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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, $ .01 par value
Class B Common Stock, $ .01 par value
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. YES X NO
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed using the closing sale price of the registrant's Class
A Common Stock on September 15, 2000, as reported on the Nasdaq National Market,
was approximately $803,000,000.
The number of shares of the registrant's Class A Common Stock outstanding on
September 15, 2000 was 43,930,639 and the number of shares of the registrant's
Class B Common Stock outstanding on September 15, 2000 was 3,350,471.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on November 30, 2000, are incorporated
by reference into Part III of this Form 10-K.
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EDISON SCHOOLS INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2000
TABLE OF CONTENTS
PART I
PAGE
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Item 1 - Business....................................................... 4
Item 2 - Properties..................................................... 21
Item 3 - Legal Proceedings.............................................. 22
Item 4 - Submission of Matters to a Vote of Security Holders............ 22
- Executive Officers and Directors of the Registrant............. 22
PART II
PAGE
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Item 5 - Market for Registrant's Common Equity and Related
Stockholder Matters.......................................... 26
Item 6 - Selected Financial Data........................................ 27
Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 28
Item 7a - Quantitative and Qualitative Disclosures About Market Risk..... 50
Item 8 - Financial Statements and Supplementary Data................... 50
Item 9 - Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..................................... 50
PART III
PAGE
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Item 10 - Directors and Executive Officers of the Registrant............. 51
Item 11 - Executive Compensation......................................... 51
Item 12 - Security Ownership of Certain Beneficial Owners and
Management................................................... 51
Item 13 - Certain Relationships and Related Transactions................. 51
PART IV
PAGE
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Item 14 - Exhibits, Financial Statements and Reports on Form 8-K......... 52
SIGNATURES...................................................................... 53
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Some of the statements under "Management's Discussion and Analysis of
Financial Condition and Result of Operations," "Business" and elsewhere in this
Annual Report are forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934. We have based these forward-looking statements on our current expectations
and projections about our ability to, among other things:
- implement our business strategy;
- expand our customer base and increase the number of students enrolled in
schools managed by us;
- control costs;
- improve the academic achievement of students in our schools; and
- finance and manage our rapid growth
In some cases, you can identify forward-looking statements by words such
as "may," "will," "should," "expects," "plans," "anticipates," "believes,"
"estimates," "predicts," "potential" or "continue," or the negative of these and
other similar words.
Forward-looking statements are subject to known and unknown risks,
uncertainties and other factors that may cause our actual results, levels of
activity, performance, achievements and prospects to be materially different
from those expressed or implied by such forward-looking statements. These risks,
uncertainties and other factors include those identified under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Additional Risk Factors That May Affect Future Results" and elsewhere in this
report. You should also carefully review the risks outlined in other documents
that we file from time to time with the Securities and Exchange Commission,
including our Quarterly Reports on form 10-Q that we file in fiscal 2001.
Technology as a Second Language(R), EdLab and Edison's logo are trademarks
or service marks of Edison. Other trademarks or service marks appearing in this
Annual Report are the property of their respective holders.
We are a Delaware corporation, and our principal executive offices are
located at 521 Fifth Avenue, 15th Floor, New York, New York 10175 and our
telephone number is (212) 419-1600. Our web site address is
www.edisonschools.com. The information on our web site is not incorporated by
reference into this Annual Report and should not be considered to be a part of
this Annual Report. Our web site address is included in this Annual Report as an
inactive textual reference only.
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PART 1
ITEM 1. BUSINESS
Edison is the nation's largest private operator of public schools serving
students from kindergarten through 12th grade. As reflected in the agendas of
both the Republican and Democratic parties, education is among the most
important domestic issues in the United States today. Directly addressing this
issue, we contract with local school districts and public charter school boards
to assume educational and operational responsibility for individual schools in
return for per-pupil funding that is generally comparable to that spent on other
public schools in the area. Over the course of three years of intensive
research, Edison's team of leading educators and scholars developed an
innovative, research-backed curriculum and school design. We opened our first
four schools in August 1995, and have grown rapidly in every subsequent year. We
served approximately 37,500 students in 79 schools located in 16 states across
the country and the District of Columbia in the 1999-2000 school year. This
represents an increase of 14,000 students and four new states from the 1998-1999
school year. In the 1999-2000 school year, approximately 26,700 students were
enrolled in our schools in grades K-5, approximately 9,700 in grades 6-8 and
approximately 1,600 in grades 9-12. In the 2000-2001 school year, we expect to
enroll between 57,000 and 59,000 students in 113 schools located in 21 states
and the District of Columbia. Our total revenue has grown from $11.8 million in
fiscal 1996 to $224.6 million in fiscal 2000. We attribute our growth in part to
the demonstrated success of our schools, as measured by significant improvements
in student academic performance and high levels of parental satisfaction.
Our model offers public school authorities, who face widespread concern
about disappointing student achievement, the benefits of a large private sector
company with national support systems. We believe those benefits include:
- the ability to create, implement and support a superior educational
model through focused research and development; and
- increased emphasis on accountability for achieving improved academic
performance.
These benefits contribute to an enhanced educational experience that has
proven attractive to public school authorities, parents and teachers alike.
Elements of that experience include:
- a rich and challenging curriculum based on clear standards and high
expectations for all students;
- a significantly longer school day and year;
- an enriched technology program characterized by computers, supplied by
us without cost to the family, in the home of every student above the
second grade following the first year of the school's operation, full
time technology personnel supporting each site and laptop computers for
every teacher;
- an emphasis on the professional growth of teachers through a commitment
to training, an explicit career ladder and a school management structure
that allows teachers to participate in the leadership of the school;
- a support system focused on improving student achievement;
- exposure to foreign language beginning in kindergarten; and
- an emphasis on parental involvement and character development.
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INDUSTRY BACKGROUND
OVERVIEW
During the 1997-1998 school year, over 14,000 school districts comprising
89,000 K-12 schools enrolled an estimated 46.1 million students. We currently
concentrate our business development efforts on the approximately 1,800 medium
and large school districts that each have more than 5,000 students. We estimate
that these districts had annual operating budgets aggregating $190 billion for
the 1998-1999 school year. Despite the growth in spending on public education
over the last decade, student achievement has progressed very little and remains
low. For example, on the National Assessment of Educational Progress, only
approximately 24% of students in grades 4 and 8 met grade level standards in
mathematics in 1996, the last date for which results are available. In reading,
only approximately 37% of students in grades 4 and 8 met grade level standards
in 1998, and only approximately 25% of students in grades 4 and 8 met grade
level standards in writing in 1998. The National Assessment of Educational
Progress, a testing program conducted by the U.S. Department of Education since
1970, uses tests specially designed to measure how well students meet grade
level standards established by a national panel of education experts. The tests
are administered to random national samples of students at three grade levels
every other year, or every fourth year, in major subjects.
We recognize that there are many excellent public schools in the United
States. We also believe, however, that the overall performance of public schools
has been compromised by several inherent constraints under which they operate.
We believe that, taken together, these constraints inhibit many districts from
implementing a systemic program of improvement.
- LACK OF CONSISTENCY IN LEADERSHIP. We believe that an effective program
for change requires both planning and a sustained commitment to
effective implementation over a lengthy period of time. School districts
are typically governed by school boards subject to regular elections and
related turnover. The average term of urban school superintendents is
less than three years. As a result of the relatively brief tenure of
leadership, many public school systems have found it difficult to
implement long-term approaches to improving student performance and
school quality generally.
- INABILITY TO EXPLOIT THE ADVANTAGE OF SCALE. The over 14,000 school
districts in the United States tend to be small, independent and
localized operations. Only 2% of all school districts had annual
operating budgets greater than $100 million for the 1995-1996 school
year. This modest size can result in severe limitations on the ability
both to develop and to implement substantial improvements in curriculum
and school design. For example, in contrast to most large-scale private
enterprises, the research and development budget in many districts is
negligible. With the need to devote a significant portion of their
resources to stand-alone administrative structures and the support staff
to oversee curriculum for all subjects over 13 grade levels, many
districts simply have nothing left for a long-term program of
improvement.
- INABILITY TO INVEST FOR THE FUTURE. The time horizons of school
districts necessarily are linked to the one-year appropriations cycle
under which they usually operate. The ability to invest for the future
by tolerating substantial short-term budget deficits is generally not
feasible for school districts. For this reason as well, we believe,
change tends to be only incremental.
In all three respects -- consistency of leadership, the benefits of scale
and the ability to make substantial investment for the future -- a large,
private sector company such as Edison is in a strong position to add substantial
value to public education.
CURRENT REFORM INITIATIVES
Public education is currently at the top of national, state and local
political agendas. Both major national political parties have placed education
at the center of their national platforms and many state and local authorities
have enacted or encouraged measures to implement significant educational
reforms. Some of these reforms are programmatic innovations occurring within
public schools. Examples include expanded levels of teacher training, higher
standards, more rigorous testing and more effective technology. Other
initiatives have sought to reform the public education system itself by
embracing the market-oriented concepts of competition, accountability and a
broader range of parental choice. These
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measures include legislation authorizing charter schools, private
management of public schools, voucher programs and increased choice within
existing systems.
- CHARTER SCHOOLS. Since Minnesota first enacted legislation in 1991, 36
states and the District of Columbia have passed charter school
legislation. Under the typical charter school statute, identified
entities, such as the state board of education or a state university,
are authorized to grant a specified number of charters to community
groups or non-profit entities to create a public school. A growing
number of charter boards in turn contract with private sector
organizations to operate the schools. In return for a large measure of
autonomy from regulation, the charter school is accountable for student
academic performance. Many charter school statutes limit the number of
charter schools or the number of students that may enroll in charter
schools. Currently, there are over 1,600 charter schools in operation,
with an estimated enrollment of over 350,000 students in 31 states and
the District of Columbia. This enrollment represents approximately 1.0%
of the total student population in those 31 states and the District of
Columbia.
- CONTRACT SCHOOLS. Contract schools are public schools operated by
private organizations based upon management agreements with local school
boards. Unlike charter schools, contract schools do not require specific
statutory authority, but are created through a contract between a school
management company and a school board in accordance with existing
authority.
- VOUCHER PROGRAMS. Voucher programs provide for the issuance to parents
of tuition vouchers worth a certain amount of money that they can redeem
at any approved school of their choice. These programs allow students to
choose among public schools, which would have to compete for students,
or possibly even attend private schools. Milwaukee and Cleveland have
implemented voucher programs and Florida has adopted legislation
authorizing such a program. Voucher legislation has also been introduced
in several states. Private philanthropists have also made funds
available for voucher programs.
- CHOICES OFFERED BY SCHOOL DISTRICTS. School districts are offering
increased choice to their students by, for example, establishing magnet
schools serving students within the district and allowing students to
attend schools across district lines. Magnet schools are specialized
public schools offering unique programs, such as curricula emphasizing
math, science or the arts.
- STATE TAKEOVER STATUTES. Some states have exercised their ability under
local law to divest local school boards of their authority to manage an
identified school or schools within the district. These states include
Maryland and New Jersey. One of those states, Maryland, has opted to
contract with us to provide educational services at the identified
schools.
Incorporating elements of both a market-oriented approach and programmatic
innovation, we are a leader in offering reform alternatives to local school
boards searching for new approaches to education. For the 1999-2000 school year,
we operated 55 contract schools with a total enrollment of approximately 26,500
students and 24 charter schools with a total enrollment of approximately 11,000
students. Of these contract schools, 15 were operated under charters granted by
school districts, which provide the facilities, and we categorize these schools
as contract schools because we do not provide the facilities and therefore the
economics of these arrangements closely resemble those of a contract school. The
remaining 40 contract schools were operated under management agreements with
local school boards. For the 2000-2001 school year, we are operating 68 contract
schools and 45 charter schools. We do not participate in voucher programs.
THE EDISON SOLUTION
As a private enterprise with national scale, Edison offers school
districts and charter boards a vehicle for overcoming many of the inherent
constraints that have impeded systemic reform of public schools. The Edison
solution consists of two equally critical and mutually reinforcing components:
- a research-backed curriculum and school design that we believe yields
significant improvement in student academic achievement as reflected in
average annual gains of six percentage points against state
criterion-referenced tests and four percentage points per year against
national norm-referenced tests; and
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- support systems designed to ensure consistent, replicable and effective
implementation of our educational model as we expand into a wide range
of communities across the nation.
Examples of the latter include a national teacher and principal recruiting
system; an infrastructure to support teacher training both before and after a
school opens; a national distribution network for curriculum materials,
technology equipment and supplies; and information systems to track and enhance
student progress against identified goals.
We believe that many public school authorities are attracted to the Edison
solution because, unlike some other school reform initiatives, it enables them
to stimulate positive, market-oriented, comprehensive school reform within the
framework of the existing, locally controlled public school system. By entering
into a partnership with us, such authorities enjoy the resources, systems,
continuity of focus and commitment to ongoing research and development
associated with a national private sector company while at the same time
retaining local control of public education. For example, our management
agreements typically provide for the district or charter board to maintain
ultimate oversight and supervision over the school. In addition to regular
reporting requirements and the ability to terminate the management agreement on
performance grounds, such oversight may take several forms, including the right
to reject Edison's candidate for school principal and the right to make
adjustments to the curriculum.
RESEARCH BEHIND THE EDISON SOLUTION
The Edison school design and curriculum grew out of a comprehensive
three-year research project conducted by a team of approximately 30 full-time
professional employees and numerous outside experts under the leadership of
Benno C. Schmidt, Jr., the former President of Yale University. Our design team
included respected education researchers, curriculum developers, teachers,
principals, school administrators, writers, technology specialists and experts
in school finance and management. Together, they brought a wide range of
perspectives on improving education through the reform of curriculum,
instruction, assessment, professional development, school organization and most
other elements of education.
The research leading to the development of our solution was extensive and
systematic; our staff members interviewed educators, reviewed a wide range of
school programs and attempted to assemble the best scientific evidence of the
effects of potential reforms in K-12 education. For example, our review of a
successful project in Indiana which placed computers in the homes of high-risk
students was instrumental in our decision to put computers in our students'
homes. Similarly, our investment in tutors resulted from our examination of
programs run by a Johns Hopkins University sociologist with a well-documented
record of developing basic skills with students who are at high risk for
academic failure.
THE EDISON CURRICULUM AND SCHOOL DESIGN
Our schools combine innovative curriculum and instruction methods with
structures to assess and guide students, hold school administrators accountable
for student performance and encourage and facilitate parental involvement in
their children's education.
CURRICULUM
DEMANDING PROGRAM OF STUDY. Our curriculum is guided by detailed and
demanding student academic standards that specify what students should know and
be able to do at the end of each school year in twenty fields of study, from
reading, writing and mathematics to economics, geography, visual arts and
foreign languages. Our curriculum is also rich in content. For example, students
at the junior and high school levels study three years of world history and
literature and two years of U.S. history and literature. In addition, all high
school students have the opportunity to complete biology, chemistry and physics,
usually by the end of 10th grade, and we offer a wide range of advanced
placement courses to students in the 11th and 12th grades.
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PROFESSIONAL DEVELOPMENT FOR TEACHERS. Our professional development
program provides opportunities for teachers to learn how to implement our
program and develop their skills as educators. We typically provide teachers
with four to six weeks of training before a school first opens and additional
support and training during the school's initial year. In addition, teachers
generally have two periods every day free for their own professional
development, and our school calendars provide at least five days for ongoing
training each year. We also offer more than a dozen national curriculum
conferences annually for different specialists within our schools.
PROVEN INSTRUCTION METHODS. We use instruction methods derived from
systematic research. For example, our elementary schools implement Success for
All, a K-5 reading program developed at Johns Hopkins University and refined
through experimental studies directed by Johns Hopkins University over the last
ten years. Our schools generally use mathematics programs developed through
years of research by the University of Chicago School Mathematics Project.
EMPHASIS ON CORE VALUES. We believe schools cannot be successful unless
the students display certain values, such as the willingness to take
responsibility for themselves and their education, respect for teachers and
other students, and the desire to become educated. Our educational program is
built around a defined set of core values: wisdom, justice, courage, compassion,
hope, respect, responsibility and integrity. We believe these core values help
us promote strong character in our students and a positive learning environment.
Our students receive instruction in these core values at every grade level. For
example, students in our elementary schools read out loud and have group
discussions of morality stories written for children. Also, our teacher training
in student discipline, classroom management and instruction is based on a
character education program that incorporates these values.
REGULAR ASSESSMENTS OF STUDENT PERFORMANCE. We routinely monitor our
students' progress against academic standards. We connect our standards and
instructional programs with state standards and assessments, and we believe our
students are well prepared for state and local tests, for which we are held
accountable. Each quarter teachers complete a unique report card, known as a
Quarterly Learning Contract, which is a special narrative report card that
tracks student progress against academic standards and sets specific goals for
students. We believe this is a contrast to the typical American report card that
grades progress relative to each teacher's subjective classroom standards.
Students also receive traditional letter grades in the Quarterly Learning
Contract. Our students take all standardized tests required by state and local
authorities, and we also administer our own annual tests, known as Common
Performance Assessments, calibrated to our academic standards, to ensure
teachers are judging work appropriately. In the 1999-2000 school year, we
introduced a monthly benchmark assessment system that provides us with detailed
measurements of student progress toward achieving grade level academic
standards. We use these assessments to determine whether we should adjust our
instructional programs to help our students achieve the academic requirements of
their grade level.
EXTENSIVE REMEDIAL INSTRUCTION. The Edison curriculum is designed to meet
the needs of all students, regardless of ability. We employ one-on-one tutoring
to help students master the academic requirements of their grade level.
Intensive remedial instruction in reading is available at all grade levels. In
addition, our longer school day and year provide more time for instruction.
SUPPORT FOR STUDENTS WITH SPECIAL NEEDS. We instruct special education
students in mainstream classrooms, to the extent we believe it is responsible to
do so. However, special education staff are available at each site to provide a
full continuum of services, including additional support in regular classrooms,
resource rooms and self-contained environments for students with greater needs.
We offer students who have limited English proficiency
English-as-a-second-language programs or bilingual programs, depending on
community preference and needs.
SCHOOL DESIGN
STUDENTS AND TEACHERS ARE ORGANIZED INTO SMALL SCHOOLS-WITHIN-A-SCHOOL.
Each of our schools consists of small, flexible schools-within-a-school, called
academies, where teachers typically follow the same students from grade to grade
for several years. We believe this organization ensures that students are better
known by their teachers, helps foster student-teacher relationships and
encourages teachers to feel more ongoing responsibility for individual students.
Within each academy, students are generally organized into multigrade groups,
called houses, of 100 to 180 students each. Students typically remain
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within the same house until they graduate from the particular academy. Each
house is led by four to six teachers, who usually work with students of every
level of the house for the duration of their academy experience and are
responsible for the core academic program of instruction in math, science,
history, geography, civics, economics, reading and language arts.
LONGER SCHOOL DAY AND YEAR. Our students are in school an average of 1,500
hours each year after the first year of their school's operation, compared to
the national average of approximately 1,170 hours per year. Our school year is
approximately 200 days, compared to an average of 180 days for public schools.
Based on these averages, we believe our students spend approximately 28% more
time in school each year than students in most other public schools. This
provides our students with substantially more time for learning than many public
school students and enables us to implement a richer curriculum. Our school
schedule also provides our students with less time during the shorter summer
vacation to forget what they learned during the school year.
INCREASED INTEGRATION OF TECHNOLOGY IN THE LEARNING ENVIRONMENT. Our
schools are technologically rich environments aimed at preparing students for
the workplaces of the future. We provide each of our teachers with a laptop
computer and our classrooms generally have three computers as well as printers
for student use. We provide every family with a student above the second grade a
computer and a modem for use at home, following the first year of their school's
operation. To encourage and increase communication and enable the sharing of
best practices, teachers, students and parents are electronically connected via
The Common, our Internet-based, internal message, conferencing and information
system that connects all our schools. We have a distinctive program called
Technology as a Second Language to teach school staff, students and families to
use technology effectively.
IMMEDIATE AND COMPREHENSIVE CHANGE. For the schools we opened in the fall
of 1999, we made an average initial investment of approximately $2,400 per
student, or approximately $1.4 million per school, which we used to purchase
computers and other technology, implement our curriculum and train new teachers.
We believe this provides an opportunity for schools to launch a comprehensive
package of change all at once. In contrast to the small steps that school reform
usually must take, our schools are able to integrate new curriculum, technology
and professional development and pursue excellence in all areas immediately and
aggressively.
SCHOOL-LEVEL ACCOUNTABILITY. We hold each school accountable for a high
level of demonstrated student progress as measured by conventional standardized
tests, official performance assessments and our own assessments. Staff
compensation and promotions within our schools are generally linked to
performance. Parents of students in our schools are encouraged to share
accountability for their children's progress by co-signing the Quarterly
Learning Contract, under which they make a moral commitment to help their
children achieve specified academic goals. The Quarterly Learning Contract
serves as the report card for our students and indicates to parents how well
their children are performing relative to our annual academic standards. In
addition to educational accountability, our schools are also held accountable
for financial management and student, parent and community satisfaction.
PRINCIPALS ACCOUNTABLE FOR SCHOOL PERFORMANCE. Principals at our schools
are appraised and compensated based on meeting student academic performance,
financial management and community satisfaction goals. They are also responsible
for public reporting of their school's accounts and budgets. Principals receive
school report cards that track progress on all accountability criteria, and
principals are in turn appraised and compensated based on progress against the
accountability criteria. Principals for our contract and charter schools are
chosen in consultation with the school district or charter board and normally
hired four to six months before the school opens. This allows our regional vice
presidents to work closely with the new principals for several months to
thoroughly introduce them to our education system. In addition, new principals
receive two weeks of formal training on our education system.
DEDICATED TEACHERS. We believe our schools attract motivated and dedicated
teachers due to the following factors:
- our innovative curriculum and approach to education;
- our commitment to professional development of teachers;
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- increased access to resources and technology; and
- generally competitive salary levels.
Our schools are staffed by four levels of teachers: lead teacher, senior
teacher, teacher and resident teacher. We believe this four-tier seniority
system provides an attractive career path and allows new teachers to be mentored
by more experienced teachers. Teachers are hired based on classroom and
educational experience, expertise in a particular subject area, evidence of
leadership abilities in the context of teams, and interaction with staff,
students and families. Lead teachers have responsibility for the organizational
management of the teaching team, and classroom instruction is the primary focus
of senior teachers, teachers and resident teachers. In addition, lead teachers
serve on the management team of the school, which is led by the principal and
also includes the business services manager. In this respect, teachers are
offered the opportunity to participate in the management of the school.
PARTNERSHIPS WITH FAMILIES. We are committed to keeping families engaged
in their children's education, both at school and in the home. We actively
encourage parental involvement in the education of their children through
interaction with teachers, involvement in school affairs and numerous volunteer
opportunities. We believe our program of providing, following the first year of
the school's operation, computers to the families of our students above the
second grade has increased parents' level of involvement in the school. In
addition, by co-signing the Quarterly Learning Contract, parents commit to
monitor the progress of their children in meeting stated educational goals.
THE EDISON OPERATING SYSTEM
The systems we have built to ensure consistent and effective
implementation, replicability and scalability are as essential to our model as
the Edison curriculum and school design itself. Although there are many
outstanding public schools in the United States, we believe that the basis for
such success has been highly individualized, often, for example, dependent on an
especially dynamic principal. Edison has designed its support systems with the
objective of not only creating excellence, but being able to replicate it in a
consistent manner in a widely diverse array of schools across the country.
REGIONAL VICE PRESIDENT STRUCTURE. Edison's seven regional vice
presidents, most of whom are former school superintendents or principals,
provide the most critical link between our central operations and each school
site. They are accountable for building and ensuring the operation of successful
schools, defined as schools that measurably enhance student achievement over
time and meet financial objectives. In meeting this responsibility, regional
vice presidents make frequent site visits, analyze school academic and financial
data, coordinate central support operations that meet the needs of each school
and hold regional training sessions for principals and teachers.
EDUCATION AND CURRICULUM DIVISION. Our Education and Curriculum Division,
our largest central division, oversees the implementation, modification, support
and effectiveness of our educational design. The Education and Curriculum
Division's approximately 50 employees, together with approximately 200 of our
teachers who we annually certify as trainers, provide a continuous stream of
support to our schools through the coordination of schoolwide and national
training programs, development of curricular standards and assessment of design
effectiveness at each school. The Education and Curriculum Division also
collects, analyzes and publishes educational data for use by our schools, our
school district and charter board clients and the public.
ASSESSMENT. The Assessment Department within our Education and Curriculum
Division monitors student achievement, school design and customer satisfaction
criteria of our schools, and analyzes these data to understand and measure our
schools' performance. This department also prepares monthly and annual reports
on school performance for our principals and regional vice presidents.
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RECRUITING. Strong educational leadership and teaching ability are vital
to the successful implementation of the Edison design. Our Recruitment
Department works year-round to attract outstanding principal candidates through
a variety of recruitment strategies, including direct headhunting, national
advertising and cultivation of outstanding internal candidates. The department
also recruits outstanding teacher candidates through a network of school-based
recruitment coordinators and through targeted recruitment efforts at prominent
schools of education, historically black colleges and highly regarded teacher
organizations.
