<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 1999
REGISTRATION NO. 333-84177
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------------------------
EDISON SCHOOLS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 8200 13-3915075
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
521 FIFTH AVENUE, 15TH FLOOR
NEW YORK, NY 10175
(212) 419-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
H. CHRISTOPHER WHITTLE
PRESIDENT AND CHIEF EXECUTIVE OFFICER
EDISON SCHOOLS INC.
521 FIFTH AVENUE, 15TH FLOOR
NEW YORK, NY 10175
(212) 419-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID SYLVESTER, ESQ. MICHAEL W. BLAIR, ESQ.
BRENT B. SILER, ESQ. DEBEVOISE & PLIMPTON
HALE AND DORR LLP 875 THIRD AVENUE
1455 PENNSYLVANIA AVENUE, N.W. NEW YORK, NY 10022
WASHINGTON, D.C. 20004 TELEPHONE: (212) 909-6000
TELEPHONE: (202) 942-8400 TELECOPY: (212) 909-6836
TELECOPY: (202) 942-8484
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ------------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ------------
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one to be
used in connection with a U.S. and Canadian offering of the registrant's class A
common stock and one to be used in a concurrent international offering of the
class A common stock. The international prospectus will be identical to the U.S.
prospectus except that it will have a different front cover page, underwriting
section and back cover page. The U.S. prospectus is included herein and is
followed by the alternate front cover page, underwriting section and back cover
page to be used in the international prospectus, which each have been labeled
"Alternative Page for International Prospectus."
<PAGE> 3
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 17, 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.................................................... 38
MANAGEMENT.................................................. 55
RELATED PARTY TRANSACTIONS.................................. 63
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 August 15, 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;
and
- additional shares of class A common stock reserved for issuance
under our stock option plans.
DESCRIPTION OF COMMON STOCK
In general, holders of class A common stock have the same rights as the
holders of class B common stock, except that holders of class A common stock
have one vote per share and holders of class B common stock have ten votes per
share. 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 July 1999 and the automatic conversion of
all outstanding shares of our existing common stock and preferred stock,
including the shares issued in the July 1999 private placements, into
shares of class A common stock and class B common stock upon the closing
of this offering.
- The pro forma as adjusted balance sheet data also reflect the sale of the
class A common stock offered by us in this offering, after deducting the
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.
- Curriculum, administration and development expenses for fiscal 1999
included $22.4 million of stock-based compensation, which is a non-cash
expense recognized by us in connection with stock options and amendments
of stock options. For more information on these amendments, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Overview -- Stock-Based and Other Non-Cash Compensation
Expenses."
- We consider grades K-5, 6-8 and 9-12 each to be a school, and we count
grades K-5, 6-8 and 9-12 as separate schools even if they are located in
the same building. As we expand, we often introduce new grade levels
gradually rather than simultaneously opening all grade levels within a
school. We consider ourselves to have opened a new school if we introduce
at least one grade level at a different school level, for example, if we
add grade 6 at a location housing an existing K-5 school. In some cases,
we count grades K-6 as one school if it is the local practice to
configure elementary schools in this manner.
- We define gross site contribution as revenue from educational services
less direct site expenses. Gross site contribution is 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>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue from educational services.......... $ -- $ 11,773 $ 38,559 $ 69,407 $ 132,762
Education and operating expenses:
Direct site expenses..................... -- 11,415 32,150 59,576 114,097
Curriculum, administration and
development............................ 14,286 7,717 12,755 18,258 49,984
Depreciation and amortization............ -- 1,166 3,552 7,232 12,526
Pre-opening expenses..................... -- 1,476 1,487 2,486 5,457
Design team compensation................. -- -- -- 2,724 --
--------- --------- --------- --------- ----------
Total education and operating
expenses.......................... 14,286 21,774 49,944 90,276 182,064
--------- --------- --------- --------- ----------
Loss from operations....................... (14,286) (10,001) (11,385) (20,869) (49,302)
Other income (expense), net................ 161 (102) (137) (1,165) (249)
--------- --------- --------- --------- ----------
Net loss................................... (14,125) (10,103) (11,522) (22,034) (49,551)
Dividends on preferred stock............... -- -- -- (4,290) --
Preferred stock accretion.................. -- -- -- (278) (1,027)
--------- --------- --------- --------- ----------
Net loss attributable to common
stockholders............................. $ (14,125) $ (10,103) $ (11,522) $ (26,602) $ (50,578)
========= ========= ========= ========= ==========
Basic and diluted net loss per share
attributable to common stockholders...... $ (2.27) $ (1.63) $ (1.85) $ (4.28) $ (8.14)
========= ========= ========= ========= ==========
Weighted average number of common shares
outstanding used in computing basic and
diluted net loss per share attributable
to common stockholders................... 6,214,709 6,214,709 6,214,709 6,214,711 6,214,711
========= ========= ========= ========= ==========
Pro forma basic and diluted net loss per
share.................................... $ (0.86)
==========
Pro forma weighted average number of shares
outstanding used in computing pro forma
basic and diluted net loss per share..... 57,823,893
==========
STUDENT AND PER STUDENT DATA:
Student enrollment......................... -- 2,250 7,150 12,800 23,900
Total revenue per student.................. $ 5,232 $ 5,393 $ 5,422 $ 5,555
Loss from operations per student........... $ (4,445) $ (1,592) $ (1,630) $ (2,063)
EBITDA, net of other charges, per
student.................................. $ (3,927) $ (1,089) $ (807) $ (603)
OTHER OPERATING DATA:
Capital expenditures....................... $ 233 $ 4,970 $ 9,090 $ 21,181 $ 34,023
Gross site contribution.................... $ 358 $ 6,409 $ 9,831 $ 18,665
Gross site margin.......................... 3.0% 16.6% 14.2% 14.1%
Curriculum, administration and development
expenses, net of stock-based
compensation............................. $ 14,286 $ 7,717 $ 12,710 $ 17,673 $ 27,613
Curriculum, administration and development
expenses, net of stock-based
compensation, as a percentage of total
revenue.................................. 65.6% 33.0% 25.5% 20.8%
Total number of schools.................... -- 4 12 25 51
</TABLE>
(continued on the following page)
9
<PAGE> 12
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $ 27,923 69,664
Working capital............................................. 23,127 64,869
Total assets................................................ 104,392 146,133
Total debt, including current portion....................... 21,535 21,535
Accumulated deficit......................................... (141,055) (141,055)
Total stockholders' equity.................................. 60,564 102,306
</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.
10
<PAGE> 13
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, 1999, our net loss was
$49.6 million. As of June 30, 1999, our accumulated deficit was approximately
$141.1 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 1999, will expire
at the end of the 1999-2000 school year, and management agreements representing
10 schools, accounting for 21.1% of our total revenue for fiscal 1999, will
expire at the end of the 2000-2001 school year. In addition, 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. We also have a lengthy sales
cycle for charter schools for similar reasons, as well as the need to arrange
for facilities to house the school. 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
$24.9 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 $18.8 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 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. Of these shares, Morgan allowed WSI
to pledge shares to another lender. Upon satisfaction of WSI's
obligations to the other lender, these shares would revert back to being pledged
to Morgan. If Mr. Whittle and WSI were to default on their obligations to Morgan
and Morgan were to foreclose on its pledge, the class B common stock transferred
directly or indirectly to Morgan would be converted into class A common stock.
Thereafter, based on current holdings, and assuming the shares pledged to the
other lender revert to the Morgan pledge, 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 cash and cash equivalents, current
portion of long-term debt and capitalization as of June 30, 1999:
- on an actual basis;
- on a pro forma basis reflecting our July 1999 private placements of
preferred stock and the automatic conversion of all of our outstanding
shares of common stock and preferred stock, including the shares issued
in the July 1999 private placements, into shares of class A common stock
and class B common stock upon the closing of this offering; and
- on a pro forma as adjusted basis reflecting also the sale of the shares
of class A common stock offered by us in this offering and our receipt of
the estimated net proceeds, after deducting the estimated underwriting
discount and the estimated offering expenses that we expect to pay in
connection with this offering.
You should read this table along with "Management's Discussion and Analysis
of Financial Condition and Results of Operations," our financial statements and
the related notes and the other financial information included in this
prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents............................... $ 27,923 $ 69,664 $
========= ========= ======
Current portion of long-term debt....................... $ 6,661 $ 6,661 $6,661
========= ========= ======
Long-term debt, less current portion.................... $ 8,264 $ 8,264 $8,264
Stockholders' notes payable............................. 6,611 6,611 6,611
Stockholders' equity:
Series A through I common stock, $.01 par value per
share; 97,466,152 shares authorized, 6,214,711
shares issued and outstanding (actual); no shares
authorized, issued or outstanding (pro forma and
pro forma as adjusted)............................. 62 -- --
Non-voting common stock, $.01 par value per share;
9,827,026 shares authorized, no shares issued or
outstanding (actual); no shares authorized, issued
or outstanding (pro forma and pro forma as
adjusted).......................................... -- -- --
Class A common stock, $.01 par value per share; no
shares authorized, issued or outstanding (actual);
shares authorized (pro forma and pro
forma as adjusted); shares issued and
outstanding (pro forma); shares issued
and outstanding (pro forma as adjusted)............ -- 1,798
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).......................................... -- 200
Convertible preferred stock, series A through G, $.01
par value per share; 77,931,054 shares authorized,
56,422,341 shares issued and outstanding (actual);
no shares authorized, issued or outstanding (pro
forma and pro forma as adjusted)................... 1,868 -- --
Preferred stock, undesignated, $.01 par value per
share; no shares authorized, issued or outstanding
(actual);
shares authorized, no shares issued or outstanding
(pro forma and pro forma as adjusted).............. -- -- --
Additional paid-in capital............................ 207,666 249,340
Unearned stock-based compensation..................... (5,836) (5,836)
Accumulated deficit................................... (141,055) (141,055)
Stockholder note receivable........................... (2,141) (2,141)
--------- --------- ------
Total stockholders' equity....................... 60,564 102,306
--------- --------- ------
Total capitalization.................................... $ 75,439 $ 117,181 $
========= ========= ======
</TABLE>
23
<PAGE> 26
The number of shares of class A and class B common stock outstanding as of
June 30, 1999 does not reflect:
- 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 June 30, 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 June 30, 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 June 30, 1999 at an
exercise price of $ per share; and
- additional shares of class A common stock reserved for issuance
under our stock option plans.
At June 30, 1999, there were 97,466,145 shares of series A common stock
authorized and 6,214,704 shares of series A common stock issued and outstanding.
At that time, there was one share authorized and one share issued and
outstanding of each of series B through H common stock.
At June 30, 1999, there were 31,000,000, 1,010,101, 6,258,608, 25,077,843,
6,759,420, 4,757,476 and 3,067,606 shares of series A, B, C, D, E, F and G
preferred stock, respectively, authorized. There were 30,294,435, 1,010,101,
6,258,608, 14,101,721, 3,957,476 and 800,000 shares of series A, B, C, D, F and
G preferred stock, respectively, issued and outstanding at June 30, 1999 and no
shares of series E preferred stock issued or outstanding at June 30, 1999.
After June 30, 1999, we authorized an additional 7,000,000 shares of series
A common stock, one share of series I common stock and an additional 7,000,000
shares of series F preferred stock. In our July 1999 private placements, we
issued one share of series I common stock and 6,787,238, shares of series F
preferred stock.
