Schedule A attached hereto; provided that the Units purchased by JPMIC or IAB at
the First Closing shall include the Series G Common Share and Series H Common
Share, respectively, and no additional consideration shall be paid by either of
JPMIC or IAB in respect of the Series G Common Share or Series H Common Share,
respectively.
(c) At any time on or before January 28, 1998, RLEC
may, at its option, elect to commit to purchase up to 848,801 Units in the
aggregate on the terms and condition provided in this Agreement. If RLEC elects
to commit to purchase Units as provided in this Section 1.1(c), RLEC shall, on
or prior to January 28, 1998, deliver to the Company (i) written notice of its
election to commit to purchase Units under this Agreement, which shall set forth
the aggregate number of Units it has elected to commit to purchase, and (ii) a
wire transfer in the amount of the aggregate purchase price for
<PAGE> 10
the number of Units that RLEC elects to purchase immediately upon delivery of
its election to commit to purchase Units, which shall be not less than 40% (or
such greater percentage of the aggregate commitments, under this Agreement that
have been required by the Company to have been paid as of such date) of the
aggregate number of Units which RLEC shall have elected to purchase pursuant to
this Section 1.1(c). Upon delivery of the foregoing election to commit to
purchase Units and payment of the purchase price for the applicable proportion
of such Units, RLEC shall be deemed to be an "Investor" hereunder and shall have
all rights, remedies and obligations of an Investor for all purposes under this
Agreement, and RLEC shall be deemed to have become an Investor as of the date of
this Agreement. In the event RLEC fails to deliver the election to commit to
purchase Units or payment of the purchase price for the applicable proportion of
such Units on or before January 28, 1998, RLEC shall not be an "Investor" under
this Agreement for any purpose and shall have no rights, remedies or obligations
hereunder. By its execution and delivery of this Agreement, RLEC hereby confirms
that it has waived and/or exercised (as the case may be) any and all preemptive
rights it has against the Company with respect to the transactions described in
this Agreement and that it has no right to purchase any Units except as provided
in this Agreement.
1.2 Sale and Issuance of Series D Convertible Preferred Stock.
Options and Notes at Subsequent Closings.
(a) Request. Subject to the terms and conditions of
this Agreement, the Company and each Investor may, each at its respective
option, at any time and from time to time during the period from the date of the
First Closing through December 31, 2000 request a Subsequent Closing (as defined
below) for the purchase and sale of additional Units (each such request is
referred to herein as a "Subsequent Closing Request").
(i) Subsequent Closing Request by the
Company. Each Subsequent Closing Request made by the Company shall
relate to Units having an aggregate purchase price (excluding LIBOR
Accruals (as defined below)) of not less than the lesser of (x) ten
million dollars ($10,000,000) in the aggregate or (y) the aggregate
Remaining Commitments of all Investors (as defined below), and of not
more than the aggregate Remaining Commitments of all Investors. Each
Subsequent Closing Request made by the Company shall be made to all
Investors pro rata (based on each Investor's "Ratable Share" (as
defined below)).
(ii) Subsequent Closing Request by
Investors. Each Subsequent Closing Request made by one or more
Investors shall relate to Units having an aggregate purchase price
(excluding LIBOR Accruals) of not less than the lesser of (x) five
million dollars ($5,000,000) in the aggregate or (y) the Remaining
Commitment (as defined below) of such Investor(s), and of not more than
the Remaining Commitment of such Investor(s). Each Subsequent Closing
<PAGE> 11
Request made by one or more Investors may be made independently of all
other Investors (and, accordingly, no Investor shall have an obligation
to purchase its Ratable Share at any Subsequent Closing requested by
another Investor or Investors).
(b) Purchase and Sale.
(i) Subsequent Closing Requested by Company.
Subject to the terms and conditions of this Agreement, each Investor,
severally and not jointly, agrees to purchase at each Subsequent
Closing requested by the Company, and the Company agrees to sell and
issue to each Investor at each such Subsequent Closing, such Investor's
"Ratable Share" (as defined below) at a price per Unit of $3.98 plus
the LIBOR Accrual.
(ii) Subsequent Closing Requested by
Investor(s). Subject to the terms and conditions of this Agreement,
each Investor, severally and not jointly, agrees to purchase at each
Subsequent Closing which such Investor requested (or in which such
Investor has elected to join pursuant to Section 1.6), and the Company
agrees to sell and issue to each such Investor at each such Subsequent
Closing, the number of Units that such Investor has requested to
purchase (up to a number of Units equal to such Investor's Remaining
Commitment divided by $3.98), at a price per Unit of $3.98 plus the
LIBOR Accrual.
(iii) Certain Definitions. An Investor's
"Ratable Share" shall mean the number of Units determined by dividing
(i) an amount equal to the product of (X) the aggregate dollar amount
requested by the Company to be invested at such Subsequent Closing (not
including any LIBOR Accruals) and (Y) a fraction, the numerator of
which is such Investor's Remaining Commitment and the denominator of
which is the aggregate Remaining Commitments of all the Investors, by
(ii) $3.98, provided, however that in no event shall any Investor's
Ratable Share exceed such Investor's Remaining Commitment divided by
$3.98. The "Remaining Commitment" of each Investor, at any time, shall
mean the amount set forth opposite such Investor's name in Column G on
Schedule A attached hereto, reduced by any and all investments (other
than the payment of LIBOR Accruals) made by such Investor at Subsequent
Closings which shall have occurred prior to such time. The "aggregate
Remaining Commitments of all the Investors" shall mean the sum of all
Remaining Commitments. The "LIBOR Accrual", as determined in connection
with any Subsequent Closing, shall mean the amount of interest that
would accrue on $3.98 at the six (6) month LIBOR rate publicly
announced by Citibank (London) (determined on the date of the First
Closing), during the period from the date of the First Closing through
(and including) the day immediately prior to the date of the applicable
Subsequent Closing, provided that at each Subsequent Closing the LIBOR
rate will be adjusted to the six (6) month LIBOR rate publicly
announced by Citibank
<PAGE> 12
(London) in effect on the date of such Subsequent Closing.
(c) Notwithstanding anything to the contrary
contained herein, in no event shall any Investor be obligated under this
Agreement (pursuant to the First Closing and all Subsequent Closings) to invest
in the Company an amount greater than its Aggregate Commitment set forth in
Column H on Schedule A plus the LIBOR Accruals on any Units purchased after the
First Closing.
(d) If any Investor fails to purchase any Units that
such Investor was obligated to purchase at any Subsequent Closing after written
notice of such failure has been received by such Investor and such Investor has
failed to cure within ten (10) business days of receipt of the notice of such
failure (each such Investor, a "Defaulting Investor"), the LIBOR Accrual on each
Unit that was required to be purchased by such Defaulting Investor shall be
deemed to be the amount of interest that would accrue on $3.98 at the rate of
24.9% per annum (or, if less, the maximum rate permitted by law) during the
period from the First Closing through the date such Defaulting Investor
purchases all the Units such Defaulting Investor was required to purchase at
such Subsequent Closing. In addition, each Defaulting Investor shall be liable
for all costs relating to the enforcement of such Defaulting Investor's
obligations under this Agreement, including, without limitation, all attorneys'
fees (all of which costs periodically shall be reimbursed as incurred).
(e) The total of the WSI Investors' obligations to
purchase Units hereunder shall be $10,000,000, plus any LIBOR Accruals in
respect of any such amount not invested at the First Closing, and vis-a-vis
other Investors and, except as specifically set forth in this paragraph (e), the
Company, the WSI Investors shall be treated as one Investor for all purposes
under this Section 1. The WSI Investors shall be obligated to purchase Units,
severally and not jointly, as follows: (i) WEG III shall be obligated to
purchase $1,000,000 of the Units to be purchased by the WSI Investors (plus any
LIBOR Accruals due in respect of the purchase of such Units, the "WEG III
Commitment") and (ii) WEG IV shall be obligated to purchase $6,000,000 of Units
to be purchased by the WSI Investors hereunder (plus any LIBOR Accruals due in
respect of the purchase of such Units, the "WEG IV Initial Commitment"), and WSI
shall not be required to purchase Units under this Agreement until all of the
Units to be purchased under the WEG III Commitment and WEG IV Initial Commitment
have been, or have been required by the Company to be, purchased. Thereafter,
the WSI Investors' Remaining Commitment (initially $3,000,000 plus any LIBOR
Accruals due in respect of the purchase of such Units) shall be divided between
WEG IV and WSI such that each is responsible for 25% and 75%, respectively,
thereof, provided, that in the event that WEG IV fails to purchase any Units
other than Units to be purchased under the WEG IV Initial Commitment, WSI shall
be solely responsible for the purchase of such Units and for any interest due as
provided in paragraph 1.2 (d) above and the Company shall have recourse solely
against WSI in connection with any failure by WSI to purchase such Units
(including that WSI shall be solely responsible for all costs and expenses
related to the enforcement of such obligations).
<PAGE> 13
1.3 Certain Definitions Several Obligations. The total amount
of Series D Stock (and in the case of JPMIC and IAB, the Series G Common Share
and Series H Common Share, respectively) sold to the Investors pursuant to this
Agreement is sometimes hereinafter referred to as the "Shares". The total amount
of the Non-Voting Series E Convertible Preferred Stock, par value $0.01 per
share, of the Company issuable upon conversion of Series D Stock is sometimes
hereinafter referred to as "Non-Voting Series E Stock." The Series A Common
Stock issuable directly or indirectly upon conversion of the Series D Stock
and/or Non-Voting Series E Stock and upon exercise of the Options (and in the
case of JPMIC and IAB, upon conversion of the Series G Common Share and Series H
Common Share, respectively) is sometimes hereinafter referred to as the
"Conversion Series A Common Stock." The non-voting common stock, par value $0.01
per share, of the Company (the "Non-Voting Common Stock") issuable upon
conversion of each of the Series A Common Stock and Non-Voting Series E Stock is
hereinafter referred to as the "Conversion Non-Voting Common Stock" and,
together with the Conversion Series A Common Stock, is hereinafter referred to
as the "Conversion Stock." The Shares, Options and Notes (and in the case of
JPMIC and IAB, the Series G Common Share and Series H Common Share,
respectively) are sometimes hereinafter collectively referred to as the
"Purchased Securities". The Purchased Securities and the Conversion Stock are
sometimes hereinafter collectively referred to as the "Securities." The sale of
the Securities to each Investor under this Agreement shall constitute a separate
sale, and the obligations of each Investor under this Agreement shall be
separate from and independent of the obligations of each other Investor under
this Agreement.
1.4 First Closing. Subject to the conditions set forth below,
the purchase and sale of Units at the First Closing shall take place on the date
of the execution and delivery of this Agreement at the offices of Cadwalader,
Wickersham & Taft, 100 Maiden Lane, New York, New York 10038, at 10:00 a.m., or
at such other time and place as the Company and each of the Investors mutually
agree upon orally or in writing (which time and place are designated as the
"First Closing"). At the First Closing, the Company shall deliver to each
Investor a certificate and instruments, as applicable, representing the
Purchased Securities to be purchased by such Investor at the First Closing,
against delivery to the Company by such Investor of a wire transfer in the
amount of the aggregate purchase price therefor. Such certificates and
instruments shall be issued in the names and the amounts set forth on Schedule A
hereto. The execution and delivery of this Agreement and the First Closing shall
be simultaneous in that neither the execution and delivery of this Agreement nor
any event required by the terms of this Agreement to occur at the First Closing
shall be deemed to have occurred until such execution and delivery and all such
events shall have occurred, and when such execution and delivery and all such
events have occurred, they shall be deemed to have occurred simultaneously.
1.5 Subsequent Closings. Subject to the conditions set forth
below, the purchase and sale of Units at Subsequent Closings shall take place at
the offices of
<PAGE> 14
Cadwalader, Wickersham & Taft, 100 Maiden Lane, New York, New York 10038, at
10:00 a.m. on the date specified in the applicable Subsequent Closing Notice, or
at such other time and place as the Company and the Investors purchasing 662/3%
of the Purchased Securities to be purchased at such Subsequent Closing mutually
agree upon orally or in writing (which time and place are designated as a
"Subsequent Closing"). The Company shall give each Investor at least twenty (20)
days prior written notice (the "Subsequent Closing Notice") of each Subsequent
Closing, which notice shall specify the date and time of such Subsequent
Closing, the aggregate number of Units to be purchased and sold at such
Subsequent Closing, the amount of the LIBOR Accrual per Unit, instructions for
the payment of the purchase price and, if applicable, each Investor's Ratable
Share to be purchased at such Subsequent Closing. In the event an Investor or
Investors elect to request a Subsequent Closing, such Investor(s) shall deliver
a written notice to the Company requesting such Subsequent Closing (an "Investor
Notice"). The Company shall, promptly after receipt of an Investor Notice,
deliver a Subsequent Closing Notice to each of the Investors. Such Subsequent
Closing Notice shall provide each Investor with at least twenty (20) days prior
written notice of the proposed Subsequent Closing, and shall provide each
Investor a period of not less than ten (10) days in which to notify the Company
of the number of Units, if any, such Investor has elected to purchase at the
Subsequent Closing. No Investor shall be obligated to purchase any Units at a
Subsequent Closing requested by another Investor(s) and no Investor's rights or
obligations under this Agreement shall be affected by the failure of an Investor
to participate in such a Subsequent Closing. At each Subsequent Closing, the
Company shall deliver to each Investor participating in such Subsequent Closing
a certificate and instruments representing the Purchased Securities to be
purchased by such Investor, against delivery to the Company by such Investor of
a wire transfer in the amount of the aggregate purchase price therefor. Such
certificates and instruments shall be issued in the names and the proportions
set forth on Schedule A hereto.
1.6 JPMIC Fee. At the First Closing, JPMIC shall be entitled
to receive a fee of 4.0% of the aggregate consideration to be provided by JPMIC
under this Agreement (the "Fee"). JPMIC shall be entitled, at its option, to
offset the aggregate amount of consideration payable by JPMIC to the Company at
the First Closing by the amount of the Fee.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants to, and agrees with, the Investors, except as set forth
on the Schedule of Exceptions furnished to the Investors and attached hereto as
Schedule 1, specifically identifying the relevant subsection hereof, which
exceptions shall be deemed to be representations and warranties as if made
hereunder, as follows:
2.1 Organization, Good Standing and Qualification. Each of the
Company, Sprout Edison Project, Inc., a Delaware corporation and a wholly-owned
subsidiary of the Company ("SEP") and The Edison Project L.P., a Delaware
limited partnership, the sole general partner and 74.56203% owner of which is
the Company
<PAGE> 15
and the sole limited partner and 25.43797% owner of which is SEP ("Edison LP"
and, together with SEP, the "Subsidiaries"; the Company and the Subsidiaries are
sometimes hereinafter collectively referred to as the "Companies"), is duly
organized, validly existing and in good standing under the laws of the State of
Delaware. Each of the Companies has all requisite power and authority to carry
on its business as now conducted and as proposed to be conducted in the
Confidential Information Memorandum dated November, 1997, the Supplement thereto
dated November 14, 1997 and the Second Supplement thereto dated December 13,
1997 (collectively, the "Memorandum"). The Company has all requisite power and
authority to enter into and perform this Agreement and the transactions
contemplated hereby. Each of the Companies is duly qualified to transact
business and is in good standing in each jurisdiction in which the failure so to
qualify could have a material adverse effect on its business, properties,
operations, earnings, assets, liabilities, condition (financial or otherwise) or
prospects (collectively, "Condition").
2.2 Capitalization. After giving effect to the transactions
contemplated by this Agreement, and immediately after the First Closing, the
capital stock of the Company, as authorized by the Certificate, will consist of.
(i) 94,390,253 shares of common stock, par value $0.01 per share (collectively,
the "Common Stock") of the Company, of which (A) 87,630,826 shares shall have
been designated Series A Common Stock, 6,214,704 shares of which will be issued
and outstanding, 14,101,728 shares of which will be reserved for issuance upon
conversion, directly or indirectly, of the Series D Stock, 947,163 shares of
which will be reserved for issuance upon exercise of the Options, 37,563,144
shares of which will be reserved for issuance upon conversion of the outstanding
shares of Preferred Stock (other than Series D Stock) of the Company, and
18,200,250 shares will be reserved for issuance upon exercise of the options and
warrants described on Schedule 2, (B) one share shall have been designated as
Series B Common Stock, which share will be issued and outstanding, (C) one share
shall have been designated as Series C Common Stock, which share shall be issued
and outstanding, (D) one share shall have been designated as Series D Common
Stock, which share will be issued and outstanding, (E) one share shall have been
designated as Series E Common Stock, which share will be issued and outstanding,
(F) one share shall have been designated as Series F Common Stock, which share
will be issued and outstanding, (G) one share shall have been designated as
Series G Common Stock, which share will be issued and outstanding, (H) one share
shall have been designated as Series H Common Stock, which share will be issued
and outstanding, and (I) 6,759,420 shares shall have been designated as
NonVoting Common Stock, none of which will be issued and outstanding and all of
which will be reserved for issuance upon conversion of Non-Voting Series E Stock
and/or Series A Common Stock; and (ii) 65,028,129 shares of Preferred Stock, par
value $0.01 per share (collectively, the "Preferred Stock"), of the Company, of
which (I) 31,000,000 shares shall have been designated Series A Convertible
Preferred Stock (the "Series A Stock"), 30,294,435 shares of which will be
issued and outstanding and 213,333 of which will be reserved for issuance upon
exercise of warrants issued to Comdisco, Inc., (II) 1,010,101 shares shall have
been designated Series B Convertible Preferred Stock
<PAGE> 16
(the "Series B Stock"), of which 1,010,101 shares will be issued and outstanding
(III) 6,258,608 shares shall have been designated Series C Convertible Preferred
Stock (the "Series C Stock"), of which 6,258,608 shares will be issued and
outstanding, (IV) 20,000,000 shares shall have been designated Series D Stock,
of which 5,689,432 shares will be issued and outstanding, and 8,412,296 shares
will be reserved for issuance pursuant to this Agreement, and (V) 6,759,420
shares shall have been designated Non-Voting Series E Stock, no shares of which
will be issued and outstanding and all of which will be reserved for issuance
upon conversion of Series D Stock. The rights, privileges and preferences of the
Common Stock and Preferred Stock are as stated in the Certificate, a true and
complete copy of which is attached hereto as Exhibit A. Except as set forth on
Schedule 2 and except for conversion rights of issued and outstanding shares of
Preferred Stock, as of the First Closing, the Company will not (i) have
outstanding any capital stock or other securities convertible into or
exchangeable for any shares of its capital stock and, except for the preemptive
rights contained in the Amended and Restated Shareholders' Agreement in the form
of Exhibit E hereto (the "Shareholders Agreement") and except as provided herein
no person will have any right against the Company to subscribe for or to
purchase from the Company (including conversion or preemptive rights), or any
options for the purchase from the Company of, or any agreements providing for
the issuance (contingent or otherwise) by the Company of, or any calls,
commitments or other claims of any character against the Company relating to,
any capital stock or any stock or securities convertible into or exchangeable
for any capital stock of the Company; (ii) have any capital stock, equity
interests or other securities reserved for issuance for any purpose; or (iii) be
subject to any obligation (contingent or otherwise) to repurchase or otherwise
acquire or retire any shares of its capital stock or any convertible securities,
rights or options of the type described in the preceding clause (i). Except as
set forth on Schedule 2, no outstanding options, warrants or other securities
directly or indirectly exercisable for or convertible into any class or series
of the Company's capital stock require anti-dilution adjustments by reason of
the transactions contemplated by this Agreement. All of the issued and
outstanding shares of Common Stock and Preferred Stock have been duly and
validly issued, are fully paid and nonassessable and were issued in compliance
with all applicable federal and state securities laws. All of the shares of
Series D Stock, Conversion Stock and Non-Voting Series E Stock and the Series G
Common Share and the Series H Common Share, when issued as contemplated hereby,
(i) will be duly and validly issued, fully paid and nonassessable, (ii) except
as set forth in the Shareholders Agreement, will be free of any Liens (as
defined below) other than those created by the Investor, and (iii) will be
issued in compliance with all applicable federal and state securities laws. To
the best knowledge of the Company, there are no agreements among the Company's
stockholders with respect to the voting or transfer of the Company's capital
stock, other than the agreements regarding voting contained in the Shareholders
Agreement and the agreements regarding transfer contained in the Shareholders
Agreement. Schedule 2 sets forth a complete and correct list of (i) the name of
each of the Company's stockholders and the number of shares and class and series
of capital stock registered in the name of such stockholder, and (ii) the name
of each holder of an outstanding
<PAGE> 17
stock option and/or warrant, and the number of options and/or warrants to
purchase capital stock owned by such holder (and the applicable class and series
of capital stock) and the exercise price at which such option(s) or warrants may
be exercised.
2.3 Authority; Execution and Delivery; Requisite Consents,
Nonviolation. The Company has, and as of the First Closing will have, all
requisite power and authority to execute, deliver and perform this Agreement,
the Notes, the Options, the Shareholders Agreement and each other document or
instrument executed by it, or any of its officers, in connection herewith or
therewith or pursuant hereto or thereto (this Agreement, together with all of
the foregoing documents and instruments, are sometimes collectively referred to
herein as the "Company's Document"), and to consummate the transactions
contemplated hereby and thereby. The execution, delivery and performance of this
Agreement and the other Company's Documents and the consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by all necessary action on the part of the Company and its
stockholders. This Agreement and each of the other Company's Documents that has
been executed as of the date hereof is, and each of the Company's Documents will
be as of the First Closing, duly executed and delivered by the Company and the
legal, valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms, except as the enforceability thereof may
be limited by bankruptcy, insolvency or other similar laws affecting the
enforceability of creditors' rights in general or by general principles of
equity. The execution, delivery and performance of this Agreement and the other
Company's Documents (including, without limitation, the Notes, the Options and
the Shareholders Agreement), the consummation by the Company of the transactions
contemplated hereby and thereby (including, without limitation, the offer, sale
and delivery by the Company of the Purchased Securities) will not (a) except for
filings required to comply with the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act") and the filing of the Certificate with the
Secretary of State of the State of Delaware require the consent, license,
permit, waiver, approval, authorization or other action of, by or with respect
to, or registration, declaration or filing with, any court or governmental
authority, department, commission, board, bureau, agency or instrumentality,
domestic or foreign ("Governmental Authority") or any other individual,
partnership, corporation, unincorporated organization or association, limited
liability company, trust or other entity (collectively, a "Person") other than
such as shall already have been made or obtained and shall be in full force and
effect; (b) violate or conflict with any provision of the Certificate, or the
Amended and Restated By-Laws of the Company as in effect immediately prior to
the execution and delivery of this Agreement; or (c) constitute a default under
(with or without notice or lapse of time or both), violate or conflict with, or
give rise to a right of termination, cancellation or acceleration under, or
result in a loss of a material benefit under, any Law (as defined in Section
2.14 below), Contract (as defined in Section 2.8 below), rights relating to
Intellectual Property (as defined in Section 2.9 below), Permit (as defined in
Section 2.14 below) or Order (as defined in Section 2.13 below) to which the
Company is or hereafter may be a party or by which the Company or its properties
are or hereafter may be bound.
<PAGE> 18
2.4 Subsidiaries. Schedule 3 correctly sets forth all of the
subsidiaries of the Company, the place of incorporation or organization (as
applicable) of each such subsidiary and its authorized capitalization, its
shares of capital stock or partnership interests (as applicable) outstanding,
and the record and beneficial owner of those shares or partnership interests.
Except for the Subsidiaries, the Company does not, and prior to the First
Closing will not, own or control, directly or indirectly, any partnership
interests, stock or other equity interests in any partnership, corporation or
other entity or any voting rights or right to control the policies and direction
of any partnership, corporation or other entity. There are not outstanding (and
neither the Company nor any Subsidiary has any plan to issue, grant or enter
into) any options, warrants, rights (including conversion or preemptive rights),
subscriptions or agreements for the purchase or acquisition from or by the
Company or any Subsidiary of any shares of capital stock of any Subsidiary.
Other than the Amended and Restated Agreement of Limited Partnership of Edison
LP, as amended, there are no voting agreements, voting trust agreements,
shareholder agreements or other agreements relating to the capital stock or
equity of any of the Subsidiaries.
2.5 Financial Information. The Company previously has provided
to each Investor its consolidated balance sheet as of June 30, 1997, and the
related consolidated statements of operations, stockholders' equity and cash
flows for the year then ended (the "Audited Financials"), as audited by Coopers
& Lybrand L.L.P., who issued their report thereon dated September 26, 1997.
Attached hereto as Exhibit F is an unaudited consolidated balance sheet of the
Company as of November 30, 1997 and the related unaudited consolidated statement
of operations for the period then ended (the "Unaudited Financials" and,
together with the Audited Financials, the "Financial Statements"). The Financial
Statements are complete and correct in all material respects; are in accordance
with the books of account, ledgers and records of the Companies; have been
prepared in conformity with generally accepted accounting principles applied, in
the case of the Unaudited Financials, on a basis consistent with that of the
Audited Financials; and present fairly the consolidated financial position,
results of operations and cash flows of the Companies as of the respective dates
thereof. Except as reflected in the Unaudited Financials, in the footnotes to
the Audited Financials and in Part 2.5 of Schedule 1, none of the Companies has
on the date hereof, and none of the Companies will have as of the First Closing,
any obligation or liability, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business and consistent with past practice
since the date of the Audited Financials, which liabilities are not,
individually or in the aggregate, material to the Condition of the Companies,
taken as a whole (ii) obligations under Scheduled Contracts or Contracts of a
type not required to be listed as Scheduled Contracts, and (iii) obligations and
liabilities which, individually or in the aggregate, are not material to the
Condition of the Companies taken as a whole. The Company and each of the
Subsidiaries maintain and will continue to maintain a standard system of
accounting established and administered in accordance with generally accepted
accounting principles.
<PAGE> 19
2.6 Certain Changes or Events. Except as set forth in Part 2.6
of Schedule 1, since June 30, 1997, the business of each of the Companies has
been operated only in the ordinary course, consistent with past practice, and in
addition to, and not in limitation of the foregoing: (i) there has been no
change in the Condition of any of the Companies, except for changes in the
ordinary course of business consistent with past practice which have not been,
in the aggregate, materially adverse to the Companies taken as a whole; (ii)
there has been no change of Laws, no revocation or change in any Contract or
Permit or right to do business, and no other event or occurrence of any
character, whether or not insured against, which has resulted, or could
reasonably be expected to result, in a material adverse change in the Condition
of the Companies taken as a whole; (iii) except as reflected in the Unaudited
Financials, the Company has not authorized or made any distributions, or
declared or paid any dividends, upon or with respect to any of its capital
stock, or other equity interests, nor has the Company redeemed, purchased or
otherwise acquired, or issued or sold, any of its capital stock or other equity
interests; (iv) none of the Companies has entered into any transaction, other
than in the ordinary course of business and consistent with past practice, which
is material to the Companies taken as a whole; (v) except as reflected in the
Unaudited Financials, none of the Companies has incurred any indebtedness for
borrowed money or made any loans or advances to any Person; (vi) there has been
no waiver by any of the Companies of a valuable right or of a material debt owed
to it; (vii) none of the Companies has failed to satisfy or discharge any Lien,
except in the ordinary course of business and which is not material to the
Condition of the Companies taken as a whole (as such business is presently
conducted and as it is proposed to be conducted); (viii) there has been no
material change in any compensation, arrangement or agreement with any key
employee, director, stockholder or Affiliate (as defined below); and (ix) there
has been no agreement or commitment by any of the Companies to do or perform any
of the acts described in this Section 2.6. "Affiliate" of a specified Person
shall mean a Person that directly, or indirectly through one or more
intermediaries, controls or is controlled by, or is under common control with,
the Person specified.
2.7 Title to Assets. Except as set forth in Part 2.7 of
Schedule 1, each of the Companies has good and marketable title to all of its
assets and properties, free and clear of any liens, pledges, security interests,
claims or encumbrances (collectively, "Liens") and, with respect to any assets
or properties it leases, each Company holds a valid and subsisting leasehold
interest therein, free and clear of any Liens, is in compliance, in all material
respects, with the terms of the applicable lease, and enjoys peaceful and
undisturbed possession under such lease. All of the assets and properties of
each of the Companies that are material to the conduct of business as presently
conducted or as proposed to be conducted by the Companies taken as a whole are
in good operating condition and repair, subject to ordinary wear and tear.
2.8 Contracts. None of the Companies is a party to, nor are
any of the Companies or any of their respective assets or properties bound by,
or subject to, any contracts, agreements, notes, instruments, franchises,
leases, licenses, commitments,
<PAGE> 20
arrangements or understandings, written or oral (collectively, "Contracts") of
the following types, except for those (the "Scheduled Contracts") listed in Part
2.8 of Schedule 1 hereto:
(a) any Contracts pursuant to which any of the
Companies, or another party thereto, is obligated to pay in excess of fifty
thousand dollars ($50,000) per year,
(b) any Contracts pursuant to which any of the
Companies acquired the right to use any Intellectual Property or information
that is material to or necessary in the business of such Company, or pursuant to
which any of the Companies has granted to others the right to use, or which
otherwise relates to, its Intellectual Property;
(c) any Contracts (other than advances of expenses to
employees in the ordinary course of business) involving loans, loan agreements,
debt securities, mortgages, deeds of trust, security agreements, suretyships or
guarantees;
(d) any Contracts between any of the Companies, on
the one hand, and any of their respective officers, directors, employees or
Persons that beneficially own in excess of 1.0% of the outstanding equity
interest of the Company (each a "Principal Owner") or any Affiliate or relative,
or Affiliate of a relative, of any of the foregoing, on the other;
(e) other than the Stock Option Plans, any deferred
compensation agreements, bonus, pension, profit sharing, stock option and
incentive plans or arrangements, hospitalization, medical and insurance plans,
agreements and policies, retirement and severance plans and other employee
compensation policies and agreements affecting employees of any of the
Companies;
(f) any Contracts with any labor union affecting
employees of any of the Companies;
(g) any Contracts which restrict any of the Companies
from freely engaging in business or competing anywhere; or
(h) any Contracts which otherwise are material to the
Condition of any of the Companies.
True and correct copies of all Scheduled Contracts have been
made available to the Investors. Except as set forth on Part 2.8 of Schedule 1
hereto, all of the Scheduled Contracts are in full force and effect and
constitute legal, valid and binding obligations of each of the Companies that is
a party thereto and, to the best knowledge of the Company, the other parties
thereto; the Companies and, to the best knowledge of the Company, each other
party thereto, has performed in all material
<PAGE> 21
respects all obligations required to be performed by it under the Scheduled
Contracts, and no material violation exists in respect thereof on the part of
any of the Companies or, to the best knowledge of the Company, any other party
thereto; and none of the Scheduled Contracts is currently being renegotiated.
The validity, effectiveness and continuation of all Scheduled Contracts will not
be adversely affected by the transactions contemplated by this Agreement. No
default or violation exists under any Contract(s) which, in the aggregate, are
material to the Companies taken as a whole.
2.9 Intellectual Property. (a) (i) Set forth on Part 2.9 of
Schedule 1 hereto is a true, correct and complete list of all patents,
trademarks, service marks, trade names, brand names, proprietary computer
software and programs, franchises, proprietary technology and registered
copyrights, and any applications for any of the foregoing (collectively, the
"Intellectual Property") of any kind which in any material respect are used in
the business of the Companies. Part 2.9 of Schedule 1 hereto contains a true,
correct and complete list of all licenses or agreements that in any way affect
the rights of the Companies to any of the Intellectual Property or any trade
secret material of the Companies (the "Intellectual Property Licenses").
(ii) Except as set forth in Part 2.9 of
Schedule 1, the Companies are the sole and exclusive owners, free and
clear of all Liens, and have all right, title and interest in all of
the Intellectual Property. With respect to any Intellectual Property or
trade secret necessary to conduct its business, each Company owns or
has the exclusive right to use such Intellectual Property or trade
secret in its business.
(iii) Each of the Intellectual Property
Licenses is in full force and effect and constitutes a legal, valid,
binding and enforceable obligation in accordance with its terms against
each Company party thereto, and, to the best knowledge of the Company,
each other Person party thereto. Each Company has performed all
obligations imposed upon it under each of the Intellectual Property
Licenses to which it is a party. None of the Companies nor, to the best
knowledge of the Company, any other party thereto is in default
thereunder, nor, to the best knowledge of the Company, is there any
event that with notice or lapse of time, or both, would constitute a
default thereunder. None of the Companies has received any notice that
any other party to any of the Intellectual Property Licenses intends to
cancel, terminate or refuse to renew the same or to exercise or decline
to exercise any option or other right thereunder. No licenses,
sublicenses, covenants or agreements have been granted or entered into
by any Company in respect of any of the Intellectual Property or any
trade secret material of any Company, except the Intellectual Property
Licenses. To the best knowledge of the Company, no director, officer,
stockholder, employee or other Affiliate of the Company owns, directly
or indirectly, in whole or in part, any of the Intellectual Property or
any trade secret material of any Company. Except as set forth on Part
2.9 of Schedule 1 hereto, to the best knowledge of the Company, no
director, officer, employee or Affiliate of any
<PAGE> 22
Company has entered into any agreement relating to the Companies'
business regarding the assignment of rights in inventions, or
prohibiting or restricting competition or solicitation of customers, or
any other similar restrictive agreement or covenant, whether written or
oral, with any Person other than a Company.
(iv) The consummation of the transactions
contemplated hereby will not alter or impair the rights of any Company
to any of the Intellectual Property, any trade secret material to any
Company, or under any of the Intellectual Property Licenses.
(b) (i) No claim with respect to the Intellectual
Property, any trade secret material to the Company, or any Intellectual Property
License which would adversely affect the ability of any Company to conduct its
business as presently conducted and as proposed to be conducted is currently
pending or, to the best knowledge of the Company, has been asserted, or overtly
threatened by any Person, nor does the Company know of any grounds for any claim
against any Company, (A) to the effect that any operation or activity of any
Company presently occurring or contemplated, including, inter alia, the
manufacture, use or sale of any product, device, instrument, or other material
made or used according to the patents or patent applications included in the
Intellectual Property or Intellectual Property Licenses, infringes or
misappropriates any United States or foreign copyright, patent, trademark,
service mark or trade secret; (B) to the effect that any other Person infringes
on the Intellectual Property or misappropriates any trade secret or know-how or
other proprietary rights material to any Company; (C) challenging the ownership,
validity or effectiveness of any of the Intellectual Property or trade secret
material of such Company; or (D) challenging the license of any Company or other
legally enforceable right under, any Intellectual Property or the Intellectual
Property Licenses.
(ii) None of the Companies is aware of any
presently existing United States or foreign patents or any patent
applications which if issued as patents would be infringed by any
activity contemplated by any Company.
2.10 Insurance. Each of the Companies has in full force and
effect (i) fire and casualty insurance policies, with extended coverage,
sufficient in amount (subject to reasonable deductibles) to allow it to replace
any of its properties that might be damaged or destroyed, (ii) all workers'
compensation or similar insurance required by the laws of any jurisdiction in
which the business of such Company is operated, (iii) public liability insurance
against claims for personal injury, death or property damage suffered upon, in
or about any premises occupied by such Company or occurring as a result of the
ownership, maintenance or operation by such Company of any automobile, truck or
other vehicle, (iv) products liability insurance against claims for personal
injury, death or property damage suffered as a result of the distribution,
resale or use of products distributed, manufactured, produced or sold by such
Company or services rendered by it, providing coverage in such amounts as is
customary for companies of
<PAGE> 23
established reputation engaged in the same or similar business and similarly
situated, (v) comprehensive general liability insurance providing coverage in
such amount as is customary for companies of established reputation engaged in
the same or similar business and similarly situated, and (vi) such other
insurance policies as are sufficient for compliance with all requirements of law
and applicable agreements.
2.11 Labor Union Activities; Employee Relations. Except as set
forth in Part 2.11 of Schedule 1, no employee of any of the Companies is
represented by any labor union or covered by any collective bargaining agreement
to which the Company is a party or is subject or by which it is bound; nor, to
the best knowledge of the Company, has any labor union sought to represent any
employee of any of the Companies. There is no strike or other labor dispute
involving or affecting any of the Companies pending, or to the best knowledge of
the Company, threatened. To the best knowledge of the Company, no officer or key
employee intends to terminate his employment with any of the Companies. To the
best knowledge of the Company, no officer or key employee of any of the
Companies is a party to or bound by any Contract, or subject to any restrictions
(including, without limitation, any non-competition restriction), which would
restrict the right of such person to participate in the affairs of any of the
Companies.
2.12 ERISA. Part 2.12 of Schedule 1 contains a true and
complete list of all "employee benefit plans," within the meaning of Section
3(3) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and any other bonus, profit sharing, compensation, severance,
deferred compensation, fringe benefit, insurance, welfare, medical,
post-retirement health or welfare benefit, life, stock option, stock purchase,
disability, termination, retention or other plan, agreement, trust fund or
arrangement (whether written or unwritten), maintained, sponsored or contributed
to by the Company or any entity that would be deemed a "single employer" with
the Company under Section 414(b), (c), (m) or (o) of the Internal Revenue Code
of 1986, as amended (the "Code") or Section 4001 of ERISA (an "ERISA Affiliate")
on behalf of any employee of the Company or any ERISA Affiliate (whether
current, former or retired) or their beneficiaries or with respect to which the
Company or any ERISA Affiliate has or has had any obligation on behalf of any
such employee or beneficiary (each a "Plan" and, collectively, the "Plans").
(a) None of the ERISA Affiliates or the Company has
ever contributed to or contributes to, been required to contribute to, or
otherwise participated in or participates in (i) any "multiemployer plan"
(within the meaning of Section 4001 (a) (3) of ERISA or Section 414(f) of the
Code), (ii) any single employer pension plan (within the meaning of Section 4001
(a)(1 5) of ERISA) which is subject to Sections 4063 and 4064 of ERISA or (iii)
any plan subject to Title IV of ERISA or Section 412 of the Code.
(b) The Company, each ERISA Affiliate, each Plan and
each "plan sponsor" (within the meaning of Section 3(16) of ERISA) and each
"employee benefit plan" (within the meaning of Section 3(3) of ERISA) has
complied in all material
<PAGE> 24
respects with applicable law including, without limitation, the Code and ERISA,
and each Plan complies with and has been maintained and operated in all material
respects in accordance with its terms.
(c) With respect to each of the Plans on Part 2.12 of
Schedule 1: (i) all payments required by any Plan or by law with respect to all
periods through the date of the First Closing have been made prior to the First
Closing; (ii) no "prohibited transaction," within the meaning of Section 4975 of
the Code and Section 406 of ERISA, has occurred, or to the best of the Company's
knowledge is expected to occur, with respect to any Plan which has subjected or
could subject the Company, any officer, director or employee thereof or any
trustee, administrator or other fiduciary, to a tax or penalty on prohibited
transactions imposed by either Section 502 of ERISA or Section 4975 of the Code,
or any other liability with respect thereto; and (iii) no Plan is under audit or
investigation by the Internal Revenue Service or the Department of Labor or any
other governmental authority and no such completed audit, if any, has resulted
in the imposition of any tax or penalty.
2.13 Litigation. Except as set forth in Part 2.13 of Schedule
1, there is no action, suit, proceeding, investigation or governmental approval
process (collectively, "Actions") pending or, to the best knowledge of the
Company, threatened against any of the Companies, or affecting any of the
properties or assets of any of the Companies (including, without limitation, any
of its Permits) which individually or in the aggregate could have a material
adverse effect on the Condition of the Companies taken as a whole. To the best
knowledge of the Company, there is no Action against any director, officer or
employee of any of the Companies in connection with the business of any of the
Companies which, in the event of an adverse judgment against any such Person,
could have a material adverse effect on the Condition of the Companies taken as
a whole. The foregoing includes, without limitation, any Action pending or, to
the Company's best knowledge, threatened involving the prior employment of any
employees of any of the Companies, their use in connection with the business of
any of the Companies of any information or techniques allegedly proprietary to
any of their former employers, or their obligations under any agreements with
prior employers. None of the Companies nor any of their respective assets or
properties, nor, in connection with its business, any stockholder, director,
officer or employee of any of the Companies, is subject to any order, judgment,
writ, injunction, decree, ruling or decision (collectively, an "Order") of any
Governmental Authority which is material to the Condition the Companies taken as
a whole. There is no Action by any of the Companies currently pending or which
any of the Companies intends to initiate which is material to the Condition of
the Companies taken as a whole.
2.14 Compliance with Laws; Permits. Except as set forth in
Part 2.14 of Schedule 1 hereto, none of the Companies has violated or failed to
comply with, in any material respect, any material statute, law, ordinance,
rule, regulation or policy of any Governmental Authority (collectively, "Laws")
to which it or any of its properties or assets is subject. Each of the Companies
has all permits, licenses, orders, certificates,
<PAGE> 25
authorizations and approvals of any Governmental Authority (collectively, the
"Permits") that are material to the conduct of the Companies' business as
presently conducted and as proposed to be conducted; all such Permits are, and
as of the First Closing will be, in full force and effect; no violations or
notices of failure to comply have been issued or recorded in respect of any such
Permits; and none of the Companies has any knowledge of any reason why such
Permits may be revoked or suspended. All material applications, reports, notices
and other documents required to be filed by the Companies with all Governmental
Authorities have been timely filed and are complete and correct in all material
respects as filed or as amended prior to the date hereof. With respect to any
required Permits, applications for which are either pending or contemplated to
be made pursuant to the business strategy of the Companies, none of the
Companies knows of any reason why such Permits should not be approved and
granted by the appropriate Governmental Authority. None of the Companies nor any
of their respective officers or agents has made any illegal or improper payments
to, or provided any illegal or improper inducement for, any governmental
official or other Person in an attempt to influence any such Person to take or
to refrain from taking any action relating to any of the Companies.
2.15 Taxes. Except as set forth in Part 2.15 of Schedule 1
hereto, all federal, state, city, county, local and foreign income, franchise,
sales, use and value added tax returns and reports, and all other material tax
returns and reports required to be filed by any Company in those or in any other
jurisdiction (collectively, "Return") have been timely filed. All such Returns
were true, correct and complete in all material respects at the time of filing.
All taxes, assessments, fees, interest, penalties and other charges with respect
thereto (collectively, "Taxes") due or claimed to be due from any of the
Companies have been paid except to the extent reserved against on the Financial
Statements. Except as set forth in Part 2.15 of Schedule 1 hereto, there are no
pending audits of any income tax return of any of the Companies by the
applicable Governmental Authority, and there are in effect no waivers of the
applicable statute of limitations for Taxes in any jurisdiction for any of the
Companies for any period.
2.16 Books and Records. The books of account, ledgers and
records of each of the Companies accurately and completely reflect in all
material respects all material information relating to its business, the nature,
acquisition, maintenance, location and collection of its assets, and the nature
of all transactions giving rise to its obligations or accounts receivable. The
minute books of each of the Companies fully set forth all action taken by the
Board of Directors, stockholders and, if any, executive board (or other
committee thereof) of each such Company.
2.17 Environmental Matters. The business, assets and
properties of each of the Companies are and have been operated and maintained in
compliance with all applicable federal, state, city, county and local
environmental protection laws and regulations (collectively, the "Environmental
Laws"). Except as set forth in Part 2.17 of Schedule 1, no event has occurred
which, with or without the passage of time or the giving of notice, or both,
would constitute a non-compliance by any of the Companies
<PAGE> 26
with, or a violation by any of the Companies of, the Environmental Laws and none
of the Companies nor any of their respective predecessor companies has caused or
permitted to exist, as a result of an intentional or unintentional act or
omission, a disposal, discharge or release of solid wastes, pollutants or
hazardous substances, on or from any site which currently is or formerly was
owned, leased, occupied or used by any of the Companies or any predecessor
company, except where such disposal, discharge or release was in compliance with
the Environmental Laws. Part 2.17 of Schedule 1 hereto contains a complete and
correct list of the name and location of each site (i) which is listed, or
proposed for listing on a registry or inventory of inactive hazardous waste
sites maintained by any Governmental Authority and which currently is or
formerly was owned, leased, occupied or used by any of the Companies or any
predecessor company or (ii) with respect to which any of the Companies or any
predecessor company has received notice that such Company is considered to be a
potentially responsible person for cleanup or other liability in respect of
Environmental Laws.
2.18 Transactions with Affiliates. Except as set forth on Part
2.18 of Schedule 1, none of the Companies is a party or subject to any
contractual obligation between any such Company and any officer, director,
stockholder, partner or employee of any of the Companies or, to the best
knowledge of the Company, any affiliate of any thereof, including without
limitation any contractual obligation providing for the furnishing of services
to or by, providing for rental of property, real, personal or mixed, to or from,
or providing for the lending or borrowing of money to or from or otherwise
requiring payments to or from, any such person, other than employment agreements
that individually or in the aggregate are not material to the Companies taken as
a whole. To the best knowledge of the Company, no past or present Principal
Owner of any of the Companies, nor any of his or its Affiliates, associates or
relatives, has any direct or indirect interest of any kind in any business or
entity which is competitive with the Companies.
2.19 Registration Rights. Except as set forth in Part 2.19 of
Schedule 1 and as provided in the Shareholders Agreement, no Person has, and as
of the First Closing no Person shall have, demand, "piggy-back," or other rights
to cause any of the Companies to file any registration statement under the
Securities Act of 1933, as amended (the "Securities Act") relating to any
securities of any of the Companies or to participate in any such registration
statement.
2.20 No Brokers or Finders. Except for agreements with J.P.
Morgan Securities Incorporated and with NationsBanc Montgomery Securities, Inc.,
none of the Companies nor any of their respective Affiliates has entered into or
will enter into any agreement pursuant to which any of the Companies or any
Investor will be liable, as a result of the transactions contemplated by this
Agreement or any of the Company's Documents, for any claim of any Person for any
commission, fee or other compensation as finder or broker.
<PAGE> 27
2.21 Investment Company Act. Neither the Company nor any of
its Subsidiaries is an "investment company" nor is the Company or any of its
Subsidiaries directly or indirectly controlled by or acting on behalf of any
Person which is an "Investment Company" within the meaning of the Investment
Company Act of 1940, as amended.
2.22 Confidential Information Memorandum. The Memorandum,
including the projections contained therein, is based on assumptions believed by
the Company to be reasonable. The Company has no reason to believe that the
Company will not achieve substantially the results described in the Memorandum.
2.23 Employee Confidentiality Agreement. Each key executive
employee of each of the Companies has executed an Agreement which contains a
confidentiality provision substantially in the form attached hereto as Exhibit
J. The Company is not aware that any such employee is in violation thereof, and
the Company and each of the Subsidiaries will make reasonable efforts to prevent
any such violation.
2.24 Disclosure. In connection with the purchase of the
Securities by the Investors as contemplated hereby, the Company has disclosed to
the Investors all material facts concerning the Companies, their Condition and
the Securities, and has not made any untrue statement of a material fact or
omitted to state any material fact necessary in order to make the statements
contained herein, in the Memorandum or in any other Company's Documents not
misleading.
2.25 Small Business. The Company, together with its
"affiliates" (as that term is defined in Title 13 of the United States Code of
Federal Regulations, Section 121.103), is a "Small Business" within the meaning
of the Small Business Investment Act of 1958, as amended (the "Small Business
Investment Act"), and the regulations promulgated thereunder (including Parts
107 and 121 of Title 13 of the United States Code of Federal Regulations). The
information provided by the Company on SBA Forms 480, 652 and 1031 delivered in
connection herewith is true and correct.
2.26 Use of Proceeds. The proceeds from the sale of the
Securities to the Investors will be used solely to fund working capital, and for
growth, modernization and expansion. No portion of such proceeds will be used
(i) to purchase stock in, provide capital to or repay any indebtedness incurred
for the purpose of investing in a company licensed under the Small Business
Investment Act, (ii) to acquire realty or to discharge an obligation relating to
the prior acquisition of realty (except that a portion of the proceeds may be
used (x) to acquire an existing property, provided that at least 51% of the
usable square footage of such property will be used for an eligible business
purpose and (y) to build or renovate a building, provided that at least 67% of
the usable square footage of such property will be used for an eligible business
purpose), (iii) outside the United States (except to acquire abroad materials
and equipment or property rights for use or sale in the United States), or (iv)
for any purpose contrary to the public interest (including but not limited to
activities which are in violation of law) or
<PAGE> 28
inconsistent with free competitive enterprise, in each case, within the meaning
of Section 107.720 of the United States Code of Federal Regulations.
2.27 Business Activity. The Company's primary business
activity does not involve, directly or indirectly, providing funds to others,
the purchase or discounting of debt obligations, factoring or long-term leasing
of equipment with no provision for maintenance or repair, and the Company is not
classified under Major Group 65 (Real Estate) or Industry No. 1531 (Operative
Builders) of the SIC Manual. None of the employees or tangible assets of the
Company and its subsidiaries are located outside of the United States.
2.28 Acknowledgment of JPM Investors as SBICs. The Company
hereby acknowledges its awareness that each of the JPM Investors is a Federal
licensee under the Small Business Investment Act.
