<PAGE> 1
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 DECEMBER 31, 1999
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:
38,941,451
(Number of shares of Class A Common Stock Outstanding as of January 31, 2000)
3,543,800
(Number of shares of Class B Common Stock Outstanding as of January 31, 2000)
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EDISON SCHOOLS INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PAGE
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of December 31, 1999 (unaudited) and
June 30, 1999................................................................................... 3
Condensed Statements of Operations for the Three Months and Six Months Ended
December 31, 1999 and 1998 (unaudited).......................................................... 4
Condensed Statements of Cash Flows for the Six Months Ended
December 31, 1999 and 1998 (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.......................................................... 25
SIGNATURES ............................................................................... 26
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDISON SCHOOLS INC.
CONDENSED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1999 1999
--------- ---------
(UNAUDITED)
<S> <C> <C>
ASSETS:
Current assets:
Cash and cash equivalents ......................................................... $ 103,450 $ 27,922
Accounts receivable ............................................................... 25,995 12,035
Notes and other receivables ....................................................... 15,112 9,712
Other current assets .............................................................. 4,075 1,440
--------- ---------
Total current assets ........................................................ 148,632 51,109
Property and equipment, net ............................................................ 73,542 42,871
Restricted cash ........................................................................ 2,682 2,432
Notes and other receivables, less current portion ...................................... 4,397 3,893
Stockholder notes receivable ........................................................... 7,068 2,478
Other assets ........................................................................... 12,633 4,087
--------- ---------
Total assets ................................................................. $ 248,954 $ 106,870
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long term debt ................................................. $ 8,998 $ 6,661
Accounts payable .................................................................. 11,350 12,014
Accrued expenses .................................................................. 13,358 9,800
--------- ---------
Total current liabilities ..................................................... 33,706 28,475
Long term debt, less current portion ................................................... 13,429 8,264
Stockholders' notes payable ............................................................ 6,611 6,611
Other liabilities ...................................................................... 594 478
--------- ---------
Total liabilities ................................................................. 54,340 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; 38,941,451
shares issued and outstanding at December 31, 1999 ............................ 389 -
Class B Common, par value $.01; 5,000,000 shares authorized; 3,543,800 shares
issued and outstanding at December 31, 1999 .................................... 36 -
Additional paid-in capital ............................................................. 301,301 145,877
Unearned stock-based compensation ...................................................... (4,295) (5,836)
Stockholder receivable ................................................................. (2,175) -
Accumulated deficit .................................................................... (100,642) (78,929)
--------- ---------
Total stockholders' equity .................................................... 194,614 63,042
--------- ---------
Total liabilities and stockholders' equity .................................... $ 248,954 $ 106,870
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
3
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EDISON SCHOOLS INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
-----------
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue from educational services ..................................... $ 61,596 $ 35,576 $ 102,747 $ 59,580
Education and operating expenses:
Direct site expenses ............................................. 51,693 30,449 90,688 52,084
Administration, curriculum and development ....................... 9,571 7,854 20,156 13,744
Preopening expenses .............................................. 1,002 371 4,458 3,099
Depreciation and amortization .................................... 5,538 3,508 9,125 5,899
--------- --------- --------- ---------
Total education and operating expenses ...................... 67,804 42,182 124,427 74,826
--------- --------- --------- ---------
Loss from operations ....................................... (6,208) (6,606) (21,680) (15,246)
Other income (expense):
Interest income .................................................. 1,314 1,353 2,203 2,450
Interest expense ................................................. (741) (697) (1,528) (1,307)
Other expenses ................................................... (409) 71 (708) (7)
--------- --------- --------- ---------
Total other ................................................ 164 727 (33) 1,136
--------- --------- --------- ---------
Net loss ................................................... (6,044) (5,879) (21,713) (14,110)
Preferred stock accretion ............................................. - (256) - (513)
--------- --------- --------- ---------
Net loss attributable to common stockholders .............. $ (6,044) $ (6,135) $ (21,713) $ (14,623)
========= ========= ========= =========
Per common share data:
Basic and diluted net loss per share ............................ $ (0.26) $ (1.97) $ (1.65) $ (4.71)
========= ========= ========= =========
Weighted average shares of common stock outstanding
used in computing basic and diluted net loss per share .... 23,143 3,107 13,125 3,107
========= ========= ========= =========
Pro forma per share data:
Pro forma basic and diluted net loss per share .................. $ (0.16) $ (0.22) $ (0.60) $ (0.53)
========= ========= ========= =========
Pro forma weighted average shares outstanding used in
computing basic and diluted net loss per share .................. 38,602 27,332 36,421 26,499
========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
4
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EDISON SCHOOLS INC.