REAL ESTATE. Prior to finalizing a management agreement, we typically
review the physical condition, technology infrastructure, suitability and
student capacity of each school site, and estimate the costs of preparing the
facilities for an Edison school. Once the management agreement is finalized, we
contract with local architects and construction managers to make the necessary
modifications or work closely with client school districts, depending on the
terms of the management agreement. In some independent charter school management
agreements, we may be responsible for new construction, major renovation or
conversion of a commercial or industrial property, along with providing certain
financing. We have developed expertise in working with national, regional and
local project managers, architects, engineers and construction firms to develop
these properties for school use. In the future, we intend to work with Ksixteen
LLC to develop properties for use as charter schools. Ksixteen, a company that
has recently been formed by Edison and several other investors, will provide
construction management and real estate development and financial advisory
services to charter schools. For more information on our real estate
arrangements and our relationship with Ksixteen, see "Properties" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Additional Risk Factors That May Affect Future Results - Ksixteen
LLC may be unable to develop properties for use as charter schools."
START-UP. As a management agreement is finalized, the assigned regional
vice president sets up a local start-up office, hires a start-up staff, and
begins to complete each step outlined in our Start-up Manual, a multi-volume
guide that directs each phase of the start-up process. The start-up office
serves as the center for all school operations, including student enrollment,
staff recruitment and coordination with the central office.
PURCHASING. Our Purchasing Department is responsible for coordinating both
the purchase and the delivery of each school's curriculum and technology. We
believe our size and growth have allowed us to achieve economies of scale by
realizing more competitive prices from vendors than could most school districts.
Once all curriculum and technology orders are made, attention shifts to
coordinating delivery to each Edison school. To help achieve this goal, we
require most of our vendors to ship most orders to a central warehouse for
distribution to the schools.
ENROLLMENT. We provide technical expertise and on-site support to assist
each school in reaching its targeted enrollment. The Student Enrollment
Department supports a variety of student recruitment strategies, including
door-to-door distribution of recruitment literature, neighborhood information
sessions, posting of fliers in public areas, use of available print and
electronic media and interaction with community-based organizations. In the
event that the number of students seeking admission to an Edison school exceeds
the school's capacity, an open admissions lottery is held to determine which
students are admitted and which are placed on the school's waiting list.
BUSINESS SERVICES. We hire a business services manager to manage the
day-to-day administrative operations at each Edison school under the supervision
of the school's principal. Business services managers are responsible for
managing the school's budget, processing all site expenditures and coordinating
student transportation, food and personnel services at each Edison school. We
also employ four financial analysts in our central office to assess prospective
management contracts and monitor the budgets of our existing schools. Our
central office also monitors real estate financing and performs traditional
financial administrative functions.
TECHNOLOGY. Our Technology Department oversees the creation, modification,
and implementation of the technology components of the Edison curriculum and
school design. The department creates specifications for each school and
start-up office, oversees technology-related building modifications and
equipment installation, recruits and selects, together with the school
principal, the school's technology director, trains the school's technology
director and provides additional field support as needed.
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FAMILY AND COMMUNITY PARTNERSHIPS. Formal parent orientation begins once
the student body has been selected, but all parent meetings and community
information sessions that lead up to final student selection are part of
families' introduction to Edison and the contract or charter school. The parent
orientation process is organized at each site by the school's student support
manager, an individual hired for the school's first year to facilitate community
interaction and coordinate social services within the school. The student
support manager works closely with the school's principal throughout the
start-up process to recruit parent volunteers, hold welcome meetings, orient
parents to the Edison curriculum and school design and coordinate the school's
grand opening celebration.
PRE-OPENING TRAINING. We provide a comprehensive, pre-opening professional
development program for principals and teachers at each of our new sites. Our
national leadership training gives new principals an intense overview of the
Edison design, including the start-up process, curriculum, student academic
standards, school organization, school culture, technology, financial management
and measures of accountability. Training for all instructional school staff
takes place during the summer before the opening of the school and includes
training on instructional methodology, classroom management and the core
curriculum in each teacher's area of expertise.
ONGOING TRAINING. We maintain the successful operation of each of our
schools through frequent site visits by our support personnel and through
ongoing professional development for school staff. All schools receive an
average of 19 days of on site visits from our Curriculum and Education Division
personnel. These visits are frequently supplemented with additional training
sessions based upon the observations made during site visits and the expressed
needs of each school's principal and teachers. In addition to training at the
site level, principals and teachers regularly convene for national conferences,
where training typically focuses on student achievement, leadership strategies,
design modifications, community relations, new support services or
subject-specific training sessions. Principals and teachers can also utilize The
Common, our on-line network, to access additional resources and interact with
individuals from other Edison schools.
SITE MONITORING AND ACCOUNTABILITY. To ensure that each Edison school
makes continuous progress in each of these areas, we generate a monthly School
Operations Report for each school site. This report includes a compilation of
educational data generated at each school site, anecdotal observations from our
personnel who visited the school and information related to attendance,
enrollment, student and teacher mobility and technology usage. In addition to
the School Operations Report, we compile a year-end School Report Card for each
school site. The report includes information about student performance on
standardized tests; student performance on Edison's common performance
assessments; levels of parent, staff, and student satisfaction; and the degree
to which the school met its budgetary requirements. The School Report Card
serves as the basis upon which the school principal is evaluated and, where
state law permits, compensated.
THE EDISON SOLUTION IMPLEMENTED
In the 1999-2000 school year, we operated 79 schools in 35 cities located
in 16 states and the District of Columbia with a combined student enrollment of
approximately 37,500. This represented an increase of approximately 14,000
students and four new states from the 1998-1999 school year. We have chosen not
to renew a management agreement covering two schools that expired after the
1999-2000 school year. In total, we expect to enroll between 57,000 and 59,000
students in 113 schools in 46 cities located in 21 states and the District of
Columbia. We are also offering summer school programs at three of our schools in
the summer of 2000.
We operate two types of schools: contract and charter. In the case of most
charter schools, we are required to arrange for a facility. In some cases,
however, we operate charter schools under a charter granted by the local school
board, which provides the facility. In these cases, we categorize and count
these schools as contract schools because we do not provide the facilities and
therefore the economics of the arrangement more nearly resemble those of a
contract school. We believe that Edison, which operated 55 contract schools in
the 1999-2000 school year and is operating 68 contract schools in the 2000-2001
school year, is the only major provider of contract schools for traditional K-12
instruction in the United States.
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We consider grades K-5, 6-8 and 9-12 to each be a school, and we count
grades K-5, 6-8 and 9-12 as separate schools, even if they are located in the
same building. As we expand, we often introduce new grade levels gradually
rather than simultaneously opening all grade levels within a school. We consider
ourselves to have opened a new school if we introduce at least one grade level
at a different school level, for example, if we add grade 6 at a location
housing an existing K-5 school. In some cases, we count grades K-6 as one school
if it is the local practice to configure elementary schools in this manner. For
the 1999-2000 school year, we had 38 principals, and each principal is generally
responsible for all the Edison schools on his or her campus. Our students have
generally been from economically disadvantaged backgrounds, and approximately
60% of our students participated in the federal free and reduced lunch program
during the 1999-2000 school year. These students came from families with incomes
at or below 185% of the poverty level established by federal authorities.
The following table provides information about the schools we are
operating for the 2000-2001 school year:
NUMBER
OF YEAR TYPE OF SHORTEST EARLIEST
CLIENT LOCATION SCHOOLS COMMENCED GRADES SCHOOL TERM EXPIRATION
- -----------------------------------------------------------------------------------------------------------------
Chula Vista Elementary
School District Chula Vista, 1 1997 K-5 Contract* 5 yrs June 2002
California
Ravenswood City
School District East Palo Alto, 2 1998 K-8 Contract* 5 yrs January 2003
California
Fresno Unified
School District Fresno, California 1 1999 K-6 Contract* 5 yrs June 2004
Napa Unified School
District Napa, California 1 1998 K-6 Contract* 5 yrs June 2003
San Francisco School
District San Francisco, 1 1998 K-5 Contract* 5 yrs June 2003
California
West Covina School
District West Covina, 2 1998 K-6 Contract* 5 yrs June 2003
California
Academy School
District Colorado Springs, 2 1998 K-8 Contract 5 yrs June 2005
Colorado
Colorado Springs
School District Colorado Springs, 2 1996 K-8 Contract* 5 yrs June 2001
Colorado
Wyatt-Edison Charter
School Denver, Colorado 2 1998 K-7 Charter 5 yrs June 2003
Board of Area
Cooperative Ed
Services Hamden, Connecticut 2 1998 K-8 Contract 5 yrs June 2003
Friendship Public
Charter Schools Washington, D.C. 4 1998 K-12 Charter 5 yrs June 2003
Dade County Public
Schools Miami, Florida 1 1996 K-5 Contract 5 yrs June 2001
Bibb County School
District Macon, Georgia 2 1999 K-6 Contract 5 yrs June 2004
Chicago Charter
School Foundation Chicago, Illinois 3 1999 K-11 Charter 8 yrs June 2007
Peoria Public
Schools Peoria, Illinois 3 1999 K-8 Contract 5 yrs June 2004
Davenport Community
School District Davenport, Iowa 1 1999 K-5 Contract 5 yrs June 2004
Wichita School
District No. 259 Wichita, Kansas 4 1995 K-8 Contract 5 yrs June 2005
Boston Renaissance
Charter Public School Boston, Massachusetts 2 1995 K-8 Charter 5 yrs June 2005
Seven Hills Charter
School Worcester, 2 1996 K-8 Charter 5 yrs June 2001
Massachusetts
Battle Creek School
District Battle Creek, 3 1998 K-7 Contract 5 yrs June 2003
Michigan
Detroit Academy of
Arts and Sciences Detroit, Michigan 2 1997 K-6 Charter 5 yrs June 2002
Detroit Public
School Academy Detroit, Michigan 2 1998 K-8 Charter 3 yrs June 2001
YMCA Service
Learning Academy Detroit, Michigan 2 1999 K-8 Charter 5 yrs June 2004
Edison Oakland
Public School Academy Ferndale, Michigan 2 1999 K-8 Charter 5 yrs June 2004
Flint School
District Flint, Michigan 4 1997 K-10 Contract 5 yrs June 2002
Mid-Michigan Public
School Academy Lansing, Michigan 2 1996 K-8 Charter 3 yrs June 2001
Mt. Clemens School
District Mt. Clemens, Michigan 4 1995 K-12 Contract 5 yrs June 2003
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NUMBER
OF YEAR TYPE OF SHORTEST EARLIEST
CLIENT LOCATION SCHOOLS COMMENCED GRADES SCHOOL TERM EXPIRATION
- -----------------------------------------------------------------------------------------------------------------
Board of Education
of Pontiac Pontiac, Michigan 2 1998 K-7 Contract 5 yrs June 2003
Duluth Public
Schools Duluth, Minnesota 3 1997 K-8 Contract* 3 yrs June 2003
Minneapolis School
District No. 1 Minneapolis, 2 1998 K-7 Contract 5 yrs June 2003
Minnesota
Westport Community
Secondary Schools Kansas City, Missouri 2 1999 6-12 Contract* 5 yrs June 2004
Kansas City Municipal
School District Kansas City, Missouri 1 1999 K-5 Contract 5 yrs June 2004
Westport Allen-Edison
Village Educational
School Kansas City, Missouri 2 1999 K-8 Charter 5 yrs June 2004
Granville Public
Charter chools Trenton, New Jersey 3 1998 K-11 Charter 2 yrs June 2002
Wayne County Public
Schools Goldsboro, North 2 1998 K-8 Contract 5 yrs June 2003
Carolina
Nash-Rocky Mount
Public Schools Whitakers, North 1 1999 K-5 Contract 5 yrs June 2004
Carolina
Alliance Community
Schools, Inc. Dayton, Ohio 3 1999 K-6 Charter 5 yrs June 2004
Southwest Independent
School District San Antonio, Texas 4 1997 K-7 Contract 5 yrs June 2002
Tyler Independent
School District Tyler, Texas 1 1999 6-8 Contract 5 yrs June 2004
Long Beach Unified
School District Long Beach, 1 2000 K-5 Contract 5 yrs June 2005
California
New Covenant Charter
School Albany, New York 1 2000 K-5 Charter 4 yrs June 2004
Lincoln-Edison
Charter School York, Pennsylvania 1 2000 K-5 Contract* 5 yrs June 2005
Thomas A. Edison
Charter School of
Wilmington Wilmington, Delaware 2 2000 K-7 Charter 5 yrs June 2005
Drew Charter
School, Inc. Atlanta, Georgia 1 2000 K-5 Charter 5 yrs June 2005
Springfield Public
Schools Springfield, Illinois 1 2000 K-5 Contract 5 yrs June 2005
New Baltimore City
Board of School
Commissioners and
the Maryland State
Department of
Education Baltimore, Maryland 3 2000 PK-5 Contract 5 yrs June 2005
Inkster Public
Schools Inkster, Michigan 4 2000 K-12 Contract 5 yrs June 2005
Shomburg Charter
School Jersey City, 1 2000 K-5 Charter 2 yrs June 2002
New Jersey
Charter School of
Science and
Technology Rochester, New York 2 2000 K-8 Charter 5 yrs June 2005
Renaissance
Academy-Edison
Charter School Phoenixville, 2 2000 K-8 Charter 5 yrs June 2005
Pennsylvania
Dallas Independent
School District Dallas, Texas 7 2000 PK-6 Contract 5 yrs June 2005
Milwaukee Science
Education
Consortium, Inc. Milwaukee, Wisconsin 2 2000 PK-7 Charter 5 yrs June 2005
---
Total 113
===
- ----------
* Indicates charter schools operated under a charter granted by the local school
board.
GROWTH STRATEGY
We believe the approximately 1,800 medium and large independent school
districts nationwide, which we estimate collectively had operating budgets of
$190 billion in the 1998-1999 school year, represent a significant growth
opportunity. Our strategy is to grow within this market through the
establishment of expanded relationships with existing clients as well as new
relationships.
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Our marketing efforts will continue to focus on our ability to replicate
the success achieved at other Edison schools throughout the country. We believe
that effective marketing and communication efforts targeted at administrators,
teachers and parents will yield higher levels of perceived benefits among these
constituencies and ultimately generate increased penetration within our market
of K-12 schools.
A core element of our growth strategy is to establish multiple schools
within a given school district to cover the entire K-12 grade range (elementary,
middle and high school). We believe that uninterrupted access to the Edison
system from kindergarten through high school will achieve the most favorable
outcome for students. Historically, our management agreements have provided for
the establishment of one elementary school during the first contract year.
Through our development efforts, we seek to expand upon the initial contract by
opening additional schools within the district in subsequent years. We believe
that our strong academic results will encourage school districts and charter
holders to retain us to operate multiple schools. In addition, we believe that
satisfied parents will push to make our schools available for their children's
entire K-12 education.
We also expect our demonstrated success at our existing schools will
encourage school districts and charter boards to enter into management
agreements providing for us to establish multiple schools either in the first
year or over time. Eleven of our first 13 clients have added one or more
additional schools. Of the nineteen new clients for whom we are opening schools
in the 2000-2001 school year, eight have entered into management agreements with
us to establish multiple schools in the first school year.
COMPETITIVE STRENGTHS
We believe that the following factors will contribute to our continued
success and future growth:
- QUANTIFIABLE ACADEMIC IMPROVEMENT. Student achievement in our schools
has been substantial, as measured by a range of state and local tests.
On average, in those schools that we have operated long enough to
generate trend data, typically by a school's second year with Edison,
our students have gained six percentage points per year against state
criterion-referenced tests and four percentage points per year against
national norm-referenced tests.
- PARENTAL SATISFACTION. Our schools enjoy high parental satisfaction.
According to a survey prepared for us by an independent market research
firm for the 1997-1998 school year, covering all 20 of our schools then
in operation, over 50% of the parents of our students gave our schools
grades of A or A-. This compares to 37.2% of parents who give a grade of
A or A- in U.S. public schools generally, according to the same market
research firm.
- EXTENSIVE INFRASTRUCTURE. We have a series of systems and support staff
that permit us to implement our curriculum and school design in contract
and charter schools in communities across the United States. The systems
have been used successfully during our past four years of rapid
expansion. These systems include recruiting capabilities, assessment
mechanisms, professional development systems, financial management and
acquisition systems, and systems to assess prospective management
agreements.
- ADVANTAGES OF SCALE. We expect to achieve advantages of scale as more
schools are added to our school systems, allowing us to increase our
purchasing power and reduce our overhead costs as a percentage of total
revenue. We are also focused on achieving clustering efficiencies by
opening multiple schools in a district. We have successfully opened
additional schools for 11 of our first 13 clients. By focusing on
expanding operations in existing markets, we believe we can better
capitalize on our relationships with the district, our knowledge of the
specific market and economies of scale in the provision of centralized
services.
- EXPERIENCED MANAGEMENT TEAM. We have an experienced management team led
by H. Christopher Whittle, founder of several media enterprises
including the first national electronic news system for middle and high
schools in the United States, Benno C. Schmidt, Jr., former President of
Yale University, Christopher D. Cerf, former Associate Counsel to
President Clinton from 1994 to 1996, John E. Chubb, senior fellow at the
Brookings Institution and a noted author and speaker on education, and
Reverend Floyd H. Flake, former member of the United States
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House of Representatives. Our management team also has seven former
school system superintendents, including Deborah M. McGriff, former
superintendent of the Detroit public schools, and Manuel Rivera, former
superintendent of the Rochester public schools.
- SIGNIFICANT INVESTMENT IN RESEARCH AND DEVELOPMENT. Prior to opening our
first four schools during the 1995-1996 school year, we conducted a
three-year research project led by a core team of educators,
researchers, policy experts and other professionals to create an
innovative and, we believe, effective model for operating more efficient
and effective public schools. This research project led to the creation
of Edison's curriculum and school design, which integrate many
successful educational practices into a comprehensive school solution
for grades K-12, guided by high academic standards, supported by
research-backed innovations in most areas of schooling and emphasizing
assessment and accountability. In addition, our Education and Curriculum
Division regularly assesses the effectiveness of our educational design
and oversees its modification and improvement.
ACADEMIC PERFORMANCE
School districts and charter boards generally retain us both to improve
the academic performance of the students who will be in our schools and to
create competition, which they hope will stimulate academic progress in the
other schools in the district. Our students are required to take the same local,
state and national tests administered by other public schools in the district.
States regularly require students to take assessments based on state standards,
known as criterion-referenced tests, and school districts also typically require
students to take tests based on national standards, known as national norm-
referenced tests. Both types of tests are scored by independent authorities and
result in publicly available data about student performance. As of the end of
the 1998-1999 school year, our fourth academic year, these tests have provided
over 300 measures of our students' achievement.
Student academic achievement in our schools has been substantial, as
measured by these external assessments. Since 1995, for those schools that we
have operated long enough to generate trend data, which is generally two years,
the average annual improvement in student achievement, taking into consideration
gains, losses and instances of no change, has been six percentage points on
state criterion-referenced tests and four percentage points on national
norm-referenced tests. These results compare favorably to the only available
national measure of achievement trends, known as the National Assessment of
Educational Progress, or NAEP. The NAEP is determined from criterion-referenced
tests administered by the federal government every two years to random samples
of students nationwide. From the 1994-1995 school year to the 1996-1997 school
year, the average annual improvement in student achievement for American nine
year olds and 13 year olds, which are ages similar to our students, has been
less than one percentage point in math, and from the 1994-1995 school year to
the 1997-1998 school year, the average annual improvement in reading has also
been less than one percentage point. While the NAEP and the state tests taken by
our students are not identical, these criterion-referenced tests attempt to
measure essentially the same academic skills against the standards of grade
level curricula.
FUTURE OPPORTUNITIES
We intend to selectively pursue opportunities created by state-sponsored
school and school district take-overs and other opportunities for whole-district
management. In addition, we believe our success in operating K-12 public schools
will allow us to expand into complementary areas of the education industry.
Concepts under consideration include:
- establishing teacher training schools, which we refer to as Edison
Teacher's Colleges;
- configuring our curriculum, school design and systems for license to
small school districts; and
- operating pre-school programs, after-school programs and summer school
programs.
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RELATIONSHIP WITH APEX ONLINE LEARNING INC.
In July 1999, we acquired for $5.0 million a 16.5% ownership interest in
APEX Online Learning Inc., a company that provides interactive advanced
placement courses for high school students over the Internet. Concurrently,
Vulcan Ventures Incorporated, then the majority stockholder of APEX, invested
$30.0 million in Edison. In December 1999, we invested an additional $5.0
million in APEX, increasing our ownership interest to 19.7%. We are developing
educational programs for students and teachers with APEX, components of which
may be delivered on-line, and we piloted two such programs during the 1999-2000
school year. These programs, known as EdLabs, are physical environments in our
schools that are designed to deliver online educational programs to students and
professional development for teachers. Each EdLab contains networked computers,
large-screen video monitors, audio and videoconferencing capabilities, and
specially designed workstations for students and teachers.
BUSINESS DEVELOPMENT
Our development division is responsible for establishing new client
relationships, expanding relationships with current clients and renewing client
management agreements. The division is led by a chief development officer, who
supervises 14 development professionals, each of whom is responsible for a
particular region. The development cycle for contract and charter schools
usually begins 10 to 20 months prior to a school's opening. The development vice
president typically targets numerous school districts within his or her region
as potential clients for a contract school, based upon a variety of criteria,
including:
- total enrollment and per-pupil expenditures of the district;
- proximity to existing Edison schools;
- perceived district and teacher's union support;
- the school superintendent's perceived receptivity to innovation; and
- number of new public or private schools opening in the district.
The development vice president's decision to focus on an area for a potential
charter school is based on similar factors, as well as other criteria,
including:
- particulars of the applicable state charter legislation;
- an established non-profit community agency interested in holding the
charter;
- a viable site acquisition strategy; and
- the support of state and local officials for charter schools.
The development cycle for contract and charter schools usually involves numerous
presentations to school district governing boards, teachers, teachers' union
leaders, parents, community groups and the media, as well as visits to our
existing contract or charter schools.
CONTRACTUAL ARRANGEMENTS FOR ESTABLISHING CONTRACT AND CHARTER SCHOOLS
CONTRACT SCHOOLS. Our management agreements for operating contract schools
are typically negotiated with the district school board. Management agreements
normally last for three to five years, provide us with per-student funding
generally comparable to that received by other schools in the district and give
us substantial control over a school, under the board's ultimate supervision, in
return for meeting specified academic results. We deliver and support our
curriculum, manage the school's budget, provide periodic assessment reports to
the school district, hire teachers and, in collaboration with the school
district, choose the school's principal.
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CHARTER SCHOOLS. Our management agreements for operating charter schools
are negotiated with the charter boards, which generally consist of community
groups or established non-profit entities. Public school districts also
sometimes issue charters and may retain us to operate charter schools. The terms
and conditions of these management agreements are similar to our management
agreements for contract schools. We often also help the charter boards arrange
for financing to obtain the facilities for the charter schools. In some cases,
we have entered into long-term leases for the charter school facilities. We have
also provided permanent credit support for many of our charter school buildings,
typically in the form of loan guarantees or cash advances.
GOVERNMENT LAWS AND REGULATIONS
FEDERAL AND STATE EDUCATION PROGRAMS. We receive funds derived from
numerous federal and state programs to be used for specific educational
purposes. If we fail to comply with the requirements of the various programs, we
could be required to repay the funds and be determined ineligible for receipt of
future federal funds. Most of our schools receive funds under Title I of the
Elementary and Secondary Education Act of 1965. This program supports the
education of children from low-income families. Some of our schools also receive
funds from other programs under this act, including Title II, which provides
funding for the professional development of teachers, Title III, which provides
funding for technology programs, Title VII, which provides funding for bilingual
education programs, and Title X, which provides start-up funding for charter
schools. We have policies and procedures in place in order to comply with the
regulations and requirements of these programs.
Although we receive these federal and state funds indirectly, through
local school boards and charter boards, our receipt of these funds subjects us
to extensive governmental regulation and scrutiny. We could lose all or part of
these funds if we fail to comply with the applicable statutes or regulations, if
the federal or state authorities reduce the funding for the programs or if we
are determined to be ineligible to receive funds under such programs. To the
extent that the laws and regulations governing federal and state programs change
or are interpreted in a manner that would prevent school districts and public
charter schools from using federal funds to pay for the services we provide, the
loss of all or part of these funds would hurt our business.
INDIVIDUALS WITH DISABILITIES IN EDUCATION ACT. This act requires that
students with qualified disabilities receive an appropriate education through
special education and related services provided in a manner reasonably
calculated to enable the child to receive educational benefit in the least
restrictive environment. Our responsibility to provide the potentially extensive
services required by this act varies depending on state law, type of school and
the terms of our management agreements. We are generally responsible for
ensuring the requirements of this act are met in our charter schools, unless
state law assigns that responsibility to another entity. School districts are
generally responsible for ensuring the requirements of this act are met in our
contract schools. We could be required to provide additional teachers, aides or
special services, at our cost, if we are found in violation of this act in one
of our schools.
FAMILY EDUCATIONAL RIGHTS AND PRIVACY ACT. We are subject to the federal
Family Educational Rights and Privacy Act, which protects the privacy of a
student's educational record, and generally prohibits a school from disclosing a
student's records to a third party without the student's prior consent. The law
also gives parents certain rights with respect to their minor children's
education records. Our failure to comply with this law may result in termination
of our eligibility to receive federal education funds.
GUN-FREE SCHOOLS ACT. The Gun-Free Schools Act, which became effective in
1994, requires us to effect certain policies, assurances and reports regarding
the discipline of students who bring weapons to our schools. If we violate any
of these requirements, we may be deemed ineligible to receive certain Federal
education funds.
FEDERAL CIVIL RIGHTS LAWS. We must comply with federal civil rights laws
or we could be determined ineligible to receive funds from federal programs or
face criminal or civil penalties. These laws include the following:
- TITLE VI OF THE CIVIL RIGHTS ACT OF 1964. Title VI prohibits recipients
of federal financial assistance from discriminating on the basis of
race, color or national origin.
