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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2000
OR
_ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 000-27817
EDISON SCHOOLS INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3915075
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
521 Fifth Avenue, 15th Floor, New York, NY 10175
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (212) 419-1600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes (X) No ( ) (2) Yes (X) No ( )
The number of shares outstanding of each of the Registrant's
classes of common stock:
39,068,447
(Number of shares of Class A Common Stock Outstanding as of April 24, 2000)
3,528,543
(Number of shares of Class B Common Stock Outstanding as of April 24, 2000)
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EDISON SCHOOLS INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2000
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of March 31, 2000 (unaudited) and
June 30, 1999 3
Condensed Statements of Operations for the Three Months and Nine Months Ended
March 31, 2000 and 1999 (unaudited) 4
Condensed Statements of Cash Flows for the Nine Months Ended
March 31, 2000 and 1999 (unaudited) 5
Notes to Condensed Financial Statements (unaudited) 6-8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9-23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 24
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 5. OTHER INFORMATION 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
SIGNATURES 25
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDISON SCHOOLS INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
2000 1999
---- ----
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents .......................................................... $ 81,036 $ 27,922
Accounts receivable ................................................................ 31,448 12,035
Notes and other receivables ........................................................ 17,087 9,712
Other current assets ............................................................... 3,834 1,440
--------- ---------
Total current assets ......................................................... 133,405 51,109
Property and equipment, net ............................................................. 80,655 42,871
Restricted cash ......................................................................... 2,665 2,432
Notes and other receivables, less current portion ....................................... 4,387 3,893
Stockholder notes receivable ............................................................ 7,281 2,478
Other assets ............................................................................ 12,976 4,087
--------- ---------
Total assets .................................................................. $ 241,369 $ 106,870
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long term debt .................................................. $ 8,974 $ 6,661
Accounts payable ................................................................... 6,622 12,014
Accrued expenses ................................................................... 17,803 9,800
--------- ---------
Total current liabilities ...................................................... 33,399 28,475
Long term debt, less current portion .................................................... 11,261 8,264
Notes payable to stockholders ........................................................... 6,611 6,611
Other liabilities ....................................................................... 512 478
--------- ---------
Total liabilities .................................................................. 51,783 43,828
--------- ---------
Stockholders' equity:
Preferred Stock:
Series A-G, par value $.01; 77,931,054 shares authorized; 56,422,341 shares
issued and outstanding at June 30, 1999, (aggregate liquidation preference of
$146,990,753 at June 30, 1999) ................................................. -- 1,868
Common stock:
Series A-H and non-voting common, par value $.01; 107,293,178 shares authorized;
6,214,711 shares issued and outstanding at June 30, 1999 ....................... -- 62
Class A Common, par value $.01; 150,000,000 shares authorized; 39,068,447 shares
issued and outstanding at March 31, 2000 ....................................... 391 --
Class B Common, par value $.01; 5,000,000 shares authorized; 3,528,543 shares
issued and outstanding at March 31, 2000 ........................................ 35 --
Additional paid-in capital .............................................................. 301,537 145,877
Unearned stock-based compensation ....................................................... (3,422) (5,836)
Stockholder receivable .................................................................. (2,175) --
Accumulated deficit ..................................................................... (106,780) (78,929)
--------- ---------
Total stockholders' equity ..................................................... 189,586 63,042
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 241,369 $ 106,870
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
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EDISON SCHOOLS INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
THREE MONTHS ENDED NINE MONTHS ENDED
------------------ -----------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue from educational services ................................ $ 61,531 $ 36,391 $ 164,278 $ 95,971
Education and operating expenses:
Direct site expenses ........................................ 51,550 29,827 142,238 81,911
Administration, curriculum and development .................. 9,733 8,647 29,889 22,391
Preopening expenses ......................................... 1,088 352 5,546 3,451
Depreciation and amortization ............................... 5,731 3,366 14,856 9,265
--------- --------- --------- ---------
Total education and operating expenses ................. 68,102 42,192 192,529 117,018
--------- --------- --------- ---------
Loss from operations .................................. (6,571) (5,801) (28,251) (21,047)
Other income (expense):
Interest income ............................................. 2,082 637 4,285 3,087
Interest expense ............................................ (1,043) (842) (2,571) (2,149)
Other expenses .............................................. (606) (45) (1,314) (52)
--------- --------- --------- ---------
Total other ........................................... 433 (250) 400 886
--------- --------- --------- ---------
Net loss .............................................. (6,138) (6,051) (27,851) (20,161)
Preferred stock accretion ........................................ -- (257) -- (770)
--------- --------- --------- ---------
Net loss attributable to common stockholders ......... $ (6,138) $ (6,308) $ (27,851) $ (20,931)
========= ========= ========= =========
Per common share data:
Basic and diluted net loss per share ....................... $ (0.14) $ (2.03) $ (1.23) $ (6.74)
========= ========= ========= =========
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per share 42,518 3,107 22,707 3,107
========= ========= ========= =========
Pro forma per share data:
Pro forma basic and diluted net loss per share ............. $ (0.14) $ (0.21) $ (0.73) $ (0.74)
========= ========= ========= =========
Pro forma weighted average shares outstanding used in
computing basic and diluted net loss per share ............. 42,518 28,940 38,372 27,306
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
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EDISON SCHOOLS INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED MARCH 31, 2000 AND 1999
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
UNAUDITED
---------
2000 1999
---- ----
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................................................... $ (27,851) $ (20,161)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment ...................... 13,687 8,484
Amortization of deferred charter costs and original issue discount ........... (135) (884)
Stock-based compensation ..................................................... 2,809 4,971
Equipment loss ............................................................... 351 51
Changes in working capital accounts .......................................... (24,476) (4,238)
--------- ---------
Cash used in operating activities ..................................... (35,615) (11,777)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ............................................ (53,368) (22,797)
Proceeds from disposition of property and
equipment, net ............................................................... 2,058 10,538
Notes receivable and advances to charter schools .............................. (10,931) (15,012)
Repayment of notes receivable and advances due from charter schools ........... 3,640 157
Other assets ................................................................... (9,333) 398
--------- ---------
Cash used in investing activities ........................................ (67,934) (26,716)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock and warrants ................................... 151,586 31,763
Proceeds from notes payable .................................................... 11,993 8,939
Proceeds from stockholders' notes payable ...................................... -- 938
Payments on notes payable and capital leases ................................... (6,682) (4,478)
Restricted cash ................................................................ (235) 1,541
--------- ---------
Cash provided by financing activities ............................................ 156,662 38,703
--------- ---------
Increase in cash and cash equivalents ............................................ 53,113 210
Cash and cash equivalents at beginning of period ................................. 27,923 7,492
--------- ---------
Cash and cash equivalents at end of period ....................................... $ 81,036 $ 7,702
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the periods for interest, net of capitalized interest of $260
and $0 for March 2000 and 1999, respectively ............................ $ 2,452 $ 1,818
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Stockholder note receivable exchanged for common stock ....................... $ 2,175 $ --
Accretion of Series D preferred PIK dividend ................................. $ -- $ 770
Additions to property and equipment included in accounts payable ............. $ 511 $ --
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
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EDISON SCHOOLS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed financial statements have been prepared by
Edison Schools Inc (the "Company") in accordance with generally accepted
accounting principles ("GAAP") for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. In the opinion of
management, all adjustments, consisting of normal recurring items necessary to
present fairly the financial position and results of operations have been
included. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with the generally accepted
accounting principles have been condensed or omitted pursuant to such SEC rules
and regulations. These financial statements should be read in conjunction with
the financial statements and related notes included in the Company's
Registration Statement on Form S-1, as amended (Registration No. 333-84177),
declared effective on November 10, 1999 (the "Registration Statement").
The preparation of financial statements in conformity with GAAP
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, certain school revenues and expenses, useful lives
of assets, 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.
2. DESCRIPTION OF BUSINESS
The Company manages elementary and secondary public schools under
contracts with school districts and charter school boards located in 16 states
and Washington, D.C. The Company opened its first four schools in the fall of
1995, and, as of March 31, 2000 operates 79 schools with approximately 37,500
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 school boards 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.
3. INITIAL PUBLIC OFFERING
On November 17, 1999, the Company completed an initial public offering
("IPO") in which the Company sold 6,800,000 shares of its Class A Common Stock
for net proceeds to the Company of approximately $109.3 million.