CONDENSED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1999 AND 1998
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
(UNAUDITED)
1999 1998
--------- ---------
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .............................................................................. $ (21,713) $ (14,110)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment ............................. 8,340 5,380
Amortization of deferred charter costs and original issue discount .................. (96) (60)
Stock-based compensation ............................................................ 1,874 3,314
Equipment loss ...................................................................... 237 7
Changes in working capital accounts ................................................. (22,213) 626
--------- ---------
Cash used in operating activities ............................................ (33,571) (4,843)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment ................................................... (37,270) (22,645)
Proceeds from disposition of property and
equipment, net ...................................................................... 2,057 10,402
Notes receivable and advances to charter schools ...................................... (5,804) (6,829)
Repayment of notes receivable and advances due from charter schools ................... 693 98
Other assets .......................................................................... (9,241) (357)
--------- ---------
Cash used in investing activities ............................................... (49,565) (19,331)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock and warrants ............................................ 151,411 31,763
Proceeds from notes payable ............................................................. 11,993 6,069
Proceeds from stockholders' notes payable ............................................... - 938
Payments on notes payable and capital leases ............................................ (4,490) (2,808)
Restricted cash ......................................................................... (250) 1,806
--------- ---------
Cash provided by financing activities ................................................... 158,664 37,768
--------- ---------
Increase in cash and cash equivalents ................................................... 75,528 13,593
Cash and cash equivalents at beginning of period ........................................ 27,922 7,492
--------- ---------
Cash and cash equivalents at end of period .............................................. $ 103,450 $ 21,085
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the periods for interest, net of capitalized interest of $149 ...... $ 1,297 $ 1,092
========= =========
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 .......................................... $ - $ 513
========= =========
Additions to property and equipment included in accounts payable ...................... $ 4,036 $ -
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
5
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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 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 December 31, 1999, operated 79 schools with approximately
38,000 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
Company's Registration Statement on Form S-1, as amended (Registration No.
333-84177).
4. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings 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. SFAS No. 128 also replaced primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effect of options, warrants and convertible securities. Diluted
earnings per share is very similar to fully diluted earnings per share. Basic
earnings per share is computed using the weighted-average number of common
shares outstanding during the period. Diluted earnings per share is computed
using the weighted-average number of common and common stock equivalent shares
outstanding during the period. Common stock equivalent shares, such as
convertible preferred stock, stock options, and warrants, have been excluded
from the computation, as their effect is antidilutive for all periods presented.
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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 six month periods ended December 31, 1999 and
1998 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net Loss ....................................................... $ (6,044) $ (5,879) $(21,713) $(14,110)
======== ======== ======== ========
Class A Common stock outstanding at beginning
of period ................................................... 31,241 24,270 28,187 22,348
Class B Common stock outstanding at beginning
of period ................................................... 3,471 2,698 3,132 2,483
Add:
Issuance of Class A Common stock
(as if converted on a weighted average basis) ................ 3,853 328 4,768 1,501
Issuance of Class B Common stock
(as if converted on a weighted average basis) ................ 37 36 334 167
-------- -------- -------- --------
Pro forma weighted average number of shares outstanding,
assuming conversion of convertible preferred stock ........... 38,602 27,332 36,421 26,499
======== ======== ======== ========
Pro forma net loss per share ................................... $ (0.16) $ (0.22) $ (0.60) $ (0.53)
======== ======== ======== ========
</TABLE>
5. RELATED PARTY TRANSACTION
In November 1999, the Company loaned $6,620,700 to H. Christopher
Whittle, its President and Chief Executive Officer. The loan bears interest at
the greater of the prime rate or the Company's actual borrowing rate, in effect
from time to time, with payment due in full in November 2004. The proceeds from
the loan 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 December 31, 1999 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 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 December 31, 1999 and
February 10, 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.
7
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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 December 1999, pursuant to the exercise of outstanding warrants,
the Company issued an aggregate of 247,932 shares of Class A Common Stock at a
weighted average price of $2.48 per share.
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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 38,000 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 December 31, 1999, our
accumulated deficit since November 1996 was approximately $100.6 million. In
addition, prior to November 1996, we incurred losses of approximately $61.8
million, which are reflected in our additional paid-in capital. Because of our
rapid growth, and in view of the evolving nature of our business and our limited
operating history, we believe that period-to-period comparisons of our operating
results may not be meaningful.
Edison's curriculum expenses include the ongoing costs to maintain
and support Edison's educational design. These expenses include the salaries and
wages of trained educators in our central office curriculum department, the
costs of providing professional training to our staff and teachers, including
materials, and the ongoing costs of maintaining and updating the teaching
methods and educational content of our program.
We make a significant investment in each school we open. The
investment generally includes:
- Initial staff training and professional development;
- Technology, including laptop computers for teachers and,
after the first year of operation, a computer for the home
of every child above the second grade;
- Books and other materials to support the Edison curriculum
and school design, including enrollment fees for the
Success for All reading program; and
- Upgrades in facilities.