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- TITLE IX OF THE EDUCATION AMENDMENTS OF 1972. Title IX prohibits
discrimination on the basis of gender by recipients of federal financial
assistance.
- SECTION 504 OF THE REHABILITATION ACT OF 1973. Section 504 prohibits
discrimination on the basis of disability by recipients of federal
financial assistance.
- AMERICANS WITH DISABILITIES ACT OF 1990. This act prohibits
discrimination in employment against a qualified individual with a
disability and requires that buildings, facilities and vehicles
associated with public services be accessible to individuals with
disabilities.
- AGE DISCRIMINATION ACT OF 1975. This act prohibits recipients of federal
financial assistance from discriminating on the basis of age.
- AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967. This act prohibits
discrimination on the basis of age in employment.
- EQUAL PAY ACT OF 1963. This act prohibits discrimination on the basis of
gender in the payment of wages.
- TITLE VII OF THE CIVIL RIGHTS ACT OF 1964. Title VII prohibits
discrimination on the basis of gender in employment.
DRUG-FREE WORKPLACE ACT OF 1988. The Drug-Free Workplace Act requires a
recipient of federal funds to certify that it provides a drug-free workplace. If
we violate the certification and reporting requirements of this act, then we
could be determined ineligible to receive federal funds.
STATE REGULATIONS. We are also subject to state statutory and regulatory
requirements in the states in which we operate. All states have standards for
the operation of schools concerning, for example, the length of the school year,
curriculum, hours of the school day, physical education and other areas. We
could be in violation of our management agreements with charter boards or school
districts if we fail to comply with these standards.
For more information on the effect of government laws and regulations on
our business, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations - Additional Risk Factors That May Affect Future
Results -- We rely on government funds for specific education programs, and our
business could suffer if we fail to comply with rules concerning the receipt and
use of the funds" and "-- We could be subject to extensive government regulation
because we benefit from federal funds, and our failure to comply with government
regulations could result in the reduction or loss of federal education funds."
SECURITY
We believe our school design helps maintain order and security by
encouraging closer relationships between teachers, students and families. In
addition, we recently began to implement the following three-step program for
ensuring security at our schools:
- first, we have engaged a national school security consultant to oversee
the design and effectiveness of security at our schools;
- second, we have convened a security committee, consisting of school
administrators, superintendents and security experts, to develop
detailed security procedures and standards for all Edison schools; and
- third, we are including a security training module as part of the
leadership training for all principals.
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HUMAN RESOURCES AND LABOR RELATIONS
As of June 30, 2000, we had 202 full-time headquarters employees. In
addition, 62 principals, approximately 2,000 teachers and approximately 1,600
members of administrative staff and management worked in our schools at the end
of the 1999-2000 school year.
We are committed to developing a positive relationship with teachers'
unions at both the local and national levels. We work in successful partnership
with local teachers' unions in numerous schools across the country, and believe
our distinctive curriculum and school design can be successfully delivered in
the context of a unionized school. In this regard, we believe we are unique
among school management companies, which generally have declined to operate in
schools subject to collective bargaining.
Our commitment to developing a successful working relationship with unions
reflects the fact that a majority of our schools are contract rather than
charter schools. As a general proposition, teachers at charter schools in the
United States are not represented by unions. In contrast, at least in those
states with strong public employee labor laws, school teachers in traditional
public schools generally have elected to organize. Approximately 35% of the
schools we operated in the 1999-2000 school year were operated under collective
bargaining agreements as modified by a memorandum of understanding. In some
charter schools, the charter incorporates by reference portions of collective
bargaining agreements.
Although we prefer positive union relations, we regularly encounter
resistance from teachers unions in local school board debates over whether to
enter into a management agreement with us. Local teachers' unions have also
occasionally initiated litigation challenging our management agreements. The
concept of a private sector school manager in public education is a
comparatively new one. In addition, both national teachers unions historically
have opposed privatization in public schools. While we reject that label and
regard our approach to be more of a public/private partnership that draws on the
strengths of both sectors, the unions' historical perspective often influences
local debates. In many instances, we have pursued a charter in a community only
after it became clear that the local teachers association would decline to
participate in discussions concerning our retention by the district to operate a
contract school.
For several reasons, we believe that our relations with unions at all
levels will continue to improve:
- as an organization, we are committed to that improvement;
- many union members recognize that we are the only significant private
sector organization in this area that seeks to work within the existing
public school system;
- notwithstanding the perception of some opinion leaders, significant
elements within teachers unions are committed to meaningful reforms,
including any initiative that improves student performance, preserves
the integrity of the public school system as a whole and protects the
rights of teachers as professionals. We believe that our approach,
unlike many other reform initiatives, is consistent with these
objectives;
- we believe that some local union leaders have concluded that working
with us is an effective defensive strategy against other more
threatening initiatives, such as vouchers or non-unionized charters; and
- many aspects of our curriculum and school design, such as extensive
professional development and an enhanced leadership role for teachers in
the management of the school, have long enjoyed the support of the
unions.
We typically have employment agreements with our regional and
developmental vice presidents and with the principals, union and non-union
teachers and other personnel of our schools.
COMPETITION
We have few direct competitors. We believe the companies that are most
similar to us in terms of corporate strategy focus primarily or exclusively on
operating charter schools, rather than contracting with
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school districts. These companies include Advantage Schools, Beacon Education
Management, Charter Schools USA, The Leona Group, National Heritage Academy and
SABIS Educational Systems. In addition, there are at least two companies that
operate private schools with plans for charter schools. The TesseracT Group is
currently managing one charter school and has been awarded several more
charters. Nobel Learning Communities was recently awarded its first charter to
operate a school in Pennsylvania. In addition, other private school operators,
post-secondary education providers or child care providers could possibly enter
our market. For example, Bright Horizons Family Solutions, a provider of
corporate sponsored child care, just opened its first private school and it or
other child care providers could seek opportunities in the charter or contract
schools market as well.
ITEM 2. PROPERTIES
Of the 79 schools we operated in the 1999-2000 school year, the 55
contract schools generally operated in existing facilities provided by our
school district clients, though we manage the maintenance and operation of these
facilities. Of our 55 contract schools, 15 were operated under a charter granted
by a public school district which provided a facility.
Significant real estate investments are often necessary when we establish
a charter school for a charter board and existing facilities are not available.
These investments are generally either made by the charter board or by us, and
we work closely with the charter board to locate, develop and finance the
charter school's facilities. A suitable location often needs to be found prior
to completing a charter application for a particular jurisdiction. The building
or renovation process generally lasts at least several months and can vary
widely in expense from minimal upgrades to new construction, which can cost from
$4.0 million to more than $8.0 million. Innovative financing methods are often
needed to compensate for the limited amount of state and local funding available
to develop charter school facilities and we have employed a variety of
approaches, including owning or leasing the building, advancing funds for the
building to the charter board with various repayment terms, or having the
charter board directly own or lease the facility, sometimes assisted by a
subordinated loan from us. We also consider providing guarantees to lending
institutions to allow the charter board flexibility in obtaining financing. For
more information on our charter school facility financing arrangements, see
"Management's Analysis and Discussion of Financial Condition and Results of
Operations - Charter School Facility Financings."
Effective July 1, 2000, we acquired a 35% interest in Ksixteen LLC, a
company organized to provide construction management and real estate development
and financial advisory services to charter schools. The other members of
Ksixteen are School Choice Investments LLC, a privately held investment entity
controlled by the management of Ksixteen, and the Rise Group LLC, a national
provider of construction consulting and project management services that has
worked on several Edison projects in the past. School Choice Investments and the
Rise Group hold 55% and 10% interests in Ksixteen, respectively. The management
of Ksixteen includes all the members of our former real estate department.
Edison and Ksixteen have entered into a master development agreement effective
July 1, 2000, pursuant to which Ksixteen will perform construction management
and real estate development and financing services on behalf of charter schools
that have entered into management agreements with us. In certain instances, we
may elect to use Ksixteen's services under the master development agreement for
a charter school in development prior to the execution of a management agreement
with the charter school. In such cases, upon execution of the management
agreement, we would arrange for the charter school to assume the obligations
incurred up to that point by us, including the obligation incurred by us to pay
fees to Ksixteen. Ksixteen's fees would then be part of the facilities costs of
that charter school that would be financed through a mortgage or other means.
For more information on our relationship with Ksixteen, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Additional Risk Factors That May Affect Future Results - Ksixteen LLC may be
unable to develop properties for use as charter schools."
We have entered into an agreement to purchase property in New York, New
York for a purchase price of $10 million. We are negotiating with the Museum of
African Art to develop the property for a mixed use project consisting of our
new corporate headquarters, a charter school and a facility to house the Museum
of African Art. We have not yet received the necessary zoning approvals for this
project. We have paid $3.0 million to the current owner of the property and
could be required to pay up to an additional $500,000 if we need to extend the
closing date in order to obtain the zoning approvals. If we
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are unable to obtain the necessary zoning approvals by April 11, 2001, or if
prior to that time we decide to terminate the contract with the current owner,
we will be forced to either forfeit any amounts paid to the current owner, which
could be as much as $3.5 million, or to purchase the property without the zoning
approval. We do not currently have a contract with the Museum of African Art for
this project or an agreement with any party to operate a charter school on that
site.
Our executive offices are currently located in New York, New York in a
leased facility consisting of approximately 60,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various legal proceedings from time to time incidental
to the conduct of our business. For example, we are currently involved in
lawsuits filed in Dallas, Texas, Baltimore, Maryland and Peoria, Illinois
questioning the authority of these school districts to enter into management
contracts with us. We currently believe that any ultimate liability arising out
of such proceedings will not have a material adverse effect on our financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of our stockholders during the fourth
quarter of 2000.
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages as of September 15,
2000, are as follows:
NAME AGE POSITION
---- --- --------
H. Christopher Whittle.............. 53 President, Chief Executive Officer and Director
Benno C. Schmidt, Jr................ 58 Chairman of the Board of Directors
Christopher D. Cerf................. 45 Chief Operating Officer
James L. Starr...................... 37 Chief Financial Officer and Executive Vice President
John E. Chubb, Ph.D................. 46 Chief Education Officer and Executive Vice President
Laura K. Eshbaugh (1)............... 52 Executive Vice President and Director
Reverend Floyd H. Flake............. 55 President of Edison Charter Schools
David A. Graff...................... 33 General Counsel and Senior Vice President
Kathleen M. Hamel................... 36 Executive Vice President, Whole District Partnerships
Tonya G. Hinch...................... 37 Executive Vice President, School Operations Division
Deborah M. McGriff, Ph.D............ 51 President of Edison Teacher's Colleges
Manuel J. Rivera, Ed.D.............. 48 Chief Development Officer
Donald N. Sunderland................ 50 Chief Information Officer and Executive Vice President
Virginia G. Bonker (1).............. 36 Director
John W. Childs (2).................. 59 Director
Ramon C. Cortines................... 68 Director
Charles J. Delaney.................. 40 Director
Robert Finzi (2).................... 46 Director
John B. Fullerton (1)............... 40 Director
Janet A. Hickey (1)................. 55 Director
Klas Hillstrom (1).................. 34 Director
Jeffrey T. Leeds (2)................ 44 Director
William F. Weld..................... 55 Director
- ----------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
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Set forth below is certain information regarding the professional
experience for each of the above-named persons.
H. Christopher Whittle, Edison's founder, has served as President since
March 1997 and as Chief Executive Officer since July 1998. He has served as a
director since 1992 and also served as our Chairman of the Board of Directors
from 1992 until March 1995. He is the President and sole stockholder of WSI Inc.
WSI Inc. is a corporation wholly owned by Mr. Whittle whose current primary
purpose is to hold Mr. Whittle's personal investments. From 1986 to 1994, Mr.
Whittle was Chairman and Chief Executive Officer of Whittle Communications L.P.,
which developed magazines and other print publications as well as Channel One,
an advertising-supported daily news and information television program for
schools. Before that, Mr. Whittle was the founder of 13-30 Corporation, the
predecessor of Whittle Communications L.P., and served as the publisher of
Esquire magazine from 1979 to 1986.
Benno C. Schmidt, Jr. has served as Chairman of the Board of Directors
since March 1997. He also served as our Chief Executive Officer from 1992 to
June 1998, our President from 1992 to February 1997 and our Chief Education
Officer from July 1998 through April 1999. Mr. Schmidt served as President of
Yale University from 1986 to 1992. He also served as Dean of the Columbia
University School of Law from 1984 to 1986.
Christopher D. Cerf has served as Chief Operating Officer since May 1999.
He also served as our General Counsel from June 1997 to April 2000. Prior to
joining us, he was a partner in the law firm of Wiley, Rein and Fielding from
May 1996 to May 1997. Between 1994 and May 1996, he served in the White House as
Associate Counsel to the President. Mr. Cerf is also a former high school
history teacher.
James L. Starr has served as Chief Financial Officer and Executive Vice
President since April 1998. Prior to joining us, he served as Senior Vice
President and Chief Financial Officer of Sierra Health Services, Inc., a health
services company, from August 1994 to April 1998. From 1989 to August 1994, he
served as Sierra's Director of Finance and Controller. Prior to that, Mr. Starr
was a senior accountant at Deloitte and Touche. He is a certified public
accountant.
John E. Chubb has served as Chief Education Officer and Executive Vice
President since May 1999. Prior to that, he served as Executive Vice President
of Curriculum, Instruction and Assessment from 1992 to April 1999.
Laura K. Eshbaugh has served in a variety of roles since joining us at our
inception in 1992, most recently serving as Executive Vice President since July
1998. She has been a director since 1992. From 1989 to September 1994, Ms.
Eshbaugh served as Vice Chairman of Whittle Communications L.P.
Reverend Floyd H. Flake has served as President of Edison Charter Schools
since May 2000. He has also served as the senior pastor of the Allen African
Methodist Episcopal Church in Jamaica, Queens since 1976. Reverend Flake has
served as a Senior Fellow at the Manhattan Institute for Social and Economic
Policy since January 1998 and a columnist for the New York Post since January
1998. Reverend Flake has been a member of the Board of Directors of the Fannie
Mae Foundation since January 1998 and an Adjunct Fellow on the Advisory Board of
the Brookings Institution Center on Urban and Metropolitan Policy since February
1998. From January 1986 to December 1997, Reverend Flake served as a member of
the United States House of Representatives, representing the 6th district of New
York.
David A. Graff has served as Senior Vice President and General Counsel
since April 2000. From December 1998 to April 2000, he served as our Deputy
General Counsel. Prior to that, he was an associate in the law firm of Shea &
Gardner from September 1995 to December 1998.
Kathleen M. Hamel has served as our Executive Vice President, Whole
District Partnerships since May 2000. From June 1999 to May 2000, she served as
Senior Vice President of Development, and prior to that as Vice President of
Development. Ms. Hamel joined us as a publishing specialist in January 1996.
Prior to joining us, Ms. Hamel was a senior marketing manager at Cathay Pacific
Airways.
Tonya G. Hinch has served as Executive Vice President, School Operations
Division since April 2000. From June 1999 to April 2000, she served as our
Senior Vice President, School Operations
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Division, and from November 1998 to June 1999, she served as our Vice President
for Start-Up. Prior to joining us, she served as Co-President of Ultrafem, Inc.,
a womens' reproductive health care company, from October 1997 to October 1998,
and as Ultrafem's Senior Vice President for Marketing and Sales from November
1995 to October 1997. Ultrafem declared bankruptcy in April 1998. From October
1993 to October 1995, she served as General Manager of Haircare for Neutrogena,
Inc., a subsidiary of Johnson & Johnson Corporation.
Deborah M. McGriff has served as President of Edison Teacher's Colleges
since May 2000. Prior to that time, she served as our Executive Vice President
of Development from July 1998 to May 2000. From September 1993 to July 1998, she
served as our Senior Vice President of Charter School Development. Before
joining us, she was General Superintendent of the Detroit public schools. Ms.
McGriff earlier served as Assistant Superintendent in Cambridge, Massachusetts
and Deputy Superintendent in Milwaukee, Wisconsin.
Manuel J. Rivera has served as our Chief Development Officer since May
2000. Prior to that, he served as our Executive Vice President of Development
from January 1998 to May 2000, and as our Executive Vice President and Director
of Schools from December 1994 to January 1998. From 1991 to 1994, he was
Superintendent of Rochester Public Schools.
Donald N. Sunderland has served as Chief Information Officer and Executive
Vice President since January 1999. He previously served as Managing Director and
Head of Global Technology for Fixed Income and FX Derivatives at the Union Bank
of Switzerland from October 1995 to September 1998. Prior to that time, from
July 1994 to August 1995, he served as Head of Global Technology for Sumitomo
Bank Capital Markets.
Virginia G. Bonker has served as a director since November 1996. She has
been a partner with Blue Rock Capital L.P., a private investment firm, since
July 1995. From 1988 until August 1995, Ms. Bonker was a Vice President with the
Sprout Group, a division of DLJ Capital Corporation, which is a wholly-owned
subsidiary of Donaldson, Lufkin & Jenrette Inc.
John W. Childs has served as a director since November 1996. He has served
as President of J.W. Childs Associates L.P., a private investment firm, since
June 1995. Mr. Childs was previously a Senior Managing Director at Thomas H. Lee
Co., a private investment firm, from 1987 to June 1995.
Ramon C. Cortines has served as a director since July 1, 2000. Mr.
Cortines earlier served on our Board of Directors from October 7, 1999 to
November 21, 1999, when he resigned to become to the Interim Superintendent of
the Los Angeles Unified School District, a position he held from November 1999
to June 2000. He has served as Director of the Pew Network for Standard Space
Reform at Stanford University from July 1996 to March 1997 and a senior advisor
to the Secretary of Education of the U.S. Department of Education from November
1995 to December 1999. From February 1999 to June 1999, Mr. Cortines was a
lecturer on education with Harvard University. From January 1998 to October
1998, he served as the Interim Director of the Annenberg Institute at Brown
University. Mr. Cortines served as the Acting Assistant Secretary for
Educational Research and School Improvement at the U.S. Department of Education
from March 1997 to August 1997. From November 1993 to October 1995, he served as
the Chancellor of the New York City Public Schools. Mr. Cortines serves on the
Board of Directors of Scholastic Corporation.
Charles J. Delaney has served as a director since July 1999. Mr. Delaney
is the President of UBS Capital Americas, which is the manager for two funds
established by UBS AG to make private equity investments in the U.S. and Latin
America. Mr. Delaney served as President of UBS Capital LLC from May 1989 to
December 1999. UBS Capital Americas and UBS Capital LLC are affiliated with UBS
AG. Mr. Delaney serves on the Board of Directors of Aurora Foods, Inc.,
AuduroNet.com and AMS Holdings Corp.
Robert Finzi has served as a director since March 1995. He has been a
general partner of the Sprout Group since May 1991. The Sprout Group is a
division of DLJ Capital Corporation, which is a wholly-owned subsidiary of
Donaldson, Lufkin & Jenrette Inc. Mr. Finzi serves on the Board of Directors of
Interdent, Inc. The Sprout Group, DLJ Capital Corporation and Donaldson, Lufkin
& Jenrette Inc. are affiliated with Donaldson, Lufkin & Jenrette Securities
Corporation.
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John B. Fullerton has served as a director since January 1998. He has been
a managing director at J.P. Morgan Capital Corporation and J.P. Morgan
Investment Corporation since 1991. J.P. Morgan Capital Corporation and J.P.
Morgan Investment Corporation are affiliated with J.P. Morgan Securities Inc.
Janet A. Hickey has served as a director since March 1995. She has been a
general partner of the Sprout Group and a Senior Vice President of DLJ Capital
Corporation since 1986. The Sprout Group and DLJ Capital Corporation are
affiliated with Donaldson, Lufkin & Jenrette Securities Corporation.
Klas Hillstrom has served as a director since January 1998. Mr. Hillstrom
has served as a Managing Director with Investor Growth Capital Inc. since
February 1999. From February 1995 to January 1999, Mr. Hillstrom served as
Senior Investment Manager of Investor UK Ltd., and as President of Investor U.K.
Ltd. from January 1998 to February 1999. Prior to February 1995, Mr. Hillstrom
served as an Investment Manager with Investor AB.
Jeffrey T. Leeds has served as a director since November 1996. He has been
a principal of Leeds Equity Management L.L.C., a private investment firm, since
November 1999. He has also been a principal of Advance Capital Management
L.L.C., a private investment firm, since October 1995, and has served as
President of Leeds Group Inc., an investment banking firm, since January 1993.
Mr. Leeds serves on the Board of Directors of Elsinore Corporation, TransAct
Technologies Inc. and Argosy Education Group Inc.
William F. Weld has served as a director since October 1999. He has been a
partner with the law firm of McDermott, Will & Emery since November 1997. From
January 1991 to July 1997, Mr. Weld served as the Governor of the Commonwealth
of Massachusetts. Mr. Weld serves on the Boards of Directors of Affiliated
Managers Group, Inc., IDT Corp. and Ross University.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our class A common stock began trading on the Nasdaq National Market on
November 11, 1999, under the symbol "EDSN." The following table sets forth for
the indicated periods the high and low sale prices of our class A common stock
as reported by the Nasdaq National Market.
PERIOD HIGH LOW
------ ------- ------
Fiscal Year Ended June 30, 2000:
Second Quarter (beginning November 11, 1999)........... $ 18.44 $ 14.50
Third Quarter.......................................... 25.13 12.75
Fourth Quarter......................................... 26.50 19.25
There is no established trading market for our class B common stock. Class
B common stock may be converted into class A common stock at any time on a
one-for-one basis. Each share of class B common stock will automatically convert
into one share of class A common stock upon its transfer in most circumstances
or upon the occurrence of other specified events.
As of September 15, 2000, we had approximately 182 holders of record of
class A common stock and 72 holders of record of class B common stock. Because
many of these shares are held by brokers and other institutions on behalf of
stockholders, we are unable to estimate the total number of stockholders
represented by these holders of record.
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business.
On November 17, 1999, we closed an initial public offering of our class A
common stock. The Registration Statement on Form S-1 (No. 333-84177) was
declared effective by the Securities and Exchange Commission on November 10,
1999, and we commenced the offering on that date. After deducting underwriting
discounts and commissions and offering expenses, our net proceeds from the
offering were approximately $109.7 million. From the effective date through June
30, 2000, we used approximately $32.5 million of the net proceeds for capital
expenditures, approximately $14.0 million for advances to charter schools and
approximately $12.4 million of the net proceeds for operations. None of the
proceed amounts were paid directly or indirectly to any director, officer or
general partner of Edison or our associates, persons owning 10% or more of any
class of equity securities of Edison, or an affiliate of Edison. As June 30,
2000, we had approximately $50.8 million of net proceeds remaining, and pending
use of these proceeds, we have invested such proceeds primarily in investment
grade, interest-bearing securities.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our financial statements and the related notes and with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included in this
Annual Report. The statement of operations data for the years ended June 30,
1998, 1999 and 2000, and the balance sheet data as of June 30, 1999 and 2000,
are derived from, and are qualified by reference to, audited financial
statements included in this Annual Report. The statement of operations data for
the years ended June 30, 1996 and 1997 and the balance sheet data as of June 30,
1996, 1997 and 1998 are derived from our audited financial statements that are
not included in this Annual Report. Administration, curriculum and development
expenses for fiscal 1999 included $22.4 million of stock-based compensation
expense. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Stock-Based and Other Non-Cash Compensation Expenses."
Please see note 2 in the notes to our financial statements for information
concerning the calculation of pro forma basic and diluted net loss per share.
FISCAL YEAR ENDED JUNE 30,
---------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenue from educational services........ $ 11,773 $ 38,559 $ 69,407 $ 132,762 $ 224,578
--------- --------- --------- --------- ---------
Education and operating expenses:
Direct site expenses................... 11,415 32,150 59,576 114,097 192,602
Administration, curriculum and
development.......................... 7,717 12,755 18,258 49,984 40,643
Depreciation and amortization.......... 1,166 3,552 7,232 12,526 20,906
Pre-opening expenses................... 1,476 1,487 2,486 5,457 8,372
Design team compensation............... -- -- 2,724 -- --
--------- --------- --------- --------- ---------
Total education and operating expenses 21,774 49,944 90,276 182,064 262,523
--------- --------- --------- --------- ---------
Loss from operations..................... (10,001) (11,385) (20,869) (49,302) (37,945)
Other income (expense), net.............. (102) (37) (1,046) (131) 1,355
--------- --------- --------- --------- ---------
Net loss ................................ (10,103) (11,422) (21,915) (49,433) (36,590)
Dividends on preferred stock............. -- -- (4,290) -- --
Preferred stock accretion................ -- -- (278) (1,027) 0
--------- --------- --------- --------- ---------
Net loss attributable to common
stockholders........................... $ (10,103) $ (11,422) $ (26,483) $ (50,460) $ (36,590)
========= ========= ========= ========= =========
Basic and diluted net loss per share
attributable to common stockholders.... $ (3.68) $ (8.52) $ (16.24) $ (1.32)
========= ========= -========= =========
Weighted average number of common shares
outstanding used in computing basic and
diluted net loss per share attributable
to common stockholders................. 3,107,355 3,107,356 3,107,356 27,685,203
========= ========= ========= ==========
Pro forma basic and diluted net loss per
share.................................. $ (0.93)
===========
Pro forma weighted average number of shares
outstanding used in computing pro forma
basic and diluted net loss per share... 39,498,381
==========
STUDENT AND PER STUDENT DATA:
Student enrollment....................... 2,250 7,150 12,600 23,900 37,500
Total revenue per student................ $ 5,232 $ 5,393 $ 5,508 $ 5,555 $ 5,989
Net loss per student..................... $ (4,490) $ (1,597) $ (1,739) $ (2,068) $ (976)
EBITDA, net of other charges, per student $ (3,927) $ (1,089) $ (820) $ (603) $ (349)
Cash used in operating activities per
student................................ $ (3,652) $ (1,530) $ (837) $ (673) $ (1,076)
Cash used in investing activities per
student................................ $ (2,203) $ (1,822) $ (1,594) $ (1,269) $ (2,405)
Cash provided by financing activities per
student................................ $ 6,385 $ 5,008 $ 1,776 $ 2,797 $ 4,140
OTHER OPERATING DATA:
Capital expenditures..................... $ 6,457 $ 15,553 $ 21,181 $ 34,023 $ 75,899
Gross site contribution.................. $ 358 $ 6,409 $ 9,831 $ 18,665 $ 31,976
Gross site margin........................ 3.0% 16.6% 14.2% 14.1% 14.2%
EBITDA, net of other charges............. $ (8,836) $ (7,787) $ (10,328) $ (14,404) $ (13,102)
Cash used in operating activities........ $ (8,216) $ (10,941) $ (10,550) $ (16,079) $ (40,350)
Cash used in investing activities........ $ (4,956) $ (13,030) $ (20,082) $ (30,328) $ (90,194)
Cash provided by financing activities.... $ 14,365 $ 35,809 $ 22,383 $ 66,838 $ 155,266
Total number of schools.................. 4 12 25 51 79
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AS OF JUNE 30,
---------------------------------------------------------------
1996 1997 1998 1999 2000
----------- ----------- ----------- ---------- ----------
(DOLLARS IN THOUSANDS)
BALANCE SHEET DATA:
Cash and cash equivalents............... $ 3,904 $ 15,741 $ 7,492 $ 27,923 $ 52,644
Working capital......................... 7,960 19,843 2,684 22,634 61,031
Total assets............................ 19,603 48,472 58,294 106,870 251,030
Total debt, including current portion... 2,825 9,395 17,151 21,535 36,280
Accumulated deficit..................... (57,948) (7,581) (29,496) (78,929) (115,518)
Total stockholders' equity.............. 13,929 33,814 29,190 63,042 182,513
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and
results of operations of Edison should be read in conjunction with "Selected
Financial Data" and our financial statements and the related notes included in
this Annual Report. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors that include, but are not limited to, those set forth
under "--Additional Factors That May Affect Future Results" and elsewhere in
this Annual Report.