3. Representations and Warranties of the Investors. Each Investor
severally, as to itself, and not jointly, hereby represents and warrants to, and
agrees with, the Company as follows:
3.1 Organization. Such Investor, if a corporation or a
partnership, is duly and validly organized and validly existing in good standing
as a corporation or partnership, as applicable, under the laws of its
jurisdiction of organization.
3.2 Authorization. Such Investor has all requisite power and
authority to enter into and perform, and has taken all actions necessary to
authorize such Investor to enter into and perform, such Investor's obligations
under this Agreement, and to consummate the transactions contemplated hereby
and, except for filings under the HSR Act, such execution, delivery and
performance do not and will not require the consent, waiver, approval, license,
designation or authorization of, or filing with, any Person or public authority
other than those which have been made or obtained or those which are required to
be made after the First Closing (which will be timely made). This Agreement is
and will be as of the First Closing, the legal, valid and binding obligation of
such Investor, enforceable against such Investor in accordance with its terms,
except as the enforceability thereof may be limited by bankruptcy, insolvency or
other similar laws affecting the enforceability of creditors' rights in general
or by general principles of equity.
3.3 No Intended Resale. Such Investor's Purchased Securities
are being acquired for investment for such Investor's own account (except for
transfers between JPM Investors) and not with a view to the resale or
distribution thereof in violation of applicable securities laws.
3.4 No Agency Relationship. Such Investor is not acting as a
nominee or agent for any Person, and does not have any contracts,
understandings, agreements or arrangements with any Person to sell, transfer or
grant participation in its Purchased
<PAGE> 29
Securities to any Person, except for arrangements between the JPM Investors and
arrangements between RLEC and certain of its investors.
3.5 Investment Experience. Such Investor is an "accredited
investor" (as defined in Rule 501 promulgated under the Securities Act), can
bear the economic risk of its investment for an indefinite period of time and
has such knowledge and experience in financial and business matters as to be
capable of evaluating the merits and risks of its investment in the Company.
3.6 Memorandum and Agreements. Such Investor has received and
reviewed the Memorandum and understands that to the extent, if any, that this
Agreement, the Disclosure Schedules hereto, the Certificate, the Notes, or the
Options are inconsistent with the Memorandum, the Memorandum is qualified in its
entirety by, and is subject to the terms set forth in, such agreements and
Disclosure Schedules.
3.7 Opportunity to Ask Questions. Such Investor has had an
opportunity to ask questions of the Company and its senior management regarding
the term of this offering and other matters pertaining to this investment.
3.8 Access. Such Investor has been afforded an opportunity to
examine the books, records, financial statements, contracts, documents and other
information concerning the Companies and their respective Affiliates, and has
been given all information as has been requested by such Investor in order to
evaluate the merits and risks of this investment.
3.9 Own Investigation. Such Investor has performed its own due
diligence with respect to this investment and is relying on that due diligence
in making this investment. Such Investor is not relying on J.P. Morgan
Securities Incorporated or NationsBanc Montgomery Securities, Inc. or their
respective Affiliates with respect to tax, suitability or other economic
considerations of this investment.
3.10 Securities Registration. Such Investor understands and
acknowledges that the purchase of its Securities will not be registered under
the Securities Act, in reliance upon an exemption from the registration
requirements thereof, and that the purchase of its Securities will not be
registered or qualified under the securities or Blue Sky laws of any other
jurisdiction. Such Investor understands and acknowledges that the availability
of such exemption is based, in part, upon its representations in this Agreement.
Such Investor also understands and acknowledges that no federal or state agency
has made any recommendation or endorsement of an investment in the Company.
3.11 Restricted Securities. Such Investor understands that (a)
its Series D Stock, Options, Notes and Conversion Stock are each a "restricted
security" (as defined in Rule 144 promulgated under the Securities Act) and that
they may not be resold or otherwise transferred without registration under the
Securities Act and
<PAGE> 30
applicable state securities laws unless an exemption from registration is
available; (b) transfer of its Series D Stock, Options and Conversion Stock is
further restricted by the Shareholders Agreement; and (c) legends may be placed
on any certificate or other document evidencing the Securities, setting forth
the foregoing transfer restrictions.
3.12 No Brokers or Finders. Such Investor has not and will not
enter into any agreement pursuant to which the Company or any of the Investors
will be liable, as a result of the transactions contemplated by this Agreement,
for any claim of any Person for any commission, fee or other compensation as
finder or broker.
3.13 Pre-emptive Rights. Such Investor, if a shareholder of
the Company prior to the First Closing, hereby agrees that the execution and
delivery of this Agreement constitutes the exercise in full by such Investor of
any and all pre-emptive rights such Investor has against the Company with
respect to the transactions described in this Agreement.
Nothing contained in this Section 3 shall in any respect limit or modify the
representations and warranties of the Company in Section 2 of this Agreement or
the right of each Investor to rely thereon.
4. Conditions of Investors' Obligations at First Closing. The
obligation of each Investor to purchase the Purchased Securities to be purchased
by it at the First Closing is subject to the fulfillment to each such Investor's
satisfaction, prior to or at the First Closing, of each of the following
conditions:
4.1 Representations and Warranties. The representations and
warranties of the Company contained in this Agreement and the other Company's
Documents shall be true and correct in all material respects on and as of the
date of the First Closing as if made on and as of such date.
4.2 Performance. The Company shall have performed and complied
with all agreements and conditions required by this Agreement and the other
Company's Documents to be performed or complied with by it prior to or at the
First Closing.
4.3 Stock Certificates. Etc. At the First Closing, the Company
shall have tendered to each Investor for delivery upon payment in full therefor
in accordance with the provisions of this Agreement, a certificate representing
shares of Series D Stock, a WSI A Option, a Tranche 1 Option, a Tranche 2 Option
and a Note (and, in the cases of JPMIC and IAB only, a certificate representing
the Series G Common Share and a certificate representing the Series H Common
Share, respectively), in accordance with Section 1.1 hereof, all in form and
substance satisfactory to such Investor and sufficient to transfer to and vest
in such Investor good and valid title to such Purchased Securities, free and
clear of any Lien.
<PAGE> 31
4.4 No Material Adverse Change. There shall not have occurred
any material adverse change in the Condition of any of the Companies since June
30, 1997.
4.5 Consents. The Company shall have obtained all consents,
approvals or waivers from Governmental Authorities and third Persons necessary
for the execution, delivery and performance of this Agreement, the other
Company's Documents and the amendments to the Certificate and the By-Laws of the
Company in the form of Exhibit G hereto (the "Amended and Restated By-Laws") and
the transactions contemplated hereby and thereby. Without limiting the
generality of the foregoing, each of the Company's existing stockholders shall
have exercised (in which case their rights are being satisfied in full by their
purchase of Securities under this Agreement) or waived any preemptive right any
such stockholder may have to purchase any of the Securities.
4.6 No Actions. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or authority or legislative body to
enjoin, restrain, prohibit, or obtain substantial damages in respect of, this
Agreement or the consummation of the transactions contemplated by this
Agreement.
4.7 Opinion of Counsel. The Investors shall have received from
Cadwalader, Wickersham & Taft an opinion dated as of the First Closing, in the
form attached hereto as Exhibit H.
4.8 Compliance Certificate. The Investors shall have received
certificates dated as of the day of the First Closing executed by a senior
officer of the Company certifying that the conditions specified in Sections 4.1,
4.2, 4.4 through 4.6 and 4.10 have been fulfilled.
4.9 Directors. Those persons listed on Schedule 4 hereto shall
have been duly elected and qualified as directors of the Company and immediately
following the First Closing shall constitute the entire Board of Directors of
the Company.
4.10 Related Documents. The Shareholders Agreement shall have
been executed and delivered by each of the parties thereto and in full force and
effect, and the Certificate and Amended and Restated By-Laws shall be in full
force and effect.
4.11 Proceedings and Documents. All proceedings in connection
with the transactions contemplated hereby and all documents and instruments
incident to such transactions shall be satisfactory in substance and form to the
Investors and their counsel, and the Investors shall have received all such
counterpart originals or certified or other copies of such documents as the
Investors may reasonably request.
If at the First Closing the Company fails to tender to the
Investors the documents specified herein which are required to be delivered to
the Investors at the
<PAGE> 32
First Closing or if at the First Closing any of the conditions specified in this
Section 4 shall not have been fulfilled to each Investor's satisfaction, such
Investor shall, at its election, be relieved of all further obligations under
this Agreement.
5. Conditions of Investors' Obligations at Subsequent Closings. The
obligation of each Investor to purchase the Purchased Securities to be purchased
by it at each Subsequent Closing is subject to the fulfillment to each such
Investor's satisfaction, prior to or at such Subsequent Closing, of each of the
following conditions:
5.1 HSR Compliance. All filings required to be made under the
HSR Act in connection with the transactions contemplated by this Agreement shall
have been made and the waiting period under the HSR Act shall have thereafter
expired or been terminated.
5.2 Stock Certificates, Etc. At each Subsequent Closing, the
Company shall have tendered to each Investor for delivery upon payment in full
therefor in accordance with the provisions of this Agreement, a certificate
representing shares of Series D Stock, a WSI A Option, a Tranche 1 Option, a
Tranche 2 Option and a Note in accordance with Section 1.2 hereof, all in the
form delivered at the First Closing and sufficient to transfer to and vest in
such Investor good and valid title to such Purchased Securities, free and clear
of any Lien.
5.3 No Actions. No injunction or other order or decree of a
court or Governmental Authority restraining or prohibiting the Subsequent
Closing under this Agreement shall be in effect.
6. Conditions of the Company's Obligations at First Closing. The
obligations of the Company to an Investor under this Agreement are subject to
the fulfillment to the Company's satisfaction, prior to or at the First Closing,
of each of the following conditions:
6.1 Representations and Warranties. The representations and
warranties of such Investor contained in this Agreement shall be true and
correct in all material respects on and as of the date of the First Closing as
if made on and as of such date.
6.2 Payment of Purchase Price. Such Investor shall have
delivered to the Company the purchase price specified in Section 1.1 hereof.
6.3 No Actions. No action, proceeding, investigation,
regulation or legislation shall have been instituted, threatened or proposed
before any court, governmental agency or authority or legislative body to
enjoin, restrain, prohibit, or obtain substantial damages in respect of, this
Agreement or the consummation of the transactions contemplated by this
Agreement.
<PAGE> 33
6.4 Proceedings and Documents. All proceedings in connection
with the transactions contemplated hereby and all documents and instruments
incident to such transactions shall be satisfactory in substance and form to the
Company and its counsel, and the Company shall have received all such
counterpart originals or certified or other copies of such documents as it may
reasonably request.
6.5 Consents. The Company shall have obtained all consents,
approvals or waivers from Governmental Authorities and third Persons necessary
for the execution, delivery and performance of this Agreement, the other
Company's Documents and the amendments to the Certificate and the Amended and
Restated By-Laws and the transactions contemplated hereby and thereby. Without
limiting the generality of the foregoing, each of the Company's existing
stockholders shall have exercised or waived any preemptive right or right of
first offer any such stockholder may have to purchase any of the Securities.
6.6 Related Documents. The Shareholders Agreement shall have
been executed and delivered by each of the parties thereto and in full force and
effect, and the Certificate and Amended and Restated By-Laws shall be in full
force and effect.
If at the First Closing an Investor fails to tender to the
Company the payment or documents specified herein which are required to be
delivered to the Company at the First Closing or if at the First Closing any of
the conditions specified in this Section 6 shall not have been fulfilled to the
Company's satisfaction, the Company shall, at its election, be relieved of all
further obligations to such Investor under this Agreement and shall have such
other remedies available under the law.
7. Conditions of the Company's Obligations at Subsequent Closings. The
obligations of the Company to an Investor under this Agreement are subject to
the fulfillment to the Company's satisfaction, prior to or at each Subsequent
Closing, of each of the following conditions:
7.1 HSR Compliance. All filings required to be made under the
HSR Act in connection with the transactions contemplated by this Agreement shall
have been made and the waiting period under the HSR Act shall have thereafter
expired or been terminated.
7.2 Payment of Purchase Price. Such Investor shall have
delivered to the Company the purchase price specified in Section 1.2 hereof.
7.3 No Actions. No injunction or other order or decree of a
court or Governmental Authority restraining or prohibiting the Subsequent
Closing under this Agreement shall be in effect.
If at a Subsequent Closing an Investor fails to tender to the
Company the payment or documents specified herein which are required to be
delivered to the
<PAGE> 34
Company at such Subsequent Closing or if at such Subsequent Closing any of the
conditions specified in this Section 7 shall not have been fulfilled to the
Company's satisfaction, the Company shall, at its election, be relieved of all
obligations to such Investor at such Subsequent Closing under this Agreement and
shall have such other remedies available under the law.
8. Certain Post-Closing Covenants. The Company covenants and agrees
with the Investors (except that (x) Section 8.1 shall be for the benefit of
JPMIC and IAB only and (y) Section 8.7 shall be for the benefit of the JPM
Investors (and their permitted assigns) only) as follows:
8.1 Observer Rights. During any time that either JPMIC and/or
IAB has not designated at least one director on the Company's Board of
Directors, the Company shall give to JPMIC and/or IAB (as applicable) notice of
each meeting of the Board of Directors of the Company and/or its subsidiaries
and of each committee thereof at the same time and in the same manner as notice
is given to the directors (or their equivalent in the case of a partnership
subsidiary) of the Company or such subsidiary. One (1) designee of JPMIC and/or
one (1) designee of IAB (as applicable) shall be entitled to attend in person,
as an observer, all meetings held in person and to listen to telephone meetings
of the Board of Directors of the Company and each of its subsidiaries and of
each committee thereof solely for the purpose of allowing JPMIC and/or IAB to
have current information with respect to the affairs of such Company. The
Company shall provide to JPMIC and/or IAB in connection with each meeting its
respective observer designee is entitled to attend, whether or not present at
such meeting, copies of all notices, minutes, consents, and all other materials
or information that it provides to the directors of the applicable Company with
respect to such meeting, at the same time such materials and information are
given to the directors of such Company (except that materials and information
provided to directors of the Company or such subsidiary at meetings at which a
designee of JPMIC and/or IAB is not present shall be provided to JPMIC and/or
IAB, as applicable, promptly after the meeting). If the Board of Directors of
any of the Company or any subsidiary or any committee thereof proposes to take
any action by written consent in lieu of a meeting, the Company shall give
written notice thereof to JPMIC and/or IAB prior to the effective date of such
consent describing in reasonable detail the nature and substance of such action.
The Company shall bear all travel and related expenses incurred by the observer
designees of JPMIC and/or IAB associated with attending meetings.
8.2 Information. For as long as a Designated Investor (as
hereinafter defined) and/or its permitted assignees holds at least 250,000
shares (as adjusted for any stock splits, combinations and similar events) of
Series D Stock (or any other securities into which such shares have been
converted or for which they have been exchanged), such Investor and/or its
permitted assignees shall be entitled to receive, and the Company agrees to
provide to such Investor and its permitted assignees (unless such Investor or
such assignee requests that such information not be delivered to it at such
time), the information and access set forth below. For purposes of this
<PAGE> 35
Section 8.2 the term "Designated Investor" shall mean any Investor that holds or
is purchasing on the date hereof a share of Special Common Stock (as-defined in
the Certificate).
(a) Financial and Related Data.
(i) As soon as available, but in any event
not later than 45 days after the end of each month, the unaudited
consolidated balance sheet as at the end of such month of the Company
and its subsidiaries and the related unaudited consolidated statements
of operations, stockholders' equity and cash flows for such month and
for the elapsed period in such fiscal year, all in reasonable detail
and stating in comparative form the figures as of the end of and for
the comparable period of the preceding fiscal year and budgeted figures
for the period. All such financial statements shall be complete and
correct in all material respects, shall be prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods reflected therein (except that such financial
statements may omit footnotes and would be subject to normal year-end
adjustments which are not, in the aggregate, material) and shall be
accompanied by a certificate of the President or chief financial
officer of the Company to such effect and shall be accompanied by a
certificate of the President or chief financial officer of the Company
to such effect.
(ii) As soon as available, but in any event
within 90 days after the end of each fiscal year of the Company, the
audited consolidated and unaudited consolidating balance sheet of the
Company and its subsidiaries as at the end of such fiscal year and the
related audited consolidated statements and unaudited consolidating
statements of operations, stockholders' equity and cash flows of the
Company and its subsidiaries for such fiscal year, all in reasonable
detail and stating in comparative form the figures as at the end of and
for the previous fiscal year and budgeted figures for the fiscal year
accompanied by an opinion of an accounting firm of nationally
recognized standing selected by the Company with respect to the
consolidated statements, which opinion shall state that such accounting
firm's audit was conducted in accordance with generally accepted
auditing standards and, accordingly, included such tests of accounting
records and such other auditing procedures as were considered necessary
under the circumstances and which opinion shall not be subject to any
qualification resulting from a limit on the scope of the examination of
the financial statements or the underlying data or which could be
eliminated by changes in the financial statements or the notes thereto
or by the creation of or increase in a reserve or a decreased carrying
value of assets. All such financial statements shall be complete and
correct in all material respects and prepared in reasonable detail and
in accordance with generally accepted accounting principles applied,
except as stated therein, on a consistent basis throughout the periods
reflected therein.
<PAGE> 36
(iii) As soon as available, but in any event
not later than 30 days prior to the end of each fiscal year of the
Company, the financial plan of the Company for the next succeeding
fiscal year, including but not limited to cash flow and balance sheet
projections and operating budget, calculated monthly, and any updates
or revisions as soon as available.
(iv) Promptly after receipt, copies of all
management letters from accountants and all certificates prepared by or
for the Company or its subsidiaries as to compliance, defaults,
material adverse changes, material litigation or similar matters, but
only to the extent that the delivery thereof would not result in the
loss of any generally recognizable privilege otherwise applicable
thereto.
(v) Within 15 days after the Company obtains
knowledge of the commencement or written threat of commencement of any
material litigation or proceeding against any of the Companies or their
respective assets, written notice by the Company of the nature and
extent of such litigation or proceeding.
(vi) Promptly, but in any event within
fifteen (15) days, after any distribution to its stockholders generally
or to specific stockholders by agreement, to its directors, to
prospective investors or to the financial community of an annual
report, proxy statement, registration statement or other similar report
or communication, a copy of each such report, proxy statement,
registration statement or other similar report or communication;
promptly, but in any event within fifteen (15) days after any filing
with the Securities and Exchange Commission or with any national
securities exchange or with the National Association of Securities
Dealers, Inc., of any publicly available annual or periodic or special
report or proxy statement or registration statement, a copy of such
report or statement; and promptly, but in any event within two (2)
business days after released, copies of all press releases and other
statements made available generally by any of the Companies to the
public concerning material developments.
(vii) Within 60 days after the end of each
fiscal year, a list of stockholders and other security holders, showing
the authorized and outstanding shares by class (including the common
stock equivalents of any convertible security), the holdings of each
stockholder (both before giving effect to dilution and on a
fully-diluted basis) and the holdings of each Person that holds
options, warrants or convertible securities (both before giving effect
to dilution and on a fully diluted basis).
(viii) Within 60 days after the end of each
fiscal year, and in addition to the information requested in paragraph
(vii) above, copies of all
<PAGE> 37
stock option plans, and a list detailing all options granted, issued,
exercised or lapsed; all warrants granted, issued (whether to
directors, in connection with financings or otherwise), exercised or
lapsed; and all stock issued or sold (including in each case, without
limitation, all option and warrant exercise prices, stock issuance
prices, and other terms).
(ix) Promptly, but in any event not later
than ten (10) days after execution, copies of any agreement entered
into by the Company or any of its subsidiaries, with any stockholder,
director, or officer of the Company or any of its subsidiaries or any
past or present Principal Owner or Affiliate.
(x) From time to time, and promptly, such
additional information and financial data regarding results of
operations, financial condition, business, affairs or prospects of the
Company and its subsidiaries, including without limitation cash flow
analyses and projections, as is available to the Company that any
Investor shall reasonably request.
(b) Access. The Company shall permit, and shall cause
its subsidiaries to permit, representatives designated by each Investor, upon
reasonable prior notice to the Company, to visit and inspect each of the
Company's or its subsidiaries' properties, to examine their respective corporate
and financial records (and make copies thereof or extracts therefrom), to
discuss their respective affairs, finances and accounts; with the Company's or
its subsidiaries' directors and officers, key employees and accountants, all at
such reasonable times as may be requested by any such Investor.
(c) Other Information. The Company shall provide,
from time to time, such additional information regarding the Company or its
subsidiaries as any of JPMIC or IAB reasonably may request, including without
limitation, any information or reports required by reason of reporting or
regulatory requirements to which any such Investor, or any Person controlling
any such Investor is subject.
8.3 Annual Meetings. The Company will hold annual meetings as
required by law.
8.4 Exemption from Investment Company Act. The Company shall
conduct its business so that neither the Company nor any of its subsidiaries
shall become an "investment company" within the meaning of the Investment
Company Act of 1940, as amended.
8.5 Accounting and Reserves. The Company shall, and the
Company shall cause each of its subsidiaries to, maintain a standard and uniform
system of accounting and shall keep proper books and records and accounts in
which full, true and correct entries shall be made of its transactions, all in
accordance with generally accepted accounting principles applied on a consistent
basis through all periods, and
<PAGE> 38
shall set aside on such books for each fiscal year all such proper reserves for
depreciation, obsolescence, amortization, bad debts and other purposes in
connection with its operations as are required by such principles so applied.
8.6 Transactions with Affiliates. Neither the Company nor any
subsidiary of the Company shall directly or indirectly, enter into any
transaction or agreement with any stockholder of the Company or any Affiliate of
the Company, unless the transaction or agreement is (i) reviewed and approved by
a majority of Disinterested Directors (as defined below) and (ii) on terms no
less favorable to the Company or any such subsidiary than those obtainable from
a non-Affiliated Person. A "Disinterested Director" shall mean an individual who
is not and who has not been an officer or employee of the Company and who is not
a member of the family of, controlled by or under common control with, any such
officer or employee.
8.7 Provisions Relating to JPM Investors.
(a) Use of Proceeds. The Company will use the
proceeds from the sale of the Securities as provided in the first sentence of
Section 2.26, and no portion of such proceeds shall be applied to any prohibited
use described in the second sentence of Section 2.26. The Company will provide
to the JPM Investors and the U.S. Small Business Administration access to its
books and records for the purpose of confirming the use of the proceeds and for
all other purposes required by the U.S. Small Business Administration. Upon the
request of any JPM Investor at any time or from time to time, the Company will
provide a certificate of its chief financial officer (or other executive
officer) (i) describing the use of such proceeds and (ii) certifying compliance
by the Company with this Section 8.7 and Section 2.26.
(b) Business Activity. For a period of one year
following the date hereof, the Company will not change its business activity if
such change would render the Company ineligible as a "Small Business" under the
Small Business Investment Act and the regulations thereunder.
(c) Non-Discrimination Compliance. The Company will
at all times comply with the non-discrimination requirements of Title 13 of the
United States Code of Federal Regulations Parts 112, 113 and 117.
(d) Information. Upon request, the Company promptly
(and in any event within twenty (20) days of such request) will provide to each
JPM Investor an assessment, in form and substance satisfactory to such JPM
Investor, of the economic impact of its financing, specifying the full-time
equivalent jobs created or retained, the impact of the financing on the
Company's business, in terms of expanded revenue and profits, and on taxes paid
by the business and its employees. Upon request, the Company promptly (and in
any event within twenty (20) days of such request) will furnish to each JPM
Investor all information requested by it in order for it to prepare and file SBA
Form 468 and any other information requested or required by any
<PAGE> 39
governmental agency asserting jurisdiction over such JPM Investor.
(e) Transfers by JPM Investors to Affiliates. The
Company and each of the Investors hereby covenant and agree that, upon the
request of a JPM Investor in connection with a proposed transfer of shares of
capital stock of the Company from such JPM Investor to one or more of its
affiliates that is subject to the provisions of Regulation Y of the Board of
Governors of the Federal Reserve System (12 C.F.R. Part 225) or any successor to
such regulation (a "Regulation Y Shareholder"), the Company and the Investors
will take such commercially reasonable actions (including, without limitation,
voting all shares of stock of the Company held by them in favor of such actions)
as such JPM Investor may reasonably request in order to permit such Regulation Y
Shareholder to comply with regulatory limitations applicable to it, including,
without limitation, taking such actions as may be required in order:
(i) to amend this Agreement and the
Shareholders Agreement so that (x) at the election of such JPM
Investor, any covenant in favor of and any right afforded to such JPM
Investor as applicable, shall run in favor of and be afforded to such
Regulation Y Shareholder (including, without limitation, registration
rights, tag-along rights, preemptive rights and informational rights),
(y) the covenants and agreements contained in Sections 2.26 and
8.7(a)-(c) of this Agreement and Sections 3.5, 3.11 and 4.11 of the
Shareholders Agreement shall terminate with respect to such JPM
Investor and shall not apply to such Regulation Y Shareholder, and
neither such JPM Investor nor such Regulation Y Shareholder shall be a
party to or bound by or have the right to enforce, amend or waive such
provisions and (z) such Agreements are consistent with the Regulation Y
Term Sheet (as defined below); and
(ii) to cause the Company and the Investors
to enter into an agreement with the Regulation Y Shareholder providing
for the matters referred to in the term sheet attached hereto as
Exhibit I ("Regulation Y Term Sheet").
Without limiting the generality of the foregoing, in connection with
any such transfer by a JPM Investor to a Regulation Y Shareholder, the
Company, the Investors and the Common Shareholders shall take such
other actions and enter into such further agreements as such JPM
Investor or such Regulation Y Shareholder may reasonably request in
order to permit such transfer and to permit such Regulation Y
Shareholder to comply with regulatory limitations applicable to it
provided, that no Investor shall be obligated to take any action
pursuant to this sentence or Section 8.8 which would adversely affect
such Investor's rights under any of the Company's Documents, as the
same may be amended from time to time.
(f) Nothing in this Section 8.7 shall relieve the JPM
Investors from their obligation to purchase any Securities as set forth in this
Agreement.
<PAGE> 40
8.8 Assistance in Sales. In the event that it becomes unlawful
for any Investor to continue to hold all or some portion of the Securities to be
held by it, or restrictions are imposed on such Investor by any Law which, in
the reasonable judgement of such Investor, make it unduly burdensome to continue
to hold all or some portion of such Securities, then such Investor, subject to
the Shareholders Agreement, may sell or otherwise dispose of all or any portion
of its Securities, and the Company shall use reasonable efforts to assist such
Investor in disposing of such interest in a prompt and orderly manner, and, at
the request of any such investor, shall provide (and authorize such Investor to
provide) financial and other information concerning the Company and its
subsidiaries to any prospective purchaser of such interest, provided, however,
that neither the Company, its subsidiaries nor any Investor shall provide any
confidential information regarding the Company and its subsidiaries to any such
prospective purchaser unless such prospective purchaser shall first have entered
into a confidentiality agreement in form and substance reasonably satisfactory
to the Company.
8.9 Additional Covenants.
(a) When applicable, the Company shall file the
reports required to permit sales under Rule 144 of the Securities Act.
(b) During any period in which the Company is not
subject to Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Company shall make available information required to be provided by
Rule 144A(d)(4), upon request.
8.10 HSR Compliance. The parties hereto will cooperate and use
their reasonable best efforts promptly to have JPMIC, IAB and the Company file
under the HSR Act with respect to the purchase by JPMIC and IAB of Purchased
Securities and obtain termination or expiration of the waiting period under the
HSR Act. In the event of the expiration of the notification filed by JPMIC or
IAB under the HSR Act prior to its purchase in full of the Purchased Securities
under this Agreement, JPMIC and/or IAB, as applicable, shall refile under the
HSR Act to the extent required to permit the purchase by such Investor of all
Purchased Securities that remain to be purchased by such Investor under this
Agreement.
9. Miscellaneous.
9.1 Expenses. The Company shall pay all stamp, documentary and
other taxes which may be payable in connection with the execution, delivery and
performance of this Agreement, and the purchase and sale of the Securities. In
addition, the Company shall, upon presentation of an appropriate invoice
relating thereto, pay all reasonable legal and accounting fees and expenses
incurred in connection with this Agreement and the transactions contemplated
hereby (i) by the
<PAGE> 41
JPM Investors, including the fees and expenses of Proskauer Rose LLP and the
fees and expenses of accountants for the JPM Investors in connection with
accounting due diligence, in an aggregate amount not to exceed $130,000, (ii) by
IAB, including the fees and expenses of Davis Polk & Wardwell, in an aggregate
amount not to exceed $40,000 and (iii) by all other Investors, in an aggregate
amount not to exceed $20,000, to be allocated among such Investors submitting
invoices based upon their aggregate commitments under this Agreement In
addition, the Company shall pay all filing fees relating to filings under the
HSR Act required to be made by any Investor, provided that the Company shall not
be obligated to pay the filing fees in connection with more than one such filing
per Investor.
9.2 J.P. Morgan Fee. The Company shall not pay any fee to J.P.
Morgan Securities Incorporated on the portion of the Purchased Securities
purchased by the JPM Investors.
9.3 Publicity. Except as may be required by Law, the Company
shall not use the name of, or make reference to, any Investor or any of its
Affiliates in any press release or in any public manner without such Investor's
prior written consent. Except as required in furtherance of the Company's
activities or as otherwise required by law or regulation or requested by
regulatory agencies, each Investor shall treat, and shall cause its
representatives to treat, as confidential all confidential and proprietary
information regarding the Company and Edison LP which such Investor receives
from the Company as an Investor or Stockholder of the Company.
9.4 Indemnification. The Company agrees to indemnify each
Investor and each officer, director, employee, agent, partner, stockholder and
affiliate of each Investor (collectively, the "Indemnified Parties") for, and
hold each Indemnified Party harmless from and against: (i) any and all damages,
losses, claims and other liabilities of any and every kind, including, without
limitation, judgments and costs of settlement, and (ii) any and all
out-of-pocket costs and expenses of any and every kind, including, without
limitation, reasonable fees and disbursements of counsel for such Indemnified
Parties (all of which expenses periodically shall be reimbursed as incurred), in
each case, arising out of or suffered or incurred in connection with any of the
following: (a) any misrepresentation or any breach of any warranty made by the
Company herein or in any of the other Company's Documents, (b) any breach or
non-fulfillment of any covenant or agreement made by the Company herein or in
any of the other Company's Documents, (c) any claim relating to or arising out
of a violation of applicable federal or state securities laws by the Company in
connection with the sale of the Securities by the Company to the Investors and
(d) any failure by the Company to use the proceeds from the sale of the
Securities as specified herein.
9.5 Survival. All representations, warranties, covenants and
agreements contained in or made pursuant to this Agreement or contained in any
certificate delivered pursuant to this Agreement, shall remain operative and in
full force and effect, regardless of any investigation made by or on behalf of
any party hereto,
<PAGE> 42
and shall survive the transfer and payment for the Securities and the
consummation of the transactions contemplated hereby; provided, however, that
the representations and warranties contained in Sections 2 and 3 (other than (x)
the representations and warranties set forth in Sections 2.1, 2.2, 2.3, 2.4,
2.18, 2.19, 2.25, 2.26, 2.27, 3.1 and 3.2 which shall survive indefinitely and
(y) the representations and warranties set forth in Sections 2.12 and 2.15 which
shall terminate on the fourth anniversary of the date of this Agreement) shall
terminate upon the later to occur of (i) two years from the date hereof and (ii)
ninety (90) days after delivery to the Investors of the audited financial
statements pursuant to Section 8.2(a)(ii) above for the fiscal year ending June
30, 1999, provided further, however, that no representation or warranty shall
terminate until after the final non-appealable resolution of any claim relating
to such representation or warranty, which claim shall have been made prior to
the expiration of such representation or warranty.
9.6 Assignment. This Agreement and all the provisions hereof
shall be binding upon and shall inure to the benefit of the parties hereto and
their respective successors and assigns, except that neither this Agreement nor
any rights or obligations hereunder shall be assigned or delegated by the
Company without the prior written consent of the Investors. After the First
Closing, any Investor may assign this Agreement and such Investor's rights
hereunder, in whole or in part without the consent of the Company or any other
Investor to (i) any Affiliate of such Investor (which shall include, without
limitation, in the case of JPMIC, Sixty Wall and, in the case of Sixty Wall,
JPMIC) or (ii) any other transferee of at least 25% of the Securities acquired
and to be acquired by such Investor (the WSI Investors to be treated as one
Investor for purposes of this clause (ii)) under this Agreement (it being
understood that all transfers of Securities shall be in accordance with the
terms of the Shareholders Agreement). No such assignment shall relieve an
Investor of its obligation to purchase the Purchased Securities at Subsequent
Closings.
9.7 Amendment; Waiver. Any term, covenant, agreement or
condition of this Agreement may be amended, and compliance therewith may be
waived (either generally or in a particular circumstance and either
retroactively or prospectively), by one or more substantially concurrent written
instruments signed by the Company and by Investors that have the right to
acquire 85% or more of the Series D Stock to be acquired by the Investors under
this Agreement. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each Investor and the Company.
9.8 APPLICABLE LAW. THE LAWS OF THE STATE OF NEW YORK SHALL
GOVERN THE INTERPRETATION, VALIDITY AND PERFORMANCE OF THE TERMS OF THIS
AGREEMENT, REGARDLESS OF THE LAW THAT MIGHT BE APPLIED UNDER PRINCIPLES OF
CONFLICTS OF LAW.
9.9 DISPUTE RESOLUTION. IN THE EVENT OF ANY DISPUTE,
CONTROVERSY OR CLAIM ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE RIGHTS
OR INTERESTS OF THE INVESTORS OR THE
<PAGE> 43
COMPANY OR THE BREACH OR ALLEGED BREACH OF TIES AGREEMENT (EACH OF THE FOREGOING
DISPUTES, CONTROVERSIES AND CLAIMS HEREINAFTER REFERRED TO AS A "DISPUTE"), SUCH
DISPUTE WILL BE SETTLED BY ARBITRATION IN NEW YORK CITY, NEW YORK. THE
ARBITRATION WILL BE CONDUCTED IN ACCORDANCE WITH THE PROCEDURES IN THIS SECTION
9.9 AND THE COMMERCIAL ARBITRATION RULES OF THE AAA ("AAA RULES"). IN THE EVENT
OF A CONFLICT, THE PROVISIONS OF TIES SECTION 9.9 WILL CONTROL.
THE ARBITRATION WILL BE CONDUCTED BEFORE A PANEL OF THREE
ARBITRATORS, REGARDLESS OF THE SIZE OF THE DISPUTE, TO BE SELECTED AS PROVIDED
IN THE AAA RULES. ANY ISSUE CONCERNING THE. EXTENT TO WHICH ANY DISPUTE IS
SUBJECT TO ARBITRATION, OR CONCERNING THE APPLICABILITY, INTERPRETATION, OR
ENFORCEABILITY OF THESE PROCEDURES, INCLUDING ANY CONTENTION THAT ALL OR PART OF
THESE PROCEDURES ARE INVALID OR UNENFORCEABLE, SHALL BE GOVERNED BY THE FEDERAL
ARBITRATION ACT AND RESOLVED BY THE ARBITRATORS. NO POTENTIAL ARBITRATOR MAY
SERVE ON THE PANEL UNLESS HE OR SHE HAS AGREED IN WRITING TO ABIDE AND BE BOUND
BY THESE PROCEDURES.
THE ARBITRATORS SHALL HAVE NO POWER TO AWARD (I) DAMAGES
INCONSISTENT WITH THIS AGREEMENT OR (II) PUNITIVE DAMAGES OR ANY OTHER DAMAGES
NOT MEASURED BY THE PREVAILING PARTY'S ACTUAL DAMAGES, AND THE PARTIES EXPRESSLY
WAIVE THEIR RIGHT TO OBTAIN SUCH DAMAGES IN ARBITRATION OR IN ANY OTHER FORUM.
IN NO EVENT, EVEN IF ANY OTHER PORTION OF THESE PROVISIONS IS HELD TO BE INVALID
OR UNENFORCEABLE, SHALL THE ARBITRATORS HAVE POWER TO MAKE AN AWARD OR IMPOSE A
REMEDY THAT COULD NOT BE MADE OR IMPOSED BY A FEDERAL COURT DECIDING THE MATTER
IN THE SAME JURISDICTION.
NO DISCOVERY WILL BE PERMITTED IN CONNECTION WITH THE
ARBITRATION UNLESS IT IS EXPRESSLY AUTHORIZED BY THE ARBITRATION PANEL UPON A
SHOWING OF SUBSTANTIAL NEED BY THE PARTY SEEKING DISCOVERY.
ALL ASPECTS OF THE ARBITRATION SHALL BE TREATED AS
CONFIDENTIAL. NEITHER THE PARTIES NOR THE ARBITRATORS MAY DISCLOSE THE
EXISTENCE, CONTENT OR RESULTS OF THE ARBITRATION, EXCEPT AS NECESSARY TO COMPLY
WITH LEGAL OR REGULATORY REQUIREMENTS. BEFORE MAKING ANY SUCH DISCLOSURE, A
PARTY SHALL GIVE WRITTEN NOTICE TO ALL OTHER PARTIES AND SHALL AFFORD SUCH
PARTIES A REASONABLE OPPORTUNITY TO PROTECT THEIR INTERESTS.
<PAGE> 44
THE RESULT IN THE ARBITRATION WILL BE BINDING ON THE
PARTIES, AND JUDGMENT ON THE ARBITRATORS' AWARD MAY BE ENTERED
IN ANY COURT HAVING JURISDICTION.
9.10 Notices. All notices and other communications provided
for herein shall be dated and in writing and shall be deemed to have been duly
given (x) on the date of delivery, if delivered personally or by telecopier,
receipt confirmed, (y) on the second following business day, if delivered by a
recognized overnight courier service, or (z) seven days after mailing, if sent
by registered or certified mail, return receipt requested, postage prepaid, in
each case, to the party to whom it is directed at the following address (or at
such other address as any party hereto shall hereafter specify by notice in
writing to the other parties hereto):
(i) If to the Company, to it at the following address:
550 Maine Street
Suite 366
Knoxville, TN 37902
Telecopy: (423) 546-1090
Attention: Ms. Laura Eshbaugh, President;
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, NY 10038
Telecopy: (212) 504-6666
Attention: John F. Fritts, Esq.
(ii) If to any Investor, to it at the address set forth below
its name on the signature page hereto.
9.11 Integration. This Agreement and the documents referred to
herein or delivered pursuant hereto or pursuant to such documents, including all
exhibits and schedules, contain the entire understanding of the parties with
respect to their subject matter and supersede all prior agreements and
understandings between the parties with respect to their subject matter.
9.12 Severability. Each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision of this Agreement is held to be prohibited or invalid under
applicable law, such provision will be ineffective only to the extent of such
prohibition or invalidity, without invalidating the remainder of this Agreement.
9.13 Descriptive Headings. The section and other headings
contained
<PAGE> 45
in this Agreement are for convenience of reference only and shall not affect the
meaning or interpretation of this Agreement.
9.14 Counterparts. This Agreement may be executed in two or
more counterparts, each of which when so executed and delivered shall be deemed
to be an original and all of which together shall be deemed to be one and the
same agreement.
9.15 Understanding Among Investors. The decision of each
Investor to purchase Securities pursuant to this Agreement has been made by such
Investor independently of any other Investor (in its capacity as such) and
independently of any statements or opinions as to the Condition of the Company
which may have been made or given by any other Investor (in its capacity as
such) or by any agent or employee of any other Investor. Each Investor
acknowledges that no other Investor has acted as agent for such Investor in
connection with making its investment hereunder and that no other Investor will
be acting as agent of such Investor in connection with monitoring its investment
hereunder.
[Remainder of page intentionally left blank]
<PAGE> 46
IN WITNESS WHEREOF, the parties have executed this
Agreement as of the date first above written.
THE COMPANY:
The Edison Project Inc.
By: /s/ Laura Eshbaugh
-----------------------------
Name: Laura Eshbaugh
Title: President
INVESTORS:
J.P. MORGAN INVESTMENT CORPORATION
By: /s/ John B. Fullerton
-----------------------------
Name: John B. Fullerton
Title: Managing Director
Address: 60 Wall Street
New York, New York 10260-0060
Attention: Mr. John B. Fullerton
J. Edmund Colloton, Esq.
Telecopy: (212) 648-7066
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036-8299
Attention: Bruce Lieb, Esq.
Telecopy: (212) 969-2900
SIXTY WALL STREET SBIC FUND, L.P.
By: Sixty Wall Street SBIC Corporation,
its General partner
By: /s/ John B. Fullerton
------------------------
Name: John B. Fullerton
<PAGE> 47
Title: Managing Director
Address: 60 Wall Street
New York, New York 10260-0060
Attention: Mr. John B. Fullerton
J. Edmund Colloton, Esq.
Telecopy: (212) 648-7066
with a copy to:
Proskauer Rose LLP
1585 Broadway
New York, New York 10036-8299
Attention: Bruce Lieb, Esq.
Telecopy: (212) 969-2900
INVESTOR INVESTMENTS AB:
By: /s/ M. Wattenborg /s/ Guje Holmborg
--------------------------------------
/s/ Klas Hillstrom
----------------------------
Name: Marcus Wattenborg/Guje Holmberg/
Klas Hillstrom
Title: Executive Vice President and Deputy
Chief Executive Officer, Investor AB/
Vice President Group Accounting/Vice
President
Address: c/o Investor UK Ltd.
10 Hill Street
London, WTX 7 FU
United Kingdom
Attention: Kles Hillstrom
Telecopy: 011-44-171-409-1305
with a copy to:
David Polk & Wardwell
450 Lexington Avenue
New York, New York 10017
Attention: George R. Bason, Jr., Esq.
Telecopy: (212) 450-4800
WSI INC.
<PAGE> 48
By: /s/ H. Christopher Whittle
------------------------------
Name: H. Christopher Whittle
Title: President
Address: 366 NationsBank Center
550 Main Street
Knoxville, TN 37902
Attention: H. Christopher Whittle
Laura Eshbaugh
Telecopy: (423) 546-1090
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: John F. Fritts, Esq.
Telecopy: (212) 504-6666
WEG III L.P.
By: WSI INC., its General Partner
By: /s/ H. Christopher Whittle
-----------------------------
Name: H. Christopher Whittle
Title: President
Address: 366 NationsBank Center
550 Main Street
Knoxville, TN 37902
Attention: H. Christopher Whittle
Laura Eshbaugh
Telecopy: (423) 546-1090
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
<PAGE> 49
New York, New York 10038
Attention: John F. Fritts, Esq.
Telecopy: (212) 504-6666
WEG IV L.P.
By: WSI INC., its General Partner
By: /s/ H. Christopher Whittle
-----------------------------
Name: H. Christopher Whittle
Title: President
Address: 366 NationsBank Center
550 Main Street
Knoxville, TN 37902
Attention: H. Christopher Whittle
Laura Eshbaugh
Telecopy: (423)546-1090
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attention: John F. Fritts, Esq.
Telecopy: (212) 504-6666
RICHMONT LEEDS EDUCATION COMPANY
L.L.C.
By: /s/ Jeffrey T. Leeds
-----------------------------
Name: Jeffrey T. Leeds
Title: Member
Address: Leeds Group Inc.
660 Madison Avenue
15th Floor
New York, New York 10021
Telecopy: (212) 835-2020
<PAGE> 50
/s/ Joel E. Smilow
-----------------------------
Joel E. Smilow
Address: 315 Post Road West
Westport, Connecticut 06880
Telecopy: (203) 227-0766
/s/ Alexandra O. Bjorklund
-----------------------------
Alexandra O. Bjorklund
Address: c/o J. Gaddis Parsons
Parsons Capital
10 Weybosset Street
Suite 106
Providence, Rhode Island 02903
Telecopy: (401) 521-4870
GREENWOOD PARTNERS
By: /s/ Arnold Mullen
--------------------------
Arnold Mullen, its General Partner
Address: c/o Arnold Mullen
PFP Associates
1601 Forum Place, Suite 905
W. Palm Beach, FL 33401-8105
Telecopy: 561-684-2168
FORUM PARTNERS
By: /s/ Arnold Mullen
---------------------------
Arnold Mullen, its General Partner
Address: c/o Arnold Mullen
<PAGE> 51
PFP Associates
1601 Forum Place, Suite 905
W. Palm Beach, Fl 33041-8105
Telecopy: 561-684-2168
ABS EMPLOYEES' VENTURE FUND L.P.
By: Alex. Brown Investments Inc.
By: /s/ Beverly L .Wright
--------------------------
Name: Beverly L. Wright
Title: Treasurer
Address: 375 West Paconia Road
M.S. 22
Timonium, Maryland 21093
Attention: Rick O'Connell
Telecopy: (410) 308-6840
<PAGE> 52
<TABLE>
<CAPTION>
A B C D E
- - - - -
Principal
WSI A Option Tranche 1 Tranche 2 Amount of
Series D to be to be Options to be Options to be Note to be
Purchased at Purchased at Purchased at Purchased at Purchased at
First Closing First Closing First Closing First Closing First Closing
Investor ------------- ------------- ------------- ------------- -------------
- --------
<S> <C> <C> <C> <C> <C>
J.P. Morgan Investment 1,909,547 36,646 36,646 54,968 218,095
Corporation
Sixty Wall Street SBIC Fund, 100,502 1,928 1,928 2,893 11,478
L.P.
Investor Investments AB 2,010,050 38,574 38,574 57,861 229,573
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
WSI Inc. -- -- -- -- --
Richmond Leeds Education 339,520 6,515 6,515 9,773 38,773
Company LLC
Joel E. Smilow 16,750 321 321 482 1,913
Alexandra O. Bjorklund 8,040 154 154 231 918
Greenwood Partners 150,753 2,693 2,693 4,339 17,217
Forum Partners 50,251 964 964 1,446 5,739
ABS Employees' Venture Fund 50,251 964 964 1,446 5,739
L.P.
Total 5,689,432 109,181 109,181 163,772 649,802
Total w/o Leeds 5,349,912 102,668 102,666 153,999 611,025
</TABLE>
<TABLE>
<CAPTION>
F G H I
- - - -
Aggregate
Aggregate Remaining Commitment Aggregate
Purchase Price Commitment not including Number of
to be paid at After First LIBOR Units To Be
First Closing Closing Accruals Purchased
Investor ------------- ----------- ------------- -----------
- --------
<S> <C> <C> <C> <C>
J.P. Morgan Investment 7,600,000 11,400,000 19,000,000 4,773,609
Corporation
Sixty Wall Street SBIC Fund, 400,000 600,000 1,000,000 251,256
L.P.
Investor Investments AB 8,000,000 12,000,000 20,000,000 5,025,125
WEG III L.P. 600,000 400,000 1,000,000 251,256
WEG IV L.P. 3,594,000 3,156,000 6,750,000 1,695,979
WSI Inc. -- 2,250,000 2,250,000 565,326
Richmond Leeds Education 1,351,292 2,206,937 3,378,229 848,801
Company LLC
Joel E. Smilow 66,667 100,001 166,668 41,676
Alexandra O. Bjorklund 32,000 48,000 80,000 20,100
Greenwood Partners 600,000 900,000 1,500,000 376,884
Forum Partners 200,000 300,000 500,000 125,628
ABS Employees' Venture Fund 200,000 300,000 500,000 125,628
L.P.
Total 22,643,959 33,480,938 56,124,897 14,101,728
Total w/o Leeds 21,292,667 31,454,001 52,746,668 13,252,927
</TABLE>
<PAGE> 1
Exhibit 10.23
March 1, 1997
Mr. Benno C. Schmidt, Jr.
222 Riverside Drive
New York, NY 10025
Dear Benno:
This letter agreement ("Agreement") sets forth the terms of your
employment with The Edison Project L.P. ("Edison" or the "Company") as approved
by the board of directors (the "Board") of The Edison Project Inc. ("Edison
Inc."), the sole general partner of Edison. This Agreement supersedes and
replaces (i) the employment agreement dated March 15, 1995 and any agreement
appearing as an exhibit or attachment thereto or referred to therein (the "March
1995 Employment Agreement") between you and Edison and (ii) the letter agreement
dated May 1, 1996 between you and Edison which served to clarify the March 1995
Employment Agreement (the "May 1996 Agreement"). Notwithstanding the foregoing,
your obligations with respect to the following shall survive and shall not be
modified except for the modifications contained herein: (i) the promissory note
issued to Whittle Communications L.P. (which was assigned to Edison) dated June
5, 1992 with a face amount of $1,600,000 and any accrued and unpaid interest
thereon through the date hereof (the "Existing Loan"); (ii) the promissory note
issued to Edison dated January 23, 1996 with a face amount of $200,000 and any
accrued and unpaid interest thereon through the date hereof (the "Transition
Loan" and, together with the Existing Loan, the "Loans"); (iii) the release
provided by the terms of the March 1995 Employment Agreement; and (iv) the
assignment to Edison of benefits under the $5,000,000 First Colony Life
Insurance policy 1893365 (the "'Insurance Policy") as collateral for the Loans.