There were no shares of series A, B, C, D, E, F and G preferred stock
authorized, issued or outstanding on a pro forma or a pro forma as adjusted
basis.
More detailed information about our series A through I common stock and
series A through G convertible preferred stock is included in note 9 to our
financial statements included in this prospectus.
The capitalization table gives effect to a change in the number of
authorized shares of common stock and preferred stock after June 30, 1999 that
will result from the filing of our amended and restated certificate of
incorporation.
24
<PAGE> 27
DILUTION
Our pro forma net tangible book value as of June 30, 1999 was approximately
$102.3 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 July
1999 private placements and the conversion of our common stock and preferred
stock, including the preferred stock that was issued in the July 1999 private
placements, into class A common stock and class B common stock. After giving
effect to the issuance and sale of the 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 June 30, 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 June 30, 1999, the total number of shares of class A and class B common stock
purchased, the total consideration paid and the average price paid by existing
stockholders and to be paid by new investors in this offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- ------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------- ------- ------- -------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................... % $ % $
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 June 30, 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 June 30, 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, 1997,
1998 and 1999, and the balance sheet data as of June 30, 1998 and 1999, are
derived from, and are qualified by reference to, audited financial statements
included in this prospectus. The statement of operations data for the years
ended June 30, 1995 and 1996 and the balance sheet data as of June 30, 1995,
1996 and 1997 are derived from our audited financial statements that are not
included in this prospectus. For fiscal 1995 and 1996, although Edison was a
partnership, we computed our earnings per share as if Edison were a corporation.
Curriculum, administration and development expenses for fiscal 1999 included
$22.4 million of stock-based compensation expense. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Stock-Based and
Other Non-Cash Compensation Expenses."
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------
1995 1996 1997 1998 1999
---------- ---------- ---------- ---------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue from educational services................... $ -- $ 11,773 $ 38,559 $ 69,407 $132,762
Education and operating expenses:
Direct site expenses............................ -- 11,415 32,150 59,576 114,097
Curriculum, administration and development...... 14,286 7,717 12,755 18,258 49,984
Depreciation and amortization................... -- 1,166 3,552 7,232 12,526
Pre-opening expenses............................ -- 1,476 1,487 2,486 5,457
Design team compensation........................ -- -- -- 2,724 --
--------- --------- --------- --------- ----------
Total education and operating
expenses................................... 14,286 21,774 49,944 90,276 182,064
--------- --------- --------- --------- ----------
Loss from operations................................ (14,286) (10,001) (11,385) (20,869) (49,302)
Other income (expense), net......................... 161 (102) (137) (1,165) (249)
--------- --------- --------- --------- ----------
Net loss............................................ (14,125) (10,103) (11,522) (22,034) (49,551)
Dividends on preferred stock........................ -- -- -- (4,290) --
Preferred stock accretion........................... -- -- -- (278) (1,027)
--------- --------- --------- --------- ----------
Net loss attributable to common
stockholders...................................... $(14,125) $(10,103) $(11,522) $(26,602) $(50,578)
========= ========= ========= ========= ==========
Basic and diluted net loss per share attributable to
common
stockholders...................................... $ (2.27) $ (1.63) $ (1.85) $ (4.28) $ (8.14)
========= ========= ========= ========= ==========
Weighted average number of common shares outstanding
used in computing basic and diluted net loss per
share attributable to common stockholders......... 6,214,709 6,214,709 6,214,709 6,214,711 6,214,711
========= ========= ========= ========= ==========
Pro forma basic and diluted net loss per share...... $ (0.86)
==========
Pro forma weighted average number of shares
outstanding used in computing pro forma basic and
diluted net loss per share........................ 57,823,893
==========
</TABLE>
(continued on the following page)
26
<PAGE> 29
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND PER STUDENT DATA)
<S> <C> <C> <C> <C> <C>
STUDENT AND PER STUDENT DATA:
Student enrollment................................ -- 2,250 7,150 12,800 23,900
Total revenue per student......................... $ 5,232 $ 5,393 $ 5,422 $ 5,555
Loss from operations per student.................. $ (4,445) $ (1,592) $ (1,630) $ (2,063)
EBITDA, net of other charges, per student......... $ (3,927) $ (1,089) $ (807) $ (603)
OTHER OPERATING DATA:
Capital expenditures.............................. $ 233 $ 4,970 $ 9,090 $ 21,181 $ 34,023
Gross site contribution........................... $ 358 $ 6,409 $ 9,831 $ 18,666
Gross site margin................................. 3.0% 16.6% 14.2% 14.1%
Curriculum, administration and development
expenses, net of stock-based compensation....... $ 14,286 $ 7,717 $ 12,710 $ 17,673 $ 27,613
Curriculum, administration and development
expenses, net of stock-based compensation, as a
percentage of total revenue..................... 65.6% 33.0% 25.5% 20.8%
Total number of schools........................... -- 4 12 25 51
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents......................... $ 2,710 $ 3,904 $ 15,741 $ 7,492 $ 27,923
Working capital................................... 4,672 8,693 19,843 2,684 23,127
Total assets...................................... 6,359 18,423 46,231 55,935 104,392
Total debt, including current portion............. -- 2,825 9,395 17,151 21,535
Accumulated deficit............................... (47,845) (57,215) (69,470) (91,504) (141,055)
Total stockholders' equity........................ 5,474 12,539 31,573 26,831 60,564
</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 $132.8
million in fiscal 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 June 30, 1999, we had an accumulated deficit of
$141.1 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
28
<PAGE> 31
associated with new schools, financing costs or depreciation and amortization
related to technology, including computers for teachers and students, curriculum
materials and capital improvements to school buildings.
GROSS SITE CONTRIBUTION AND GROSS SITE MARGIN
We define gross site contribution as revenue from educational services less
direct site expenses. Gross site margin is gross site contribution expressed as
a percentage of revenue from educational services. Gross site contribution is
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, 1999, our net loss was $49.6 million. As of June 30, 1999,
our accumulated deficit was approximately $141.1 million.
29
<PAGE> 32
The following table sets forth various financial data expressed as a
percentage of total revenue for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED JUNE 30,
--------------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Revenue from educational services........................... 100.0% 100.0% 100.0%
----- ----- -----
Education and operating expenses:
Direct site expenses...................................... 83.4 85.8 86.0
Curriculum, administration and development
expenses............................................... 33.1 26.3 37.6
Depreciation and amortization............................. 9.2 10.4 9.4
Pre-opening expenses...................................... 3.9 3.6 4.1
Design team compensation.................................. -- 3.9 --
----- ----- -----
Total education and operating expenses................. 129.6 130.0 137.1
----- ----- -----
Loss from operations........................................ (29.6) (30.0) (37.1)
----- ----- -----
Other income (expense), net................................. (0.4) (1.7) (0.2)
----- ----- -----
Net loss.................................................... (30.0)% (31.7)% (37.3)%
===== ===== =====
</TABLE>
In order to achieve profitability, we believe it will be necessary both to
improve gross site margin while maintaining educational quality and to continue
to reduce central expenses as a percentage of total revenue from educational
services. The latter improvement is largely dependent on our ability to increase
our total revenue through expanded student enrollment while controlling central
costs.
CONTRACT SCHOOLS COMPARED TO CHARTER SCHOOLS
We operate two types of schools: contract and charter. Contract schools are
public schools we operate under a management agreement with local school boards.
Charter schools are schools we operate under a 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.
STOCK-BASED AND OTHER NON-CASH COMPENSATION EXPENSES
Beginning in 1995, we granted a number of stock options with four and
five-year terms. In the fourth quarter of fiscal 1999, we decided to extend the
term of these options to ten years and to make other changes in their terms that
we believe are customary for options granted by public companies. As a result,
we were required to record compensation expense at that time representing the
difference between the exercise price of the options and the deemed fair market
value of the shares underlying the stock options. In this regard, we recognized
an expense of $17.4 million in the fourth quarter of fiscal 1999. This is in
addition to $5.0 million of stock-based compensation expenses recorded in fiscal
1999 in connection with stock options that were subject to variable accounting
treatment. We expect to recognize additional expenses related to the option
amendments aggregating approximately $5.8 million over the vesting periods of
the individual stock options. These additional expenses are expected to
approximate $3.6 million for
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fiscal 2000, $1.1 million for fiscal 2001, $703,000 for fiscal 2002 and $413,000
for fiscal 2003. We do not expect any future charges for currently existing
options resulting from variable accounting.
In connection with our assumption of a contingent liability of Mr. Whittle
in the first quarter of fiscal 2000, we expect to record a non-cash charge of
approximately $1.9 million in that quarter. For details of this assumption, see
"Related Party Transactions -- Assumption of Put Obligation of Executive."
INCOME TAXES
We have not recorded any provision for federal, state and local income
taxes because we have incurred operating losses from our inception through June
30, 1999. As of that date, we had approximately $80 million of net operating
loss carryforwards for federal income tax purposes, approximately $45 million of
which are expected to expire in fiscal 2013 and approximately $35 million of
which are expected to expire in fiscal 2019, available to offset future taxable
income. Given our limited operating history, losses incurred to date and the
difficulty in accurately forecasting our future results, we do not believe the
realization of the related deferred income tax assets meets the criteria
required by generally accepted accounting principles and, accordingly, we have
recorded a full valuation allowance.
SEASONALITY
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
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $132.8 million for fiscal 1999 from $69.4 million for fiscal 1998,
an increase of 91.4%. The increase was primarily due to the 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 $114.1 million
for fiscal 1999 from $59.6 million for fiscal 1998, an increase of 91.4%. Like
revenue growth, the increase in direct site expenses was primarily due to the
86.7% increase in student enrollment. The largest element of direct site
expenses is personnel costs. Personnel costs included in direct site expenses
increased to $90.7 million for fiscal 1999 from $46.0 million for fiscal 1998.
GROSS SITE MARGIN AND CONTRIBUTION. Our gross site margin remained
relatively stable at 14.1% for fiscal 1999 compared to 14.2% for fiscal 1998.
Higher revenues resulted in an increase in gross site contribution to $18.7
million for fiscal 1999 from $9.8 million for fiscal 1998.
CURRICULUM, ADMINISTRATION AND DEVELOPMENT EXPENSES. Our curriculum,
administration and development expenses increased to $50.0 million for fiscal
1999 from $18.3 million for fiscal 1998, an increase of 173%. This substantial
increase was primarily due to stock-based, non-cash compensation
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expense, which increased to $22.4 million for fiscal 1999 from $585,000 for
fiscal 1998, resulting from amendments to options and, to a lesser extent,
application of variable accounting to outstanding options. A 97.2% increase in
personnel costs represented the next largest portion of the overall increase.
This increase in personnel costs was primarily attributable to a substantial
increase in staff in our school operations and curriculum and education
divisions, an increase in our professional marketing employees to support an
expanded marketing program, an increase in our central office administrative
staff to enhance legal and contracting functions and to expand financial
reporting and support functions. The remainder was primarily attributable to
increased travel expenses and, to a lesser extent, greater rent expenses.
Curriculum, administration and development expenses as a percentage of total
revenue increased to 37.6% for fiscal 1999 from 26.3% for fiscal 1998. Excluding
stock-based non-cash compensation expenses, curriculum, administration and
development expenses as a percentage of total revenue decreased to 20.8% for
fiscal 1999 from 25.5% for fiscal 1998.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $12.5 million for fiscal 1999 from $7.2 million for fiscal 1998, an increase
of 73.6%. The increased depreciation and amortization resulted from additional
capital expenditures for our curriculum materials, computers and related
technology and, to a lesser extent, facility improvements. For fiscal 1999,
additions to property and equipment totaled $34.0 million, including $13.7
million for additional computers and equipment, $12.6 million for curriculum
materials and $7.7 million for new facilities and improvements. These increases
resulted primarily from the large investments in the 26 new schools we opened in
the 1998-1999 school year and operated during the year.