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. We served 37,500 students in 79 schools located in 16 states
across the country and the District of Columbia in the 1999-2000 school year.
For the 2000-2001 school year, we expect to enroll between 57,000 and 59,000
students in 113 schools located in 21 states and the District of Columbia. Our
total revenue has increased from $11.8 million in fiscal 1996 to $224.6 million
in fiscal 2000.
From our formation in 1992 until opening our first schools in fiscal 1996,
we were a development stage company focused on research, development and
marketing of the Edison school design and curriculum and raising capital to
support our business plan. From 1992 until 1995, Edison's team of leading
educators and scholars developed an innovative, research-backed curriculum and
school design. We operated as a partnership prior to November 1996, when we
converted to a corporation. As of June 30, 2000, our accumulated deficit since
November 1996 was approximately $115.5 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;
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- 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 0.6% of total revenue in fiscal 2000,
from the collection of after-school program fees and food service costs. We
receive per-pupil revenue from local, state and federal sources, including Title
I and special education funding, in return for providing comprehensive education
to our students. The per-pupil revenue is generally comparable to the funding
spent on other public schools in the area. We recognize revenue for each school
pro rata over the 11 months from August through June. Because the amount of
revenue we receive for operating each school depends on the number of students
enrolled, achieving site-specific enrollment objectives is necessary for
satisfactory financial performance at the school. Both the amount of per-pupil
revenue and the initial enrollment at each school become known at the beginning
of the school year and generally tend not to vary significantly throughout the
year. For these reasons, our revenue for each school year is largely predictable
at the beginning of the school year.
DIRECT SITE EXPENSES
Direct site expenses include most of the expenses incurred on-site at our
schools. The largest component of this expense is salaries and wages, primarily
for principals and teachers. The remaining direct site expenses include on-site
administration, facility maintenance and, in some cases, transportation and food
services. Once staffing levels for the school year are determined, most of these
expenses are fixed and, accordingly, variations in enrollment will generally not
change the overall cost structure of a school for that year. Direct site
expenses do not include teacher training and other pre-opening expenses
associated with new schools, financing costs or depreciation and amortization
related to technology, including computers for teachers and students, curriculum
materials and capital improvements to school buildings.
GROSS SITE CONTRIBUTION AND GROSS SITE MARGIN
We define gross site contribution as revenue from educational services
less direct site expenses. Gross site margin is gross site contribution
expressed as a percentage of revenue from educational services. Gross site
contribution is a measurement of ongoing site-level operating performance of our
schools. We believe it serves as a useful operating measurement when evaluating
our schools' financial performance. Gross site contribution does not reflect all
site-related costs, such as 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
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school. Pre-opening expenses generally are first incurred in the fourth quarter
of the fiscal year prior to the school's opening or expansion and generally
continue into the first or second 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 academic
goals, both of which we believe are critical to the ongoing success of our
business. Therefore, our budgets are designed to achieve the proper balance
between financial performance and academic standards. While managed closely at
each school, our school enrollment levels are evaluated by management in the
aggregate.
We implement various strategies to achieve optimal enrollment, including
local recruiting, media advertising, and coordinating with our school district
partners and community groups. Since some site costs are partially fixed,
incremental enrollment can positively affect profitability. Further, due to the
closely correlated relationship of site revenue and expenses, school personnel
closely manage expenses based upon actual enrollment. While 49 of our 79 schools
maintained waiting lists or were oversubscribed during the 1999-2000 school
year, based upon our assumptions about enrollment used in the budgeting process,
in the aggregate our schools were operating at 97.5% of the enrollment levels
assumed in our budget. During the 1999 and 2000 fiscal years, we operated at
approximately 96% of assumed enrollment levels. As discussed below under "--
Financial Performance," we do not believe that achieving 100% of assumed
enrollment at each school is necessary to achieve positive cash flow.
FINANCIAL PERFORMANCE
We have incurred substantial net losses in every fiscal period since we
began operations and expect losses to continue into the future. For the fiscal
year ended June 30, 2000, our net loss was $36.6 million. As of June 30, 2000,
our accumulated deficit since November 1996, when we converted from a
partnership to a corporation, was approximately $115.5 million. In addition,
prior to November 1996, we incurred losses of approximately $61.8 million, which
are reflected in our additional paid-in capital.
The following table sets forth various financial data expressed as a
percentage of total revenue for the periods indicated:
FISCAL YEAR ENDED JUNE 30,
-----------------------------
1998 1999 2000
--------- --------- ---------
Revenue from educational services.............. 100.0% 100.0% 100.0%
--------- --------- ---------
Education and operating expenses:
Direct site expenses......................... 85.8 86.0 85.8
Administration, curriculum and development
Expenses..................................... 26.3 37.6 18.1
Depreciation and amortization................ 10.4 9.4 9.3
Pre-opening expenses......................... 3.6 4.1 3.7
Design team compensation..................... 3.9 -- --
--------- --------- ---------
Total education and operating expenses....... 130.0 137.1 116.9
--------- --------- ---------
Loss from operations........................... (30.0) (37.1) (16.9)
--------- --------- ---------
Other income (expense), net.................... (1.5) (0.1) 0.6
--------- --------- ---------
Net loss....................................... (31.5)% (37.2)% (16.3)%
========= ========= =========
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In order to achieve profitability, we believe it will be necessary both to
improve gross site margin while maintaining educational quality and to continue
to reduce central expenses as a percentage of total revenue from educational
services. The latter improvement is largely dependent on our ability to increase
our total revenue through expanded student enrollment while controlling central
costs.
In general, we believe that reaching positive cash flow, like achieving
profitability, will be dependent on increasing our aggregate gross site
contribution without a proportionate increase in central expenses. Because gross
site contribution is the difference between site revenues and site expenditures,
positive gross site contribution can be achieved at a range of enrollment
levels. While higher enrollment tends to have a positive effect on gross site
contribution, our financial success does not depend on 100% enrollment at each
site. In particular, we believe achieving positive cash flow and profitability
is not dependent on closing the gap between 97.5% and 100% aggregate assumed
enrollment, but rather is a function of the aggregate gross site contribution
from all of our sites and our central expenses.
CONTRACT SCHOOLS COMPARED TO CHARTER SCHOOLS
We operate two types of schools: contract and charter. Contract schools
are public schools we operate under a management agreement with local school
boards. Charter schools are schools we operate under a management agreement with
a charter holder, which is typically a community group or non-profit entity that
has been granted a state-authorized charter to create a public school. The cost
of operating a contract school and a charter school is similar, except that, in
the case of a charter school, we are typically required to arrange for a
facility. In some cases, we operate charter schools under a charter granted by
the local school board, which provides the facility. In these cases, we
categorize these schools as contract schools because we do not provide the
facilities and therefore the economics of these arrangements closely resemble
those of a contract school. Charter school facilities that are not provided by a
local school board are financed in a variety of ways, including bank debt,
sale/leaseback arrangements, third-party ownership by real estate investment
trusts and philanthropy. At times, we advance funds or guarantee loans to our
charter board clients to assist them in arranging for facilities. As of June 30,
2000, we had lent or advanced $30.0 million and guaranteed loans of $6.7 million
to our charter board clients. Our facility investment for a charter school will
generally exceed our investment in facilities for a contract school. Because of
these higher costs, we generally seek to establish charter schools in areas with
higher per-pupil revenue.
ANTICIPATED FINANCIAL IMPACT OF RECENT TRANSACTIONS
On June 5, 2000, we announced an agreement to manage the Inkster, Michigan
school district, including all three schools in the district. This is our first
agreement to manage all the schools within an entire school district. We intend
to selectively pursue additional small whole-district contracts like Inkster.
As part of our initial entry into the whole-district market through the
Inkster agreement, we expect to assume approximately $2.6 million of obligations
of the Inkster School District. These obligations will be paid over the next
twelve months and will be amortized over the five-year term of the agreement. In
addition, we expect to incur approximately $1.4 million of incremental
pre-opening costs in fiscal 2001, primarily in the first quarter. These costs
primarily relate to severance and other personnel obligations within the
district, which we were required to assume in connection with the award of the
contract.
On June 16, 2000, we announced the execution of a letter of intent with
IBM which contemplates that IBM will provide us with the computer hardware and
software technology to support our network of schools. Beginning with the
2000-2001 school year, all new Edison schools will use an IBM platform
consisting of IBM personal computers, software and network technology, and all
of our existing schools will transition to the IBM platform over time. The
letter of intent also contemplates that IBM will collaborate with us on a
research and development effort to create the next-generation technology model
for K-12 education. We also entered into a license agreement with IBM for the
IBM enterprise management software to support computers, network devices and
servers for up to 250,000 students.
We currently estimate that initial launch costs under our new IBM
arrangement will increase our net loss for fiscal 2001 by approximately $4.3
million. We expect, however, to realize significant returns on this investment
in subsequent years in the form of cost savings and improvements in the
scalability of our technology infrastructure to support enrollment growth.
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STOCK-BASED AND OTHER NON-CASH COMPENSATION EXPENSES
Beginning in 1995, we granted a number of stock options with four- and
five-year terms. In the fourth quarter of fiscal 1999, we decided to extend the
term of these options to ten years and to make other changes in their terms that
we believe are customary for options granted by public companies. As a result,
we were required to record compensation expense at that time representing the
difference between the exercise price of the options and the deemed fair market
value of the shares underlying the stock options. In this regard, we recognized
an expense of $17.4 million in the fourth quarter of fiscal 1999. This is in
addition to $5.0 million of stock-based compensation expenses recorded in fiscal
1999 in connection with stock options that were subject to variable accounting
treatment. We expect to recognize additional expenses related to the option
amendments aggregating approximately $7.0 million, including the impact from
options granted during fiscal 2000, over the vesting periods of the individual
stock options. These additional expenses were $3.9 million for fiscal 2000 and
are expected to approximate $1.4 million for fiscal 2001, $1.0 million for
fiscal 2002 and $700,000 for fiscal 2003. In addition to these expenses we may,
from time to time, grant options below fair market value which could result in
further charges at the time of grant.
INCOME TAXES
We have not recorded any provision for federal, state and local income
taxes because we have incurred net losses from our inception through June 30,
2000. As of June 30, 2000, we had approximately $115.9 million of net operating
loss carryforwards for federal income tax purposes, approximately $45 million of
which are expected to expire in fiscal 2013 and approximately $70.9 million of
which are expected to expire in fiscal 2019, available to offset future taxable
income. Given our limited operating history, losses incurred to date and the
difficulty in accurately forecasting our future results, we do not believe the
realization of the related deferred income tax assets meets the criteria
required by generally accepted accounting principles and, accordingly, we have
recorded a full valuation allowance.
SEASONALITY
Because new schools are opened in the first fiscal quarter of each year,
trends in our business, whether favorable or unfavorable, will tend not to be
reflected in our quarterly financial results, but will be evident primarily in
year-to-year comparisons. The first quarter of our fiscal year has historically
reflected less revenue and lower expenses than the other three quarters, and we
expect this pattern to continue. We generally have lower gross site margin in
the first fiscal quarter than in the remaining fiscal quarters. We also
recognize pre-opening costs primarily in the first and fourth quarters.
Our financial results can vary among the quarters within any fiscal year
for other reasons, and our quarterly revenue and results of operations could
also fluctuate somewhat based on changes in school enrollment throughout the
fiscal year. For more information on the seasonality of our financial results,
see "-- Additional Factors That May Affect Future Results - Our financial
results are subject to patterns that could affect the perception of our
financial results."
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2000 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1999
REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $224.6 million for the twelve months ended June 30, 2000 from
$132.8 million for the same period of the prior year, an increase of 69.1%. The
increase was primarily due to a 57% increase in student enrollment from 23,900
in the 1998-1999 school year to 37,500 in the 1999-2000 school year, reflecting
both the opening of new schools and the expansion of existing schools.
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DIRECT SITE EXPENSES. Our direct site expenses increased to $192.6 million
for fiscal 2000 from $114.1 million for the same period of the prior year, an
increase of 68.8%. Like the increase in revenue from educational services, the
increase in direct site expenses was primarily due to the 57% increase in
student enrollment. The largest element of direct site expenses is personnel
costs. Personnel costs included in direct site expenses increased to $155.0
million for fiscal 2000 from $90.7 million for the same period of the prior
year.
GROSS SITE MARGIN AND CONTRIBUTION. Our gross site contribution margin
remained relatively stable at 14.2% for fiscal 2000 compared to 14.1% for fiscal
1999. Higher revenues resulted in an increase in gross site contribution to
$32.0 million for fiscal 2000 from $18.7 million for fiscal 1999.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES. Our administration,
curriculum and development expenses decreased to $40.6 million for fiscal 2000
from $50.0 million for fiscal 1999, a decrease of 18.8%. Our fiscal 1999
administration, curriculum and development expenses includes $22.4 million of
non-cash stock-based compensation compared to only $3.9 million for fiscal 2000.
Excluding the non-cash stock-based compensation, our administration, curriculum
and development expenses increased to $36.7 million for fiscal 2000 from $27.6
million for fiscal 1999. The resulting net increase was substantially due to
greater personnel costs resulting from the hiring of 66 new headquarters
employees, which reflects a substantial increase in staff in our school
operations and curriculum and education divisions and an increase in our central
office administrative staff to enhance legal, contracting, and financial
reporting functions. These expenses increased in part due to the additional
reporting and administrative obligations required of us in connection with
operating as a public company.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $20.9 million for fiscal 2000 from $12.5 million for fiscal 1999, an increase
of 67.2%. The increased depreciation and amortization resulted from additional
capital expenditures for our curriculum materials, computers and related
technology, and facility improvements related to our enrollment growth.
PRE-OPENING EXPENSES. Our pre-opening expenses increased to $8.4 million
for fiscal 2000 from $5.5 million for fiscal 1999, an increase of 52.7%. This
increase was associated primarily with opening new schools and expanding
existing schools for the 1999- 2000 school year, with 13,600 new students
enrolled compared to approximately 11,300 new students enrolled one year
earlier, as well as approximately $2.4 million of expenses incurred for new
schools opened in the fall of 2000.
Excluding the non-cash compensation charges discussed above,
administration, curriculum and development and pre-opening expenses as a
percentage of revenues decreased to 20.1% for fiscal 2000 from 24.9% for the
same period of the prior year.
EDUCATION AND OPERATING EXPENSES. Our total education and operating
expenses as a percentage of total revenue decreased to 116.9% for fiscal 2000
from 137.1% for fiscal 1999. Excluding stock-based, non-cash expenses amounts,
total education and operating expenses as a percentage of total revenue would
have decreased to 115.2% for fiscal 2000 from 120.2% for fiscal 1999. This
decrease primarily resulted from continued revenue growth and increased
operating leverage and a decrease in administration, curriculum and development
expenses as a percentage of total revenue.
EBITDA, NET OF OTHER CHARGES. EBITDA, net of other charges, means the net
loss we would have shown if we did not take into consideration our interest
expense, income tax expense, depreciation and amortization, stock based
compensation and non-recurring design team compensation. These costs are
discussed above. This amount for fiscal 2000 was a negative $13.1 million
compared to a negative $14.4 million for fiscal 1999. The improved negative
EBITDA resulted primarily from relatively stable gross site margin and decreased
administration, curriculum and development, and pre-opening expenses. On a
per-student basis, negative EBITDA improved to $349 compared to $603 for the
same period one year ago.
LOSS FROM OPERATIONS. Our loss from operations decreased to $37.9 million
for fiscal 2000 from $49.3 million for fiscal 1999, a decrease of 23%. The
improvement primarily results from substantially less non-cash stock based
compensation expense, partially offset by increased administration, curriculum
and development costs.
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OTHER INCOME AND EXPENSE. Other income, net was $1.4 million for fiscal
2000 compared to other expense, net of $131,000 in fiscal 1999. The improvement
was primarily due to $6.8 million of interest income resulting from larger
invested cash balances, partially offset by interest expense from expanded
borrowings and the recording of our applicable share of the net losses of APEX
Online Learning. For fiscal 2000, we recognized $2.0 million of losses as our
pro rata share of APEX's net loss for that period.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
decreased to $36.6 million for fiscal 2000 from $49.4 million for fiscal 1999, a
decrease of 25.9%. During fiscal 2000 and 1999, we recognized $0 and
approximately $1.1 million of preferred stock accretion, respectively. This
resulted in net loss attributable to common stockholders of $36.6 million and
$50.5 million for these periods, respectively.
FISCAL YEAR ENDED JUNE 30, 1999 COMPARED TO FISCAL YEAR ENDED JUNE 30, 1998
REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $132.8 million for fiscal 1999 from $69.4 million for fiscal 1998,
an increase of 91.4%. The increase was primarily due to the 89.7% increase in
student enrollment from 12,600 in the 1997-1998 school year to 23,900 in the
1998-1999 school year, reflecting both the opening of new schools and the
expansion of existing schools.
DIRECT SITE EXPENSES. Our direct site expenses increased to $114.1 million
for fiscal 1999 from $59.6 million for fiscal 1998, an increase of 91.4%. Like
revenue growth, the increase in direct site expenses was primarily due to the
89.7% increase in student enrollment. The largest element of direct site
expenses is personnel costs. Personnel costs included in direct site expenses
increased to $90.7 million for fiscal 1999 from $46.0 million for fiscal 1998.
GROSS SITE MARGIN AND CONTRIBUTION. Our gross site margin remained
relatively stable at 14.1% for fiscal 1999 compared to 14.2% for fiscal 1998.
Higher revenues resulted in an increase in gross site contribution to $18.7
million for fiscal 1999 from $9.8 million for fiscal 1998.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES. Our administration,
curriculum and development expenses increased to $50.0 million for fiscal 1999
from $18.3 million for fiscal 1998, an increase of 173%. This substantial
increase was primarily due to stock-based, non-cash compensation expense, which
increased to $22.4 million for fiscal 1999 from $585,000 for fiscal 1998,
resulting from amendments to options and, to a lesser extent, application of
variable accounting to outstanding options. A 52.1% increase in personnel costs
resulting from a 104% increase in the number of headquarters employees
represented the next largest portion of the overall increase. This increase in
personnel costs was primarily attributable to a substantial increase in staff in
our school operations and curriculum and education divisions, an increase in our
professional marketing employees to support an expanded marketing program, an
increase in our central office administrative staff to enhance legal and
contracting functions and to expand financial reporting and support functions.
The remainder was primarily attributable to increased travel expenses and, to a
lesser extent, greater rent expenses. Administration, curriculum and development
expenses as a percentage of total revenue increased to 37.6% for fiscal 1999
from 26.3% for fiscal 1998. Excluding stock-based non-cash compensation
expenses, administration, curriculum and development expenses as a percentage of
total revenue decreased to 20.8% for fiscal 1999 from 25.5% for fiscal 1998.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $12.5 million for fiscal 1999 from $7.2 million for fiscal 1998, an increase
of 73.6%. The increased depreciation and amortization resulted from additional
capital expenditures for our curriculum materials, computers and related
technology and, to a lesser extent, facility improvements. For fiscal 1999,
additions to property and equipment totaled $34.0 million, including $13.7
million for additional computers and equipment, $12.6 million for curriculum
materials and $7.7 million for new facilities and improvements. These increases
resulted primarily from the large investments in the 26 new schools we opened in
the 1998-1999 school year and operated during the year.
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PRE-OPENING EXPENSES. Our pre-opening expenses increased to $5.5 million
for fiscal 1999 from $2.5 million for fiscal 1998, an increase of 120%. This
increase was associated primarily with enrolling students at the 26 new schools
opened in August 1998 compared to the 13 schools opened one year earlier.
DESIGN TEAM COMPENSATION. Some members of our original design team were
entitled to distributions when we achieved predetermined performance objectives.
These objectives were achieved and the contractual provisions triggered in
connection with our issuance of preferred stock in December 1997. Accordingly,
during fiscal 1998, we incurred approximately $2.7 million of expense. We did
not recognize any similar expenses in fiscal 1999 and we do not expect to
recognize any similar expenses in the future.
EDUCATION AND OPERATING EXPENSES. Our total education and operating
expenses as a percentage of total revenue increased to 137.1% for fiscal 1999
from 130.0% for fiscal 1998. Total education and operating expenses for fiscal
1999 included stock-based, non-cash expenses, which accounted for 16.9% of total
revenue. In addition, total education and operating expenses for fiscal 1998
included a non-recurring design team compensation expense which accounted for
3.9% of total revenue. Excluding such amounts, total education and operating
expenses as a percentage of total revenue would have decreased to 120.2% for
fiscal 1999 from 126.1% for fiscal 1998. This decrease primarily resulted from
the decrease in administration, curriculum and development expenses as a
percentage of total revenue.
EBITDA, NET OF OTHER CHARGES. EBITDA, net of other charges, was a negative
$14.4 million for fiscal 1999 compared to a negative $10.3 million for fiscal
1998. The decline was primarily a result of increased administration, curriculum
and development expense. However, on a per-student basis, negative EBITDA
improved from $820 to $603 for the same periods.
LOSS FROM OPERATIONS. Our loss from operations increased to $49.3 million
for fiscal 1999 from $20.9 million for fiscal 1998, an increase of 136%. The
$28.4 million of additional loss primarily reflects the growth in
administration, curriculum and development expenses.
OTHER INCOME AND EXPENSE. We recognized $131,000 of other expenses, net,
for fiscal 1999, compared to $1.0 million for fiscal 1998. The change was
primarily attributable to a significant increase in interest income, which
primarily relates to interest earned on the fully committed proceeds from our
series D preferred stock financing in December 1997, which we drew on as needed
in August and December 1998. We recognized $1.5 million of interest income as a
result of our series D preferred stock financing. This improvement was partially
offset by an increase in interest expense primarily due to additional financing
for technology and other equipment investments at our schools.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
increased to $49.4 million for fiscal 1999 from $21.9 million for fiscal 1998,
an increase of 125.5%. During fiscal 1998, we declared a $4.3 million dividend
on preferred stock, in the form of notes payable, in connection with an equity
financing. During fiscal 1999 and fiscal 1998, we recognized $1.0 million and
$278,000 of preferred stock accretion, respectively. This resulted in net loss
attributable to common stockholders of $50.5 million and $26.5 million for these
periods, respectively.
LIQUIDITY AND CAPITAL RESOURCES
We have historically operated in a negative cash flow position. To date we
have financed our cash needs through a combination of equity and debt financing.
Since our inception and through June 30, 2000, we had raised $345.3 million of
equity capital, including $109.7 million, net of offering costs, from our
initial public offering in November 1999. During the same period we used $132.3
million of cash for operating activities and $163.0 million of cash for
investing activities. We have also utilized debt and equipment leasing
arrangements to finance computers and other technology investments in our
schools.
At June 30, 2000, our cash available for operations was approximately
$52.6 million. In August 2000, we issued and sold 3.35 million shares of class A
common stock, which resulted in net proceeds to us of approximately $71.2
million.
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We intend to enter into debt financing arrangements to finance a
substantial portion of our expected technology and facilities-related
expenditures through fiscal 2001. As of September 15, 2000, we have not entered
into all such financing arrangements. Although we have successfully obtained
necessary financings in the past for technology and facilities-related
expenditures, there can be no assurances that we will be able obtain them, or on
favorable terms, in the future.
We expect our cash on hand, together with borrowings under anticipated
financing arrangements to finance technology and facilities-related expenditures
and expected reimbursements of advances we have made to charter boards, will be
sufficient to meet our working capital needs to operate our existing schools
through fiscal 2001. If, however, we are to open new schools in the 2001-2002
school year, we would require additional funding.