Position/Responsibilities. You will be employed as Edison's Chairman 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 December 31, 1998, unless terminated earlier by Company as provided below.
Base Salary. You will be paid at an annual base salary rate of $255,000
from the date hereof. Contingent upon achievement of Edison's Board-approved
business plan for each fiscal year as determined by Edison Inc.'s Board in its
sole discretion, your base salary at the start of the following fiscal year will
be increased 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
participate in the Management Committee incentive compensation plan as set by
the Board each
<PAGE> 2
fiscal year. Under the terms of this plan for FY 1997, you will be eligible to
receive a bonus of up to 33-1/3% of your base salary (the "Maximum Bonus"). A
portion (the "Award") of the Maximum Bonus equal to 20% of your base salary may
be earned upon achievement of certain identified results--25% of the Award will
be linked to the achievement of individual performance goals (as determined by
the Board), and 75% of the Award will be linked to the achievement of Edison's
Board-approved business plan for the year (as determined by the Board). For
exceeding both personal goals and the Company business plan, your bonus may be
increased up to the Maximum Bonus amount in the sole discretion of the Board.
Subsequent to FY 1997, you will be eligible to receive 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.
Stock Options. Simultaneous with the execution of this agreement the
parties hereto shall execute the Stock Option Agreement attached as Exhibit B
which shall supersede and replace the Option Agreement dated as of March 15,
1995 between you and the Company. In addition, you will be eligible to
participate in the "Performance Option Pool" for key executives described in
Exhibit C attached hereto, with your portion of the option pool set at 268,526
shares, such number to be reduced to the extent the Board approves vesting of
additional Performance Segment Shares, as defined in the Stock Option Agreement,
with respect to Fiscal Year 1996, but in no event to be less than 250,000
shares.
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 under the Insurance Policy provided that you execute, and cause any
beneficiary named under the Insurance Policy to execute, all documentation
required or requested by Edison in connection with the assignment of the
Insurance Policy as collateral for the Loans, including, without limitation, the
assignment (for your execution) attached hereto as Exhibit E and the consent to
assignment (for execution by each beneficiary) attached hereto as Exhibit F. You
agree not to change the beneficiaries named under the Insurance Policy without
the prior written consent of Edison. You will receive six weeks of vacation
annually in addition to the official Company holidays.
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.
Loans. Simultaneous with the execution of this Agreement, the parties
shall amend the Existing Loan and the Transition Loan to (i) make the due date
of each loan the earlier of February 15, 2000 or the date on which your
employment by Edison is terminated, (ii) make the interest rate of each Loan
5.83% compounded annually effective as of the date hereof, and (iii) provide for
interest to accrue until
-2-
<PAGE> 3
the Loans are paid in full with payment of the interest due on the date of
payment of the Loans, and upon the Company's request you shall execute and
deliver any necessary documents, including replacement promissory notes, in
connection therewith.
Termination/Severance Pay. 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 (the "Effective Termination Date").
(i) 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 Termination Date and ending twelve months from
such date (the "Severance Period") your then current base salary plus the bonus
amount you earned for the prior fiscal year (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."
(ii) If you terminate your employment without "good reason" as defined
above, Edison will pay you as severance pay your base salary as of the date of
termination for the Severance Period, provided that if you become employed
elsewhere during the Severance 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 Severance 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.
(iii) 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
-3-
<PAGE> 4
(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.
(iv) In the event of a termination of your employment for any reason
except your death, in addition to any other severance pay to which you may be
entitled, the Company will pay you a lump sum of $2.5 million (the "Lump-sum
Severance Payment") within 30 days after the Effective Termination Date. Edison
will withhold from the Lump-sum Severance Payment all Federal, state and city
employment and income taxes related thereto that Edison is required to withhold.
You agree that Edison may offset against the Lump-Sum Severance Payment, as
reduced by any applicable tax withholdings, the total amount outstanding on the
Loans including the accrued and unpaid interest through the date of such offset.
(v) In consideration of the severance pay provided for in (i), (ii) and
(iv) 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.
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.
Stock Redemption. In the event of the termination of your employment for
any reason except your death, Edison Inc. agrees that upon receipt of your
written request within six months after the Effective Termination Date, it will
promptly purchase from you the minimum amount of Edison Inc. stock (the
"Redeemed Stock") necessary to provide you with enough cash to pay an Federal,
state and city income taxes (the "Required Taxes") on the Lump-Sum Severance
Payment and the Redeemed Stock. The Required Taxes shall be deemed to be the sum
of (A) the product of the Lump-Sum Severance Payment multiplied by the total of
your expected marginal tax rates for federal, state and city income taxes for
the year in which such payment is made, taking into account the deductibility of
state and city taxes for federal purposes, plus (B) the product of the capital
gain on the sale of the Redeemed Stock multiplied by the total of the applicable
federal, state and city capital gains tax rates for the year in which the stock
is sold, taking into account the deductibility of state and city taxes for
federal purposes. The date on which the Redeemed Stock will be purchased (the
"Redemption Date") will be determined by the Edison Inc. Board, but shall not be
later than the date Federal income taxes are required to be paid on the Lump-Sum
Severance Payment. If Edison Inc.'s stock is
-4-
<PAGE> 5
publicly traded, the price per share paid by Edison for the Redeemed Stock shall
be the average of the bid and asked share prices for the 30-day period preceding
the Redemption Date. If Edison Inc.'s stock is not publicly traded, the price
per share paid for the Redeemed Stock shall be the price paid in the most recent
transaction, provided however that if a third-party transaction occurs within
three months after the Effective Termination Date at a higher price, the
purchase price shall be adjusted upward to reflect such difference. Edison may
offset against the proceeds of the Redeemed Stock the total amount outstanding
under the Loans, including the accrued and unpaid interest through the date of
such offset.
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 agree to use your best efforts to prevent such disclosure
by others. 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 and exclusive property of Edison and
you agree to execute all documents requested by Edison to protect Edison's
rights thereto.
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 or successor to the business
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
business shall exist during your employment with Edison (for example, the
business of managing public and/or private schools for profit), but a
"competing" business shall not include the traditional non-profit education
business so long as such activities do not violate the confidentiality
provisions of this agreement. 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
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<PAGE> 6
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 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. Except as expressly provided in the first paragraph of
this Agreement and 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 L.P.
By: The Edison Project Inc., general partner
By: /s/ Laura K. Eshbaugh
----------------------------
Laura K. Eshbaugh, President
ACCEPTED AND AGREED:
/s/ Benno C. Schmidt, Jr.
- -------------------------
Benno C. Schmidt, Jr.
April 7, 1997
- -------------------------
Date
-6-
<PAGE> 7
EXHIBIT A
RESPONSIBILITIES OF THE CHAIRMAN/CEO
All of the following responsibilities are subject to the direction, authority
and approval of Edison Inc.'s Board.
- - Convene and direct Edison's Office of the Chairman and participate in all
strategic decisions.
- - Act as co-spokesperson for the Company.
- - Exercise full and usual authority of a CEO, including hiring, firing and
supervising Edison employees, agents, representatives, etc.
- - Exercise final authority over day-to-day operations of Edison.
- - Provide oversight of educational aspects of Edison's business.
- - Head legislative/ macromarketing activities.
<PAGE> 8
EXHIBIT B
OPTION AGREEMENT
Option Agreement, dated as of March 1, 1997, between Benno C. Schmidt, Jr.
("Holder") and The Edison Project Inc. (the "Company"). Capitalized terms used
but not defined herein are used herein as defined in The Edison Project Inc.
Shareholders' Agreement dated as of November 18, 1996, among the Company and the
other shareholders named therein (the "Shareholders' Agreement"). This Agreement
supersedes and replaces the Option Agreement dated as of March 15, 1995 between
Holder and The Edison Project L.P. (the "Partnership").
Holder and the Company hereby agree as follows:
1. Issuance: Vesting. (a) The Company hereby grants to Holder the option
(the "Option") to purchase 1,237,110 shares of the Company's Series A Common
Stock (the "Shares") subject to the terms and conditions below.
(b) The Option may only be exercised with respect to the entire
number of vested Shares at the time of exercise. If the Option is exercised
before all the Shares are vested,, the unvested Shares will continue to vest as
provided herein, (it being understood that each and every exercise of the Option
shall be a purchase of the full number of Shares which are vested at the time of
exercise and which have not previously been purchased).
(c) The Option shall vest as follows:
(i) Half of the Option (the "Time Vested Portion"), or
618,555 Shares, shall vest based on the amount of time
Holder is continuously employed by the Partnership
according to the following schedule:
(aa) 51.92% of the Time Vested Portion of the Option,
or 321,153.75 shares, is vested as of the date
hereof.
(bb) 1.33% of the Time Vested Portion of the Option
shall vest on the last day of each month
commencing with the last day of March, 1997 and
ending on the last day of February, 2000:
provided, however, that if Holder is no longer
employed by the Partnership, the balance of the
Time Vested Portion shall cease vesting as of the
effective date of Holder's termination of
employment.
<PAGE> 9
(ii) Half of the Option (the "Performance Vested Portion"),
or 618,555 shares, shall vest in five equal segments
(each such segment, a "Performance Segment") based upon
achievement of the Partnership's business plans as
approved by the Company's Board of Directors (the
"Board") for the five Fiscal Years (as defined below) of
the Partnership beginning with the 1996 Fiscal Year.
Each Performance Segment shall vest as of the date on
which the Board determines that the targets set forth in
the relevant business plan have been achieved. For
Fiscal Year 1996, the Board awarded holder 65% of the
Performance Segment Shares, or 80,412 Shares. The Board
may, but is not required to, permit Holder to be
eligible to vest in a subsequent Fiscal Year in any
Performance Segment which did not vest in respect of y
any prior Fiscal Year due to the non-achievement of the
targets in the relevant business plan to the extent said
targets are achieved in a subsequent Fiscal Year up to
and including the 2000 Fiscal Year. Holder shall only be
eligible to vest in a Performance Segment if Holder was
continuously employed by the Partnership during the
Fiscal Year to which such Performance Segment relates.
2. Exercise. Holder may exercise the vested portion of the Option as
of the first day of each Fiscal Year (or at such other times as may be permitted
by the Board) and prior to the expiration of five years from the first day of
the Fiscal Year immediately following the date of vesting of such portion of the
Option, by (a) transfer to the Account (as defined below) of immediately
available funds in an amount equal to the sum of (x) the number of vested Shares
which have not previously been purchased times the Share Price (as defined
below), and (y) the Withholding Amount (as defined below), and (b) giving
written notice to the Company, failing which the Option shall expire unexercised
and the Company shall have no further obligation hereunder. Upon exercise of the
vested portion of the Option, the books and records of the Company shall be
appropriately amended to reflect the Holder's acquisition of the Shares
corresponding to the vested portion of the Option then exercised.
3. Definitions.
(a) "Management Option Plan" means the management equity and
option program of the Company, pursuant to which this Option is granted.
(b) "Account" means the Company's account number #5001083966
at First American National Bank, Nashville, Tennessee (for further
-2-
<PAGE> 10
transfer to the Knoxville office), ABA # 064-000017 or such other account as the
Company may designate by notice to Holder.
(c) "Fiscal Year" means with respect to the Company and the
Partnership the twelve-month period running from July 1 of one calendar year
through June 30 of the succeeding calendar year.
(d) "Share Price" means $1.25.
(e) "Withholding Amount" means the amount (which shall be
determined by the Board) which the Company or the Partnership is required to
withhold and remit to the Internal Revenue Service and/or any other taxing
authority by reason of the exercise by the Holder of the portion of the Option
which is vested at the time of exercise.(1)
4. Nontransferable. Neither this Option nor the Shares may be
transferred, pledged, assigned, sold or otherwise disposed of, except that the
Shares may be redeemed by the Company at anytime by tender to Holder of an
amount equal to the fair market value thereof as determined (i) in good faith by
the Board or (ii) by a third party transaction at the time of redemption.
5. Representations and Warranties. Holder represents and warrants to
the Company that:
(a) Holder is acquiring the Option for Holder's own account
for investment purposes and not with a view to, or for
resale in connection with, a distribution in whole or in
part of the Option or the Shares.
(b) Holder understands that this Option is not transferable
and the Shares are transferable only to the Company (it
being understood that the foregoing prohibitions on
transfer apply to any transfer by way of pledge,
assignment sale or any other means of disposition), and
that the Shares may be legended to such effect.
- --------
(1) The requirement that the Holder pay a Withholding Amount arises
because (i) the Holder will be treated by the relevant taxing authorities as
receiving compensation income upon exercise of the Option to the extent that, at
the time of such exercise, the fair market value of the Shares exceeds the Share
Price, and (ii) the Company or Partnership has a withholding obligation with
respect to such compensation income.
-3-
<PAGE> 11
(c) Holder has carefully reviewed this Option Agreement, the
Shareholders' Agreements, the Partnership's preliminary
financial statements dated as of June 30, 1996, and the
Partnership's business plan for the 1997 Fiscal Year.
Holder and Holder's advisors have had a reasonable
opportunity to ask questions of and receive answers from
the Company and Partnership, or a person or persons
acting on its behalf, concerning the terms and
conditions of the offering, and to obtain additional
information, to the extent possessed by the Company or
Partnership or obtainable by it without unreasonable
effort or expense. All such questions have been answered
to the full satisfaction of Holder. No oral or written
representations or warranties have been made or oral or
written information furnished or oral or written
promises made to Holder or Holder's advisors in
connection with the Option being offered hereunder or
the offering generally which were in any way
inconsistent this Option Agreement
(d) Holder, either alone or together with Holder's advisors,
has such knowledge and experience in financial, tax and
business matters to enable Holder to utilize the
information made available to Holder in connection with
the offering, to evaluate the merits and risks of the
prospective investment and to make an informed
investment decision with respect thereto.
(e) Holder understands that an investment in the Company
involves a high degree of risk and that the Option and
the Shares may prove to be valueless.
(f) Holder understands that neither the offering nor the
transfer of the Option to Holder has been registered
under the Securities Act of 1933, as amended, in
reliance upon an exemption therefrom for non-public
offerings, nor has such offering or transfer been
registered or qualified under any state securities or
"Blue Sky" law in reliance upon similar exemptions.
(g) Holder understands that the issuance of the Option has
not been, and the issuance of the Shares will not be,
reviewed, approved or otherwise passed upon by the U.S.
Securities and Exchange Commission, any state securities
administrator, the National Association of Securities
-4-
<PAGE> 12
Dealers Inc., any securities or commodities exchange, or
any other governmental agency or self-regulatory
authority.
6. Indemnification. The Holder agrees to indemnify and hold harmless
the Company, the Partnership, and their respective officers, directors and
affiliates from and against all damages, losses, costs and expenses (including
reasonable attorney's fees and expenses) which they may incur by reason of any
breach of this Option Agreement by Holder including any breach of any of the
representations and warranties made by Holder herein.
7. Confidentiality. To the extent Holder acquires non-public
information with respect to the Company or Partnership, including, without
limitation, technical, financial, competitive, marketing sales, and business
information, documents and tangible items (collectively, the "Information"),
Holder shall keep such Information strictly confidential and not at any time
hereafter disclose or divulge such Information to any person, firm or
corporation or otherwise use such Information for any purpose (other than for
the purposes of the Company or Partnership) without the prior written consent of
the Company or the Partnership.
8. Non-Competition and Non-Solicitation. (a) Holder agrees that
until the later of one year after (i) the expiration of the Option, or (ii)
Holder ceases to own the Shares, Holder shall 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 the business of the Company, the Partnership or
any subsidiary of the Company or the Partnership (the Company, the Partnership
and their respective subsidiaries being hereby defined as "Edison"). 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 Holder's ownership of the Option or the Shares, for example, the business
of managing public and/or private schools for profit, but a "competing" business
shall not include the traditional non-profit education business, so long as such
activities do not violate the confidentiality provisions of the Option
Agreement. Ownership by Holder of publicly traded stock of any corporation
conducting any such business shall not be deemed a violation of the preceding
two sentences provided Holder does not own more than three percent (3%) of the
stock of any such corporation.
(b) Holder agrees that until the later of one year after (i)
the expiration of the Option, or (ii) the Holder ceases to own the Shares,
Holder shall not directly or indirectly, solicit the employment, or other
services of any executive employee of the Partnership. For purposes of the
foregoing, any executive employee who within twelve months of terminating his
employment with the Partnership becomes employed by any Person in which Holder
is an officer or director or owner
-5-
<PAGE> 13
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.
9. Satisfaction of Equity Offering. Holder hereby acknowledges that
(i) the issuance of the Option satisfies any and all obligations which the
Partnership or any of the current or former General Partners of the Partnership,
or its predecessor, may have to offer to Holder the opportunity to purchase an
equity interest in the Partnership, and (ii) Holder has no right to acquire any
equity interest in the Partnership or the Company, other than Holder's right to
acquire the Company Shares hereunder.
10. Governing Law. This Option Agreement is governed by the laws of
the State of New York without giving effect to renvoi or other choice of law
doctrine to the extent that the application of the law of another jurisdiction
would be required thereby.
11. Entire Agreement. This Option Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, written or oral, between the
parties with respect to such subject matter.
12. Miscellaneous. (a) Notices. All notices, demands, elections,
requests or other communications which any party to this Option Agreement may
desire or be required to give hereunder shall be in writing and shall be given
by personal delivery, recognized overnight delivery service, telecopy or by
mailing (by registered or certified first class mail, postage prepaid, return
receipt requested) addressed as follows:
if the Company at:
The Edison Project Inc.
c/o The Edison Project L.P.
521 Fifth Avenue 16th Floor
New York, New York 10175
212-309-1604
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Telecopy: 212-504-6666
Attention: John F. Fritts, Esq.
-6-
<PAGE> 14
if to Holder at:
The Edison Project L.P.
521 Fifth Avenue
16th Floor
New York, New York 10175
Telecopy: 212-309-1618
or at such other address or telecopy number as may be designated by one party by
notice given as provided herein to the other party. A notice shall be deemed to
have been given (i) if delivered personally, on the date so delivered (or, if
not a Business Day, on the next following Business Day), (ii) if sent by
recognized overnight delivery service, on the Business Day following the date
sent, (iii) if sent by telecopy, upon electronic confirmation of receipt, or
(iv) if sent by registered or certified first class mail, postage prepaid,
return receipt requested, five Business Days following the date sent.
(b) Amendments. This Option Agreement may not be changed
orally, but only by an agreement in writing signed by the Company and the
Holder.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Option Agreement as of the date set forth above.
____________________________ THE EDISON PROJECT INC.
Benno C. Schmidt, Jr.
BY:_______________________________
Laura Eshbaugh
President
-7-
<PAGE> 15
EXHIBIT C
PERFORMANCE OPTION POOL DESCRIPTION
As of March 1, 1997
Current senior management of The Edison Project L.P. (the "'Partnership") will
be awarded additional options to acquire shares of the Series A Common Stock of
The Edison Project Inc. ("Edison Inc.") under new option agreements. The options
will vest upon the ninth anniversary of the issuance of such options, provided
that the option holder has been continuously employed by the Partnership, and
may be exercised in whole or in part at any time after the ninth anniversary and
prior to the tenth anniversary, on which date any portion of the option which
has not been exercised will expire. The price for shares covered by these option
agreements will be $1.50.
The option agreements will include an acceleration feature providing that the
options will become fully vested if Edison Inc. makes an initial public offering
prior to January 1, 2000 at a share price of at least $8. Alternatively, the
options will become fully vested if prior to January 1, 2000 Edison Inc. (i)
sells all or substantially all of its assets, (ii) completes a merger or
consolidation where Edison Inc. is not the surviving entity, or (iii) concludes
any other transaction in which Edison Inc. investors as of March 1, 1997 are
permitted or required to sell at least fifty percent (50%) of their shares, in
each of (i), (ii), or (iii) only so long as the price per share is at least $8.
The Performance Option Pool will consist of 1,250,000 shares awarded as follows:
<TABLE>
<S> <C>
Chris Whittle 600,000
Benno Schmidt 250,000
John Reid 200,000
Other senior executives* 200,000
---------
1,250,000
</TABLE>
* to be recommended by the Office of the Chairman for approval by the Edison
Inc. board at its April, 1997 meeting
<PAGE> 16
EXHIBIT D
BENEFITS
Insurance
The Company provides a medical and dental insurance plan and a long-term
disability plan, descriptions of which will be provided to you.
Life insurance coverage furnished by the Company provides benefits of two times
annual base salary up to a maximum benefit of $300,000.
Sick Leave
Beginning with the third month of employment, sick leave accrues at the rate of
1.85 hours per pay period.
Personal Leave
Employees receive two days of personal leave each year. These days are lost if
not taken during the year.
Short-Term Disability
Beginning with the seventh month of employment, short-term disability accrues at
the rate of 5.54 hours per pay period, up to a maximum of 400 hours.
Wellness Plan
Employees will be reimbursed up to $150 per year for qualified medical expenses
that are not covered by the Company's medical or dental insurance plan.
401(k) Plan
Employees may contribute on a pre-tax basis up to the annual limit set by the
IRS ($9,500 for 1997) and may allocate contributions among several different
investment options offered by the plan. The Company matches 50% of the first
$1,000 of employee contributions.
<PAGE> 17
EXHIBIT F
CONSENT TO ASSIGNMENT
Each of the undersigned beneficiaries of the First Colony Life Insurance
policy number 1893365 (the "Policy") in the amount of $5,000,000 for the benefit
of Benno C. Schmidt Jr. ("Schmidt") , hereby consents to the assignment of the
Policy by Schmidt to The Edison Project L.P. ("Edison") pursuant to the
assignment attached as Annex I hereto (the "Assignment"), and hereby relinquish
any claims such beneficiary may have in respect of the Policy while the
Assignment is in effect.
Dated:_______________
_________________________________
[BENEFICIARY]
_________________________________
[BENEFICIARY]
_________________________________
[BENEFICIARY]
_________________________________
[BENEFICIARY]
<PAGE> 18
As of December 15, 1997
Mr. Benno C. Schmidt, Jr.
222 Riverside Drive
New York, NY 10025
Dear Benno:
This letter agreement (the "Agreement") sets forth certain amendments to
your employment agreement with The Edison Project L.P. ("Edison" or the
"Company") dated as of March 1, 1997 (the "Initial Employment Agreement")
approved by the Board of Directors (the "Board") of The Edison Project Inc.
("Edison Inc."), the sole general partner of Edison, as of the date hereof.
Except as specifically provided for herein, all terms and provisions of your
Initial Employment Agreement remain intact.
1. Position/Responsibilities. This paragraph is revised in its entirety to
read as follows:
You will be employed as Edison's Chairman and Chief Executive Officer
("CEO") through June 30, 1998. On July 1, 1998 your title will become Chairman
and Chief Education Officer. You will work out of the Company's headquarters in
New York City. Your responsibilities are as set out on Exhibit A to this
Agreement.
2. Term. The end date of your employment agreement is changed from
December 31, 1998 to June 30, 2000.
3. Stock Options. This entire paragraph is replaced in its entirety with
the following:
Stock Options. Simultaneous with the execution of this Agreement, the
parties hereto shall execute the amendment to the Stock Option Agreement
dated as of March 1, 1997 attached as Exhibit B. In addition, the parties
hereto shall execute the Tranche I Option Agreement attached as Exhibit C.
4. Loans. By execution of this Agreement, the parties hereby amend, as
provided in the Initial Employment Agreement, the Existing Loan and the
Transition Loan.
5. Exhibit A. Exhibit A to the Initial Agreement is replaced in its
entirety with Exhibit A as attached to this Agreement.
Entire Agreement. Together with the attached exhibits, this Agreement
constitutes the entire understanding of the parties with respect to the subject
matter hereof and supersedes all prior agreements with respect to the subject
matter. This agreement is governed by the substantive laws of the State of New
York.
<PAGE> 19
Mr. Benno C. Schmidt, Jr.
Page Two
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 L.P.
By: The Edison Project Inc., general partner
By: /s/ Laura K. Eshbaugh
----------------------------
Laura K. Eshbaugh, President
ACCEPTED AND AGREED:
/s/ Benno C. Schmidt, Jr.
- -------------------------
Benno C. Schmidt, Jr.
<PAGE> 20
EXHIBIT A: RESPONSIBILITIES
All of the following responsibilities are subject to the direction, authority
and approval of Edison Inc.'s Board.
* Preside over Edison Inc.'s Board meetings
* Direct the Company's legislative and political efforts
* Co-supervise the Company's General Counsel with the Company's President
until June 30, 1998 and thereafter with the CEO
* Participate in all important educational decisions, with particular focus
on ensuring the quality of educational results
* Participate in the Company's strategic planning and educational design
matters
* Serve as co-spokesperson for the Company
* Support the Company's marketing efforts
* Assist in capital formation
<PAGE> 21
EXHIBIT B
AMENDMENT TO THE OPTION AGREEMENT
DATED AS OF MARCH 1, 1997
BETWEEN BENNO C. SCHMIDT, JR. AND THE EDISON PROJECT INC.
The option agreement dated as of March 1, 1997 between Benno C. Schmidt,
Jr. ("Holder") and The Edison Project Inc. (the "Company") (the "Option
Agreement") is hereby amended as described herein. Except as specifically
provided for herein, all terms and provisions of the Option Agreement remain
intact.
Paragraph l(c)(ii) is amended to provide that any Performance Segment
Shares which have not been awarded as of the date hereof, which shares total
420,598, shall henceforth vest on a time-vested basis as follows: 1) 123,711
Performance Segment Shares shall vest on June 30, 1998, 2) 123,711 Performance
Segment Shares shall vest on June 30, 1999 and 3) the remaining 173,196
Performance Segment Shares shall vest on June 30, 2000, provided, however, that
1) any such vesting shall cease as of the effective date of the termination of
Holder's employment if Holder is terminated by the Company "for cause" or if
Holder terminates his employment without good reason and provided further that
2) if Holder is no longer employed by the Company due to a) Holder's death, b)
Holder's inability to perform his employment responsibilities for a period of
ninety (90) consecutive days, c) the termination of Holder's employment by the
Company without "cause" or d) Holder's termination of his employment for "good
reason," then upon such termination Holder shall be vested in a pro rata portion
of the Performance Segment Shares which would otherwise vest on June 30 of the
relevant year (such proration based on a 365-day year), and vesting of the
balance of unvested Performance Segment Shares for such year and any succeeding
years shall cease. For purposes of the preceding sentence, "for cause" and "good
reason" shall have the meanings set forth in Holder's employment agreement dated
March 1, 1997 as amended as of December 15, 1997.
Entire Agreement. This agreement constitutes the entire understanding of
the parties with respect to the subject matter hereof and supersedes all prior
agreements with respect to the 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 L.P.
BY: The Edison Project Inc., general partner
<PAGE> 22
By: /s/ Laura K. Eshbaugh
-----------------------------
Laura K. Eshbaugh, President
ACCEPTED AND AGREED:
/s/ Benno C. Schmidt, Jr.
- ---------------------------
Benno C. Schmidt, Jr.
Date:
----------------------
-2-
<PAGE> 1
EXHIBIT 10.24
As of March 1, 1997
Mr. H. Christopher Whittle
The Edison Project L.P.
521 Fifth Avenue
New York, NY 10175
Dear Chris:
This letter agreement ("Agreement") sets forth the terms of your
employment with The Edison Project L.P. ("Edison" or the "Company") as approved
by the board of directors (the "Board") of The Edison Project Inc. ("Edison
Inc."), the sole general partner of Edison.
Position/Responsibilities. You will be employed as Edison's Founder and
President, 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 December 31, 1998, 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
$200,000. Contingent upon achievement of Edison's Board-approved business plan
for each fiscal year as determined by Edison Inc.'s 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.
Bonuses. In addition to your base salary, you will receive a bonus of
$7,000 (a "School Bonus") for each school to be managed by Edison (a "Managed
School") under a school management contract (a "Management Contract") secured by
a member of the Development staff and executed after the date hereof, including
without limitation any Management Contracts that are currently contemplated or
under review. Fifty percent (50%) of each School Bonus shall be paid within 30
days after Edison's receipt of a Management Contract covering such Managed
School, with the remaining fifty percent (50%) of each such School Bonus to be
paid within 30 days of the opening of the related Managed School. Should any
Managed School fail to open, the next succeeding School Bonus to be paid shall
be reduced by the portion of the School Bonus previously paid with respect to
such school (the "Repayment Amount"), provided that if any part of the Repayment
Amount remains outstanding at the end of the fiscal year during which, such
school was scheduled to open, the Company may reduce any such compensation due
you by the outstanding balance of the Repayment Amount. The Edison Inc. Board
commits to consider increasing your total bonus with respect to FY 1997 if the
total of School Bonuses for schools covered under Management Contracts signed
during such year is significantly lower than the bonuses paid to Edison's
Chairman/CEO and COO
<PAGE> 2
under the Management Committee incentive compensation plan for such year, with
any action taken to be in the Board's sole discretion.
Stock Options. Simultaneous with the execution of this agreement, the
parties hereto shall execute the Stock Option Agreement attached as Exhibit B.
In addition, you will be eligible to participate in the "Performance Option
Pool" for key executives described in Exhibit C attached hereto, with your
portion of the option pool set at 600,000 shares.
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. 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.
WSI Management Agreement/Expenses. Simultaneous with the execution of
this agreement, the parties hereto shall execute an amendment to the Management
Agreement dated as of March 14, 1995 between Edison and WSI Inc. ("WSI")
attached hereto as Exhibit E. In recognition of the expenses incurred by WSI
from July 1, 1996 through February 28, 1997 in conjunction with your marketing
efforts on behalf of Edison, the Company will pay WSI Inc. $179,000 on or before
March 31, 1997 upon submission of adequate documentation for such expenses and
subject to the Company's policies.
Administrative Assistant. The Company agrees to employ Kristal Shipe as
your administrative assistant during the term of this agreement to work out of
the WSI office, or such other location as you and she shall agree, in Knoxville,
TN. Ms. Shipe shall be paid at an annual base salary of $49,500, with her then
current base to be increased at the beginning of each fiscal year by the average
percentage increase granted to other Edison employees at her level. Ms. Shipe
will be eligible for all employee benefits provided to other employees at her
level, including participation in Edison's Employee Option Plan. Should either
you or Ms. Shipe terminate her employment with the Company, the Company will
provide you with another administrative assistant of your choice. Upon
submission of adequate documentation, the Company will reimburse WSI for Ms.
Shipe's portion of its Knoxville office expenses, e.g. rent, parking, telephone,
copier, office supplies, maintenance, mail, overnight delivery charges, etc.
(such expenses expected to
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<PAGE> 3
average less than $2,500 a month, subject to the activity level for variable
expenses such as overnight delivery charges, mail and long distance phone
usage.)
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
twelve months from such date (the "Severance Period") your then current base
salary plus the bonus amount you earned for the prior fiscal year (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 the
Severance Period, provided that if you become employed elsewhere during the
Severance 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 Severance 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.
(iv) 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.
(v) 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
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<PAGE> 4
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 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)
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 business 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
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<PAGE> 5
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 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 L.P.
By: The Edison Project Inc., general partner
By: /s/ Laura K. Eshbaugh
--------------------------------
Laura K. Eshbaugh, President
ACCEPTED AND AGREED:
/s/ H. Christopher Whittle
- ----------------------------
H. Christopher Whittle
April 7, 1997
- ----------------------------
Date
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<PAGE> 6
EXHIBIT A
RESPONSIBILITIES OF THE PRESIDENT
All of the following responsibilities are subject to the direction, authority
and approval of Edison Inc.'s Board.
- - Member of the Office of the Chairman and involved in all strategic
decisions.
- - Co-spokesperson for the Company.
- - Oversees Company's marketing/development/sales activities, including
hiring, firing and supervision of all employees and consultants engaged
in such activities and preparation and management of the budget for
such activities.
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<PAGE> 7
OPTION AGREEMENT
Option Agreement, dated as of March 1, 1997, between H. Christopher
Whittle ("Holder") and The Edison Project Inc. (the "Company"). Capitalized
terms used but not defined herein are used herein as defined in The Edison
Project Inc. Shareholders' Agreement dated as of November 18, 1996, among the
Company and the other shareholders named therein (the "Shareholders'
Agreement".)
Holder and the Company hereby agree as follows:
1. Issuance: Vesting. (a) The Company hereby grants to Holder the
option (the "Option") to purchase 600,000 shares of the Company's Series A
Common Stock (the "Shares") subject to the terms and conditions below.
(b) The Option may only be exercised with respect to the entire
number of vested Shares at the time of exercise. If the Option is exercised
before all the Shares are vested, the unvested Shares will continue to vest as
provided herein, (it being understood that each and every exercise of the Option
shall be a purchase of the full number of Shares which are vested at the time of
exercise and which have not previously been purchased).
(c) The Option shall vest as follows:
(i) Half of the Option (the "Time Vested Portion") shall vest
based on the amount of time Holder is continuously employed
by The Edison Project L.P. (the "Partnership") according to
the following schedule, provided that if Holder is no
longer employed by the Partnership, the balance of the Time
Vested Portion shall cease vesting as of the effective date
of Holder's termination of employment unless Holder is
terminated by the Partnership without cause in which case
the Time Vested Portion shall continue to vest for 12
months following such termination.
(aa) 20% of the Time Vested Portion of the Option shall
vest ratably at the end of each month between March
1, 1997 and June 30, 1997.
(bb) 30% of the Time Vested Portion of the Option shall
vest ratably at the end of each month between July 1,
1997 and June 30, 1998.
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<PAGE> 8
(cc) 30% of the Time Vested Portion of the Option shall
vest ratably at the end of each month between July 1,
1998 and June 30, 1999.
(dd) 10% of the Time Vested Portion of the Option shall
vest ratably at the end of each month between July 1,
1999 and June 30, 2000.
(ee) 10% of the Time Vested Portion of the Option shall
vest ratably at the end of each month between July 1,
2000 and June 30, 2001.
(ii) Half of the Option (the "Performance Vested Portion") shall
vest in five equal segments (each such segment, a
"Performance Segment") based upon achievement of the
Partnership's business plans as approved by the Company's
Board of Directors (the "Board") for the five Fiscal Years
(as defined below) of the Partnership beginning with the
1997 Fiscal Year according the schedule below. Each
Performance Segment shall vest as of the date on which the
Board determines that the targets set forth in the relevant
business plan have been achieved. The Board may, but is not
required to, permit Holder to be eligible to vest in a
subsequent Fiscal Year in any Performance Segment which did
not vest in respect of any prior Fiscal Year due to the
non-achievement of the targets in the relevant business
plan to the extent said targets are achieved in a
subsequent Fiscal Year up to and including the 2001 Fiscal
Year. Holder shall only be eligible to vest in a
Performance Segment if Holder was continuously employed by
the Partnership during the Fiscal Year to which such
Performance Segment relates, provided that if Holder's
employment is terminated either by the Partnership without
cause or by virtue of the expiration of Holder's employment
agreement, Holder shall be eligible to vest in a pro rata
portion of the Performance Segment for the Fiscal Year
during which such termination occurred, with such pro rata
portion based on the number of months or partial months
Holder was employed during such Fiscal Year.
(aa) Holder shall be eligible for a Performance Segment
equal to 20% of the Performance Vested Portion for the
Fiscal Year 1997.
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<PAGE> 9
(bb) Holder shall be eligible for a Performance Segment
equal to 30% of the Performance Vested Portion for
the Fiscal Year 1998.
(cc) Holder shall be eligible for a Performance Segment
equal to 30% of the Performance Vested Portion for the
Fiscal Year 1999.
(dd) Holder shall be eligible for a Performance Segment
equal to 10% of the Performance Vested Portion for the
Fiscal Year 2000.
(ee) Holder shall be eligible for a Performance Segment
equal to 10% of the Performance Vested Portion for the
Fiscal Year 2001.
2. Exercise. Holder may exercise the vested portion of the Option as of
the first day of each Fiscal Year (or at such other times as may be permitted by
the Board) and prior to the expiration of five years from the first day of the
Fiscal Year immediately following the date of vesting of such portion of the
Option, by (a) transfer to the Account (as defined below) of immediately
available funds in an amount equal to the sum of (x) the number of vested Shares
which have not previously been purchased times the Share Price (as defined
below), and (y) the Withholding Amount (as defined below), and (b) giving
written notice to the Company, failing which the Option shall expire unexercised
and the Company shall have no further obligation hereunder. Upon exercise of the
vested portion of the Option, the books and records of the Company shall be
appropriately amended to reflect the Holder's acquisition of the Shares
corresponding to the vested portion of the Option then exercised.
3. Definitions.
(a) "Management Option Plan" means the management equity and option
program of the Company, pursuant to which this Option is granted.
(b) "Account" means the Company's account number #5001083966 at
First American National Bank, Nashville, Tennessee (for further transfer to the
Knoxville office), ABA # 064-000017 or such other account as the Company may
designate by notice to Holder.
(c) "Fiscal Year" means with respect to the Company and the
Partnership the twelve-month period running from July 1 of one calendar year
through June 30 of the succeeding calendar year.
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<PAGE> 10
(d) "Share Price" means $1.50.
(e) "Withholding Amount" means the amount (which shall be determined
by the Board) which the Company or the Partnership is required to withhold and
remit to the Internal Revenue Service and/or any other taxing authority by
reason of the exercise by the Holder of the portion of the Option which is
vested at the time of exercise.(1)
4. Nontransferable. Neither this Option nor the Shares may be
transferred, pledged, assigned, sold or otherwise disposed of, except that the
Shares may be redeemed by the Company at anytime by tender to Holder of an
amount equal to the fair market value thereof as determined (i) in good faith by
the Board or (ii) by a third party transaction at the time of redemption.
5. Representations and Warranties. Holder represents and warrants to
the Company that:
(a) Holder is acquiring the Option for Holder's own account for
investment purposes and not with a view to, or for resale in
connection with, a distribution in whole or in part of the
Option or the Shares.
(b) Holder understands that this Option is not transferable and the
Shares are transferable only to the Company (it being
understood that the foregoing prohibitions on transfer apply to
any transfer by way of pledge, assignment, sale or any other
means of disposition), and that the Shares may be legended to
such effect.
(c) Holder has carefully reviewed this Option Agreement the
Shareholders' Agreements, the Partnership's preliminary
financial statements dated as of June 30, 1996, and the
Partnership's business plan for the 1997 Fiscal Year. Holder
and Holder's advisors have had a reasonable opportunity to ask
questions of and receive answers from the Company and
Partnership, or a person or persons acting on its behalf,
concerning the terms and conditions of the offering, and to
obtain additional information, to the
- ----------
(1) The requirement that the Holder pay a Withholding Amount arises
because (i) the Holder will be treated by the relevant taxing authorities as
receiving compensation income upon exercise of the Option to the extent that, at
the time of such exercise, the fair market value of the Shares exceeds the Share
Price, and (ii) the Company or Partnership has a withholding obligation with
respect to such compensation income.
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<PAGE> 11
extent possessed by the Company or Partnership or obtainable by
it without unreasonable effort or expense. All such questions
have been answered to the full satisfaction of Holder. No oral
or written representations or warranties have been made or
oral or written information furnished or oral or written
promises made to Holder or Holder's advisors in connection
with the Option being offered hereunder or the offering
generally which were in any way inconsistent this Option
Agreement.
(d) Holder, either alone or together with Holder's advisors, has
such knowledge and experience in financial, tax and business
matters to enable Holder to utilize the information made
available to Holder in connection with the offering, to
evaluate the merits and risks of the prospective investment and
to make an informed investment decision with respect thereto.
(e) Holder understands that an investment in the Company involves a
high degree of risk and that the Option and the Shares may
prove to be valueless.
(f) Holder understands that neither the offering nor the transfer
of the Option to Holder has been registered under the
Securities Act of 1933, as amended, in reliance upon an
exemption therefrom for non-public offerings, nor has such
offering or transfer been registered or qualified under any
state securities or "Blue Sky" law in reliance upon similar
exemptions.
(g) Holder understands that the issuance of the Option has not
been, and the issuance of the Shares will not be, reviewed,
approved or otherwise passed upon by the U.S. Securities and
Exchange Commission, any state securities administrator, the
National Association of Securities Dealers Inc., any securities
or commodities exchange, or any other governmental agency or
self-regulatory authority.
6. Indemnification. The Holder agrees to indemnify and hold harmless
the Company, the Partnership, and their respective officers, directors and
affiliates from and against all damages, losses, costs and expenses (including
reasonable attorney's fees and expenses) which they may incur by reason of any
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<PAGE> 12
breach of this Option Agreement by Holder including any breach of any of the
representations and warranties made by Holder herein.
7. Confidentiality. To the extent Holder acquires non-public
information with respect to the Company or Partnership, including, without
limitation, technical, financial, competitive, marketing, sales, and business
information, documents and tangible items (collectively, the "Information"),
Holder shall keep such Information strictly confidential and not at any time
hereafter disclose or divulge such Information to any person, firm or
corporation or otherwise use such Information for any purpose (other than for
the purposes of the Company or Partnership) without the prior written consent of
the Company or the Partnership.
8. Non-Competition and Non-Solicitation. (a) Holder agrees that until
the later of one year after (i) the expiration of the Option, or (ii) Holder
ceases to own the Shares, Holder shall 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 the business of the Company, the Partnership or any subsidiary
of the Company or the Partnership (the Company, the Partnership and their
respective subsidiaries being hereby defined as "Edison"). 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
Holder's ownership of the Option or the Shares, (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 Holder of publicly
traded stock of any corporation conducting any such business shall not be deemed
a violation of the preceding two sentences provided Holder does not own more
than three percent (3%) of the stock of any such corporation.
(b) Holder agrees that until the later of one year after (i) the
expiration of the Option, or (ii) the Holder ceases to own the Shares, Holder
shall not, directly or indirectly, solicit the employment, or other services of
any executive employee of the Partnership. For purposes of the foregoing any
executive employee who within twelve months of terminating his employment with
the Partnership becomes employed by any Person in which Holder is 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.
9. Governing Law. This Option Agreement is governed by the laws of the
State of New York without giving effect to renvoi or other choice of law
doctrine to the extent that the application of the law of another jurisdiction
would be required thereby.
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<PAGE> 13
10. Entire Agreement. This Option Agreement contains the entire
understanding of the parties with respect to the subject matter hereof and
supersedes all prior agreements and understandings, written or oral, between the
parties with respect to such subject matter.
11. Miscellaneous. (a) Notices. All notices, demands, elections,
requests or other communications which any party to this Option Agreement may
desire or be required to give hereunder shall be in writing and shall be given
by personal delivery, recognized overnight delivery service, telecopy or by
mailing (by registered or certified first class mail, postage prepaid, return
receipt requested) addressed as follows:
if the Company at:
The Edison Project Inc.
c/o The Edison Project L.P.
521 Fifth Avenue 16th Floor
New York, New York 10175
212-309-1604
with a copy to:
Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Telecopy: 212-504-6666
Attention: John F. Fritts, Esq.
if to Holder at:
Suite 366
NationsBank Center
550 Main Street
Knoxville, TN 37902
Telecopy: 423-546-1090
or at such other address or telecopy number as may be designated by one party by
notice given as provided herein to the other party. A notice shall be deemed to
have been given (i) if delivered personally, on the date so delivered (or, if
not a Business Day, on the next following Business Day), (ii) if sent by
recognized overnight delivery service, on the Business Day following the date
sent, (iii) if sent by telecopy, upon electronic confirmation of receipt, or
(iv) if sent by registered or certified first
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<PAGE> 14
class mail, postage prepaid, return receipt requested, five Business Days
following the date sent.
(b) Amendments. This Option Agreement may not be changed orally,
but only by an agreement in writing signed by the Company and the Holder.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Option Agreement as of the date set forth above.
- ------------------------------- THE EDISON PROJECT INC.
H. Christopher Whittle
BY:
-------------------------------
Laura Eshbaugh
President
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EXHIBIT C
PERFORMANCE OPTION POOL DESCRIPTION
As of March 1, 1997
Current senior management of The Edison Project L.P. (the "Partnership") will be
awarded additional options to acquire shares of the Series A Common Stock of The
Edison Project Inc. ("Edison Inc.") under new option agreements. The options
will vest upon the ninth anniversary of the issuance of such options, provided
that the option holder has been continuously employed by the Partnership, and
may be exercised in whole or in part at any time after the ninth anniversary and
prior to the tenth anniversary on which date any portion of the option which has
not been exercised will expire. The price for shares covered by these option
agreements will be $1.50.
The option agreements will include an acceleration feature providing that the
options will become fully vested if Edison Inc. makes an initial public offering
prior to January 1, 2000 at a share price of at least $8. Alternatively, the
options will become fully vested if prior to January 1, 2000 Edison Inc. (i)
sells an or substantially all of its assets, (ii) completes a merger or
consolidation where Edison Inc. is not the surviving entity, or (iii) concludes
any other transaction in which Edison Inc. investors as of March 1, 1997 are
permitted or required to sell at least fifty percent (50%) of their shares, in
each of (i), (ii), or (iii) only so long as the price per share is at least $8.
The Performance Option Pool will consist of 1,250,000 shares awarded as follows:
<TABLE>
<S> <C>
Chris Whittle 600,000
Benno Schmidt 250,000
John Reid 200,000
Other senior executives* 200,000
---------
1,250,000
</TABLE>
* to be recommended by the Office of the Chairman for approval by the Edison
Inc. board at its April, 1997 meeting
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EXHIBIT D
BENEFITS
Insurance
The Company provides a medical and dental insurance plan and a long-term
disability plan, descriptions of which will be provided to you.
Life insurance coverage furnished by the Company provides benefits of two times
annual base salary up to a maximum benefit of $300,000.
Sick Leave
Beginning with the third month of employment, sick leave accrues at the rate of
1.85 hours per pay period.
Personal Leave
Employees receive two days of personal leave each year. These days are lost if
not taken during the year.
Short-Term Disability
Beginning with the seventh month of employment, short-term disability accrues at
the rate of 5.54 hours per pay period, up to a maximum of 400 hours.
Wellness Plan
Employees will be reimbursed up to $150 per year for qualified medical expenses
that are not covered by the Company's medical or dental insurance plan.
401(k) Plan
Employees may contribute on a pre-tax basis up to the annual limit set by the
IRS ($9,500 for 1997) and may allocate contributions among several different
investment options offered by the plan. The Company matches 50% of the first $
1,000 of employee contributions.
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EXHIBIT E
AMENDMENT TO THE MANAGEMENT AGREEMENT
DATED AS OF MARCH 14,1995
BETWEEN
THE EDISON PROJECT L.P. AND WSI INC
The Management Agreement (the "Agreement") dated as of March 14, 1995
between The Edison Project L.P. (the "Company") and WSI Inc. ("WSI") is hereby
amended as follows:
1. The WHEREAS clauses of the Agreement are amended to read as follows:
WHEREAS, WSI was the founding partner of the Company and its president,
H. Christopher Whittle ("Whittle"), is the "Founder" and President of the
Company; and
WHEREAS, the Company recognizes that WSI personnel possess special
knowledge and expertise with respect to the Company's business which knowledge
and expertise is vital to the Company in connection with the growth of its
business; and
WHEREAS, the Company desires to ensure to itself the availability of
WSI personnel's knowledge and expertise; and
WHEREAS, WSI desires to provide the services described herein to the
Company on the terms and conditions provided herein.
2. Paragraph 2(a) is amended to read as follows:
During the Initial Term and any Renewal Term, WSI shall cause
its personnel to provide services to the Company in areas in
which its personnel have knowledge or expertise upon
reasonable request from the Company.
3. Paragraph 2(b) is omitted, and Paragraph 2(c), which is amended to
delete the words "Whittle and any other" before the word "WSL" and Paragraph
2(d) shall become Paragraphs 2(b) and 2(c).
4. Paragraph 3 is amended to read in its entirety as follows:
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<PAGE> 18
Management Fees and Expenses. Mutually agreeable fees for any services
to be provided by WSI to the Company under this Agreement and any
expenses related thereto (the "Management Fees") shall be specifically
reviewed and approved in advance by the Board of Directors of The
Edison Project Inc. as part of the Company's annual budget or a
revision thereto.
5. Paragraph 4 is amended to delete the words ", Whittle or other" before
the word "personnel."
6. Paragraph 5 is amended to delete the following words: "'this provision
shall not affect any of WSI's rights (or Whittle's rights as WSI's controlling
shareholder) or the Company's obligations under the Company's Amended and
Restated Agreement of Limited Partnership dated as of March 14, 1995, and,
further, provided, that".
7. Paragraphs 6(a) and 6(b) are deleted and Paragraph 6(c), which is
amended to delete the parenthetical at the end of the paragraph and change the
word "Fee" to "Fees," becomes Paragraph 6.
8. Paragraph 7(c) is hereby amended by changing the reference to
"paragraph 6(c)" to "paragraph 6."
9. The Edison Project Inc. hereby acknowledges that it is the corporation
referred to in Paragraph 7(a) (including, without limitation, in the last
sentence thereof) and that it will comply with the obligations therein set
forth.