On October 5, 1999, the Board of Directors approved a proposal to amend
and restate the Company's certificate of incorporation. On October 26, 1999, the
amended and restated certificate of incorporation was approved by the Company's
shareholders. The amended and restated certificate of incorporation became
effective upon the closing of the IPO and, among other things, provided that
outstanding Series A through G Preferred stock converted into Class A Common
Stock upon the closing of the IPO with the number of shares upon conversion
calculated as the original purchase price of each share plus accrued and unpaid
dividends divided by the conversion price multiplied by nine-twentieths. In
addition, each preferred share converted into a number of shares of Class B
Common Stock upon the closing of the IPO calculated as the original purchase
price for each share plus accrued and unpaid dividends divided by the conversion
price multiplied by one-twentieth. Further, all outstanding shares of existing
common stock converted into nine-twentieths of a share of Class A Common stock
and one-twentieth of a Class B Common Stock upon the closing of the IPO. All
fractional shares of Class A Common Stock and Class B Common Stock were rounded
up to the next larger number. Additional information concerning the IPO and
changes in the Company's capital structure since June 30, 1999 may be found in
the financial statements and notes thereto included in the Registration
Statement.
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4. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
Pursuant to SFAS No. 128, the basic and diluted earnings per common
share information has been shown on the Condensed Statements of Operations
adjusted retroactively for the periods presented to reflect the changes in the
Company's capital structure discussed in Note 3. 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 weighted average number of shares of common stock
assuming conversion of convertible preferred stock outstanding during the period
under the if-converted method. The pro forma presentation includes the
conversion of 6,214,711 shares of common and 51,664,865 shares of preferred
stock which were converted into 0.45 shares of Class A Common stock and 0.05
shares of Class B Common stock resulting in 26,045,809 and 2,893,979 shares of
Class A and Class B common stock, respectively. The calculation of pro forma net
loss per share for the three and nine month periods ended March 31, 2000 and
1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net Loss ............................................... $ (6,138) $ (6,051) $(27,851) $(20,161)
======== ======== ======== ========
Class A Common stock outstanding at beginning
of period ........................................... 38,941 26,046 28,187 22,348
Class B Common stock outstanding at beginning
of period ........................................... 3,544 2,894 3,132 2,483
Add:
Issuance of Class A Common stock
(as if converted on a weighted average basis) ........ 45 -- 6,692 2,227
Issuance (conversion) of Class B Common stock
(as if converted on a weighted average basis) ........ (13) -- 358 247
-------- -------- -------- --------
Pro forma weighted average number of shares outstanding,
assuming conversion of convertible preferred stock ... 42,518 28,940 38,372 27,306
======== ======== ======== ========
Pro forma net loss per share ........................... $ (0.14) $ (0.21) $ (0.73) $ (0.74)
======== ======== ======== ========
</TABLE>
5. RELATED PARTY TRANSACTION
In November 1999 and April 2000, the Company loaned $6,620,700 and
$1,248,500, respectively to H. Christopher Whittle, its President and Chief
Executive Officer. The loans bear interest at the greater of the prime rate or
the Company's actual borrowing rate, in effect from time to time, with payment
of the principal amount of $6,620,700 and accrued interest on the November 1999
loan due in full in November 2004 and payment of the principal amount of
$1,248,500 and accrued interest on the April 2000 loan due in full April 2005.
The proceeds from the loans were used by Mr. Whittle to purchase an aggregate of
652,500 shares of Class A Common Stock and 72,500 shares of Class B Common Stock
for $3.00 per share through the exercise of existing stock options, and to pay
income tax obligations resulting from the exercise of such options. The portion
of the loan attributable to the purchase of shares, amounting to $2,175,000, has
been recorded on the Condensed Balance Sheet at March 31, 2000 as a reduction of
stockholders' equity.
6. LINE OF CREDIT
In November 1999, the Company obtained a line of credit from Imperial
Bank (the "LOC") which provides for
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borrowings of up to $10 million. The LOC is for 3 years and may be used for
seasonal working capital needs and other general corporate purposes. The
interest rate on the LOC is LIBOR plus 4% and it is collateralized by the
general assets of the Company and is subject to financial covenants and
restrictions, including minimum liquidity requirements and prohibition on the
payment of dividends. As of March 31, 2000 and May 12, 2000, no amounts had been
borrowed under the LOC.
7. ISSUANCE AND EXERCISE OF WARRANTS
In October 1999, in connection with an equipment financing, the Company
issued to an equipment financing firm a warrant to purchase up to 30,000 shares
of Series A Common Stock at an exercise price of $6.15 per share. Upon the
closing of the IPO, each share of Series A Common Stock converted, automatically
and without additional consideration, into 0.45 shares of Class A Common Stock
and 0.05 shares of Class B Common Stock, and the warrant automatically adjusted
to become a warrant to purchase 13,500 shares of Class A Common Stock and 1,500
shares of Class B Common Stock at an exercise price of $12.30 per share.
In January and March 2000, pursuant to the exercise of outstanding
warrants, the Company issued an aggregate of 17,500 and 71,012 shares,
respectively, of Class A Common Stock at a weighted average price of $4.00 per
share.
8. PROPERTY ACQUISITION AND DEVELOPMENT
In partnership with the Museum of African Art, the Company plans to
acquire and develop certain New York City property for a mixed-use project
consisting of Edison Corporate Headquarters, a charter school, and the museum.
To that end, the Company has entered into a contract to purchase from Castle
Senior Living LLC ("Castle") a lot located in the Harlem section of the borough
of Manhattan in New York City, for a purchase price of $10.0 million (the
"Purchase Agreement"). Additionally, the Company has signed a non-binding letter
of intent with the Museum of African Art setting forth the proposed business
terms of the project and a development schedule (the "Letter of Intent").
Under the terms of the Purchase Agreement, which was executed January
11, 2000, the Company paid $1.5 million to Castle upon execution and delivery of
the Purchase Agreement and $500,000 thirty days after the execution date. The
closing date is scheduled for July 11, 2000, at which time the balance of the
purchase price must be paid. If the Company is unable to obtain the necessary
zoning approvals prior to July 11, 2000, it will have the option of extending
the closing date until January 11, 2001 and April 11, 2001, respectively, if:
(i) on or before June 29, 2000, it pays Castle $1.0 million; and (ii) on or
before December 28, 2000, if such approvals have still not been obtained, it
pays Castle $500,000.
The letter of intent is non-binding, and the terms set forth therein
are subject to negotiation, execution and delivery of definitive agreements. The
Company anticipates, however, that it will incur costs in carrying out its
obligations under the Letter of Intent, including but not limited to legal fees,
consultants' fees, and filing and application fees.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain of the matters and subject areas discussed in this Quarterly
Report on Form 10-Q contain "forward-looking statements" within the meaning of
the Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical information provided herein are forward-looking
statements and may contain information about financial results, economic
conditions, trends and known uncertainties based on our current expectations,
assumptions, estimates and projections about our business and our industry.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of several factors, as more fully described under the
caption "Additional Risk Factors that May Affect Future Results" and elsewhere
in this Quarterly Report. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis, judgment,
belief or expectation only as of the date hereof. The forward-looking statements
made in this Quarterly Report on Form 10-Q relate only to events as of the date
on which the statements are made. We undertake no obligation to publicly update
any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
OVERVIEW
We are the nation's largest private operator of public schools serving
students from kindergarten through 12th grade. We contract with local school
districts and public charter school boards to assume educational and operational
responsibility for individual schools in return for per-pupil funding that is
generally comparable to that spent on other public schools in the area. We
opened our first four schools in August 1995 and have grown rapidly in every
subsequent year, currently serving 37,500 students in 79 schools located in 16
states across the country and the District of Columbia.
From our formation in 1992 until opening our first schools in fiscal
1996, we were a development stage company focused on research, development and
marketing of the Edison school design and curriculum and raising capital to
support our business plan. From 1992 until 1995, Edison's team of leading
educators and scholars developed an innovative, research-backed curriculum and
school design. We operated as a partnership prior to November 1996, when we
converted to a corporation. As of March 31, 2000, our accumulated deficit since
November 1996 was approximately $106.8 million. In addition, prior to November
1996, we incurred losses of approximately $61.8 million, which are reflected in
our additional paid-in capital. Because of our rapid growth, and in view of the
evolving nature of our business and our limited operating history, we believe
that period-to-period comparisons of our operating results may not be
meaningful.
Edison's curriculum expenses include the ongoing costs to maintain and
support Edison's educational design. These expenses include the salaries and
wages of trained educators in our central office curriculum department, the
costs of providing professional training to our staff and teachers, including
materials, and the ongoing costs of maintaining and updating the teaching
methods and educational content of our program.
We make a significant investment in each school we open. The investment
generally includes:
- Initial staff training and professional development;
- Technology, including laptop computers for teachers and, after
the first year of operation, a computer for the home of every
child above the second grade;
- Books and other materials to support the Edison curriculum and
school design, including enrollment fees for the Success for
All reading program; and
- Upgrades in facilities.