PRE-OPENING EXPENSES. Our pre-opening expenses increased to $5.5 million
for fiscal 1999 from $2.5 million for fiscal 1998, an increase of 120%. This
increase was associated primarily with enrolling students at the 26 new schools
opened in August 1998 compared to the 13 schools opened one year earlier.
DESIGN TEAM COMPENSATION. Some members of our original design team were
entitled to distributions when we achieved predetermined performance objectives.
These objectives were achieved and the contractual provisions triggered in
connection with our issuance of preferred stock in December 1997. Accordingly,
during fiscal 1998, we incurred approximately $2.7 million of expense. We did
not recognize any similar expenses in fiscal 1999 and we do not expect to
recognize any similar expenses in the future.
LOSS FROM OPERATIONS. Our loss from operations increased to $49.3 million
for fiscal 1999 from $20.9 million for fiscal 1998, an increase of 136%. The
$28.4 million of additional loss primarily reflects the growth in curriculum,
administration and development expenses.
OTHER INCOME AND EXPENSE. We recognized $250,000 of other expense, net,
for fiscal 1999, compared to $1.2 million for fiscal 1998. 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 partially offset by an increase in interest expense primarily
due to additional financing for technology and other equipment investments at
our schools.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
increased to $49.6 million for fiscal 1999 from $22.0 million for fiscal 1998,
an increase of 125.5%. During fiscal 1998, we declared a $4.3 million dividend
on preferred stock, in the form of notes payable, in connection with an equity
financing. During fiscal 1999 and fiscal 1998, we recognized $1.0 million and
$278,000 of preferred stock accretion, respectively. This resulted in net loss
attributable to common stockholders of $50.6 million and $26.6 million for these
periods, respectively.
FISCAL YEAR ENDED JUNE 30, 1998 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1997
REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $69.4 million for fiscal 1998 from $38.6 million for fiscal 1997,
an increase of 79.8%. The greatest portion of the increase was due to student
enrollment increasing 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.
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DIRECT SITE EXPENSES. Our direct site expenses increased to $59.6 million
for fiscal 1998 from $32.1 million for fiscal 1997, an increase of 85.7%. The
increase in direct site expenses was primarily due to increased staffing to
support the 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.
LIQUIDITY AND CAPITAL RESOURCES
We have historically operated in a negative cash flow position. To date we
have financed our cash needs through a combination of equity and debt financing.
Since our inception and through June 30, 1999, we had raised $190.3 million of
equity capital. In July 1999, we closed on an additional $41.7 million of new
equity capital. We have also utilized debt and equipment leasing arrangements to
finance computers and other technology investments in our schools. We do not
have a line of credit.
At June 30, 1999, after giving effect to the $41.7 million of equity
capital we received in July 1999, our cash available for operations was
approximately $69.6 million.
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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 fiscal 1999, we used approximately $16.1 million for operating
activities. This use primarily resulted from $49.6 million of net loss and a
$3.0 million increase in accounts receivable. These amounts were offset by $22.4
million in stock-based compensation expense, depreciation and amortization
totaling $11.5 million and an increase of $2.6 million of accounts payable and
accrued expenses. The large increases in accounts receivable and accounts
payable and accrued expenses are directly attributable to the 86.7% increase in
student enrollment that was experienced during the fiscal year. In fiscal 1998,
we used approximately $10.6 million for operating activities.
CASH USED IN INVESTING ACTIVITIES
For fiscal 1999, we used approximately $30.3 million in investing
activities. During the year, we invested approximately $34.0 million in our
schools and operations. This amount includes the investments we make in
technology and curriculum in each of the schools we open. We have also advanced
to some of our charter board clients funds to help obtain, renovate and complete
school facilities. The amounts advanced during fiscal 1999 approximated $15.8
million. During fiscal 1999, we also received approximately $1.9 million in
repayments on advances previously made. Significant real estate investments are
often necessary when we establish a charter school and existing facilities are
not available. We work closely with the charter board to locate, develop and
finance the charter school's facilities. The building or renovation process
generally lasts several months and can vary widely in expense from minimal
upgrades to new construction, which can cost from $4.0 million to more than $8.0
million. We also sold buildings to charter boards during the year. The proceeds
of the sales approximated $10.5 million. For fiscal 1998, we used approximately
$20.1 million in investing activities. These investments were primarily for
technology and equipment for our schools.
CASH FROM FINANCING ACTIVITIES
In fiscal 1999, we received approximately $66.8 million in our financing
activities. The amounts received were from issuances of equity securities 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 fiscal 1999. Additionally, stockholder notes payable totaling
$1.6 million were issued in connection with this equity financing, of which
approximately $938,000 were issued during fiscal 1999. The amounts received
pursuant to the equity commitments were partially offset by payments on debt of
approximately $6.2 million. Cash generated from financing activities in fiscal
1998 of $22.4 million was primarily from the issuance of stock and debt
totalling $33.2 million, net of issuance expenses, partially offset by debt
repayments of $7.3 million.
We generally finance our technology investments in schools through debt
arrangements. We have also issued warrants in connection with these
transactions. Details of the financing arrangements are included in note 6 of
the notes to our financial statements. In fiscal 1999, an additional $9.6
million was financed through notes payable for computers and other technology.
PHILANTHROPY
Philanthropic entities have supported seven of our 51 schools, focused
particularly in those areas where the per-pupil expenditures would otherwise
make it difficult to achieve satisfactory financial
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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 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 June 30,
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.
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YEAR 2000
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may not properly recognize a year that begins
with "20" instead of "19." This, in turn, could result in major system failures
or miscalculations that could disrupt our business. We have formulated a plan to
address our year 2000 issues and have created a year 2000 task force headed by
our Chief Information Officer to implement the plan. Our year 2000 plan has six
phases:
- ORGANIZATIONAL AWARENESS: educating our employees, senior management and
the board of directors about the year 2000 issue;
- INVENTORY: conducting a complete inventory of internal business systems
and their relative priority to continuing business operations. In
addition, this phase includes a complete inventory of critical vendors,
suppliers and service providers and their year 2000 compliance status;
- ASSESSMENT: assessing our internal business systems and the year 2000
compliance status of our important vendors, suppliers and service
providers;
- PLANNING: preparing the individual project plans and project teams and
other required internal and external resources to implement the solutions
for year 2000 compliance;
- EXECUTION: implementing the solutions and fixes; and
- VALIDATION: testing the solutions for year 2000 compliance.
Our year 2000 plan will apply to our internal business systems and compliance by
external customers and providers.
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.
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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.
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 $132.8
million in fiscal 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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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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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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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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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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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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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, Charter
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Schools USA, The Leona Group, National Heritage Academy and SABIS Educational
Systems. In addition, there are at least two companies that operate private
schools with plans for charter schools. The TesseracT Group is currently
managing one charter school and has been awarded several more charters. Nobel
Learning Communities was recently awarded its first charter to operate a school
in Pennsylvania. In addition, other private school operators, post-secondary
education providers or child care providers could possibly enter our market. For
example, Bright Horizons Family Solutions, a provider of corporate sponsored
child care, just opened its first private school and it or other child care
providers could seek opportunities in the charter or contract schools market as
well.
LEGAL PROCEEDINGS
We are involved in various legal proceedings from time to time incidental
to the conduct of our business. We currently believe that any ultimate liability
arising out of such proceedings will not have a material adverse effect on our
financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors and their ages as of 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........................ 39 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............................. 45 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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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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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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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> 61
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
59
<PAGE> 62
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. If we terminate Mr. Whittle for cause, he
is entitled to receive his base salary only through the effective date of
termination. If Mr. Whittle terminates the relationship without "good reason,"
he is entitled to receive his then current base salary for twelve
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<PAGE> 63
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 $225,000. This agreement also provided for a
one-time cash transition payment of $110,000 to Mr. Chubb. If Mr. Chubb is
terminated without cause, he is entitled to receive as severance pay his base
salary for six months following the effective date of his termination less any
amount he earns as a result of new employment. If Mr. Chubb is terminated for
cause, he is entitled to receive his base salary only through the effective date
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<PAGE> 64
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, $29,000 in fiscal
1998 and $62,876 in fiscal 1999.
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<PAGE> 65
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 $337,000,
respectively, as of June 30, 1999. Mr. Schmidt is our Chairman of the Board of
Directors. Prior to the March 1997 amendment, we forgave accrued interest of
$100,000 annually on the loans beginning on July 1, 1995 and ending on the date
of the amendment.
MANAGEMENT AGREEMENT WITH WSI INC.
On March 15, 1995, we entered into a five-year management agreement with
WSI Inc., 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, $65,123 in fiscal
1998 and $2,762 in fiscal 1999. 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. 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.
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
</TABLE>
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<PAGE> 66
<TABLE>
<CAPTION>
OPTION OPTION PRICE SERIES A COMMON
NAME GRANT DATE PER SHARE STOCK PURCHASABLE
---- ---------- ------------ -----------------
<S> <C> <C> <C>
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>
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 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 greater of
the prime rate or our actual borrowing rate in effect from time to time and
would become due in full on the fifth anniversary of the loans.
In July 1999, we amended other options held by Mr. Whittle and WSI to,
depending upon the option, (1) extend the exercise period through the tenth
anniversary of the date of grant and (2) modify the vesting provisions. The
following table summarizes these amendments:
<TABLE>
<CAPTION>
SERIES A
COMMON VESTING
OPTION STOCK EXERCISE ------------------------------------------------------------
GRANT DATE PURCHASABLE PRICE PRIOR 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 or higher for 90 days
or upon change in control
</TABLE>
In addition, the options which were not fully vested were amended to provide
that vesting accelerates fully, if our common stock is then trading at specified
levels, upon termination of Mr. Whittle's employment by Edison without cause or
by him with good reason, upon his death or disability or upon a change in
control of Edison.
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 August 1999, we assumed this contingent obligation on Mr.
Whittle's behalf.
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<PAGE> 67
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 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
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<PAGE> 68
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
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
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<PAGE> 69
(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.
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.
67
<PAGE> 70
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-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
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<PAGE> 71
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 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 August 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 August 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 10171
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 K. 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 August 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 August 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 August 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 August 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 August 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 August 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 August 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 August 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
August 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 August 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 August 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 and
shares of class A common stock and shares of class B common stock
held of record by Asher J. Liftin.
(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 August
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 August 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 August 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 August 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 August 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.
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<PAGE> 75
(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 August 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 August 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 August 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 August 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 August 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 August 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 August 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 August 15, 1999.
(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.,
73
<PAGE> 76
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
August 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 August 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) Includes an aggregate of shares of class A common stock and
shares of class B common stock issuable upon exercise of options
and warrants exercisable within 60 days of August 15, 1999. Also includes
other shares described in footnotes 8 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 August 15, 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
75
<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
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
.