REVENUE FROM EDUCATIONAL SERVICES
Our revenue is principally derived from contractual relationships
to manage and operate contract and charter schools. We also receive small
amounts of revenue, which represented less than 0.3% of total revenue for the
six months ended December 31, 1999, from the collection of after-school program
fees and food service costs. We receive per-pupil revenue from local, state and
federal sources, including Title I and special education funding, in return for
providing comprehensive education to our students. The per-pupil revenue is
generally comparable to the funding spent on other public schools in the area.
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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 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
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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 DECEMBER 31, 1999 COMPARED TO FISCAL QUARTER ENDED
DECEMBER 31, 1998
Revenue From Educational Services. Our revenue from educational
services increased to $61.6 million for the three months ended December 31, 1999
from $35.6 million for the same period of the prior year, an increase of 73%.
The increase was primarily due to a 59% increase in student enrollment from
23,900 in the 1998-1999 school year to 38,000 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 $51.7
million for the three months ended December 31, 1999 from $30.5 million for the
same period of the prior year, an increase of 69.5%. Similar to the increase in
revenue from educational services, the increase in direct site expenses was
primarily due to the 59% increase in student enrollment. The largest element of
direct site expenses is personnel costs. Personnel costs included in direct site
expenses increased to $43.8 million for the three months ended December 31, 1999
from $27.1 million for the same period of the prior year.
Gross Site Contribution and Margin. Our gross site contribution was
$9.9 million for the three month period ended December 31, 1999 compared to $5.1
million for the same period of the prior year. The corresponding gross site
margin increased to 16.1% for the three months ended December 31, 1999 from
14.4% for the same period of the prior year. The increase in Gross Site
Contribution of $4.8 million results from the larger revenues of the period
combined with an improved Gross Site Margin for new and expanding schools opened
in the 1999-2000 school year.
Administration, Curriculum and Development Expenses. Our
administration, curriculum and development expenses increased to $9.6 million
for the three months ended December 31, 1999 from $7.9 million for the same
period of the prior year, an increase of 21.5%. The increase was substantially
due to greater personnel costs resulting from an increase of 83 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 $0.8 million of non-cash stock based compensation we
incurred in the three months ended December 31, 1999 compared to $1.6 million
for the same period of the prior year. Excluding these expenses, administration,
curriculum and development and pre-opening expenses as a percentage of revenues
decreased to 15.9% for the three months ended December 31, 1999 from 18.5% for
the same period of the prior year.
Pre-opening Expenses. Our pre-opening expenses increased to $1.0
million for the three months ended December 31, 1999 from $400,000 for the same
period of the prior year, an increase of 150 %. This increase was associated
primarily with opening new schools and expanding existing schools for the
1999-2000 school year, with 14,100 new students enrolled compared to
approximately 11,300 new students enrolled one year earlier.
Depreciation and Amortization. Our depreciation and amortization
increased to $5.5 million for the three months ended December 31, 1999 from $3.5
million for the same period of the prior year, an increase of 57.1%. The
increased depreciation and amortization resulted from additional capital
expenditures for our curriculum materials, computers and related technology, and
facility improvements related to the 59% increase in 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 December 31, 1999 was approximately break even compared to a
negative $1.4 million for the same period of the prior year. The improvement
primarily resulted from a higher gross site margin and lower combined
administration, curriculum and development, and pre-opening expenses as a
percentage of revenue. On a per-student basis, we realized break even EBITDA as
compared to a negative $60 for the same period one year ago.
Other Income and Expense. Other income and expense was $164,000 for
the three months ended December 31, 1999 as compared to $727,000 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 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
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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.
THE SIX MONTHS ENDED DECEMBER 31, 1999 COMPARED TO THE SIX MONTHS ENDED
DECEMBER 31, 1998.
Revenue From Educational Services. Our revenue from educational
services increased to $102.7 million for the six months ended December 31, 1999
from $59.6 million for the same period of the prior year, an increase of 72.3%.
The increase was primarily due to a 59% increase in student enrollment from
23,900 in the 1998-1999 school year to 38,000 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 $90.7
million for the six months ended December 31, 1999 from $52.1 million for the
same period of the prior year, an increase of 74.1%. Similar to the increase in
revenue from educational services, the increase in direct site expenses was
primarily due to the 59% increase in student enrollment. The largest element of
direct site expenses is personnel costs. Personnel costs included in direct site
expenses increased to $72.9 million for the six months ended December 31, 1999
from $43 million for the same period of the prior year.
Gross Site Contribution and Margin. Our gross site contribution was
$12.1 million for the six months ended December 31, 1999 compared to $7.5
million for the same period of the prior year. The corresponding gross site
margin decreased to 11.7% for the six months ended December 31, 1999 from 12.6%
for the same period of the prior year. Though the six month's gross site margin
reflects a decrease from the same period last year, this was expected. The prior
year's six month gross site contribution was higher as estimates of expenses for
certain sites for that period were revised upward and adjusted in subsequent
periods.