REVENUE FROM EDUCATIONAL SERVICES
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Our revenue is principally derived from contractual relationships to
manage and operate contract and charter schools. We also receive small amounts
of revenue, which represented less than 0.4% of total revenue for the nine
months ended March 31, 2000, from the collection of after-school program fees
and food service costs. We receive per-pupil revenue from local, state and
federal sources, including Title I and special education funding, in return for
providing comprehensive education to our students. The per-pupil revenue is
generally comparable to the funding spent on other public schools in the area.
We recognize revenue for each school pro rata over the 11 months from August
through June. Because the amount of revenue we receive for operating each school
depends on the number of students enrolled, achieving site-specific enrollment
objectives is necessary for satisfactory financial performance at the school.
Both the amount of per-pupil revenue and the initial enrollment at each school
become known at the beginning of the school year and generally tend not to vary
significantly throughout the year. For these reasons, our revenue for each
school year is largely predictable at the beginning of the school year.
DIRECT EXPENSES
Direct site expenses include most of the expenses incurred on-site at
our schools. The largest component of this expense is salaries and wages,
primarily for principals and teachers. The remaining direct site expenses
include on-site administration, facility maintenance and, in some cases,
transportation and food services. Once staffing levels for the school year are
determined, most of these expenses are fixed and, accordingly, variations in
enrollment will generally not change the overall cost structure of a school for
that year. Direct site expenses do not include teacher training and other
pre-opening expenses associated with new schools, financing costs or
depreciation and amortization related to technology, including computers for
teachers and students, curriculum materials and capital improvements to school
buildings.
GROSS SITE CONTRIBUTION AND GROSS SITE MARGIN
We define gross site contribution as revenue from educational services
less direct site expenses. Gross site margin is gross site contribution
expressed as a percentage of revenue from educational services. Gross site
contribution is a measurement of ongoing site-level operating performance of our
schools. We believe it serves as a useful operating measurement when evaluating
our schools' financial performance. Gross site contribution does not reflect all
site-related costs, including depreciation and amortization or interest expense
and principal repayment related to site-level investments, or on-site
pre-opening expenses, and accordingly gross site contribution does not represent
site-level profitability.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES
Support from our central office is important for the successful
delivery of our curriculum and school design. Administration, curriculum and
development expenses include those amounts related to the creation and
enhancement of our curriculum, and our general, administrative and sales and
marketing functions. These costs include costs for curriculum, assessment and
training professionals, sales and marketing personnel, financial reporting and
legal and technological support and travel expenses and other development
activities.
PRE-OPENING EXPENSES
Pre-opening expenses consist principally of various administrative and
personnel costs incurred prior to the opening of a new school or the expansion
of an existing school, particularly the costs for the initial training and
orientation of professional staff, recruitment and travel expenses and expenses
for temporary offices and staff. In connection with the establishment of a new
school, we seek to hire the school's principal several months in advance of the
school's opening. This allows the principal to hire staff, most of whom receive
substantial professional training in the Edison education design prior to the
first day of school. Pre-opening expenses generally are first incurred in the
third and fourth quarter of the fiscal year prior to the school's opening or
expansion and continue into the first quarter of the fiscal year in which the
school opens. These costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization relates primarily to the investments we
make in each school for books and other educational materials, including
enrollment fees for the Success for All program, computers and other technology,
and facility
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improvements. These investments support the Edison curriculum and school design
and relate directly to our provision of educational services.
ENROLLMENT
Our annual budgeting process establishes site-specific revenue and
expense objectives, which include assumptions about enrollment and anticipated
per-student funding. While our budgets include desired enrollment levels, we do
not attempt to maximize enrollment based upon the physical capacity of our
facilities. Our budgets are designed to achieve both financial and academic
goals, both of which we believe are critical to the ongoing success of our
business. Therefore, our budgets are designed to achieve the proper balance
between financial performance and academic standards. While managed closely at
each school, our school enrollment levels are evaluated by management in the
aggregate.
RESULTS OF OPERATIONS
FISCAL QUARTER ENDED MARCH 31, 2000 COMPARED TO FISCAL QUARTER ENDED MARCH 31,
1999
Revenue From Educational Services. Our revenue from educational
services increased to $61.5 million for the three months ended March 31, 2000
from $36.4 million for the same period of the prior year, an increase of 69%.
The increase was primarily due to a 57% increase in student enrollment from
23,900 in the 1998-1999 school year to 37,500 in the 1999-2000 school year,
reflecting both the opening of new schools and the expansion of existing
schools.
Direct Site Expenses. Our direct site expenses increased to $51.6
million for the three months ended March 31, 2000 from $29.8 million for the
same period of the prior year, an increase of 73.2%. Similar to the increase in
revenue from educational services, the increase in direct site expenses was
primarily due to the 57% increase in student enrollment. The largest element of
direct site expenses is personnel costs. Personnel costs included in direct site
expenses increased to $41.1 million for the three months ended March 31, 2000
from $22.7 million for the same period of the prior year.
Gross Site Contribution and Margin. Our gross site contribution was
$10.0 million for the three month period ended March 31, 2000 compared to $6.6
million for the same period of the prior year. The corresponding gross site
margin decreased to 16.2% for the three months ended March 31, 2000 from 18.0%
for the same period of the prior year. Although the current quarter's gross
margin reflects a decrease from the same quarter last year, this was expected.
The prior year's third quarter gross site contribution was unusually high as
expenses for certain sites for that quarter were subsequently revised upward and
recorded in the fourth quarter of the school year.
Administration, Curriculum and Development Expenses. Our
administration, curriculum and development expenses increased to $9.7 million
for the three months ended March 31, 2000 from $8.6 million for the same period
of the prior year, an increase of 12.8%. The increase was substantially due to
greater personnel costs resulting from the hiring of approximately 70 new
headquarters employees, which reflects a substantial increase in staff in our
school operations and curriculum and education divisions and an increase in our
central office administrative staff to enhance legal, contracting, and financial
reporting functions. These expenses increased in part due to the additional
reporting and administrative obligations required of us in connection with
operating as a public company. Administration, curriculum and development
expenses also includes $900,000 of non-cash stock based compensation we incurred
in the three months ended March 31, 2000 compared to $1.7 million for the same
period of the prior year.
Pre-opening Expenses. Our pre-opening expenses increased to $1.1
million for the three months ended March 31, 2000 from $400,000 for the same
period of the prior year, an increase of 175 %. This increase was associated
primarily with opening new schools and expanding existing schools for the
1999-2000 school year, with 13,600 new students enrolled compared to
approximately 11,300 new students enrolled one year earlier, as well as
approximately $500,000 of expenses incurred for new schools opening in the fall
of 2000. Excluding the non-cash charges discussed above, administration,
curriculum and development and pre-opening expenses as a percentage of revenues
decreased to 16.1% for the three months ended March 31, 2000 from 20.1% for the
same period of the prior year.
Depreciation and Amortization. Our depreciation and amortization
increased to $5.7 million for the three months ended March 31, 2000 from $3.4
million for the same period of the prior year, an increase of 67.6%. The
increased depreciation and amortization resulted from additional capital
expenditures for our curriculum materials, computers and related technology,
particularly the issuance of home computers, and facility improvements related
to the 57% increase in
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student enrollment.
EBITDA, Net of Other Charges. EBITDA, net of other charges, is defined
as net loss excluding other income or loss, depreciation and amortization and
non-cash stock based compensation. This amount for the three months ended March
31, 2000 was approximately $100,000 compared to a negative $800,000 for the same
period of the prior year. The improvement primarily resulted from a higher gross
site contribution and lower administration, curriculum and development, and
pre-opening expenses as a percentage of revenue. On a per-student basis, we
realized $3 EBITDA as compared to a negative $33 for the same period one year
ago.
Other Income and Expense. Other income, net was $433,000 for the three
months ended March 31, 2000 as compared to an other expense, net of $250,000 in
the same period of the prior year. The improvement was primarily due to
increased interest income resulting from higher invested cash balances. Interest
income was partially offset by increased interest expense from expanded
borrowings and the recording of our applicable share of the quarterly net loss
of APEX Online Learning, Inc, a company which provides interactive advance
placement courses for high school students over the Internet. We made an initial
investment of $5.0 million in APEX in July 1999, for a 16.5% ownership interest,
and invested an additional $5.0 million in December 1999, increasing our
ownership interest to 19.7%. Because of our significant ownership interest in
APEX, we must recognize a pro rata portion of APEX's losses based upon our
ownership interest, up to a maximum amount equal to our investment in APEX. For
the quarter ended March 31, 2000, we recognized $600,000 of losses as our pro
rata share of APEX' net loss for that period.
THE NINE MONTHS ENDED MARCH 31, 2000 COMPARED TO THE NINE MONTHS ENDED MARCH 31,
1999.
Revenue From Educational Services. Our revenue from educational
services increased to $164.3 million for the nine months ended March 31, 2000
from $96.0 million for the same period of the prior year, an increase of 71.1%.