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<PAGE> 19
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of March 1, 1997.
WSI Inc.
By:
---------------------------------
H. Christopher Whittle, President
THE EDISON PROJECT L.P.
By: The Edison Project Inc., general partner
By:
---------------------------------
Laura K. Eshbaugh, President
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<PAGE> 20
As of December 15, 1997
Mr. H. Christopher Whittle
The Edison Project L.P.
521 Fifth Avenue
New York, NY 10175
Dear Chris:
This letter agreement (the "Agreement") sets forth certain amendments
to your employment agreement with The Edison Project L.P. ("Edison" or the
"Company") dated as of March 1, 1997 (the "Initial Employment Agreement")
approved by the Board of Directors (the "Board") of The Edison Project Inc.
("Edison Inc."), the sole general partner of Edison, as of the date hereof
Except as specifically provided for herein, all terms and provisions of your
Initial Employment Agreement remain intact.
1. Position/Responsibilities. This paragraph is revised in its entirety
to read as follows:
You will be employed as Edison's Founder and President through June 30,
1998. On July 1, 1998 your title will become Founder and Chief
Executive Officer. You will work out of the Company's headquarters in
New York City. Your responsibilities are as set out on Exhibit A to
this Agreement.
2. Term. The end date of your employment agreement is changed from
December 31, 1998 to December 31, 2000.
3. Base Salary. Your base salary is changed from $200,000 to $276,000.
4. Bonuses. This paragraph is replaced in its entirety to read as
follows:
In addition to your base salary, beginning with FY 1998 you will
participate in the Management Committee incentive compensation plan as
set forth by the Board each fiscal year. You will be eligible to
receive an annual bonus of 50% of your then current base salary under a
plan to be determined by the Board in its sole discretion. The second
fifty percent (50%) of your FY 1997 bonus with respect to the Academy
20 Management Contract will be paid within 30 days the opening of the
Academy 20 Managed School.
5. Stock Options. The title of this paragraph is revised to read
"Options Under Edison's Management Option Plan" and the second sentence of the
paragraph is deleted.
-14-
<PAGE> 21
6. Exhibit A. Exhibit A to the Initial Agreement is replaced in its
entirety with Exhibit A as attached to this Agreement.
Further, simultaneous with the execution of this Agreement, the parties
hereto shall execute the Tranche 1 Option Agreement, the Tranche 2 Option
Agreement, the Tranche 3 Option Agreement and the Tranche 4 Option Agreement
attached to this Agreement as Exhibits B, C, D and E respectively.
Entire Agreement. Together with the attached exhibits, this Agreement
constitutes the entire understanding of the parties with respect to the subject
matter hereof and supersedes all prior agreements with respect to the 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 L.P.
By: The Edison Project Inc., general partner
By: /s/ Laura K. Eshbaugh
--------------------------------
Laura K. Eshbaugh, President
ACCEPTED AND AGREED:
/s/ H. Christopher Whittle
- ----------------------------
H. Christopher Whittle
-15-
<PAGE> 22
EXHIBIT A: RESPONSIBILITIES
All of the following responsibilities are subject to the direction, authority
and approval of Edison Inc.'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
* Supervision of a) the COO until June 30, 1998 and thereafter the President; b)
the CFO; and c) the General Counsel, jointly with the Chairman/CEO until June
30, 1998 and thereafter with the Chairman
* Oversight responsibilities via the COO until June 30, 1998 and thereafter via
the President of development and product design activities
* Direction of new product development efforts
* Co-spokesperson for the Company
* Direction of the Company's media relations
-16-
<PAGE> 1
EXHIBIT 10.25
Benno C. Schmidt, Jr.
President and Chief Executive Officer
June 16, 1997
Mr. Christopher D. Cerf
c/o Wiley, Rein & Fielding
1776 K Street, N.W.
Washington, D.C. 20006
Dear Chris:
I am pleased to confirm herewith the details of our agreement regarding
your employment with The Edison Project L.P. ("Edison" or the "Company"). We all
look forward to your arrival and to a long and productive working relationship.
I am extremely pleased that you are joining the Edison team.
Position/Responsibilities. You will be employed as Executive Vice
President and General Counsel effective June 16, 1997. You will report directly
to me. Your responsibilities are as set forth on Exhibit A attached hereto.
Term. You shall be employed for an initial three-year term ending on
June 16, 2000, unless terminated earlier by you or by 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 $200,000. 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 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 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, you will be eligible to
participate in the Management Committee incentive compensation plan as set by
the Board of Directors of The Edison Project Inc. each fiscal year.
<PAGE> 2
Mr. Christopher D. Cerf
June 16, 1997
Page 2
521 Fifth Avenue, New York, NY 10175 (212) 309-1600 fax (212) 309-1618
Stock Options. Simultaneous with the execution of this Agreement, the
parties hereto shall execute and deliver the Stock Option Agreement attached as
Exhibit C.
Relocation. It is understood that you will initially work out of your
current office in Washington, D.C. (or such office space as shall be approved by
me). You shall, however, travel to New York on an as needed basis and, in
addition, workout of the Company's New York offices as necessary to fulfill your
responsibilities. At such time as we mutually agree on your relocation 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 relocation as set forth
in Exhibit D.
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 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.
<PAGE> 3
Mr. Christopher D. Cerf
June 16, 1997
Page 3
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 misconduct injurious to Edison, its general partners or
affiliates; (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 provided, however, that it is understood and agreed that you will
remain at "WR&F" in an "of counsel" or equivalent status and may in that
connection perform minimal duties upon the request of WR&F provided that such
duties do not in any manner interfere with the performance of your duties to
Edison.
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 or Edison, or successor to the business
of Edison, provided that if restrictions regarding competition in the employment
agreements of any member of the Management Committee are ever less restrictive
than those contained herein, the provisions of this paragraph will be similarly
modified. For the purposes hereof, a
<PAGE> 4
Mr. Christopher D. Cerf
June 16, 1997
Page 4
"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 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.
Duplicative 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/ Benno C. Schmidt
- ---------------------------------------
Benno C. Schmidt
ACCEPTED AND AGREED:
/s/ Christopher D. Cerf
- ---------------------------------------
Christopher D. Cerf
6/17/97
- ---------------------------------------
Date
<PAGE> 5
EXHIBIT A
Job Responsibilities
1. Designing and leading major charter and contracting legislative efforts
in a number of jurisdictions as well as coordinating and directing
local lobbying efforts to encourage legislation that opens new markets
for Edison.
2. Developing and managing a regulatory strategy vis a vis the Department
of Education and other federal agencies.
3. Auditing existing and potential legal risks to the Company and
developing strategies to control them.
4. Addressing proactively any proposed changes to existing favorable
legislation in current markets.
5. Conducting a review of our existing and future school contracts with
special attention to any possible labor law issues, liability issues,
revenue issues, or other legal issues.
6. Retaining, managing, and overseeing outside counsel with respect to
litigation and transaction work performed on behalf of Edison and
Edison Project Inc., Edison's general partner.
7. Raising Edison's visibility and influence on Capitol Hill.
8. Playing an important role in District of Columbia school development.
9. Developing a national union strategy.
10. Performing other management responsibilities as the CEO shall from time
to time direct.
11 Attend meetings of the Board of Directors of Edison Project Inc.,
Edison's General Partner.
<PAGE> 6
EXHIBIT B
Benefits
INSURANCE
The Company provides a medical and dental insurance plan and a long-term
disability plan, descriptions of which will be provided to you.
Life insurance coverage furnished by the Company provides benefits of two times
annual base salary up to a maximum benefit of $300,000.
SICK LEAVE
Beginning with the third month of employment, sick leave accrues at the rate of
1.85 hours per pay period.
PERSONAL LEAVE
Employees receive two days of personal leave each year. These days are lost if
not taken during the year.
SHORT-TERM DISABILITY
Beginning with the seventh month of employment, short-term disability accrues at
the rate of 5.54 hours per pay period, up to a maximum of 400 hours.
WELLNESS PLAN
Employees will be reimbursed up to $150 per year for qualified medical expenses
that are not covered by the Company's medical or dental insurance plan.
401(k) PLAN
Employees may contribute on a pre-tax basis up to the annual limit set by the
IRS ($9,500 for 1997) and may allocate contributions among several different
investment options offered by the plan. The Company matches 50% of the first
$1,000 of employee contributions.
<PAGE> 1
EXHIBIT 10.26
THE EDISON PROJECT L.P.
529 Fifth Avenue, 12th Floor
New York, New York 10017
March 15, 1995
John Chubb
c/o The Edison Project L.P.
529 Fifth Avenue, 12th Floor
New York, New York 10017
Dear John:
This letter supersedes and replaces any other employment agreement
which may be in effect between you and The Edison Project L.P., a Delaware
limited partnership (formerly known as Whittle Schools L.P.) ("Edison") as of
the date hereof.
The term of your employment commences as of the date hereof and ends on
June 30, 1996 and shall be automatically renewed for successive one year terms,
unless terminated earlier as provided below.
Your annual base salary will be $200,000. You are entitled to receive
within 30 days from the date hereof a one-time cash transition payment of
$110,000. 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. You will receive three weeks of vacation in addition to the official
company holidays.
Edison shall have the right to terminate your employment 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 the termination and ending the
later of June 30, 1996 or six months after the effective date of the
termination, provided that if you become employed or accept employment elsewhere
during such 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 such period. 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. Payments made to you as reimbursement for
documented expenses are not constitute compensation for purposes of this
paragraph. 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.
If prior to June 30, 1996 Edison terminates your employment and such
termination is either (a) not voluntary or (b) a result of the cessation of the
Edison
<PAGE> 2
business, then, in the event that upon the sale of your current New Jersey
residence you realize an amount less than your purchase price for such
residence, Edison will reimburse you for the amount of such loss and any
transaction costs, fees, commissions and taxes related to such sale up to
$100,000. You shall be solely responsible for any tax liabilities resulting from
such reimbursement. The provisions of the preceding sentence supersede and
replace any prior relocation expense arrangement which may be in effect between
you and Edison as of the date hereof.
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) insubordination or disregard of directives of Edison's Board
of Directors or of the Chief Executive Officer of Edison (or any other Edison
officer to whom you report); (2) commission of a willful act which constitutes a
breach of your duty of loyalty to Edison; (3) commission of a willful act of
dishonesty in the course of your duties with Edison which significantly injures
Edison; (4) engagement in gross or persistent misconduct injurious to Edison,
its general partners or affiliates; (5) conviction of a crime of moral turpitude
or of a felony; or (6) chronic alcoholism or drug abuse. If you are terminated
for cause, Edison will pay your unpaid base salary through the effective date of
termination.
In return for the compensation payments set forth above, 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 Edison.
It is understood that in order to perform your duties at Edison, it
will be necessary for Edison to divulge 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.
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 business shall exist during your employment with Edison, for example, the
business of managing public and private schools for profit, but a "competing"
business shall not include the traditional non-profit education business, so
long as such activities do not violate the confidentiality provisions of this
<PAGE> 3
agreement. 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. Additionally, you will not, directly or indirectly,
solicit the employment or other services of any executive employee of Edison for
a period of one year after you leave Edison.
By your signature below, you specifically release and discharge Edison,
its current and former general partners and their respective officers,
directors, employees, agents, attorneys, and affiliates (collectively, the
"Released Parties") from any and all claims relating to any bonus arrangements
you may have with Edison. You understand and acknowledge that this release is a
condition to the Edison refinancing occurring on the date hereof. This release
shall be binding upon your executors, administrators, successors and assigns and
shall inure to the benefit of the successors and assigns of the Released
Parties.
This letter agreement is governed by the laws of the State of New York.
Please sign below to evidence your agreement to the foregoing, and
return the duplicate copy to me for our records.
Sincerely,
/s/ Benno C. Schmidt
-------------------------
Benno C. Schmidt
ACCEPTED AND AGREED
/s/ John E. Chubb
- ------------------------------
John E. Chubb
3/14/95
- ------------------------------
Date
<PAGE> 1
Exhibit 10.27
As of April 20, 1998
Mr. James L. Starr
Avalon Grove
200 Broad Street
Apt. 4 2347
Stamford, CT 06901
Dear Jim:
I am pleased to confirm herewith the details of our agreement regarding
your employment with The Edison Project L.P. ("Edison" or the "Company"). We all
look forward to your arrival and to a long and productive working relationship.
I am extremely pleased that you are joining the Edison team.
Position/Responsibilities. You will be employed as Edison's Chief
Financial Officer ("CFO") effective April 20, 1998, working out of the Company's
headquarters in New York City at 521 Fifth Ave. You will report directly to me
and will have responsibilities customary and appropriate for a CFO, as well as
other responsibilities that I may assign to you from time to time.
Term. You shall be employed for an initial three-year term ending on
April 19, 2001, which term shall be automatically renewed for successive
one-year terms subject to the termination provisions below.
Base Salary/Benefits. Your annual base salary will be $225,O00. This
base salary will be increased annually as recommended by me and approved by the
compensation committee (the "Compensation Committee") of The Edison Project Inc.
("Edison Inc."). 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 A. You will receive three weeks of vacation
annually in addition to the official Company holidays.
Bonus. In addition to your base salary, you will be eligible to receive
up to 33% of your base salary for each fiscal year (the Company's "Fiscal Year,"
which runs from July 1 through June 30), based upon reasonable achievement of
the annual objectives that you and I jointly set. Such award must be approved
for each Fiscal Year by Edison Inc.'s Compensation Committee. An additional
$12,500 bonus will be awarded to you on the anniversary of your employment for
the next four years for a total bonus of $50,000 (the "Anniversary Bonus").
<PAGE> 2
Stock Options. Simultaneous with the execution of this agreement, the
parties hereto shall execute the Stock Option Agreement attached as Exhibit B.
Additionally, on October 20, 1999 based upon achievement of reasonable
objectives that you and I set and as recommended by the Compensation Committee
of Edison Inc. and approved by the board of directors (the "Board") of Edison
Inc., you will be awarded the option to acquire at least an additional 75,000
shares of the Series A Common Stock of Edison Inc. priced at the then current
fair market value of the stock. Such option would be 25% vested upon award, and
the remainder would vest ratably over the succeeding 36 months. The terms of
such award, if made, will be memorialized in a separate stock option agreement.
Relocation. At such time as you relocate to the New York City area,
Edison will 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. Edison will further pay the reasonable costs associated with
maintaining your professional CPA license, including appropriate membership dues
and costs associated with meeting continuing education requirements.
Loan. Upon your request within the first five months of your
employment, the Company agrees to loan you $35,000 on the terms set forth in the
specimen note attached as Exhibit D.
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 on the later of a) April 19, 1999 or b)
six months from such date. 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 misconduct injurious to Edison, its general partners or
affiliates; (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.
In the event your employment is terminated for any reason, Edison shall
pay you any
<PAGE> 3
unpaid portion of your Anniversary Bonus within thirty (30) days of 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 my prior
approval. Notwithstanding the foregoing, approval has been granted for you to
remain a member of the board of one or more subsidiaries of Sierra Health
Services subsequent to your employment by Edison.
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. 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
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
<PAGE> 4
evidence your agreement to the foregoing, and return one original to me for our
records.
Sincerely
/s/ H. Christopher Whittle
H. Christopher Whittle
ACCEPTED AND AGREED:
/s/ James L. Starr
- -------------------------
James L. Starr
- -------------------------
Date
<PAGE> 5
EXHIBIT A
BENEFITS
INSURANCE
The Company provides a medical and dental insurance plan and a long-term
disability plan, descriptions of which will be provided to you.
Life insurance coverage furnished by the Company provides benefits of two times
annual base salary up to a maximum benefit of $300,000.
SICK LEAVE
Beginning with the third month of employment, sick leave accrues at the rate of
1.85 hours per pay period.
PERSONAL LEAVE
Employees receive two days of personal leave each year. These days are lost if
not taken during the year.
SHORT-TERM DISABILITY
Beginning with the seventh month of employment, short-term disability accrues at
the rate of 5.54 hours per pay period, up to a maximum of 400 hours.
WELLNESS PLAN
Employees' will be reimbursed up to $150 per year for qualified medical expenses
that are not covered by the Company's medical or dental insurance plan.
401(k) PLAN
Employees may contribute on a pre-tax basis up to the annual limit set by the
IRS ($10,000 for 1998) and may allocate contributions among several different
investment options offered by the plan. The Company matches 50% of the first
$1,000 of employee contributions.
<PAGE> 1
Exhibit 10.28
APEX ONLINE LEARNING INC.
PREFERRED STOCK PURCHASE AGREEMENT
This Agreement dated as of July 2, 1999, is entered into by and between
Apex Online Learning Inc., a Washington corporation (the "Company"), and the
entity listed on Exhibit A hereto (the "Purchaser").
In consideration of the mutual promises and covenants contained in this
Agreement, the parties hereto agree as follows:
1. Authorization and Sale of Shares.
1.1 Authorization. The Company has, or before the Closing (as
defined in Section 2) will have, duly authorized the sale and issuance, pursuant
to the terms of this Agreement, of 2,000,000 shares of its Series B Preferred
Stock, $0.001 par value per share (the "Series B Preferred"), having the rights,
restrictions, privileges and preferences set forth in the Designation of Series
B Preferred Stock attached hereto as Exhibit B (the "Series B Designation"). The
Company has, or before the Closing will have, adopted and filed the Series B
Designation with the Secretary of State of the State of Washington.
1.2 Sale of Shares. Subject to the terms and conditions of
this Agreement, at the Closing the Company will sell and issue to the Purchaser,
and the Purchaser will purchase, the number of shares of Series B Preferred set
forth opposite the Purchaser's name on Exhibit A for the purchase price of $5.00
per share (the "Purchase Price"). The shares of Series B Preferred sold under
this Agreement are referred to as the "Shares."
1.3 Use of Proceeds. The Company will use the proceeds from
the sale of the Shares for product development and other general corporate
purposes.
2. Closings.
2.1 Initial Closing. The closing (the "Closing") of the sale
and purchase of the Shares under this Agreement shall take place at the offices
of Hale and Dorr LLP, 1455 Pennsylvania Avenue, Washington, D.C. at 10:00 am.,
on July 2, 1999, or at such other time, date and place as are mutually agreeable
to the Company and the Purchaser but in no event later than July 15, 1999. At
the Closing, the Company shall deliver to the Purchaser a certificate for the
number of Shares being purchased at the Closing by the Purchaser, registered in
the name of the Purchaser, against payment to the Company of the Purchase Price,
by wire transfer, check, cancellation of indebtedness or other method acceptable
to the Company. The date of the Closing is hereinafter referred to as the
"Closing Date." If at the Closing any of the conditions specified in Section 5
shall not have been fulfilled, the Purchaser shall, at its election,
<PAGE> 2
be relieved of all of its obligations under this Agreement without thereby
waiving any other rights it may have by reason of such failure or such
non-fulfillment.
2.2 Subsequent Closings. In the event that, prior to the
second anniversary of Closing, the Company sells shares of its Preferred Stock
to an investor (a "Subsequent Purchaser"), the Company shall at the time of each
such sale (a "Subsequent Closing") also sell and the Purchaser shall purchase
shares of Preferred Stock of the Company for an aggregate purchase price equal
to one-half of the amount paid by the Subsequent Purchaser; provided, that the
maximum amount the Purchaser shall be obligated to invest to purchase Preferred
Stock pursuant to this Section 2.2 shall be $5,000,000. The price per share to
be paid by the Purchaser for Preferred Stock at a Subsequent Closing shall be
$5.00 per share, unless the price being paid by the Subsequent Purchaser at such
Subsequent Closing is less than $2.00 per share, in which event the price to be
paid by the Purchaser at such Subsequent Closing shall equal $5.00 per share
multiplied by a fraction the numerator of which is the price per share being
paid by the Subsequent Purchaser at such Subsequent Closing and the denominator
of which is $2.00. Any Preferred Stock issued to the Purchaser or a Subsequent
Purchaser at a Subsequent Closing shall be issued to the Purchaser pursuant to a
purchase agreement substantially identical to this Agreement (or on such other
terms as the Purchaser may agree in its sole discretion) and to the Subsequent
Purchaser on terms no more favorable to the Subsequent Purchaser than the terms
of this Agreement and the Shareholders Agreement of even date herewith between
the Company, the Purchaser and the Existing Shareholders named therein (the
"Shareholders Agreement"). The Preferred Stock issued to the Purchaser at a
Subsequent Closing shall be (a) Series B Preferred if the price per share to be
paid by the Purchaser at such Subsequent Closing is $5.00, (b) if the price per
share to be paid by the Purchaser at such Subsequent Closing is less than $5.00,
a new series of Preferred Stock containing terms substantially identical to the
Series B Preferred, except that the original issue price and initial conversion
value reflected in the terms of such new series of Preferred Stock shall be the
lower purchase price, or (c) Preferred Stock containing such other terms as the
Purchaser may agree in its sole discretion. The Preferred Stock issued to the
Subsequent Purchaser at a Subsequent Closing shall be (x) a new series of
Preferred Stock (other than a series issued to the Purchaser) containing terms
substantially identical to the Series B Preferred, except that the original
issue price and initial conversion value reflected in the terms of such new
series of Preferred Stock shall be the purchase price paid by such Subsequent
Purchaser, or (y) Preferred Stock containing such other terms as the Purchaser
may agree in its sole discretion. Notwithstanding the foregoing provisions of
this Section 2, so long as the Purchaser holds at least 500,000 shares (as
adjusted for stock splits, stock dividends, recapitalizations or similar events)
of Series B Preferred Stock, (i) in no event shall the Company sell any equity
securities to any investor (other than the Purchaser) that (A) manages, operates
or owns any public or private school having any grade level from pre-K through
and including grade 12 and offering a curriculum that includes mathematics,
science and humanities and (B) has annual revenues of more than $5,000,000 from
such activity and (ii) without the prior written
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approval of the Purchaser, which shall not be unreasonably withheld, the
Subsequent Purchaser shall only be Paul G. Allen, Vulcan Ventures Incorporated
or another party which is not principally engaged in the business of making debt
or equity investments or an affiliate of such a party. The Company shall not
issue Series B Preferred Stock to any party other than the Purchaser. If any
shares of designated Series B Preferred Stock remain unissued after the second
anniversary hereof, the Board of Directors of the Company may amend the
resolution establishing such series to decrease (but not below the number of
shares of such series then outstanding) the number of shares of such series, and
the number of shares constituting the decrease shall thereafter constitute
authorized but undesignated shares.
3. Representations of the Company. Except as disclosed by the
Company in Exhibit C hereto, the Company hereby represents and warrants to the
Purchaser that the statements contained in this Section 3 are true, complete and
correct.
3.1 Organization and Standing. The Company is a corporation
duly organized and validly existing under the laws of the State of Washington
and has full corporate power and authority to conduct its business as presently
conducted and as proposed to be conducted by it and to enter into and perform
this Agreement and the Shareholders Agreement and to carry out the transactions
contemplated by this Agreement and the Shareholders Agreement. The Company is
duly qualified to do business as a foreign corporation and is in good standing
in every other jurisdiction in which the failure so to qualify would have a
material adverse effect on the business, prospects, assets or condition
(financial or otherwise) of the Company (a "Company Material Adverse Effect").
The Company has furnished to the Purchaser true and complete copies of its
Articles of Incorporation and Bylaws, each as amended to date and presently in
effect. The Company has at all times complied with all provisions of its
Articles of Incorporation and Bylaws and is not in default under, or in
violation of, any such provision.
3.2 Capitalization. The authorized capital stock of the
Company (immediately prior to the Closing) consists of 60,000,000 shares of
Common Stock, $0.001 par value per share (the "Common Stock"), of which 1,000
shares are issued and outstanding, 4,441,208 shares have been reserved for
issuance pursuant to the 1999 Stock Option/Stock Issuance Plan of the Company,
as may be amended from time to time (the "Stock Option Plan"), and 5,050,000
shares have been reserved for conversion of issued and outstanding Series A
Preferred Stock and 40,000,000 shares of Preferred Stock, $0.001 par value per
share, of which 7,550,000 shares have been designated as Series A Preferred
Stock, of which 5,050,000 shares are issued and outstanding, and of which
2,000,000 shares have been designated as Series B Preferred, none of which
shares are issued and outstanding. All of the issued and outstanding shares of
Common Stock have been duly authorized and validly issued and are fully paid and
nonassessable. Except as provided in this Agreement or the Stock Option Plan,
(i) no subscription, warrant, option, convertible security or other right
(contingent or otherwise) to purchase or acquire any shares of capital stock of
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<PAGE> 4
the Company is authorized or outstanding, (ii) the Company has no obligation
(contingent or otherwise) to issue any subscription, warrant, option,
convertible security or other such right or to issue or distribute to holders of
any shares of its capital stock any evidences of indebtedness or assets of the
Company, (iii) the Company has no obligation (contingent or otherwise) to
purchase, redeem or otherwise acquire any shares of its capital stock or any
interest therein or to pay any dividend or make any other distribution in
respect thereof, and (iv) there are no outstanding or authorized stock
appreciation, phantom stock or similar rights with respect to the Company. All
of the issued and outstanding shares of capital stock of the Company have been
offered, issued and sold by the Company in compliance with applicable federal
and state securities laws.
3.3 Subsidiaries, Etc. The Company has no subsidiaries and
does not own or control, directly or indirectly, any shares of capital stock of
any other corporation or any interest in any partnership, joint venture or other
non-corporate business enterprise.
3.4 Securityholder Lists and Agreements. Attached as Exhibit D
is a true and complete list of the securityholders of the Company, showing the
number of shares of Common Stock or other securities of the Company held by each
securityholder as of the date of this Agreement and, in the case of options,
warrants and other convertible securities, the exercise price thereof and the
number and type of securities issuable thereunder (the parties acknowledge that
the aggregate granted option amounts shown on Exhibit D may be less than actual
aggregate grants but not by more than 10%). Except as provided in this
Agreement, there are no agreements, written or oral, between the Company and any
holder of its securities, or, to the best of the Company's knowledge, among any
holders of its securities, relating to the acquisition (including without
limitation rights of first refusal, anti-dilution or pre-emptive rights),
disposition, registration under the Securities Act of 1933, as amended (the
"Securities Act"), or voting of the capital stock of the Company.
3.5 Issuance of Shares. The issuance, sale and delivery of the
Shares in accordance with this Agreement, and the issuance and delivery of the
shares of Common Stock issuable upon conversion of the Shares, have been, or
will be on or prior to the Closing, duly authorized by all necessary corporate
action on the part of the Company, and all such shares have been duly reserved
for issuance. The Shares when so issued, sold and delivered against payment
therefor in accordance with the provisions of this Agreement, and the shares of
Common Stock issuable upon conversion of the Shares, when issued upon such
conversion, will be duly and validly issued, fully paid and nonassessable.
3.6 Authority; No Conflict. The execution, delivery and
performance by the Company of this Agreement and the Shareholders Agreement, and
the consummation by the Company of the transactions contemplated thereby,
including, without limitation, the adoption and filing of the Series B
Designation, have been
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<PAGE> 5
duly authorized by all necessary corporate and shareholder action. This
Agreement and the Shareholders Agreement have each been duly executed and
delivered by the Company and each constitutes a valid and binding obligation of
the Company enforceable in accordance with its terms, subject as to enforcement
of remedies to applicable bankruptcy, insolvency, reorganization, moratorium or
similar laws affecting generally the enforcement of creditors' rights and
subject to a court's discretionary authority with respect to the granting of a
decree ordering specific performance or other equitable remedies. The execution
and delivery of this Agreement and the Shareholders Agreement and the
performance by the Company of the transactions contemplated thereby and
compliance with their respective provisions by the Company will not (a) conflict
with or violate any provision of the Articles of Incorporation or Bylaws of the
Company, (b) except with respect to the filing of the Series B Designation,
require on the part of the Company any filing with, or any permit,
authorization, consent or approval of, any court, arbitrational tribunal,
administrative agency or commission or other governmental or regulatory
authority or agency (each of the foregoing is hereafter referred to as a
"Governmental Entity"), (c) conflict with, result in a breach of, constitute
(with or without due notice or lapse of time or both) a default under, result in
the acceleration of, create in any party the right to accelerate, terminate,
modify or cancel, or require any notice, consent or waiver under, any contract,
lease, sublease, license, sublicense, franchise, permit, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, Security Interest (as
defined below) or other arrangement to which the Company is a party or by which
the Company is bound or to which its assets are subject, other than any of the
foregoing events listed in this clause (c) which do not and will not,
individually or in the aggregate, result in a Company Material Adverse Effect,
(d) result in the imposition of any Security Interest upon any assets of the
Company or (e) violate any order, writ, injunction, decree, statute, rule or
regulation applicable to the Company or any of its properties or assets. For
purposes of this Agreement, "Security Interest" means any mortgage, pledge,
security interest, encumbrance, charge, or other lien (whether arising by
contract or by operation of law).
3.7 Consents. No consent, approval, waiver, permit, order or
authorization of, or registration, qualification, designation, declaration or
filing with, any governmental authority or any other individual, partnership,
corporation, unincorporated organization or association, limited liability
company, trust or other entity (collectively, a "Person") is required on the
part of the Company in connection with the execution and delivery of this
Agreement and the Shareholders Agreement, the offer, issuance, sale and delivery
of the Shares, the issuance and delivery of the shares of Common Stock of the
Company issuable upon conversion or exchange of the Shares or consummation by
the Company of the other transactions to be consummated at the Closings, as
contemplated by this Agreement and the Shareholders Agreement, except such as
shall have been made or obtained prior to and shall be effective on and as of
the Closings and such filings required to be made after the Closings under
applicable federal and state securities laws. Based on the representations made
by the Purchaser in Section 4 of this Agreement, the offer and
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<PAGE> 6
sale of the Shares to the Purchaser will be in compliance with applicable
federal and state securities laws.
3.8 Litigation. There is no action, suit or proceeding, or
governmental inquiry or investigation, pending, or, to the best of the Company's
knowledge, threatened, against the Company, or, to the best of the Company's
knowledge, any director, executive officer or key employee of the Company, or
affecting any of the Company's assets or properties, which questions the
validity of this Agreement or the Shareholders Agreement or the right of the
Company to enter into and perform the transactions contemplated by this
Agreement and the Shareholders Agreement or otherwise seeks to enjoin or
challenges such transactions, or which might result, either individually or in
the aggregate, in a Company Material Adverse Effect.
3.9 Financial Statements; No Undisclosed Liabilities.
(a) The Company has furnished to the Purchaser a complete
and correct copy of the unaudited balance sheet of the Company (the "Balance
Sheet") at March 31, 1999 (the "Balance Sheet Date") and the related statement
of operations (collectively, the "Financial Statements"). The Financial
Statements are complete and correct, are in accordance with the books and
records of the Company and present fairly the financial condition and results of
operations of the Company, as at the dates and for the periods indicated, and
have been prepared in accordance with generally accepted accounting principles
consistently applied, except that the Financial Statements may not be in
accordance with generally accepted accounting principles only with respect to
the absence of footnotes normally contained therein and are subject to normal
year-end audit adjustments which in the aggregate will not be material.
(b) Since the Balance Sheet Date, the Company has not
incurred any liabilities or obligations of any nature (whether accrued,
absolute, contingent or otherwise) which would be required by generally accepted
accounting principles to be reflected on a consolidated balance sheet of the
Company (including the notes thereto), other than in the ordinary course of
business, consistent with past practice.
3.10 Taxes. The Company has withheld or collected from each
payment made to its employees the amount of all taxes required to be withheld or
collected therefrom and has paid all such amounts to the appropriate taxing
authorities when due. Neither the Company nor any of its stockholders has ever
filed (a) an election pursuant to Section 1362 of the Internal Revenue Code of
1986, as amended (the "Code"), that the Company be taxed as an S Corporation or
(b) consent pursuant to Section 341(f) of the Code relating to collapsible
corporations. The Company's net operating losses for federal income tax
purposes, as set forth in the Financial Statements, are not subject to any
limitations imposed by Section 382 of the
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<PAGE> 7
Code, and consummation of the transactions contemplated by this Agreement or by
any other agreement, understanding or commitment, contingent or otherwise, to
which the Company is a party or by which it is otherwise bound will not have the
effect of limiting the Company's ability to use such net operating losses in
full to offset such taxable income.
3.11 Insurance. The Company maintains valid policies of
workers' compensation insurance and of insurance with respect to its properties
and business of the kinds and in the amounts not less than is customarily
obtained by corporations of established reputation engaged in the same or
similar business or may otherwise be required by law, including, without
limitation, insurance against loss, damage, fire, theft, public liability and
other risks.
3.12 Intellectual Property.
(a) The Company owns, free and clear of all Security
Interests, or has the valid right to use all Intellectual Property (as defined
below in this Section 3.12) used by it in its business as currently conducted or
as currently proposed to be conducted. No other person or entity (other than
licensors of software that is generally commercially available, licensors of
Intellectual Property under the agreements disclosed pursuant to paragraph (d)
below and non-exclusive licensees of the Company's Intellectual Property in the
ordinary course of the Company's business) has any rights to any of the
Intellectual Property owned or used by the Company, and, to the Company's
knowledge, no other person or entity is infringing, violating or
misappropriating any of the Intellectual Property that the Company owns. For
purposes of this Agreement, "Intellectual Property" means all (i) patents and
patent applications, (ii) copyrights and registrations thereof, (iii) mask works
and registrations and applications for registration thereof, (iv) computer
software, data and documentation, (v) trade secrets and confidential business
information, whether patentable or unpatentable and whether or not reduced to
practice, know-how, manufacturing and production processes and techniques,
research and development information, copyrightable works, financial, marketing
and business data, pricing and cost information, business and marketing plans
and customer and supplier lists and information, (vi) trademarks, service marks,
trade names, domain names and applications and registrations therefor and (vii)
other proprietary rights relating to any of the foregoing.
(b) To the best knowledge of the Company after reasonable
inquiry, none of the activities or business conducted by the Company or proposed
to be conducted by the Company infringes, violates or constitutes a
misappropriation of (or in the past infringed, violated or constituted a
misappropriation of) any Intellectual Property of any other person or entity.
The Company has not received any complaint, claim or notice alleging any such
infringement, violation or misappropriation, and to the knowledge of the
Company, there is no basis for any such complaint, claim or notice.
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<PAGE> 8
(c) Exhibit C hereto identifies each (i) patent that has
been issued or assigned to the Company with respect to any of its Intellectual
Property, (ii) pending patent application that the Company has made with respect
to any of its Intellectual Property, (iii) any copyright or trademark
registration or application with respect to the Company's Intellectual Property,
and (iv) license or other agreements pursuant to which the Company has granted
any rights to any third party with respect to any of its Intellectual Property.
(d) Exhibit C hereto identifies each agreement with a
third party pursuant to which the Company obtains rights to Intellectual
Property material to the business of the Company (other than software that is
generally commercially available) that is owned by a party other than the
Company. Other than license fees for software that is generally commercially
available, the Company is not obligated to pay any royalties or other
compensation to any third party in respect of its ownership, use or license of
any of its Intellectual Property.
(e) The Company has taken reasonable precautions (i) to
protect its rights in its Intellectual Property and (ii) to maintain the
confidentiality of its trade secrets, know-how and other confidential
Intellectual Property, and to the Company's knowledge, there have been no acts
or omissions (other than those made based on reasonable, good faith business
decisions) by the officers, directors, shareholders and employees of the Company
the result of which would be to materially compromise the rights of the Company
to apply for or enforce appropriate legal protection of the Company's
Intellectual Property.
(f) All of the Company's Intellectual Property has been
created by employees of the Company within the scope of their employment by the
Company or by Affiliates or independent contractors of the Company who have
executed agreements expressly assigning all right, title and interest in such
Intellectual Property to the Company. No portion of the Company's Intellectual
Property was jointly developed with any third party other than an Affiliate.
3.13 Compliance. The Company (and its predecessors) has, in
all material respects, complied with all laws, regulations and orders applicable
to its present and proposed business and has all material authorizations,
permits and licenses required thereby, except for those the absence of which
would not have a Company Material Adverse Effect. No violations or notices of
failure to comply have been issued or recorded in respect of such
authorizations, permits and licenses, and the Company has no knowledge of any
reason why such authorizations, permits and licenses may be revoked or
suspended. With respect to any such required authorizations, permits and
licenses, applications for which are either pending or contemplated to be made
pursuant to the business strategy of the Company, the Company does not know of
any reason why such authorizations, permits and licenses should not be approved
and granted by the appropriate Governmental
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<PAGE> 9
Entity. To the best of the Company's knowledge, there is no provision of any
state or federal judgment, decree, order, statute, rule or regulation applicable
to or binding upon the Company, which materially adversely affects or, so far as
the Company may now foresee, in the future is reasonably likely to result in or
have a Company Material Adverse Effect.
3.14 Absence of Changes. Since the Balance Sheet Date and
except for the grant of options pursuant to the Stock Option Plan (i) the
business of the Company has been operated only in the ordinary course,
consistent with past practice, and there has been no material adverse change in
the business, operations, condition (financial or otherwise), results of
operations of the Company, other than changes occurring in the ordinary course
of business (which ordinary course changes have not, individually or in the
aggregate had a Company Material Adverse Effect); (ii) except as reflected in
the unaudited Financial Statements or as described on Exhibit C, the Company has
not authorized or made any distributions, or declared or paid any dividends,
upon or with respect to any of its capital stock, or other equity interests, nor
has the Company redeemed, purchased or otherwise acquired, or issued or sold,
any of its capital stock or other equity interests; and (iii) there has been no
material change in any compensation, arrangement or agreement with any key
employee, director, stockholder or Affiliate (as defined below). "Affiliate" of
a specified person or entity shall mean a person or entity that directly, or
indirectly through one or more intermediaries, controls or is controlled by, or
is under common control with, the person or entity specified.
3.15 Books and Records. The minute books of the Company
contain complete and accurate records of all actions taken by its shareholders
and its Board of Directors and committees thereof. The stock ledger of the
Company is complete in all material respects and reflects all issuances,
transfers, repurchases and cancellations of shares of capital stock of the
Company.
3.16 Contracts. Except as set forth in Exhibit C, all of the
contracts and agreements which are material to the business, assets, operations
or condition (financial or otherwise) of the Company are in full force and
effect and constitute valid and binding obligations of the Company; neither the
Company, nor, to the best knowledge of the Company, any other party thereto, is
in default of any of its obligations under any such contracts or agreements in a
manner which could reasonably be expected to have a Company Material Adverse
Effect; and none of such contracts or agreements is currently being
renegotiated.
3.17 Disclosure. Neither this Agreement nor any exhibit
hereto, nor any report, certificate, or instrument furnished to the Purchaser or
its special counsel in connection with the transactions contemplated by this
Agreement, when read together, contains or will contain any untrue statement of
a material fact or omits or will omit to state a material fact necessary in
order to make the statements contained
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herein or therein, in light of the circumstances under which they were made, not
misleading.
4. Representations of the Purchaser. The Purchaser represents and
warrants to the Company as follows:
4.1 Investment. The Purchaser is acquiring the Shares, and the
shares of Common Stock into which the Shares may be converted, for its own
account for investment and not with a view to, or for sale in connection with,
any distribution thereof, nor with any present intention of distributing or
selling the same; and, except as contemplated by this Agreement and the Exhibits
hereto, the Purchaser has no present or contemplated agreement, undertaking,
arrangement, obligation, indebtedness or commitment providing for the
disposition thereof. The Purchaser is an "accredited investor" as defined in
Rule 501(a) under the Securities Act.
4.2 Organization and Authority. The Purchaser is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware and has full corporate power and authority to conduct its
business as presently conducted and as proposed to be conducted by it and to
enter into and perform this Agreement and the Shareholders Agreement and to
carry out the transactions contemplated by this Agreement and the Shareholders
Agreement. The Purchaser has not been organized, reorganized or recapitalized
specifically for the purpose of investing in the Company.
4.3 Experience. The Purchaser has carefully reviewed the
representations concerning the Company contained in this Agreement and has made
detailed inquiry concerning the Company, its business and its personnel; the
officers of the Company have made available to the Purchaser any and all written
information which it has requested and have answered to the Purchaser's
satisfaction all inquiries made by the Purchaser; and the Purchaser has
sufficient knowledge and experience in finance and business that it is capable
of evaluating the risks and merits of its investment in the Company and the
Purchaser is able financially to bear the risks thereof.
5. Conditions to the Obligations of the Purchaser. The obligation
of the Purchaser to purchase Shares at the Closing is subject to the
fulfillment, or the waiver by the Purchaser, of each of the following conditions
on or before the Closing:
5.1 Accuracy of Representations and Warranties. Each
representation and warranty contained in Section 3 shall be true on and as of
the Closing Date with the same effect as though such representation and warranty
had been made on and as of that date.
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5.2 Performance. The Company shall have performed and complied
with all agreements and conditions contained in this Agreement required to be
performed or complied with by the Company prior to or at the Closing.
5.3 Opinion of Counsel. The Purchaser shall have received an
opinion from Foster Pepper & Shefelman PLLC, counsel for the Company, dated the
Closing Date, addressed to the Purchaser, and satisfactory in form and substance
to the Purchaser.
5.4 Shareholders Agreement. The Shareholders Agreement in the
form attached as Exhibit G shall have been executed and delivered by the parties
thereto. All such action shall have been taken as may be necessary to elect a
Board of Directors of the Company, effective upon the Closing, in accordance
with the Shareholders Agreement.
5.5 Certificates and Documents. The Company shall have
delivered to special counsel to the Purchaser:
(a) The Articles of Incorporation of the Company, as
amended and in effect as of the Closing Date (including the Series B
Designation), certified by the Secretary of State of the State of Washington;
(b) Certificates, as of the most recent practicable dates,
as to the valid existence of the Company issued by the Secretary of State of the
State of Washington;
(c) Bylaws of the Company, certified by its Secretary or
Assistant Secretary as of the Closing Date; and
(d) Resolutions of the Board of Directors and shareholders
of the Company, authorizing and approving all matters in connection with this
Agreement and the transactions contemplated hereby, certified by the Secretary
or Assistant Secretary of the Company as of the Closing Date.
5.6 Compliance Certificates. The Company shall have delivered
to the Purchaser a certificate, executed by the President of the Company, dated
the Closing Date, certifying to the fulfillment of the conditions specified in
Sections 5.1, 5.2, 5.4 and 5.5 of this Agreement.
5.7 Other Matters. All corporate and other proceedings in
connection with the transactions contemplated by this Agreement and all
documents and instruments incident to such transactions shall be reasonably
satisfactory in substance and form to the Purchaser and their special counsel,
and the Purchaser and its special counsel shall have received all such
counterpart originals or certified or other copies of such documents as they may
reasonably request.
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6. Condition to the Obligations of the Company. The obligations
of the Company under Section 1.2 of this Agreement are subject to fulfillment,
or the waiver, of the following condition on or before the Closing:
6.1 Accuracy of Representations and Warranties. The
representations and warranties of the Purchaser contained in Section 4 shall be
true on and as of the Closing Date with the same effect as though such
representations and warranties had been made on and as of that date.
6.2 Compliance Certificates. The Purchaser shall have
delivered to the Company, executed by the President of the Company, dated the
Closing Date, certifying to the fulfillment of the conditions specified in
Section 6.1 of this Agreement.
7. Affirmative Covenants of the Company.
7.1 Inspection and Observation. The Company shall permit the
Purchaser, or any authorized representative thereof, to visit and inspect the
properties of the Company, including its corporate and financial records, and to
discuss its business and finances with officers of the Company, during normal
business hours following reasonable notice and as often as may be reasonably
requested.
7.2 Financial Statements and Other Information.
(a) The Company shall deliver to the Purchaser:
(i) within 90 days after the end of each fiscal year
of the Company, an audited balance sheet of the Company as at the end of such
year and audited statements of income and of cash flows of the Company for such
year, certified by certified public accountants of established national
reputation selected by the Company, and prepared in accordance with GAAP;
(ii) within 45 days after the end of each fiscal
quarter of the Company (other than the fourth quarter), an unaudited balance
sheet of the Company as at the end of such quarter, and unaudited statements of
income and of cash flows of the Company for such fiscal quarter and for the
current fiscal year to the end of such fiscal quarter;
(iii) within 30 days after the end of each month
(other than the last month of any fiscal quarter), an unaudited balance sheet of
the Company as at the end of such month and unaudited statements of income and
of cash flows of the Company for such month and for the current fiscal year to
the end of such month, setting forth in comparative form the Company's projected
financial statements for the corresponding periods for the current fiscal year;
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(iv) as soon as available, but in any event prior to
the commencement of each new fiscal year, a business plan and projected
financial statements for such fiscal year;
(v) such other notices, information and data with
respect to the Company as the Company delivers to the holders of its capital
stock at the same time it delivers such items to such holders; and
(vi) with reasonable promptness, such other
information and data as the Purchaser may from time to time reasonably request.
(b) The foregoing financial statements shall be prepared
on a consolidated basis if the Company then has any subsidiaries. The financial
statements delivered pursuant to clauses (ii) and (iii) of paragraph (a) shall
be accompanied by a certificate of the chief financial officer of the Company
stating that such statements have been prepared in accordance with GAAP
consistently applied (except as noted) and fairly present the financial
condition and results of operations of the Company at the date thereof and for
the periods covered thereby.
7.3 Material Changes and Litigation. The Company shall
promptly notify the Purchaser of any material adverse change in the business,
prospects, assets or condition, financial or otherwise, of the Company and of
any litigation or governmental proceeding or investigation brought or, to the
best of the Company's knowledge, threatened against the Company, or against any
officer, director, key employee or principal stockholder of the Company which,
if adversely determined, would have a Company Material Adverse Effect.
7.4 Agreements with Employees. The Company shall require all
persons now or hereafter employed by the Company who have access to confidential
and proprietary information of the Company to enter into nondisclosure and
assignment of inventions agreements substantially in the form of Exhibit E, or
such other form as may be approved by the Board of Directors of the Company.
7.5 Directors.
(a) The Company shall promptly reimburse in full each
director of the Company who is not an employee of the Company and who was
elected as a director solely or in part by the holders of Series B Preferred for
all of his reasonable out-of-pocket expenses incurred in attending each meeting
of the Board of Directors of the Company or any committee thereof.
(b) The Board of Directors shall meet on at least a
quarterly basis, in-person or by telephone conference call, unless otherwise
agreed by a
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<PAGE> 14
majority of the members of the Board of Directors who are not employees of the
Company or a subsidiary of the Company.
7.6 Reservation of Common Stock. The Company shall reserve and
maintain a sufficient number of shares of Common Stock for issuance upon
conversion of all of the outstanding Shares.
7.7 Related Party Transactions. Without the approval of the
Purchaser's representative on the Board of Directors of the Company, which shall
not be unreasonably withheld, the Company shall not enter into any agreement
with any shareholder, officer or director of the Company, or any "affiliate" or
"associate" of such persons (as such terms are defined in the rules and
regulations promulgated under the Securities Act), including without limitation
any agreement or other arrangement providing for the furnishing of services by,
rental of real or personal property from, or otherwise requiring payments to,
any such person or entity, unless such agreement or arrangement is on terms no
less favorable to the Company than are available from unaffiliated third
parties. This shall not apply to the allocation of the actual costs of human
resources, information systems and accounting services provided to the Company
by Vulcan Northwest Inc. through December 31, 1999.
7.8 Termination of Covenants. The covenants of the Company
contained in Sections 7.1 through 7.7 shall terminate, and be of no further
force or effect, upon the closing of the Company's first public offering of
Common Stock pursuant to an effective registration statement under the
Securities Act, resulting in gross proceeds to the Company of at least
$30,000,000, at a price to the public of at least $10.00 per share (as adjusted
for stock splits, stock dividends, recapitalizations and similar events).
7.9 Co-Development Agreements. The Company and the Purchaser
anticipate working together on one or more co-development agreements, the terms
of which will be determined and set forth in separate agreements. The Company
and the Purchaser agree that the general principles of co-development set forth
on Exhibit H reflect the intent of both parties with respect to such
co-development work.
8. Transfer of Shares.
8.1 Restricted Shares. "Restricted Shares" means (i) the
Shares, (ii) the shares of Common Stock issued or issuable upon conversion of
the Shares, and (iii) any other shares of capital stock of the Company issued in
respect of such shares (as a result of stock splits, stock dividends,
reclassifications, recapitalizations, or similar events); provided, however,
that shares of Common Stock which are Restricted Shares shall cease to be
Restricted Shares (x) upon any sale pursuant to a registration statement under
the Securities Act, Section 4(1) of the Securities Act or Rule 144 under the
Securities Act or (y) at such time as they become eligible for sale under Rule
144(k) under the Securities Act.
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<PAGE> 15
8.2 Requirements for Transfer.
(a) Restricted Shares shall not be sold or transferred
unless either (i) they first shall have been registered under the Securities
Act, or (ii) the Company first shall have been furnished with an opinion of
legal counsel, reasonably satisfactory to the Company, to the effect that such
sale or transfer is exempt from the registration requirements of the Securities
Act.