In November 1999, we obtained a line of credit from Imperial Bank which
provides for borrowings of up to $10.0 million. The line of credit has a term of
three years and may be used for seasonal working capital needs and other general
corporate purposes. The interest rate on the line of credit 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. We are
obligated to pay a commitment fee at an annual rate of 0.5% on the unused
balance under the line of credit. The line of credit agreement provides that our
total debt may not exceed $53.5 million, our outstanding short-term loans to
charter schools may not exceed $30.0 million and our capital expenditures may
not exceed specified amounts. The agreement specifies minimum student enrollment
thresholds and provides that any default by us under our management agreements
or leases is a default under the line of credit agreement. As of June 30, 2000,
no amounts had been borrowed under the line of credit. We expect to terminate
the line of credit in the second quarter of fiscal 2001 and seek an alternative
similar financing arrangement. However, we cannot be certain that we will be
able to obtain such a similar financing arrangement on favorable terms, if at
all.
In June 2000, the Company received a financing commitment for a 36 month
lease with Cisco Systems Credit Corporation. This lease will be used to finance
and be collateralized by certain equipment to be placed in schools. The lease
commitment is up to $2.4 million and has an effective rate of 11.0%. No amounts
were outstanding under this commitment at June 30, 2000.
Our longer term requirements are for capital to fund operating losses,
capital expenditures related to growth and for anticipated working capital needs
and general corporate purposes. We expect to fund such expenditures and other
longer-term liquidity needs with cash generated from operations, proceeds from
offerings of additional debt or equity securities and expanded financing
arrangements for technology and charter school expenditures. Depending on the
terms of any financing arrangements, such funding may be dilutive to existing
shareholders, and we cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all.
In general, our ability to achieve positive cash flow will be dependent on
the volume of schools with positive gross site contribution to offset central
office and overhead expenses. Because gross site contribution is the difference
between site revenues and site expenditures, positive gross site contribution
can be achieved at a range of enrollment levels. While higher enrollment tends
to have a positive effect on gross site contribution, our growth and cash flow
do not depend on 100% enrollment.
CASH USED IN OPERATING ACTIVITIES
For the year ended June 30, 2000, we used approximately $40.4 million for
operating activities. This use primarily resulted from $36.6 million of net loss
and $28.0 million of accounts and other receivables, offset by approximately
$19.3 million of depreciation and amortization, $2.0 million in equity in loss
of unconsolidated entity, $1.3 million in accounts payable and accrued expenses
and $3.9 million in stock-based compensation expense. The large increases in
accounts receivable and accounts payable were directly attributable to a 56.9%
increase in student enrollment that was experienced during the fiscal year.
EBITDA, net of other charges, was a negative $13.1 million for the twelve months
ended June 30, 2000 compared to a negative $14.4 million for the twelve months
ended June 30, 1999. The improvement was primarily a result of decreased
administration, curriculum and development expense. As a result, on a
per-student basis, negative EBITDA, net of other charges declined from $603 to
$349 for those same periods.
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For fiscal 1999, we used approximately $16.1 million for operating
activities. This use primarily resulted from $49.4 million of net loss and a
$3.1 million increase in accounts receivable. These amounts were offset by $22.4
million in stock-based compensation expense, depreciation and amortization
totaling $11.5 million and an increase of $2.6 million of accounts payable and
accrued expenses. The large increases in accounts receivable and accounts
payable and accrued expenses are directly attributable to the 89.7% increase in
student enrollment that was experienced during the fiscal year. In fiscal 1998,
we used approximately $10.6 million for operating activities. EBITDA, net of
other charges, was a negative $14.4 million for fiscal 1999 compared to a
negative $10.3 million for fiscal 1998. The decline was primarily a result of
increased administration, curriculum and development expense. However, on a per-
student basis, negative EBITDA, net of other charges, declined from $820 to $603
for those same periods.
CASH USED IN INVESTING ACTIVITIES
For fiscal 2000, we used approximately $90.2 million in investing
activities. During this period, we invested approximately $75.9 million in our
schools and central office. This amount includes the investments we made in
technology and curriculum in each of the schools we open. We have also advanced
funds to nine of our charter board clients or their affiliates to help obtain,
renovate and complete school facilities. We generally do not charge interest on
these advances. The amounts advanced during fiscal 2000 were approximately $22.0
million. During this same period, we also received approximately $4.9 million in
repayments on advances previously made. Significant real estate investments are
often necessary when we establish a charter school and existing facilities are
not available. We work closely with the charter board to locate, develop, and
finance the charter school's facilities. The building or renovation process
generally lasts several months and can vary widely in expense from minimal
upgrades to new construction, which can cost from $4.0 million to more than $8.0
million.
For fiscal 1999, we used approximately $30.3 million in investing
activities. During the year, we invested approximately $34.0 million in our
schools and central office. This amount included the investments we made in
technology and curriculum in each of the schools we opened. We also advanced
funds to four of our charter board clients or their affiliates to help obtain,
renovate and complete school facilities. We did not charge interest on these
advances. The amounts advanced during fiscal 1999 approximated $15.8 million.
During fiscal 1999, we received approximately $1.9 million in repayments on
advances previously made. We also sold buildings to charter boards during the
year. The proceeds of the sales approximated $10.5 million, which was equal to
our cost to acquire and improve the building. For fiscal 1998, we used
approximately $20.1 million in investing activities. These investments were
primarily for technology and equipment for our schools.
CASH FROM FINANCING ACTIVITIES
For fiscal 2000, we received $155.3 million in our financing activities.
The amounts received were from issuances of series F preferred stock, series I
common stock, the issuance of class A common stock through our initial public
offering, and the exercise of stock options and warrants. In July 1999, we
completed two private placement financing transactions for total proceeds of
approximately $41.7 million. On November 17, 1999, we completed an initial
public offering in which we sold 6.8 million shares of class A common stock for
net proceeds of approximately $109.7 million. For fiscal 2000, we received
approximately $13.0 million in proceeds from financing arrangements for
computers and other technology. These proceeds are partially offset by the
repayments of notes payable of approximately $9.0 million.
In fiscal 1999, we received approximately $66.8 million in our financing
activities. The amounts received were from issuances of series D, series F and
series G preferred stock during the period. In December 1997, we received a
commitment to purchase approximately $51.0 million, net of expenses, of series D
preferred stock. The first payment of $19.2 million on this equity commitment
was made in December 1997 with the remaining $31.8 million contributed during
fiscal 1999. Additionally, stockholder notes payable totaling $1.6 million were
issued in connection with this equity financing, of which approximately $938,000
were issued during fiscal 1999. The amounts received pursuant to the equity
commitments were partially offset by payments on debt of approximately $6.2
million. Cash generated
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from financing activities in fiscal 1998 of $22.4 million was primarily from the
issuance of stock and debt totaling $33.2 million, net of issuance expenses,
partially offset by debt repayments of $7.3 million.
We generally finance our technology investments in schools through debt
arrangements. We have also issued warrants in connection with these
transactions. Details of the financing arrangements are included in note 6 of
the notes to our financial statements. In fiscal 1999, an additional $9.6
million was financed through notes payable for computers and other technology.
PHILANTHROPY
Philanthropic entities supported 11 of the 79 schools we operated in the
1999-2000 school year, focused particularly in those areas where the per-pupil
expenditures would otherwise make it difficult to achieve satisfactory financial
performance. We currently expect that philanthropic support will continue to be
required in those 11 schools, as well as in five of the new schools we opened
for the 2000-2001 school year. These philanthropic entities provide funds
directly to our school board or charter board clients, and not to Edison. Our
initial investments to open our six California schools were supported by
philanthropic entities, which made available to the school districts the amounts
to cover the cost of the items necessary to open the schools, including
technology and curriculum materials. In two of these schools, the philanthropic
support also includes funds for ongoing annual operations. In one other
location, the support helped fund the capital improvements to the buildings.
Additionally, philanthropic support has been used in Colorado to help fund a
school building and related renovations and construction. The D2F2 Foundation
has supported some of our schools in California and has indicated that it
intends to provide support up to $22.5 million for schools operated or to be
operated by us, primarily in California; $7.8 million of this amount has been
used to date in schools operated by us. We have issued a warrant to the D2F2
Foundation which represents the right to purchase up to 1,698,750 shares of
class A common stock and 188,750 shares of class B common stock at an exercise
price of $7.96 per share. In August 2000, the D2F2 Foundation partially
exercised this warrant and purchased and sold 600,000 shares of class A common
stock. Although some of our school district and charter board clients have used
philanthropic funds in the past and we expect some of them to use philanthropic
funds in the future, we do not rely on philanthropic support significantly for
our growth strategy. Our schools received approximately $11.2 million of
philanthropic support in the 1998-1999 school year and $3.8 million in the
1999-2000 school year. There is no guarantee that philanthropic support will be
available to open new schools or operate existing schools in the future.
CHARTER SCHOOL FACILITY FINANCINGS
Innovative financing methods are often needed to compensate for the
limited amount of state and local funding available to develop charter school
facilities. We have employed a variety of approaches, including owning or
leasing the building, advancing funds for the building to the charter board
without charging interest and under various repayment terms, or having the
charter board directly own or lease the facility from a third party, sometimes
assisted by a subordinated loan from us. We also consider providing guarantees
to lending institutions to allow the charter board flexibility in obtaining
financing. We generally choose the most economically viable option available for
each school and purchase real estate only if we determine it is the best
available financing option. We are currently exploring a variety of financing
structures to assist in our charter efforts, including tax-exempt structures,
expanding our current real estate investment trust relationships and forming our
own real estate investment trust. Currently, our only relationship with a real
estate investment trust consists of a sale and lease-back arrangement with
respect to one property housing two schools. We expect to continue to advance
funds to our charter board clients as well as spend significantly on charter
school facilities directly. We have been successful in securing various
financing arrangements in the past, but our ability to obtain any such financing
arrangements in the future cannot be assured. As of June 30, 2000, we had no
direct obligations for charter school facility financings but had guarantees
totaling $6.7 million for facility-related debt of three of our charter school
clients, representing five schools in fiscal 2000. The underlying debt comes due
in fiscal 2002 and fiscal 2003.
We could have facility financing obligations for charter schools we no
longer operate, because the terms of our facility financing obligations for some
of our charter schools exceeds the term of the management agreement for those
schools. For four 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
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much as 14 years. If our management agreements were to be terminated, or not
renewed in these charter schools, our obligations to make lease payments would
continue. As of June 30, 2000, our aggregate future lease obligations totaled
$29.1 million, with varying maturities over the next 17 years.
In five of our charter schools, we have provided some type of permanent
credit support for the school building, typically in the form of loan
guarantees, loans or cash advances. As of June 30, the amount of loans we had
guaranteed totaled $6.7 million. Although the term of these arrangements is
coterminous with the term of the corresponding management agreement, our
guarantee does not expire until the loan is repaid in full. The lenders under
these facilities are not committed to release us from our obligations unless
replacement credit support is provided. The default by any charter school under
a credit facility that we have guaranteed could result in a claim against us for
the full amount of the borrowings. We also have an obligation to set aside
restricted cash as collateral for the loans we guarantee. The amount of
restricted cash required currently is approximately $2.2 million and escalates
to specified amounts up to $2.7 million at various times through August 2001. As
of June 30, 2000, we had advances or loans to charter school boards totaling
approximately $30.0 million to finance the purchase or renovation of school
facilities we manage. We generally have not charged interest on these loans and
advances. Approximately $17.2 million of these loans, representing 17 schools,
are unsecured or subordinated to a senior lender. Loans of $12.8 million,
representing four schools, may be accelerated upon termination of the
corresponding management agreement with the charter school. We currently expect
to make additional advances of at least $50.4 million in connection with charter
schools we opened in the 2000-2001 school year. If these advances or loans,
which generally consist of balloon payments, are not repaid when due, our
financial results could be adversely affected.
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
four of our charter schools, we have entered into a long-term lease for the
school facility which exceeds the current term of the management agreement by as
much as 14 years. If our management agreements were to be terminated, or not
renewed in these charter schools, our obligations to make lease payments would
continue, which could adversely affect our financial results. As of June 30,
2000, our aggregate future lease obligations totaled $29.1 million, with varying
maturities over the next 17 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. To date, we have
generally not charged 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. In addition, in the event of a failure by any of
our charter schools to pay fees due Ksixteen LLC for its services to the charter
school, we could be obligated to pay those fees to Ksixteen.
INVESTMENT IN APEX ONLINE LEARNING INC.
In July 1999, we acquired a 16.5% ownership interest in APEX Online
Learning Inc., a company that provides interactive advanced placement courses
for high school students over the Internet. Concurrently, Vulcan Ventures
Incorporated, then the majority stockholder of APEX, invested $30.0 million in
Edison. We initially invested $5.0 million in APEX and were obligated to invest
up to an additional $5.0 million in the future, if any third party were to
invest in APEX. In December 1999, we invested all of the additional $5.0 million
in APEX, increasing our ownership interest at that time to 19.7%. Because of the
nature of our relationship with APEX through June 2000, we were required to
recognize a pro rata portion of APEX's losses based upon our ownership interest.
In the fiscal year ended June 30, 2000, we recognized $2.0 million of loss as
our share of APEX's net loss. We modified our relationship
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with APEX on June 30, 2000 and, as a result, we are no longer required to
recognize any of APEX's losses.
ANTICIPATED CAPITAL EXPENDITURES
Capital expenditures for fiscal 2001 are expected to be approximately
$75.6 million, which includes approximately $31.8 million for computers and
other technology, approximately $18.0 million for curriculum materials and
approximately $12.0 million for the purchase and improvement of property in New
York, New York in connection with the development of our new corporate
headquarters. For more information on this project, see "- We may incur
substantial costs if we are unable to complete our Edison corporate headquarters
project" and "Properties." Additionally, we expect to make additional advances
or loans approximating $50.4 million to new charter board clients to help secure
and renovate school properties for the schools opening in the 2000-2001 school
year, a significant portion of which we expect will be refinanced through third
parties. We are also implementing enterprise-wide computer and software
packages. Such systems include financial reporting, payroll, purchasing,
accounts payable, human resources and other administrative modules as well as a
student data and school management package. We expect expenditures for the
software packages, together with related hardware, implementation costs and
other maintenance expenditures, will total approximately $15.0 to $20.0 million
through fiscal 2003, of which we had expended approximately $5.6 million through
June 30, 2000.
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 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 five years of operating history on which you can base
your evaluation of our business and prospects. Our business and prospects must
be considered in light of the risks and uncertainties frequently encountered by
companies in the early stages of development, particularly companies like us who
operate in new and rapidly evolving markets. Our failure to address these risks
and uncertainties could cause our operating results to suffer and result in the
loss of all or part of your investment.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES IN THE FUTURE
We have incurred substantial net losses in every fiscal period since we
began operations. For the fiscal year ended June 30, 2000, our net loss was
$36.6 million. As of June 30, 2000, our accumulated deficit since November 1996,
when we converted from a partnership to a corporation, was approximately $115.5
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
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schools. If this business model fails to gain acceptance among the general
public, educators, politicians and school boards, we may be unable to grow our
business and the market price of our class A common stock would be adversely
affected.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO IMPROVE THE ACADEMIC
ACHIEVEMENT OF THE STUDENTS ENROLLED IN OUR SCHOOLS, AND WE MAY FACE
DIFFICULTIES IN DOING SO IN THE FUTURE
We believe that our growth will be dependent upon our ability to
demonstrate general improvements in academic performance at our schools. Our
management agreements contain performance requirements related to test scores.
As average student performance at our schools increases, whether due to
improvements in achievement over time by individual students in our schools or
changes in the average performance levels of new students entering our schools,
aggregate absolute improvements in student performance will be more difficult to
achieve. If academic performance at our schools declines, or simply fails to
improve, we could lose business and our reputation could be seriously damaged,
which would impair our ability to gain new business or renew existing school
management agreements.
WE COULD INCUR LOSSES AT OUR SCHOOLS IF WE ARE UNABLE TO ENROLL ENOUGH STUDENTS
Because the amount of revenue we receive for operating each school depends
on the number of students enrolled, and because many facility and on-site
administrative costs are fixed, achieving site-specific enrollment objectives is
an important factor in our ability to achieve satisfactory financial performance
at a school. We may be unable to recruit enough students to attend all grades in
our new schools or maintain enrollment at all grades in our existing schools. We
sometimes do not have enough students to fill some grades in some schools,
particularly the higher grades. It is sometimes more difficult to enroll
students in the higher grades because older students and their parents are
reluctant to change schools. To the extent we are unable to meet or maintain
enrollment objectives at a school, the school will be less financially
successful and our financial performance will be adversely affected.
WE ARE EXPERIENCING RAPID GROWTH, WHICH MAY STRAIN OUR RESOURCES AND MAY NOT BE
SUSTAINABLE
We have grown rapidly since we opened our first four schools in August
1995. We operated 79 schools during the 1999-2000 school year and are operating
113 schools in the 2000-2001 school year. This rapid growth has sometimes
strained our managerial, operational and other resources, and we expect that
continued growth would strain these resources in the future. If we are to manage
our rapid growth successfully, we will need to continue to hire and retain
management personnel and other employees. We must also improve our operational
systems, procedures and controls on a timely basis. If we fail to successfully
manage our growth, we could experience client dissatisfaction, cost
inefficiencies and lost growth opportunities, which could harm our operating
results. We cannot guarantee that we will continue to grow at our historical
rate.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN HIGHLY SKILLED PRINCIPALS AND TEACHERS
IN THE NUMBERS REQUIRED TO GROW OUR BUSINESS
Our success depends to a very high degree on our ability to attract and
retain highly skilled school principals and teachers. We hired 27 new principals
and approximately 1,400 new teachers to meet the needs of our new schools for
the 2000-2001 school year, in addition to satisfying our needs resulting from
normal turnover at existing schools. Currently, there is a well-publicized
nationwide shortage of teachers and other educators in the United States. In
addition, we may find it difficult to attract and retain principals and teachers
for a variety of reasons, including the following:
- we generally require our teachers to work a longer day and a longer year
than most public schools;
- we tend to have a larger proportion of our schools in challenging
locations, such as low-income urban areas, which may make attracting
principals and teachers more difficult; and
- we believe we generally impose more accountability on principals and
teachers than do public schools as a whole.
These factors may increase the challenge we face in an already difficult
market for attracting
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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.
AS WE TRANSITION FROM OUR EXISTING TECHNOLOGY INFRASTRUCTURE TO AN IBM PLATFORM,
WE MAY FACE DIFFICULTIES AND DELAYS IN IMPLEMENTING THE NEW SYSTEM AND WE WILL
BECOME DEPENDENT UPON IBM TO A LARGE DEGREE TO MANAGE THE NEW SYSTEM
We recently announced that we have selected IBM to provide the computers
and related software for use in our schools and classrooms, as well as the
networking hardware and network management software necessary to connect our
schools nationwide. To date, we have only a letter of intent with IBM, and we
cannot be certain that we will reach a definitive agreement. We expect to use
IBM to perform a significant portion of the installation, implementation and
integration services necessary for the deployment of this technology. We
anticipate that the deployment will commence with the new schools we open for
2000-2001 school year, and will continue over time to existing schools, with the
result that we will operate some schools using the new IBM platform at the same
time we operate schools on our existing platform, which is based largely on
Apple and other non-IBM technologies. We may face significant difficulties and
delays in this complex implementation, as well as difficulties in the transition
from our existing system to the new IBM system. Additionally, we may face
unforeseen implementation costs. Once the hardware and software is installed, we
cannot be certain that it will work satisfactorily or at all. We also expect to
engage the services of IBM to manage significant portions of our technology
function in the future, and any unsatisfactory performance on the part of IBM
could seriously impair the operations of our schools. If we experience
implementation or transition difficulties or delays, or unexpected costs, our
financial performance could be harmed and our reputation could be compromised.
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.
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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. In addition,
local teachers' unions have occasionally initiated litigation challenging our
management agreements. 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,
and we cannot be assured that any management agreements will be renewed at the
end of their term. A management agreement covering two schools expired after the
1999-2000 school year and was not renewed. Management agreements representing 12
schools, accounting for 17.3% of our total revenue for fiscal 2000, will expire
at the end of the 2000-2001 school year, and agreements representing 12 schools,
accounting for 13.8% of our total revenue for fiscal 2000, will expire at the
end of the 2001-2002 school year. In addition, management agreements
representing 15 schools, accounting for 18.2% of our total revenue for fiscal
2000, 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. In addition, as a result
of changes within a school district, such as changes in the political climate,
we could from time to time face pressure to permit a school district or charter
board to terminate our management agreement even if they do not have a legal
right to do so. 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
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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.
Because we have limited experience operating high schools, 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 to more than
$8.0 million for new construction. Each charter school absorbs a portion of its
facility financing costs each year through its leasing and similar expenses. If
these expenses exceed our estimates for the charter school, the charter school
could lose money and our financial results would be adversely affected.
WE HAVE ADVANCED AND LOANED MONEY TO CHARTER SCHOOL BOARDS THAT MAY NOT BE
REPAID
As of June 30, 2000, we had advances or loans to charter school boards
totaling approximately $30 million to finance the purchase or renovation of
school facilities we manage. We generally have not charged interest on these
loans and advances. Approximately $17.2 million of these loans, representing
seventeen schools, are unsecured or subordinated to a senior lender. Loans of
$12.8 million, representing four schools, may be accelerated upon termination of
the corresponding management agreement with the charter school. We currently
expect to make additional advances of at least $50.4 million in connection with
charter schools we opened in the 2000-2001 school year. If these advances or
loans are not repaid when due, our financial results could be adversely
affected.
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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
four of our charter schools, we have entered into a long-term lease for the
school facility which exceeds the current term of the management agreement by as
much as 14 years. If our management agreements were to be terminated, or not
renewed in these charter schools, our obligations to make lease payments would
continue, which could adversely affect our financial results. As of June 30,
2000, our aggregate future lease obligations totaled $29.1 million, with varying
maturities over the next 17 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. To date, we have
generally not charged interest on these advances. Although the term of these
arrangements is coterminous with the term of the corresponding management
agreement, our guarantee does not expire until the loan is repaid in full. The
lenders under these facilities are not committed to release us from our
obligations unless replacement credit support is provided. The default by any
charter school under a credit facility that we have guaranteed could result in a
claim against us for the full amount of the borrowings. Furthermore, in the
event any charter board becomes insolvent or has its charter revoked, our loans
and advances to the charter board may not be recoverable, which could adversely
affect our financial results. As of June 30, 2000, the amount of loans we had
guaranteed totaled $6.7 million.
KSIXTEEN LLC MAY BE UNABLE TO DEVELOP PROPERTIES FOR USE AS CHARTER SCHOOLS
We intend to rely on Ksixteen LLC to develop properties for use as charter
schools and they may be unable to develop the properties by the required date.
Ksixteen, a company recently formed by Edison, former members of Edison's real
estate department and an outside investor, has no operating history and has
never developed property as a separate entity. Any delay in the development of
charter school properties could prevent us from successfully opening charter
schools on time, which could result in lost charter school management
agreements, financial losses and damage to our reputation. In addition, in the
event of a failure by any of our charter schools to pay fees due Ksixteen LLC
for its services to the charter school, we could be obligated to pay those fees
to Ksixteen.
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
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in July. This results in lower gross site margin in the first fiscal
quarter than in the remaining fiscal quarters. We also recognize
pre-opening costs primarily in the first and fourth quarters.
Our financial results can vary among the quarters within any fiscal year
for other reasons, including unexpected enrollment changes, greater than
expected costs of opening schools or delays in opening new schools.
WE EXPECT OUR MARKET TO BECOME MORE COMPETITIVE
We expect the market for providing private, for-profit management of
public schools will become increasingly competitive. Currently, we compete with
a relatively small number of companies which provide these services, and they
have to date primarily focused on the operation of charter schools. These
companies could, however, begin to compete with us at any time for contract
schools. In addition, a variety of other types of companies and entities could
enter the market, including colleges and universities, other private companies
that operate higher education or professional education schools and others. Our
existing competitors and these new market entrants could have financial,
marketing and other resources significantly greater than ours. We also compete
for public school funding with existing public schools, who may elect not to
enter into management agreements with private managers or who may pursue
alternative reform initiatives, such as magnet schools and inter-district choice
programs. In addition, in jurisdictions where voucher programs have been
authorized, we will begin to compete with existing private schools for public
tuition funds. Voucher programs provide for the issuance by local or other
governmental bodies of tuition vouchers to parents worth a certain amount of
money that they can redeem at any approved school of their choice, including
private schools. If we are unable to compete successfully against any of these
existing or potential competitors, our revenues could be reduced, resulting in
increased losses.
FAILURE TO RAISE NECESSARY ADDITIONAL DEBT AND/OR EQUITY 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 through the sale of equity or debt
securities. We cannot be certain that we will be able to obtain additional
financing on favorable terms, if at all. If we issue additional equity or
convertible debt securities, stockholders may experience dilution or the new
equity or convertible debt securities may have rights, preferences or privileges
senior to those of existing holders of class A common stock. In addition, we
intend to enter into debt financing arrangements to finance a substantial
portion of our expected technology and facilities-related expenditures through
fiscal 2001. As of September 15, 2000, we have not entered into all such
financing arrangements. 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 MAY INCUR SUBSTANTIAL COSTS IF WE ARE UNABLE TO COMPLETE OUR EDISON CORPORATE
HEADQUARTERS PROJECT
We have entered into a contract to purchase a lot located in the Harlem
section of the borough of Manhattan in New York City for a purchase price of $10
million. We intend to develop the property in partnership with the Museum of
African Art for a mixed-use project consisting of our corporate headquarters, a
charter school and a museum. We have not yet received the necessary zoning
approvals for this project. We have paid $3.0 million to the current owner of
the property and could be required to pay up to an additional $500,000 if we
need to extend the closing date in order to obtain the zoning approvals. If we
are unable to obtain the necessary zoning approvals by April 11, 2001, or if
prior to that time we decide to terminate the contract, we will be forced either
to forfeit any amounts paid to the current owner, which could be as much as $3.5
million, or to purchase the property without the zoning approvals. In addition,
we do not currently have a contract with the Museum of African Art for this
project or an agreement with any party to operate a charter school on that site.