The increase was primarily due to a 57% increase in student enrollment from
23,900 in the 1998-1999 school year to 37,500 in the 1999-2000 school year,
reflecting both the opening of new schools and the expansion of existing
schools.
Direct Site Expenses. Our direct site expenses increased to $142.2
million for the nine months ended March 31, 2000 from $81.9 million for the same
period of the prior year, an increase of 73.6%. Similar to the increase in
revenue from educational services, the increase in direct site expenses was
primarily due to the 57% increase in student enrollment. The largest element of
direct site expenses is personnel costs. Personnel costs included in direct site
expenses increased to $114.1 million for the nine months ended March 31, 2000
from $65.6 million for the same period of the prior year.
Gross Site Contribution and Margin. Our gross site contribution was
$22.0 million for the nine months ended March 31, 2000 compared to $14.1 million
for the same period of the prior year. The corresponding gross site margin
decreased to 13.4% for the nine months ended March 31, 2000 from 14.7% for the
same period of the prior year. Although the nine month's gross site margin
reflects a decrease from the same period last year, this was expected. The prior
year's nine month gross site contribution was higher as estimates of expenses
for certain sites for that period were revised upward and adjusted in the fourth
quarter.
Administration, Curriculum and Development Expenses. Our
administration, curriculum and development expenses increased to $29.9 million
for the nine months ended March 31, 2000 from $22.4 million for the same period
of the prior year, an increase of 33.5%. The increase was substantially due to
greater personnel costs resulting from the hiring of approximately 70 new
headquarters employees, which reflects a substantial increase in staff in our
school operations and curriculum and education divisions and an increase in our
central office administrative staff to enhance legal, contracting, and financial
reporting functions. These expenses increased in part due to the additional
reporting and administrative obligations required of us in connection with
operating as a public company. Administration, curriculum and development
expenses also includes $2.8 million of non-cash stock based compensation we
incurred in the nine months ended March 31, 2000 compared to $5.0 million for
the same period of the prior year.
Pre-opening Expenses. Our pre-opening expenses increased to $5.5
million for the nine months ended March 31, 2000 from $3.5 million for the same
period of the prior year, an increase of 57.1%. This increase was associated
primarily with opening new schools and expanding existing schools for the
1999-2000 school year, with 13,600 new students enrolled compared to
approximately 11,300 new students enrolled one year earlier, as well as
approximately $500,000 of expenses incurred for new schools opening in the fall
of 2000. Excluding the non-cash charges discussed above, administration,
curriculum and development and pre-opening expenses as a percentage of revenues
decreased to 19.9% for the nine months ended March 31, 2000 from 21.8% for the
same period of the prior year.
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Depreciation and Amortization. Our depreciation and amortization
increased to $14.9 million for the nine months ended March 31, 2000 from $9.3
million for the same period of the prior year, an increase of 60.2%. The
increased depreciation and amortization resulted from additional capital
expenditures for our curriculum materials, computers and related technology, and
facility improvements related to our standard enrollment growth.
EBITDA, Net of Other Charges. EBITDA, net of other charges, is defined
as net loss excluding other income or loss, depreciation and amortization and
non-cash stock based compensation. This amount for the nine months ended March
31, 2000 was a negative $10.6 million compared to a negative $6.8 million for
the same period of the prior year. The decline primarily resulted from slightly
lower gross site margin and increased administration, curriculum and
development, and pre-opening expenses. On a per-student basis, negative EBITDA
improved slightly to $283 compared to $285 for the same period one year ago.
Other Income and Expenses. Other income, net was $400,000 for the nine
months ended March 31, 2000 compared to $886,000 in the same period of the prior
year. The decrease was primarily due to increased interest expense from expanded
borrowings and the recording of our applicable share of the net losses of APEX
Online Learning, Inc., partially offset by an increase of $1.2 million of
interest income resulting from larger invested cash balances. For the nine
months ended March 31, 2000, we recognized $1.3 million of losses as our pro
rata share of APEX' net loss for that 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. In November 1999, we completed an initial public offering of
6,800,000 shares of our Class A Common Stock (the "IPO"). These shares were sold
to the public at $18.00 per share, which, net of offering expenses, resulted in
net proceeds of $109.3 million.
For the nine months ended March 31, 2000, we used approximately $35.6
million for operating activities. This use resulted primarily from a $27.9
million net loss and a $24.5 million net decrease in working capital accounts
partially offset by depreciation and amortization totaling $13.7 million and a
$2.8 million non-cash stock based compensation charge.
During the same nine month period, we advanced approximately $10.9
million to our charter board clients to help fund new or improved facilities for
our students. In December 1999, we invested an additional $5.0 million in APEX,
a company that provides interactive advanced placement courses for high school
students over the Internet, increasing our ownership interest to 19.7%.
During the same nine month period we received $12.0 million of long
term financing related to technology equipment purchases. As of May 12, 2000,
the Company had approximately $7.4 million of available financing for future
technology purchases. Such financing availability expires through August 31,
2000, at which time the company expects to negotiate for additional similar
technology financing.
In November 1999, we obtained a line of credit from Imperial Bank which
provides for borrowings of up to $10.0 million (the "LOC"). The LOC is for 3
years and may be used for seasonal working capital needs and other general
corporate purposes. The interest rate on the LOC is LIBOR plus 4% and it is
secured by our general assets and is subject to financial covenants and
restrictions, including the prohibition on the payment of dividends. As of May
12, 2000 no amounts had been borrowed under the LOC.
We expect our cash on hand, including the proceeds of the IPO,
borrowings under financing arrangements to finance technology and
facilities-related expenditures together with expected repayments of advances we
have made to charter boards, will be sufficient to meet our working capital
needs over the next twelve months.
Our longer term requirements are for capital to fund operational
losses, capital expenditures related to growth and for anticipated working
capital needs and general corporate purposes. We expect to fund such
expenditures and other longer term liquidity needs with cash generated from
operations, the remaining proceeds from the IPO, additional proceeds from future
equity offerings or expanded financing arrangements. Depending on the terms of
any financing arrangements or equity issuance, such funding may be dilutive to
existing shareholders, and we cannot be certain that we will be able to obtain
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additional financing or issue additional equity on favorable terms, if at all.
In general, our ability to achieve positive cash flow will be dependent
on the volume of schools with positive gross site contribution to offset central
office and overhead expenses. Because gross site contribution is the difference
between site revenues and site expenditures, positive gross site contribution
can be achieved at a range of enrollment levels. While higher enrollment tends
to have a positive effect on gross site contribution, our growth and cash flow
do not depend on 100% enrollment.
We are 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. Through March 31, 2000, we have spent approximately
$4.7 million on such systems. We expect the hardware, implementation costs and
other maintenance expenditures related to such systems to account for an
additional $10.0 to $12.0 million over the next 24 to 36 months.
In partnership with the Museum of African Art, we plan to acquire and
develop certain New York City property for a mixed-use project consisting of
Edison Corporate Headquarters, a charter school, and the museum. To that end, we
have entered into a contract to purchase from Castle Senior Living LLC
("Castle") a lot located in the Harlem section of the borough of Manhattan in
New York City, for a purchase price of $10 million (the "Purchase Agreement").
Additionally, we have signed a non-binding letter of intent with the Museum of
African Art setting forth the proposed business terms of the project and a
development schedule (the "Letter of Intent").
Under the terms of the Purchase Agreement, which was executed January
11, 2000, we paid $1.5 million to Castle upon execution and delivery of the
Purchase Agreement and $500,000 thirty days after the execution date. The
closing date is scheduled for July 11, 2000, at which time the balance of the
purchase price must be paid. If we are unable to obtain the necessary zoning
approvals prior to July 11, 2000, we have the option of extending the closing
date until January 11, 2001 and April 11, 2001, respectively, if: (i) on or
before June 29, 2000, we pay Castle $1.0 million; and (ii) on or before December
28, 2000, if such approvals have still not been obtained, we pay Castle
$500,000.
The letter of intent is non-binding, and the terms set forth therein
are subject to negotiation, execution and delivery of definitive agreements. We
do anticipate, however, that we will incur costs in carrying out our obligations
under the Letter of Intent, including but not limited to legal fees,
consultants' fees, and filing and application fees.
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business, operating results or financial condition could be
materially adversely affected by any of the following factors. You should also
refer to the information set forth in this report, including our condensed
financial statements and the related notes.