(b) Notwithstanding the foregoing, no registration or
opinion of counsel shall be required for (i) a transfer by a Purchaser which is
a corporation to a wholly owned subsidiary of such corporation, a transfer by a
Purchaser which is a partnership to a partner of such partnership or a retired
partner of such partnership who retires after the date hereof, or to the estate
of any such partner or retired partner, or a transfer by a Purchaser which is a
limited liability company to a member of such limited liability company or a
retired member who resigns after the date hereof or to the estate of any such
member or retired member; provided that the transferee in each case agrees in
writing to be subject to the terms of this Section 8 to the same extent as if it
were the original Purchaser hereunder, or (ii) a transfer made in accordance
with Rule 144 under the Securities Act.
8.3 Legend. Each certificate representing Restricted Shares
shall bear a legend substantially in the following form:
"The shares represented by this certificate have not been
registered under the Securities Act of 1933, as amended, and
may not be offered, sold or otherwise transferred, pledged or
hypothecated unless and until such shares are registered under
such Act or an opinion of counsel satisfactory to the Company
is obtained to the effect that such registration is not
required."
The foregoing legend shall be removed from the certificates
representing any Restricted Shares, at the request of the holder thereof, at
such time as they become eligible for resale pursuant to Rule 144(k) under the
Securities Act.
8.4 Rule 144A Information. The Company shall, at all times
during which it is neither subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), nor exempt from reporting pursuant to Rule 12g3-2(b) under the Exchange
Act, upon the written request of the Purchaser, provide in writing to the
Purchaser and to any prospective transferee of any Restricted Shares of such
Purchaser the information concerning the Company described in Rule 144A(d)(4)
under the Securities Act ("Rule 144A Information"). The Company also shall, upon
the written request of the Purchaser, cooperate with and assist the Purchaser or
any member of the National Association
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<PAGE> 16
of Securities Dealers, Inc. PORTAL system in applying to designate and
thereafter maintain the eligibility of the Restricted Shares for trading through
PORTAL. The Company's obligations under this Section 8.4 shall at all times be
contingent upon receipt from the prospective transferee of Restricted Shares of
a written agreement to take all reasonable precautions to safeguard the Rule
144A Information from disclosure to anyone other than persons who will assist
such transferee in evaluating the purchase of any Restricted Shares.
9. Miscellaneous.
9.1 Successors and Assigns. This Agreement shall be binding
upon and inure to the benefit of the parties and their respective successors and
permitted assigns. This Agreement, and the rights and obligations of the
Purchaser hereunder, may be assigned by the Purchaser to any person or entity to
which Shares are transferred by the Purchaser, and such transferee shall also be
deemed a "Purchaser" for purposes of this Agreement; provided that the
transferee provides written notice of such assignment to the Company. The
Company may not assign its rights under this Agreement.
9.2 Confidentiality. The Purchaser agrees that it will keep
confidential and will not disclose, divulge or use for any purpose other than to
monitor its investment in the Company any confidential, proprietary or secret
information which the Purchaser may obtain from the Company pursuant to
financial statements, reports and other materials submitted by the Company to
such Purchaser pursuant to this Agreement, or pursuant to visitation or
inspection rights granted hereunder ("Confidential Information"), unless such
Confidential Information is known, or until such Confidential Information
becomes known, to the public (other than as a result of a breach of this Section
9.2 by the Purchaser); provided, however, that the Purchaser may disclose
Confidential Information (i) to its attorneys, accountants, consultants, and
other professionals to the extent necessary to obtain their services in
connection with monitoring its investment in the Company, (ii) to any
prospective purchaser of any Shares from the Purchaser as long as such
prospective purchaser agrees in writing to be bound by the provisions of this
Section 9.2, (iii) to any affiliate of the Purchaser or to a partner,
stockholder or subsidiary of the Purchaser, provided that such affiliate agrees
in writing to be bound by the provisions of this Section 9.2, or (iv) as may
otherwise be required by law, provided that the Purchaser takes reasonable steps
to minimize the extent of any such required disclosure. "Confidential
Information" does not include any information that the Purchaser (a) already
possesses at the time of disclosure without obligation of confidentiality; (b)
develops independently; or (c) rightfully receive without obligation of
confidentiality from a third party.
9.3 Survival of Representations and Warranties. All
agreements, representations and warranties contained herein shall survive the
execution and delivery of this Agreement and the closing of the transactions
contemplated hereby.
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<PAGE> 17
9.4 Expenses. The Company shall pay, at the Closing, the
reasonable fees and disbursements of Hale and Dorr LLP, special counsel to the
Purchaser, in connection with the preparation of this Agreement and the other
agreements contemplated hereby and the closing of the transactions contemplated
hereby.
9.5 Brokers. The Company and the Purchaser (i) represents and
warrants to the other party hereto that it has not retained a finder or broker
in connection with the transactions contemplated by this Agreement, and (ii)
will indemnify and save the other party harmless from and against any and all
claims, liabilities or obligations with respect to brokerage or finders' fees or
commissions, or consulting fees in connection with the transactions contemplated
by this Agreement asserted by any person on the basis of any statement or
representation alleged to have been made by such indemnifying party.
9.6 Severability. The invalidity or unenforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
9.7 Specific Performance. In addition to any and all other
remedies that may be available at law in the event of any breach of this
Agreement, the Purchaser shall be entitled to specific performance of the
agreements and obligations of the Company hereunder and to such other injunctive
or other equitable relief as may be granted by a court of competent
jurisdiction.
9.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of Washington
(without reference to the conflicts of law provisions thereof).
9.9 Notices. All notices, requests, consents, and other
communications under this Agreement shall be in writing and shall be deemed
delivered (i) two business days after being sent by registered or certified
mail, return receipt requested, postage prepaid or (ii) one business day after
being sent via a reputable nationwide overnight courier service guaranteeing
next business day delivery, in each case to the intended recipient as set forth
below:
If to the Company, at 110 110th Avenue N.E., Suite 210, Bellevue,
Washington 98004, Attention: President, Facsimile: (425) 468-6501, or at such
other address or addresses as may have been furnished in writing by the Company
to the Purchaser, with a copy to Allen D. Israel, Esq., Foster Pepper &
Shefelman PLLC, 1111 Third Avenue, Suite 3400, Seattle, Washington 98101,
Facsimile: (206) 749-1957;
If to the Purchaser, at the address set forth on Exhibit A for such
Purchaser, or at such other address or addresses as may have been furnished to
the Company in
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<PAGE> 18
writing by such Purchaser, with a copy to David Sylvester, Esq., Hale and Dorr
LLP, 1455 Pennsylvania Avenue N.W., Washington, D.C. 20004, Facsimile: (202)
942-8484.
Any party may also give any notice, request, consent or other
communication under this Agreement using any other means (including, without
limitation, personal delivery, messenger service, telecopy, first class mail or
electronic mail), but no such notice, request, consent or other communication
shall be deemed to have been duly given unless and until it is actually received
by the party for whom it is intended. Any party may change the address to which
notices, requests, consents or other communications hereunder are to be
delivered by giving the other parties notice in the manner set forth in this
Section.
9.10 Complete Agreement. This Agreement (including its
Exhibits) and the Ancillary Agreements constitute the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes all prior agreements and understandings relating to such subject
matter.
9.11 Amendments and Waivers. Except as otherwise expressly set
forth in this Agreement, any term of this Agreement may be amended or terminated
and the observance of any term of this Agreement may be waived (either generally
or in a particular instance and either retroactively or prospectively), with the
written consent of the Company and the holders of a majority of the shares of
Common Stock issued or issuable upon conversion of the Shares. Any amendment,
termination or waiver effected in accordance with this Section 9.11 shall be
binding upon each holder of any Shares (including shares of Common Stock into
which such Shares have been converted) even if they do not execute such consent,
each future holder of all such securities and the Company. No waivers of or
exceptions to any term, condition or provision of this Agreement, in any one or
more instances, shall be deemed to be, or construed as, a further or continuing
waiver of any such term, condition or provision.
9.12 Pronouns. Whenever the context may require, any pronouns
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns and pronouns shall include the
plural, and vice versa.
9.13 Counterparts; Facsimile Signatures. This Agreement may be
executed in any number of counterparts, each of which shall be deemed to be an
original, and all of which shall constitute one and the same document. This
Agreement may be executed by facsimile signatures.
9.14 Section Headings. The section headings are for the
convenience of the parties and in no way alter, modify, amend, limit, or
restrict the contractual obligations of the parties.
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<PAGE> 19
Executed as of the date first written above.
COMPANY:
APEX ONLINE LEARNING INC.
By: /s/Sally G. Narodick
-------------------------
Sally G. Narodick
President
PURCHASER:
THE EDISON PROJECT INC.
By: /s/H. Christopher Whittle
-------------------------
H. Christopher Whittle
President
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<PAGE> 20
EXHIBIT A
Purchaser Information
<TABLE>
<CAPTION>
Name and Address No. of Shares of Aggregate
of the Purchaser Series B Preferred Purchase Price
---------------- ------------------ --------------
<S> <C> <C>
The Edison Project Inc. 1,000,000 $5,000,000
521 Fifth Avenue
15th Floor
New York, NY 10175
Attention: President
Facsimile: (425) 546-1090
</TABLE>
<PAGE> 1
Exhibit 10.29
APEX ONLINE LEARNING INC.
SHAREHOLDERS AGREEMENT
This Agreement dated as of July 2, 1999, is entered into by and among
Apex Online Learning Inc., a Washington corporation (the "Company"), The Edison
Project Inc., a Delaware corporation (the "Purchaser") and the existing
Shareholders of the Company listed on Exhibit A attached hereto (the "Existing
Shareholders") (the Purchaser and the Existing Shareholders are referred to
collectively herein as the "Shareholders").
Recitals
WHEREAS, the Company and the Shareholders desire to provide for certain
arrangements with respect to (i) the registration of shares of capital stock of
the Company under the Securities Act of 1933, (ii) the Shareholders' right of
first refusal with respect to certain issuances of securities of the Company,
(iii) certain negative covenants of the Company; and (iv) the continuing
representation of the Shareholders on the Board of Directors of the Company.
NOW, THEREFORE, in consideration of the mutual promises and covenants
contained in this Agreement, the parties hereto agree as follows:
1. Certain Definitions.
As used in Section 2 of this Agreement, the following terms shall have
the following respective meanings:
"Commission" means the Securities and Exchange Commission, or
any other federal agency at the time administering the Securities Act.
"Common Stock" means the common stock, $0.001 par value per
share, of the Company.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any successor federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
"Initiating Holders" means the Shareholders initiating a
request for registration pursuant to Section 2.1(a) or 2.1(b), as the case may
be.
"Initial Public Offering" means the initial underwritten
public offering of shares of Common Stock pursuant to an effective Registration
Statement.
<PAGE> 2
"Other Holders" shall have the meaning set forth in Section
2.1(d).
"Prospectus" means the prospectus included in any Registration
Statement, as amended or supplemented by an amendment or prospectus supplement,
including post-effective amendments, and all material incorporated by reference
or deemed to be incorporated by reference in such Prospectus.
"Registration Statement" means a registration statement filed
by the Company with the Commission for a public offering and sale of securities
of the Company (other than a registration statement on Form S-8 or Form S-4, or
their successors, or any other form for a similar limited purpose, or any
registration statement covering only securities proposed to be issued in
exchange for securities or assets of another corporation).
"Registration Expenses" means the expenses described in
Section 2.4.
"Registrable Shares" means (i) the shares of Common Stock
issued or issuable upon conversion of the Shares, (ii) any shares of Common
Stock, and any shares of Common Stock issued or issuable upon the conversion or
exercise of any other securities, acquired by the Purchasers pursuant to Section
3 of this Agreement and (iii) any other shares of Common Stock issued in respect
of such shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that shares of Common
Stock which are Registrable Shares shall cease to be Registrable Shares upon (i)
any sale pursuant to a Registration Statement or Rule 144 under the Securities
Act or (ii) any sale in any manner to a person or entity which, by virtue of
Section 6 of this Agreement, is not entitled to the rights provided by this
Agreement. Wherever reference is made in this Agreement to a request or consent
of holders of a certain percentage of Registrable Shares, the determination of
such percentage shall include shares of Common Stock issuable upon conversion of
the Shares even if such conversion has not been effected.
"Securities Act" means the Securities Act of 1933, as amended,
or any successor federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
"Selling Shareholder" means any Shareholder owning Registrable
Shares included in a Registration Statement.
"Shares" shall have the meaning set forth in Section 7 below.
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<PAGE> 3
2. Registration Rights
2.1 Required Registrations.
(a) At any time after the earlier of (x) July 2, 2002, or
(y) six months after the closing of the Initial Public Offering, a Shareholder
or Shareholders holding in the aggregate at least 35% of the Registrable Shares
then outstanding may request, in writing, that the Company effect the
registration on Form S-1 or Form S-2 (or any successor form) of Registrable
Shares owned by such Shareholder or Shareholders having an aggregate value of at
least $5,000,000 (based on the then current market price or fair value).
(b) At any time after the Company becomes eligible to file
a Registration Statement on Form S-3 (or any successor form relating to
secondary offerings), a Shareholder or Shareholders holding in the aggregate at
least 1,000,000 of the Registrable Shares then outstanding (as adjusted for
stock splits, stock dividends and similar recapitalizations) may request, in
writing, that the Company effect the registration on Form S-3 (or such successor
form), of Registrable Shares having an aggregate value of at least $1,000,000
(based on the then current public market price); provided, that if a Shareholder
requests registration at least one year after the Initial Public Offering and
the Company is not then eligible to use Form S-3 (or such successor form), the
Company shall effect such registration on Form S-1 or Form S-2 (or any successor
form).
(c) Upon receipt of any request for registration pursuant
to this Section 2, the Company shall promptly give written notice of such
proposed registration to all other Shareholders. Such Shareholders shall have
the right, by giving written notice to the Company within 30 days after the
Company provides its notice, to elect to have included in such registration such
of their Registrable Shares as such Shareholders may request in such notice of
election, subject in the case of an underwritten offering to the approval of the
managing underwriter as provided in Section 2.1(d) below. Thereupon, the Company
shall, as expeditiously as possible, use its best efforts to effect the
registration on an appropriate registration form of all Registrable Shares which
the Company has been requested to so register.
(d) If the Initiating Holders intend to distribute the
Registrable Shares covered by their request by means of an underwriting, they
shall so advise the Company as a part of their request made pursuant to Section
2.1(a) or (b), as the case may be, and the Company shall include such
information in its written notice referred to in Section 2.1(c). The right of
any other Shareholder to include its Registrable Shares in such registration
pursuant to Section 2.1(a) or (b), as the case may be, shall be conditioned upon
such other Shareholder's participation in such underwriting on the terms set
forth herein. If the managing underwriter determines that the marketing factors
require a limitation of the number of shares to be underwritten, the number of
Registrable Shares to be included in a Registration
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<PAGE> 4
Statement filed pursuant to this Section 2.1, shall be reduced pro rata among
the requesting Shareholders based on the quotient of (1) the total Registrable
Shares to be included in the Registration Statement, divided by (2) the total
number of Registrable Shares that requested registration.
(e) The Initiating Holders shall have the right to select
the managing underwriter(s) for any underwritten offering requested pursuant to
Section 2.1(a) or (b), subject to the approval of the Company, which approval
will not be unreasonably withheld.
(f) The Company shall not be required to effect more than
two registrations pursuant to Section 2.1(a) or more than three registrations
pursuant to Section 2.1(b). In addition, the Company shall not be required to
effect any registration (other than on Form S-3 or any successor form relating
to secondary offerings) within six months after the effective date of any other
Registration Statement of the Company. For purposes of this Section 2.1(f), a
Registration Statement shall not be counted until such time as such Registration
Statement has been declared effective by the Commission (unless the Initiating
Holders withdraw their request for such registration (other than as a result of
information concerning the business or financial condition of the Company which
is made known to the Shareholders after the date on which such registration was
requested) and elect not to pay the Registration Expenses therefor pursuant to
Section 2.4).
(g) If at the time of any request to register Registrable
Shares by Initiating Holders pursuant to this Section 2.1, the Company is
engaged or has plans to engage in a registered public offering or is engaged in
any other activity which, in the good faith determination of the Company's Board
of Directors, would be adversely affected by the requested registration, then
the Company may at its option direct that such request be delayed for a period
not in excess of 90 days from the date of such request, such right to delay a
request to be exercised by the Company not more than once in any 12-month
period.
2.2 Incidental Registration.
(a) Whenever the Company proposes to file a Registration
Statement (other than a Registration Statement filed pursuant to Section 2.1) at
any time and from time to time, it will, prior to such filing, give written
notice to all Shareholders of its intention to do so; provided, that no such
notice need be given if no Registrable Shares are to be included therein as a
result of a determination of the managing underwriter pursuant to Section
2.2(b). Upon the written request of a Shareholder or Shareholders given within
20 days after the Company provides such notice (which request shall state the
intended method of disposition of such Registrable Shares), the Company shall
use its best efforts to cause all Registrable Shares which the Company has been
requested by such Shareholder or Shareholders to register to be registered under
the Securities Act to the extent necessary to permit
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<PAGE> 5
their sale or other disposition in accordance with the intended methods of
distribution specified in the request of such Shareholder or Shareholders;
provided that the Company shall have the right to postpone or withdraw any
registration effected pursuant to this Section 2.2 without obligation to any
Shareholder.
(b) If the registration for which the Company gives
notice pursuant to Section 2.2(a) is a registered public offering involving an
underwriting, the Company shall so advise the Shareholders as a part of the
written notice given pursuant to Section 2.2(a). In such event, the right of any
Shareholder to include its Registrable Shares in such registration pursuant to
Section 2.2 shall be conditioned upon such Shareholder's participation in such
underwriting on the terms set forth herein. All Shareholders proposing to
distribute their securities through such underwriting shall enter into an
underwriting agreement in customary form with the underwriter or underwriters
selected for the underwriting by the Company, provided that such underwriting
agreement shall not provide for indemnification or contribution obligations on
the part of Shareholders materially greater than the obligations of the
Shareholders pursuant to Section 2.5. Notwithstanding any other provision of
this Section 2.2, if the managing underwriter determines that the inclusion of
all shares requested to be registered would adversely affect the offering, the
Company may limit the number of Registrable Shares to be included in the
registration and underwriting. The Company shall so advise all holders of
Registrable Shares requesting registration, and the number of shares that are
entitled to be included in the registration and underwriting shall be allocated
in the following manner. The securities of the Company held by holders other
than Shareholders and Other Holders shall be excluded from such registration and
underwriting to the extent deemed advisable by the managing underwriter, and, if
a further limitation on the number of shares is required, the number of shares
that may be included in such registration and underwriting shall be allocated
among all Shareholders and Other Holders requesting registration in proportion,
as nearly as practicable, to the respective number of shares of Common Stock (on
an as-converted basis) which they held at the time the Company gives the notice
specified in Section 2.2(a), provided that the number of Registrable Shares
permitted to be included therein shall in any event be at least 50% of the
securities included therein (based on aggregate market values). If any
Shareholder or Other Holder would thus be entitled to include more securities
than such holder requested to be registered, the excess shall be allocated among
other requesting Shareholders and Other Holders pro rata in the manner described
in the preceding sentence. If any holder of Registrable Shares or any officer,
director or Other Holder disapproves of the terms of any such underwriting, such
person may elect to withdraw therefrom by written notice to the Company, and any
Registrable Shares or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.
-5-
<PAGE> 6
2.3 Registration Procedures.
(a) If and whenever the Company is required by the
provisions of this Agreement to use its best efforts to effect the registration
of any Registrable Shares under the Securities Act, the Company shall:
(i) file with the Commission a Registration
Statement with respect to such Registrable Shares and use its best efforts to
cause that Registration Statement to become effective as soon as possible;
(ii) as expeditiously as possible prepare
and file with the Commission any amendments and supplements to the Registration
Statement and the prospectus included in the Registration Statement as may be
necessary to comply with the provisions of the Securities Act (including the
anti-fraud provisions thereof) and to keep the Registration Statement effective
for 12 months from the effective date or such lesser period until all such
Registrable Shares are sold;
(iii) as expeditiously as possible furnish
to each Selling Shareholder such reasonable numbers of copies of the Prospectus,
including any preliminary Prospectus, in conformity with the requirements of the
Securities Act, and such other documents as such Selling Shareholder may
reasonably request in order to facilitate the public sale or other disposition
of the Registrable Shares owned by such Selling Stockholder;
(iv) as expeditiously as possible use its
best efforts to register or qualify the Registrable Shares covered by the
Registration Statement under the securities or Blue Sky laws of such states as
the Selling Shareholders shall reasonably request, and do any and all other acts
and things that may be necessary or desirable to enable the Selling Shareholders
to consummate the public sale or other disposition in such states of the
Registrable Shares owned by the Selling Shareholder; provided, however, that the
Company shall not be required in connection with this paragraph (iv) to qualify
as a foreign corporation or execute a general consent to service of process in
any jurisdiction;
(v) as expeditiously as possible, cause all
such Registrable Shares to be listed on each securities exchange or automated
quotation system on which similar securities issued by the Company are then
listed;
(vi) promptly provide a transfer agent and
registrar for all such Registrable Shares not later than the effective date of
such registration statement;
(vii) promptly make available for inspection
by the Selling Shareholders, any managing underwriter participating in any
disposition pursuant to such Registration Statement, and any attorney or
accountant or other
-6-
<PAGE> 7
agent retained by any such underwriter or selected by the Selling Shareholders,
all financial and other records, pertinent corporate documents and properties of
the Company and cause the Company's officers, directors, employees and
independent accountants to supply all information reasonably requested by any
such seller, underwriter, attorney, accountant or agent in connection with such
Registration Statement;
(viii) as expeditiously as possible, notify
each Selling Shareholder, promptly after it shall receive notice thereof, of the
time when such Registration Statement has become effective or a supplement to
any Prospectus forming a part of such Registration Statement has been filed; and
(ix) as expeditiously as possible following
the effectiveness of such Registration Statement, notify each seller of such
Registrable Shares of any request by the Commission for the amending or
supplementing of such Registration Statement or Prospectus.
(b) If the Company has delivered a Prospectus to the
Selling Shareholders and after having done so the Prospectus is amended to
comply with the requirements of the Securities Act, the Company shall promptly
notify the Selling Shareholders and, if requested, the Selling Shareholders
shall immediately cease making offers of Registrable Shares and return all
Prospectuses to the Company. The Company shall promptly provide the Selling
Shareholders with revised Prospectuses and, following receipt of the revised
Prospectuses, the Selling Shareholders shall be free to resume making offers of
the Registrable Shares.
(c) In the event that, in the judgment of the
Company, it is advisable to suspend use of a Prospectus included in a
Registration Statement due to pending material developments or other events that
have not yet been publicly disclosed and as to which the Company believes public
disclosure would be detrimental to the Company, the Company shall notify all
Selling Shareholders to such effect, and, upon receipt of such notice, each such
Selling Shareholder shall immediately discontinue any sales of Registrable
Shares pursuant to such Registration Statement until such Selling Shareholder
has received copies of a supplemented or amended Prospectus or until such
Selling Shareholder is advised in writing by the Company that the then current
Prospectus may be used and has received copies of any additional or supplemental
filings that are incorporated or deemed incorporated by reference in such
Prospectus. Notwithstanding anything to the contrary herein, the Company shall
not exercise its rights under this Section 2.3(c) to suspend sales of
Registrable Shares for a period in excess of 60 days in any 365-day period.
2.4 Allocation of Expenses. The Company will pay all
Registration Expenses for all registrations under this Agreement; provided,
however, that if a registration under Section 2.1 is withdrawn at the request of
Initiating Holders holding at least a majority of the Registrable Shares as to
which registration was
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<PAGE> 8
requested (other than as a result of information concerning the business or
financial condition of the Company which is made known to the Shareholders after
the date on which such registration was requested) and if such Initiating
Holders elect not to have such registration counted as a registration requested
under Section 2.1, the requesting Shareholders shall pay the Registration
Expenses of such registration pro rata in accordance with the number of their
Registrable Shares included in such registration. For purposes of this Section,
the term "Registration Expenses" shall mean all expenses incurred by the Company
in complying with this Agreement, including, without limitation, all
registration and filing fees, exchange listing fees, printing expenses, fees and
expenses of counsel for the Company and the fees and expenses of one counsel
selected by the Selling Shareholders to represent the Selling Shareholders,
state Blue Sky fees and expenses, and the expense of any special audits incident
to or required by any such registration, but excluding underwriting discounts,
selling commissions and the fees and expenses of Selling Shareholders' own
counsel (other than the counsel selected to represent all Selling Shareholders).
2.5 Indemnification and Contribution.
(a) In the event of any registration of any of the
Registrable Shares under the Securities Act pursuant to this Agreement, the
Company will indemnify and hold harmless the seller of such Registrable Shares,
each underwriter of such Registrable Shares, and each other person, if any, who
controls such seller or underwriter within the meaning of the Securities Act or
the Exchange Act against any losses, claims, damages or liabilities, joint or
several, to which such seller, underwriter or controlling person may become
subject under the Securities Act, the Exchange Act, state securities or Blue Sky
laws or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact contained in any Registration
Statement under which such Registrable Shares were registered under the
Securities Act, any preliminary prospectus or final prospectus contained in the
Registration Statement, or any amendment or supplement to such Registration
Statement, or arise out of or are based upon the omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading; and the Company will reimburse such seller,
underwriter and each such controlling person for any legal or any other expenses
reasonably incurred by such seller, underwriter or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Company, in writing, by or on behalf of such seller,
underwriter or controlling person specifically for use in the preparation
thereof.
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<PAGE> 9
(b) In the event of any registration of any of the
Registrable Shares under the Securities Act pursuant to this Agreement, each
seller of Registrable Shares, severally and not jointly, will indemnify and hold
harmless the Company, each of its directors and officers and each underwriter
(if any) and each person, if any, who controls the Company or any such
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Company, such directors and officers, underwriter or controlling person may
become subject under the Securities Act, Exchange Act, state securities or Blue
Sky laws or otherwise, insofar as such losses, claims, damages or liabilities
(or actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such Registrable Shares were registered under
the Securities Act, any preliminary prospectus or final prospectus contained in
the Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information relating to such seller
furnished in writing to the Company by or on behalf of such seller specifically
for use in connection with the preparation of such Registration Statement,
prospectus, amendment or supplement; provided, however, that the obligations of
a Shareholder hereunder shall be limited to an amount equal to the net proceeds
to such Shareholder of Registrable Shares sold in connection with such
registration.
(c) Each party entitled to indemnification under this
Section (the "Indemnified Party") shall give notice to the party required to
provide indemnification (the "Indemnifying Party") promptly after such
Indemnified Party has actual knowledge of any claim as to which indemnity may be
sought, and shall permit the Indemnifying Party to assume the defense of any
such claim or any litigation resulting therefrom; provided, that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or litigation,
shall be approved by the Indemnified Party (whose approval shall not be
unreasonably withheld); and, provided, further, that the failure of any
Indemnified Party to give notice as provided herein shall not relieve the
Indemnifying Party of its obligations under this Section except to the extent
that the Indemnifying Party is adversely affected by such failure. The
Indemnified Party may participate in such defense at such party's expense;
provided, however, that the Indemnifying Party shall pay such expense if
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding; provided further that in no event shall the
Indemnifying Party be required to pay the expenses of more than one law firm per
jurisdiction as counsel for the Indemnified Party. The Indemnifying Party also
shall be responsible for the expenses of such defense if the Indemnifying Party
does not elect to assume such defense. No Indemnifying Party, in the defense of
any such claim or litigation shall,
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<PAGE> 10
except with the consent of each Indemnified Party, consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such Indemnified Party
of a release from all liability in respect of such claim or litigation, and no
Indemnified Party shall consent to entry of any judgment or settle such claim or
litigation without the prior written consent of the Indemnifying Party, which
consent shall not be unreasonably withheld.
(d) In order to provide for just and equitable
contribution in circumstances in which the indemnification provided for in this
Section 2.5 is due in accordance with its terms but for any reason is held to be
unavailable to an Indemnified Party in respect to any losses, claims, damages
and liabilities referred to herein, then the Indemnifying Party shall, in lieu
of indemnifying such Indemnified Party, contribute to the amount paid or payable
by such Indemnified Party as a result of such losses, claims, damages or
liabilities to which such party may be subject in such proportion as is
appropriate to reflect the relative fault of the Company on the one hand and the
Shareholders on the other in connection with the statements or omissions which
resulted in such losses, claims, damages or liabilities, as well as any other
relevant equitable considerations. The relative fault of the Company and the
Shareholders shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of material fact related to information
supplied by the Company or the Shareholders and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission. The Company and the Shareholders agree that it would not
be just and equitable if contribution pursuant to this Section 2.5 were
determined by pro rata allocation or by any other method of allocation which
does not take account of the equitable considerations referred to above.
Notwithstanding the provisions of this paragraph of Section 2.5, (a) in no case
shall any one Shareholder be liable or responsible for any amount in excess of
the net proceeds received by such Shareholder from the offering of Registrable
Shares and (b) the Company shall be liable and responsible for any amount in
excess of such proceeds; provided, however, that no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. Any party entitled to contribution will, promptly
after receipt of notice of commencement of any action, suit or proceeding
against such party in respect of which a claim for contribution may be made
against another party or parties under this Section, notify such party or
parties from whom contribution may be sought, but the omission so to notify such
party or parties from whom contribution may be sought shall not relieve such
party from any other obligation it or they may have thereunder or otherwise
under this Section. No party shall be liable for contribution with respect to
any action, suit, proceeding or claim settled without its prior written consent,
which consent shall not be unreasonably withheld.
2.6 Other Matters with Respect to Underwritten Offerings. In
the event that Registrable Shares are sold pursuant to a Registration Statement
in an underwritten offering pursuant to Section 2.1, the Company agrees to (a)
enter into
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<PAGE> 11
an underwriting agreement containing customary representations and warranties
with respect to the business and operations of the Company and customary
covenants and agreements to be performed by the Company, including without
limitation customary provisions with respect to indemnification by the Company
of the underwriters of such offering; (b) use its best efforts to cause its
legal counsel to render customary opinions to the underwriters and the Selling
Shareholders with respect to the Registration Statement; and (c) use its best
efforts to cause its independent public accounting firm to issue customary "cold
comfort letters" to the underwriters and the Selling Shareholders with respect
to the Registration Statement.
2.7 Information by Holder. Each holder of Registrable Shares
included in any registration shall furnish to the Company such information
regarding such holder and the distribution proposed by such holder as the
Company may reasonably request in writing and as shall be required in connection
with any registration, qualification or compliance referred to in this
Agreement.
2.8 "Stand-Off" Agreement; Confidentiality of Notices. Each
Shareholder, if requested by the Company and the managing underwriter of an
underwritten public offering by the Company of Common Stock, shall not sell or
otherwise transfer or dispose of any Registrable Shares or other securities of
the Company held by such Shareholder for a period of 180 days following the
effective date of a Registration Statement; provided, that:
(a) such agreement shall only apply to the Initial
Public Offering; and
(b) all Shareholders of the Company then holding at
least a majority of the outstanding Common Stock (on an as-converted basis) and
all officers and directors of the Company enter into similar agreements.
The Company may impose stop-transfer instructions with respect to the
Registrable Shares or other securities subject to the foregoing restriction
until the end of such 180-day period.
Any Shareholder receiving any written notice from the Company regarding
the Company's plans to file a Registration Statement shall treat such notice
confidentially and shall not disclose such information to any person other than
as necessary to exercise its rights under this Agreement.
2.9 Limitations on Subsequent Registration Rights. The Company
shall not, without the prior written consent of Shareholders holding at least a
majority of the Registrable Shares then held by all Shareholders, enter into any
agreement (other than this Agreement) with any holder or prospective holder of
any securities of the Company which grant such holder or prospective holder
rights to include securities of the Company in any Registration Statement,
unless (a) such
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<PAGE> 12
rights to include securities in a registration initiated by the Company or by
Shareholders are not more favorable than the rights granted to Other Holders
under Sections 2.1 and 2.2 of this Agreement, and (b) no rights are granted to
initiate a registration, other than registration pursuant to a registration
statement on Form S-3 (or its successor) in which Shareholders are entitled to
include Registrable Shares on a pro rata basis with such holders based on the
number of shares of Common Stock (on an as-converted basis) owned by
Shareholders and such holders.
2.10 Rule 144 Requirements. After the earliest of (i) the
closing of the sale of securities of the Company pursuant to a Registration
Statement, (ii) the registration by the Company of a class of securities under
Section 12 of the Exchange Act, or (iii) the issuance by the Company of an
offering circular pursuant to Regulation A under the Securities Act, the Company
agrees to:
(a) make and keep current public information about
the Company available, as those terms are understood and defined in Rule 144;
(b) use its best efforts to file with the Commission
in a timely manner all reports and other documents required of the Company under
the Securities Act and the Exchange Act (at any time after it has become subject
to such reporting requirements); and
(c) furnish to any holder of Registrable Shares upon
request (i) a written statement by the Company as to its compliance with the
reporting requirements of Rule 144 and of the Securities Act and the Exchange
Act (at any time after it has become subject to such reporting requirements),
(ii) a copy of the most recent annual or quarterly report of the Company, and
(iii) such other reports and documents of the Company as such holder may
reasonably request to avail itself of any similar rule or regulation of the
Commission allowing it to sell any such securities without registration.
2.11 Termination. All of the Company's obligations to register
Registrable Shares under Sections 2.1 and 2.2 of this Agreement shall terminate
five years after the closing of the Initial Public Offering.
3. Right Of First Refusal
(a) The Company shall not issue, sell or exchange,
agree to issue, sell or exchange, or reserve or set aside for issuance, sale or
exchange, (i) any shares of its Common Stock, (ii) any other equity securities
of the Company, including, without limitation, shares of preferred stock, (iii)
any option, warrant or other right to subscribe for, purchase or otherwise
acquire any equity securities of the Company, or (iv) any debt securities
convertible into capital stock of the Company (collectively, the "Offered
Securities"), unless in each such case the Company shall have first complied
with this Section 3. The Company shall deliver to the
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<PAGE> 13
Shareholders a written notice of any proposed or intended issuance, sale or
exchange of Offered Securities (the "Offer"), which Offer shall (i) identify and
describe the Offered Securities, (ii) describe the price and other terms upon
which they are to be issued, sold or exchanged, and the number or amount of the
Offered Securities to be issued, sold or exchanged, (iii) identify the persons
or entities (if known) to which or with which the Offered Securities are to be
offered, issued, sold or exchanged and (iv) offer to issue and sell to or
exchange with each Shareholder (A) a pro rata portion of the Offered Securities
determined by dividing the aggregate number of shares of Common Stock then held
by such Shareholder (giving effect to the conversion of all shares of
convertible preferred stock then held) by the total number of shares of Common
Stock then outstanding (giving effect to the conversion of all outstanding
shares of convertible preferred stock) (the "Basic Amount"), and (B) any
additional portion of the Offered Securities attributable to the Basic Amounts
of other Shareholders as such Shareholder shall indicate it will purchase or
acquire should the other Shareholders subscribe for less than their Basic
Amounts (the "Undersubscription Amount").
(b) To accept an Offer, in whole or in part, each
Shareholder must deliver a written notice to the Company prior to the end of the
30-day period of the Offer, setting forth the portion of such Shareholder's
Basic Amount that such Shareholder elects to purchase and, if such Shareholder
shall elect to purchase all of its Basic Amount, the Undersubscription Amount
(if any) that such Shareholder elects to purchase (the "Notice of Acceptance").
If the Basic Amounts subscribed for by all Shareholders are less than the total
of all of the Basic Amounts available for purchase, then each Shareholder who
has set forth an Undersubscription Amount in its Notice of Acceptance shall be
entitled to purchase, in addition to the Basic Amounts subscribed for, the
Undersubscription Amount it has subscribed for; provided, however, that if the
Undersubscription Amounts subscribed for exceed the difference between the total
of all of the Basic Amounts available for purchase and the Basic Amounts
subscribed for (the "Available Undersubscription Amount"), the Shareholder who
has subscribed for any Undersubscription Amount shall be entitled to purchase
only that portion of the Available Undersubscription Amount as the
Undersubscription Amount subscribed for by such Shareholder bears to the total
Undersubscription Amounts subscribed for by all Shareholders, subject to
rounding by the Board of Directors to the extent it deems reasonably necessary.
(c) The Company shall have 90 days from the
expiration of the period set forth in Section 3(b) above to issue, sell or
exchange all or any part of such Offered Securities as to which a Notice of
Acceptance has not been given by a Shareholder (the "Refused Securities"), but
only to the offerees or purchasers described in the Offer (if so described
therein) and only upon terms and conditions (including, without limitation, unit
prices and interest rates) which are not more favorable, in the aggregate, to
the acquiring person or persons or less favorable to the Company than those set
forth in the Offer.
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(d) In the event the Company shall propose to sell
less than all the Refused Securities (any such sale to be in the manner and on
the terms specified in Section 3(c) above), then each Shareholder may, at its
sole option and in its sole discretion, reduce the number or amount of the
Offered Securities specified in its Notice of Acceptance to an amount that shall
be not less than the number or amount of the Offered Securities that the
Shareholder elected to purchase pursuant to Section 3(b) above multiplied by a
fraction, (i) the numerator of which shall be the number or amount of Offered
Securities the Company actually proposes to issue, sell or exchange (including
Offered Securities to be issued or sold to Shareholders pursuant to Section 3(b)
above prior to such reduction) and (ii) the denominator of which shall be the
original amount of the Offered Securities. In the event that the Shareholders so
elect to reduce the number or amount of Offered Securities specified in the
Notices of Acceptance, the Company may not issue, sell or exchange more than the
reduced number or amount of the Offered Securities unless and until such
securities have again been offered to the Shareholders in accordance with
Section 3(a) above.
(e) Upon the closing of the issuance, sale or
exchange of all or less than all of the Refused Securities, each Shareholder
shall acquire from the Company, and the Company shall issue to each Shareholder,
the number or amount of Offered Securities specified in the Notices of
Acceptance, as reduced pursuant to Section 3(d) above if the Shareholders have
so elected, upon the terms and conditions specified in the Offer. The purchase
by the Shareholders of any Offered Securities is subject in all cases to the
preparation, execution and delivery by the Company and the Shareholders of a
purchase agreement relating to such Offered Securities reasonably satisfactory
in form and substance to the Shareholders and their counsel.
(f) Any Offered Securities not acquired by the
Shareholders or other persons in accordance with Section 3(c) above may not be
issued, sold or exchanged until they are again offered to the Shareholders under
the procedures specified in this Agreement.
(g) The rights of the Shareholders under this Section
3 shall not apply to:
(1) Common Stock issued as a stock dividend
to holders of Common Stock or upon any subdivision or combination of shares of
Common Stock;
(2) the issuance of any shares of Common
Stock upon conversion of shares of convertible preferred stock;
(3) the issuance of up to the greater of (i)
4,441,208 shares (such number to be proportionately adjusted in the event of any
stock splits, stock dividends, recapitalizations or similar events occurring on
or after the date of this Agreement) or (ii) 25% of the capital stock of the
Company on a fully-diluted
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<PAGE> 15
basis (assuming the conversion to Common Stock of all convertible securities and
the exercise of all outstanding options and warrants), or the grant of options
or warrants therefor, including shares issued upon exercise of options
outstanding on the date of this Agreement to officers, directors, consultants
and employees of the Company or any subsidiary pursuant to the Stock Option Plan
or any other plan, agreement or arrangement approved by a vote of not less than
a majority of the Board of Directors of the Company (it being understood that
any shares subject to options that expire or terminate unexercised shall not
count towards the maximum number set forth in this clause (3));
(4) securities issued solely in
consideration for the bona fide acquisition (whether by merger or otherwise) by
the Company or any of its subsidiaries of all or a majority of the stock or
substantially all of the assets or a discrete product line of any other entity;
(5) securities issued in connection with
bona fide technology licensing, distribution or similar corporate partnering
arrangements, provided that any such arrangements are approved by the Company's
Board of Directors and are not for equity financing purposes, and further
provided, that any options or warrants issued pursuant to such arrangements
shall count towards the maximum number set forth in clause (3) above;
(6) up to $10,000,000 of Preferred Stock of
the Company issued to a Subsequent Purchaser pursuant to Section 2.2 of the
Preferred Stock Purchase Agreement of even date herewith between the Company and
the Purchaser; or
(7) shares of Common Stock sold by the
Company in an underwritten public offering pursuant to an effective registration
statement under the Securities Act.
4. Voting of Shares. The parties hereto acknowledge and agree that the
Purchaser has the right to designate and elect a director of the Company in
accordance with the provisions of the Certificate of Designation establishing
the Series B Preferred.
5. Restrictions on Transfer.
5.1 General.
(a) Any sale, transfer or other disposition, whether
voluntarily or by operation of law ("Transfer") of any of the Shares, as defined
in Section 7 below, by a Shareholder, other than according to the terms of this
Agreement, shall be void and transfer no right, title, or interest in or to any
of such Shares to the purported transferee. For purposes of calculating a
Shareholder's pro rata ownership of Shares,
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<PAGE> 16
all shares of Preferred Stock of the Company shall be deemed to have been
converted into Common Stock of the Company.
(b) Each Shareholder agrees to present the
certificates representing the Shares presently owned or hereafter acquired by
him to the Secretary of the Company and cause the Secretary to stamp on the
certificate in a prominent manner the following legend:
"The sale or other disposition of any of the shares
represented by this certificate is restricted by a
Shareholders Agreement, dated as of July 2, 1999, as
amended from time to time, among certain of the
shareholders of this corporation and this corporation
(the "Agreement"). A copy of the Agreement is
available for inspection during normal business hours
at the principal executive office of this
corporation."
5.2 Transfer Not Subject to Restrictions.
(a) Any Shareholder may Transfer Shares to his spouse
or children or to a trust established for the benefit of his spouse, children or
himself, or dispose of them under his will, without compliance with Sections 5.3
through 5.6 hereof provided that the transferee delivers to the Company and the
Shareholders a written instrument agreeing to be bound by the terms of this
Agreement as if it were a Shareholder.
(b) The rights of the Company and the Shareholders
under Sections 5.4 and 5.5 hereof shall not apply to any pledge of Shares by a
Shareholder which creates a mere security interest, provided the pledgee
provides the Company and the Shareholders with a written agreement to be bound
hereby to the same extent as the pledging Shareholder.
5.3 Offer of Sale; Notice of Proposed Sale.
If any Shareholder desires to Transfer any of its Shares, or
any interest in such Shares, in any transaction other than pursuant to Section
5.2 of this Agreement, such Shareholder (the "Selling Shareholder") shall first
deliver written notice of its desire to do so (the "Notice") to the Company and
the other Shareholders, in the manner prescribed in Section 10(d) of this
Agreement. The Notice must specify: (i) the name and address of the party to
which the Selling Shareholder proposes to sell or otherwise dispose of the
Shares or an interest in the Shares (the "Offeror"), (ii) the number of Shares
the Selling Shareholder proposes to sell or otherwise dispose of (the "Offered
Shares"), (iii) the consideration per Share to be
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<PAGE> 17
delivered to the Selling Shareholder for the proposed sale, transfer or
disposition, and (iv) all other material terms and conditions of the proposed
transaction.
5.4 Company's Option to Purchase.
(a) Subject to Section 5.6, the Company shall have
the first option to purchase all or any part of the Offered Shares for the
consideration per share and on the terms and conditions specified in the Notice.
The Company must exercise such option, no later than 15 days after such Notice
is deemed under Section 9(d) hereof to have been delivered to it, by written
notice to the Selling Shareholder.
(b) In the event the Company does not exercise its
option within such 15-day period with respect to all of the Offered Shares, the
Company shall, by the last day of such period, give written notice of that fact
(the "Shareholder Notice") to the other Shareholders (the "Eligible
Shareholders"). The Shareholder Notice shall specify the number of Offered
Shares not purchased by the Company (the "Remaining Shares").
(c) In the event the Company duly exercises its
option to purchase all or part of the Offered Shares, the closing of such
purchase shall take place at the offices of the Company on the later of (i) the
date five days after the expiration of such 15-day period or (ii) the date that
the Eligible Shareholders consummate their purchase of Remaining Shares under
Section 5.5(c) hereof.
(d) To the extent that the consideration proposed to
be paid by the Offeror for the Offered Shares consists of property other than
cash or a promissory note, the consideration required to be paid by the Company
and/or the Eligible Shareholders exercising their options under Sections 5.4 and
5.5 hereof may consist of cash equal to the value of such property, as
determined in good faith by agreement of the Selling Shareholder and the Company
and/or the Eligible Shareholders acquiring such Offered Shares.
(e) Notwithstanding anything to the contrary herein,
neither the Company nor the Eligible Shareholders shall have any right to
purchase any of the Offered Shares hereunder unless the Company and/or the
Eligible Shareholders exercise their option or options to purchase all of the
Offered Shares.
5.5 Shareholder Option to Purchase.
(a) Subject to Section 5.6, the Eligible Shareholders
shall have an option, exercisable for a period of 15 days from the date of
delivery of the Shareholder Notice, to purchase the Remaining Shares for the
consideration per share and on the terms and conditions set forth in the Notice.
Such option shall be exercised by delivery by each Eligible Shareholder of
written notice to the Secretary of the Company. Alternatively, an Eligible
Shareholder may within the same 15-day
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period, notify the Secretary of the Company of its desire to participate in the
sale of the Shares on the terms set forth in the Notice, and the number of
Shares it wishes to sell.
(b) In the event options to purchase have been
exercised by the Eligible Shareholders with respect to some but not all of the
Remaining Shares, those Eligible Shareholders who have exercised their options
within the 15-day period specified in Section 5.5(a) shall have an additional
option, for a period of five days next succeeding the expiration of such 15-day
period, to purchase all or any part of the balance of such Remaining Shares on
the terms and conditions set forth in the Notice, which option shall be
exercised by the delivery of written notice to the Secretary of the Company. In
the event there are two or more such Eligible Shareholders that choose to
exercise the last-mentioned option for a total number Remaining Shares in excess
of the number available, the Remaining Shares available for each such Eligible
Shareholder's options shall be allocated to such Eligible Shareholder pro rata
based on the number of Shares owned by the Eligible Shareholder so electing.
(c) If the option to purchase the Remaining Shares is
exercised in full by the Purchaser, the closing of the purchase of the Remaining
Shares shall take place at the offices of the Company no later than five days
after the date of such notice to the Purchaser.
5.6 Failure to Fully Exercise Options; Co-Sale.
(a) If the Company and the Eligible Shareholders do
not exercise their options to purchase all of the Offered Shares within the
periods described in this Agreement (the "Option Period"), then all options of
the Company and the Eligible Shareholders to purchase the Offered Shares,
whether exercised or not, shall terminate, but each Eligible Shareholder has,
pursuant to Section 5.5, expressed a desire to sell Shares in the transaction (a
"Participating Shareholder"), shall be entitled to do so pursuant to this
Section. The Company shall promptly, on expiration of the Option Period, notify
the Selling Shareholder of the aggregate number of Shares the Participating
Shareholders wish to sell. The Selling Shareholder shall use its best efforts to
interest the Offeror in purchasing, in addition to the Offered Shares, the
Shares the Participating Shareholders wish to sell. If the Offeror does not wish
to purchase all of the Shares made available by the Selling Shareholder and the
Participating Shareholders, then the Participating Shareholders and the Selling
Shareholder shall be entitled to sell, at the price and on the terms and
conditions set forth in the Notice, a portion of the Shares being sold to the
Offeror, in the same proportion as such Selling Shareholder or Participating
Shareholders' ownership of Shares bears to the aggregate number of Shares owned
by the Selling Shareholder and the Participating Shareholders. The transaction
contemplated by the Notice shall be consummated not later than 60 days after the
expiration of the Option Period.
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<PAGE> 19
(b) If the Participating Shareholders do not elect to
sell the full number of Shares which they are entitled to sell pursuant to
Section 5.6(a), the Selling Shareholder shall be entitled to sell to the
Offeror, according to the terms set forth in the Notice, that number of its own
Shares which equals the difference between the number of Shares desired to be
purchased by the Offeror and the number of Shares the Participating Shareholders
are entitled to sell pursuant to Section 5.6(a). If the Selling Shareholder
wishes to Transfer any such Shares at a price per Share which differs from that
set forth in the Notice, upon terms different from those previously offered to
the Company and the Eligible Shareholders, or more than 60 days after the
expiration of the Option Period, then, as a condition precedent to such
transaction, such Shares must first be offered to the Company and the Eligible
Shareholders on the same terms and conditions as given the Offeror, and in
accordance with the procedures and time periods set forth above.
(c) The proceeds of any sale made by the Selling
Existing Shareholder without compliance with the provisions of this Section 5
shall be deemed to be held in constructive trust in such amount as would have
been due the Participating Shareholders if the Selling Shareholder had complied
with this Agreement.