Administration, Curriculum and Development Expenses. Our
administration, curriculum and development expenses increased to $20.1 million
for the six months ended December 31, 1999 from $13.7 million for the same
period of the prior year, an increase of 46.7%. The increase was substantially
due to greater personnel costs resulting from an increase of 83 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 $1.9 million of non-cash stock based compensation we
incurred in the six months ended December 31, 1999 compared to $3.3 million for
the same period of the prior year. Excluding these expenses, administration,
curriculum and development and pre-opening expenses as a percentage of revenues
decreased to 22% for the six months ended December 31, 1999 from 23% for the
same period of the prior year.
Pre-opening Expenses. Our pre-opening expenses increased to $4.5
million for the six months ended December 31, 1999 from $3.1 million for the
same period of the prior year, an increase of 45.2 %. This increase was
associated primarily with opening new schools and expanding existing schools for
the 1999-2000 school year, with 14,100 new students enrolled compared to
approximately 11,300 new students enrolled one year earlier.
Depreciation and Amortization. Our depreciation and amortization
increased to $9.1 million for six months ended December 31, 1999 from $5.9
million for the same period of the prior year, an increase of 54.2%. 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 six
months ended December 31, 1999 was a negative $10.7 million compared to a
negative $6 million for the same period of the prior year. The decline primarily
resulted from lower gross site margin and increased administration, curriculum
and development, and pre-opening expenses. On a per-student basis, negative
EBITDA increased to $281 compared to $252 for the same period one year ago.
Other Income and Expenses. Other income and expenses was a net
expense of $33,000 for the six months ended December 31, 1999 compared to income
of $1.1 million in the same period of the prior year. The decrease was primarily
due to a lower interest income resulting from lower invested cash balances,
increased interest expense from expanded borrowings and the recording of our
applicable share of the net losses of APEX Online learning, Inc.
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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 six months ended December 31, 1999, we used approximately
$33.6 million for operating activities. This use resulted primarily from a $21.7
million of net loss and a $22.2 million net decrease in working capital accounts
partially offset by depreciation and amortization totaling $8.3 million and a
$1.9 million non-cash stock based compensation charge.
During the same six month period, we advanced approximately $5.8
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 the
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 six month period we received $12.0 million of long
term financing related to technology equipment purchases. As of January 31,
2000, the Company had approximately $7.9 million of available financing for
future technology purchases.
In November 1999, we obtained a line of credit from Imperial Bank
which provides for borrowings of up to $10 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
February 10, 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 proceeds from the IPO and expanded financing arrangements.
Depending on the terms of any financing arrangements, such funding may be
dilutive to existing shareholders, and we cannot be certain that we will be able
to obtain additional financing on favorable terms, if at all.
In general, our ability to achieve positive cash flow will be
dependent on the volume of schools with positive gross site contributions 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.
Capital expenditures for fiscal 2000 are expected to be
approximately $42 million, which includes approximately $20 million for
computers and other technology, $14 million for facilities improvements and $8
million for curriculum materials. Additionally, we expect to advance or lend
$8.2 million to new charter board clients to help secure and renovate properties
for schools opening in the 1999-2000 school year. We are also implementing
enterprise-wide computer and software packages. Such systems include financial
reporting, payroll, purchasing, accounts payable, human resources and other
administrative modules as well as a student data and school management package.
Through December 31, 1999, we have spent approximately $4.4 million on such
systems. We expect the hardware, implementation costs and other maintenance
expenditures related to such systems to account for an additional $9.9 million
over the next 24 to 36 months.
YEAR 2000
We have completed our year 2000 plan as scheduled. The possibility
of significant interruptions of normal operations has been reduced. As of
February 10, 2000, our internal business systems have operated without year 2000
related problems and appear to be year 2000 ready. We are not aware that any of
our external customers and providers has experienced significant year 2000
related problems. Our contingency plan is complete and will be implemented if
required.
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We believe all of our critical internal business systems are year
2000 ready. However, there is no guarantee that we have discovered all possible
failure points.
Specific factors contributing to this uncertainty include failure to
identify all systems, non-ready third parties whose systems and operations
impact us, and other similar uncertainties. We anticipate that any remaining
year 2000 issues will not have a material adverse effect on our financial
position or results of operations, however, we can give no assurance that the
systems of our clients, other companies or government entities, on which we rely
for supplies, cash payments and future business, have been timely converted or
that a failure to convert by our clients or government entities would not have a
material adverse effect on our business.
To date, we have spent an approximately $350,000 on our year 2000
plan.
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 six months ended December 31, 1999, our net
loss was $21.7 million. As of December 31, 1999, our accumulated deficit since
November 1996, when we converted from a partnership to a corporation, was
approximately $100.6 million. In addition, prior to November 1996, we incurred
losses of approximately $61.8 million, which are reflected in our additional
paid-in capital. We have not yet demonstrated that public schools can be
profitably managed by private companies and we are not certain when we will
become profitable, if at all. Our ability to become profitable will depend upon
our ability to generate and sustain higher levels of both gross site
contribution and total revenue to allow us to reduce central expenses as a
percentage of total revenue. Even if we do achieve profitability, we may not
sustain or increase profitability on a quarterly or annual basis. Failure to
become and remain profitable may adversely affect the market price of our class
A common stock and our ability to raise capital and continue operations.