WE ARE A YOUNG COMPANY, HAVING OPENED OUR FIRST SCHOOLS IN FISCAL 1996; THIS
MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS
We opened our first schools and recorded our first revenue in fiscal
1996. As a result, we have only four years of operating history on which you can
base your evaluation of our business and prospects. Our business and prospects
must be considered in light of the risks and uncertainties frequently
encountered by companies in the early stages of development, particularly
companies like us who operate in new and rapidly evolving markets. Our failure
to address these risks and uncertainties could cause our operating results to
suffer and result in the loss of all or part of your investment.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES IN THE FUTURE
We have incurred substantial net losses in every fiscal period since we
began operations. For the nine months ended March 31, 2000, our net loss was
$27.9 million. As of March 31, 2000, our accumulated deficit since November
1996, when we converted from a partnership to a corporation, was approximately
$106.8 million. In addition, prior to November 1996, we incurred losses of
approximately $61.8 million, which are reflected in our additional paid-in
capital. We have not yet demonstrated that public schools can be profitably
managed by private companies and we are not certain when we will become
profitable, if at all. Our ability to become profitable will depend upon our
ability to generate and sustain higher levels
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of both gross site contribution and total revenue to allow us to reduce central
expenses as a percentage of total revenue. Even if we do achieve profitability,
we may not sustain or increase profitability on a quarterly or annual basis.
Failure to become and remain profitable may adversely affect the market price of
our class A common stock and our ability to raise capital and continue
operations.
THE PRIVATE, FOR-PROFIT MANAGEMENT OF PUBLIC SCHOOLS IS A RELATIVELY NEW AND
UNCERTAIN INDUSTRY, AND IT MAY NOT BECOME PUBLICLY ACCEPTED
Our future is highly dependent upon the development, acceptance and
expansion of the market for private, for-profit management of public schools.
This market has only recently developed and we are among the first companies to
provide these services on a for-profit basis. We believe the first meaningful
example of a school district contracting with a private company to provide core
instructional services was in 1992, and we opened our first schools in August
1995. The development of this market has been accompanied by significant press
coverage and public debate concerning for-profit management of public schools.
If this business model fails to gain acceptance among the general public,
educators, politicians and school boards, we may be unable to grow our business
and the market price of our class A common stock would be adversely affected.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO IMPROVE THE ACADEMIC
ACHIEVEMENT OF THE STUDENTS ENROLLED IN OUR SCHOOLS, AND WE MAY FACE
DIFFICULTIES IN DOING SO IN THE FUTURE
We believe that our growth will be dependent upon our ability to
demonstrate general improvements in academic performance at our schools. Our
management agreements contain performance requirements related to test scores.
As average student performance at our schools increases, whether due to
improvements in achievement over time by individual students in our schools or
changes in the average performance levels of new students entering our schools,
aggregate absolute improvements in student performance will be more difficult to
achieve. If academic performance at our schools declines, or simply fails to
improve, we could lose business and our reputation could be seriously damaged,
which would impair our ability to gain new business or renew existing school
management agreements.
WE COULD INCUR LOSSES AT OUR SCHOOLS IF WE ARE UNABLE TO ENROLL ENOUGH STUDENTS
Because the amount of revenue we receive for operating each school
depends on the number of students enrolled, and because many facility and
on-site administrative costs are fixed, achieving site-specific enrollment
objectives is an important factor in our ability to achieve satisfactory
financial performance at a school. We may be unable to recruit enough students
to attend all grades in our new schools or maintain enrollment at all grades in
our existing schools. We sometimes do not have enough students to fill some
grades in some schools, particularly the higher grades. It is sometimes more
difficult to enroll students in the higher grades because older students and
their parents are reluctant to change schools. To the extent we are unable to
meet or maintain enrollment objectives at a school, the school will be less
financially successful and our financial performance will be adversely affected.
WE ARE EXPERIENCING RAPID GROWTH, WHICH MAY STRAIN OUR RESOURCES AND MAY NOT BE
SUSTAINABLE
We have grown rapidly since we opened our first four schools in August
1995. For the 1999-2000 school year, we have grown to 79 schools. This rapid
growth has sometimes strained our managerial, operational and other resources,
and we expect that continued growth would strain these resources in the future.
If we are to manage our rapid growth successfully, we will need to continue to
hire and retain management personnel and other employees. We must also improve
our operational systems, procedures and controls on a timely basis. If we fail
to successfully manage our growth, we could experience client dissatisfaction,
cost inefficiencies and lost growth opportunities, which could harm our
operating results. We cannot guarantee that we will continue to grow at our
historical rate.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN HIGHLY SKILLED PRINCIPALS AND TEACHERS
IN THE NUMBERS REQUIRED TO GROW OUR BUSINESS
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Our success depends to a very high degree on our ability to attract and
retain highly skilled school principals and teachers. For the 1999-2000 school
year we hired approximately 750 new teachers and 20 new principals. Currently,
there is a well-publicized nationwide shortage of teachers and other educators
in the United States. In addition, we may find it difficult to attract and
retain principals and teachers for a variety of reasons, including the
following:
- We generally require our teachers to work a longer day and a
longer year than most public schools;
- We tend to have a larger proportion of our schools in
challenging locations, such as low-income urban areas, which
may make attracting principals and teachers more difficult; and
- We believe we generally impose more accountability on
principals and teachers than do public schools as a whole.
These factors may increase the challenge we face in an already
difficult market for attracting principals and teachers. We have also
experienced higher levels of turnover among teachers than is generally found in
public schools nationally, which we attribute in part to these factors. If we
fail to attract and retain principals and teachers in sufficient numbers or of a
sufficient quality, we could experience client dissatisfaction and lost growth
opportunities, which would adversely affect our business.
WE ARE CURRENTLY IMPLEMENTING NEW INFORMATION SYSTEMS, WHICH COULD CAUSE
DISRUPTIONS TO OUR BUSINESS
We are currently in the process of implementing a new student
information system, as well as a new accounting, financial reporting and
management information system. We may face difficulties in integrating these
systems with our existing information and other systems. If we fail to
successfully implement and integrate these new systems, we may not have access
on a timely basis to the information we need to effectively manage our schools,
our business and our growth.
WE MUST OPEN A LARGE NUMBER OF NEW SCHOOLS IN A SHORT PERIOD OF TIME AT THE
BEGINNING OF EACH SCHOOL YEAR AND, IF WE ENCOUNTER DIFFICULTIES IN THIS PROCESS,
OUR BUSINESS AND REPUTATION COULD SUFFER
It is the nature of our business that virtually all of the new schools
we open in any year must be opened within a few weeks of each other at the
beginning of the school year. Each new school must be substantially functional
when students arrive on the first day of school. This is a difficult logistical
and management challenge, and the period of concentrated activity preceding the
opening of the school year places a significant strain on our management and
operational functions. We expect this strain will increase if we are successful
in securing larger numbers of school management agreements in the future. If we
fail to successfully open schools by the required date, we could lose school
management agreements, incur financial losses and our reputation would be
damaged. This could seriously compromise our ability to pursue our growth
strategy.
OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF KEY EXECUTIVES
Our future success depends upon the continued services of a number of
our key executive personnel, particularly Benno C. Schmidt, Jr., our Chairman of
the Board of Directors, and H. Christopher Whittle, our President and Chief
Executive Officer. Mr. Schmidt and Mr. Whittle have been instrumental in
determining our strategic direction and focus and in publicly promoting the
concept of private management of public schools. If we lose the services of
either Mr. Schmidt or Mr. Whittle, or any of our other executive officers or key
employees, our ability to grow our business would be seriously compromised and
the market price of our class A common stock may be adversely affected. Also, we
do not maintain any key man insurance on any of our executives.
WE DEPEND UPON COOPERATIVE RELATIONSHIPS WITH TEACHERS' UNIONS, BOTH AT THE
LOCAL AND NATIONAL LEVELS
With respect to contract schools, but generally not charter schools,
union cooperation at the local level is often critical to us in obtaining new
management agreements and maintaining existing management agreements. In those
school districts where applicable, provisions of collective bargaining
agreements must typically be waived in areas such as length of school day,
length of school year, negotiated compensation policies and prescribed methods
of evaluation in order to implement the Edison design at a contract school. We
regularly encounter resistance from local teachers' unions during school board
debates over whether to enter into a management agreement with us. If we fail to
achieve and maintain cooperative relationships with local teachers' unions, we
could lose business and our ability to grow could suffer, which could adversely
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affect the market price of our class A common stock. In addition, at the
national level, the American Federation of Teachers and the National Education
Association have substantial financial and other resources that could be used to
influence legislation and public opinion in a way that would hurt our business.