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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 August 15, 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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<PAGE> 83
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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<PAGE> 84
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
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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,
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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, 1998 and 1999 and for each of the
three years in the period ended June 30, 1999 included in this prospectus have
been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the class A
common stock we propose to sell in this offering. This prospectus, which
constitutes part of the registration statement, does not contain all of the
information set forth in the registration statement. For further information
about us and the class A common stock we propose to sell in this offering, we
refer you to the registration statement and the exhibits filed as a part of the
registration statement. Statements contained in this prospectus as to the
contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement, we refer you to the
copy of the contract or document that has been filed. The registration statement
may be inspected without charge at the principal office of the Securities and
Exchange Commission in Washington, D.C. and copies of all or any part of which
may be inspected and copied at the public reference facilities maintained by the
Securities and Exchange Commission at 450 Fifth Street, N.W., Judiciary Plaza,
Room 1024, Washington, D.C. 20549, and at the Commission's regional offices
located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661-2511 and 7 World Trade Center, Suite 1300, New York, New York
10048. You can obtain information on the operation of the public reference
facilities maintained by the Commission by calling 1-800-SEC-0330. Copies of
such material can also be obtained at prescribed rates by mail from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549. In addition, the Securities and Exchange Commission maintains a website
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission.
87
<PAGE> 90
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Balance Sheets as of June 30, 1998 and 1999................. F-3
Statements of Operations for the years ended June 30, 1997,
1998 and 1999............................................. F-4
Statements of Changes in Stockholders' Equity for the years
ended June 30, 1997, 1998 and 1999........................ F-5
Statements of Cash Flows for the years ended June 30, 1997,
1998 and 1999............................................. F-6
Notes to Financial Statements............................... F-7
</TABLE>
F-1
<PAGE> 91
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Edison Schools Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Edison Schools Inc. (the
"Company") at June 30, 1998 and 1999, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 1999, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 2 to the financial statements, the Company, in
accordance with Accounting Principles Board Opinion No. 20 "Accounting Changes,"
has retroactively expensed all start up costs that had been previously deferred.
PRICEWATERHOUSECOOPERS LLP
New York, New York
August 13, 1999
F-2
<PAGE> 92
EDISON SCHOOLS INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30,
-----------------------------
1998 1999
------------ -------------
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents................................. $ 7,491,644 $ 27,922,576
Accounts receivable....................................... 9,027,283 12,034,962
Notes and other receivables............................... 712,325 10,204,966
Other current assets...................................... 816,164 1,439,920
------------ -------------
Total current assets.............................. 18,047,416 51,602,424
Property and equipment, net................................. 31,642,444 42,871,238
Restricted cash............................................. 3,972,000 2,431,416
Notes and other receivables, less current portion........... 838,520 3,399,890
Other assets................................................ 1,434,487 4,086,887
------------ -------------
Total assets...................................... $ 55,934,867 $ 104,391,855
============ =============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long term debt......................... $ 4,601,683 $ 6,660,789
Accounts payable.......................................... 3,845,958 12,014,443
Accrued expenses.......................................... 6,914,934 9,799,721
------------ -------------
Total current liabilities......................... 15,362,575 28,474,953
Long term debt, less current portion........................ 6,877,425 8,263,824
Stockholders' notes payable................................. 5,672,155 6,610,594
Other liabilities........................................... 1,191,864 478,128
------------ -------------
Total liabilities................................. 29,104,019 43,827,499
------------ -------------
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock:
Series A-G, par value $.01; 70,105,972 and 77,931,054
shares authorized in 1998 and 1999, respectively;
43,448,289 and 56,422,341 shares issued and
outstanding in 1998 and 1999, respectively (aggregate
liquidation preference of $85,219,974, and
$146,990,753 in 1998 and 1999, respectively)......... 712,177 1,868,380
Common stock:
Series A-H and non-voting common, par value $.01;
99,468,096 and 107,293,178 shares authorized in 1998
and 1999, respectively; 6,214,711 shares issued and
outstanding in 1998 and 1999......................... 62,147 62,147
Additional paid-in capital................................ 120,575,885 207,666,150
Unearned stock-based compensation......................... (874,987) (5,836,556)
Accumulated deficit....................................... (91,503,518) (141,054,909)
Stockholder receivable.................................... (2,140,856) (2,140,856)
------------ -------------
Total stockholders' equity........................ 26,830,848 60,564,356
------------ -------------
Total liabilities and stockholders' equity........ $ 55,934,867 $ 104,391,855
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 93
EDISON SCHOOLS INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenue from educational services........................... $ 38,559,233 $ 69,406,841 $132,762,491
------------ ------------ ------------
Education and operating expenses:
Direct site expenses...................................... 32,149,738 59,576,224 114,096,875
Curriculum, administration and development................ 12,755,088 18,257,818 49,984,180
Depreciation and amortization............................. 3,552,440 7,231,628 12,525,904
Preopening expenses....................................... 1,486,740 2,485,813 5,457,113
Design team compensation.................................. -- 2,723,902 --
------------ ------------ ------------
Total education and operating expenses.............. 49,944,006 90,275,385 182,064,072
------------ ------------ ------------
Loss from operations................................ (11,384,773) (20,868,544) (49,301,581)
Other income (expense):
Interest income........................................... 390,599 723,409 3,363,082
Interest expense.......................................... (527,421) (1,761,821) (3,244,782)
Loss on disposal of property and equipment................ -- (126,499) (368,110)
------------ ------------ ------------
Total other......................................... (136,822) (1,164,911) (249,810)
------------ ------------ ------------
Net loss.................................................... $(11,521,595) $(22,033,455) $(49,551,391)
============ ============ ============
Net loss attributable to common stockholders:
Net loss.................................................. $(11,521,595) $(22,033,455) $(49,551,391)
Dividends declared on preferred stock..................... -- (4,290,200) --
Preferred stock accretion................................. -- (277,694) (1,026,462)
------------ ------------ ------------
Net loss attributable to common stockholders........ $(11,521,595) $(26,601,349) $(50,577,853)
============ ============ ============
Per common share data:
Basic and diluted net loss per share...................... $ (1.85) $ (4.28) $ (8.14)
============ ============ ============
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share....... 6,214,709 6,214,711 6,214,711
============ ============ ============
Pro forma per share data:
Pro forma basic and diluted net loss per share............ $ (0.86)
============
Pro forma weighted average shares outstanding used in
computing basic and diluted net loss per share.......... 57,823,893
============
</TABLE>
The accompanying notes are an integral part of these financial statements
F-4
<PAGE> 94
EDISON SCHOOLS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
PREFERRED STOCK
------------------------------------------------------------------------------
SERIES A SERIES B SERIES C SERIES D
PARTNERS' --------------------- ------------------- ------------------- ----------
CONTRIBUTIONS SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES
------------- ---------- -------- --------- ------- --------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.................... 5,885,145
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 5,885,145
Issuance of Series D preferred
stock, net.................... 8,216,576
Issuance of Series F preferred
stock, net....................
Issuance of Series G preferred
stock, net....................
Deferred compensation related
to stock options..............
Stock-based compensation.......
Accretion of Series D preferred
PIK dividend..................
Net loss for the year ended
June 30, 1999.................
------------ ---------- -------- --------- ------- --------- ------- ----------
Balances, June 30, 1999........ $ 0 30,294,435 $302,945 1,010,101 $10,101 6,258,608 $62,586 14,101,721
============ ========== ======== ========= ======= ========= ======= ==========
<CAPTION>
PREFERRED STOCK COMMON STOCK
---------------------------------------------------- -------------------------------------
SERIES D SERIES F SERIES G SERIES A SERIES B-H
---------- ------------------- ----------------- ------------------- ---------------
AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
---------- --------- ------- ------- ------- --------- ------- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances, June 30, 1996........
Partner contributions -- Edison
Project LP....................
Effect of reorganization....... 6,214,704 $62,147 5 $0
Issuance of Series A, B and C
preferred stock, net..........
Deferred compensation related
to stock options..............
Stock-based compensation.......
Interest on stockholder note
receivable....................
Net loss for the year ended
June 30, 1997.................
---------- --------- ------- ------- ------- --------- ------- --- --
Balances, June 30, 1997........ 6,214,704 62,147 5 0
Issuance of Series D preferred
stock, net.................... $ 58,851 2 0
Issuance of stock warrants.....
Issuance of Series C preferred
stock as purchase price
adjustment....................
Deferred compensation related
to stock options..............
Stock-based compensation.......
Dividends declared.............
Accretion of Series D preferred
PIK dividend.................. 277,694
Net loss for the year ended
June 30, 1998.................
---------- --------- ------- ------- ------- --------- ------- --- --
Balances, June 30, 1998........ 336,545 6,214,704 62,147 7 0
Issuance of Series D preferred
stock, net.................... 82,166
Issuance of Series F preferred
stock, net.................... 3,957,476 $39,575
Issuance of Series G preferred
stock, net.................... 800,000 $8,000
Deferred compensation related
to stock options..............
Stock-based compensation.......
Accretion of Series D preferred
PIK dividend.................. 1,026,462
Net loss for the year ended
June 30, 1999.................