6. Transfers of Rights; Additional Shareholders. This Agreement, and
the rights and obligations of each Shareholder hereunder other than the
Purchaser's rights under Section 4, may be assigned by such Shareholder to (i)
any person or entity to which at least 200,000 Shares (subject to appropriate
adjustment for stock splits, stock dividends, recapitalizations and other
similar events) are transferred by such Shareholder or (ii) to any partner or
stockholder of a Shareholder, and such transferee shall be deemed a
"Shareholder" for purposes of this Agreement; provided, that the transferee
provides written notice of such assignment to the Company and agrees in writing
to be bound hereby. The Purchaser shall have the right to require that the
Company, as a term of the issuance of stock of the Company to any additional
shareholder, require such shareholder to agree to the terms of Section 5 of this
Agreement to the same extent as if such shareholder were a "Shareholder"
hereunder; provided, that any party to whom securities are issued pursuant to a
transaction described in Section 3(g)(1), (2), (3), (4), (5) or (7) above shall
not be required to enter into this Agreement if such issuance does not result in
a majority of the capital stock of the Company on a fully-diluted basis
(assuming the conversion to Common Stock of all convertible securities and the
exercise of all outstanding options and warrants) being held by parties other
than the Shareholders.
7. Shares. As used in this Agreement, the term "Shares" shall mean all
shares of capital stock of the Company held by a Shareholder, whether now owned
or subsequently acquired.
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<PAGE> 20
8. Termination. This Agreement shall terminate in its entirety on the
earliest of (a) the closing of the Company's initial public offering of shares
of Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, resulting in at least $30,000,000 of gross
proceeds to the Company at a minimum price to the public of $10.00 per share
(subject to appropriate adjustment for stock splits, stock dividends,
recapitalizations and other similar events), or (b) the sale of all or
substantially of the assets or business of the Company, by merger, sale of
assets or otherwise;
9. General.
(a) Severability. The invalidity or unenforceability
of any provision of this Agreement shall not affect the validity or
enforceability of any other provision of this Agreement.
(b) Specific Performance. In addition to any and all
other remedies that may be available at law in the event of any breach of this
Agreement, the Purchaser shall be entitled to specific performance of the
agreements and obligations of the Company hereunder and to such other injunctive
or other equitable relief as may be granted by a court of competent
jurisdiction.
(c) Governing Law. This Agreement shall be governed
by and construed in accordance with the internal laws of the State of Washington
(without reference to the conflicts of law provisions thereof).
(d) Notices. All notices, requests, consents, and
other communications under this Agreement shall be in writing and shall be
deemed delivered (i) two business days after being sent by registered or
certified mail, return receipt requested, postage prepaid or (ii) one business
day after being sent via a reputable nationwide overnight courier service
guaranteeing next business day delivery, in each case to the intended recipient
as set forth below:
If to the Company, at 110 110th Avenue N.E., Suite 210, Bellevue,
Washington 98004, Attention: President, Facsimile: (425) 468-6501, or at such
other address or addresses as may have been furnished in writing by the Company
to the Purchaser, with a copy to Allen D. Israel, Esq., Foster Pepper &
Shefelman PLLC, 1111 Third Avenue, Suite 3400, Seattle, Washington 98101,
Facsimile: (206) 749-1957; or
If to a Shareholder, at its address set forth on Exhibit A, or at such
other address or addresses as may have been furnished to the Company in writing
by the Shareholder.
Any party may give any notice, request, consent or other communication
under this Agreement using any other means (including, without limitation,
personal
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<PAGE> 21
delivery, messenger service, telecopy, first class mail or electronic mail), but
no such notice, request, consent or other communication shall be deemed to have
been duly given unless and until it is actually received by the party for whom
it is intended. Any party may change the address to which notices, requests,
consents or other communications hereunder are to be delivered by giving the
other parties notice in the manner set forth in this Section.
(e) Complete Agreement. This Agreement constitutes
the entire agreement and understanding of the parties hereto with respect to the
subject matter hereof and supersedes all prior agreements and understandings
relating to such subject matter.
(f) Amendments and Waivers. Any term of this
Agreement may be amended or terminated and the observance of any term of this
Agreement may be waived (either generally or in a particular instance and either
retroactively or prospectively), with the written consent of the Company and all
of the Shareholders. No waivers of or exceptions to any term, condition or
provision of this Agreement, in any one or more instances, shall be deemed to
be, or construed as, a further or continuing waiver of any such term, condition
or provision.
(g) Pronouns. Whenever the context may require, any
pronouns used in this Agreement shall include the corresponding masculine,
feminine or neuter forms, and the singular form of nouns and pronouns shall
include the plural, and vice versa.
(h) Counterparts; Facsimile Signatures. This
Agreement may be executed in any number of counterparts, each of which shall be
deemed to be an original, and all of which together shall constitute one and the
same document. This Agreement may be executed by facsimile signatures.
(i) Section Headings. The section headings are for
the convenience of the parties and in no way alter, modify, amend, limit or
restrict the contractual obligations of the parties.
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<PAGE> 22
COMPANY:
APEX ONLINE LEARNING INC.
By: /s/Sally G. Narodick
Sally G. Narodick, President
SHAREHOLDERS
VULCAN VENTURES
INCORPORATED
By: /s/Bert Kolde
Bert Kolde, Vice President
THE EDISON PROJECT INC.
By: /s/H. Christopher Whittle
H. Christopher Whittle,
President
/s/Paul G. Allen
Paul G. Allen
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<PAGE> 23
EXHIBIT A
SHAREHOLDERS
Paul G. Allen 110 110th Avenue N.E.
Suite 550
Bellevue, WA
98004
Attention: Ed Harris
Telecopy: (425) 453-1985
Vulcan Ventures Incorporated 110 110th Avenue N.E.
Suite 550
Bellevue, WA
98004
Attention: Ed Harris
Telecopy: (425) 453-1985
The Edison Project, Inc. 521 Fifth Avenue
15th Floor
New York, NY 10175
Attention: Christopher Cerf, Esq.
Telecopy: (212) 419-1604
<PAGE> 1
Exhibit 10.30
Lease 4-95
STANDARD FORM OF OFFICE LEASE
The Real Estate Board of New York, Inc.
AGREEMENT OF LEASE, dated as of the 4th day of April, 1995 between 521 FIFTH
AVENUE ASSOCIATES, a New York limited partnership, having an office at 521 Fifth
Avenue, New York, New York 10175, party of the first part, hereinafter referred
to as OWNER or LANDLORD, and THE EDISON PROJECT, L.P., a New York limited
partnership, having an office at 529 Fifth Avenue, New York, New York, party of
the second part, hereinafter referred to as TENANT,
WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner
that portion of the sixteenth (16th) floor as shown shaded on Exhibit "A",
annexed hereto and made a part hereof (the "demised premises) in the building
known as 521 Fifth Avenue (the "building") in the Borough of Manhattan, City of
New York, for the term of TWO (2) YEARS AND THREE (3) MONTHS (or until such term
shall sooner cease and expire as hereinafter provided) to commence on the 1st
day of May, nineteen hundred and ninety-five, and to end on the 31st day of
July, nineteen hundred and ninety-seven, both dates inclusive, at an annual
rental rate of ONE HUNDRED SIXTY-SIX THOUSAND TWO HUNDRED SEVENTY-THREE AND
80/100 ($166,273.80) DOLLARS per annum, commencing on the Commencement Date,
which Tenant agrees to pay in lawful money of the United States which shall be
legal tender in payment of all debts and dues, public and private, at the time
of payment, in equal monthly installments in advance on the first day of each
month during said term, at the office of Owner or such other place as Owner may
designate, without any set off or deduction whatsoever, except that Tenant shall
pay the first __________ monthly installment(s) on the execution hereof (unless
this lease be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns, hereby
covenant as follows:
<PAGE> 2
Rent Occupancy:
1. Tenant shall pay the rent as above and as hereinafter provided.
2. Tenant shall use and occupy demised premises for executive and
administrative offices in connection with Tenant's business and consistent with
a first-class office building, and for no other purpose.
Tenant Alternations:
3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, and to the provisions of this article, Tenant at Tenant's
expense, may make alterations, installations, additions or improvements which
are nonstructural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. Tenant shall, before making
any alterations, additions, installations or improvements, at its expense,
obtain all permits, approvals and certificates required by any governmental or
quasi-governmental bodies and (upon completion) certificates of final approval
thereof and shall deliver promptly duplicates of all such permits, approvals and
certificates to Owner and Tenant agrees to carry and will cause Tenant's
contractors and sub-contractors to carry such workman's compensation, general
liability, personal and property damage insurance as Owner may require. If any
mechanic's lien is filed against the demised premises, or the building of which
the same forms a part, for work claimed to have been done for, or materials
furnished to, Tenant, whether or not done pursuant to this article, the same
shall be discharged by Tenant within thirty days thereafter, at Tenant's
expense, by filing the bond required by law. All fixtures and all paneling,
partitions, railings and like installations, installed in the premises at any
time, either by Tenant or by Owner in Tenant's behalf, shall, upon installation,
become the property of Owner and shall remain upon and be surrendered with the
demised premises unless Owner, by notice to Tenant no later than twenty days
prior to the date fixed as the termination of this lease, elects to relinquish
Owner's right thereto and to have them removed by Tenant, in which event the
same shall be removed from the premises by Tenant prior to the expiration of the
lease, at Tenant's expense. Nothing in this Article shall be construed to give
Owner title to or to prevent Tenant's removal of trade fixtures, moveable office
furniture and equipment, but upon removal of any such from the premises or upon
removal of other installations as may be required by Owner, Tenant shall
immediately and at its expense, repair and restore the premises to the condition
existing prior to installation and repair any damage to the demised premises or
the building due to such removal. All property permitted or required to be
removed, by Tenant at the end of the term remaining in the premises after
Tenant's removal shall be deemed abandoned and may, at the election of Owner,
either be retained as
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<PAGE> 3
Owner's property or may be removed from the premises by Owner, at Tenant's
expense. (See Article 42)
Maintenance and Repairs:
4. Tenant shall, throughout the term of this lease, take good care of
the demised premises and the fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the systems and equipment thereof, whether requiring
structural or nonstructural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant. Tenant's subtenants, agents,
employees, invitees or licensees, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair the exterior and the structural portions of the
building, including the structural portions of its demised premises, and the
public portions of the building interior and the building plumbing, electrical,
heating and ventilating systems (to the extent such systems presently exist)
serving the demised premises. Tenant agrees to give prompt notice of any
defective condition in the premises for which Owner may be responsible
hereunder. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or others making repairs, alterations,
additions or improvements in or to any portion of the building or the demised
premises or in and to the fixtures, appurtenances or equipment thereof. It is
specifically agreed that Tenant shall not be entitled to any setoff or reduction
of rent by reason of any failure of Owner to comply with the covenants of this
or any other article of this Lease. Tenant agrees that Tenant's sole remedy at
law in such instance will be by way of an action for damages for breach of
contract. The provisions of this Article 4 shall not apply in the case of fire
or other casualty which are dealt with in Article 9 hereof.
Window Cleaning:
5. Tenant will not clean nor require, permit, suffer or allow any
window in the demised premises to be cleaned from the outside in violation of
Section 202 of the Labor Law or any other applicable law or of the Rules of the
Board of Standards and Appeals, or of any other Board or body having or
asserting jurisdiction.
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<PAGE> 4
Requirements of Law, Fire Insurance, Floor Loads:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use of manner or use thereof,
(including Tenant's permitted use) or, with respect to the building if arising
out of Tenant's use or manner of use of the premises or the building (including
the use permitted under the lease). Nothing herein shall require Tenant to make
structural repairs or alterations unless Tenant has, by its manner of use of the
demised premises or method of operation therein, violated any such laws,
ordinances, orders, rules, regulations or requirements with respect thereto.
Tenant may, after securing Owner to Owner's satisfaction against all damages,
interest, penalties and expenses, including, but not limited to, reasonably
attorney's fees, by cash deposit or by surety bond in an amount and in a company
satisfactory to Owner, contest and appeal any such laws, ordinances, orders,
rules, regulations or requirements provided same is done with all reasonable
promptness and provided such appeal shall not subject Owner to prosecution for a
criminal offense or constitute a default under any lease or mortgage under which
Owner may be obligated, or cause the demised premises or any part thereof to be
condemned or vacated. Tenant shall not do or permit any act or thing to be done
in or to the demised premises which is contrary to law, or which will invalidate
or be in conflict with public liability, fire or other policies of insurance at
any time carried by or for the benefit of Owner with respect to the demised
premises or the building of which the demised premises form a part, or which
shall or might subject Owner to any liability or responsibility to any person or
for property damage. Tenant shall not keep anything in the demised premises
except as now or hereafter permitted by the Fire Department, Board of Fire
Underwriters, Fire Insurance Rating Organization or other authority having
jurisdiction, and then only in such manner and such quantity so as not to
increase the rate for fire insurance applicable to the building, nor use the
premises in a manner which will increase the insurance rate for the building or
any property located therein over that in effect prior to the commencement of
Tenant's occupancy. Tenant shall pay all costs, expenses, fines, penalties, or
damages, which may be imposed upon Owner by reason of Tenant's failure to comply
with the provisions of this article and if by reason of such failure the fire
insurance rate shall, at the beginning of this lease or at any time thereafter,
be higher than it otherwise would be, then Tenant shall reimburse Owner, as
additional rent hereunder, for that portion of all fire insurance premiums
thereafter paid by Owner which shall have been charged because of such failure
by Tenant. In any action or proceeding wherein
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<PAGE> 5
Owner and Tenant are parties, a schedule or "make-up" of rate for the building
or demised premises issued by the New York Fire Insurance Exchange, or other
body making fire insurance rates applicable to said premises shall be conclusive
evidence of the facts therein stated and of the several items and charges in the
fire insurance rates then applicable to said premises. Tenant shall not place a
load upon any floor of the demised premises exceeding the floor load per square
foot area which it was designed to carry and which is allowed by law. Owner
reserves the right to prescribe the weight and position of all safes, business
machines and mechanical equipment. Such installations shall be placed and
maintained by Tenant, at Tenant's expense, in settings sufficient, in Owner's
judgment, to absorb and prevent vibration, noise and annoyance. (See Article 47)
Subordination:
7. This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or the
real property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Owner may request.
Property-Loss, Damage, Reimbursement, Indemnity:
8. Owner or its agents shall not be liable for any damage to property
of Tenant or of others entrusted to employees of the building, nor for loss of
or damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused by
other tenants or persons in, upon or about said building or caused by operations
in construction of any private, public or quasi public work. If at any time any
windows of the demised premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law for any
reason whatsoever including, but not limited to Owner's own acts. Owner shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefor nor abatement or diminution of rent nor
shall the same release Tenant from its obligations hereunder nor constitute an
eviction. Tenant shall indemnify and save harmless Owner against and from all
liabilities, obligations, damages, penalties, claims, costs and expenses for
which Owner shall not be reimbursed by insurance, including reasonable attorneys
fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's
agents, contractors, employees, invitees, or licensees, of any covenant
- 5 -
<PAGE> 6
or condition of this lease, or the carelessness, negligence or improper conduct
of the Tenant, Tenant's agents, contractors, employees, invitees or licensees.
Tenant's liability under this lease extends to the acts and omissions of any
sub-tenant, and any agent, contractor, employee, invitee or licensee of any
sub-tenant. In case any action or proceeding is brought against Owner by reason
of any such claim, Tenant, upon written notice from Owner, will, at Tenant's
expense, resist or defend such action or proceeding by counsel approved by Owner
in writing, such approval not to be unreasonably withheld.
Destruction, Fire and Other Casualty:
9. (a) If the demised premises or any part thereof shall be damaged by
fire or other casualty, Tenant shall give immediate notice thereof to Owner and
this lease shall continue in full force and effect except as hereinafter set
forth. (b) If the demised premises are partially damaged or rendered partially
unusable by fire or other casualty, the damages thereto shall be repaired by and
at the expense of Owner and the rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty according to
the part of the premises which is usable. (c) If the demised premises are
totally damaged or rendered wholly unusable by fire or other casualty, then the
rent shall be proportionately paid up to the time of the casualty and
thenceforth shall cease until the date when the premises shall have been
repaired and restored by Owner, subject to Owner's right to elect not to restore
the same as hereinafter provided. (d) If the demised premises are rendered
wholly unusable or (whether or not the demised premises are damaged in whole or
in part) if the building shall be so damaged that Owner shall decide to demolish
it or to rebuild it, then, in any of such events, Owner may elect to terminate
this lease by written notice to Tenant, given within 90 days after such fire or
casualty, specifying a date for the expiration of the lease, which date shall
not be more than 60 days after the giving of such notice, and upon the date
specified in such notice the term of this lease shall expire as fully and
completely as if such date were the date set forth above for the termination of
this lease and Tenant shall forthwith quit, surrender and vacate the premises
without prejudice however, to Landlord's rights and remedies against Tenant
under the lease provisions in effect prior to such termination, and any rent
owing shall be paid up to such date and any payments of rent made by Tenant
which were on account of any period subsequent to such date shall be returned to
Tenant. Unless Owner shall serve a termination notice as provided for herein,
Owner shall make the repairs and restorations under the conditions of (b) and
(c) hereof, with all reasonable expedition, subject to delays due to adjustment
of insurance claims, labor troubles and causes beyond Owner's control. After any
such casualty, Tenant shall cooperate with Owner's restoration by removing from
the premises as promptly as reasonably possible, all of Tenant's salvageable
inventory and movable equipment, furniture, and other property. Tenant's
liability for rent shall resume five (5) days after written notice from Owner
that the premises are substantially ready for Tenant's occupancy. (e) Nothing
contained hereinabove shall
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<PAGE> 7
relieve Tenant from liability that may exist as a result of damage from fire or
other casualty. Notwithstanding anything contained to the contrary contained in
subdivisions (a) through (e) hereof, each party shall look first to any
insurance in its favor before making any claim against the other party for
recovery for loss or damage resulting from fire or other casualty, and to the
extent that such insurance is in force and collectible and to the extent
permitted by law, Owner and Tenant each hereby releases and waives all right of
recovery against the other or any one claiming through or under each of them by
way of subrogation or otherwise. The foregoing release and waiver shall be in
force only if both releasors' insurance policies contain a clause providing that
such a release or waiver shall not invalidate the insurance. If, and to the
extent, that such waiver can be obtained only by the payment of additional
premiums, then the party benefitting from the waiver shall pay such premium
within ten days after written demand or shall be deemed to have agreed that the
party obtaining insurance coverage shall be free of any further obligation under
the provisions hereof with respect to waiver of subrogation. Tenant acknowledges
that Owner will not carry insurance on Tenant's furniture and/or furnishings or
any fixtures or equipment, improvements, or appurtenances removable by Tenant
and agrees that Owner will not be obligated to repair any damage thereto or
replace the same. (f) Tenant hereby waives the provisions of Section 227 of the
Real Property Law and agrees that the provisions of this article shall govern
and control in lieu thereof.
Eminent Domain:
10. If the whole or any part of the demised premises shall be acquired
or condemned by Eminent Domain for any public or quasi public use or purpose,
then and in that event, the term of this lease shall cease and terminate from
the date of title vesting in such proceeding and Tenant shall have no claim for
the value of any unexpired term of said lease and assigns to Owner, Tenant's
entire interest in any such award.
Assignment, Mortgage, Etc.:
11. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns, expressly
covenants that it shall not assign, mortgage or encumber this agreement, nor
underlet, or suffer or permit the demised premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance.
Transfer of the majority of the stock of a corporate Tenant shall be deemed an
assignment. If this lease be assigned, or if the demised premises or any part
thereof be underlet or occupied by anybody other than Tenant, Owner may, after
default by Tenant, collect rent from the assignee, under-tenant or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, underletting, occupancy or collection shall be deemed a waiver of
this covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a
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<PAGE> 8
release of Tenant from the further performance by Tenant of covenants on the
part of Tenant herein contained. The consent by Owner to an assignment or
underletting shall not in any wise be construed to relieve Tenant from obtaining
the express consent in writing of Owner to any further assignment or
underletting. (See Article 41).
Electric Current:
12. Rates and conditions in respect to submetering or rent inclusion,
as the case may be, to be added in RIDER attached hereto. Tenant covenants and
agrees that at all times its uses of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain. (See Article 46)
Access to Premises:
13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time, and, at
other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably
desirable to the demised premises or to any other portion of the building or
which Owner may elect to perform. Tenant shall permit Owner to use and maintain
and replace pipes and conduits in and through the demised premises and to erect
new pipes and conduits therein provided they are concealed within the walls,
floor, or ceiling. Owner may, during the progress of any work in the demised
premises, take all necessary materials and equipment into said premises without
the same constituting an eviction nor shall the Tenant be entitled to any
abatement of rent while such work is in progress nor to any damages by reason or
loss or interruption of business or otherwise. Throughout the term hereof Owner
shall have the right to enter the demised premises at reasonable hours for the
purpose of showing the same to prospective purchasers or mortgagees of the
building, and during the last six months of the term for the purpose of showing
the same to prospective tenants. If Tenant is not present to open and permit an
entry into the premises, Owner or Owner's agents may enter the same whenever
such entry may be necessary or permissible by master key or forcibly and
provided reasonable care is exercised to safeguard Tenant's property, such entry
shall not render Owner or its agents liable therefor, nor in any event shall the
obligations of Tenant hereunder be affected. If during the last month of the
term Tenant shall have removed all or substantially all of Tenant's property
therefrom, Owner may immediately enter, alter, renovate or redecorate the
demised premises without limitation or abatement of rent, or incurring liability
to Tenant for
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any compensation and such act shall have no effect on this lease or Tenant's
obligations hereunder.
Vault, Vault Space, Area:
14. No Vaults, vault space or area, whether or not enclosed or covered,
not within the property line of the building is leased hereunder, anything
contained in or indicated on any sketch, blue print or plan, or anything
contained elsewhere in this lease to the contrary notwithstanding. Owner makes
no representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Owner shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant.
Occupancy:
15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts them
as is, subject to the riders annexed hereto with respect to Owner's work, if
any. In any event, Owner makes no representations as to the condition of the
premises and Tenant agrees to accept the same subject to violations, whether or
not of record.
Bankruptcy:
16. (a) Anything elsewhere in this lease to the contrary
notwithstanding, this lease may be cancelled by Owner by the sending of a
written notice to Tenant within a reasonable time after the happening of any one
or more of the following events: (1) the commencement of a case in bankruptcy or
under the laws of any state naming Tenant as the debtor; or (2) the making by
Tenant of an assignment or any other arrangement for the benefit of creditors
under any state statute. Neither Tenant nor any person claiming through or under
Tenant, or by reason of any statute or order of court, shall thereafter be
entitled to possession of the premises demised but shall forthwith quit and
surrender the premises. If this lease shall be assigned in accordance with its
terms, the provisions of this Article 16 shall be applicable only to the party
then owning Tenant's interest in this lease. (b) It is stipulated and agreed
that in the event of the termination of this lease pursuant to (a) hereof, Owner
shall forthwith, notwithstanding any other provisions of this lease to the
contrary, be entitled to recover from Tenant as and for liquidated damages an
amount equal to
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the difference between the rent reserved hereunder for the unexpired portion of
the term demised and the fair and reasonable rental value of the demised
premises for the same period. In the computation of such damages the difference
between any installment of rent becoming due hereunder after the date of
termination and the fair and reasonable rental value of the demised premises for
the period for which such installment was payable shall be discounted to the
date of termination at the rate of four percent (4%) per annum. If such premises
or any part thereof be relet by the Owner for the unexpired term of said lease,
or any part thereof, before presentation of proof of such liquidated damages to
any court, commission or tribunal, the amount of rent reserved upon such
reletting shall be deemed to be the fair and reasonable rental value for the
part or the whole of the premises so re-let during the term of the re-letting
shall be deemed to be the fair and reasonable rental value for the part or the
whole of the premises so re-let during the term of the re-letting. Nothing
herein contained shall limit or prejudice the right of the Owner to prove for
and obtain as liquidated damages by reason of such termination, an amount equal
to the maximum allowed by any statute or rule of law in effect at the time when,
and governing the proceedings in which, such damages are to be proved, whether
or not such amount be greater, equal to, or less than the amount of the
difference referred to above. (See Article 55)
Default:
17. (1) If Tenant defaults in fulfilling any of the covenants of this
lease other than the covenants for the payment of rent or additional rent; or if
the demised premises becomes vacant or deserted; or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if this lease be rejected under Section 365 of Title 11 of the U.S. Code
(bankruptcy code); or if Tenant shall fail to move into or take possession of
the premises within fifteen (15) days after the commencement of the term of this
lease or if Tenant shall be in default under any other lease for space in the
building, then, in any one or more of such events, upon Owner serving a written
five (5) days notice upon Tenant specifying the nature of said default and upon
the expiration of said five (5) days, if Tenant shall have failed to comply with
or remedy such default, or if the said default or omission complained of shall
be of a nature that the same cannot be completely cured or remedied within said
five (5) day period, and if Tenant shall not have diligently commenced during
such default within such five (5) day period, and shall not thereafter with
reasonable diligence and in good faith, proceed to remedy or cure such default,
then Owner may serve a written three (3) days' notice of cancellation of this
lease upon Tenant, and upon the expiration of said three (3) days this lease and
the term thereunder shall end and expire as fully and completely as if the
expiration of such three (3) day period were the day herein definitely fixed for
the end and expiration of this lease and the term thereof and Tenant shall then
quit and surrender the demised premises to Owner but Tenant shall remain liable
as hereinafter provided.
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<PAGE> 11
(2) If the notice provided for in (1) hereof shall have been
given, and the term shall expire as aforesaid; or if Tenant shall make default
in the payment of the rent reserved herein or any item of additional rent herein
mentioned or any part of either or in making any other payment herein required,
then and in any of such events Owner may without notice, re-enter the demised
premises either by force or otherwise, and dispossess Tenant by summary
proceedings or otherwise, and the legal representative of Tenant or other
occupant of demised premises and remove their effects and hold the premises as
if this lease had not been made, and Tenant hereby waives the service of notice
of intention to re-enter or to institute legal proceedings to that end. If
Tenant shall make default hereunder prior to the date fixed as the commencement
of any renewal or extension of this lease, Owner may cancel and terminate such
renewal or extension agreement by written notice.
Remedies of Owner and Waiver of Redemption:
18. In case of any such default, re-entry, expiration and/or dispossess
by summary proceedings or otherwise, (a) the rent shall become due thereupon and
be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner
may re-let the premises or any part or parts thereof, either in the name of
Owner or otherwise, for a term or terms, which may at Owner's option be less
than or exceed the period which would otherwise have constituted the balance of
the term of this lease and may grant concessions or free rent or charge a higher
rental than that in this lease, and/or (c) Tenant or the legal representatives
of Tenant shall also pay Owner as liquidated damages for the failure of Tenant
to observe and perform said Tenant's covenants herein contained, any deficiency
between the rent hereby reserved and/or covenanted to be paid and the net
amount, if any, of the rents collected on account of the lease or leases of the
demised premises for each month of the period which would otherwise have
constituted the balance of the term of this lease. The failure of Owner to
re-let the premises or any part or parts thereof shall not release or affect
Tenant's liability for damages. In computing such liquidated damages there shall
be added to the said deficiency such expenses as Owner may incur in connection
with re-letting, such as legal expenses, attorneys' fees, brokerage, advertising
and for keeping the demised premises in good order or for preparing the same for
re-letting. Any such liquidated damages shall be paid in monthly installments by
Tenant on the rent day specified in this lease and any suit brought to collect
the amount of the deficiency for any month shall not prejudice in any way the
rights of Owner to collect the deficiency of any subsequent month by a similar
proceeding. Owner, in putting the demised premises in good order or preparing
the same for re-rental may, at Owner's option, make such alterations, repairs,
replacements, and/or decorations in the demised premises as Owner, in Owner's
sole judgment, considers advisable and necessary for the purpose of re-letting
the demised premises, and the making of such alterations, repairs, replacements,
and/or decorations shall not operate or be construed to release Tenant from
liability
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<PAGE> 12
hereunder as aforesaid. Owner shall in no event be liable in any way whatsoever
for failure to re-let the demised premises, or in the event that the demised
premises are re-let, for failure to collect the rent thereof under such
re-letting, and in no event shall Tenant be entitled to receive any excess, if
any, of such net rents collected over the sums payable by Tenant to Owner
hereunder. In the event of a breach or threatened breach by Tenant of any of the
covenants or provisions hereof, Owner shall have the right of injunction and the
right to invoke any remedy allowed at law or in equity as if re-entry, summary
proceedings and other remedies were not herein provided for. Mention in this
lease of any particular remedy, shall not preclude Owner from any other remedy,
in law or in equity. Tenant hereby expressly waives any and all rights of
redemption granted by or under any present or future laws in the event of Tenant
being evicted or dispossessed for any cause, or in the event of Owner obtaining
possession of demised premises, by reason of the violation by Tenant of any of
the covenants and conditions of this lease, or otherwise.
Fees and Expenses:
19. If Tenant shall default in the observance or performance of any
term or covenant on Tenant's part to be observed or performed under or by virtue
of any of the terms or provisions in any article of this lease, then, unless
otherwise provided elsewhere in this lease, Owner may immediately or at any time
thereafter and without notice perform the obligation of Tenant thereunder. If
Owner, in connection with the foregoing or in connection with any default by
Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs
any obligations for the payment of money, including but not limited to
attorney's fees, in instituting, prosecuting or defending any action or
proceeding, then Tenant will reimburse Owner for such sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid by Tenant to Owner within five (5) days of rendition of any bill
or statement to Tenant therefor. If Tenant's lease term shall have expired at
the time of making of such expenditures or incurring of such obligations, such
sums shall be recoverable by Owner as damages.
Building Alterations and Management:
20. Owner shall have the right at any time without the same
constituting an eviction and without incurring liability to Tenant therefor to
change the arrangement and/or location of public entrances, passageways, doors,
doorways, corridors, elevators, stairs, toilets or other public parts of the
building and to change the name, number or designation by which the building may
be known. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or other Tenants making any repairs in the
building or any such alterations, additions and improvements. Furthermore,
Tenant shall not have any claim against
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<PAGE> 13
Owner by reason of Owner's imposition of such controls of the manner of access
to the building by Tenant's social or business visitors as the Owner may deem
necessary for the security of the building and its occupants.
No Representations by Owner:
21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which it is erected or the demised premises, the rents, leases, expenses of
operation or any other matter or thing affecting or related to the premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
the provisions of this lease. Tenant has inspected the building and the demised
premises and is thoroughly acquainted with their condition and agrees to take
the same "as is" and acknowledges that the taking of possession of the demised
premises by Tenant shall be conclusive evidence that the said premises and the
building of which the same form a part were in good and satisfactory condition
at the time such possession was so taken, except as to latent defects. All
understandings and agreements heretofore made between the parties hereto are
merged in this contract, which alone fully and completely expresses the
agreement between Owner and Tenant and any executory agreement hereafter made
shall be ineffective to change, modify, discharge or effect an abandonment of it
in whole or in part, unless such executory agreement is in writing and signed by
the party against whom enforcement of the change, modification, discharge or
abandonment is sought.
End of Term:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair as provided elsewhere in this lease excepted, and Tenant shall remove
all its property. Tenant's obligation to observe or perform this covenant shall
survive the expiration or other termination of this lease. If the last day of
the term of this Lease or any renewal thereof, falls on Sunday, this lease shall
expire at noon on the preceding Saturday unless it be a legal holiday in which
case it shall expire at noon on the preceding business day.
Quiet Enjoyment:
23. Owner covenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject, nevertheless,
to the terms
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<PAGE> 14
and conditions of this lease including, but not limited to, Article 31 hereof
and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.
Failure to Give Possession:
24. If Owner is unable to give possession of the demised premises on
the date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease shall
not be impaired under such circumstances, nor shall the same be construed in any
wise to extend the term of this lease, but the rent payable hereunder shall be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession) until after Owner shall have given Tenant written notice that the
premises are substantially ready for Tenant's occupancy. If permission is given
to Tenant to enter into the possession of the demised premises or to occupy
premises other than the demised premises prior to the date specified as the
commencement of the term of this lease, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions and
provisions of this lease, except as to the covenant to pay rent. The provisions
of this article are intended to constitute "an express provision to the
contrary" within the meaning of Section 223-a of the New York Real Property Law.
No Waiver:
25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this lease or of any
of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not
prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any covenant of this lease shall
not be deemed a waiver of such breach and no provision of this lease shall be
deemed to have been waived by Owner unless such waiver be in writing signed by
Owner. No payment by Tenant or receipt by Owner of a lesser amount than the
monthly rent herein stipulated shall be deemed to be other than on account of
the earliest stipulated rent, nor shall any endorsement or statement of any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Owner may accept such check or payment without
prejudice to Owner's right to recover the balance of such rent or pursue any
other remedy in this lease provided. No act or thing done by Owner or Owner's
agents during the term hereby demised shall be deemed an acceptance of a
surrender of said premises, and no agreement to accept such surrender shall be
valid unless in writing signed by Owner. No employee of
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<PAGE> 15
Owner or Owner's agent shall have any power to accept the keys of said premises
prior to the termination of the lease and the delivery of keys to any such agent
or employee shall not operate as a termination of the lease or a surrender of
the premises.
Waiver of Trial by Jury:
26. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any summary proceeding for
possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding including a counterclaim
under Article 4.
Inability to Perform:
27. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever including, but not limited to, government
preemption in connection with a National Emergency or by reason of any rule,
order or regulation of any department or subdivision thereof of any government
agency or by reason of the conditions of supply and demand which have been or
are affected by war or other emergency.
Bills and Notices:
28. Except as otherwise in this lease provided, a bill, statement,
notice or communication which Owner may desire or be required to give to Tenant,
shall be deemed sufficiently given or rendered if, in writing, delivered to
Tenant personally or sent by registered or certified mail addressed to Tenant at
the building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner
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<PAGE> 16
must be served by registered or certified mail addressed to Owner at the address
first hereinabove given or at such other address as Owner shall designate by
written notice.
Services Provided by Owners:
29. As long as Tenant is not in default under any of the covenants of
this lease, Owners shall provide: (a) necessary elevator facilities on business
days from 8 a.m. to 6 p.m. and have one elevator subject to call at all other
times; (b) heat to the demised premises when and as required by law, on business
days from 8 a.m. to 6 p.m.; (c) water for ordinary lavatory purposes, but if
Tenant uses or consumes water for any other purposes or in unusual quantities
(of which fact Owner shall be the sole judge), Owner may install a water meter
at Tenant's expense which Tenant shall thereafter maintain at Tenant's expense
in good working order and repair to register such water consumption and Tenant
shall pay for water consumed as shown on said meter as additional rent as and
when bills are rendered; (d) cleaning service for the demised premises on
business days at Owner's expense provided that the same are kept in order by
Tenant. If, however, said premises are to be kept clean by Tenant, it shall be
done at Tenant's sole expense, in a manner satisfactory to Owner and no one
other than persons approved by Owner shall be permitted to enter said premises
or the building of which they are a part for such purpose. Tenant shall pay
Owner the cost of removal of any of Tenant's refuse and rubbish from the
building; (e) If the demised premises is serviced by Owner's air
conditioning/cooling and ventilating system, air conditioning/cooling will be
furnished to tenant from May 15th through September 30th on business days
(Mondays through Fridays, holidays excepted) from 8:00 a.m. to 6:00 p.m., and
ventilation will be furnished on business days during the aforesaid hours except
when air conditioning/cooling is being furnished as aforesaid. If Tenant
requires air conditioning/cooling or ventilation for more extended hours or on
Saturdays, Sundays or on holidays, as defined under Owner's contract with
Operating Engineers Local 94-94A, Owner will furnish the same at Tenant's
expense. RIDER to be added in respect to rates and conditions for such
additional service; (f) Owner reserves the right to stop services of the
heating, elevators, plumbing, air-conditioning, power systems or cleaning or
other services, if any, when necessary by reason of accident or for repairs,
alterations, replacements or improvements necessary or desirable in the judgment
of Owner for as long as may be reasonably required by reason thereof. If the
building of which the demised premises are a part supplies manually-operated
elevator service. Owner at any time may substitute automatic-control elevator
service and upon ten days' written notice to Tenant, proceed with alterations
necessary therefor without in any wise affecting this lease or the obligation of
Tenant hereunder. The same shall be done with a minimum of inconvenience to
Tenant and Owner shall pursue the alteration with due diligence.
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<PAGE> 17
Captions:
30. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.
Definitions:
31. The term "office", or "offices", wherever used in this lease, shall
not be construed to mean premises used as a store or stores, for the sale or
display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lessor, and as used in this lease means only the owner, or the mortgagee in
possession, for the time being of the land and building (or the owner of a lease
of the building or of the land and building) of which the demised premises form
a part, so that in the event of any sale or sales of said land and building or
of said lease, or in the event of a lease of said building, or of the land and
building, the said Owner shall be and hereby is entirely freed and relieved of
all covenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors in
interest, or between the parties and the purchaser, at any such sale, or the
said lessee of the building, or of the land and building, that the purchaser or
the lessee of the building has assumed and agreed to carry out any and all
covenants and obligations of Owner, hereunder. The words "re-enter" and
"re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays,
Sundays and all days observed by the State or Federal Government as legal
holidays and those other designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service.
Adjacent Excavation -- Shoring:
32. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against Owner, or diminution or abatement of
rent.
Rules and Regulations:
33. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations and such
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<PAGE> 18
other and further reasonable Rules and Regulations as Owner or Owner's agents
may from time to time adopt. Notice of any additional rules or regulations shall
be given in such manner as Owner may elect. In case Tenant disputes the
reasonableness of any additional Rule or Regulation hereafter made or adopted by
Owner or Owner's agents, the parties hereto agree to submit the question of the
reasonableness of such Rule or Regulation for decision to the New York office of
the American Arbitration Association, whose determination shall be final and
conclusive upon the parties hereto. The right to dispute the reasonableness of
any additional Rule or Regulation upon Tenant's part shall be deemed waived
unless the same shall be asserted by service of a notice, in writing upon Owner
within ten (10) days after the giving of notice thereof. Nothing in this lease
contained shall be construed to impose upon Owner any duty or obligation to
enforce the Rules and Regulations or terms, covenants or conditions in any other
lease, as against any other tenant and Owner shall not be liable to Tenant for
violation of the same by any other tenant, its servants, employees, agents,
visitors or licensees.
Security:
34. Tenant has deposited with Owner the sum of $27,712.30 as security
for the faithful performance and observance by Tenant of the terms, provisions
and conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the re-letting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Owner. In the event that Tenant shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this lease, the security
shall be returned to Tenant after the date fixed as the end of the Lease and
after delivery of entire possession of the demised premises to Owner. In the
event of a sale of the land and building or leasing of the building, of which
the demised premises form a part, Owner shall have the right to transfer the
security to the vendee or lessee and Owner shall thereupon be released by Tenant
from all liability for the return of such security; and Tenant agrees to look to
the new Owner solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Owner nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.
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<PAGE> 19
Estoppel Certificate:
35. (See Article 43)
Successors and Assigns:
36. The covenants, conditions and agreements contained in this lease
shall bind and inure to the benefit of Owner and Tenant and their respective
heirs, distributees, executors, administrators, successors, and except as
otherwise provided in this lease, their assigns.
SEE RIDER PAGES ANNEXED HERETO AND MADE A PART HEREOF
CONTAINING ARTICLES 37 - 56
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and
sealed this lease as of the day and year first above written.
521 FIFTH AVENUE ASSOCIATES,
Owner
By: /s/ Larry A. Silverstein
-------------------------------
General Partner
Witness for Owner:
- ------------------------
Witness for Tenant: THE EDISON PROJECT, L.P., Tenant
By: /s/ Christopher Whittle
- ------------------------ -------------------------------
Name: Christopher Whittle
Title: General Partner
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<PAGE> 20
FIRST AMENDMENT OF LEASE
AGREEMENT, dated as of the 6th day of June, 1996, by and between 521 FIFTH
AVENUE ASSOCIATES ("LANDLORD"), a New York limited partnership, with its
principal place of business at 521 Fifth Avenue, New York, New York 10175, and
THE EDISON PROJECT, L.P. ("TENANT"), a New York limited partnership, having an
office at 521 Fifth Avenue, New York, New York 10175.
STATEMENT OF FACTS
By Lease dated as of April 4, 1995 (the "ORIGINAL LEASE"), by and between
Landlord and Tenant, Landlord leased to Tenant and Tenant hired from Landlord
certain premises in the building (the "BUILDING") known as 521 Fifth Avenue, New
York, New York, consisting of a portion of the sixteenth (16th) floor (the
"ORIGINAL PREMISES").
The Original Lease and any and all amendments and modifications thereof are
hereinafter collectively referred to as the "LEASE". Landlord and Tenant now
desire to amend the Lease upon the terms hereinafter contained.
NOW, THEREFORE, in consideration of the Lease and the mutual covenants
herein contained, Landlord and Tenant hereby agree as follows:
1. DEFINED TERMS:
A. Unless the context otherwise clearly indicates a contrary intent
or unless specifically otherwise provided herein, each term used in this
Agreement which is defined in the Lease shall be deemed to have the meaning set
forth in the Lease.
2. EXTENSION OF LEASE TERM:
A. The term of the Lease is hereby extended for a period of five
(5) months, commencing on AUGUST 1, 1997 and expiring on DECEMBER 31, 1997 (the
"EXPIRATION DATE"), or shall expire on such earlier date upon which said term
may expire or be cancelled or terminated pursuant to any of the conditions or
covenants of the Lease as hereby amended or pursuant to law.
3. ADDITIONAL PREMISES:
A. For the purposes of this Agreement, the "ADDITIONAL PREMISES"
shall mean that certain portion of the sixteenth (16th) floor of the Building as
<PAGE> 21
indicated by cross-hatch markings on the floor plan annexed hereto as EXHIBIT A
and made a part hereof.
B. Effective throughout the period (the "ADDITIONAL PREMISES TERM")
commencing on JULY 1, 1996 (the "ADDITIONAL PREMISES COMMENCEMENT DATE") and
ending on the Expiration Date, both dates inclusive:
i. the Lease is hereby amended by adding the Additional
Premises to the Demised Premises; and
ii. Tenant shall use and occupy the Additional Premises under
the same terms, covenants and conditions provided in the Lease,
except as otherwise herein amended.
4. FIXED RENT:
A. Effective throughout the period commencing on the Additional
Premises Commencement Date and ending on the Expiration Date, both dates
inclusive, the fixed rent payable pursuant to the Lease shall, subject to
adjustment as provided in the Lease, be increased by the annual amount of
Fifty-Seven Thousand Two Hundred Sixty-Two and 45/100 ($57,262,.45) Dollars
($4,771.84 per month) (which increase shall herein be referred to as the "FIXED
A/P RENT").
B. Effective as of the Additional Premises Commencement Date and
provided Tenant is not then in default under the terms, covenants and conditions
of this Agreement and/or the Lease, Tenant is herewith granted a fixed rent
concession solely in connection with the Fixed A/P Rent payable as set forth in
Paragraph 4.A of this Agreement for the Additional Premises, solely for the two
(2) month period (the "FREE FIXED A/P RENT PERIOD") commencing on the Additional
Premises Commencement Date and ending on the day next preceding the two (2)
month anniversary of the Additional Premises Commencement Date; provided,
however, Tenant shall nevertheless be obligated to pay to Landlord all
additional rents and other charges payable under the terms of this Agreement
(including electricity charges) during the Free Fixed A/P Rent Period, and
provided further that Tenant shall pay to Landlord all of the fixed rent with
respect to the Original Premises and all additional rents and other charges
payable under the Lease during the Free Fixed A/P Rent Period. Except for the
Fixed A/P Rent concession as herein provided, Tenant shall use and occupy the
Demised Premises pursuant to all of the other terms, covenants and conditions of
the Lease.
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<PAGE> 22
5. TENANT'S PROPORTIONATE SHARE:
A. Effective as of the Additional Premises Commencement Date and
ending on the Expiration Date, Sections 39.A.4 and 40.A.2 of the Original Lease
shall be amended so as to increase the "Tenant's Proportionate Share" by adding
the percentage "0.73%" thereto.
6. ELECTRIC CURRENT:
A. Effective as of the Additional Premises Commencement Date and
ending on the Expiration Date, the provisions of Article 46 of the Original
Lease (which is captioned "Electric Current") shall be amended by the deletion
of the number "8,052" from Paragraph 46.B.2. and the insertion of the number
"10,825" in lieu thereof.
7. LAYOUT AND FINISH:
A. Any and all provisions of the Lease which provide for the
performance by Landlord of any work in the Original Premises (such as, by way of
example, the "Tenant's Initial Work" pursuant to Article 50 of the Original
Lease) shall apply solely to the Original Premises and shall not apply to the
Additional Premises. Accordingly, Tenant acknowledges that Landlord shall have
no obligation to perform in the Additional Premises any of the Landlord's work
required in connection with the Original Premises, and there shall be no
contribution or allowance payable by Landlord with respect to all or any portion
of the Additional Premises.
8. AS-IS POSSESSION/TENANT'S A/P WORK:
A. Tenant acknowledges that it has fully inspected the Additional
Premises and Tenant agrees to accept possession thereof in its then "as-is"
physical condition as of the Additional Premises Commencement Date. It is
understood and agreed that Landlord shall not be obligated to make any
improvements, alterations or repairs to the Additional Premises or incur any
expense to prepare the Additional Premises for Tenant's occupancy thereof. The
taking of possession of the Additional Premises by Tenant for the term herein
demised shall be conclusive evidence as against Tenant that the Additional
Premises and the Building were in good and satisfactory condition as of the time
such possession was taken. Tenant acknowledges that Landlord and Landlord's
agent have made no representations or promises in regard to the Additional
Premises for the term herein demised.
B. Tenant shall, at Tenant's sole cost and expense, and as part of
Tenant's Changes (as defined in Article 42), perform all of the work (the
"TENANT'S A/P WORK") in the entire Additional Premises necessary to demise the
Additional Premises
3
<PAGE> 23
such that the Demised Premises and the Additional Premises shall together
constitute a single, self-contained rental unit and for Tenant's occupancy
thereof, subject to the provisions of this Agreement and the Lease. Tenant
agrees with respect to its activities and work that it will conform to all of
Landlord's labor regulations and shall not do or permit anything to be done that
might create any work stoppage, picketing or other labor disruption or dispute.
Tenant agrees that it will, prior to the commencement of any work in the
Additional Premises, deliver to Landlord all policies of insurance required to
be supplied to Landlord by Tenant pursuant to the terms of the Lease.
C. Tenant, at Tenant's sole cost and expense, shall prepare a
final plan or final set of plans (which said final plan or final set of plans,
as the case may be, is hereinafter called the "A/P PLANS") which shall contain
complete information (including engineering required) and dimensions necessary
and sufficient for the construction and finishing of the Additional Premises.
The A/P Plans shall be submitted by Tenant to Landlord for Landlord's review and
approval on or before the date (the "PLANS DELIVERY DATE") of the execution and
delivery of this Agreement by Tenant. Any revisions to the A/P Plans required by
Landlord shall be performed by Tenant within three (3) days after demand by
landlord.
D. Tenant agrees to utilize Landlord's designated general
contractor for the performance of the Tenant's A/P Work. Tenant further agrees
that the Tenant's A/P Work shall be completed on or before the date which shall
be sixty (60) days after the Additional Premises Commencement Date.
9. DELIVERY OF POSSESSION:
If Landlord is unable to give possession of the Additional
Premises to Tenant on the Additional Premises to Tenant on the Additional
Premises Commencement Date because of the holding-over or retention of
possession of any tenant, undertenant or occupants, or for any other reason
beyond Landlord's reasonable control, Landlord shall not be subject to any
liability for failure to give possession on said date and the validity of this
Agreement and the Lease shall not be impaired under such circumstances, nor
shall the same be construed in any way to extend the Additional Premises Term or
the term of the Lease, but the Additional Premises Commencement Date shall be
deemed extended until the date on which Landlord shall have delivered possession
thereof to Tenant (provided Tenant is not responsible for the inability to
obtain possession). The provisions of this Paragraph are intended to constitute
"an express provision to the contrary" within the meaning of Section 223-a of
the New York Real Property Law.
10. SECURITY DEPOSIT:
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<PAGE> 24
A. In addition to the security previously deposited with Landlord
pursuant to the provisions of Article 34 of the Original Lease, concurrently
with Tenant's execution of this Agreement, Tenant shall deposit with Landlord
the sum of Nine Thousand Five Hundred Forty-Four and 00/100 ($9,544.00) Dollars,
as additional security for the full and punctual performance by Tenant of all of
the terms of the Lease (including this Agreement), by check (subject to
collection).
B. Effective as of the Additional Premises Commencement Date,
Article 34 of the Original Lease (which is captioned "Security") is hereby
amended by increasing the amount of the security deposit by adding the amount of
Nine Thousand Five Hundred Forty-Four and 00/100 ($9,544.00) Dollars thereto.
11. BROKER:
Tenant represents and warrants that it neither consulted nor
negotiated with any broker or finder with regard consummating this Agreement.