WE COULD BE LIABLE FOR EVENTS THAT OCCUR AT OUR SCHOOLS
We could become liable for the actions of principals, teachers and
other personnel in our schools. In the event of on-site accidents, injuries or
other harm to students, we could face claims alleging that we were negligent,
provided inadequate supervision or were otherwise liable for the injury. We
could also face allegations that teachers or other personnel committed child
abuse, sexual abuse or other criminal acts. In addition, if our students commit
acts of violence, we could face allegations that we failed to provide adequate
security or were otherwise responsible for their actions, particularly in light
of recent highly publicized incidents of school violence. Although we maintain
liability insurance, this insurance coverage may not be adequate to fully
protect us from these kinds of claims. In addition, we may not be able to obtain
liability insurance in the future at reasonable prices or at all. A successful
liability claim could injure our reputation and hurt our financial results. Even
if unsuccessful, such a claim could cause unfavorable publicity, entail
substantial expense and divert the time and attention of key management
personnel.
OUR MANAGEMENT AGREEMENTS WITH SCHOOL DISTRICTS AND CHARTER BOARDS ARE
TERMINABLE UNDER SPECIFIED CIRCUMSTANCES AND GENERALLY EXPIRE AFTER A TERM OF
FIVE YEARS
Our management agreements generally have a term of five years. When we
expand by adding an additional school under an existing management agreement,
the term with respect to that school generally expires at the end of the initial
five-year period. We have limited experience in renewing management agreements
and we cannot be assured that any management agreements will be renewed at the
end of their term. Management agreements representing 13 schools, accounting for
22.9% of our total revenue for fiscal 1999, were renewed for an additional five
year term, and management agreements representing 2 schools, accounting for 2.8%
of our total revenue for fiscal 1999, were not renewed. In addition, management
agreements representing 13 schools, accounting for 25.8% of our total revenue
for fiscal 1999, are terminable by the school district or charter board at will,
with or without good reason, and all of our management agreements may be
terminated for cause, including a failure to meet specified educational
standards, such as academic performance based on standardized test scores. If we
fail to renew a significant number of management agreements at the end of their
term, or if management agreements are terminated prior to their expiration, our
reputation and financial results would be adversely affected.
OUR MANAGEMENT AGREEMENTS INVOLVE FINANCIAL RISK
Under all of our management agreements, we agree to operate a school in
return for per-pupil funding that generally does not vary with our actual costs.
To the extent our actual costs under a management agreement exceed our budgeted
costs, or our actual revenue is less than planned because we are unable to
enroll as many students as we anticipated or for any other reason, we could lose
money at that school. We are generally obligated by our management agreements to
continue operating a school for the duration of the contract even if it becomes
unprofitable to do so.
WE HAVE LIMITED EXPERIENCE OPERATING FOUR-YEAR HIGH SCHOOLS
An element of our strategy is to increase our business with existing
customers by opening new schools in school districts with whom we have an
existing relationship. An important aspect of this strategy is to open Edison
high schools in districts in which we operate elementary and middle schools. In
the 1998-1999 school year, we operated one high school through the 11th grade.
In the current school year, we added the senior year to that school and opened
our first four-year high school. Because we have just begun to operate all four
years of a high school, our complete high school curriculum, school design and
operating plan are not fully tested. In addition, school districts typically
spend more per pupil on high school education than on elementary education. By
contrast, some of our management agreements provide that we receive for each
student, regardless of grade level, the average per-pupil funding spent by the
school district for all grade levels. For this reason, in these schools we
receive less per high school student than is spent by the school district for
each of its high school students. In these situations, our success depends upon
our ability to deliver our high school design for the same per-pupil spending as
in our elementary schools. If we are unable to successfully and profitably
operate high schools, our ability to pursue our growth strategy will be
impaired, which could adversely affect the market price of our class A common
stock.
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OUR LENGTHY SALES CYCLE COULD DELAY NEW BUSINESS
The time between initial contact with a potential contract or charter
client and the ultimate opening of a school, and related recognition of revenue,
typically ranges between 10 and 20 months. Our sales cycle for contract schools
is generally very long due to the approval process at the local school board
level, the political sensitivity of converting a public school to private
management and the need, in some circumstances, for cooperation from local
unions. We also have a lengthy sales cycle for charter schools for similar
reasons, as well as the need to arrange for facilities to house the school. As a
result of this lengthy sales cycle, we have only a limited ability to forecast
the timing of new management agreements. Any delay in completing, or failure to
complete, management agreements could hurt our financial performance.
WE COULD LOSE MONEY IF WE UNDERESTIMATE THE REAL ESTATE COSTS ASSOCIATED WITH
ACQUIRING OR RENOVATING A CHARTER SCHOOL
If we incur unexpected real estate cost overruns in acquiring or
renovating a charter school, we could lose money in operating the school. Our
decision to enter into a management agreement for a charter school, and our
estimate of the financial performance of the charter school, is based, in part,
on the estimated facility financing cost associated with renovating an existing
facility or building a new facility to house the charter school. This cost
varies widely from minimal amounts for minor upgrades to between $4.0 million
and more than $8.0 million for new construction. Each charter school absorbs a
portion of its facility financing costs each year through its leasing and
similar expenses. If these expenses exceed our estimates for the charter school,
the charter school could lose money and our financial results would be adversely
affected.
WE HAVE ADVANCED AND LOANED MONEY TO CHARTER SCHOOLS THAT MAY NOT BE REPAID
As of March 31, 2000, we had receivables from charter boards of
approximately $15.4 million. The amounts advanced were used to finance the
purchase or renovation of school facilities we manage. We generally have not
charged interest on these loans and advances. Approximately $4.4 million of
these receivables, representing eight schools, are unsecured or subordinated to
a senior lender. Receivables of $11.0 million, representing three schools, may
be accelerated upon termination of the corresponding management agreement with
the charter school. If these loans are not repaid when due, our financial
results could be adversely affected.
WE COULD BECOME LIABLE FOR FINANCIAL OBLIGATIONS OF CHARTER BOARDS
We could have facility financing obligations for charter schools we no
longer operate, because the terms of our facility financing obligations for some
of our charter schools exceeds the term of the management agreement for those
schools. While the charter board is generally responsible for locating and
financing its own school building, the holders of school charters, which are
often non-profit organizations, typically do not have the resources required to
obtain the financing necessary to secure and maintain the school building. For
this reason, if we want to obtain a management agreement with the charter board,
we must often help the charter board arrange for the necessary financing. For
three of our charter schools, we have entered into a long-term lease for the
school facility, which exceeds the current term of the management agreement by
as much as 14 years. If our management agreements were to be terminated, or not
renewed in these charter schools, our obligations to make lease payments would
continue, which could adversely affect our financial results. As of March 31,
2000, our aggregate future lease obligations totaled $24.4 million, with varying
maturities over the next 18 years. In four of our charter schools, we have
provided some type of permanent credit support for the school building,
typically in the form of loan guarantees or cash advances. We do not charge
interest on these advances. Although the term of these arrangements is
coterminous with the term of the corresponding management agreement, our
guarantee does not expire until the loan is repaid in full. The lenders under
these facilities are not committed to release us from our obligations unless
replacement credit support is provided. The default by any charter school under
a credit facility that we have guaranteed could result in a claim against us for
the full amount of the borrowings. Furthermore, in the event any charter board
becomes insolvent or has its charter revoked, our loans and advances to the
charter board may not be recoverable, which could adversely affect our financial
results. As of March 31, 2000, the amount of loans we had guaranteed totaled
$6.9 million and the company expects to provide additional guarantees over the
next twelve months.
OUR FINANCIAL RESULTS ARE SUBJECT TO SEASONAL PATTERNS AND OTHER FLUCTUATIONS
FROM QUARTER TO QUARTER
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We expect our results of operations to experience seasonal patterns and
other fluctuations from quarter to quarter. The factors that could contribute to
fluctuations, which could have the effect of masking or exaggerating trends in
our business and which could hurt the market price of our class A common stock,
include:
- Because new schools are opened in the first fiscal quarter of
each year, increases in student enrollment and related revenue
and expenses will first be reflected in that quarter.
Subsequent to the first quarter, student enrollment is expected
to remain relatively stable throughout a school year, and,
accordingly, trends in our business, whether favorable or
unfavorable, will tend not to be reflected in our quarterly
financial results, but will be evident primarily in
year-to-year comparisons.
- We recognize revenue for each school pro rata over the 11
months from August through June, and we recognize no school
revenue in July. Most of our site costs are recognized over the
11 months from August through June. For this reason, the first
quarter of our fiscal year has historically reflected less
revenue and lower expenses than the other three quarters, and
we expect this pattern to continue.
- Our recognition of site-related expenses in the first fiscal
quarter is proportionally greater than the revenue recognition
because some site expenses are incurred in July and no revenue
is recorded in July. This results in lower gross site margin in
the first fiscal quarter than in the remaining fiscal quarters.
We also recognize pre-opening costs primarily in the first and
fourth quarters.
Our financial results can vary among the quarters within any fiscal
year for other reasons, including unexpected enrollment changes, greater than
expected costs of opening schools or delays in opening new schools.