THE PRIVATE, FOR-PROFIT MANAGEMENT OF PUBLIC SCHOOLS IS A RELATIVELY NEW AND
UNCERTAIN INDUSTRY, AND IT MAY NOT BECOME PUBLICLY ACCEPTED
Our future is highly dependent upon the development, acceptance and
expansion of the market for private, for-profit management of public schools.
This market has only recently developed and we are among the first companies to
provide these services on a for-profit basis. We believe the first meaningful
example of a school district contracting with a private company to provide core
instructional services was in 1992, and we opened our first schools in August
1995. The development of this market has been accompanied by significant press
coverage and public debate concerning for-profit management of public schools.
If this business model fails to gain acceptance among the general public,
educators, politicians and school boards, we may be unable to grow our business
and the market price of our class A common stock would be adversely affected.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO IMPROVE THE ACADEMIC
ACHIEVEMENT OF THE STUDENTS ENROLLED IN OUR SCHOOLS, AND WE MAY FACE
DIFFICULTIES IN DOING SO IN THE FUTURE
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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
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.
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WE MUST OPEN A LARGE NUMBER OF NEW SCHOOLS IN A SHORT PERIOD OF TIME AT THE
BEGINNING OF EACH SCHOOL YEAR AND, IF WE ENCOUNTER DIFFICULTIES IN THIS PROCESS,
OUR BUSINESS AND REPUTATION COULD SUFFER
It is the nature of our business that virtually all of the new
schools we open in any year must be opened within a few weeks of each other at
the beginning of the school year. Each new school must be substantially
functional when students arrive on the first day of school. This is a difficult
logistical and management challenge, and the period of concentrated activity
preceding the opening of the school year places a significant strain on our
management and operational functions. We expect this strain will increase if we
are successful in securing larger numbers of school management agreements in the
future. If we fail to successfully open schools by the required date, we could
lose school management agreements, incur financial losses and our reputation
would be damaged. This could seriously compromise our ability to pursue our
growth strategy.
OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF KEY EXECUTIVES
Our future success depends upon the continued services of a number
of our key executive personnel, particularly Benno C. Schmidt, Jr., our Chairman
of the Board of Directors, and H. Christopher Whittle, our President and Chief
Executive Officer. Mr. Schmidt and Mr. Whittle have been instrumental in
determining our strategic direction and focus and in publicly promoting the
concept of private management of public schools. If we lose the services of
either Mr. Schmidt or Mr. Whittle, or any of our other executive officers or key
employees, our ability to grow our business would be seriously compromised and
the market price of our class A common stock may be adversely affected. Also, we
do not maintain any key man insurance on any of our executives.
WE DEPEND UPON COOPERATIVE RELATIONSHIPS WITH TEACHERS' UNIONS, BOTH AT THE
LOCAL AND NATIONAL LEVELS
With respect to contract schools, but generally not charter
schools, union cooperation at the local level is often critical to us in
obtaining new management agreements and maintaining existing management
agreements. In those school districts where applicable, provisions of collective
bargaining agreements must typically be waived in areas such as length of school
day, length of school year, negotiated compensation policies and prescribed
methods of evaluation in order to implement the Edison design at a contract
school. We regularly encounter resistance from local teachers' unions during
school board debates over whether to enter into a management agreement with us.
If we fail to achieve and maintain cooperative relationships with local
teachers' unions, we could lose business and our ability to grow could suffer,
which could adversely affect the market price of our class A common stock. In
addition, at the national level, the American Federation of Teachers and the
National Education Association have substantial financial and other resources
that could be used to influence legislation and public opinion in a way that
would hurt our business.
WE COULD BE LIABLE FOR EVENTS THAT OCCUR AT OUR SCHOOLS
We could become liable for the actions of principals, teachers and
other personnel in our schools. In the event of on-site accidents, injuries or
other harm to students, we could face claims alleging that we were negligent,
provided inadequate supervision or were otherwise liable for the injury. We
could also face allegations that teachers or other personnel committed child
abuse, sexual abuse or other criminal acts. In addition, if our students commit
acts of violence, we could face allegations that we failed to provide adequate
security or were otherwise responsible for their actions, particularly in light
of recent highly publicized incidents of school violence. Although we maintain
liability insurance, this insurance coverage may not be adequate to fully
protect us from these kinds of claims. In addition, we may not be able to obtain
liability insurance in the future at reasonable prices or at all. A successful
liability claim could injure our reputation and hurt our financial results. Even
if unsuccessful, such a claim could cause unfavorable publicity, entail
substantial expense and divert the time and attention of key management
personnel.