Tenant agrees to indemnify and hold Landlord harmless from any damages, costs
and expenses suffered by Landlord by reason of any breach of the foregoing
representation.
12. MISCELLANEOUS:
A. Except as expressly set forth in this Agreement, all of the
terms, provisions, covenants and conditions of the Lease shall remain and
continue unmodified and in full force and effect and are hereby ratified and
confirmed in all respects.
B. This Agreement shall not be changed, modified or cancelled
orally. This Agreement shall be binding upon the parties hereto, their
respective heirs, administrators, successors and, as permitted, assigns.
C. This Agreement shall in all respects and in all events be
governed by and construed in accordance with the laws of the State of New York
(excluding, however, its conflict of laws provisions).
D. This Agreement is being tendered to Tenant without obligation
on Landlord's part and in no event shall it be deemed to be binding upon
Landlord or give Tenant any rights unless and until Landlord shall have executed
the same and delivered a copy to Tenant.
5
<PAGE> 25
IN WITNESS WHEREOF, Landlord and Tenant have respectively executed
this First Amendment of Lease as of the day and year first above written.
521 FIFTH AVENUE ASSOCIATES, Landlord
By: /s/ Larry A. Silverstein
-------------------------------------
Larry A. Silverstein, General Partner
THE EDISON PROJECT, L.P., Tenant
By: /s/ H. Christopher Whittle
-------------------------------------
Name: H. Christopher Whittle
Title: General Partner
Tenant's Federal Employer
I.D. Number: 621 488 748
6
<PAGE> 26
SECOND AMENDMENT OF LEASE
AGREEMENT, dated as of the 8th day of December, 1997, between 521 FIFTH
AVENUE ASSOCIATES, a New York limited partnership, having an office at 521 Fifth
Avenue, New York, New York 10175 (hereinafter called "LANDLORD"), and THE EDISON
PROJECT, L.P., a New York limited partnership, having an office at 521 Fifth
Avenue, New York, New York 10175 (hereinafter called "TENANT").
W I T N E S S E T H:
WHEREAS:
1. Landlord and Tenant executed that certain lease dated as of April 4,
1995 (said lease as amended by First Amendment of Lease dated as of June 6, 1996
(the "FIRST AMENDMENT") is hereinafter called the "ORIGINAL LEASE"), covering a
certain portion of the sixteenth (16th) floor, as more particularly described in
the Original Lease (hereinafter called the "PRESENT PREMISES") , in the building
known as 521 Fifth Avenue, New York, New York (hereinafter called the
"BUILDING"), for a term expiring on December 31, 1997;
2. The Original Lease and any and all amendments and modifications
thereof are hereinafter collectively referred to as the "LEASE"; and
3. The parties now desire to amend the Lease by extending the term
thereof, adding additional space to the Present Premises, and in other respects
as hereinafter provided.
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, it is agreed as follows:
FIRST: The term of the Lease is hereby extended for a period of TEN
(10) YEARS (hereinafter called the "EXTENDED TERM") commencing on January 1,
1998 (hereinafter called the "EXTENDED TERM COMMENCEMENT DATE") and expiring on
December 31, 2007 (hereinafter called the "EXTENDED TERM EXPIRATION DATE"),
unless sooner terminated pursuant to any of the terms, covenants and conditions
contained in the Lease or pursuant to law, upon all the terms, covenants and
conditions contained in the Lease, except as expressly provided herein.
SECOND: The Lease is hereby amended, effective from the Additional
Premises Commencement Date (as defined in Article FIFTH of this Agreement), so
that the Present Premises shall include that portion of the fifteenth (15th)
floor of the Building as approximately shown by the diagonal markings on the
rental plan annexed hereto as Exhibit "A" and made a part hereof (hereinafter
called the "ADDITIONAL PREMISES"). Tenant shall use and occupy the Additional
Premises from and after the Additional Premises Commencement Date under the same
terms, covenants and conditions as provided in the Lease.
<PAGE> 1
EXHIBIT 10.31
STANDARD FORM OF OFFICE LEASE
The Real Estate Board of New York, Inc.
AGREEMENT OF LEASE, dated as of the 19th day of March, 1999 between 529 FIFTH
COMPANY, a New York limited partnership, having an office at 521 Fifth Avenue,
New York, New York 10175, party of the first part, hereinafter referred to as
OWNER or LANDLORD, and THE EDISON PROJECT, INC. (formerly known as The Edison
Project, L.P.), a Delaware corporation, having an office at 521 Fifth Avenue,
New York, New York, party of the second part, hereinafter referred to as TENANT,
WITNESSETH: Owner hereby leases to Tenant and Tenant hereby hires from Owner
that portion of the eleventh (11th) floor as shown by diagonal markings on the
rental plan annexed hereto as Exhibit "A" and made a party hereof (the "demised
premises") in the building known as 529 Fifth Avenue (the "building") in the
Borough of Manhattan, City of New York, for the term of EIGHT (8) YEARS AND TEN
(10) MONTHS (or until such term shall sooner cease and expire as hereinafter
provided) to commence on the 1st day of March, nineteen hundred and ninety-nine,
subject to the terms of Article 50 hereof (the "Commencement Date") and to end
on the 31st day of December, two thousand seven, both dates inclusive, at an
annual rental rate of FOUR HUNDRED NINETY-NINE THOUSAND FOUR HUNDRED
TWENTY-EIGHT AND 00/100 ($499,428.00) DOLLARS per annum during the period
commencing on the Commencement Date (hereinafter defined) and ending on July 31,
2003 (both dates inclusive); and at an annual rental rate of FIVE HUNDRED
TWENTY-SEVEN THOUSAND ONE HUNDRED SEVENTY-FOUR AND 00/100 ($527,174.00) DOLLARS
per annum for the balance of the term of this lease, which Tenant agrees to pay
in lawful money of the United States which shall be legal tender in payment of
all debts and dues, public and private, at the time of payment, in equal monthly
installments in advance on the first day of each month during said term, the
office of Owner or such other place as Owner may designate, without any set off
or deduction whatsoever, except that Tenant shall pay the first _____ monthly
installment(s) on the execution hereof (unless this lease be a renewal).
In the event that, at the commencement of the term of this lease, or
thereafter, Tenant shall be in default in the payment of rent to Owner pursuant
to the terms of another lease with Owner or with Owner's predecessor in
interest, Owner may at Owner's option and without notice to Tenant add the
amount of such arrears to any monthly installment of rent payable hereunder and
the same shall be payable to Owner as additional rent.
The parties hereto, for themselves, their heirs, distributees,
executors, administrators, legal representatives, successors and assigns, hereby
covenant as follows:
<PAGE> 2
Rent Occupancy:
1. Tenant shall pay the rent as above and as hereinafter provided.
2. Tenant shall use and occupy demised premises for executive and
administrative offices in connection with Tenant's business and consistent with
a first-class office building, and for no other purpose.
Tenant Alternations:
3. Tenant shall make no changes in or to the demised premises of any
nature without Owner's prior written consent. Subject to the prior written
consent of Owner, [3A] and to the provisions of this article, Tenant at Tenant's
expense, may make alterations, installations, additions or improvements which
are nonstructural and which do not affect utility services or plumbing and
electrical lines, in or to the interior of the demised premises by using
contractors or mechanics first approved by Owner. [3B] Tenant shall, before
making any alterations, additions, installations or improvements, at its
expense, obtain all permits, approvals and certificates required by any
governmental or quasi-governmental bodies and (upon completion) certificates of
final approval thereof and shall deliver promptly duplicates of all such
permits, approvals and certificates to Owner and Tenant agrees to carry and will
cause Tenant's contractors and sub-contractors to carry such workman's
compensation, general liability, personal and property damage insurance as Owner
may require. If any mechanic's lien is filed against the demised premises, or
the building of which the same forms a part, for work claimed to have been done
for, or materials furnished to, Tenant, whether or not done pursuant to this
article, the same shall be discharged by Tenant within thirty days thereafter,
at Tenant's expense, by filing the bond required by law. All fixtures and all
paneling, partitions, railings and like installations, installed in the premises
at any time, either by Tenant or by Owner in Tenant's behalf, shall, upon
installation, become the property of Owner and shall remain upon and be
surrendered with the demised premises unless Owner, by notice to Tenant no later
than twenty days prior to the date fixed as the termination of this lease,
elects to relinquish Owner's right thereto and to have them removed by Tenant,
in which event the same shall be removed from the premises by Tenant prior to
the expiration of the lease, at Tenant's expense. [3C] Nothing in this Article
shall be construed to give Owner title to or to prevent Tenant's removal of
trade fixtures, moveable office furniture and equipment, but upon removal of any
such from the premises or upon removal of other installations as may be required
by Owner, Tenant shall immediately and at its expense, repair and restore the
premises to the condition existing prior to installation and repair any damage
to the demised premises or the building due to such removal. All property
permitted or required to be removed, by Tenant at the end of the term remaining
in the premises after Tenant's removal shall be deemed abandoned and may, at the
election of Owner,
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<PAGE> 3
either be retained as Owner's property or may be removed from the premises by
Owner, at Tenant's expense. (See Article 42)
Maintenance and Repairs:
4. Tenant shall, throughout the term of this lease, take good care of
the demised premises and the fixtures and appurtenances therein. Tenant shall be
responsible for all damage or injury to the demised premises or any other part
of the building and the systems and equipment thereof, whether requiring
structural or nonstructural repairs caused by or resulting from carelessness,
omission, neglect or improper conduct of Tenant. Tenant's subtenants, agents,
employees, invitees or licensees, or which arise out of any work, labor, service
or equipment done for or supplied to Tenant or any subtenant or arising out of
the installation, use or operation of the property or equipment of Tenant or any
subtenant. Tenant shall also repair all damage to the building and the demised
premises caused by the moving of Tenant's fixtures, furniture and equipment.
Tenant shall promptly make, at Tenant's expense, all repairs in and to the
demised premises for which Tenant is responsible, using only the contractor for
the trade or trades in question, selected from a list of at least two
contractors per trade submitted by Owner. Any other repairs in or to the
building or the facilities and systems thereof for which Tenant is responsible
shall be performed by Owner at the Tenant's expense. Owner shall maintain in
good working order and repair [4A] the exterior and the structural portions of
the building, including the structural portions of its demised premises, and the
public portions of the building interior and the building plumbing, electrical,
heating and ventilating systems (to the extent such systems presently exist)
serving the demised premises. Tenant agrees to give prompt notice of any
defective condition in the premises for which Owner may be responsible
hereunder. There shall be no allowance to Tenant for diminution of rental value
and no liability on the part of Owner by reason of inconvenience, annoyance or
injury to business arising from Owner or others making repairs, alterations,
additions or improvements in or to any portion of the building or the demised
premises or in and to the fixtures, appurtenances or equipment thereof. It is
specifically agreed that Tenant shall not be entitled to any setoff or reduction
of rent by reason of any failure of Owner to comply with the covenants of this
or any other article of this Lease. Tenant agrees that Tenant's sole remedy at
law in such instance will be by way of an action for damages for breach of
contract. The provisions of this Article 4 shall not apply in the case of fire
or other casualty which are dealt with in Article 9 hereof.
Window Cleaning:
5. Tenant will not clean nor require, permit, suffer or allow any
window in the demised premises to be cleaned from the outside in violation of
Section 202 of the Labor Law or any other applicable law or of the Rules of the
Board of Standards and Appeals, or of any other Board or body having or
asserting jurisdiction. [5A]
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<PAGE> 4
Requirements of Law, Fire Insurance, Floor Loads:
6. Prior to the commencement of the lease term, if Tenant is then in
possession, and at all times thereafter, Tenant, at Tenant's sole cost and
expense, shall promptly comply with all present and future laws, orders and
regulations of all state, federal, municipal and local governments, departments,
commissions and boards and any direction of any public officer pursuant to law,
and all orders, rules and regulations of the New York Board of Fire
Underwriters, Insurance Services Office, or any similar body which shall impose
any violation, order or duty upon Owner or Tenant with respect to the demised
premises, whether or not arising out of Tenant's use or manner of use thereof,
(including Tenant's permitted use) or, with respect to the building if arising
out of Tenant's manner of use of the premises or the building [6A]. Nothing
herein shall require Tenant to make structural repairs or alterations unless
Tenant has, by its manner of use of the demised premises or method of operation
therein, violated any such laws, ordinances, orders, rules, regulations or
requirements with respect thereto [6B]. Tenant may, after securing Owner to
Owner's [6C] satisfaction against all damages, interest, penalties and expenses,
including, but not limited to, reasonably attorney's fees, by cash deposit or by
surety bond in an amount and in a company [6D] satisfactory to Owner, contest
and appeal any such laws, ordinances, orders, rules, regulations or requirements
provided same is done with all reasonable promptness and provided such appeal
shall not subject Owner to prosecution for a criminal offense or constitute a
default under any lease or mortgage under which Owner may be obligated, or cause
the demised premises or any part thereof to be condemned or vacated. Tenant
shall not do or permit any act or thing to be done in or to the demised premises
which is contrary to law, or which will invalidate or be in conflict with public
liability, fire or other policies of insurance at any time carried by or for the
benefit of Owner with respect to the demised premises or the building of which
the demised premises form a part, or which shall or might subject Owner to any
liability or responsibility to any person or for property damage. Tenant shall
not keep anything in the demised premises except as now or hereafter permitted
by the Fire Department, Board of Fire Underwriters, Fire Insurance Rating
Organization or other authority having jurisdiction, and then only in such
manner and such quantity so as not to increase the rate for fire insurance
applicable to the building, nor use the premises in a manner which will increase
the insurance rate for the building or any property located therein over that in
effect prior to the commencement of Tenant's occupancy. Tenant shall pay all
costs, expenses, fines, penalties, or damages, which may be imposed upon Owner
by reason of Tenant's failure to comply with the provisions of this article and
if by reason of such failure the fire insurance rate shall, at the beginning of
this lease or at any time thereafter, be higher than it otherwise would be, then
Tenant shall reimburse Owner, as additional rent hereunder, for that portion of
all fire insurance premiums thereafter paid by Owner which shall have been
charged because of such failure by Tenant. In any action or proceeding wherein
Owner and Tenant are parties, a schedule or "make-up" of rate for the building
or demised premises issued by the New York Fire Insurance
- 4 -
<PAGE> 5
Exchange, or other body making fire insurance rates applicable to said premises
shall be conclusive evidence of the facts therein stated and of the several
items and charges in the fire insurance rates then applicable to said premises.
Tenant shall not place a load upon any floor of the demised premises exceeding
the floor load per square foot area which it was designed to carry and which is
allowed by law. Owner reserves the right to prescribe the weight and position of
all safes, business machines and mechanical equipment. Such installations shall
be placed and maintained by Tenant, at Tenant's expense, in settings sufficient,
in Owner's judgment, to absorb and prevent vibration, noise and annoyance. (See
Article 47)
Subordination:
7. This lease is subject and subordinate to all ground or underlying
leases and to all mortgages which may now or hereafter affect such leases or the
real property of which demised premises are a part and to all renewals,
modifications, consolidations, replacements and extensions of any such
underlying leases and mortgages. This clause shall be self-operative and no
further instrument of subordination shall be required by any ground or
underlying lessor or by any mortgagee, affecting any lease or the real property
of which the demised premises are a part. In confirmation of such subordination,
Tenant shall execute promptly any certificate that Owner may request.
Property--Loss, Damage, Reimbursement, Indemnity:
8. Owner or its agents shall not be liable for any damage to property
of Tenant or of others entrusted to employees of the building, nor for loss of
or damage to any property of Tenant by theft or otherwise, nor for any injury or
damage to persons or property resulting from any cause of whatsoever nature,
unless caused by or due to the negligence of Owner, its agents, servants or
employees. Owner or its agents will not be liable for any such damage caused by
other tenants or persons in, upon or about said building or caused by operations
in construction of any private, public or quasi public work. If at any time any
windows of the demised premises are temporarily closed, darkened or bricked up
(or permanently closed, darkened or bricked up, if required by law). Owner shall
not be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefor nor abatement or diminution of rent nor
shall the same release Tenant from its obligations hereunder nor constitute an
eviction. Tenant shall indemnify and save harmless Owner against and from all
liabilities, obligations, damages, penalties, claims, costs and expenses for
which Owner shall not be reimbursed by insurance, including reasonable attorneys
fees, paid, suffered or incurred as a result of any breach by Tenant, Tenant's
agents, contractors, employees, invitees, or licensees, of any covenant or
condition of this lease, or the carelessness, negligence or improper conduct of
the Tenant, Tenant's agents, contractors, employees, invitees or licensees.
Tenant's liability under this lease extends to the acts and omissions of any
sub-tenant,
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<PAGE> 6
and any agent, contractor, employee, invitee or licensee of any sub-tenant. In
case any action or proceeding is brought against Owner by reason of any such
claim, Tenant, upon written notice from Owner, will, at Tenant's expense, resist
or defend such action or proceeding by counsel approved by Owner in writing,
such approval not to be unreasonably withheld.
Destruction, Fire and Other Casualty:
9. (a) If the demised premises or any part thereof shall be damaged by
fire or other casualty, Tenant shall give immediate notice thereof to Owner and
this lease shall continue in full force and effect except as hereinafter set
forth. (b) If the demised premises are partially damaged or rendered partially
unusable by fire or other casualty, the damages thereto shall be repaired by and
at the expense of Owner and the rent, until such repair shall be substantially
completed, shall be apportioned from the day following the casualty according to
the part of the premises which is usable. (c) If the demised premises are
totally damaged or rendered wholly unusable by fire or other casualty, then the
rent shall be proportionately paid up to the time of the casualty and
thenceforth shall cease until the date when the premises shall have been
repaired and restored by Owner, subject to Owner's right to elect not to restore
the same as hereinafter provided. (d) If the demised premises are rendered
wholly unusable or (whether or not the demised premises are damaged in whole or
in part) if the building shall be so damaged that Owner shall decide to demolish
it or to rebuild it, then, in any of such events, Owner may elect to terminate
this lease by written notice to Tenant, given within 90 days after such fire or
casualty, specifying a date for the expiration of the lease, which date shall
not be more than 60 days after the giving of such notice, [9A]. Upon the date
specified in such notice the term of this lease shall expire as fully and
completely as if such date were the date set forth above for the termination of
this lease and Tenant shall forthwith quit, surrender and vacate the premises
without prejudice however, to Landlord's rights and remedies against Tenant
under the lease provisions in effect prior to such termination, and any rent
owing shall be paid up to such date and any payments of rent made by Tenant
which were on account of any period subsequent to such date shall be returned to
Tenant. Unless Owner shall serve a termination notice as provided for herein,
Owner shall make the repairs and restorations under the conditions of (b) and
(c) hereof, with all reasonable expedition, subject to delays due to adjustment
of insurance claims, labor troubles and causes beyond Owner's control. After any
such casualty, Tenant shall cooperate with Owner's restoration by removing from
the premises as promptly as reasonably possible, all of Tenant's salvageable
inventory and movable equipment, furniture, and other property. Tenant's
liability for rent shall resume five (5) days after written notice from Owner
that the premises are substantially ready for Tenant's occupancy. (e) Nothing
contained hereinabove shall relieve Tenant from liability that may exist as a
result of damage from fire or other casualty. Notwithstanding anything to the
contrary contained in subdivisions (a) through (e) hereof, each party shall look
first to any
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<PAGE> 7
insurance in its favor before making any claim against the other party for
recovery for loss or damage resulting from fire or other casualty, and to the
extent that such insurance is in force and collectible and to the extent
permitted by law, Owner and Tenant each hereby releases and waives all right of
recovery against the other or any one claiming through or under each of them by
way of subrogation or otherwise. The foregoing release and waiver shall be in
force only if both releasors' insurance policies contain a clause providing that
such a release or waiver shall not invalidate the insurance. If, and to the
extent, that such waiver can be obtained only by the payment of additional
premiums, then the party benefitting from the waiver shall pay such premium
within ten days after written demand or shall be deemed to have agreed that the
party obtaining insurance coverage shall be free of any further obligation under
the provisions hereof with respect to waiver of subrogation. Tenant acknowledges
that Owner will not carry insurance on Tenant's furniture and/or furnishings or
any fixtures or equipment, improvements, or appurtenances removable by Tenant
and agrees that Owner will not be obligated to repair any damage thereto or
replace the same. (f) Tenant hereby waives the provisions of Section 227 of the
Real Property Law and agrees that the provisions of this article shall govern
and control in lieu thereof.
Eminent Domain:
10. If the whole or any part of the demised premises shall be acquired
or condemned by Eminent Domain for any public or quasi public use or purpose,
then and in that event, the term of this lease shall cease and terminate from
the date of title vesting in such proceeding and Tenant shall have no claim for
the value of any unexpired term of said lease and assigns to Owner, Tenant's
entire interest in any such award.
Assignment, Mortgage, Etc.:
11. Tenant, for itself, its heirs, distributees, executors,
administrators, legal representatives, successors and assigns, expressly
covenants that it shall not assign, mortgage or encumber this agreement, nor
underlet, or suffer or permit the demised premises or any part thereof to be
used by others, without the prior written consent of Owner in each instance.
Transfer of the majority of the stock of a corporate Tenant shall be deemed an
assignment. If this lease be assigned, or if the demised premises or any part
thereof be underlet or occupied by anybody other than Tenant, Owner may, after
default by Tenant, collect rent from the assignee, under-tenant or occupant, and
apply the net amount collected to the rent herein reserved, but no such
assignment, underletting, occupancy or collection shall be deemed a waiver of
this covenant, or the acceptance of the assignee, under-tenant or occupant as
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained. The consent by Owner to an
assignment or underletting shall not in any wise be construed to relieve Tenant
from obtaining the express
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consent in writing of Owner to any further assignment or underletting. (See
Article 41).
Electric Current:
12. Rates and conditions in respect to submetering or rent inclusion,
as the case may be, to be added in RIDER attached hereto. Tenant covenants and
agrees that at all times its uses of electric current shall not exceed the
capacity of existing feeders to the building or the risers or wiring
installation and Tenant may not use any electrical equipment which, in Owner's
opinion, reasonably exercised, will overload such installations or interfere
with the use thereof by other tenants of the building. The change at any time of
the character of electric service shall in no wise make Owner liable or
responsible to Tenant, for any loss, damages or expenses which Tenant may
sustain. (See Article 46)
Access to Premises:
13. Owner or Owner's agents shall have the right (but shall not be
obligated) to enter the demised premises in any emergency at any time, and, at
other reasonable times, to examine the same and to make such repairs,
replacements and improvements as Owner may deem necessary and reasonably
desirable to the demised premises or to any other portion of the building or
which Owner may elect to perform [13A]. Tenant shall permit Owner to use and
maintain and replace pipes and conduits in and through the demised premises and
to erect new pipes and conduits therein provided they are concealed within the
walls, floor, or ceiling. Owner may, during the progress of any work in the
demised premises, take all necessary materials and equipment into said premises
without the same constituting an eviction nor shall the Tenant be entitled to
any abatement of rent while such work is in progress nor to any damages by
reason or loss or interruption of business or otherwise. Throughout the term
hereof Owner shall have the right to enter the demised premises at reasonable
hours [13B] for the purpose of showing the same to prospective purchasers or
mortgagees of the building, and during the last six months of the term for the
purpose of showing the same to prospective tenants. If Tenant is not present to
open and permit an entry into the premises, Owner or Owner's agents may enter
the same whenever such entry may be necessary or permissible by master key or
forcibly and provided reasonable care is exercised to safeguard Tenant's
property, such entry shall not render Owner or its agents liable therefor, nor
in any event shall the obligations of Tenant hereunder be affected. If during
the last month of the term Tenant shall have removed all or substantially all of
Tenant's property therefrom, Owner may immediately enter, alter, renovate or
redecorate the demised premises without limitation or abatement of rent, or
incurring liability to Tenant for any compensation and such act shall have no
effect on this lease or Tenant's obligations hereunder.
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<PAGE> 9
Vault, Vault Space, Area:
14. No Vaults, vault space or area, whether or not enclosed or covered,
not within the property line of the building is leased hereunder, anything
contained in or indicated on any sketch, blue print or plan, or anything
contained elsewhere in this lease to the contrary notwithstanding. Owner makes
no representation as to the location of the property line of the building. All
vaults and vault space and all such areas not within the property line of the
building, which Tenant may be permitted to use and/or occupy, is to be used
and/or occupied under a revocable license, and if any such license be revoked,
or if the amount of such space or area be diminished or required by any federal,
state or municipal authority or public utility, Owner shall not be subject to
any liability nor shall Tenant be entitled to any compensation or diminution or
abatement of rent, nor shall such revocation, diminution or requisition be
deemed constructive or actual eviction. Any tax, fee or charge of municipal
authorities for such vault or area shall be paid by Tenant.
Occupancy:
15. Tenant will not at any time use or occupy the demised premises in
violation of the certificate of occupancy issued for the building of which the
demised premises are a part. Tenant has inspected the premises and accepts them
as is, subject to the riders annexed hereto with respect to Owner's work, if
any. [15A] In any event, Owner makes no representations as to the condition of
the premises and Tenant agrees to accept the same subject to violations, whether
or not of record.
Bankruptcy:
16. (a) Anything elsewhere in this lease to the contrary
notwithstanding, this lease may be cancelled by Owner by the sending of a
written notice to Tenant within a reasonable time after the happening of any one
or more of the following events: (1) the commencement of a case in bankruptcy or
under the laws of any state naming Tenant as the debtor; or (2) the making by
Tenant of an assignment or any other arrangement for the benefit of creditors
under any state statute. Neither Tenant nor any person claiming through or under
Tenant, or by reason of any statute or order of court, shall thereafter be
entitled to possession of the premises demised but shall forthwith quit and
surrender the premises. If this lease shall be assigned in accordance with its
terms, the provisions of this Article 16 shall be applicable only to the party
then owning Tenant's interest in this lease.
(b) It is stipulated and agreed that in the event of the termination of
this lease pursuant to (a) hereof, Owner shall forthwith, notwithstanding any
other provisions of this lease to the contrary, be entitled to recover from
Tenant as and for liquidated damages an amount equal to the difference between
the rent reserved hereunder for the unexpired portion of the term demised and
the fair and reasonable
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<PAGE> 10
rental value of the demised premises for the same period. In the computation of
such damages the difference between any installment of rent becoming due
hereunder after the date of termination and the fair and reasonable rental value
of the demised premises for the period for which such installment was payable
shall be discounted to the date of termination at the rate of four percent (4%)
per annum. If such premises or any part thereof be relet by the Owner for the
unexpired term of said lease, or any part thereof, before presentation of proof
of such liquidated damages to any court, commission or tribunal, the amount of
rent reserved upon such reletting shall be deemed to be the fair and reasonable
rental value for the part or the whole of the premises so re-let during the term
of the re-letting. Nothing herein contained shall limit or prejudice the right
of the Owner to prove for and obtain as liquidated damages by reason of such
termination, an amount equal to the maximum allowed by any statute or rule of
law in effect at the time when, and governing the proceedings in which, such
damages are to be proved, whether or not such amount be greater, equal to, or
less than the amount of the difference referred to above. (See Article 55)
Default:
17. (1) If Tenant defaults in fulfilling any of the covenants of this
lease other than the covenants for the payment of rent or additional rent; or if
the demised premises becomes vacant or deserted; or if any execution or
attachment shall be issued against Tenant or any of Tenant's property whereupon
the demised premises shall be taken or occupied by someone other than Tenant; or
if this lease be rejected under Section 365 of Title 11 of the U.S. Code
(bankruptcy code); or if Tenant shall fail to move into or take possession of
the premises within fifteen (15) days after the commencement of the term of this
lease or if Tenant shall be in default under any other lease for space in the
building, then, in any one or more of such events, upon Owner serving a written
15 days notice upon Tenant specifying the nature of said default and upon the
expiration of said 15 days, if Tenant shall have failed to comply with or remedy
such default, or if the said default or omission complained of shall be of a
nature that the same cannot be completely cured or remedied within said 15 day
period, and if Tenant shall not have diligently commenced during such default
within such 15 day period, and shall not thereafter with reasonable diligence
and in good faith, proceed to remedy or cure such default, then Owner may serve
a written three (3) days' notice of cancellation of this lease upon Tenant, and
upon the expiration of said three (3) days this lease and the term thereunder
shall end and expire as fully and completely as if the expiration of such three
(3) day period were the day herein definitely fixed for the end and expiration
of this lease and the term thereof and Tenant shall then quit and surrender the
demised premises to Owner but Tenant shall remain liable as hereinafter
provided.
(2) If the notice provided for in (1) hereof shall have been given,
and the term shall expire as aforesaid; or if Tenant shall make default in the
payment of
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<PAGE> 11
the rent reserved herein or any item of additional rent herein mentioned or any
part of either or in making any other payment herein required, [17A] then and in
any of such events Owner may without notice, re-enter the demised premises
either by force or otherwise, and dispossess Tenant by summary proceedings or
otherwise, and the legal representative of Tenant or other occupant of demised
premises and remove their effects and hold the premises as if this lease had not
been made, and Tenant hereby waives the service of notice of intention to
re-enter or to institute legal proceedings to that end. If Tenant shall make
default hereunder prior to the date fixed as the commencement of any renewal or
extension of this lease, Owner may cancel and terminate such renewal or
extension agreement by written notice.
Remedies of Owner and Waiver of Redemption:
18. In case of any such default, re-entry, expiration and/or dispossess
by summary proceedings or otherwise, (a) the rent shall become due thereupon and
be paid up to the time of such re-entry, dispossess and/or expiration, (b) Owner
may re-let the premises or any part or parts thereof, either in the name of
Owner or otherwise, for a term or terms, which may at Owner's option be less
than or exceed the period which would otherwise have constituted the balance of
the term of this lease and may grant concessions or free rent or charge a higher
rental than that in this lease, and/or (c) Tenant or the legal representatives
of Tenant shall also pay Owner as liquidated damages for the failure of Tenant
to observe and perform said Tenant's covenants herein contained, any deficiency
between the rent hereby reserved and/or covenanted to be paid and the net
amount, if any, of the rents collected on account of the lease or leases of the
demised premises for each month of the period which would otherwise have
constituted the balance of the term of this lease. The failure of Owner to
re-let the premises or any part or parts thereof shall not release or affect
Tenant's liability for damages. In computing such liquidated damages there shall
be added to the said deficiency such expenses as Owner may incur in connection
with re-letting, such as legal expenses, attorneys' fees, brokerage, advertising
and for keeping the demised premises in good order or for preparing the same for
re-letting. Any such liquidated damages shall be paid in monthly installments by
Tenant on the rent day specified in this lease and any suit brought to collect
the amount of the deficiency for any month shall not prejudice in any way the
rights of Owner to collect the deficiency of any subsequent month by a similar
proceeding. Owner, in putting the demised premises in good order or preparing
the same for re-rental may, at Owner's option, make such alterations, repairs,
replacements, and/or decorations in the demised premises as Owner, in Owner's
sole judgment, considers advisable and necessary for the purpose of re-letting
the demised premises, and the making of such alterations, repairs, replacements,
and/or decorations shall not operate or be construed to release Tenant from
liability hereunder as aforesaid. Owner shall in no event be liable in any way
whatsoever for failure to re-let the demised premises, or in the event that the
demised premises are re-let, for failure to collect the rent thereof under such
re-letting, and in no event shall
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<PAGE> 12
Tenant be entitled to receive any excess, if any, of such net rents collected
over the sums payable by Tenant to Owner hereunder. In the event of a breach or
threatened breach by Tenant of any of the covenants or provisions hereof, Owner
shall have the right of injunction and the right to invoke any remedy allowed at
law or in equity as if re-entry, summary proceedings and other remedies were not
herein provided for. Mention in this lease of any particular remedy, shall not
preclude Owner from any other remedy, in law or in equity. Tenant hereby
expressly waives any and all rights of redemption granted by or under any
present or future laws in the event of Tenant being evicted or dispossessed for
any cause, or in the event of Owner obtaining possession of demised premises, by
reason of the violation by Tenant of any of the covenants and conditions of this
lease, or otherwise.
Fees and Expenses:
19. If Tenant shall default in the observance or performance of any
term or covenant on Tenant's part to be observed or performed under or by virtue
of any of the terms or provisions in any article of this lease, then, unless
otherwise provided elsewhere in this lease, Owner may immediately or at any time
thereafter and without notice perform the obligation of Tenant thereunder. If
Owner, in connection with the foregoing or in connection with any default by
Tenant in the covenant to pay rent hereunder, makes any expenditures or incurs
any obligations for the payment of money, including but not limited to
attorney's fees, in instituting, prosecuting or defending any action or
proceeding, then Tenant will reimburse Owner for such [19A] sums so paid or
obligations incurred with interest and costs. The foregoing expenses incurred by
reason of Tenant's default shall be deemed to be additional rent hereunder and
shall be paid by Tenant to Owner within [19B] days of rendition of any bill or
statement to Tenant therefor. If Tenant's lease term shall have expired at the
time of making of such expenditures or incurring of such obligations, such sums
shall be recoverable by Owner as damages.
Building Alterations and Management:
20. Owner shall have the right at any time without the same
constituting an eviction and without incurring liability to Tenant therefor to
change the arrangement and/or location of public entrances, passageways, doors,
doorways, corridors, elevators, stairs, toilets or other public parts of the
building and to change the name, number or designation by which the building may
be known [20A]. There shall be no allowance to Tenant for diminution of rental
value and no liability on the part of Owner by reason of inconvenience,
annoyance or injury to business arising from Owner or other Tenants making any
repairs in the building or any such alterations, additions and improvements.
Furthermore, Tenant shall not have any claim against Owner by reason of Owner's
imposition of such controls of the manner of access to the building by Tenant's
social or business visitors as the Owner may deem necessary for the security of
the building and its occupants.
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<PAGE> 13
No Representations by Owner:
21. Neither Owner nor Owner's agents have made any representations or
promises with respect to the physical condition of the building, the land upon
which it is erected or the demised premises, the rents, leases, expenses of
operation or any other matter or thing affecting or related to the premises
except as herein expressly set forth and no rights, easements or licenses are
acquired by Tenant by implication or otherwise except as expressly set forth in
the provisions of this lease. Tenant has inspected the demised premises and is
thoroughly acquainted with their condition and agrees to take the same "as is"
and acknowledges that the taking of possession of the demised premises by Tenant
shall be conclusive evidence that the said premises and the building of which
the same form a part were in good and satisfactory condition at the time such
possession was so taken, except as to latent defects. All understandings and
agreements heretofore made between the parties hereto are merged in this
contract, which alone fully and completely expresses the agreement between Owner
and Tenant and any executory agreement hereafter made shall be ineffective to
change, modify, discharge or effect an abandonment of it in whole or in part,
unless such executory agreement is in writing and signed by the party against
whom enforcement of the change, modification, discharge or abandonment is
sought.
End of Term:
22. Upon the expiration or other termination of the term of this lease,
Tenant shall quit and surrender to Owner the demised premises, broom clean, in
good order and condition, ordinary wear and damages which Tenant is not required
to repair as provided elsewhere in this lease excepted, and Tenant shall remove
all its property. Tenant's obligation to observe or perform this covenant shall
survive the expiration or other termination of this lease. If the last day of
the term of this Lease or any renewal thereof, falls on Sunday, this lease shall
expire at noon on the preceding Saturday unless it be a legal holiday in which
case it shall expire at noon on the preceding business day.
Quiet Enjoyment:
23. Owner covenants and agrees with Tenant that upon Tenant paying the
rent and additional rent and observing and performing all the terms, covenants
and conditions, on Tenant's part to be observed and performed, Tenant may
peaceably and quietly enjoy the premises hereby demised, subject, nevertheless,
to the terms and conditions of this lease including, but not limited to, Article
31 hereof and to the ground leases, underlying leases and mortgages hereinbefore
mentioned.
Failure to Give Possession:
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<PAGE> 14
24. If Owner is unable to give possession of the demised premises on
the date of the commencement of the term hereof, because of the holding-over or
retention of possession of any tenant, undertenant or occupants or if the
demised premises are located in a building being constructed, because such
building has not been sufficiently completed to make the premises ready for
occupancy or because of the fact that a certificate of occupancy has not been
procured or for any other reason, Owner shall not be subject to any liability
for failure to give possession on said date and the validity of the lease shall
not be impaired under such circumstances, nor shall the same be construed in any
wise to extend the term of this lease, but the rent payable hereunder shall be
abated (provided Tenant is not responsible for Owner's inability to obtain
possession) until after Owner shall have given Tenant written notice that the
premises are substantially ready for Tenant's occupancy. If permission is given
to Tenant to enter into the possession of the demised premises or to occupy
premises other than the demised premises prior to the date specified as the
commencement of the term of this lease, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants, conditions and
provisions of this lease, except as to the covenant to pay rent. The provisions
of this article are intended to constitute "an express provision to the
contrary" within the meaning of Section 223-a of the New York Real Property Law.
[24A]
No Waiver:
25. The failure of Owner to seek redress for violation of, or to insist
upon the strict performance of any covenant or condition of this lease or of any
of the Rules or Regulations, set forth or hereafter adopted by Owner, shall not
prevent a subsequent act which would have originally constituted a violation
from having all the force and effect of an original violation. The receipt by
Owner of rent with knowledge of the breach of any covenant of this lease shall
not be deemed a waiver of such breach and no provision of this lease shall be
deemed to have been waived by Owner unless such waiver be in writing signed by
Owner. No payment by Tenant or receipt by Owner of a lesser amount than the
monthly rent herein stipulated shall be deemed to be other than on account of
the earliest stipulated rent, nor shall any endorsement or statement of any
check or any letter accompanying any check or payment as rent be deemed an
accord and satisfaction, and Owner may accept such check or payment without
prejudice to Owner's right to recover the balance of such rent or pursue any
other remedy in this lease provided. No act or thing done by Owner or Owner's
agents during the term hereby demised shall be deemed an acceptance of a
surrender of said premises, and no agreement to accept such surrender shall be
valid unless in writing signed by Owner. No employee of Owner or Owner's agent
shall have any power to accept the keys of said premises prior to the
termination of the lease and the delivery of keys to any such agent or employee
shall not operate as a termination of the lease or a surrender of the premises.
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<PAGE> 15
Waiver of Trial by Jury:
26. It is mutually agreed by and between Owner and Tenant that the
respective parties hereto shall and they hereby do waive trial by jury in any
action, proceeding or counterclaim brought by either of the parties hereto
against the other (except for personal injury or property damage) on any matters
whatsoever arising out of or in any way connected with this lease, the
relationship of Owner and Tenant, Tenant's use of or occupancy of said premises,
and any emergency statutory or any other statutory remedy. It is further
mutually agreed that in the event Owner commences any summary proceeding for
possession of the premises, Tenant will not interpose any counterclaim of
whatever nature or description in any such proceeding including a counterclaim
under Article 4. [26A]
Inability to Perform:
27. This Lease and the obligation of Tenant to pay rent hereunder and
perform all of the other covenants and agreements hereunder on part of Tenant to
be performed shall in no wise be affected, impaired or excused because Owner is
unable to fulfill any of its obligations under this lease or to supply or is
delayed in supplying any service expressly or impliedly to be supplied or is
unable to make, or is delayed in making any repair, additions, alterations or
decorations or is unable to supply or is delayed in supplying any equipment or
fixtures if Owner is prevented or delayed from so doing by reason of strike or
labor troubles or any cause whatsoever [27A] including, but not limited to,
government preemption in connection with a National Emergency or by reason of
any rule, order or regulation of any department or subdivision thereof of any
government agency or by reason of the conditions of supply and demand which have
been or are affected by war or other emergency.
[27B]
Bills and Notices:
28. Except as otherwise in this lease provided, a bill, statement,
notice or communication which Owner may desire or be required to give to Tenant,
shall be deemed sufficiently given or rendered if, in writing, delivered to
Tenant personally or sent by registered or certified mail addressed to Tenant at
the building of which the demised premises form a part or at the last known
residence address or business address of Tenant or left at any of the aforesaid
premises addressed to Tenant, and the time of the rendition of such bill or
statement and of the giving of such notice or communication shall be deemed to
be the time when the same is delivered to Tenant, mailed, or left at the
premises as herein provided. Any notice by Tenant to Owner must be served by
registered or certified mail addressed to Owner at the address first hereinabove
given or at such other address as Owner shall designate by written notice.
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<PAGE> 16
Services Provided by Owners:
29. As long as Tenant is not in default under any of the covenants of
this lease, Owners shall provide: (a) necessary elevator facilities on business
days from 8 a.m. to 6 p.m. and have one elevator subject to call at all other
times; (b) heat to the demised premises when and as required by law, on business
days from 8 a.m. to 6 p.m.; (c) water for ordinary lavatory purposes, but if
Tenant uses or consumes water for any other purposes or in unusual quantities
(of which fact Owner shall be the sole judge), Owner may install a water meter
at Tenant's expense which Tenant shall thereafter maintain at Tenant's expense
in good working order and repair to register such water consumption and Tenant
shall pay for water consumed as shown on said meter as additional rent as and
when bills are rendered; (d) cleaning service for the demised premises on
business days at Owner's expense [29] provided that the same are kept in order
by Tenant. If, however, said premises are to be kept clean by Tenant, it shall
be done at Tenant's sole expense, in a manner satisfactory to Owner and no one
other than persons approved by Owner shall be permitted to enter said premises
or the building of which they are a part for such purpose. Tenant shall pay
Owner the cost of removal of any of Tenant's refuse and rubbish from the
building; (e) If the demised premises is serviced by Owner's air
conditioning/cooling and ventilating system, air conditioning/cooling will be
furnished to tenant from May 15th through September 30th on business days
(Mondays through Fridays, holidays excepted) from 8:00 a.m. to 6:00 p.m., [29B]
and ventilation will be furnished on business days during the aforesaid hours
except when air conditioning/cooling is being furnished as aforesaid. If Tenant
requires air conditioning/cooling or ventilation for more extended hours or on
Saturdays, Sundays or on holidays, as defined under Owner's contract with
Operating Engineers Local 94-94A, Owner will furnish the same at Tenant's
expense. RIDER to be added in respect to rates and conditions for such
additional service; (f) Owner reserves the right to stop services of the
heating, elevators, plumbing, air-conditioning, power systems or cleaning or
other services, if any, when necessary by reason of accident or for repairs,
alterations, replacements or improvements necessary or desirable in the judgment
of Owner for as long as may be reasonably required by reason thereof. If the
building of which the demised premises are a part supplies manually-operated
elevator service. Owner at any time may substitute automatic-control elevator
service and upon ten days' written notice to Tenant, proceed with alterations
necessary therefor without in any wise affecting this lease or the obligation of
Tenant hereunder. The same shall be done with a minimum of inconvenience to
Tenant and Owner shall pursue the alteration with due diligence. [29C]
Captions:
30. The Captions are inserted only as a matter of convenience and for
reference and in no way define, limit or describe the scope of this lease nor
the intent of any provisions thereof.
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<PAGE> 17
Definitions:
31. The term "office", or "offices", wherever used in this lease, shall
not be construed to mean premises used as a store or stores, for the sale or
display, at any time, of goods, wares or merchandise, of any kind, or as a
restaurant, shop, booth, bootblack or other stand, barber shop, or for other
similar purposes or for manufacturing. The term "Owner" means a landlord or
lessor, and as used in this lease means only the owner, or the mortgagee in
possession, for the time being of the land and building (or the owner of a lease
of the building or of the land and building) of which the demised premises form
a part, so that in the event of any sale or sales of said land and building or
of said lease, or in the event of a lease of said building, or of the land and
building, the said Owner shall be and hereby is entirely freed and relieved of
all covenants and obligations of Owner hereunder, and it shall be deemed and
construed without further agreement between the parties or their successors in
interest, or between the parties and the purchaser, at any such sale, or the
said lessee of the building, or of the land and building, that the purchaser or
the lessee of the building has assumed and agreed to carry out any and all
covenants and obligations of Owner, hereunder. The words "re-enter" and
"re-entry" as used in this lease are not restricted to their technical legal
meaning. The term "business days" as used in this lease shall exclude Saturdays,
Sundays and all days observed by the State or Federal Government as legal
holidays and those other designated as holidays by the applicable building
service union employees service contract or by the applicable Operating
Engineers contract with respect to HVAC service.
Adjacent Excavation--Shoring:
32. If an excavation shall be made upon land adjacent to the demised
premises, or shall be authorized to be made, Tenant shall afford to the person
causing or authorized to cause such excavation, license to enter upon the
demised premises for the purpose of doing such work as said person shall deem
necessary to preserve the wall or the building of which demised premises form a
part from injury or damage and to support the same by proper foundations without
any claim for damages or indemnity against Owner, or diminution or abatement of
rent.
Rules and Regulations:
33. Tenant and Tenant's servants, employees, agents, visitors, and
licensees shall observe faithfully, and comply strictly with, the Rules and
Regulations and such other and further reasonable Rules and Regulations as Owner
or Owner's agents may from time to time adopt. Notice of any additional rules or
regulations shall be given in such manner as Owner may elect. In case Tenant
disputes the reasonableness of any additional [33A] Rule or Regulation hereafter
made or adopted by Owner or Owner's agents, the parties hereto agree to submit
the question of the reasonableness
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<PAGE> 18
of such Rule or Regulation for decision to the New York office of the American
Arbitration Association, whose determination shall be final and conclusive upon
the parties hereto. The right to dispute the reasonableness of any additional
Rule or Regulation upon Tenant's part shall be deemed waived unless the same
shall be asserted by service of a notice, in writing upon Owner within ten (10)
days after the giving of notice thereof. Nothing in this lease contained shall
be construed to impose upon Owner any duty or obligation to enforce the Rules
and Regulations or terms, covenants or conditions in any other lease, as against
any other tenant and Owner shall not be liable to Tenant for violation of the
same by any other tenant, its servants, employees, agents, visitors or
licensees. [33B]
Security:
34. Tenant has deposited with Owner the sum of $87,862.00 as security
for the faithful performance and observance by Tenant of the terms, provisions
and conditions of this lease; it is agreed that in the event Tenant defaults in
respect of any of the terms, provisions and conditions of this lease, including,
but not limited to, the payment of rent and additional rent, Owner may use,
apply or retain the whole or any part of the security so deposited to the extent
required for the payment of any rent and additional rent or any other sum as to
which Tenant is in default or for any sum which Owner may expend or may be
required to expend by reason of Tenant's default in respect of any of the terms,
covenants and conditions of this lease, including but not limited to, any
damages or deficiency in the re-letting of the premises, whether such damages or
deficiency accrued before or after summary proceedings or other re-entry by
Owner. In the event that Tenant shall fully and faithfully comply with all of
the terms, provisions, covenants and conditions of this lease, the security
shall be returned to Tenant after the date fixed as the end of the Lease and
after delivery of entire possession of the demised premises to Owner. In the
event of a sale of the land and building or leasing of the building, of which
the demised premises form a part, Owner shall have the right to transfer the
security to the vendee or lessee and Owner shall thereupon be released by Tenant
from all liability for the return of such security; and Tenant agrees to look to
the new Owner solely for the return of said security, and it is agreed that the
provisions hereof shall apply to every transfer or assignment made of the
security to a new Owner. Tenant further covenants that it will not assign or
encumber or attempt to assign or encumber the monies deposited herein as
security and that neither Owner nor its successors or assigns shall be bound by
any such assignment, encumbrance, attempted assignment or attempted encumbrance.
Estoppel Certificate:
35. (See Article 43)
Successors and Assigns:
- 18 -
<PAGE> 19
36. The covenants, conditions and agreements contained in this lease
shall bind and inure to the benefit of Owner and Tenant and their respective
heirs, distributees, executors, administrators, successors, and except as
otherwise provided in this lease, their assigns.
SEE RIDER PAGES ANNEXED HERETO AND MADE A PART HEREOF
CONTAINING ARTICLES 37 - 56
IN WITNESS WHEREOF, Owner and Tenant have respectively signed and
sealed this lease as of the day and year first above written.
529 FIFTH COMPANY, Owner
By: /s/ Larry A. Silverstein
-----------------------------------
General Partner
Witness for Owner:
/s/ [L.S.]
- --------------------------- ---------------------------------
Witness for Tenant: THE EDISON PROJECT, INC., Tenant
By: /s/ James L. Starr
- --------------------------- ------------------------------------
Name: James L. Starr
Title: EVP/CFO
- 19 -
<PAGE> 1
Exhibit 10.32
MANAGEMENT AGREEMENT
MANAGEMENT AGREEMENT (the "Agreement") dated as of March 14,
1995 between The Edison Partnership L.P. (the "Company") and WSI Inc. ("WSI").
WHEREAS, WSI is the founding partner of the Company and its
president, H. Christopher Whittle ("Whittle"), is the "Founder" of the Company;
and
WHEREAS, the Company recognizes that Whittle and other WSI
personnel possess special knowledge and expertise with respect to the Company's
business which knowledge and expertise is vital to the Company in connection
with the growth of its business; and
WHEREAS, the Company desires to ensure to itself the
availability of Whittle's and other WSI personnel's knowledge and expertise; and
WHEREAS, Whittle and WSI desire to provide the services
described herein to the Company on the terms and conditions provided herein.