WE EXPECT OUR MARKET TO BECOME MORE COMPETITIVE
We expect the market for providing private, for-profit management of
public schools will become increasingly competitive. Currently, we compete with
a relatively small number of companies which provide these services, and they
have to date primarily focused on the operation of charter schools. These
companies could, however, begin to compete with us at any time for contract
schools. In addition, a variety of other types of companies and entities could
enter the market, including colleges and universities, other private companies
that operate higher education or professional education schools and others. Our
existing competitors and these new market entrants could have financial,
marketing and other resources significantly greater than ours. We also compete
for public school funding with existing public schools, who may elect not to
enter into management agreements with private managers or who may pursue
alternative reform initiatives, such as magnet schools and inter-district choice
programs. In addition, in jurisdictions where voucher programs have been
authorized, we will begin to compete with existing private schools for public
tuition funds. Voucher programs provide for the issuance by local or other
governmental bodies of tuition vouchers to parents worth a certain amount of
money that they can redeem at any approved school of their choice, including
private schools. If we are unable to compete successfully against any of these
existing or potential competitors, our revenues could be reduced, resulting in
increased losses.
FAILURE TO RAISE NECESSARY ADDITIONAL CAPITAL COULD RESTRICT OUR GROWTH AND
HINDER OUR ABILITY TO COMPETE
We have had negative cash flow in every fiscal period since we began
operations and are not certain when we will have positive cash flow, if at all.
We 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.
WE MUST RECOGNIZE A PORTION OF ANY LOSSES OF APEX ONLINE LEARNING INC.
In July 1999, we acquired a 16.5% ownership interest in APEX Online
Learning Inc., a company which provides interactive advance placement courses
for high school students over the Internet, for $5.0 million. In December 1999,
we invested an additional $5.0 million in APEX, increasing our ownership
interest to 19.7%. Because of our significant
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<PAGE> 20
ownership interest in APEX, we must recognize a pro rata portion of APEX's
losses based upon our ownership interest, up to a maximum amount equal to our
investment in APEX. In the nine months ended March 31, 2000, we recognized $1.3
million of loss as our share of APEX' net loss for that period. We expect APEX
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 RELY ON GOVERNMENT FUNDS FOR SPECIFIC EDUCATION PROGRAMS, AND OUR BUSINESS
COULD SUFFER IF WE FAIL TO COMPLY WITH RULES CONCERNING THE RECEIPT AND USE OF
THE FUNDS
We benefit from funds from federal and state programs to be used for
specific educational purposes. Funding from the federal government under Title I
of the Elementary and Secondary Education Act, which provides federal funds for
children from low-income families, accounts for approximately 6% of our total
revenue. We estimate that funding from other federal and state programs accounts
for an additional 12% of our total revenue. A number of factors relating to
these government programs could lead to adverse effects on our business:
- These programs have strict requirements as to eligible students
and allowable activities. If we or our school district and
charter board clients fail to comply with the regulations
governing the programs, we or our clients could be required to
repay the funds or be determined ineligible to receive these
funds, which would harm our business.
- 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 2000. If
Congress does not reauthorize or provide interim appropriation
for the Elementary and Secondary Education Act, we would
receive less funding and our growth and financial results would
suffer.
- Most federal education funds are administered through state and
local education agencies, which allot funds to school boards
and charter boards. These state and local education agencies
are subject to extensive government regulation concerning their
eligibility for federal funds. If these agencies were declared
ineligible to receive federal education funds, the receipt of
federal education funds by our school board or charter board
clients could be delayed, which could in turn delay our payment
from our school board and charter board clients.
- We could become ineligible to receive these funds if any of our
high-ranking employees commit serious crimes.
WE COULD BE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION BECAUSE WE BENEFIT FROM
FEDERAL FUNDS, AND OUR FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD
RESULT IN THE REDUCTION OR LOSS OF FEDERAL EDUCATION FUNDS
Because we benefit from federal funds, we must also comply with a
variety of federal laws and regulations not directly related to any federal
education program, such as federal civil rights laws and laws relating to
lobbying. Our failure to comply with these federal laws and regulations could
result in the reduction or loss of federal education funds which would cause our
business to suffer. In addition, our management agreements are potentially
covered by federal procurement rules and regulations because our school district
and charter board clients pay us, in part, with funds received from federal
programs. Federal procurement rules and regulations generally require
competitive bidding, awarding contracts based on
20
<PAGE> 21
lowest cost and similar requirements. If a court or federal agency determined
that a management agreement was covered by federal procurement rules and
regulations and was awarded without compliance with those rules and regulations,
then the management agreement could be voided and we could be required to repay
any federal funds we received under the management agreement, which would hurt
our business.
WE RECEIVE ALL OF OUR REVENUE FROM PUBLIC SOURCES AND ANY REDUCTION IN GENERAL
FUNDING LEVELS FOR EDUCATION COULD HURT OUR BUSINESS
All of our revenue is derived from public sources. If general levels of
funding for public education were to decline, the field of school districts in
which we could profitably operate schools would likewise diminish, and our
ability to grow by adding new schools would suffer. In addition, our management
agreements generally provide that we bear the risk of lower levels of per-pupil
funding, which would be directly reflected in lower revenue to us, even if our
costs do not decline accordingly.
RESTRICTIONS ON GOVERNMENT FUNDING OF FOR-PROFIT SCHOOL MANAGEMENT COMPANIES
COULD HURT OUR BUSINESS
Any restriction on the use of federal or state government educational
funds by for-profit companies could hurt our business and our ability to grow.
From time to time, a variety of proposals have been introduced in state
legislatures to restrict or prohibit the management of public schools by
private, for-profit entities like us. For example, a bill filed in Minnesota
that would have prohibited for-profit entities from managing charter schools in
that state was defeated in both 1997 and 1998. A similar bill in Massachusetts
was not voted out of committee. Additionally, Idaho's charter school law may,
subject to interpretation, restrict our ability to manage schools in that state.
If states were to adopt legislation prohibiting for-profit entities from
operating public schools, the market for our services could suffer.
THE OPERATION OF OUR CHARTER SCHOOLS DEPENDS ON THE MAINTENANCE OF THE
UNDERLYING CHARTER GRANT
Our 16 charter schools operate under a charter that is typically
granted by a state authority to a third-party charter holder, such as a
community group or established non-profit organization. Our management agreement
in turn is with the charter holder or the charter board. If the state charter
authority were to revoke the charter, which could occur based on actions of the
charter board outside of our control, we would lose the right to operate that
school. In addition, many state charter school statutes require periodic
reauthorization. Charter schools accounted for 33.5% of our total revenue in
fiscal 1999, or $44.5 million. If state charter school legislation were not
reauthorized or were substantially altered in a meaningful number of states, our
business and growth strategy would suffer and we could incur losses.
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.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CHARTER AND BYLAWS COULD
PREVENT OR DELAY A CHANGE IN CONTROL
21
<PAGE> 22
Provisions of Delaware law, our charter and our bylaws could make it
more difficult for a third party to acquire us, even if doing so would be
beneficial to our stockholders. These provisions could limit the price that
certain investors might be willing to pay in the future for shares of class A
common stock, and could have the effect of delaying, deferring or preventing a
change in control of Edison. These provisions include:
- The high-vote nature of the class B common stock;
- Restrictions on removal of directors, which may only be
effected for cause and only by a vote of the holders of 80% of
the class of common stock that elected the director;
- Section 203 of the General Corporation Law of Delaware which
could have the effect of delaying transactions with interested
stockholders;
- A prohibition of stockholder action by written consent; and
- Procedural and notice requirements for calling and bringing
action before stockholder meetings.
OUR OFFICERS AND DIRECTORS EXERCISE SIGNIFICANT CONTROL OVER OUR AFFAIRS, WHICH
COULD RESULT IN THEIR TAKING ACTIONS OF WHICH OTHER STOCKHOLDERS DO NOT APPROVE
As of March 31, 2000 our officers and directors and entities affiliated
with them together beneficially owned 24,980,277 shares of class A common stock
and 3,361,334 shares of class B common stock. The shares held of record by such
parties represent approximately 59.4% of the voting power of the class A common
stock, including the ability to elect three of the seven class A directors;
approximately 87.1% of the voting power of the class B common stock, including
the ability to elect all of the four class B directors; and approximately 72.7%
of the combined voting power of the class A and class B common stock. Of the
shares beneficially owned by our officers and directors and others affiliated
with them, approximately 2,972,793 shares of class A common stock and 330,329
shares of class B common stock are subject to options exercisable within 60 days
of March 31, 2000. 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, as of March 31, 2000, H. Christopher Whittle, our
President and Chief Executive Officer and a director, beneficially owned
4,160,248 shares of class A common stock and 1,265,305 shares of class B common
stock. The shares held of record by Mr. Whittle and his affiliates represent
approximately 10.2% of the voting power of the class A common stock;
approximately 34.2% of the voting power of the class B common stock, including
the ability to elect one of the four class B directors; and approximately 21.6%
of the combined voting power of the class A and class B common stock. Of the
shares beneficially owned by Mr. Whittle and his affiliates, 1,562,640 shares of
class A common stock and 173,627 shares of class B common stock are subject to
options exercisable within 60 days of March 31, 2000. Mr. Whittle and his
affiliates also own options not exercisable within 60 days of March 31, 2000
covering 2,780,027 shares of class A common stock and 308,894 shares of class B
common stock. To the extent Mr. Whittle exercises these options, his voting
power will be increased. In addition, if the other holders of class B common
stock sell a significant portion of their class B common stock, the voting power
of Mr. Whittle's class B common stock will further concentrate. Also, if the
other holders of class B common stock reduce their common stock holdings below a
specified threshold, then their class B common stock will automatically convert
into class A common stock, further increasing Mr. Whittle's voting power. The
class B common stock generally converts into class A common stock upon its
transfer. However, shares of class B common stock transferred to Mr. Whittle do
not automatically convert into class B common stock. Consequently, Mr. Whittle
can also increase his voting power by acquiring shares of class B common stock
from other stockholders.