---------- --------- ------- ------- ------- --------- ------- --- --
Balances, June 30, 1999........ $1,445,173 3,957,476 $39,575 800,000 $8,000 6,214,704 $62,147 7 $0
========== ========= ======= ======= ======= ========= ======= === ==
<CAPTION>
ADDITIONAL UNEARNED STOCKHOLDER
PAID IN STOCK-BASED ACCUMULATED NOTE
CAPITAL COMPENSATION DEFICIT RECEIVABLE TOTAL
------------ ------------ ------------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Balances, June 30, 1996........ $ (57,948,468) $(2,122,256) $ 11,806,346
Partner contributions -- Edison
Project LP.................... 1,224,965
Effect of reorganization....... $ 72,828,388 --
Issuance of Series A, B and C
preferred stock, net.......... 29,883,106 30,036,663
Deferred compensation related
to stock options.............. 165,771 $ (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........ 102,877,265 (120,429) (69,470,063) (2,140,856) 31,573,121
Issuance of Series D preferred
stock, net.................... 19,147,771 19,206,622
Issuance of stock warrants..... 2,500,000 2,500,000
Issuance of Series C preferred
stock as purchase price
adjustment.................... (10,575) --
Deferred compensation related
to stock options.............. 1,339,118 (1,339,118) --
Stock-based compensation....... 584,560 584,560
Dividends declared............. (5,000,000) (5,000,000)
Accretion of Series D preferred
PIK dividend.................. (277,694) --
Net loss for the year ended
June 30, 1998................. (22,033,455) (22,033,455)
------------ ----------- ------------- ----------- ------------
Balances, June 30, 1998........ 120,575,885 (874,987) (91,503,518) (2,140,856) 26,830,848
Issuance of Series D preferred
stock, net.................... 31,681,398 31,763,564
Issuance of Series F preferred
stock, net.................... 24,208,647 24,248,222
Issuance of Series G preferred
stock, net.................... 4,893,755 4,901,755
Deferred compensation related
to stock options.............. 27,332,927 (27,332,927) --
Stock-based compensation....... 22,371,358 22,371,358
Accretion of Series D preferred
PIK dividend.................. (1,026,462) --
Net loss for the year ended
June 30, 1999................. (49,551,391) (49,551,391)
------------ ----------- ------------- ----------- ------------
Balances, June 30, 1999........ $207,666,150 $(5,836,556) $(141,054,909) $(2,140,856) $ 60,564,356
============ =========== ============= =========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 95
EDISON SCHOOLS INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(11,521,595) $(22,033,455) $(49,551,391)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and
equipment............................................. 3,552,440 7,231,628 11,491,955
Amortization of deferred charter costs and original
issue discount........................................ -- -- (68,688)
Stock-based compensation................................ 45,342 584,560 22,371,358
Equipment write-off..................................... -- -- 1,090,768
Loss on disposal of property and equipment.............. -- 126,500 368,110
Issuance of note receivable in lieu of interest
income................................................ (18,600) -- --
Changes in operating assets and liabilities:
Accounts receivable................................... (5,079,091) (2,726,658) (3,007,679)
Other current assets.................................. (334,238) (422,429) (623,756)
Accounts payable and accrued expenses................. 2,414,428 5,497,686 2,563,812
Other liabilities..................................... -- 1,191,864 (713,736)
------------ ------------ ------------
Cash used in operating activities................... (10,941,314) (10,550,304) (16,079,247)
------------ ------------ ------------
Cash flows from investing activities:
Additions to property and equipment....................... (9,090,450) (21,180,550) (25,533,246)
Proceeds from disposition of property and
equipment, net.......................................... -- 35,670 10,537,786
Proceeds from notes receivable and advances due from
charter schools......................................... -- 2,331,667 1,880,989
Notes receivable and advances due from charter schools.... (3,858,238) -- (15,768,384)
Other assets.............................................. (81,762) (1,269,192) (1,445,035)
------------ ------------ ------------
Cash used in investing activities................... (13,030,450) (20,082,405) (30,327,890)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from partner contributions....................... 7,557,965 -- --
Proceeds from issuance of stock and warrants.............. 30,466,663 25,251,971 62,060,480
Costs in connection with equity financing................. (430,000) (3,545,349) (1,146,939)
Proceeds from stockholders' notes payable................. -- 672,155 938,439
Proceeds from notes payable............................... -- 10,797,304 9,624,131
Payments on notes payable and capital leases.............. (1,313,145) (7,293,088) (6,178,626)
Restricted cash........................................... (472,000) (3,500,000) 1,540,584
------------ ------------ ------------
Cash provided by financing activities............... 35,809,483 22,382,993 66,838,069
------------ ------------ ------------
Increase (decrease) in cash and cash equivalents............ 11,837,719 (8,249,716) 20,430,932
Cash and cash equivalents at beginning of period............ 3,903,641 15,741,360 7,491,644
------------ ------------ ------------
Cash and cash equivalents at end of period.................. $ 15,741,360 $ 7,491,644 $ 27,922,576
============ ============ ============
Supplemental disclosure of cash flow information:
Cash paid during the periods for:
Interest.................................................. $ 527,421 $ 1,761,821 $ 3,008,260
Supplemental disclosure of non-cash investing and financing
activities:
Dividends declared and settled with notes in lieu of
cash.................................................... $ 5,000,000
Capitalized lease obligations incurred.................... $ 6,462,686
Amounts due from bank under note payable incurred......... $ 1,419,690
Accretion of Series D preferred PIK dividend.............. $ 277,694 $ 1,026,462
Additions to property and equipment included in accounts
payable................................................. $ 8,489,460
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 96
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Edison Schools Inc. (the "Company") (formerly known as The Edison Project
Inc. and Subsidiaries) manages elementary and secondary public schools under
contracts with school districts and charter schools located in 11 states and
Washington, D.C. The Company opened its first four schools in the fall of 1995,
and, as of June 30, 1999, operated 51 schools with approximately 23,900
students.
The Company provides the education program, recruits and manages personnel,
and maintains and operates the facilities at each school it manages. The Company
also assists charter schools in obtaining facilities and the related financing.
As compensation for its services, the Company receives revenues which
approximate, on a per pupil basis, the average per pupil spending of the school
district in which the school is located.
Prior to November 18, 1996, the Company was a partnership. On November 18,
1996, the partners transferred their interests in the assets and liabilities of
the partnership, in a tax free conversion to the Company, in exchange for common
and preferred stock. This transaction was accounted for as a reorganization of
entities under common control, in a manner similar to a pooling-of-interests.
On July 26, 1999, the Company's board of directors approved the filing of a
registration statement with the Securities and Exchange Commission for an
initial public offering ("IPO") of its Common Stock. No assurance can be given
that this offering will become effective.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents consist of
highly liquid debt instruments with original maturities of three months or less.
The Company maintains funds in accounts in excess of FDIC insurance limits;
however, management believes that it minimizes risk by maintaining deposits in
high quality financial institutions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Routine maintenance and repairs
are expensed as incurred. The cost of major additions, replacements, and
improvements are capitalized. Gains and losses from sales or retirements of
property and equipment are included in earnings for the period. Depreciation is
computed on a straight-line basis over the estimated useful lives of the
respective assets (30 years for buildings, the remaining lease term or shorter
for leasehold improvements and 3-5 years for all other items).
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 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
the 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.
F-7
<PAGE> 97
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
REVENUE RECOGNITION
The Company recognizes revenue from each school pro rata over eleven months
from August through June (the "School year").
PREOPENING COSTS
The Company expenses certain preopening training, personnel and other
costs, which are incurred prior to the fiscal year in which operations commence
at new school sites.
Effective July 1, 1997, the Company elected for early adoption of Statement
of Position 98-5, "Accounting for the Costs of Start-Up Activities" ("SOP
98-5"). SOP 98-5 establishes standards for the expensing of start-up costs as
incurred as defined in the statement. The Company had originally accounted for
the adoption through a cumulative effect adjustment in the year ended June 30,
1998. For purposes of these financial statements, the Company has applied
certain provisions of Accounting Principles Board ("APB") No. 20, "Accounting
Changes," and retroactively expensed all start-up costs that had previously been
deferred.
UNAMORTIZED ORIGINAL ISSUE DISCOUNT AND DEFERRED CHARTER COSTS
Unamortized original issue discount is amortized using the interest method
over the term of the non-interest bearing notes receivable (see Note 3).
Deferred charter costs are costs incurred to finance the non-interest bearing
notes receivable and are amortized on a straight line basis over the term of
these notes.
STOCK-BASED COMPENSATION
For financial reporting purposes, the Company accounts for stock-based
compensation in accordance with the intrinsic value method of accounting
prescribed by APB No. 25 "Accounting for Stock Issued to Employees." In
accordance with this method, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the Company's stock,
as of the grant date, is not greater than the amount an employee must pay to
acquire the stock as defined. To the extent that stock options are granted to
employees with variable terms or if the fair value of the Company's stock as of
the measurement date is greater than the amount an employee must pay to acquire
the stock, then the Company will recognize compensation expense. The fair value
of options granted to non-employees are included in operating results as an
expense.
Disclosures, including pro forma operating results had the Company prepared
its financial statements in accordance with the fair value based method as
stated in Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," have been included in Note 10.
ADVERTISING EXPENSES
Advertising costs consist primarily of print media and brochures and are
expensed when the related advertising occurs. Total advertising expense for each
of the three years ended June 30, 1997, 1998 and 1999 amounted to approximately
$113,000, $265,000 and $788,000, respectively.
INCOME TAXES
The Company recognizes deferred income taxes for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each reporting period based on enacted tax
laws and statutory tax rates. Valuation allowances are established when
F-8
<PAGE> 98
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense consists of the tax payable for the period and the change
during the period in deferred tax assets and liabilities. Prior to the
reorganization (Note 1), the entity structure consisted solely of a partnership,
which under present income tax regulations pays no federal income taxes. Any
income or loss was included in the tax returns of the partners.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including cash
and cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of their short maturities. The
carrying amount of the Company's capital lease and other equipment financing
obligations approximates the fair value of such instruments based upon
management's best estimate of interest rates that would be available to the
Company for similar debt obligations at June 30, 1999.
NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings per Share." SFAS No. 128 replaced primary and fully diluted earnings
per share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effect of options,
warrants and convertible securities. Diluted earnings per share is very similar
to fully diluted earnings per share. Basic earnings per share is computed using
the weighted-average number of common shares outstanding during the period.
Diluted earnings per share is computed using the weighted-average number of
common and common stock equivalent shares outstanding during the period. Common
stock equivalent shares, such as convertible preferred stock, stock options, and
warrants, have been excluded from the computation, as their effect is
antidilutive for all periods presented.
The pro forma basic and diluted net loss per share is computed by dividing
the net loss by the sum of the weighted average number of shares of common stock
including the shares to be issued as a result of the assumed conversion of all
outstanding shares of convertible preferred stock.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Significant estimates include, among other things, useful
lives, recoverability of equipment, deferred income tax valuation allowance,
certain accrued expenses and expenses in connection with stock options and
warrants; actual results could differ from these 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 SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities" in June 1998. This statement
is effective in fiscal years beginning after June 15, 2000, although early
adoption is permitted. This statement requires the recognition of the fair value
of any derivative financial instruments on the balance sheet. Changes in fair
value of the derivative and, in certain instances, changes in the fair value of
an underlying hedged asset or liability, are
F-9
<PAGE> 99
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recognized through either income or as a component of other comprehensive
income. The adoption of SFAS 133 is not expected to have any effect on the
Company's financial position or results of operations.
BASIS OF PRESENTATION
The fiscal 1997 and 1998 financial statements of the Company reflect the
consolidated accounts of its two subsidiaries. All intercompany balances and
transactions have been eliminated in consolidation. During fiscal 1999, the two
subsidiaries were merged into the Company or dissolved and their assets and
liabilities were assumed by the Company.
RECLASSIFICATIONS
Certain reclassifications have been made to the fiscal 1997 and 1998
financial statements to conform with the current year's presentation.
3. NOTES AND OTHER RECEIVABLES:
Notes and other receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Notes receivable due from charter schools(a)............. $1,526,571 $ 6,084,574
Advances due from charter schools(b)..................... -- 5,975,537
Other receivables........................................ 24,274 1,544,745
---------- -----------
1,550,845 13,604,856
Less, current portion.................................... 712,325 10,204,966
---------- -----------
Total notes and other receivables................... $ 838,520 $ 3,399,890
========== ===========
</TABLE>
- ---------------
(a) Notes receivable due from charter schools consist of non-interest bearing
notes with an aggregate face value of $839,093 and $6,803,410 at June 30,
1998 and 1999, respectively, less unamortized original issue discount of
$1,465,768 at June 30, 1999. Interest is imputed on the notes at 12% per
annum. The notes mature at various dates 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 $687,478 and $746,932 at June
30, 1998 and 1999, respectively, and mature at various dates through the
year 2002.
(b) Advances due from charter schools were converted into a non-interest bearing
note receivable in July 1999. The note is due December 31, 1999 and
automatically converts into a 20 year term loan with interest at 10% per
annum and regular amortization. The advances have been discounted at a rate
of 12% over the expected period of refinancing. The face value of the
advances at June 30, 1999 was $6,343,153, less unamortized original issue
discount of $367,616.
F-10
<PAGE> 100
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
----------------------------
1998 1999
------------ ------------
<S> <C> <C>
Land and buildings.................................... $ 3,161,019 $ --
Leasehold improvements................................ 11,748,747 11,844,562
Furniture, fixtures and equipment..................... 24,199,478 36,137,855
Educational software and textbooks.................... 4,109,888 16,673,303
------------ ------------
43,219,132 64,655,720
Accumulated depreciation and amortization............. (11,576,688) (21,784,482)
------------ ------------
Property and equipment, net...................... $ 31,642,444 $ 42,871,238
============ ============
</TABLE>
Assets under capital leases at both June 30, 1998 and 1999 totaled
$5,449,180 and related accumulated amortization totaled $3,021,407 and
$4,564,551, respectively. Amortization expense for each of the three years ended
June 30, 1997, 1998 and 1999 related to assets under capital leases amounted to
$1,100,286, $1,602,121 and $1,543,144, respectively. The Company wrote off
approximately $1,100,000 of equipment during the year ended June 30, 1999 in
connection with its year-end physical equipment inventory.