We must also acquire additional property adjacent to the lot to house the entire
project. If we are unable to acquire the additional property, we will be
required to reduce the size of the project.
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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, accounted for approximately 5.3% of our total
revenue for the year ended June 30, 2000. We estimate that funding from other
federal and state programs accounts for an additional 9.8% of our total revenue.
A number of factors relating to these government programs could lead to adverse
effects on our business:
- These programs have strict requirements as to eligible students and
allowable activities. If we or our school district and charter board
clients fail to comply with the regulations governing the programs,
we or our clients could be required to repay the funds or be
determined ineligible to receive these funds, which would harm our
business.
- If the income demographics of a district's population were to change
over the life of our management agreement for a school in the
district, resulting in a decrease in Title I funding for the school,
we would receive less revenue for operating the school and our
financial results could suffer.
- Funding from federal and state education programs is allocated
through formulas. If federal or state legislatures or, in some case,
agencies were to change the formulas, we could receive less funding
and the growth and financial performance of our business would
suffer.
- Federal, state and local education programs are subject to annual
appropriations of funds. Federal or state legislatures or local
officials could drastically reduce the funding amount of
appropriation for any program, which would hurt our business and our
ability to grow.
- The authorization for the Elementary and Secondary Education Act,
including Title I, has expired and this act is being funded by
Congress on an interim appropriation basis. If Congress does not
reauthorize or continue to 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.
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WE RECEIVE ALL OF OUR REVENUE FROM PUBLIC SOURCES AND ANY REDUCTION IN GENERAL
FUNDING LEVELS FOR EDUCATION COULD HURT OUR BUSINESS
All of our revenue is derived from public sources. If general levels of
funding for public education were to decline, the field of school districts in
which we could profitably operate schools would likewise diminish, and our
ability to grow by adding new schools would suffer. In addition, our management
agreements generally provide that we bear the risk of lower levels of per-pupil
funding, which would be directly reflected in lower revenue to us, even if our
costs do not decline accordingly.
RESTRICTIONS ON GOVERNMENT FUNDING OF FOR-PROFIT SCHOOL MANAGEMENT COMPANIES
COULD HURT OUR BUSINESS
Any restriction on the use of federal or state government educational
funds by for-profit companies could hurt our business and our ability to grow.
From time to time, a variety of proposals have been introduced in state
legislatures to restrict or prohibit the management of public schools by
private, for-profit entities like us. For example, a bill filed in Minnesota
that would have prohibited for-profit entities from managing charter schools in
that state was defeated in both 1997 and 1998. A similar bill in Massachusetts
was not voted out of committee. Additionally, Idaho's charter school law may,
subject to interpretation, restrict our ability to manage schools in that state.
If states were to adopt legislation prohibiting for-profit entities from
operating public schools, the market for our services could suffer.
THE OPERATION OF OUR CHARTER SCHOOLS DEPENDS ON THE MAINTENANCE OF THE
UNDERLYING CHARTER GRANT
Our 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 36% of our total revenue in fiscal 2000, or $79.6
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 OFFICERS AND DIRECTORS WILL EXERCISE SIGNIFICANT CONTROL OVER OUR AFFAIRS,
WHICH COULD RESULT IN THEIR TAKING ACTIONS OF WHICH OTHER STOCKHOLDERS DO NOT
APPROVE
Based upon their holdings at September 15, 2000, our officers and
directors and entities affiliated with them together beneficially own 20,445,254
shares of class A common stock and 3,148,332 shares of class B common stock.
These shares represent approximately 46.6% of the voting power of the class A
common stock, including the ability to elect three of the seven class A
directors; approximately 84.4% of the voting power of the class B common stock,
including the ability to elect all of the four class B directors; and
approximately 61.3% 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, 3,505,849 shares of class A common stock and
378,901 shares of class B common stock are subject to options exercisable within
60 days of September 15, 2000. These stockholders, if they act together, will be
able to exercise control over all matters requiring approval by our
stockholders, including the approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of our company and could prevent stockholders from receiving a
premium over the market price if a change of control is proposed.
In addition, H. Christopher Whittle, our President and Chief Executive
Officer and a director, beneficially owns 4,232,403 shares of class A common
stock and 1,281,423 shares of class B common stock. These shares represent
approximately 11.7% of the voting power of the class A common stock;
approximately 36.2% of the voting power of the class B common stock, including
the ability to elect two of the four class B directors; and approximately 21.0%
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, 1,714,363 shares of
class A common stock and 189,745 shares of class B common stock are subject to
options exercisable within 60 days of September 15, 2000. Mr. Whittle and his
affiliates also own options not exercisable within 60 days of September 15, 2000
covering 2,728,304 shares of class A common stock
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and 292,775 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
A 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
Mr. Whittle and WSI Inc., a corporation controlled by Mr. Whittle,
directly or indirectly own 3,194,027 shares of class A common stock and
1,166,047 shares of class B common stock, including an aggregate of 761,625
shares of class A common stock and 84,625 shares of class B common stock which
represents WSI's interest in a limited partnership and a limited liability
company that hold Edison stock. These figures include shares issuable upon the
exercise of options within 60 days of September 15, 2000. 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 February 2003 and interest on these obligations is
payable monthly. In addition, Mr. Whittle may not vote his class A common stock
and class B common stock on any matter other than the election or removal of
directors without Morgan's prior written consent. Of these shares, Morgan
allowed WSI to pledge up to 900,002 shares to other lenders. Upon satisfaction
of WSI's obligations to the other lenders, these shares would revert back to
being pledged to Morgan. Morgan also allowed WSI to grant options to purchase an
aggregate of 61,425 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 lenders
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 6,920,775 shares of class A common stock,
including shares subject to options exercisable within 60 days of September 15,
2000. The holdings of Morgan and its affiliates would then represent 15.3% of
the voting power of the class A common stock, 11.9% of the voting power of the
class B common stock and 14.1% of the combined voting power. This would enable
Morgan to exercise greater influence over corporate matters.
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.
Since our class A common stock has been publicly traded, its market price
has fluctuated over a wide range and we expect it to continue to do so in the
future. 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.
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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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have market risk sensitive instruments related to interest
rates. As disclosed in note 6 of the notes to our financial statements, we had
outstanding long-term notes payable of $17.8 million at June 30, 2000. Interest
rates on the notes are fixed and range from 14.1% to 20.4% per annum and have
terms of 36 to 48 months.
We do not believe that we have significant exposure to changing interest
rates on long-term debt because interest rates for our debt is fixed. We have
not undertaken any additional actions to cover interest rate market risk and are
not a party to any other interest rate market risk management activities.
Additionally, we do not have significant exposure to changing interest
rates on invested cash, which was approximately $27.9 million and $52.6 million
at June 30, 1999 and June 30, 2000, respectively. We invest cash mainly in money
market accounts and other investment-grade securities. We do not purchase or
hold derivative financial instruments for trading purposes.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our financial statements together with the related notes and the report of
PricewaterhouseCoopers LLP, independent auditors, are set forth in the Index to
Financial Statements at Item 14 and incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
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PART III
Certain information required by Part III is omitted from this Annual
Report as we intend to file our definitive Proxy Statement for our Annual
Meeting of Stockholders to be held on November 30, 2000, pursuant to Regulation
14A of the Securities Exchange Act of 1934, as amended, not later than 120 days
after the end of the fiscal year covered by this Annual Report, and certain
information included in the Proxy Statement is incorporated herein by reference.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Executive Officers and Directors - The information in the section entitled
"Executive Officers and Directors of the Registrant" in Part I hereof is
incorporated herein by reference.
(b) Directors - The information in the section entitled "Election of
Directors" in the Proxy Statement is incorporated herein by reference.
The disclosure required by Item 405 of Regulations S-K is incorporated by
reference to the section entitled "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information in the sections entitled "Compensation of Executive
Officers", "Compensation of Directors" and "Compensation Committee Interlocks
and Insider Participation" in the Proxy Statement is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information in the section entitled "Security Ownership of Certain
Beneficial Owners and Management" in the Proxy Statement is incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information in the section entitled "Certain Transactions" in the
Proxy Statement is incorporated herein by reference.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES AND REPORTS ON FORMS 8-K
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements. The following financial statements of Edison
Schools Inc. are filed as part of this Form 10-K on the pages
indicated:
INDEX TO FINANCIAL STATEMENTS
EDISON SCHOOLS INC.
PAGE
----
Report of Independent Accountants.................................................... 54
Balance Sheets as of June 30, 2000 and 1999 ......................................... 55
Statements of Operations for the years ended June 30, 1998,
1999, and 2000................................................................... 56
Statements of Changes in Stockholders' Equity for the years
ended June 30, 1998, 1999 and 2000................................................ 57
Statements of Cash Flows for the years ended June 30, 1998,
1999 and 2000..................................................................... 58
Notes to Financial Statements........................................................ 59
2. Schedules are omitted as the required information is inapplicable or
the information is presented in the financial statements or related
notes.
3. Exhibits. The exhibits listed in the Exhibits Index immediately
preceding such exhibits are filed as part of this Annual Report on
Form 10-K.
(b) Reports on Form 8-K
On June 16, 2000, the Registrant filed a report on Form 8-K announcing
that (i) on June 15, 2000, the Registrant issued a press release regarding
the number of new schools the Registrant expects to operate during the
2000-2001 school year, (ii) on June 16, 2000, the Registrant issued two
press releases regarding the execution of a letter of intent with IBM and
(iii) on June 16, 2000, the Registrant issued a press release regarding
the filing of a registration statement on Form S-1 with the Securities and
Exchange Commission concerning the Registrant's proposed public offering
of class A common stock.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 on the 28th day of
September, 2000.
EDISON SCHOOLS INC.
BY: /s/ H. Christopher Whittle
--------------------------------------
H. Christopher Whittle
President, Chief Executive Officer and
Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the 28th day of September, 2000.
SIGNATURE TITLE
- --------- -----
/s/ H. Christopher Whittle President, Chief Executive Officer
- ---------------------------------------------------------------------------------
H. Christopher Whittle and Director (Principal Executive Officer)
/s/ Benno C. Schmidt, Jr. Chairman of the Board of Directors
- ---------------------------------------------------------------------------------
Benno C. Schmidt, Jr.
/s/ James L. Starr Executive Vice President and Chief
- ---------------------------------------------------------------------------------
James L. Starr Financial Officer (Principal Accounting Officer)
/s/ Laura K. Eshbaugh Executive Vice President and
- ---------------------------------------------------------------------------------
Laura K. Eshbaugh Director
/s/ Virginia G. Bonker Director
- ---------------------------------------------------------------------------------
Virginia G. Bonker
Director
- ---------------------------------------------------------------------------------
John W. Childs
/s/ Ramon C. Cortines Director
- ---------------------------------------------------------------------------------
Ramon C. Cortines
/s/ Charles J. Delaney Director
- ---------------------------------------------------------------------------------
Charles J. Delaney
/s/ Robert Finzi Director
- ---------------------------------------------------------------------------------
Robert Finzi
/S/John B. Fullerton Director
- ---------------------------------------------------------------------------------
John B. Fullerton
/s/ Janet A. Hickey Director
- ---------------------------------------------------------------------------------
Janet A. Hickey
/s/ Klas Hillstrom Director
- ---------------------------------------------------------------------------------
Klas Hillstrom
/s/ Jeffrey T. Leeds Director
- ---------------------------------------------------------------------------------
Jeffrey T. Leeds
/s/ William F. Weld Director
- ---------------------------------------------------------------------------------
William F. Weld
53
54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Edison Schools Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, changes in stockholders' equity and cash flows present fairly, in
all material respects, the financial position of Edison Schools Inc. (the
"Company") at June 30, 1999 and 2000, and the results of its operations and its
cash flows for each of the three years in the period ended June 30, 2000, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Melville, New York
September 11, 2000
54
55
EDISON SCHOOLS INC.
BALANCE SHEETS
JUNE 30
----------------------------------
1999 2000
--------------- ---------------
ASSETS
Current Assets:
Cash and cash equivalents....................................................... $ 27,922,576 $ 52,644,204
Accounts receivable............................................................. 12,034,962 33,752,622
Notes and other receivables..................................................... 9,711,772 14,515,200
Other current assets............................................................ 1,439,920 3,620,547
--------------- ---------------
Total current assets.................................................... 51,109,230 104,532,573
Property and equipment, net........................................................ 42,871,238 98,133,719
Restricted cash.................................................................... 2,431,416 3,387,303
Notes and other receivables, less current portion.................................. 3,893,084 16,023,697
Stockholder notes receivable....................................................... 2,478,056 8,801,868
Investment......................................................................... -- 8,024,743
Other assets....................................................................... 4,086,887 12,126,519
--------------- ---------------
Total assets............................................................ $ 106,869,911 $ 251,030,422
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt............................................... $ 6,660,789 $ 11,838,495
Accounts payable................................................................ 12,014,443 15,452,660
Accrued expenses................................................................ 9,799,721 16,210,911
--------------- ---------------
Total current liabilities............................................... 28,474,953 43,502,066
Long term debt, less current portion............................................... 8,263,824 17,830,687
Stockholders' notes payable........................................................ 6,610,594 6,610,594
Other liabilities.................................................................. 478,128 574,030
--------------- ---------------
Total liabilities....................................................... 43,827,499 68,517,377
--------------- ---------------
Commitments And Contingencies (Note 13)
Stockholders' Equity:
Preferred stock:
Series A-G, par value $.01; 77,931,054 shares authorized in 1999;
28,211,173 shares issued and outstanding in 1999
(aggregate liquidation preference of
$146,990,753 in 1999)...................................................... 1,586,269 --
Undesignated, par value $.01; 5,000,000 shares
authorized, no shares issued or outstanding in 2000........................ -- --
Common stock:
Series A-I and non-voting common, par value $.01;
107,293,178 authorized in 1999; 3,107,356
shares issued and outstanding in 1999...................................... 31,074 --
Class A common, par value $.01; 150,000,000 shares
authorized in 2000; 39,558,746 shares issued and
outstanding in 2000........................................................ -- 395,588
Class B common, par value $.01; 5,000,000 shares
authorized in 2000; 3,448,004 shares issued and
outstanding in 2000........................................................ -- 34,480
Additional paid-in capital...................................................... 146,190,334 303,060,911
Unearned stock-based compensation............................................... (5,836,556) (3,160,004)
Accumulated deficit............................................................. (78,928,709) (115,518,323)
Stockholder note receivable..................................................... -- (2,299,607)
--------------- ---------------
Total stockholders' equity.............................................. 63,042,412 182,513,045
--------------- ---------------
Total liabilities and stockholders' equity.............................. $ 106,869,911 $ 251,030,422
=============== ===============
The accompanying notes are an integral part of these financial statements.
55
56
EDISON SCHOOLS INC.
STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30,
--------------------------------------------------
1998 1999 2000
------------- ------------- -------------
Revenue from educational services.................................... $ 69,406,841 $ 132,762,491 $ 224,577,591
------------- ------------- -------------
Education and operating expenses:
Direct site expenses.............................................. 59,576,224 114,096,875 192,601,707
Administration, curriculum and development........................ 18,257,818 49,984,180 40,643,025
Depreciation and amortization..................................... 7,231,628 12,525,904 20,905,833
Preopening expenses............................................... 2,485,813 5,457,113 8,371,923
Design team compensation.......................................... 2,723,902 -- --
------------- ------------- -------------
Total education and operating expenses.................... 90,275,385 182,064,072 262,522,488
------------- ------------- -------------
Loss from operations................................................. (20,868,544) (49,301,581) (37,944,897)
Other income (expense):
Interest income................................................... 842,010 3,481,682 6,768,261
Interest expense.................................................. (1,761,821) (3,244,782) (3,433,759)
Equity in loss of unconsolidated entity........................... -- -- (1,975,257)
Other............................................................. (126,500) (368,110) (3,962)
------------- ------------- -------------
Total other............................................... (1,046,311) (131,210) 1,355,283
------------- ------------- -------------
Net loss $ (21,914,855) $ (49,432,791) $ (36,589,614)
============= ============= =============
Net loss attributable to common stockholders:
Net loss.......................................................... $ (21,914,855) $ (49,432,791) $ (36,589,614)
Dividends declared on preferred stock............................. (4,290,200) -- --
Preferred stock accretion......................................... (277,694) (1,026,462) --
------------- ------------- -------------
Net loss attributable to Common
stockholders............................................ $ (26,482,749) $ (50,459,253) $ (36,589,614)
============= ============= =============
Per common share data:
Basic and diluted net loss per share.............................. $ (8.52) $ (16.24) $ (1.32)
============= ============= =============
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share..................................... 3,107,356 3,107,356 27,685,203
============= ============= -------------
Pro forma per share data:
Pro forma basic and diluted net loss per share
(unaudited)....................................................... $ (0.93)
=============
Pro forma weighted average shares outstanding
used in computing basic and diluted net loss
per share (unaudited).......................................... 39,498,381
=============
The accompanying notes are an integral part of these financial statements.
56
57
EDISON SCHOOLS INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
PREFERRED STOCK COMMON STOCK
--------------------- ---------------------------------------------------------------------
SERIES A-G SERIES A-I CLASS A CLASS B
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
----------- ----------- ---------- ---------- ---------- ---------- --------- ----------
Balances, June 30, 1997......... 18,252,837 $182,530 3,107,355 $ 31,074
Issuance of Series D
preferred stock, net............ 2,942,573 29,426 1 0
Issuance of stock warrants......
Issuance of Series C
preferred stock as
purchase price adjustment....... 528,737 5,287
Deferred compensation related
to stock options................
Stock-based compensation........
Dividends declared..............
Accretion of Series
D preferred PIK dividend........ 277,694
Net loss for the
year ended June 30, 1998........
----------- ----------- ---------- ---------- ---------- ---------- --------- ----------
Balances, June 30, 1998......... 21,724,147 $ 494,937 3,107,356 $ 31,074
Issuance of Series D
preferred stock, net............ 4,108,288 41,083
Issuance of Series F
preferred stock, net............ 1,978,738 19,787
Issuance of Series G
preferred stock, net............ 400,000 4,000
Deferred compensation related
to stock options................
Stock-based compensation........
Accretion of Series D preferred
PIK dividend.................... 1,026,462
Net loss for the year ended
June 30, 1999...................
----------- ----------- ---------- ---------- ---------- ---------- --------- ----------
Balances, June 30, 1999......... 28,211,173 $1,586,269 3,107,356 $ 31,074
Issuance of Series F
preferred stock, net............ 3,393,619 33,936
Issuance of Series I
common stock, net............... 1 0
Issuance of Class A
common stock in an
initial public
offering........................ 6,800,000 68,000
Stock warrants exercised........ 597,528 5,976
Stock options exercised......... 824,426 8,245 72,500 725
Deferred
compensation related
to stock options................
Stock based compensation........
Conversion of the Series A
through G Preferred Stock and
Series A through I common
Stock to Class A and Class B
common stock.................... (31,604,792) (1,620,205) (3,107,357) (31,074) 31,240,934 312,409 3,471,215 34,712
Fractional Class A and Class B
common shares issued due to
rounding during conversion ..... 15,319 153 (15,172) (152)
Conversion of Class B to
Class A)........................ 80,539 805 (80,539) (805)
Stockholder notes receivable....
Interest on stockholder
receivable......................
Net loss for the year ended
June 30, 2000...................
----------- ----------- ---------- ---------- ----------- ---------- ---------- ----------
Balances, June 30, 2000......... - $ - - $ - 39,558,746 $395,588 3,448,004 $34,480
=========== =========== ========== ========== =========== ========== ========== ==========
ADDITIONAL UNEARNED STOCKHOLDER
PAID-IN STOCK-BASED ACCUMULATED NOTES
CAPITAL COMPENSATION DEFICIT RECEIVABLE TOTAL
------------ -------------- --------------- -------------- -------------
Balances, June 30, 1997......... $ 41,301,865 $ (120,429) $ (7,581,063) $ 33,813,977
Issuance of Series D
preferred stock, net............ 19,177,196 19,206,622
Issuance of stock warrants...... 2,500,000 2,500,000
Issuance of Series C
preferred stock as
purchase price adjustment....... (5,287) -
Deferred compensation related
to stock options................ 1,339,118 (1,339,118) -
Stock-based compensation........ 584,560 584,560
Dividends declared.............. (5,000,000) (5,000,000)
Accretion of Series
D preferred PIK dividend........ (277,694) -
Net loss for the
year ended June 30, 1998........ (21,914,855) (21,914,855)
------------ -------------- -------------- -------------- -------------
Balances, June 30, 1998......... $ 59,035,198 $ (874,987) $ (29,495,918) 29,190,304
Issuance of Series D
preferred stock, net............ 31,722,481 31,763,564
Issuance of Series F
preferred stock, net............ 24,228,435 24,248,222
Issuance of Series G
preferred stock, net............ 4,897,755 4,901,755
Deferred compensation related
to stock options................ 27,332,927 (27,332,927) -
Stock-based compensation........ 22,371,358 22,371,358
Accretion of Series D preferred
PIK dividend.................... (1,026,462) -
Net loss for the year ended
June 30, 1999................... (49,432,791) (49,432,791)
------------ ----------- --------------- -------------- -------------
Balances, June 30, 1999......... $146,190,334 $(5,836,556) $ (78,928,709) $ 63,042,412
Issuance of Series F
preferred stock, net............ 41,707,771 41,741,707
Issuance of Series I
common stock, net............... -
Issuance of Class A
common stock in an
initial public
offering........................ 109,632,298 109,700,298
Stock warrants exercised........ 43,893 49,869
Stock options exercised......... 2,921,813 2,930,783
Deferred
compensation related
to stock options................ 1,260,645 (1,260,645) -
Stock based compensation........ 3,937,197 3,937,197
Conversion of the Series A
through G Preferred Stock and
Series A through I common
Stock to Class A and Class B
common stock.................... 1,304,158 -
Fractional Class A and Class B
common shares issued due to
rounding during conversion ..... (1) -
Conversion of Class B to
Class A)........................ -
Stockholder notes receivable.... (2,175,000) (2,175,000)
Interest on stockholder
receivable...................... (124,607) (124,607)
Net loss for the year ended
June 30, 2000................... (36,589,614 (36,589,614)
------------ ------------ --------------- -------------- -------------
Balances, June 30, 2000......... $303,060,911 $(3,160,004) $(115,518,323) $(2,299,607) $182,513,045
============= ============== =============== ============== =============
The accompanying notes are an integral part of these financial statements.
57
58
EDISON SCHOOLS INC.
STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
--------------------------------------------------
1998 1999 2000
------------- ------------- -------------
Cash flows from operating activities:
Net loss ............................................................ $ (21,914,855) $ (49,432,791) $ (36,589,614)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization of property and
equipment.................................................... 7,231,628 11,491,955 19,310,639
Amortization of deferred charter costs and
original issue discount...................................... -- (68,688) (184,193)
Stock-based compensation........................................ 584,560 22,371,358 3,937,197
Provision for fixed asset write-off............................. -- 653,000 (153,000)
Equipment write-off............................................. -- 437,768 309,741
Loss on disposal of property and equipment...................... 126,500 368,110 (268)
Interest on stockholder note receivable......................... -- -- (124,607)
Equity in loss of unconsolidated entity......................... -- -- 1,975,257
Changes in operating assets and liabilities:
Accounts and other receivables............................... (2,845,258) (3,126,279) (28,041,472)
Other current assets......................................... (422,429) (623,756) (2,180,627)
Accounts payable and accrued expenses........................ 5,497,686 2,563,812 1,294,561
Other liabilities............................................ 1,191,864 (713,736) 95,902
------------- ------------- -------------
Cash used in operating activities.......................... (10,550,304) (16,079,247) (40,350,484)
------------- ------------- -------------
Cash flows from investing activities:
Additions to property and equipment.................................. (21,180,550) (25,533,246) (57,462,036)
Proceeds from disposition of property and equipment, net............. 35,670 10,537,786 2,057,664
Proceeds from notes receivable and advances due
from charter schools............................................... 2,331,667 1,880,989 4,931,007
Notes receivable and advances due from charter
schools............................................................ -- (15,768,384) (21,952,849)
Investment in unconsolidated entity.................................. -- -- (10,000,000)
Other assets (1,269,192) (1,445,035) (7,767,638)
------------- ------------- -------------
Cash used in investing activities............................ (20,082,405) (30,327,890) (90,193,852)
------------- ------------- -------------
Cash flows from financing activities:
Proceeds from issuance of stock and warrants......................... 25,251,971 62,060,480 167,784,859
Costs in connection with equity financing............................ (3,545,349) (1,146,939) (13,362,202)
Proceeds from stockholders' notes payable............................ 672,155 938,439 --
Payment to stockholder............................................... -- -- (2,175,000)
Proceeds from notes payable.......................................... 10,797,304 9,624,131 13,001,328
Payments on notes payable and capital leases......................... (7,293,088) (6,178,626) (9,027,134)
Restricted cash...................................................... (3,500,000) 1,540,584 (955,887)
------------- ------------- -------------
Cash provided by financing activities........................ 22,382,993 66,838,069 155,265,964
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents........................ (8,249,716) 20,430,932 24,721,628
Cash and cash equivalents at beginning of period........................ 15,741,360 7,491,644 27,922,576
------------- ------------- -------------
Cash and cash equivalents at end of period.............................. $ 7,491,644 $ 27,922,576 $ 52,644,204
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the periods for: interest........................... $ 1,761,821 $ 3,008,260 $ 3,554,350
Supplemental disclosure of non-cash investing and financing activities:
Dividends declared and settled with notes in lieu of
cash ............................................................. $ 5,000,000
Amounts due from bank under note payable incurred....................