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1. Term. Unless this Agreement is earlier terminated as
provided herein, the term of this Agreement shall commence on March 15, 1995 and
expire on March 15, 2000 (the "Initial Term"). The Initial Term shall
automatically renew for successive two year terms (each a "Renewal Term") unless
WSI shall have given the Company notice of its intention not to renew this
Agreement at least 12 months before the commencement of any Renewal Term.
<PAGE> 2
2. Services. (a) During the Initial Term and any Renewal Term,
WSI shall cause Whittle to and Whittle shall, pursuant to the direction of the
Board of Directors (which for all purposes of this Agreement shall include
members of the Board appointed by WSI), have the power, duty and right to (i)
along with the Company's chief executive officer, act as the Company's
co-spokesperson, (ii) coordinate the strategic planning and capital formation
efforts of the Company, (iii) sit on the Company's management committee (or any
committee exercising similar authority) and attend any meeting thereof, and (iv)
perform any and all other duties or services for the Company as may be assigned
by the Board of Directors in order to implement and further the goals of the
Company and the Company's business plans as approved by the Board of Directors.
Whittle shall report directly to the Board of Directors. Whittle shall cause WSI
personnel to assist Whittle in accordance with his instructions in performing
the services to be performed by WSI or Whittle under this Agreement.
(b) Whittle will perform services for the Company under this
Agreement during no more than 50% of his normal working time. Whittle and the
Company agree to schedule Whittle's time giving due regard to the needs of the
Company and other business demands on Whittle's time. Whittle shall undertake
reasonable travel to such locations and for such reasonable periods of time as
shall be required to perform the services hereunder provided that travel shall
be scheduled with reasonable regard to the other business demands on Whittle's
time. For the purposes of determining the amount of time spent by Whittle under
this Agreement,
-2-
<PAGE> 3
any travel time shall be considered time during which services are being
performed under this Agreement.
(c) During the Initial Term and any Renewal Term, Whittle and
any other WSI personnel who perform services on behalf of the Company will be
covered by the Company's standard benefits plans for personnel at the same level
as such WSI personnel, a current schedule of which is attached.
(d) During the term of this Agreement and for one year after
the termination of such employment for any reason, Whittle will not, and will
not cause or permit WSI to, 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 the
Company, any subsidiary of the Company or any successor to the business of the
Company. For the purposes hereof, a "competing" business shall mean any business
which directly competes with any of the businesses of the Company as such
businesses shall exist during the term of this Agreement (for example, the
business of managing public and private schools for profit or the sale of school
management or student assessment systems such as "The Edison Common" would be
considered to directly compete, but a "competing" business would not include the
business of developing for, marketing to or implementing in schools electronic
curriculum services or technology delivery systems for such services, or the
fulfillment of Whittle's obligations under the Retention Agreement dated August
17, 1994, between Whittle and WEN Acquisition Corp., as amended, so long as the
activities do not violate the confidentiality
-3-
<PAGE> 4
provisions of this Agreement). Ownership by Whittle or WSI of publicly traded
stock of any corporation conducting any such business shall not be deemed a
violation of the preceding two sentences provided Whittle or WSI does not own
more than three percent (3%) of the stock of any such corporation. Additionally,
Whittle will not and will not cause or permit WSI to directly or indirectly
solicit the employment or other services of any executive employee of the
Company during and for a period of one year after this Agreement is terminated.
3. Management Fee and Expenses. (a) The Company shall pay WSI
for the services performed by Whittle and other WSI personnel under this
Agreement a fee at the annual rate of $275,000 (the "Management Fee"). The
Management Fee shall be paid in equal monthly installments of $22,916.67 payable
in arrears on the fifteenth day of each calendar month during the Initial Term
and any Renewal Term, provided that until July 1, 1996, $12,500.00 of each
monthly installment shall accrue and be paid on the closing by the Company of an
initial public offering, with interest at the rate of 7% per annum compounded
[quarterly] from the respective dates accrued until paid, and provided further
that the Management Fee for periods after July 1, 1996 shall continue to accrue
and be paid as provided above if the conditions precedent to the Round Three
closing set forth in section 5(c) of the Subscription Agreement dated as of
March 14, 1995 among the Company and the other parties listed therein have not
been met.
(b) The Management Fee shall cover all expenses incurred by
Whittle and other WSI personnel in performing services under this Agreement,
-4-
<PAGE> 5
including, without limitation, all reasonable travel and/or entertainment
expenses in connection with the performance of services hereunder, provided that
if the Company specifically requests that Whittle or other WSl personnel travel
and/or entertain on behalf of the Company, the Company shall reimburse, in
accordance with the policies of the Company as in effect from time to time, WSI
for such expenses related to such travel and/or entertainment.
(c) The Company shall provide Whittle with a suitable office
at its principal office.
4. Independence. WSI and Whittle acknowledge and agree that
none of WSI, Whittle or other WSI personnel performing services under this
Agreement is an employee of the Company.
5. Confidential Information. In connection with the provision
of services under this Agreement, Whittle will and will cause WSI personnel to
maintain all Company proprietary information in confidence and not to divulge
any such information whether or not this Agreement remains in effect, except as
may be required by law or as Whittle or WSI personnel acting on Whittle's
instructions deem advisable in connection with the provision of services under
this Agreement, provided, that this provision shall not affect any of WSI's
rights (or Whittle's rights as WSI's controlling shareholder) or the Company's
obligations under the Company's Amended and Restated Agreement of Limited
Partnership dated as of March 14, 1995, and, further, provided, that Whittle and
WSI personnel shall take reasonable efforts (including the instruction of
persons or entities to which information is
-5-
<PAGE> 6
disclosed pursuant to this paragraph) to ensure that persons and entities to
whom the Company's proprietary information is disclosed keep such information
confidential.
6. Termination. (a) Death. If Whittle shall die while this
Agreement remains in effect, the Company's obligation to pay the Management Fee
for any period after the date of death shall terminate automatically, provided,
however, that the Company shall pay to WSI the amount of $22,916.67 plus any
amounts owed to WSI for reimbursement of any expenses properly reimbursable
under this Agreement and not yet reimbursed. Any Management Fee payments then
accrued and unpaid will be paid as provided in paragraph 3(a) above.
(b) Disability. The Company may terminate its obligation to
make Management Fee payments for any period after the date of termination, by
notice to WSI, in the event Whittle is unable to provide services to the Company
under this Agreement for a period of 90 consecutive days during the Initial Term
or any Renewal Term because of physical or mental disability (as determined by a
reasonably selected independent medical doctor), provided that with such notice
the Company pays to WSI the amount of $22,916.67 plus any amounts owed to WSI
for reimbursement of any expenses properly reimbursable under this Agreement and
not yet reimbursed. Any Management Fee payments then accrued and unpaid will be
paid as provided in paragraph 3(a) above.
(c) Termination. Either the Company or WSI may terminate this
Agreement by written notice to the other and upon the effective date of such
termination neither party shall have any further rights or obligations under
this
-6-
<PAGE> 7
Agreement, provided that (i) in the event either party terminates this Agreement
WSI shall be entitled to (a) reimbursement for any expenses properly
reimbursable under this Agreement and not yet reimbursed and (b) any Management
Fee then earned and unpaid (which Management Fee will be paid as provided in
paragraph 3(a) above) and provided further that (ii) in the event the Company
terminates this Agreement WSI shall be additionally entitled to the Management
Fee through the later of July 1, 1996, or six months following the effective
date of termination (which Management Fee will be paid as provided in paragraph
3(a) above).
7. Option. (a) The Company hereby grants to WSI (or its
assignee) two options (each an "Option", and together the "Options") to purchase
additional Partnership Interests in the Company. Under the first Option, WSI (or
its assignee) has the right to purchase a Partnership Interest with a 5.714286%
Percentage Interest in the Company for $10,000,000 and under the second Option
WSI (or its assignee) has the right to purchase a Partnership Interest with a
5.405405% Percentage Interest in the Company for $20,000,000. WSl may purchase
all or a portion of the Percentage Interest specified in the previous sentence
with respect to each Option. In the event WSI elects in either case to purchase
only a portion of such Percentage Interest, the purchase price shall be the
portion of the purchase price for the entire Percentage Interest that the
portion purchased is of the entire Interest purchasable. In the case of each
Option, the Percentage Interest is determined based upon the assumption that all
options granted or reserved by the Company as part of the Company's Management
Option Plan are exercised on or prior to the exercise of the Option.
-7-
<PAGE> 8
Further, the Percentage Interests of the Options are based upon the Percentage
Interests of Partners outstanding immediately following the Round One Closing
Date and are subject to dilution and other adjustments in the same manner as the
Percentage Interests of Partnership Interests outstanding immediately following
the Round One Closing Date. Finally, the Percentage Interest of the first Option
assumes that the second Option has not been exercised (in whole or in part) at
the time that the first Option is exercised, and the Percentage Interest of the
second Option assumes that the first Option has been exercised in full at the
time that the second Option is exercised. In other words, the Percentage
Interests of the Options are computed as though the Company had 1,250,000 shares
of Partnership Interests outstanding immediately following the Round One Closing
Date, that options with respect to 400,000 shares of Partnership Interests will
be granted under the Management Option Program and that each of the Options
hereby granted is for the purchase of 100,000 shares of Partnership Interests.
The Options shall survive termination of this Agreement for any reason. Each
Option shall vest 50% on the date of this Agreement and the remaining 50% shall
vest 10% per year on the last day of each of the next five succeeding fiscal
years of the Company until fully vested, provided, however, that no further
vesting will occur after a termination of this Agreement. In the event of
Whittle's death or disability or the termination of this Agreement under
paragraph 6(c) above, a pro rata portion of the Options which would have vested
at the end of the fiscal year in which such death, disability or termination
occurred shall vest upon Whittle's death, the termination date specified
-8-
<PAGE> 9
in the notice of disability or such termination, as the case may be, based on
the number of days from the first day of such fiscal year to the date of death,
disability or termination, as the case may be. The Company may redeem each
Option or any portion thereof in connection with a financing transaction or
capital restructuring pursuant to which the Company is redeeming options or
equity issued under the Company's Management Option Plan as in effect from time
to time, provided the Company shall redeem the Options or any portion thereof on
the same relative terms as the Company redeems such management options. Upon any
capital transaction or reorganization of the Company (including the conversion
of the Company to a corporation) or the Company's business or any amendment of
the Company's Partnership Agreement, the Partnership Interest subject to each
Option shall be adjusted so that WSI shall thereafter be entitled to receive,
upon exercise of the Option, the Partnership Interest or shares or other equity
interest or entitlement that WSI would have owned or have been entitled to
receive after the occurrence of such event had such option been exercised
immediately prior to the occurrence of such event, with the Option as so revised
to be subject to adjustment, if the Company is then incorporated, appropriately
to reflect stock splits, stock dividends, combinations, and sales of all or
substantially all the assets of the Company and, if the Company is then a
partnership, with the Interest subject to dilution in the same manner as the
Percentage Interests of Partnership Interests outstanding following such event.
Any registration rights which accrue to WSI (or its assignees) with respect to
any equity interests in the Company (or its successor) shall apply to any equity
obtained by WSI
-9-
<PAGE> 10
(or its assignees) upon the exercise in whole or in part of either of the
Options. In the event of any transaction in which the Company and/or the
Company's business is reorganized as a corporation, such corporation's
obligations hereunder upon the exercise of the Option shall be to issue common,
voting stock of such corporation.
(b) WSI may exercise the Options as of the first business day
of any fiscal year of the Company (or at such other times as may be permitted by
the Board of Directors) by on or before such day (a) transferring to the account
designated by the Company immediately available funds in an amount equal to the
sum of the pro rata portion of the exercise price of the Option corresponding to
the to the portion of the Option then exercised and any amounts required to be
withheld by the Company and remitted to any taxing authority by reason of the
exercise of the Option and (b) giving written notice to the Company, provided
that (i) the portion of each Option that vests on the date of this Agreement
shall expire at 5:00 p.m. E.S.T. on the first business day of 2003, (ii) the
portion of each Option that vests in the Company's 1996, 1997 and 1998 fiscal
years shall expire on the business day following the seventh anniversary of the
vesting of such portion of such Option, and (iii) the portion of each Option
that vests in the Company's 1999 and 2000 fiscal years shall expire on the
business day following the fifth anniversary of the vesting of such portion of
such Option. Upon the exercise of any portion of the Options, the books and
records of the Company shall be appropriately amended to reflect WSI's
acquisition of the partnership or other equity interest corresponding to the
portion of the Option then exercised.
-10-
<PAGE> 11
8. Assignability, Parties in Interest. None of WSI, Whittle or
the Company may assign its or his rights or obligations under this Agreement,
provided, however, that the rights and obligations of the Company may be
assigned, upon notice to WSI, to any entity to which the Company's business is
transferred (whether upon incorporation or otherwise) and further provided,
however, that the rights and obligations of the Company under this Agreement
shall be binding upon and inure to the benefit of the successors and assigns of
the Company and their affiliates including any transferee of all or
substantially all of the business of the Company and further provided that WSI
may (i) at any time grant to any third party a security interest in all or any
part of the Options and (ii) sell, assign, transfer or otherwise dispose of any
vested portion of the Options at any time following the fourth anniversary of
the vesting of the portion of the Options to be sold, assigned, transferred or
otherwise disposed of.
9. Governing Law. This Agreement shall be governed and
interpreted and enforced in accordance with the substantive laws of the State of
New York without regard to the conflicts of laws provisions thereof.
10. Notices. Any notice required or desired to be served,
given or delivered hereunder shall be in writing, and shall be deemed to have
been validly served, given or delivered (i) five business days after the deposit
in the United States mails, with proper postage prepaid, whether by air, first
class, registered or certified mail, (ii) one business day after being deposited
with an overnight courier with all charges prepaid (ii) when delivered, if
hand-delivered by messenger, or (iv) when
-11-
<PAGE> 12
dispatched by facsimile to the telecopy number provided below, all of which
shall be properly addressed to the party to be notified and sent to the address
indicated as follows.
If to the Company: The Edison Project L.P.
529 Fifth Avenue
New York, New York 10017
Attn: Board of Directors
Telecopy: (212) 309-1604
copy to: Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attn: John F. Fritts, Esq.
Telecopy: (212) 504-6666
If to WSI: WSI Inc.
c/o H. Christopher Whittle
529 Fifth Avenue
12th Floor
New York, New York 10017
Telecopy: (212) 309-1515
copy to: Cadwalader, Wickersham & Taft
100 Maiden Lane
New York, New York 10038
Attn: John F. Fritts, Esq.
Telecopy: (212) 504-6666
or to such other address as such party may specify to the other in writing in
accordance with the provisions hereof.
11. Miscellaneous. (a) Waiver by either party of a breach of
any provision of this Agreement by the other party shall not operate or be
construed as a waiver of any subsequent breach by such waiving party.
-12-
<PAGE> 13
(b) This instrument contains the entire agreement and
understanding of the parties hereto and may not be changed except by an
agreement in writing signed by WSI, Whittle and the Company.
(c) The captions set forth in this Agreement are used solely
for convenience or reference and shall not control or effect the meaning or
interpretation of any of the provisions.
-13-
<PAGE> 14
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first above written.
WSI Inc.
By: /s/ H. Christopher Whittle
----------------------------------
H. Christopher Whittle, President
THE EDISON PROJECT, L.P.
By its general partners:
WSI, Inc., a general partner
By: /s/ H. Christopher Whittle
----------------------------------
H. Christopher Whittle, President
Sprout Edison Project, Inc.,
a general partner
By: /s/ Janet A. Hickey
----------------------------------
Janet A. Hickey, President
ACCEPTED AND ACKNOWLEDGED:
/s/ H. Christopher Whittle
- -------------------------------------
H. Christopher Whittle, individually
-14-
<PAGE> 15
As of November 15, 1996
Reference is made to the Management Agreement (the "Management Agreement")
dated as of March 14, 1995, between The Edison Project L.P. (the "Partnership")
and WSI Inc. ("WSI"). Capitalized terms used but not defined herein shall have
the meanings set forth in the Management Agreement.
The Partnership hereby acknowledges payment, and WSI hereby acknowledges
receipt, of $500,000 (the "Service Fee") in respect of (i) payment in full of
the Partnership's contingent obligation set forth in Section 3(a) of the
Management Agreement to pay accrued installments of the Management Fee upon the
closing of an initial public offering (the "Contingent Obligation"), and (ii)
additional services provided and expenses incurred by WSI in connection with
its performance under the Management Agreement.
Each of WSI and the Partnership agree that Section 3(a) of the Management
Agreement shall be amended as promptly as practicable to reflect payment of the
Contingent Obligation.
WSI INC.
By: /s/ H. Christopher Whittle
---------------------------
H. Christopher Whittle, President
THE EDISON PROJECT L.P.
By SPROUT EDISON PROJECT, Inc.,
a General Partner
By: /s/ Janet A. Hickey
---------------------------
Janet A. Hickey, President
<PAGE> 16
AMENDMENT TO THE MANAGEMENT AGREEMENT
DATED AS OF MARCH 14, 1995
BETWEEN
THE EDISON PROJECT L.P. AND WSI INC.
The Management Agreement (the "Agreement") dated as of March 14, 1995
between The Edison Project L.P. (the "Company") and WSI Inc. ("WSI") is hereby
amended as follows:
1. The WHEREAS clauses of the Agreement are amended to read as follows:
WHEREAS, WSI was the founding partner of the Company and its president,
H. Christopher Whittle ("Whittle"), is the "Founder" and President of the
Company; and
WHEREAS, the Company recognizes that WSI personnel possess special
knowledge and expertise with respect to the Company's business which knowledge
and expertise is vital to the Company in connection with the growth of its
business; and
WHEREAS, the Company desires to ensure to itself the availability of WSI
personnel's knowledge and expertise; and
WHEREAS, WSI desires to provide the services described herein to the
Company on the terms and conditions provided herein.
2. Paragraph 2(a) is amended to read as follows:
During the Initial Term and any Renewal Term, WSI shall cause its personnel
to provide services to the Company in areas in which its personnel have
knowledge or expertise upon reasonable request from the Company.
3. Paragraph 2(b) is omitted, and Paragraph 2(c), which is amended to delete the
words "Whittle and any other" before the word "WSI," and Paragraph 2(d) shall
become paragraphs 2(b) and 2(c).
4. Paragraph 3 is amended to read in its entirety as follows:
Management Fees and Expenses. Mutually agreeable fees for any services to
be provided by WSI to the Company under this Agreement and any expenses
related thereto (the "Management Fees") shall be specifically reviewed and
approved in advance by the Board of Directors of The Edison Project Inc. as
part
<PAGE> 17
of the Company's annual budget or a revision thereto.
5. Paragraph 4 is amended to delete the words ", Whittle or other" before the
word "personnel."
6. Paragraph 5 is amended to delete the following words: "this provision shall
not affect any of WSI's rights (or Whittle's rights as WSI's controlling
shareholder) or the Company's obligations under the Company's Amended and
Restated Agreement of Limited Partnership dated as of March 14, 1995, and,
further provided, that".
7. Paragraphs 6(a) and 6(b) are deleted and Paragraph 6(c), which is amended to
delete the parenthetical at the end of the paragraph and change the word "Fee"
to "Fees," becomes Paragraph 6.
8. Paragraph 7(c) is hereby amended by changing the reference to "paragraph
6(c)" to "paragraph 6."
9. The Edison Project Inc. hereby acknowledges that it is the corporation
referred to in Paragraph 7(a) (including, without limitation, in the last
sentence thereof) and that it will comply with the obligations therein set
forth.
2
<PAGE> 18
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as of
March 1, 1997.
WSI Inc.
By: /s/ H. Christopher Whittle
-------------------------------
H. Christopher Whittle, President
THE EDISON PROJECT L.P.
By: The Edison Project Inc., general partner
By: /s/ Laura K. Eshbaugh
-------------------------------
Laura K. Eshbaugh, President
3
<PAGE> 19
SECOND AMENDMENT TO THE MANAGEMENT AGREEMENT
DATED AS OF MARCH 14, 1995
BETWEEN
THE EDISON PROJECT L.P. AND WSI INC.
The Management Agreement (the "Agreement") dated as of March 14, 1995
between The Edison Project L.P. (the "Company") and WSI Inc. ("WSI"), as amended
by the first amendment thereto dated as of March 1, 1997, is hereby amended by
replacing the text in Paragraph 7, which describes two options granted to WSI,
in its entirety with the following:
WSI will receive two options to acquire the stock of The Edison
Project Inc., which are attached hereto as Exhibit A and Exhibit B.
IN WITNESS HERETO, the parties hereto have executed this Agreement as of
December 31, 1997.
WSI INC.
By: /s/ H. Christopher Whittle
---------------------------
THE EDISON PROJECT L.P.
By: The Edison Project Inc., general
partner,
By: /s/ Laura Eshbaugh
-------------------
Laura Eshbaugh, President
<PAGE> 20
NEITHER THE OPTION GRANTED PURSUANT TO THIS AGREEMENT (OR THE SHARES OF STOCK
ISSUABLE UPON EXERCISE OF SUCH OPTION) HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. NEITHER SUCH OPTION OR SHARES MAY BE SOLD, OFFERED FOR
SALE, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SUCH ACT AND THE RULES AND REGULATIONS PROMULGATED
THEREUNDER.
Option Agreement to subscribe
Dated: December 30,1997 for 850,000 Shares
THE EDISON PROJECT INC. A STOCK OPTION
THIS CERTIFIES that, for value received, WSI Inc. ("Holder") is
entitled to subscribe for and purchase from The Edison Project Inc., a Delaware
corporation (the "Company"), at a price of $10.00 per share (the "Exercise
Price"), the number of shares of the Company's Series A Common Stock first shown
above (as adjusted pursuant to the provisions hereof, the "Option Shares"). This
Option is intended to replace and supersede the option originally contained in
the Management Agreement dated as of March 14, 1995 between The Edison Project
L.P. and Holder, as amended as of March 1, 1997 (the "Management Agreement"), to
acquire a 5.714286% partnership interest for $10,000,000 and is issued in
conjunction with the Subscription Agreement, dated as of December 30, 1997, by
and among the Company, J.P. Morgan Investment Corporation, Sixty Wall Street
SBIC Fund, L.P., Investor Investments AB and certain Other Investors (as defined
therein).
The Option is subject to the following provisions, terms and
conditions:
1. Vesting: Term: Exercise.
(a) The rights of Holder to exercise the Option shall vest as
follows: With respect to: (i) 700,000 of the Option Shares, on the date hereof,
provided,
<PAGE> 21
that for the purposes of paragraph 8 hereof, (A) 500,000 of such Option Shares
shall be deemed to have vested on March 14, 1995, (B) 100,000 of such Option
Shares shall be deemed to have vested on June 30, 1996, and (C) 100,000 of such
Option Shares shall be deemed to have vested on June 30, 1997; (ii) 50,000 of
the Option Shares, on June 30, 1998; (iii) 50,000 of the Option Shares, on June
30, 1999; and (iv) 50,000 of the Option Shares, on June 30, 2000.
(b) The rights of Holder to exercise this Option shall expire
as follows: With respect to (i) the Option Shares vested on the date hereof, (A)
500,000 at 5:00 p.m. E.S.T. on the first business day of 2003, (B) 100,000
shares on the first business day of the Company's 2004 fiscal year, and (C)
100,000 shares on the first business day of the Company's 2005 fiscal year, (ii)
the Option Shares that vest in the Company's 1998 fiscal year, on the business
day following the seventh anniversary of the vesting of such Option Shares, and
(iii) the Option Shares that vest in the Company's 1999 and 2000 fiscal years,
on the business day following the fifth anniversary of the vesting of such
Option Shares. Any date specified in the preceding sentence shall be, an
"Expiration Date" hereunder.
(c) Subject to the preceding paragraphs 1(a) and (b), Holder
may exercise this Option, in whole or in part from time to time (but not as to a
fractional share of the Series A Common Stock) as of the first business day of
any fiscal year of the Company (or at such other times as may be permitted by
the Company's Board of Directors) by on or before such day (i) giving written
notice to the Company in the form attached hereto and (ii) transferring to the
account designated by the Company immediately available funds in an amount equal
to aggregate Exercise Price of the
<PAGE> 22
Option Shares in respect of which this Option is then being exercised along with
any amounts required to be withheld by the Company and remitted to any taxing
authority by reason of the exercise of the Option in respect of such Option
Shares.
(d) Upon the exercise of any portion of the Option, the books
and records of the Company shall be appropriately amended to reflect Holder's
acquisition of the Option Shares then purchased, and certificates representing
such Option Shares shall be delivered to Holder (or its designee(s)) as promptly
as practicable after such date.
2. Shares to be Full Paid: Reservation of Shares. The Company
covenants and agrees that (a) all Option Shares will, upon issuance, be validly
issued, fully paid, nonassessable, (b) at all times during the period during
which the Option may be exercised, the Company shall have authorized and
reserved for the purpose of issue upon the exercise of the Option, a sufficient
number of shares of Series A Common Stock, free from any pre-emptive rights, to
provide for the exercise of the Option in full, (c) the Company shall take all
action necessary to assure that such shares of Series A Common Stock may be so
issued without violation of any applicable law or regulation, or any
requirements of any securities exchange upon which the Series A Common Stock may
be listed, provided, however, that the Company shall not be required to register
the sale of any shares of Series A Common Stock with the United States
Securities and Exchange Commission (the "SEC") except as specifically provided
herein.
3. Adjustment to the Number of Option Shares.
(a) Upon any capital transaction, business combination, or
reorganization (a "Reorganization") of the Company or the Company's business,
the
<PAGE> 23
number of Option Shares which may be purchased hereunder and the Exercise Price
per share shall be adjusted so that Holder shall thereafter be entitled to
receive, upon the exercise of the Option, the number of shares or other equity
interest or entitlement that Holder would have been entitled to receive upon the
occurrence of such event had Holder exercised the Option immediately prior to
the occurrence of such event, with the number of Option Shares and the Exercise
Price per share as so revised to be subject to (i) adjustment appropriately to
reflect stock splits, stock dividends, combinations and sales of all or
substantially all the assets of the Company and (ii) dilution in the same manner
as the Series A Common Stock outstanding immediately following such event.
(b) The Company may redeem this Option or any portion thereof
in connection with a financing transaction or capital restructuring pursuant to
which the Company is redeeming options or equity issued under the Company's
Management Option Plan, as in effect from time to time, provided, that the
Company shall redeem the Option or any portion thereof on the same relative
terms as the Company redeems such management options.
(c) Upon any adjustment required by this Section 3, the
Company shall give written notice thereof, by first class mail, postage prepaid,
addressed to Holder at the address shown on the books of the Company, which
notice shall state the increase or decrease, if any, in the number of Option
Shares issuable upon the exercise of the Option, setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based.
(d) If at any time: (i) the Company shall declare any dividend
of cash, stock or property upon or make any other distribution in respect of the
Series A
<PAGE> 24
Common Stock, (ii) the Company shall offer for subscription pro rata to the
holders of Series A Common Stock any additional shares of stock of any class or
other securities or rights, (iii) there shall be any Reorganization or (iv)
there shall be a voluntary or involuntary dissolution, liquidation or winding up
of the Company (collectively, "Dissolution"), then the Company shall give, by
first class mail, postage prepaid, addressed to the Holder at the address shown
on the books of the Company (A) at least 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 or subscription rights or for determining rights
to vote in respect of any such Reorganization or Dissolution, and (B) in the
case of any such Reorganization or Dissolution, at least 20 days' prior written
notice of the date when the same shall take place. Such notice in accordance
with the foregoing clause (A) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Series A Common Stock shall be entitled thereto, and such notice in accordance
with the foregoing clause (B) shall also specify the date on which the holders
of Series A Common Stock shall be entitled to exchange their Series A Common
Stock for securities or other property deliverable upon such Reorganization or
Dissolution, as the case may be.
(d) If any event occurs as to which, in the good faith opinion
of the Board of Directors, the other provisions of this paragraph 3 are not
strictly applicable, then the Board of Directors shall make an adjustment in the
application of such provisions, in accordance with the essential intent and
principles of this paragraph 3, so as to protect such purchase rights, but in no
event shall any such adjustment have the effect of increasing the Exercise
Price.
<PAGE> 25
4. Registration. Any registration rights which accrue to Holder (or
its permitted assignee(s)) with respect to any equity interests in the Company
(or its successor) shall apply to any equity obtained by Holder (or its
permitted assignee(s)) upon the exercise in whole or in part of this Option.
5. Closing of Books. The Company will at no time close its transfer
books against the transfer of the Option or any Option Shares issued or issuable
upon the exercise of the Option in any manner that interferes with the timely
exercise of the Option, unless the Company is advised by its counsel that such
closing is required by applicable law or the rules of any exchange upon which
such shares of Series A Common Stock are listed, and then only for so long as
required by such law or rules.
6. Mutilated or Missing Option Agreements. If this Option Agreement
is mutilated when surrendered to the Company, or the Company receives evidence
to its reasonable satisfaction of the destruction, loss or theft of this Option
Agreement, the Company shall issue, without charge, a replacement Option
Agreement. If requested by the Company, Holder shall supply an indemnity on
customary terms to protect the Company from any loss that it may suffer upon the
replacement of this Option Agreement.
7. No Voting Rights. This Option Agreement shall not entitle Holder,
as long as the Option is not exercised, to any voting rights or other rights as
a stockholder of the Company.
8. Parties in Interest: Assignability. Neither Holder or the Company
may assign its rights or obligations under this Option, provided, however that
the rights and obligations of the Company may be assigned, upon notice to
Holder, to any entity
<PAGE> 26
to which the Company's business is transferred and further provided, however,
that the rights and obligations of the Company under this Option Agreement shall
be binding upon and inure to the benefit of the successors and assigns of the
Company and their affiliates, including any transferee of all or substantially
all of the business or assets of the Company and further provided, that Holder
may (a) at any time grant to any third party a security interest in all or any
part of the Option or transfer the Option to an Affiliate (as defined in the
Company's Shareholders' Agreement dated December 30, 1997, as amended from time
to time) and (b) by written notice to the Company in the form attached hereto,
sell, assign, transfer or otherwise dispose of any vested portion of the Option
at any time following the fourth anniversary of the vesting of the portion of
the Option to be sold, assigned, transferred or otherwise disposed of.
9. Governing Law. This Option Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflicts of laws provisions thereof.
<PAGE> 27
IN WITNESS WHEREOF, each of the Company and Holder has duly executed and
delivered this Option Agreement as of the date first set forth above.
THE EDISON PROJECT INC.
By: /s/ Laura Eshbaugh
------------------
Name: Laura Eshbaugh
Title: President
WSI Inc.
By: /s/ H. Christopher Whittle
--------------------------
H. Christopher Whittle, President
<PAGE> 28
FORM OF NOTICE OF EXERCISE
________________, 199__
To: THE EDISON PROJECT INC.
The undersigned, pursuant to the provisions set forth in the Option
Agreement between the Company and the undersigned dated _________________,
hereby subscribes for and agrees to purchase _____ shares of the Series A Common
Stock covered by such Option Agreement, and makes payment herewith in full
therefor at the price per share provided by such Option Agreement.
Dated: ______________, _______
Name of Holder: ______________________
By: _______________________
Name:
Title:
Address:
<PAGE> 29
FORM OF ASSIGNMENT
FOR VALUE RECEIVED the undersigned, _______________________ hereby
sells, assigns and transfers all of the rights of the undersigned under the
Option Agreement between The Edison Project Inc. and the undersigned dated
__________________ with respect to the number of shares of the Series A Common
Stock covered thereby set forth herein below unto:
<TABLE>
<CAPTION>
Name of Assignee Address Number of Shares
---------------- ------- ----------------
<S> <C> <C>
</TABLE>
Dated: _______________, ______
Name of Holder: _____________________
By: _______________________
Name:
Title:
Address: _____________________________
_____________________________
<PAGE> 30
NEITHER THE OPTION GRANTED PURSUANT TO THIS AGREEMENT (OR THE SHARES OF STOCK
ISSUABLE UPON EXERCISE OF SUCH OPTION) HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. NEITHER SUCH OPTION OR SHARES MAY BE SOLD, OFFERED FOR
SALE, PLEDGED OR OTHERWISE DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SUCH ACT AND THE RULES AND REGULATIONS PROMULGATED
THEREUNDER.
Option Agreement to subscribe
Dated: December 30, 1997 for 1,000,000 Shares
THE EDISON PROJECT INC. B STOCK OPTION
THIS CERTIFIES that, for value received, WSI Inc. ("Holder") is
entitled to subscribe for and purchase from The Edison Project Inc., a Delaware
corporation (the "Company"), at a price of $20.00 per share (the "Exercise
Price"), the number of shares of the Company's Series A Common Stock first shown
above (as adjusted pursuant to the provisions hereof, the "Option Shares"). This
Option is intended to replace and supersede the option originally contained in
the Management Agreement dated as of March 14, 1995 between The Edison Project
L.P. and Holder, as amended as of March 1, 1997 (the "Management Agreement"), to
acquire a 5.4054505 % partnership interest for $20,000,000 and is issued in
conjunction with the Subscription Agreement, dated as of December 30, 1997, by
and among the Company, J.P. Morgan Investment Corporation, Sixty Wall Street
SBIC Fund, L.P., Investor Investments AB and certain Other Investors (as defined
therein).
<PAGE> 31
The Option is subject to the following provisions, terms and
conditions:
1. Vesting: Term: Exercise.
(a) The rights of Holder to exercise the Option shall vest as
follows: With respect to: (i) 700,000 of the Option Shares, on the date hereof,
provided, that for the purposes of paragraph 8 hereof, (A) 500,000 of such
Option Shares shall be deemed to have vested on March 14,1995, (B) 100,000 of
such Option Shares shall be deemed to have vested on June 30, 1996, and (C)
100,000 of such Option Shares shall be deemed to have vested on June 30, 1997;
(ii) 100,000 of the Option Shares, on June 30, 1998; (iii) 100,000 of the Option
Shares, on June 30, 1999; and (iv) 100,000 of the Option Shares, on June 30,
2000.
(b) The rights of Holder to exercise this Option shall expire
as follows: With respect to (i) the Option Shares vested on the date hereof, (A)
500,000 at 5:00 p.m. E.S.T. on the first business day of 2003, (B) 100,000
shares on the first business day of the Company's 2004 fiscal year, and (C)
100,000 shares on the First business day of the Company's 2005 fiscal year, (ii)
the Option Shares that vest in the Company's 1998 fiscal year, on the business
day following the seventh anniversary of the vesting of such Option Shares, and
(iii) the Option Shares that vest in the Company's 1999 and 2000 fiscal years,
on the business day following the fifth anniversary of the vesting of such
Option Shares. Any date specified in the preceding sentence shall be, an
"Expiration Date" hereunder.
(c) Subject to the preceding paragraphs 1(a) and (b), Holder
may exercise this Option, in whole or in part from time to time (but not as to a
fractional share of the Series A Common Stock) as of the first business day of
any fiscal year of the
<PAGE> 32
Company (or at such other times as may be permitted by the Company's Board of
Directors) by on or before such day (i) giving written notice to the Company in
the form attached hereto and (ii) transferring to the account designated by the
Company immediately available funds in an amount equal to aggregate Exercise
Price of the Option Shares in respect of which this Option is then being
exercised along with any amounts required to be withheld by the Company and
remitted to any taxing authority by reason of the exercise of the Option in
respect of such Option Shares.
(d) Upon the exercise of any portion of the Option, the books
and records of the Company shall be appropriately amended to reflect Holder's
acquisition of the Option Shares then purchased, and certificates representing
such Option Shares shall be delivered to Holder (or its designee(s)) as promptly
as practicable after such date.
2. Shares to be Full Paid; Reservation of Shares. The Company
covenants and agrees that (a) all Option Shares will, upon issuance, be validly
issued, fully paid, nonassessable, (b) at all times during the period during
which the Option may be exercised, the Company shall have authorized and
reserved for the purpose of issue upon the exercise of the Option, a sufficient
number of shares of Series A Common Stock, free from any pre-emptive rights, to
provide for the exercise of the Option in full, (c) the Company shall take all
action necessary to assure that such shares of Series A Common Stock may be so
issued without violation of any applicable law or regulation, or any
requirements of any securities exchange upon which the Series A Common Stock may
be listed, provided, however, that the Company shall not be required to register
the
<PAGE> 33
sale of any shares of Series A Common Stock with the United States Securities
and Exchange Commission (the "SEC") except as specifically provided herein.
3. Adjustment to the Number of Option Shares.
(a) Upon any capital transaction, business combination, or
reorganization (a "Reorganization") of the Company or the Company's business,
the number of Option Shares which may be purchased hereunder and the Exercise
Price per share shall be adjusted so that Holder shall thereafter be entitled to
receive, upon the exercise of the Option, the number of shares or other equity
interest or entitlement that Holder would have been entitled to receive upon the
occurrence of such event had Holder exercised the Option immediately prior to
the occurrence of such evenpound sterling, with the number of Option Shares and
the Exercise Price per share as so revised to be subject to (i) adjustment
appropriately to reflect stock splits, stock dividends, combinations and sales
of all or substantially all the assets of the Company and (ii) dilution in the
same manner as the Series A Common Stock outstanding immediately following such
event.
(b) The Company may redeem this Option or any portion thereof
in connection with a financing transaction or capital restructuring pursuant to
which the Company is redeeming options or equity issued under the Company's
Management Option Plan, as in effect from time to time, provided, that the
Company shall redeem the Option or any portion thereof on the same relative
terms as the Company redeems such management options.
(c) Upon any adjustment required by this Section 3' the
Company shall give written notice thereof, by first class mail, postage prepaid,
addressed to Holder at the address shown on the books of the Company, which
notice shall state the increase
<PAGE> 34
or decrease, if any, in the number of Option Shares issuable upon the exercise
of the Option, setting forth in reasonable detail the method of calculation and
the facts upon which such calculation is based.
(d) If at any time: (i) the Company shall declare any dividend
of cash, stock or property upon or make any other distribution in respect of the
Series A Common Stock, (ii) the Company shall offer for subscription pro rata to
the holders of Series A Common Stock any additional shares of stock of any class
or other securities or rights, (iii) there shall be any Reorganization, or (iv)
there shall be a voluntary or involuntary dissolution, liquidation or winding up
of the Company (collectively, "Dissolution"), then the Company shall give, by
first class mail, postage prepaid, addressed to the Holder at the address shown
on the books of the Company (A) at least 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 or subscription rights or for determining rights
to vote in respect of any such Reorganization or Dissolution, and (B) in the
case of any such Reorganization or Dissolution, at least 20 days' prior written
notice of the date when the same shall take place. Such notice in accordance
with the foregoing clause (A) shall also specify, in the case of any such
dividend, distribution or subscription rights, the date on which the holders of
Series A Common Stock shall be entitled thereto, and such notice in accordance
with the foregoing clause (B) shall also specify the date on which the holders
of Series A Common Stock shall be entitled to exchange their Series A Common
Stock for securities or other property deliverable upon such Reorganization or
Dissolution, as the case may be.
<PAGE> 35
(d) If any event occurs as to which, in the good faith opinion
of the Board of Directors, the other provisions of this paragraph 3 are not
strictly applicable, then the Board of Directors shall make an adjustment in the
application of such provisions, in accordance with the essential intent and
principles of this paragraph 3' so as to protect such purchase rights, but in no
event shall any such adjustment have the effect of increasing the Exercise
Price.
4. Registration. Any registration rights which accrue to Holder (or
its permitted assignee(s)) with respect to any equity interests in the Company
(or its successor) shall apply to any equity obtained by Holder (or its
permitted assignee(s)) upon the exercise in whole or in part of this Option.
5. Closing of Books. The Company will at no time close its transfer
books against the transfer of the Option or any Option Shares issued or issuable
upon the exercise of the Option in any manner that interferes with the timely
exercise of the Option, unless the Company is advised by its counsel that such
closing is required by applicable law or the rules of any exchange upon which
such shares of Series A Common Stock are listed, and then only for so long as
required by such law or rules.
6. Mutilated or Missing Option Agreements. If this Option Agreement
is mutilated when surrendered to the Company, or the Company receives evidence
to its reasonable satisfaction of the destruction, loss or theft of this Option
Agreement, the Company shall issue, without charge, a replacement Option
Agreement. If requested by the Company, Holder shall supply an indemnity on
customary terms to protect the Company from any loss that it may suffer upon the
replacement of this Option Agreement.
<PAGE> 36
7. No Voting Rights. This Option Agreement shall not entitle Holder,
as long as the Option is not exercised, to any voting rights or other rights as
a stockholder of the Company.
8. Parties in Interest; Assignability. Neither Holder or the Company
may assign its rights or obligations under this Option, provided, however that
the rights and obligations of the Company may be assigned, upon notice to
Holder, to any entity to which the Company's business is transferred and further
provided, however, that the rights and obligations of the Company under this
Option Agreement shall be binding upon and inure to the benefit of the
successors and assigns of the Company and their affiliates, including any
transferee of all or substantially all of the business or assets of the Company
and further provided, that Holder may (a) at any time grant to any third party a
security interest in all or any part of the Option or transfer the Option to an
Affiliate (as defined in the Company's Shareholders' Agreement dated December
30, 1997, as amended from time to time) and (b) by written notice to the Company
in the form attached hereto, sell, assign, transfer or otherwise dispose of any
vested portion of the Option at any time following the fourth anniversary of the
vesting of the portion of the Option to be sold, assigned, transferred or
otherwise disposed of.
9. Governing Law. This Option Agreement shall be governed by and
construed in accordance with the laws of the State of New York, without regard
to the conflicts of laws provisions thereof.
<PAGE> 37
IN WITNESS WHEREOF, each of the Company and Holder has duly executed and
delivered this Option Agreement as of the date first set forth above.
THE EDISON PROJECT INC.
By: /s/ Laura Eshbaugh
-------------------
Name: Laura Eshbaugh
Title: President
WSI Inc.
By: /s/ H. Christopher Whittle
--------------------------
H. Christopher Whittle, President
<PAGE> 38
FORM OF NOTICE OF EXERCISE
____________________, 199__
To: THE EDISON PROJECT INC.
The undersigned, pursuant to the provisions set forth in the Option
Agreement between the Company and the undersigned dated __________________,
hereby subscribes for and agrees to purchase _____ shares of the Series A Common
Stock covered by such Option Agreement, and makes payment herewith in full
therefor at the price per share provided by such Option Agreement.
Dated: _______________, ______
Name of Holder: _____________________
By: ________________________
Name:
Title:
Address:
<PAGE> 39
FORM OF ASSIGNMENT
FOR VALUE RECEIVED the undersigned, _______________________ hereby
sells, assigns and transfers all of the rights of the undersigned under the
Option Agreement between The Edison Project Inc. and the undersigned dated
__________________ with respect to the number of shares of the Series A Common
Stock covered thereby set forth herein below unto:
<TABLE>
<CAPTION>
Name of Assignee Address Number of Shares
---------------- ------- ----------------
<S> <C> <C>
</TABLE>
Dated: _______________, ______
Name of Holder: _____________________
By: _______________________
Name:
Title:
Address: _____________________________
_____________________________
<PAGE> 1
EXHIBIT 10.33
PROMISSORY NOTE
$1,699,000 Dated: June 5, 1992
-------------------
FOR VALUE RECEIVED, the undersigned hereby promises to pay to Whittle
Communications L.P. ("WCLP") at its offices at 333 Main Avenue, Knoxville,
Tennessee 37902, or, if WCLP assigns this note, to Whittle Schools L.P. ("WSLP")
at its offices at 333 Main Avenue, Knoxville, Tennessee 37902, the principal
amount of $1,600,000 on the fifth anniversary of the date hereof, or, if the
undersigned's employment with WSLP earlier ceases for any reason, on the date of
cessation and, on each anniversary of the date hereof, or from the next
preceding date through which interest on the principal amount hereof shall have
been paid, such interest to be at the annual mid-term Applicable Federal Rate,
as at the date first above written, for the purposes of Section 7872 of the
Internal Revenue Code.
This note is not assignable except that WCLP may assign this note to
WSLP.
IN WITNESS WHEREOF the undersigned has hereunto set his hand as of the
date first above written.
/s/ Benno C. Schmidt, Jr.
-------------------------
Benno C. Schmidt, Jr.
<PAGE> 1
Exhibit 10.34
PROMISSORY NOTE
$200,000 Dated: January 23, 1996
FOR VALUE RECEIVED, the undersigned hereby promises to pay to THE
EDISON PROJECT L.P. ("Edison") at its offices at 529 Fifth Avenue, 12th Floor,
New York, New York, 10017, $200,000 on the earlier of (i) the fifth anniversary
of the date hereof of (ii) six months from the completion by Edison (or its
successor) of an initial public offering which raises $30,000,000 and Interest
shall accrue on each anniversary of the date hereof until this Note is paid in
full and shall be payable on the date of payment of this Note, such interest to
be at the Prime Rate as publicly announced, by Chase Manhattan Bank, N.A., from
time to time, as at the date first above written, for the purposes of Section
7872 of the Internal Revenue Code.
This note is not assignable.
IN WITNESS WHEREOF the undersigned has hereunto get his hand as of the
date first above written.
/s/ Benno C. Schmidt, Jr.
-------------------------
Benno C. Schmidt, Jr.
<PAGE> 1
Exhibit 11.1
EDISON SCHOOLS, INC. AND SUBSIDIARIES
COMPUTATION OF PRO FORMA EARNINGS (LOSS) PER SHARE
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the year For the nine
ended months ended
June 30, 1998 March 31, 1999
<C> <C>
Net (loss) $(22,033) $(20,715)
---------- ----------
Common stock outstanding at:
July 1, 1997 6,214,709
July 1, 1998 6,214,711
Convertible preferred stock outstanding at:
July 1, 1997 36,505,671
July 1, 1998 43,448,289
Add:
Series G Common Stock 0.5
Series H Common Stock 0.5
Series D Convertible Preferred Stock 3,127,995 4,949,760
Series C Convertible Preferred Stock 562,054
---------- ----------
Pro forma weighted average number of shares
outstanding, assuming conversion of
convertible preferr 46,410,430 54,612,760
---------- ----------
Pro forma net loss per share $(0.47) $(0.38)
---------- ----------
HISTORICAL LOSS PER SHARE
Net (loss) $(22,033) $(20,715)
---------- ----------
</TABLE>
COMPUTATIONS OF PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING
FROM JULY 1, 1997 TO JUNE 30, 1998
<TABLE>
<CAPTION>
Common
Stock Common
Date # of Days Equivalents Stock
No. of Shares Issued Issued Outstanding % Equivalents
- -------------------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Common shares
6,214,709 outstanding @ July 1, 1997 365 100% 6,214,709
Preferred shares
36,505,671 outstanding @ July 1, 1997 365 100% 36,505,671
2 12/18/97 194 53.2% 1
1,057,473 12/18/97 194 53.2% 562,054
5,885,145 12/18/97 194 53.2% 3,127,996
- ---------- ----------
49,663,000 46,410,431
</TABLE>
COMPUTATIONS OF PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING
FROM JULY 1, 1998 TO MARCH 31, 1999
<TABLE>
<CAPTION>
Common
Stock Common
Date # of Days Equivalents Stock
No. of Shares Issued Issued Outstanding % Equivalents
- -------------------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Common shares
6,214,711 outstanding @ July 1, 1997 365 100% 6,214,711
Preferred shares
43,448,289 outstanding @ July 1, 1997 365 100% 43,448,289
4,271,352 8/27/98 218 79.3% 3,386,018
3,945,224 12/14/98 109 39.6% 1,563,743
- ---------- ----------
57,879,576 54,612,761
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of our
report dated October 5, 1998, on our audits of the consolidated financial
statements of Edison Schools Inc. and Subsidiaries as of June 30, 1997 and 1998
and for the years ended June 30, 1996, 1997 and 1998. We also consent to the
reference to our firm under the caption "Experts".
PricewaterhouseCoopers LLP
New York, New York
July 30, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE EDISON
SCHOOLS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET AND STATEMENT OF OPERATIONS
(UNAUDITED).
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1998
<PERIOD-END> MAR-31-1999
<CASH> 7,702,000
<SECURITIES> 0
<RECEIVABLES> 13,281,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 26,930,000
<PP&E> 55,295,000
<DEPRECIATION> 19,232,000
<TOTAL-ASSETS> 78,157,000
<CURRENT-LIABILITIES> 18,780,000
<BONDS> 16,000,000
0
1,564,000
<COMMON> 62,000
<OTHER-SE> 41,238,000
<TOTAL-LIABILITY-AND-EQUITY> 75,157,000
<SALES> 95,971,000
<TOTAL-REVENUES> 95,971,000
<CGS> 0
<TOTAL-COSTS> 117,483,000
<OTHER-EXPENSES> 796,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 2,150,000
<INCOME-PRETAX> 0
<INCOME-TAX> (20,715,000)
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,715,000)
<EPS-BASIC> (3.46)
<EPS-DILUTED> 0
</TABLE>