In March 1998, the Company purchased an office building in Trenton, New
Jersey for approximately $618,000 and made significant improvements for use as a
charter school. In September 1998, the Company leased the facility to the
charter school for which the Company provides services. In December 1998, the
Company sold the building to a real estate investment trust, and simultaneously
entered into an 18 year operating lease for the building. 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.
In June 1998, the Company exercised an option to purchase a charter school
building in Detroit, Michigan for $2,500,000 which the Company had been leasing
under a capitalized lease. In September 1998, the Company, which provides
services at the site, sold the building to the charter school for approximately
$6,300,000 and realized a loss of approximately $79,000. The Company received
approximately $4,400,000 in cash and a non-interest bearing subordinated note
approximating $1,900,000 before discount, which is due on June 30, 2002 (see
Note 3(a)).
5. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
------------------------
1998 1999
---------- ----------
<S> <C> <C>
Accrued payroll and benefits.............................. $4,801,481 $7,349,776
Accrued taxes other than income........................... 932,633 1,436,092
Accrued other............................................. 1,180,820 1,013,853
---------- ----------
Total accrued expenses............................... $6,914,934 $9,799,721
========== ==========
</TABLE>
F-11
<PAGE> 101
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
-------------------------
1998 1999
---------- -----------
<S> <C> <C>
Notes payable(a)......................................... $8,870,955 $13,934,160
Capital leases (Note 7).................................. 2,608,153 990,453
---------- -----------
11,479,108 14,924,613
Current portion.......................................... (4,601,683) (6,660,789)
---------- -----------
Total long-term debt................................ $6,877,425 $ 8,263,824
========== ===========
</TABLE>
- ---------------
(a) Notes payable at June 30, 1998 and 1999 consist of notes with five financing
companies collateralized by computer equipment, furniture and other assets
of the Company. All notes are similarly structured and generally provide for
equal monthly installments, including interest and principal, over a term of
36 to 48 months. Monthly payments to each noteholder range from
approximately $30,000 to $363,000. Certain notes also provide for a final
installment of up to 15% of the original principal amount. Interest rates
range from 15.0% to 20.4% per annum.
In connection with amounts currently outstanding under the notes payable
and capital lease agreements (see Note 7), as of June 30, 1998 and 1999, the
Company had outstanding stock purchase warrants to lenders that provide for the
purchase of up to 1,151,762 and 1,251,762 shares of Series A common stock at
purchase prices ranging from $1.00 to $3.98 and $1.00 to $4.00 per share,
respectively. The stock purchase warrants are exercisable either 100% at the
date of grant, or 50% at the date of grant with the remainder vesting ratably
over the next five years. The stock purchase warrants expire at various dates
through 2009.
The Company is subject to certain reporting debt covenants under several of
its debt agreements. The Company received a waiver from one of its lenders as of
June 30, 1998 for a violation of a non-financial covenant.
Aggregate maturities of notes payable are as follows:
<TABLE>
<S> <C>
Fiscal Year Ending June 30,
2000.................................................... $ 5,688,566
2001.................................................... 5,296,462
2002.................................................... 2,877,224
2003.................................................... 71,908
-----------
Total.............................................. $13,934,160
===========
</TABLE>
7. LEASES:
The Company has entered into several lease agreements for school site
computers and equipment. The agreements, which are accounted for as capital
leases, provide that the Company will lease equipment for terms of 36 or 42
months with interest rates of 9.5% to 9.75%. Also, the Company has entered into
various non-cancelable operating leases for office space and currently leases
school sites.
F-12
<PAGE> 102
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At June 30, 1999, the present value of the minimum lease payments under the
capital leases and rental commitments under operating leases with terms in
excess of one year are as follows:
<TABLE>
<CAPTION>
CAPITAL
LEASES OPERATING LEASES
------------- ----------------
<S> <C> <C>
Fiscal Year Ending June 30,
2000.................................................... $1,015,055 $ 3,052,637
2001.................................................... 18,230 2,966,202
2002.................................................... -- 2,942,976
2003.................................................... -- 2,888,126
2004.................................................... -- 2,801,566
Thereafter.............................................. -- 17,773,209
---------- -----------
Total commitments....................................... 1,033,285 $32,424,716
===========
Less amount representing interest....................... (42,832)
----------
Present value of minimum lease payments................. 990,453
Less current installments of capital lease obligation... (972,223)
----------
Capital lease obligations, excluding current
installments.......................................... $ 18,230
==========
</TABLE>
Total rental expense for each of the three years ended June 30, 1997, 1998
and 1999 related to operating leases amounted to approximately $524,000,
$1,876,000 and $3,388,000, respectively.
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% per annum 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 by 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.
STOCKHOLDERS' NOTES PAYABLE
The Series A Common and Series A-C Preferred stockholders have been issued
promissory notes dated December 18, 1997 for $4,407,903 and January 1, 1998 for
$592,097 (see Note 9). In addition, as part of the Series D Preferred private
placement (see Note 9), the Company issued to stockholders, promissory notes
dated December 30, 1997 for $611,025, January 28, 1998 for $61,130, August 24,
1998 for $487,844 and December 14, 1998 for $450,595. The principal for each of
the notes is payable on the tenth anniversary of the dates of issuance. Each
note bears interest at 7% per annum, of which 50% is payable at maturity and the
balance payable each April 1, starting in fiscal 1999 and thereafter.
MANAGEMENT AGREEMENT
The Company and WSI Inc. ("WSI"), a shareholder of the Company, entered
into a five-year management agreement, dated March 15, 1995, as amended November
15, 1996, March 1, 1997 and December 15, 1997. This agreement provides for
payments of fees and expenses as approved by the Company's Board of Directors in
return for consulting and other services to be rendered by WSI. Payments for
each of the three years ended June 30, 1997, 1998 and 1999 relating to the
management agreement amounted to $867,619, $65,123 and $2,762, respectively.
The Chief Executive Officer of the Company is also the sole shareholder of
WSI.
F-13
<PAGE> 103
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMON AND PREFERRED STOCK:
PREFERRED STOCK
Preferred stock as of June 30, 1999 consists of the following:
<TABLE>
<CAPTION>
AUTHORIZED PAR
DESCRIPTION SHARES VALUE
----------- ---------- -----
<S> <C> <C>
Series A Convertible Preferred stock ("Series A
Preferred")............................................... 31,000,000 $.01
Series B Convertible Exchangeable Preferred stock ("Series B
Preferred")............................................... 1,010,101 $.01
Series C Convertible Exchangeable Preferred stock ("Series C
Preferred")............................................... 6,258,608 $.01
Series D Convertible Preferred stock ("Series D
Preferred")............................................... 25,077,843 $.01
Non-Voting Series E Convertible Preferred ("Non-Voting
Series E Preferred")...................................... 6,759,420 $.01
Series F Convertible Preferred stock ("Series F
Preferred")............................................... 4,757,476 $.01
Non-Voting Series G Convertible Preferred stock ("Non-Voting
Series G Preferred")...................................... 3,067,606 $.01
----------
Total preferred stock.................................. 77,931,054
==========
</TABLE>
COMMON STOCK
Common stock as of June 30, 1999 consists of the following:
<TABLE>
<CAPTION>
AUTHORIZED PAR
DESCRIPTION SHARES VALUE
----------- ----------- -----
<S> <C> <C>
Series A Common Stock ("Series A Common")................... 97,466,145 $.01
Series B Common Stock ("Series B Common")................... 1 $.01
Series C Common Stock ("Series C Common")................... 1 $.01
Series D Common Stock ("Series D Common")................... 1 $.01
Series E Common Stock ("Series E Common")................... 1 $.01
Series F Common Stock ("Series F Common")................... 1 $.01
Series G Common Stock ("Series G Common")................... 1 $.01
Series H Common Stock ("Series H Common")................... 1 $.01
Non-Voting Common Stock..................................... 9,827,026 $.01
-----------
Total common stock..................................... 107,293,178
===========
</TABLE>
Series B Common through Series H Common are known as "Special Common".
Each share of preferred stock is convertible at any time, at the option of
the holder, into one share of Series A Common. The preferred stock is subject to
mandatory conversion into common stock upon the completion of an initial public
offering resulting in gross proceeds of at least $50,000,000, at a per share
offering price of at least $7.00 per share.
All holders of preferred stock and common stock are entitled to share
ratably in any dividends declared by the board of directors.
On November 30, 1997, the Company's board of directors declared a dividend
to be paid at a rate of 0.114213 per share to all stockholders of record on
December 11, 1997 and payable in the form of interest bearing notes (see Note 8)
in December 1997. The total issued and outstanding shares of common and
preferred stock on the record date was 6,214,711 and 37,563,144 shares,
respectively.
F-14
<PAGE> 104
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Series D Preferred was sold to accredited investors for a unit price of
$3.98. A unit included a share of Series D Preferred, three options for
fractional shares of Series A Common, and a note payable for 11.4 cents per
share. Of the three options included in the unit, the first option entitles the
holder to 0.019191 shares of Series A Common at an exercise price of $10.00 per
share. On December 31, 1997, the grant date, 70% of these options vested
immediately, of which 50% expire five years from the grant date and the
remainder expire ratably over the next two years. The balance vest 10% annually
commencing June 30, 1998 and expire five years after vesting. The second option
entitles the holder to 0.019191 shares of Series A Common at an exercise price
of $1.50 per share. However, these options vest immediately upon a successful
IPO, 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.
The Series D Preferred and Non-Voting Series E Preferred ("Dividend
Securities") stockholders are entitled to a cumulative 6% paid in kind ("PIK")
dividend on the issued and outstanding shares at July 1, 2000 (the "First
Dividend Date") and thereafter at a rate of 6% per annum on the issued and
outstanding shares through December 2003. If the Dividend Securities are
converted into shares of common stock, all accrued and unpaid PIK dividends will
be converted into shares of common stock. However, PIK dividends will terminate
upon certain defined future events, including an IPO. Dividends on other
preferred stock series are non-cumulative. With respect to rights of
liquidation, winding up and dissolution, Series D Preferred and Non-voting
Series E Preferred rank prior to the Series A Preferred, Series B Preferred, and
Series C Preferred, which all rank pari passu with each other, and all of the
Company's Preferred Stock rank prior to all Common Stock of the Company. Holders
of Special Common hold rights not afforded to other holders of Common Stock or
Preferred Stock, such as certain rights to elect members of the Company's Board
of Directors and to participate in certain votes regarding the By-Laws. Shares
of Special Common are non-transferable except to the Company and as expressly
set forth in the Company's Shareholders' Agreement. Each existing holder of
Preferred Stock or Series A Common has certain preemptive rights to purchase in
any sale of additional equity by the Company and on the same terms such
additional shares as may be necessary to maintain such holder's relative
percentage ownership.
On July 2, 1999, the Company filed an amended Certificate of Incorporation
with the State of Delaware which changed its capital structure. The authorized
capital stock subsequent to the amendment consists of 114,893,179 shares of
Common Stock, par value $0.01 per share, and 85,531,054 shares of Preferred
Stock, par value $0.01 per share, representing an additional authorization of
7,600,001 shares of Common Stock and an additional 7,600,000 shares of Preferred
Stock. Of the total increase in Common Stock, 7,000,000 shares were designated
as Series A Common, one share was designated as Series I Common Stock, and an
additional 600,000 shares were designated as Non-Voting Common Stock. Of the
total increase in Preferred Stock, 7,000,000 shares were designated as Series F
Preferred and 600,000 shares were designated as Non-Voting Series G Preferred.