Accretion of Series D preferred PIK dividend......................... $ 277,694 $ 1,026,462
Additions to property and equipment included
in accounts payable................................................ $ 8,489,460 $ 7,666,235
Additions to property and equipment financed by debt................. 10,770,375
The accompanying notes are an integral part of these financial statements.
58
59
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
1. DESCRIPTION OF BUSINESS
Edison Schools Inc. (the "Company") (formerly known as The Edison Project
Inc. and Subsidiaries) manages elementary and secondary public schools under
contracts with school districts and charter schools located in 16 states and
Washington, D.C. The Company opened its first four schools in the fall of 1995,
and, as of June 30, 2000, operated 79 schools with approximately 37,500
students.
The Company provides the education program, recruits and manages
personnel, and maintains and operates the facilities at each school it manages.
The Company also assists charter schools in obtaining facilities and the related
financing. As compensation for its services, the Company receives revenues which
approximate, on a per pupil basis, the average per pupil spending of the school
district in which the school is located.
Prior to November 18, 1996, the Company was a partnership. On November 18,
1996, the partners transferred their interests in the assets and liabilities of
the partnership, in a tax free conversion to the Company, in exchange for common
and preferred stock. This transaction was accounted for as a reorganization of
entities under common control, in a manner similar to a pooling-of-interests.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, time deposits, and money market accounts all with original
maturities of three months or less. Cash equivalents also include highly liquid
debt securities that may have original maturities greater than three months, but
are readily convertible into cash. Certain amounts transferred from the
Company's operating accounts are invested in overnight investments and are
available back in the Company's operating account the next day. The Company
maintains funds in accounts in excess of FDIC insurance limits; however,
management believes that it minimizes risk by maintaining deposits in high
quality financial institutions.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Routine maintenance and repairs
are expensed as incurred. The cost of major additions, replacements, and
improvements are capitalized. Gains and losses from sales or retirements of
property and equipment are included in earnings for the period. Depreciation is
computed on a straight-line basis over the estimated useful lives of the
respective assets (30 years for buildings, the remaining lease term or shorter
for leasehold improvements and 3-5 years for all other items).
The Company purchases or renovates existing buildings to ready them for
charter school use. It is the Company's intention to recapture purchase or
renovation costs through sale to a third party or through the sale or lease of
the building to the charter school board. Buildings or renovations completed and
ready for charter school use are depreciated on a straight line basis over the
estimated useful life of the building. The Company's policy is not to capitalize
interest costs on charter school renovation expenditures since the sale
transaction does not provide for recovery of interest expense.
LONG-LIVED ASSETS
The carrying amount of assets is reviewed on a regular basis for the
existence of facts or circumstances, both internally and externally, that
suggest impairment. The Company determines if the carrying amount of a
long-lived asset is impaired based on anticipated undiscounted cash flows before
interest. In the event of impairment, a loss is recognized based on the amount
by which the carrying amount exceeds the fair value of the asset. Fair value is
determined primarily using the anticipated cash flows, discounted at a rate
commensurate with the risk involved. No impairment loss has been recorded in
fiscal 2000 and fiscal 1999. The Company has not capitalized interest under SFAS
No. 34 in
59
60
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
connection with the purchase and renovation of certain charter school buildings,
since to do so would have required a corresponding adjustment for impairment
under SFAS No. 121.
RESTRICTED CASH
Restricted cash consists of cash held in escrow in compliance with certain
debt agreements, credit issued for the benefit of certain technology suppliers
and certain amounts restricted for use in the start-up of future Edison schools.
REVENUE RECOGNITION
The Company recognizes revenue from each school on a pro rata basis over
eleven months from August through June (the "School year"). Revenue and revenue
estimates are principally derived from contractual relationships to manage and
operate contract and charter schools. The Company also receives small amounts of
revenue from the collection of after-school program fees and food service costs.
The Company receives 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 Company records adjustments to
revenue, if necessary, for accounts receivable deemed uncollectible.
PREOPENING COSTS
The Company expenses certain preopening training, personnel and other
costs, which are incurred prior to the fiscal year in which operations commence
at new school sites.
NOTES RECEIVABLE
Notes receivable are recorded at face value, less an original issue
discount if the note has no stated rate of interest. The original issue discount
is calculated using the Company's rate of interest associated with the cost of
funds for the period in which the note is issued. It is management's policy to
recognize any note as impaired when, based on its assessment of events and
circumstances, it is probable that the Company will be unable to collect all
amounts due. If a note is deemed impaired, the Company would measure impairment
based on the present value of future cash flows. No impairments have been
recognized to date.
DEFERRED CHARTER COSTS
Deferred charter costs arise as a result of the Company providing cash to
certain charter schools in return for non-interest bearing notes. In accordance
with APB No. 21, the Company discounts the non-interest bearing notes and
records the corresponding discount as deferred charter costs. These costs
represent the accounting recognition given to the Company's right to operate the
charter school. Deferred charter costs are included in other assets and are
amortized on a straight line basis over the same period as the related discount.
Net deferred charter costs and accumulated amortization as of June 30,
1999 and 2000 were $1,207,366 and $1,479,361 and $1,033,949 and $2,613,009,
respectively.
STOCK-BASED COMPENSATION
For financial reporting purposes, the Company accounts for stock-based
compensation in accordance with the intrinsic value method of accounting
prescribed by APB No. 25 "Accounting for Stock Issued to Employees." In
accordance with this method, no compensation expense is recognized in the
accompanying financial statements in connection with the awarding of stock
option grants to employees provided that, as of the grant date, all terms
associated with the award are fixed and the fair value of the
60
61
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
Company's stock, as of the grant date, is not greater than the amount an
employee must pay to acquire the stock as defined. To the extent that stock
options are granted to employees with variable terms or if the fair value of the
Company's stock as of the measurement date is greater than the amount an
employee must pay to acquire the stock, then the Company will recognize
compensation expense.
Disclosures, including pro forma operating results had the Company
prepared its financial statements in accordance with the fair value based method
as stated in Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation," have been included in Note 10.
ADVERTISING EXPENSES
Advertising costs consist primarily of print media and brochures and are
expensed when the related advertising occurs. Total advertising expense for the
three years ended June 30, 1998, 1999 and 2000 amounted to approximately
$265,000, $788,000, and $1.7 million respectively.
INCOME TAXES
The Company recognizes deferred income taxes for the tax consequences in
future years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each reporting period based on enacted tax
laws and statutory tax rates. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
Income tax expense consists of the tax payable for the period and the change
during the period in deferred tax assets and liabilities. Prior to the
reorganization (Note 1), the entity structure consisted solely of a partnership,
which paid no federal income taxes. Any income or loss was included in the tax
returns of the partners.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, accounts payable and accrued
liabilities, approximate fair value because of their short maturities. The
carrying amount of the Company's capital lease and other equipment financing
obligations approximates the fair value of such instruments based upon
management's best estimate of interest rates that would be available to the
Company for similar debt obligations at June 30, 2000.
NET LOSS PER SHARE
The Company accounts for its earnings per share in accordance with SFAS
No. 128, "Earnings per Share." Basic earnings per share excludes any dilutive
effect of options, warrants and convertible securities. 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.
61
62
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
LOSS PER SHARE
The pro forma basic and diluted net loss per share for the fiscal year
ended June 30, 2000 is as follows:
Net loss......................................................................... $ (36,589,614)
================
Class A Common stock outstanding at beginning of period.......................... 28,186,673
Class B Common stock outstanding at beginning of period.......................... 3,131,852
Add:
Issuance of Class A Common stock (as if converted on a
weighted average basis)....................................................... 7,902,561
Issuance (conversion) of Class B Common stock (as if
converted on a weighted average basis)........................................ 277,295
----------------
Pro forma weighted average number of shares outstanding,
assuming conversion of convertible preferred stock used in
computing basic and diluted net loss per share................................ 39,498,381
================
Pro forma basic and diluted net loss per share................................... $ (0.93)
================
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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,
revenues, certain school expenses, useful lives, recoverability of equipment,
deferred income tax valuation allowance, certain accrued expenses and expenses
in connection with stock options and warrants; actual results could differ from
these estimates.
SEGMENTS
Management evaluates its operating performance as a single segment. The
Company's Chief Operating Officer reviews school performance based on a
comprehensive, whole school approach. Real estate, after school programs, food
services and various other activities are not evaluated on an individual basis.
BASIS OF PRESENTATION
The fiscal 1998 financial statements of the Company reflect the
consolidated accounts of its two then wholly owned subsidiaries, Edison Project,
LP (the "Partnership") and an inactive corporation. All intercompany balances
and transactions have been eliminated in consolidation. During fiscal 1999, the
two subsidiaries were merged into the Company or dissolved and their assets and
liabilities were assumed by the Company.
RECLASSIFICATION
Certain reclassifications have been made to the 1999 financial statements
to conform to current year presentation.
3. NOTES AND OTHER RECEIVABLES
The Company provides financing in the form of interest and non-interest
bearing loans and advances to charter school boards to assist in the purchase or
renovation of charter school facilities. Certain of the loans are evidenced by
notes and other advances which are made in concert with a management contract or
without fixed repayment terms.
62
63
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
Of the approximate $28,000,000 in notes and advances, net at June 30,
2000, approximately $6,700,000 is collateralized and the balance is
uncollateralized and may be subordinated to other senior debt.
In order for the loans to be repaid, the Company generally assists
charter school boards in obtaining third party lender financing. Upon repayment
of the loans to the Company, the Company may guarantee loans to the third party
lender. The default by any charter school under a credit facility that is
guaranteed by the Company may result in a claim against the Company for the full
amount of the borrowings. (See Note 13)
Notes and other receivables consist of the following:
JUNE 30,
------------------------------------------
1999 2000
------------------- -------------------
Notes receivable due from charter schools(a)..................... $ 6,084,574 $ 16,366,551
Advances due from charter schools(b)............................. 5,975,537 11,672,607
Other receivables................................................ 1,544,745 2,499,739
------------------- -------------------
13,604,856 30,538,897
Less, current portion............................................ 9,711,772 14,515,200
------------------- -------------------
Total notes and other receivables........................... $ 3,893,084 $ 16,023,697
=================== ===================
(a) Notes receivable due from charter schools includes non-interest
bearing notes with an aggregate face value of $6,803,410 and $4,030,464
at June 30, 1999 and 2000, respectively, less unamortized imputed discount
of $1,465,768 and $827,635 at June 30, 1999 and 2000, respectively.
Interest is imputed on the notes at 12% per annum. This imputed rate is
management's estimate of the fair market interest rate for these loans
based on the Company's current estimated borrowing rate of approximately
10% and management's assessment of the incremental risk associated with
these loans. The notes mature at various dates through the year 2002.
Notes receivable due from charter schools includes interest bearing
notes at interest rates ranging from 6% to 10% per annum. Management
believes that the stated rates are the fair market rate for these notes.
The rates are less than the imputed rate on the non-interest bearing notes
discussed above due to negotiations between the charter school boards and
the Company. The notes amounted to $746,932 and $13,163,722 at June 30,
199 and 2000, respectively, and mature at various dates through the year
2005.
(b) Advances due from charter schools were converted into a non-interest
bearing note receivable in July 1999. The note is due March 31, 2001 and
automatically converts into a 20 year term loan with interest at 10% per
annum and regular amortization. The advances have been discounted at a rate
of 12% over the expected period of refinancing, consistent with the
treatment of non-interest bearing notes receivable as discussed in (a)
above. The face value of the advances at June 30, 1999 and 2000 was
$6,343,153 and $12,766,158, less unamortized imputed discount of $367,617
and $1,093,551, respectively.
63
64
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
Aggregate maturities of notes receivable are as follows:
For the fiscal year ending June 30,
2001 $ 15,608,751
2002 401,969
2003 7,635,309
2004 4,257,793
2005 4,556,261
------------------
32,460,083
Less: amount representing discount (see note 3(a) and (b)).......................... (1,921,186)
------------------
Total notes and other receivables................................................... 30,538,897
Less: current portion, net of unamortized discount of $1,093,551.................... (14,515,200)
------------------
Notes and other receivables, noncurrent............................................. $ 16,023,697
==================
4. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30,
-----------------------------------------
1999 2000
------------------ -------------------
Land and buildings....................................................... $ -- $ 1,054,843
Leasehold improvements................................................... 11,844,562 34,535,261
Furniture, fixtures and equipment........................................ 36,137,855 62,962,662
Software License......................................................... -- 11,658,986
Educational software and textbooks....................................... 16,673,303 28,717,566
------------------- -------------------
64,655,720 138,929,318
Accumulated depreciation and amortization................................ (21,784,482) (40,795,599)
------------------- -------------------
Property and equipment, net......................................... $ 42,871,238 $ 98,133,719
=================== ===================
Depreciation expense amounted to $5,621,509, $9,948,811, and $18,505,611
for the years ended June 30, 1998, 1999 and 2000, respectively. Capitalized
interest of $384,592 was recorded for the year ended June 30, 2000, in
connection with the development of the Company's new computer system. The
Company wrote off approximately $1.1 million and $157,000 of equipment during
the years ended June 30, 1999 and 2000 in connection with its year end physical
equipment inventory.
Assets under capital leases at both June 30, 1999 and 2000 totaled
$5,449,180 and $5,219,257 and related accumulated amortization totaled
$4,564,551 and $5,189,138, respectively. Amortization expense for each of the
three years ended June 30, 1998, 1999 and 2000 related to assets under capital
leases amounted to $1,602,121, $1,543,144 and $805,028, respectively.
In March 1998, the Company purchased an office building in Trenton, New
Jersey for approximately $618,000 and made significant improvements for use as a
charter school. In December 1998, the Company sold the building to a real estate
investment trust, and simultaneously entered into an 18 year operating lease for
the building with future annual minimum rentals approximating $950,000.
Subsequent to the sale and leaseback, the Company is expected to continue its
operating lease with the charter school (the "Sublease") on a month-to-month
basis (see Note 7). The Company received approximately $6,000,000 in cash and
realized a gain of approximately $28,000 on the sale of the building, which is
included in the loss on disposal of property and equipment in the statement of
operations for the year ended June 30, 1999. During the year ended June 30,
2000, the Company disposed of leasehold improvements totaling approximately
$2,058,000 for a gain of approximately $7,000.
In June 1998, the Company exercised an option to purchase a charter school
building in Detroit, Michigan for $2,500,000 which the Company had been leasing
under a capitalized lease. In September 1998, the Company, which provides
services at the site, sold the building to the charter school for
64
65
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
approximately $6,300,000 and incurred a loss of approximately $79,000, which is
included in the loss on disposal of property and equipment in the statement of
operations for the year ended June 30, 1999. The Company received approximately
$4,400,000 in cash and a non-interest bearing subordinated note approximating
$1,900,000 before discount, which is due on June 30, 2002 (see Note 3(a)).
ACQUISITION OF UNDEVELOPED PROPERTY
In partnership with the Museum of African Art, the Company plans to
acquire and develop certain New York City property for a mixed-use project
consisting of Edison Corporate Headquarters, a charter school, and the museum.
To that end, the Company has entered into a contract to purchase from Castle
Senior Living LLC ("Castle") a lot located in the Harlem section of the borough
of Manhattan in New York City, for a purchase price of $10.0 million (the
"Purchase Agreement"). Additionally, the Company is negotiating with the Museum
of African Art concerning these matters and has entered into a letter of intent
setting forth the proposed business terms of the project and a development
schedule (the "Letter of Intent").
Under the terms of the Purchase Agreement, which was executed January 11,
2000, the Company paid $1.5 million to Castle upon execution and delivery of the
Purchase Agreement, $500,000 thirty days after the execution date and $1.0
million on June 29, 2000. The closing date is currently scheduled for January
11, 2001, at which time the balance of the purchase price must be paid. If the
Company is unable to obtain the necessary zoning approvals prior to December 28,
2000, it will have the option of extending the closing date until April 11,
2001, if it pays Castle an additional $500,000.
The Letter of Intent is non-binding, and the terms set forth therein are
subject to negotiation, execution and delivery of definitive agreements. The
Company anticipates, however, that it will incur costs in carrying out its
obligations under the Letter of Intent, including but not limited to legal fees,
consultants' fees, and filing and application fees. As of June 30, 2000, other
assets includes $3 million for payments made in accordance with the terms of the
agreement.
5. ACCRUED EXPENSES
Accrued expenses consist of the following:
JUNE 30,
----------------------------------------
1999 2000
--------------- ----------------
Accrued payroll and benefits.......................................... $ 7,349,776 $ 13,881,701
Accrued taxes other than income....................................... 1,436,092 1,656,501
Accrued other......................................................... 1,013,853 672,709
---------------- ----------------
Total accrued expenses.......................................... $ 9,799,721 $ 16,210,911
================ ================
6. LONG-TERM DEBT
Long-term debt consists of the following:
JUNE 30,
---------------------------------------
1999 2000
----------------- ----------------
Notes payable(a)...................................................... $ 13,934,160 $ 19,044,476
Financing Agreement(b)................................................ -- 10,580,944
Capital leases (Note 7)............................................... 990,453 43,762
---------------- ----------------
14,924,613 29,669,182
Current portion....................................................... (6,660,789) (11,838,495)
---------------- ----------------
Total long-term debt............................................ $ 8,263,824 $ 17,830,687
================ ================
(a) Notes payable at June 30, 1999 and 2000 consist of notes with five
financing companies
65
66
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
collateralized by computer equipment, furniture and other assets of the
Company. All notes are similarly structured and generally provide for
equal monthly installments, including interest and principal, over a term
of 36 to 48 months. Monthly payments to each noteholder range from
approximately $13,000 to $456,000. Certain notes also provide for a final
installment of up to 17.5% of the original principal amount. Interest
rates are fixed and range from 14.1% to 20.4% per annum.
(b) In June 2000, the Company entered into a 36 month financing agreement with
the IBM Credit Corporation for the purchase of software. Such software
will be used to support the technology used in the Company's schools
throughout the United States. The finance agreement totals approximately
$10.7 million and has an effective rate of 15.95%.
In June 2000, the Company received a financing commitment for a 36 month
lease with Cisco Systems Credit Corporation. This lease will be used to finance
and be collateralized by certain equipment to be placed in schools. The lease
commitment is up to $2.4 million and has an effective rate of 11.0%. No amounts
were outstanding under this commitment at June 30, 2000.
In connection with amounts currently outstanding under the notes payable
and capital lease agreements (see Note 7), as of June 30, 1999 and 2000, the
Company had outstanding stock purchase warrants to lenders that provide for the
purchase of up to 625,881 and 15,000 shares of common stock at purchase prices
ranging from $2.00 to $8.00 and $12.30 per share, respectively. The stock
purchase warrants are exercisable 100% at the date of grant. The stock purchase
warrant outstanding expires in fiscal 2005. At the time of issuance, the value
of the warrants was not deemed significant pursuant to a calculation using the
Black Scholes option pricing model. Accordingly, no value was assigned to the
warrants.
In October 1999, in connection with an equipment financing, the Company
issued to an equipment financing firm a warrant to purchase up to 15,000 shares
of common stock at an exercise price of $12.30 per share. The warrant vested
upon issuance and expires five years from date of issuance. Upon the closing of
the Company's initial public offering in November 1999, 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.
During the fiscal year ended June 30, 2000, pursuant to the exercise of
finance-related warrants to purchase 625,881 shares at prices ranging from $2.00
to $8.00 per share, a total of 497,528 shares of Class A Common Stock were
issued in non-cash transactions.
The Company is subject to certain reporting debt covenants under several
of its debt agreements.
Aggregate maturities of notes payable are as follows:
For the fiscal year ending June 30,
2001 $ 11,794,727
2002 10,466,795
2003 7,363,898
---------------
Total......................................... $ 29,625,420
===============
In November 1999, the Company obtained a line of credit from Imperial
Bank (the "LOC") which provides for borrowings of up to $10.0 million. The LOC
is for three 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. The Company incurs a cost for
unused balances on the LOC equal to five basis points per annum. As of June 30,
2000, no amounts had been borrowed under the LOC. The Company expects, to
terminate the line of credit in the second quarter of fiscal 2001.
66
67
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
7. LEASES
The Company has entered into several lease agreements for school site
computers and equipment. The agreements, which are accounted for as capital
leases, provide that the Company will lease equipment for terms of 36 or 42
months with interest rates of 9.5% to 15.95%. Also, the Company has entered into
various non-cancelable operating leases for office space and currently leases
school sites. These leases expire at various dates through the year 2020.
At June 30, 2000, the present value of the minimum lease payments under
the capital leases and rental commitments under operating leases with terms in
excess of one year are as follows:
CAPITAL OPERATING
LEASES LEASES
--------------- -----------------
For the fiscal year ending June 30,
2001....................................................................... $ 44,270 4,808,622
2002....................................................................... -- 5,004,126
2003....................................................................... -- 5,160,581
2004....................................................................... -- 5,085,001
2005....................................................................... -- 4,907,789
Thereafter................................................................. -- 32,819,458
--------------- -----------------
Total commitments.......................................................... 44,270 $ 57,785,577
=================
Less amount representing interest.......................................... (508)
---------------
Present value of minimum lease payments.................................... 43,762
Less current installments of capital lease obligation...................... (43,762)
---------------
Capital lease obligations, excluding current installments.................. $ 0
===============
Total rental expense for each of the three years ended June 30, 1998, 1999
and 2000 related to operating leases amounted to approximately $1,876,000,
$3,388,000, and $4,495,000 respectively.
The Company has a sublease with a charter school on a month-to-month basis
in the amount of $28,000 per month (see Note 4). The rental income has been
recorded as a reduction to rental expense included in administration, curriculum
and development expense.
8. RELATED PARTY TRANSACTIONS
STOCKHOLDER NOTES RECEIVABLE
The stockholder notes receivable consists of two recourse notes from the
Chairman of the Company, which arose in connection with his employment
agreements. The note agreements, as amended October 15, 1999, bear interest at
prime rate per annum as defined by Chase Manhattan Bank and do not require
periodic interest or principal payments until maturity. The stockholder
receivable is collateralized by the assignment of the proceeds of a life
insurance policy and in the event of termination can be offset against the
severance pay obligation of the Company. The receivable is due on the earlier of
February 15, 2002, the date on which employment of the Chairman is terminated by
the Company or upon the death of the Chairman.
In November 1999 and April 2000, the Company loaned $6,620,700 and
$1,248,500, respectively to its President and Chief Executive Officer. The loans
bear interest at the greater of the prime rate or the Company's actual borrowing
rate, in effect from time to time, with payment of the principal amount of
$6,620,700 and accrued interest on the November 1999 loan due in full in
November 2004 and payment of the principal amount of $1,248,500 and accrued
interest on the April 2000 loan due in full in April 2005.
The proceeds from the loans were used 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
67
68
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
portion of the loan attributable to the purchase of shares, amounting to
$2,175,000, has been recorded on the balance sheet at June 30, 2000 as a
reduction of stockholders' equity.
STOCKHOLDERS' NOTES PAYABLE
The Series A Common and Series A-C Preferred stockholders were issued
promissory notes dated December 18, 1997 for $4,407,903 and January 1, 1998 for
$592,097 (see Note 9). In addition, as part of the Series D Preferred private
placement (see Note 9), the Company issued to stockholders, promissory notes
dated December 30, 1997 for $611,025, January 28, 1998 for $61,130, August 24,
1998 for $487,844 and December 14, 1998 for $450,595. The principal for each of
the notes is payable on the tenth anniversary of the dates of issuance. Each
note bears interest at 7% per annum, of which 50% is payable at maturity and the
balance payable each April 1, starting in fiscal 1999 and thereafter.
PAYMENT ON BEHALF OF AN OFFICER
In May 2000, the Company agreed to make payments totaling $200,000 to an
unrelated corporation controlled by an officer of the Company, as compensation
for expenses incurred by the unrelated corporation, as an inducement to the
unrelated corporation not to compete with the Company for five years and to
release the officer and two associates from obligations due to the corporation.
A payment of $100,000 was made in May 2000 and the remaining $100,000 was paid
in August 2000.
INVESTMENT IN UNCONSOLIDATED ENTITY
In July 1999, the Company entered into a preferred stock purchase agreement with
a corporation providing for the purchase of up to 2,000,000 shares of the
corporation's preferred stock, par value $0.001 per share, for a purchase price
of $5.00 per share. The Company purchased 1,000,000 shares in July 1999 for a
total investment of $5,000,000, which represents approximately 16.5% ownership
in the corporation. Under the agreement, if the corporation sells additional
shares of its preferred stock prior to the second anniversary of the investment,
the Company will be required to purchase up to $5,000,000 of additional shares
of preferred stock. In December 1999, an additional $5,000,000 was invested in
the corporation, increasing the Company's ownership to 19.7%. Due to the nature
of the Company's relationship with the corporation, the investment was accounted
for under the equity method. As of June 30, 2000, the Company modified its
relationship with the corporation such that the Company no longer had
significant influence and therefore the investment will be accounted for
prospectively under the cost method. As of June 30, 2000, the Company's initial
investment of $10 million is now shown net of equity in losses of the
unconsolidated entity of $1,975,257.