OUR MANAGEMENT AGREEMENTS WITH SCHOOL DISTRICTS AND CHARTER BOARDS ARE
TERMINABLE UNDER SPECIFIED CIRCUMSTANCES AND GENERALLY EXPIRE AFTER A TERM OF
FIVE YEARS
Our management agreements generally have a term of five years. When
we expand by adding an additional school under an existing management agreement,
the term with respect to that school generally expires at the end of the initial
five-year period. We have limited experience in renewing management agreements,
having renewed only one management agreement covering four schools to date. We
cannot be assured that any management agreements will be renewed at the end of
their term. Management agreements representing 16 schools, accounting for 28.3%
of our total revenue for fiscal 1999, will expire at the end of the 1999-2000
school year, and management agreements representing 10 schools, accounting for
21.1% of our total revenue for fiscal 1999, will expire at the end of the
2000-2001 school year. In addition, management agreements representing 13
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schools, accounting for 25.8% of our total revenue for fiscal 1999, are
terminable by the school district or charter board at will, with or without good
reason, and all of our management agreements may be terminated for cause,
including a failure to meet specified educational standards, such as academic
performance based on standardized test scores. If we fail to renew a significant
number of management agreements at the end of their term, or if management
agreements are terminated prior to their expiration, our reputation and
financial results would be adversely affected.
OUR MANAGEMENT AGREEMENTS INVOLVE FINANCIAL RISK
Under all of our management agreements, we agree to operate a
school in return for per-pupil funding that generally does not vary with our
actual costs. To the extent our actual costs under a management agreement exceed
our budgeted costs, or our actual revenue is less than planned because we are
unable to enroll as many students as we anticipated or for any other reason, we
could lose money at that school. We are generally obligated by our management
agreements to continue operating a school for the duration of the contract even
if it becomes unprofitable to do so.
WE HAVE LIMITED EXPERIENCE OPERATING FOUR-YEAR HIGH SCHOOLS
An element of our strategy is to increase our business with
existing customers by opening new schools in school districts with whom we have
an existing relationship. An important aspect of this strategy is to open Edison
high schools in districts in which we operate elementary and middle schools. In
the 1998-1999 school year, we operated one high school through the 11th grade.
In the current school year, we added the senior year to that school and opened
our first four-year high school. Because we have just begun to operate all four
years of a high school, our complete high school curriculum, school design and
operating plan are not fully tested. In addition, school districts typically
spend more per pupil on high school education than on elementary education. By
contrast, some of our management agreements provide that we receive for each
student, regardless of grade level, the average per-pupil funding spent by the
school district for all grade levels. For this reason, in these schools we
receive less per high school student than is spent by the school district for
each of its high school students. In these situations, our success depends upon
our ability to deliver our high school design for the same per-pupil spending as
in our elementary schools. If we are unable to successfully and profitably
operate high schools, our ability to pursue our growth strategy will be
impaired, which could adversely affect the market price of our class A common
stock.
OUR LENGTHY SALES CYCLE COULD DELAY NEW BUSINESS
The time between initial contact with a potential contract or
charter client and the ultimate opening of a school, and related recognition of
revenue, typically ranges between 10 and 20 months. Our sales cycle for contract
schools is generally very long due to the approval process at the local school
board level, the political sensitivity of converting a public school to private
management and the need, in some circumstances, for cooperation from local
unions. We also have a lengthy sales cycle for charter schools for similar
reasons, as well as the need to arrange for facilities to house the school. As a
result of this lengthy sales cycle, we have only a limited ability to forecast
the timing of new management agreements. Any delay in completing, or failure to
complete, management agreements could hurt our financial performance.
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 December 31, 1999, we had receivables from charter boards of
approximately $17.3 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 $6.4 million of
these receivables, representing eight schools, are unsecured or subordinated to
a senior lender. Receivables of $10.9 million, representing three schools, may
be accelerated upon termination of
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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 December 31,
1999, 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 December 31, 1999, the amount of loans we had guaranteed totaled
$4.9 million.
OUR FINANCIAL RESULTS ARE SUBJECT TO SEASONAL PATTERNS AND OTHER FLUCTUATIONS
FROM QUARTER TO QUARTER
We expect our results of operations to experience seasonal patterns
and other fluctuations from quarter to quarter. The factors that could
contribute to fluctuations, which could have the effect of 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
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<PAGE> 19
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 ownership interest in APEX, we
must recognize a pro rata portion of APEX's losses based upon our ownership
interest, up to a maximum amount equal to our investment in APEX. We expect APEX
to recognize losses into the future. If APEX does not become profitable, we will
be required to recognize losses attributable to APEX, and our reported financial
performance could suffer.
WE MAY BE HURT BY THE YEAR 2000 PROBLEM
To date, we have not experienced any significant year 2000 related
problems in our internal business systems, and are not aware that any of our
external customers or providers have experienced significant year 2000 problems.
However, residual year 2000 related problems may result in system failures or
disruption of operations.