PLEDGES OF SHARES OF OUR COMMON STOCK BY MR. WHITTLE COULD RESULT IN VOTING
POWER SHIFTING TO THE HANDS OF HIS LENDERS
As of March 31, 2000, Mr. Whittle and WSI Inc., a corporation
controlled by Mr. Whittle, owned 2,697,747 shares of class A common stock and
1,102,803 shares of class B common stock. These figures include shares issuable
upon the exercise of options within 60 days of March 31, 2000. Mr. Whittle and
WSI have pledged to Morgan Guaranty Trust
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<PAGE> 23
Company of New York all of their direct and indirect interests in Edison to
secure personal obligations. These obligations become due in February 2003 and
interest on these obligations is payable quarterly. In addition, Mr. Whittle may
not vote his class A common stock and class B common stock on any matter other
than the election or removal of directors without Morgan's prior written
consent. Of these shares, Morgan allowed WSI to pledge 500,002 shares to another
lender. Upon satisfaction of WSI's obligation to the other lender, these shares
would revert back to being pledged to Morgan. Morgan also allowed WSI to grant
options to purchase an aggregate of 65,991 of these shares to other investors.
If these options were not exercised, these shares would revert back to being
pledged to Morgan. WSI also granted Morgan an option to purchase 117,500 shares
of class A common stock held by WSI for an exercise price of $3.00 per share. If
Mr. Whittle and WSI were to default on their obligations to Morgan and Morgan
were to foreclose on its pledge, the class B common stock transferred directly
or indirectly to Morgan would be converted into class A common stock.
Thereafter, based on current holdings, and assuming the shares pledged to the
other lender and the shares subject to options to other investors revert to the
Morgan pledge, Morgan, together with its affiliates who are currently
stockholders of Edison, would beneficially own 6,356,911 shares of class A
common stock, including shares subject to options exercisable within 60 days of
March 31, 2000. The holdings of Morgan and its affiliates would then represent
15.2% of the voting power of the class A common stock, 11.7% of the voting power
of the class B common stock and 13.7% of the combined voting power. This would
enable Morgan to exercise greater influence over corporate matters.
WE MAY INCUR SUBSTANTIAL COSTS IF WE ARE UNABLE TO COMPLETE OUR EDISION
CORPORATE HEADQUARTERS PROJECT
We have entered into a contract with Castle Senior Living LLC
("Castle") to purchase a lot located in the Harlem section of the borough of
Manhattan in New York City for a purchase price of $10 million. We intend to
develop the property in partnership with the Museum of African Art for a
mixed-use project consisting of Edison Corporate Headquarters, a charter school
and a museum. We have paid Castle $2 million to date, and must pay the balance
of the purchase price on the closing date of July 11, 2000. If we are unable to
obtain the necessary zoning approvals by July 11, 2000, we may extend the
closing date until January 11, 2001 if we pay Castle $1 million by June 29,
2000. We may further extend the closing date until April 11, 2001 if we pay
Castle and additional $500,000 by December 28, 2000. If we are unable to obtain
the necessary zoning approvals by April 11, 2001, or if prior to that time we
decide to terminate the contract with Castle, we will forfeit any amounts paid
to Castle to date, to a maximum amount of $3.5 million. In addition, we do not
currently have a contract with the Museum of African Art for this project or an
agreement with any party to operate a charter school on that site. If we are
unable to obtain an agreement with the Museum of African Art or approval to
operate a charter school, we may have a terminate the contract with Castle.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have market risk sensitive instruments related to interest
rates. We had outstanding long-term notes payable of $20.2 million at March
2000. Interest rates on the notes are fixed and range from 15.0% to 20.4% per
annum and have terms of 36 to 48 months.
We do not believe that we have significant exposure to changing
interest rates on long-term debt because interest rates for our debt is fixed.
We have not undertaken any additional actions to cover interest rate market risk
and are not a party to any other interest rate market risk management
activities.
Additionally, we do not have significant exposure to changing interest
rates on invested cash, which totaled approximately $78.8 million of our
unrestricted cash at March 2000. We generally invest cash in money market
accounts and short term investment grade marketable securities. We do not
purchase or hold derivative financial instruments for trading purposes.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings from time to time
incidental to the conduct of its business. The Company currently believes that
any ultimate liability arising out of such proceedings will not have a material
adverse effect on its financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In January 2000 and March 2000, pursuant to the exercise of outstanding
warrants, the Company issued an aggregate of 88,512 shares of Class A Common
Stock at a weighted average price of $4.00 per share.
In March 2000, the Company issued options under its 1999 Stock
Incentive Plan to purchase an aggregate of 39,157 shares of Class A Common
Stock at a weighted average exercise price of $12.30 per share. In February
2000 and March 2000, pursuant to the exercise of outstanding options, the
Company issued an aggregate of 23,250 shares of Class A Common Stock at a
weighted average exercise price of $7.62 per share.
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 of 1933, as amended (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 Class A Common Stock, Rule 701 of the Securities Act. All of
the foregoing securities are deemed restricted securities for the purposes of
the Securities Act.
In connection with the Company's initial public offering, on November
10, 1999, the Securities and Exchange Commission declared the Company's
Registration Statement on Form S-1 (Registration No. 333-84177) effective.
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities
LLC, Credit Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette
Securities Corporation and J.P. Morgan Securities Inc., and their respective
foreign affiliates, served as the managing underwriters of the offering. On
November 17, 1999, the Company sold 6,800,000 shares of its Class A Common Stock
at $18.00 per share to the underwriters. The aggregate proceeds to the Company
from the offering were $122.4 million. The Company's total expenses in
connection with the offering were approximately $13.1 million, of which
approximately $8.6 million was for underwriting discount to the underwriters and
approximately $4.5 million was for other expenses paid to persons other than
directors or officers of the Company, persons owning more than 10 percent of any
class of equity securities of the Company or any affiliates of the Company. The
Company's net proceeds from the offering were approximately $109.3 million. From
the effective date through March 31, 2000, the Company used approximately $25.1
million for capital expenditures and approximately $5.4 million for operations,
all of which were paid to persons other than directors or officers of the
Company, persons owning more than 10 percent of any class of equity securities
of the Company or any affiliates of the Company. As of March 31, 2000, the
Company has approximately $78.8 million of net proceeds remaining, and pending
use of these proceeds, the Company intends to invest such proceeds primarily in
investment grade, interest-bearing securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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<PAGE> 25
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
EDISON SCHOOLS INC.
Date: May 12, 2000 /s/ H. Christopher Whittle
-----------------------------------------
H. Christopher Whittle
President, Chief Executive Officer and
Director
Date: May 12, 2000 /s/ James L. Starr
-----------------------------------------
James L. Starr
Executive Vice President and Chief Financial
Officer (Principal Accounting Officer)
26
<PAGE> 27
EXHIBIT INDEX
27.1 Financial Data Schedule
27
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
<CASH> 81,036
<SECURITIES> 0
<RECEIVABLES> 31,448
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 133,405
<PP&E> 116,069
<DEPRECIATION> 35,414
<TOTAL-ASSETS> 241,369
<CURRENT-LIABILITIES> 33,399
<BONDS> 0
0
0
<COMMON> 426
<OTHER-SE> 189,160
<TOTAL-LIABILITY-AND-EQUITY> 241,369
<SALES> 61,531
<TOTAL-REVENUES> 61,531
<CGS> 0
<TOTAL-COSTS> 68,102
<OTHER-EXPENSES> (1,476)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,043
<INCOME-PRETAX> (6,138)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,138)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,138)
<EPS-BASIC> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