The Series F Preferred and the Non-Voting Series G Preferred rank prior to the
Series A, B and C Preferred and the Common Stock. (See Notes 8 and 13).
In July 1999, the Company completed two private placement financing
transactions for total proceeds of $41,741,518 in exchange for 6,787,238 shares
of Series F Convertible Preferred and one share of Series I Common.
In March 1995, the Company granted to an investment bank options to
purchase 200,000 shares of Series A Common, exercisable at $0.25 per share, for
services rendered in raising equity financing. The options vested immediately on
the grant date. The options expire on July 2, 2002.
F-15
<PAGE> 105
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, 1999, stock options issued and outstanding in conjunction
with the Series D preferred private placement entitled the holders to purchase
947,137 shares of Series A Common.
In June 1998, the Company, in exchange for $2,500,000, issued 3,775,000
warrants to a philanthropic foundation to purchase 3,775,000 shares of Series D
Preferred at the price of $3.98 per share. Certain provisions of the warrant
agreement require such funds to be applied towards the pre-opening expenses and
start-up investments with respect to certain schools that the Company operates.
10. EMPLOYEE STOCK OPTIONS:
A summary of the Company's employee stock option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED STOCK WEIGHTED
AVERAGE OF OPTIONS AVERAGE OF
SHARES EXERCISE PRICES EXERCISABLE EXERCISE PRICES
---------- --------------- ----------- ---------------
<S> <C> <C> <C> <C>
Under option at June 30, 1996.............. 3,194,419 $ 1.24 709,877 $1.22
Options granted in fiscal 1997............. 945,000 $ 1.50
Options exercised in fiscal 1997........... -- --
Options cancelled in fiscal 1997........... (17,690) $ 1.25
----------
Under option at June 30, 1997.............. 4,121,729 $ 1.30 1,276,425 $1.25
Options granted in fiscal 1998............. 9,566,220 $14.14
Options exercised in fiscal 1998........... -- --
Options cancelled in fiscal 1998........... (20,954) $ 1.25
----------
Under option at June 30, 1998.............. 13,666,995 $10.26 2,506,918 $1.28
Options granted in fiscal 1999............. 2,472,217 $ 8.08 303,360 $9.67
Options exercised in fiscal 1999........... -- --
Options cancelled in fiscal 1999........... (270,435) $ 1.71
----------
Under option at June 30, 1999.............. 15,868,777 $10.21 5,187,847 $2.00
==========
</TABLE>
The board of directors approved on October 20, 1998 and amended on June 30,
1999, the 1998 Site Option Plan (the "Site Plan"). A maximum of 1,500,000 shares
of Series A Common can be awarded under the Site Plan. The options under this
plan cover all persons who perform services at the Company's schools. The
options granted are intended to be non-qualified options under section 422 of
the Internal Revenue Code of 1986. Options granted will have an exercise price
equal to the fair market value of the Series A Common at the grant date. The
vesting of the options is determined by the board of the directors, however,
these become exercisable on the earlier of an IPO or February 16, 2006. The
options expire ten years after the date of grant. As of June 30, 1999, the
Company has granted 126,217 of these
F-16
<PAGE> 106
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
options. On July 9, 1999, the Company granted additional options to purchase
808,731 shares of Series A Common.
The board of directors on June 30, 1999 approved the adoption of the 1999
Stock Option Plan (the "1999 Plan"). A maximum of 1,000,000 shares of Series A
Common can be awarded under the 1999 Plan. The options granted cover all
employees except senior executives and are intended to be non-qualified options
under Section 422 of the Internal Revenue Code of 1986. Options granted will
have an exercise price equal to the fair market value of the Series A Common at
the grant date. The board determines the vesting of the options for each
employee; however these become exercisable on the earlier of an IPO or February
16, 2006. The options expire ten years after the date of grant. On June 30,
1999, the Company granted options to purchase 397,000 shares of Series A Common.
Additionally, on July 9, 1999, the Company granted options to purchase 399,500
shares of Series A Common.
The board of directors on June 30, 1999 approved the adoption of the 1999
Key Stock Incentive Plan (the "Plan"). A maximum of 1,000,000 shares of Series A
Common can be awarded under the Plan. The options granted cover a variety of
stock-based awards to senior executives, officers and directors and are intended
to be non-qualified options under section 422 of the Internal Revenue Code of
1986. Options granted will have an exercise price equal to the fair market value
of the Series A Common at the grant date. Each option is exercisable as
determined by the board of directors; such terms are included in each option
agreement. On June 30, 1999, the Company granted options to purchase 876,000
shares of Series A Common.
The following table summarizes information about stock options outstanding
at June 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------- ------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE OF AVERAGE OF
RANGE OF SHARES CONTRACTED EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICES EXERCISABLE PRICES
--------------- ------------------ ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$1.00 - $6.15..................... 8,053,777 3.3 $ 2.48 4,967,737 $ 1.60
$8.00 - $28.00.................... 7,815,000 3.6 $18.11 220,110 $11.00
---------- ---------
15,868,777 5,187,847
========== =========
</TABLE>
The Company, during the fourth quarter of fiscal 1999, made amendments to
existing options which resulted in a new measurement date. As a result,
stock-based compensation expense was recorded representing the difference
between the exercise price of the options and the deemed fair market value of
the underlying stock at that time. In this regard, the Company has recognized an
expense of approximately $17,400,000 in the fourth quarter of fiscal 1999.
During fiscal 1999, the Company also recorded an expense of approximately
$4,970,000 in connection with stock options subject to variable accounting.
Had compensation cost for the Company's stock option issuances been
determined based on the fair value at the grant date for awards in each of the
three years ended June 30, 1997, 1998 and 1999
F-17
<PAGE> 107
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
consistent with the provisions of SFAS No. 123, the Company's net loss
attributable to common stockholders would have been adjusted to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net loss attributable to common stockholders -- as
reported......................................... $(11,521,595) $(26,601,349) $(50,577,853)
Net loss attributable to common stockholders -- pro
forma............................................ $(11,586,192) $(26,342,268) $(28,453,380)
Basic and diluted net loss attributable to common
stockholders per share -- as reported............ $ (1.85) $ (4.28) $ (8.14)
Basic net loss attributable to common stockholders
per share -- pro forma........................... $ (1.86) $ (4.24) $ (4.58)
</TABLE>
The fair value of each option grant is estimated on the date of the grant
using the "Black-Scholes Option-pricing Model" with the following weighted
average assumptions used for grants for each of the years ended June 30, 1997,
1998 and 1999: zero dividend yield; no volatility; a weighted average risk-free
interest rate of 6.33%, 5.69% and 5.40%, respectively; and expected lives of
5.3, 3.0 and 6.7 years, respectively.
11. INCOME TAXES:
There is no provision for federal or state and local income taxes pro forma
or otherwise for the years ended June 30, 1997, 1998 and 1999 since the Company
has incurred operating losses. Due to the uncertainty of the Company's ability
to realize the tax benefit of such losses, a valuation allowance has been
established to equal the total net deferred tax assets.
The components of deferred tax assets and liabilities consist of the
following:
<TABLE>
<CAPTION>
JUNE 30,
---------------------------
1998 1999
----------- ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforward........................ $16,938,000 $ 30,277,000
Accrued liabilities.................................... -- 1,874,000
Stock options.......................................... -- 8,501,000
Amortization........................................... -- 2,282,000
Organizational costs................................... 18,000 13,000
----------- ------------
Total deferred tax assets........................... 16,956,000 42,947,000
----------- ------------
Deferred tax liabilities:
Fixed assets........................................... -- 857,000
Book basis of investment in excess of tax basis........ 4,651,000 --
----------- ------------
Total deferred tax liabilities...................... 4,651,000 857,000
----------- ------------
Net benefit for income taxes............................. 12,305,000 42,090,000
Valuation allowance...................................... (12,305,000) (42,090,000)
----------- ------------
Net deferred tax asset.............................. $ -- $ --
=========== ============
</TABLE>
At June 30, 1999, the Company had approximately $80,000,000 of net
operating loss carryforwards available to reduce its future taxable income.
Under current Federal income tax law, approximately $45,000,000 of such
carryforwards will expire in 2013 and approximately $35,000,000 will expire in
2019.
F-18
<PAGE> 108
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
12. EMPLOYEE BENEFIT PLANS:
The Company has established a 401(k) Plan for substantially all full-time
employees. The Company matches each participant's contribution up to 50% of the
first $1,000. Participants become fully vested in the match after one year.
Contributions to the 401(k) Plan made by the Company for each of the three years
ended June 30, 1997, 1998 and 1999 amounted to $19,179, $28,936 and $62,876,
respectively.
13. COMMITMENTS AND CONTINGENCIES:
LITIGATION
The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. Management does not believe
the outcome of any pending claims will have a material adverse impact on the
Company's financial position or results of operations.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
executives. Such agreements may be terminated by either the executive or the
Company at any time and provide, among other things, certain termination
benefits. As of June 30, 1999, the aggregate termination benefits of the
executives and certain other employees approximated $4,800,000.
SETTLEMENT AGREEMENTS
In connection with the development of certain parts of the core curriculum,
agreements were entered into with former employees to compensate them for
services rendered. Two former employees who provided such services had bonus
agreements while employed with the Company which amounted to $888,900 and were
contingent upon the occurrence of a qualified equity transaction. Such a
transaction occurred in December 1997, causing the obligation to be payable in
three equal annual installments beginning twelve months after the equity
transaction. In addition, the Company entered into settlement agreements with
three other former employees who, while employed, rendered such services for an
aggregated obligation of $1,825,000. Upon execution of the settlement agreements
dated January 30, 1998, $825,000 was paid immediately, while the balance of
$1,000,000 is payable in two equal annual installments of principal plus
interest on the first and second anniversary date of the agreements. Interest is
computed at the rate of 6% per annum. In addition, the attorney who rendered
legal services in connection with the settlement agreements was paid $10,000.
The aforementioned expenses are included in design team compensation for the
year ended June 30, 1998.
GUARANTEES
The Company has also guaranteed certain debt obligations of charter school
boards with which it has management agreements. As of June 30, 1999, the Company
had provided guarantees totaling approximately $4,900,000.
The Company is required to maintain minimum cash balances that may increase
under certain circumstances, as well as to satisfy certain financial reporting
covenants, due to the Company's guarantor agreements with the lending financial
institutions. The Company received waivers from one financial institution as of
June 30, 1998 and 1999 due to non-compliance with a covenant that requires
maintenance of certain minimum cash balances at fiscal year end. These instances
of non-compliance were cured on July 1, 1998 and July 6, 1999, respectively.
F-19
<PAGE> 109
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
ASSUMPTION OF PUT OBLIGATION
In May 1994, in connection with a financing transaction by the Company, the
Chief Executive Officer 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 the Company's stockholders. The partnership interest
currently represents an indirect interest in approximately 262,605 shares of
Series A Common and 893,703 shares of Series A Preferred and the agreed-upon
purchase price is $11.4 million. In July 1999, the board of directors approved
the Company's assumption of this contingent obligation on the Chief Executive
Officer's behalf, and the Company expects to record a non-cash charge of
approximately $1,900,000 in the first quarter of fiscal 2000 in connection with
the assumption.