We cannot predict whether year 2000 unknown errors or defects that
affect the operation of software and systems that we use in operating our
businesses will arise in the future. If residual year 2000 related problems
cause the failure of any of the technology, software or systems necessary to
operate our business, we could lose customers, suffer significant disruptions in
its business, lose revenues and incur substantial liabilities and expenses. We
could also become involved in costly litigation resulting from year 2000 related
problems. This could seriously harm our business, financial condition and
results of operations.
WE RELY ON GOVERNMENT FUNDS FOR SPECIFIC EDUCATION PROGRAMS, AND OUR BUSINESS
COULD SUFFER IF WE FAIL TO COMPLY WITH RULES CONCERNING THE RECEIPT AND USE OF
THE FUNDS
We benefit from funds from federal and state programs to be used
for specific educational purposes. Funding from the federal government under
Title I of the Elementary and Secondary Education Act, which provides federal
funds for children from low-income families, accounts for approximately 6% of
our total revenue. We estimate that funding from other federal and state
programs accounts for an additional 12% of our total revenue. A number of
factors relating to these government programs could lead to adverse effects on
our business:
- These programs have strict requirements as to eligible
students and allowable activities. If we or our school
district and charter board clients fail to comply with
the regulations governing the programs, we or our clients
could be required to repay the funds or be determined
ineligible to receive these funds, which would harm our
business.
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<PAGE> 20
- If the income demographics of a district's population
were to change over the life of our management agreement
for a school in the district, resulting in a decrease in
Title I funding for the school, we would receive less
revenue for operating the school and our financial
results could suffer.
- Funding from federal and state education programs is
allocated through formulas. If federal or state
legislatures or, in some case, agencies were to change
the formulas, we could receive less funding and the
growth and financial performance of our business would
suffer.
- Federal, state and local education programs are subject
to annual appropriations of funds. Federal or state
legislatures or local officials could drastically reduce
the funding amount of appropriation for any program,
which would hurt our business and our ability to grow.
- The Elementary and Secondary Education Act, including
Title I, is scheduled for reauthorization by Congress in
1999. If Congress does not reauthorize or provide interim
appropriation for the Elementary and Secondary Education
Act, we would receive less funding and our growth and
financial results would suffer.
- Most federal education funds are administered through
state and local education agencies, which allot funds to
school boards and charter boards. These state and local
education agencies are subject to extensive government
regulation concerning their eligibility for federal
funds. If these agencies were declared ineligible to
receive federal education funds, the receipt of federal
education funds by our school board or charter board
clients could be delayed, which could in turn delay our
payment from our school board and charter board clients.
- We could become ineligible to receive these funds if any
of our high-ranking employees commit serious crimes.
WE COULD BE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION BECAUSE WE BENEFIT FROM
FEDERAL FUNDS, AND OUR FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD
RESULT IN THE REDUCTION OR LOSS OF FEDERAL EDUCATION FUNDS
Because we benefit from federal funds, we must also comply with a
variety of federal laws and regulations not directly related to any federal
education program, such as federal civil rights laws and laws relating to
lobbying. Our failure to comply with these federal laws and regulations could
result in the reduction or loss of federal education funds which would cause our
business to suffer. In addition, our management agreements are potentially
covered by federal procurement rules and regulations because our school district
and charter board clients pay us, in part, with funds received from federal
programs. Federal procurement rules and regulations generally require
competitive bidding, awarding contracts based on lowest cost and similar
requirements. If a court or federal agency determined that a management
agreement was covered by federal procurement rules and regulations and was
awarded without compliance with those rules and regulations, then the management
agreement could be voided and we could be required to repay any federal funds we
received under the management agreement, which would hurt our business.
WE RECEIVE ALL OF OUR REVENUE FROM PUBLIC SOURCES AND ANY REDUCTION IN GENERAL
FUNDING LEVELS FOR EDUCATION COULD HURT OUR BUSINESS
All of our revenue is derived from public sources. If general
levels of funding for public education were to decline, the field of school
districts in which we could profitably operate schools would likewise diminish,
and our ability to grow by adding new schools would suffer. In addition, our
management agreements generally provide that we bear the risk of lower levels of
per-pupil funding, which would be directly reflected in lower revenue to us,
even if our costs do not decline accordingly.
RESTRICTIONS ON GOVERNMENT FUNDING OF FOR-PROFIT SCHOOL MANAGEMENT COMPANIES
COULD HURT OUR BUSINESS
Any restriction on the use of federal or state government
educational funds by for-profit companies could hurt our business and our
ability to grow. From time to time, a variety of proposals have been 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.
20
<PAGE> 21
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
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 December 31, 1999 our officers and directors and entities
affiliated with them together beneficially owned 24,922,637 shares of class A
common stock and 3,357,379 shares of class B common stock. The shares held of
record by such parties represent approximately 58% of the voting power of the
class A common stock, including the ability to elect three of the seven class A
directors; approximately 87% of the voting power of the class B common stock,
including the ability to elect all of the four class B directors; and
approximately 71% 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 2,936,444 shares of
21
<PAGE> 22
class A common stock and 326,375 shares of class B common stock are subject to
options exercisable within 60 days of December 31, 1999. These stockholders, if
they act together, will be able to exercise control over all matters requiring
approval by our stockholders, including the approval of significant corporate
transactions. This concentration of ownership may also have the effect of
delaying or preventing a change in control of our company and could prevent
stockholders from receiving a premium over the market price if a change of
control is proposed.
In addition, as of December 31, 1999, H. Christopher Whittle, our
President and Chief Executive Officer and a director, beneficially owned
4,160,248 shares of class A common stock and 1,265,304 shares of class B common
stock. The shares held of record by Mr. Whittle and his affiliates represent
approximately 6.7% of the voting power of the class A common stock;
approximately 30.8% of the voting power of the class B common stock, including
the ability to elect one of the four class B directors; and approximately 18.2%
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 173,626 shares of class B common stock are subject to
options exercisable within 60 days of December 31,1999. Mr. Whittle and his
affiliates also own options not exercisable within 60 days of December 31, 1999
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 December 31, 1999, 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 December 31, 1999. Mr. Whittle
and WSI have pledged to Morgan Guaranty Trust Company of New York all of their
direct and indirect interests in Edison to secure personal obligations. These
obligations become due in August 2002 and interest on these obligations is
payable quarterly. Of these shares, Morgan allowed WSI to pledge 500,002 shares
to another lender. Upon satisfaction of WSI's obligation to the other lender,
these shares would revert back to being pledged to Morgan. Morgan also allowed
WSI to grant options to purchase an aggregate of 65,991 of these shares to other
investors. If these options were not exercised, these shares would revert back
to being pledged to Morgan. If Mr. Whittle and WSI were to default on their
obligations to Morgan and Morgan were to foreclose on its pledge, the class B
common stock transferred directly or indirectly to Morgan would be converted
into class A common stock. Thereafter, based on current holdings, and assuming
the shares pledged to the other lender and the shares subject to options to
other investors revert to the Morgan pledge, Morgan, together with its
affiliates who are currently stockholders of Edison, would beneficially own
6,356,911 shares of class A common stock, including shares subject to options
exercisable within 60 days of December 31, 1999. The holdings of Morgan and its
affiliates would then represent 11.4% of the voting power of the class A common
stock, 10.5% of the voting power of the class B common stock and 9.8% of the
combined voting power. This would enable Morgan to exercise greater influence
over corporate matters.
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 $22.4 million at
December 1999. Interest rates on the notes are fixed and range from 15.0% to
20.4% per annum and have terms of 36 to 48 months.
We do not believe that we have significant exposure to changing
interest rates on long-term debt because interest rates for our debt are 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.
22
<PAGE> 23
Additionally, we do not have significant exposure to changing
interest rates on invested cash, which totalled approximately $102.5 million of
our unrestricted cash at December 1999. 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.
23
<PAGE> 24
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 December 1999, pursuant to the exercise of outstanding warrants,
the Company issued an aggregate of 247,932 shares of Class A Common Stock at a
weighted average price of $2.48 per share.
In December 1999, 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.
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 December 31, 1999, the Company used approximately
$6.8 million for capital expenditures, 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 December 31, 1999, the Company has approximately $103 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
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
24
<PAGE> 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Revolving Credit Agreement, dated as of November 12,
1999, between the Company and Imperial Bank*
10.2 Security Agreement, dated as of November 12, 1999,
between the Company and Imperial Bank*
10.3 Promissory Note, dated as of November 12, 1999, issued
by the Company in the name of Imperial Bank*
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On November 23, 1999, the Company filed a report on Form
8-K announcing that on November 22, 1999, the Company issued a
press release regarding a contract with the Dallas Independent
School District.
* Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the quarter ended September 30, 1999
(Commission file no. 000-27817)
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: February 14, 2000 /s/ H. Christopher Whittle
--------------------------------------
H. Christopher Whittle
President, Chief Executive Officer and
Director
Date: February 14, 2000 /s/ James L. Starr
--------------------------------------
James L. Starr
Executive Vice President and Chief
Financial Officer (Principal Accounting
Officer)
26
<PAGE> 27
EXHIBIT INDEX
10.1 Revolving Credit Agreement, dated as of November 12, 1999, between
the Company and Imperial Bank *
10.2 Security Agreement, dated as of November 12, 1999, between the
Company and Imperial Bank *
10.3 Promissory Note, dated as of November 12, 1999, issued by the
Company in the name of Imperial Bank *
27.1 Financial Data Schedule
* Incorporated by reference to the Company's Quarterly Report on Fotrm 10-Q for
the quarter ended September 30, 1999
(Commission file no. 000-27817)
27
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<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> OCT-01-1999
<PERIOD-END> DEC-31-1999
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0
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