STOCK PURCHASE AGREEMENT
In July 1999, the Company entered into a preferred stock purchase agreement
with a corporation providing for the purchase of up to 2,000,000 shares of the
corporation's preferred stock, par value $0.001 per share, for a purchase price
of $5.00 per share. The Company purchased 1,000,000 shares in July 1999 for a
total investment of $5,000,000, which represents approximately 16.5% ownership
in the corporation. Under the agreement, if the corporation sells additional
shares of its preferred stock prior to the second anniversary of the investment,
the Company will be required to purchase up to $5,000,000 of additional shares
of preferred stock. The chairman of the board of the corporation is also a
director of the Company.
14. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents, notes receivable and advances to
charter schools, and trade receivables. The Company manages its credit risk by
maintaining cash and cash equivalents with financial institutions that it
believes are financially sound and through the contractual arrangements that it
has entered into with each district and charter school.
Trade receivables are primarily short-term receivables from various
district and charter schools. Credit risk is affected by changing conditions
within the economy of individual states and school districts in which the
Company operates. The Company establishes an allowance for doubtful accounts, if
necessary, based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
Notes receivable from charter schools are both short-term and long-term.
Credit risk associated with those amounts is affected not only by the economy of
individual states and school districts in which the charter school operates, but
on the continued existence of charter school laws. The Company establishes an
allowance of uncollectible amounts, if appropriate, based upon factors
surrounding the credit risk of the specific charter schools, historical trends
and other information.
F-20
<PAGE> 110
DESCRIPTION OF GRAPHICAL MATERIAL ON INSIDE OF BACK COVER:
PHOTOGRAPH OF FLOWER ABOVE THE NAME EDISON SCHOOLS.
<PAGE> 111
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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> 112
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED AUGUST 17, 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> 113
[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
ALT-2
<PAGE> 114
[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> 115
[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> 116
[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
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[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
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- --------------------------------------------------------------------------------
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-6
<PAGE> 118
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> 119
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> 120
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> 121
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 and 3.2 for provisions of the Certificate
of Incorporation and By-Laws of the Registrant defining the
rights of holders of class A common stock of the Registrant
5.1** Opinion of Hale and Dorr LLP
10.1* 1998 Site Option Plan
10.2* 1999 Stock Option Plan
10.3* 1999 Key Stock Incentive Plan
10.4** 1999 Stock Incentive Plan
10.5* Third Amended and Restated Shareholders' Agreement, dated as
of July 2, 1999, by and among the Registrant and certain
stockholders, as amended
10.6* Subscription Agreement, dated as of November 18, 1996, by
among the Registrant and certain other parties
10.7* Warrant Purchase Agreement, dated as of January 15, 1998,
between the Registrant and Phoenix Leasing Incorporated
10.8* Warrant, dated as of January 15, 1998, issued to Phoenix
Leasing Incorporated
10.9** Warrant Purchase Agreement, dated as of November 25, 1997,
between the Registrant and BankBoston, N.A.
10.10* Warrant, dated as of November 25, 1997, issued to
BankBoston, N.A.
10.11* Warrant Agreement, dated as of February 1, 1997, between the
Registrant and Comdisco, Inc.
10.12** Amended Warrant Purchase Agreement, dated as of June 1,
1998, between the Registrant and the D2F2 Foundation
10.13* Option Agreement, dated as of March 14, 1995, between the
Registrant and Dillon, Read & Co. Inc.
10.14* Warrant Agreement, dated as of January 1, 1996, between the
Registrant and Comdisco, Inc.
10.15* Warrant Agreement, dated as of July 5, 1995, between the
Registrant and Comdisco, Inc.
10.16* Warrant Purchase Agreement, dated as of June 30, 1997,
between the Registrant and Phoenix Leasing Incorporated and
related warrant
10.17* Warrant Purchase Agreement, dated as of June 30, 1997,
between the Registrant and LINC Capital Management and
related warrant
10.18* Stock Subscription Warrant, dated as of August 20, 1997,
issued to Transamerica Business Credit Corporation
10.19* Stock Subscription Warrant, dated as of October 30, 1997,
issued to 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> 122
<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
27.1 Financial Data Schedule
</TABLE>
- ---------------
* Previously filed.
** 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> 123
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> 124
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in New York, New
York, on this 17th day of August , 1999.
EDISON SCHOOLS INC.
By: /s/ H. CHRISTOPHER WHITTLE
------------------------------------
H. Christopher Whittle
President and Chief Executive
Officer
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman of the Board of August 17, 1999
- --------------------------------------------------- Directors
Benno C. Schmidt, Jr.
/s/ H. CHRISTOPHER WHITTLE President, Chief Executive August 17, 1999
- --------------------------------------------------- Officer and Director (Principal
H. Christopher Whittle Executive Officer)
/s/ JAMES L. STARR Executive Vice President and August 17, 1999
- --------------------------------------------------- Chief Financial Officer
James L. Starr (Principal Financial and
Accounting Officer)
* Executive Vice President and August 17, 1999
- --------------------------------------------------- Director
Laura K. Eshbaugh
* Director August 17, 1999
- ---------------------------------------------------
Virginia G. Bonker
* Director August 17, 1999
- ---------------------------------------------------
John W. Childs
* Director August 17, 1999
- ---------------------------------------------------
Charles J. Delaney
* Director August 17, 1999
- ---------------------------------------------------
Robert Finzi
* Director August 17, 1999
- ---------------------------------------------------
John B. Fullerton
* Director August 17, 1999
- ---------------------------------------------------
Janet A. Hickey
</TABLE>
II-7
<PAGE> 125
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director August 17, 1999
- ---------------------------------------------------
Klas Hillstrom
* Director August 17, 1999
- ---------------------------------------------------
Bert E. Kolde
* Director August 17, 1999
- ---------------------------------------------------
Jeffrey T. Leeds
* Director August 17, 1999
- ---------------------------------------------------
Brian P. Mathis
</TABLE>
By: /s/ JAMES L. STARR
--------------------------------------------------
James L. Starr
Attorney-in-Fact
II-8
<PAGE> 126
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 and 3.2 for provisions of the Certificate
of Incorporation and By-Laws of the Registrant defining the
rights of holders of class A common stock of the
Registrant..................................................
5.1** Opinion of Hale and Dorr LLP................................
10.1* 1998 Site Option Plan.......................................
10.2* 1999 Stock Option Plan......................................
10.3* 1999 Key Stock Incentive Plan...............................
10.4** 1999 Stock Incentive Plan...................................
10.5* Third Amended and Restated Shareholders' Agreement, dated as
of July 2, 1999, by and among the Registrant and certain
stockholders, as amended....................................
10.6* Subscription Agreement, dated as of November 18, 1996, by
among the Registrant and certain other parties..............
10.7* Warrant Purchase Agreement, dated as of January 15, 1998,
between the Registrant and Phoenix Leasing Incorporated.....
10.8* Warrant, dated as of January 15, 1998, issued to Phoenix
Leasing Incorporated........................................
10.9** Warrant Purchase Agreement, dated as of November 25, 1997,
between the Registrant and BankBoston, N.A. ................
10.10* Warrant, dated as of November 25, 1997, issued to
BankBoston, N.A. ...........................................
10.11* Warrant Agreement, dated as of February 1, 1997, between the
Registrant and Comdisco, Inc. ..............................
10.12** Amended Warrant Purchase Agreement, dated as of June 1,
1998, between the Registrant and the D2F2 Foundation........
10.13* Option Agreement, dated as of March 14, 1995, between the
Registrant and Dillon, Read & Co. Inc. .....................
10.14* Warrant Agreement, dated as of January 1, 1996, between the
Registrant and Comdisco, Inc. ..............................
10.15* Warrant Agreement, dated as of July 5, 1995, between the
Registrant and Comdisco, Inc. ..............................
10.16* Warrant Purchase Agreement, dated as of June 30, 1997,
between the Registrant and Phoenix Leasing Incorporated and
related warrant.............................................
10.17* Warrant Purchase Agreement, dated as of June 30, 1997,
between the Registrant and LINC Capital Management and
related warrant.............................................
10.18* Stock Subscription Warrant, dated as of August 20, 1997,
issued to Transamerica Business Credit Corporation..........
10.19* Stock Subscription Warrant, dated as of October 30, 1997,
issued to 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> 127
<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..........................................
27.1 Financial Data Schedule.....................................
</TABLE>
- ---------------
* Previously filed.
** To be filed by amendment.
<PAGE> 1
Exhibit 11.1
EDISON SCHOOLS, INC.
COMPUTATION OF PRO FORMA EARNINGS (LOSS) PER SHARE
(dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the year ended June 30, 1999
<S> <C>
Net (loss) $(49,551)
----------
Common stock outstanding at:
July 1, 1997
July 1, 1998 6,214,711
Convertible preferred stock outstanding at:
July 1, 1997
July 1, 1998 43,448,289
Add:
Series G Common Stock
Series H Common Stock
Series D Convertible Preferred Stock 3,729,272
Series C Convertible Preferred Stock
Series F Convertible Preferred Stock 3,686,416
Series G Convertible Preferred Stock 745,205
----------
Pro forma weighted average number of shares
outstanding, assuming conversion of
convertible preferred 57,823,893
----------
Pro forma net loss per share $(0.86)
----------
HISTORICAL LOSS PER SHARE
Net (loss) $(49,551)
----------
</TABLE>
COMPUTATIONS OF PRO FORMA WEIGHTED AVERAGE SHARES OUTSTANDING
FROM JULY 1, 1998 TO JUNE 30, 1999
<TABLE>
<CAPTION>
Common
Stock Common
Date # of Days Equivalents Stock
No. of Shares Issued Issued Outstanding % Equivalents
- -------------------- ------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Common shares
6,214,711 outstanding @ July 1, 1997 365 100% 6,214,711
Preferred shares
43,448,289 outstanding @ July 1, 1997 365 100% 43,448,289
4,271,352 8/27/98 218 59.7% 2,551,109
3,945,224 12/14/98 109 29.9% 1,178,163
3,957,476 6/5/99 340 93.2% 3,686,416
800,000 6/5/99 340 93.2% 745,205
- ---------- ----------
62,637,052 57,823,893
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in Amendment No. 1 to the Registration
Statement on Form S-1 of our report dated August 13, 1999, on our audits of the
financial statements of Edison Schools Inc. as of June 30, 1998 and 1999 and for
the years ended June 30, 1997, 1998 and 1999. We also consent to the reference
to our firm under the caption "Experts."
PricewaterhouseCoopers LLP
New York, New York
August 16, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> JUN-30-1999
<CASH> 27,923,000
<SECURITIES> 0
<RECEIVABLES> 22,240,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 51,602,000
<PP&E> 64,656,000
<DEPRECIATION> 21,785,000
<TOTAL-ASSETS> 104,392,000
<CURRENT-LIABILITIES> 28,475,000
<BONDS> 0
0
1,868,000
<COMMON> 62,000
<OTHER-SE> 58,634,000
<TOTAL-LIABILITY-AND-EQUITY> 104,392,000
<SALES> 132,762,000
<TOTAL-REVENUES> 132,762,000
<CGS> 0
<TOTAL-COSTS> 182,064,000
<OTHER-EXPENSES> 250,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,245,000
<INCOME-PRETAX> (49,551,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (49,551,000)
<EPS-BASIC> (814)
<EPS-DILUTED> 0
</TABLE>