68
69
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
9. COMMON AND PREFERRED STOCK
PREFERRED STOCK
Preferred stock consisted of the following:
JUNE 30, 1999
-----------------------------------
AUTHORIZED PAR OUTSTANDING
DESCRIPTION SHARES VALUE SHARES AMOUNT
- ----------- ------------- --------- ---------------- -----------------
Series A Convertible Preferred stock
("Series A Preferred")....................... 31,000,000 $ .01 15,147,218 $ 151,472
Series B Convertible Exchangeable
Preferred stock ("Series B Preferred")....... 1,010,101 $ .01 505,050 5,051
Series C Convertible Exchangeable
Preferred stock ("Series C Preferred")....... 6,258,608 $ .01 3,129,304 31,293
Series D Convertible Preferred stock
("Series D Preferred")....................... 25,077,843 $ .01 7,050,863 1,374,666
Non-Voting Series E Convertible
Preferred ("Non-Voting Series E
Preferred").................................. 6,759,420 $ .01 -- --
Series F Convertible Preferred stock
("Series F Preferred")....................... 4,757,476 $ .01 1,978,738 19,787
Non-Voting Series G Convertible
Preferred stock ("Non-Voting
Series G Preferred")......................... 3,067,606 $ .01 400,000 4,000
Preferred Stock................................. -- $ .01 -- --
-------------- --------------
Total preferred stock....................... 28,211,173 $ 1,586,269
============== ==============
JUNE 30, 2000
------------------------------
OUTSTANDING
DESCRIPTION SHARES AMOUNT
- ----------- ---------------- ------------
Series A Convertible Preferred stock
("Series A Preferred")....................... -- --
Series B Convertible Exchangeable
Preferred stock ("Series B Preferred")....... -- --
Series C Convertible Exchangeable
Preferred stock ("Series C Preferred")....... -- --
Series D Convertible Preferred stock
("Series D Preferred")....................... -- --
Non-Voting Series E Convertible
Preferred ("Non-Voting Series E
Preferred").................................. -- --
Series F Convertible Preferred stock
("Series F Preferred")....................... -- --
Non-Voting Series G Convertible
Preferred stock ("Non-Voting
Series G Preferred")......................... -- --
Preferred Stock................................. -- --
------------ ---------
Total preferred stock....................... -- --
============ =========
COMMON STOCK
Common stock consisted of the following:
JUNE 30, 1999
---------------------------------
AUTHORIZED PAR OUTSTANDING
DESCRIPTION SHARES VALUE SHARES AMOUNT
- ----------- ---------------- ------ ---------------- ---------------
Series A Common Stock
("Series A Common").......................... 97,466,145 $ .01 3,107,350 $ 31,074
Series B Common Stock
("Series B Common").......................... 1 $ .01 1 --
Series C Common Stock
("Series C Common").......................... 1 $ .01 1 --
Series D Common Stock
("Series D Common").......................... 1 $ .01 1 --
Series E Common Stock
("Series E Common").......................... 1 $ .01 1 --
Series F Common Stock
("Series F Common").......................... 1 $ .01 1 --
Series G Common Stock
("Series G Common").......................... 1 $ .01 1 --
Series H Common Stock
("Series H Common").......................... 1 $ .01 -- --
Class A Common Stock........................... 150,000,000 $ .01 -- --
Class B Common Stock........................... 5,000,000 $ .01 -- --
Non-Voting Common Stock........................ 9,827,026 $ .01 -- --
------------- -------------
Total common stock........................ 3,107,356 $ 31,074
============= =============
JUNE 30, 2000
---------------------------------
OUTSTANDING
DESCRIPTION SHARES AMOUNT
- ----------- --------------- ---------------
Series A Common Stock
("Series A Common")......................... -- --
Series B Common Stock
("Series B Common")......................... -- --
Series C Common Stock
("Series C Common")......................... -- --
Series D Common Stock
("Series D Common")......................... -- --
Series E Common Stock
("Series E Common")......................... -- --
Series F Common Stock
("Series F Common")......................... -- --
Series G Common Stock
("Series G Common")......................... -- --
Series H Common Stock
("Series H Common")......................... -- --
Class A Common Stock.......................... 39,558,746 395,588
Class B Common Stock.......................... 3,448,004 34,480
Non-Voting Common Stock....................... -- --
--------------- ---------------
Total common stock....................... 43,006,750 $ 430,068
=============== ===============
Series B Common through Series H Common were known as "Special Common".
All holders of common stock are entitled to share ratably in any dividends
declared by the board of directors.
69
70
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
Holders of Special Common held rights not afforded to other holders of
Common Stock, such as certain rights to elect members of the Company's Board of
Directors and to participate in certain votes regarding the By-Laws. Shares of
Special Common were non-transferable except to the Company and as expressly set
forth in the Company's Shareholders' Agreement. Holders of Preferred Stock and
Series A Common had certain preemptive rights to purchase in any sale of
additional equity by the Company and on the same terms such additional shares as
were necessary to maintain such holder's relative percentage ownership.
On July 2, 1999, the Company filed an amended Certificate of Incorporation
with the State of Delaware which changed its capital structure. The authorized
capital stock subsequent to the amendment consisted of 114,893,179 shares of
Common Stock, par value $0.01 per share, and 85,531,054 shares of Preferred
Stock, par value $0.01 per share, representing an additional authorization of
7,600,001 shares of Common Stock and an additional 7,600,000 shares of Preferred
Stock. Of the total increase in Common Stock, 7,000,000 shares were designated
as Series A Common, one share was designated as Series I Common Stock, and an
additional 600,000 shares were designated as Non-Voting Common Stock. Of the
total increase in Preferred Stock, 7,000,000 shares were designated as Series F
Preferred and 600,000 shares were designated as Non-Voting Series G Preferred.
The Series F Preferred and the Non-Voting Series G Preferred ranked prior to the
Series A, B and C Preferred and the Common Stock. (See Notes 8 and 13).
In July 1999, the Company completed two private placement financing
transactions for total proceeds of $41,741,518 in exchange for 3,393,619 shares
of Series F Convertible Preferred and one share of Series I Common.
On July 29, 1999, the Company filed an amended and restated certificate of
incorporation which changed the Company's capital structure. The authorized
capital stock subsequent to the amended and restated certificate of
incorporation consisted of 104,466,145 shares of Series A Common Stock, one
share of Series B Common Stock, one share of Series C Common Stock, one share of
Series D Common Stock, one share of Series E Common Stock, one share of Series F
Common Stock, one share of Series G Common Stock, one share of Series H Common
Stock, one Share of Series I Common Stock, 10,427,026 shares of Non-Voting
Common Stock, 150,000,000 shares of Class A Common Stock, 5,000,000 shares of
Class B Common Stock, 31,000,000 shares of Series A Convertible Preferred Stock,
1,010,101 shares of Series B Convertible Exchangeable Preferred Stock, 6,258,608
shares of Series C Convertible Exchangeable Preferred Stock, 25,077,843 shares
of Series D Convertible Preferred Stock, 11,757,476 shares of Series F
Convertible Preferred Stock, 3,667,606 shares of Non-Voting Series G Convertible
Preferred Stock, and 5,000,000 shares of undesignated Preferred Stock.
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. Upon the
closing of the IPO, each share of the prior classes of preferred and common
stock was automatically converted into 0.45 shares of Class A Common Stock and
0.05 shares of Class B Common Stock, which had the same effect as a one-for-two
reverse stock split. Accordingly, all share and per share information included
in the financial statements prior to the IPO has been retroactively adjusted to
reflect a one-for-two reverse stock split.
In general, holders of Class A Common Stock have the same rights as the
holders of Class B Common Stock, except that:
- holders of Class A Common stock have one vote per share and holders
of Class B Common Stock have ten votes per share; and
- beginning with the annual meeting of stockholders in the fall of
2000, holders of Class B Common Stock will be entitled, as a
separate class, to elect four of the 11 members of our Board of
Directors
70
71
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
and the holders of Class A Common Stock will be entitled, as a
separate class, to elect the remaining seven directors.
The holders of Class A Common Stock and Class B Common Stock have
cumulative voting rights in the election of their respective directors. On other
matters presented to the stockholders for their vote or approval, the holders of
Class A Common Stock and Class B Common Stock will vote together as a single
class, except as to matters affecting the rights of the two classes of common
stock or as may be required by Delaware law. Class B Common Stock may be
converted into Class A Common Stock at any time on a one-for-one basis. Each
share of Class B Common Stock will automatically convert into one share of Class
A Common Stock upon its transfer in most circumstances or upon the occurrence of
other specified events.
In connection with the closing of the IPO, the Company filed an amended
and restated certificate of incorporation which changed the Company's capital
structure. The authorized capital stock, due to the change in capital structure,
consisted of 150,000,000 shares of Class A Common Stock, 5,000,000 shares of
Class B Common Stock, and 5,000,000 shares of Preferred Stock.
In March 1995, the Company granted to an investment bank an option to
purchase 100,000 shares of common stock, exercisable at $0.50 per share, for
services rendered in raising equity financing. This option was exercised and
100,000 shares of Class A Common Stock were issued during fiscal 2000.
In addition, WSI, a stockholder, holds two options to purchase shares of
the Company's common stock. Under the first option, WSI has the right to
purchase up to 382,500 shares of Class A Common Stock and 42,500 shares of Class
B Common Stock at $20 per share. Under the second option, WSI has the right to
purchase up to 450,000 shares of Class A Common Stock and 50,000 shares of Class
B Common Stock at $40 per share. The options expire in years 2003 through 2005.
At the time of the grant in March 1995, the options were accounted for pursuant
to the provision of APB No. 25 and, accordingly, the Company recorded no
compensation expense.
The Series D Preferred was sold to accredited investors for a unit price
of $7.96. A unit included a share of Series D Preferred, three options for
fractional shares of common stock, and a note payable for 22.8 cents per share.
Of the three options included in the unit, the first option entitles the holder
to .0086359 share of Class A Common Stock and .0009595 share of Class B Common
Stock at an exercise price of $20.00 per share. The option expires between years
2003 and 2005. The second option entitles the holder to .0086359 share of Class
A Common Stock and .0009595 share of Class B Common Stock at an exercise price
of $3.00 per share. The option became vested upon the completion of the
Company's IPO and expires 10 years after vesting. The third option entitles the
holder to .0129537 share of Class A Common Stock and .0014393 share of Class B
Common Stock at an exercise price of $16.00 per share. However, this option only
vests if the Company is a public company and its closing price has been $32.00
per share for more than 90 consecutive days. This option expires 10 years after
vesting. As of June 30, 2000, stock options issued and outstanding in
conjunction with the Series D preferred private placement entitled the holders
to purchase 426,212 shares of Class A Common Stock and 47,357 shares of Class B
Common Stock.
In June 1998, the Company in exchange for $2,500,000, issued a warrant to
a philanthropic foundation which currently represents the right to purchase
1,698,750 shares of Class A Common Stock and 188,750 shares of Class B Common
Stock at a price of $7.96 per share. The warrant expires on June 1, 2005.
Certain provision of the warrant agreement require such funds to be applied
towards the pre-opening expenses and start-up investments with respect to
certain schools that the Company operates.
71
72
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
10. STOCK OPTIONS
A summary of the Company's employee stock option activity is as follows:
WEIGHTED STOCK WEIGHTED
AVERAGE OF OPTIONS AVERAGE OF
SHARES EXERCISE PRICES EXERCISABLE EXERCISE PRICES
--------------- --------------- ----------- ---------------
Under option at June 30, 1997.............. 2,060,865 $ 2.60 638,213 $ 2.50
Options granted in fiscal 1998............. 4,783,110 $ 28.28
Options cancelled in fiscal 1998........... (10,477) $ 2.50
---------------
Under option at June 30, 1998.............. 6,833,498 $ 20.52 1,253,459 $ 2.56
Options granted in fiscal 1999............. 1,236,109 $ 16.16 171,663 $ 17.08
Options cancelled in fiscal 1999........... (151,583) $ 3.56
---------------
Under option at June 30, 1999.............. 7,918,024 $ 20.44 2,608,990 $ 4.02
Options granted in fiscal 2000............. 2,178,169 $ 17.05 314,081 $ 13.49
Options exercised in fiscal 2000........... (920,014) $ 3.30
Options cancelled in fiscal 2000........... (189,380) $ 8.60
---------------
Under option at June 30, 2000.............. 8,986,799 $ 21.52 3,460,134 $ 8.58
===============
The board of directors approved on October 20, 1998 and amended on June
30, 1999, the 1998 Site Option Plan (the "Site Plan"). A maximum of 750,000
shares of common stock can be awarded under the Site Plan. The options under
this plan cover all persons who are employed at the Company's schools. The
options granted are intended to be either incentive stock options under section
422 of the Internal Revenue Code of 1986 or non-qualified options. The vesting
of the options is determined by the board of the directors, however, these
become exercisable on the earlier of an IPO or February 16, 2006. The options
expire ten years after the date of grant. As of June 30, 2000, the Company has
granted options for 497,834 shares.
The board of directors on June 30, 1999 approved the adoption of the 1999
Stock Option Plan (the "1999 Plan"). A maximum of 500,000 shares of common stock
can be awarded under the 1999 Plan. The options granted generally cover
all employees except senior executives and are intended to be either incentive
stock options under Section 422 of the Internal Revenue Code of 1986 or
non-qualified options. Options granted will have an exercise price equal to the
fair market value of the common stock at the grant date. The board determines
the vesting of the options for each employee; however these became exercisable
upon the IPO. The options expire ten years after the date of grant. As of June
30, 2000, the Company has granted options for 489,986 shares.
The board of directors on June 30, 1999 approved the adoption of the 1999
Key Stock Incentive Plan (the "Key Plan"). A maximum of 500,000 shares of common
stock can be awarded under the Key Plan. The options granted cover a variety of
stock-based awards to senior executives, officers and directors and are intended
to be either incentive stock options under section 422 of the Internal Revenue
Code of 1986 or non-qualified options. Options granted will have an exercise
price equal to the fair market value of the common stock at the grant date. Each
option is exercisable as determined by the board of directors; such terms are
included in each option agreement. As of June 30, 2000, the Company has granted
options for 490,000 shares.
In October 1999, the board of directors approved the adoption of the 1999
Stock Incentive Plan (the "Incentive Plan") for employees and authorized the
compensation committee of the board of directors to administer the Incentive
Plan under which options for a maximum of 2,500,000 shares of Class A Common
Stock can be issued. To the extent that all or part of a stock based award
issued under the Incentive Plan is cancelled, the related shares are available
for future award grants. As of June 30, 2000 the Company has granted options for
1,399,689 shares.
72
73
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
During fiscal 2000, the Company granted 45,000 options to certain
non-employees which vest over a three year period. The Company recorded
approximately $62,000 of expense related to the issuance of these options.
On June 30, 1999, the Company granted options for 17,500 shares of Series
A Common under the Key Stock Incentive Plan to certain non-employees. An option
for 10,000 shares of Series A Common is exercisable at $8.00 per share and
vested 20% upon grant with the balance vesting ratably over the next four years.
An option for 7,500 shares of Series A Common is exercisable at $12.30 per share
and vests ratably over the next five years. As of June 30, 1999, the right to
acquire 2,000 shares was vested. Management believes that the value of the
options issued is de minimus as calculated using the Black-Scholes option
pricing model with the following assumptions: zero dividend yield; 30%
volatility, and a weighted average risk-free interest rate at 5.4% and expected
life of 10 years.
The following table summarizes information about stock options outstanding
at June 30, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------------- ----------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE OF AVERAGE OF
RANGE OF SHARES CONTRACTED EXERCISE SHARES EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICES EXERCISABLE PRICES
- --------------------- --------------- ----------------- ----------------- ----------------- ------------
$2.50................... 1,497,476 4.47 $ 2.50 1,417,682 $ 2.50
$3.00 - $8.00........... 828,678 7.52 $ 5.27 554,538 $ 4.56
$12.30.................. 1,494,134 9.06 $ 12.30 469,584 $ 12.30
$14.25 - $16.00......... 811,000 7.62 $ 15.87 753,791 $ 15.99
$20.00 - $21.31......... 1,205,511 9.74 $ 20.84 42,206 $ 20.96
$22.00.................. 500,000 9.00 $ 22.00 222,333 $ 22.00
$32.00.................. 1,250,000 7.46 $ 32.00 0 $ 32.00
$56.00.................. 1,400,000 7.46 $ 56.00 0 $ 56.00
------------- -------------
8,986,799 3,460,134
============= =============
During the twelve months ending June 30, 2000, the Company issued options
for approximately 2,178,169 shares at prices ranging from $12.30 to $21.31 per
share to employees and non-employees.
The Company, during the fourth quarter of fiscal 1999, made amendments to
existing options which resulted in a new measurement date. As a result,
stock-based compensation expense was recorded representing the difference
between the exercise price of the options and the deemed fair market value of
the underlying stock at that time. In this regard, the Company recognized an
expense of approximately $22.4 million during 1999 and approximately $3.9
million during fiscal 2000 in connection with stock options subject to variable
accounting.
Had compensation cost for the Company's stock option issuances been
determined based on the fair value at the grant date for awards in each of the
three years ended June 30, 1998, 1999 and 2000 consistent with the provisions of
SFAS No. 123, the Company's net loss and basic and diluted net loss per share
attributable to common stockholders would have been adjusted to the pro forma
amounts indicated below:
73
74
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
YEAR ENDED JUNE 30,
--------------------------------------------------------------
1998 1999 2000
------------------- -------------------- -----------------
Net loss attributable to common stockholders -- as
reported................................................ $ (26,482,749) $ (50,459,253) $ (36,589,614)
Net loss attributable to common stockholders -- pro
forma................................................... $ (26,223,668) $ (28,334,780) $ (38,612,431)
Basic and diluted net loss attributable to common
stockholders per share -- as reported................... $ (8.52) $ (16.24) $ (1.32)
Basic net loss attributable to common stockholders
per share -- pro forma.................................. $ (8.44) $ (9.12) $ (1.39)
The fair value of each option grant is estimated on the date of the grant
using the "Black-Scholes Option-pricing Model" with the following weighted
average assumptions used for grants for each of the years ended June 30, 1998,
1999 and 2000: zero dividend yield; no volatility; a weighted average risk-free
interest rate of 5.69%, 5.40% and 6.18% respectively; and expected lives of 3.0,
6.7 and 8.86 years, respectively.
74
75
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
The following table summarizes the weighted-average grant-date fair values
of options granted during fiscal 2000:
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
EQUALED FAIR EXCEEDED FAIR LESS THAN FAIR
VALUE AT ISSUANCE VALUE AT ISSUANCE VALUE AT ISSUANCE
----------------- ----------------- -----------------
Weighted average exercise price of options granted
during the year...................................... $ 17.13 NA $13.13
Weighted average fair value of options granted during
the year............................................. $ 17.13 NA $19.79
11. INCOME TAXES
There is no provision for federal or state and local income taxes pro
forma or otherwise for the years ended June 30, 1998, 1999 and 2000, since the
Company has incurred net losses. Due to the uncertainty of the Company's ability
to realize the tax benefit of such losses, a valuation allowance has been
established to equal the total net deferred tax assets.
The components of deferred tax assets and liabilities consist of the
following:
JUNE 30,
-------------------------------------------
1999 2000
-------------------- -------------------
Deferred tax assets:
Net operating loss carryforward............................ $ 30,277,000 $ 44,030,400
Accrued liabilities........................................ 1,874,000 2,425,004
Stock options.............................................. 8,501,000 9,880,538
Amortization............................................... 2,282,000 951,596
Organizational costs....................................... 13,000 7,315
------------------ -------------------
Total deferred tax assets............................... 42,947,000 57,294,853
------------------ -------------------
Deferred tax liabilities:
Fixed assets............................................... 857,000 634,772
------------------ -------------------
Total deferred tax liabilities.......................... 857,000 634,772
------------------ -------------------
Net benefit for income taxes.................................. 42,090,000 56,660,081
Valuation allowance........................................... (42,090,000) (56,660,081)
------------------ -------------------
Net deferred tax asset.................................. $ -- $ --
================== ===================
At June 30, 2000, the Company had approximately $115.9 million of net
operating loss carryforwards available to reduce its future taxable income.
Under current Federal income tax law, approximately $45 million of such
carryforwards will expire in 2013 and approximately $70.9 million will expire in
2019.
12. EMPLOYEE BENEFIT PLANS
The Company has established a 401(k) and a 403(b) Plan for substantially
all full-time employees and teachers. The Company matches each participant's
contribution up to 50% of the first $1,000. Participants become fully vested in
the match after one year. Contributions to the 401(k) and a 403(b) Plan made by
the Company for each of the three years ended June 30, 1998, 1999 and 2000
amounted to $28,936, $62,876, and $186,316 respectively.
13. COMMITMENTS AND CONTINGENCIES
LONG TERM LEASE OBLIGATIONS
The Company has entered into operating leases for two charter school
facilities with lease terms in excess of the initial term of the management
agreement for the schools operating in those facilities.
75
76
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
One of the facilities, currently housing two schools, has been leased for
an 18 year term expiring in June 2017. The initial term of the management
agreement to operate in this facility expires in June 2002. The annual lease
payments begin at $640,500 per year and increase by approximately 2% per year
resulting in a final year's annual rent of $905,823.
The second facility, currently housing two schools, has been leased for a
15 year term expiring in September 2013. The initial term of the management
agreement to operate in this facility expires in June 2001. The annual lease
payment is $769,000 through fiscal 2008 and increases to $932,400 for fiscal
2009 through fiscal 2013.
The Company's lease obligations noted above both exceed the length of the
initial management agreement. In the event that the management agreements are
not renewed, the Company would be obligated to continue paying rent on the
facilities.
FUNDRAISING AGREEMENT
Effective June 23, 2000, the Company entered into an agreement (the
"Fundraising Agreement") with Alliance Community Schools ("ACS"), an entity that
holds charters for the two schools managed by the Company in Ohio, pursuant to
which the Company agreed to work together with ACS to raise $4.0 million in
capital donations on behalf of ACS. Under the Fundraising Agreement, the Company
is required to transfer its interest in Alliance-Edison, $3.5 million included
in other assets at June 30, 2000, to ACS for $1 if (i) ACS raises $2.0 million
by June 30, 2002 and (ii) if (a) the Company fails either to raise or contribute
$405,000 from sources outside of the Dayton, Ohio area by March 1, 2001, or (b)
the Company fails to raise or contribute a total of $2.0 million by June 30,
2002.
LITIGATION
The Company is subject to occasional lawsuits, investigations and claims
arising out of the normal conduct of its business. Management does not believe
the outcome of any pending claims will have a material adverse impact on the
Company's financial position or results of operations.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
executives. Such agreements may be terminated by either the executive or the
Company at any time and provide, among other things, certain termination
benefits. As of June 30, 2000, the aggregate termination benefits of the
executives and certain other employees approximated $5.5 million.
SETTLEMENT AGREEMENTS
In connection with the development of certain parts of the core
curriculum, agreements were entered into with former employees to compensate
them for services rendered. Two former employees who provided such services had
bonus agreements while employed with the Company which amounted to $888,900 and
were contingent upon the occurrence of a qualified equity transaction. Such a
transaction occurred in December 1997, causing the obligation to be payable in
three equal annual installments beginning twelve months after the equity
transaction. In addition, the Company entered into settlement agreements with
three other former employees who, while employed, rendered such services for an
aggregated obligation of $1,825,000. Upon execution of the settlement agreements
dated January 30, 1998, $825,000 was paid immediately, while the balance of
$1,000,000 is payable in two equal annual installments of principal plus
interest on the first and second anniversary date of the agreements. Interest is
computed at the rate of 6% per annum. In addition, the attorney who rendered
legal services in connection with the settlement agreements was paid $10,000.
The aforementioned expenses are included in design team compensation for the
year ended June 30, 1998.
76
77
EDISON SCHOOLS INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 1998, 1999 AND 2000
GUARANTEES
The Company has guaranteed certain debt obligations of charter school
boards with which it has management agreements. As of June 30, 2000, the Company
had provided guarantees totaling approximately $6.7 million. The debt
obligations mature from August 2001 to June 2003.
As of June 30, 2000, the debt obligations of the charter school boards are
current. Under the guarantor agreements, the Company is also required to
maintain minimum cash balances that may increase under certain circumstances, as
well as to satisfy certain financial reporting covenants.
For fiscal 1998, 1999 and 2000, all covenants as guarantor have been met
except that the Company received waivers for June 30, 1998 and 1999,
respectively, from one financial institution as of June 30, 1998 and 1999 due to
non-compliance with a covenant that requires maintenance of certain minimum cash
balances aggregating to $1.5 million at fiscal year end. These instances of
non-compliance were cured on July 1, 1998 and July 5, 1999, respectively.
In July 2000 the Company guaranteed debt obligations of $1.6 million for a
charter school board with which it has a management agreement.
14. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to credit risk
consist primarily of cash and cash equivalents, notes receivable and advances to
charter schools, and trade receivables. The Company manages its credit risk by
maintaining cash and cash equivalents with financial institutions that it
believes are financially sound and through the contractual arrangements that it
has entered into with each district and charter school.
Trade receivables are primarily short-term receivables from various
district and charter schools. Credit risk is affected by changing conditions
within the economy of individual states and school districts in which the
Company operates. The Company establishes an allowance for doubtful accounts, if
necessary, based upon factors surrounding the credit risk of specific customers,
historical trends and other information.
Notes receivable from charter schools are both short-term and long-term.
Credit risk associated with those amounts is affected not only by the economy of
individual states and school districts in which the charter school operates, but
on the continued existence of charter school laws. The Company establishes an
allowance of uncollectible amounts, if appropriate, based upon factors
surrounding the credit risk of the specific charter schools, historical trends
and other information.
77
78
15. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly data for the years ended June 30, 2000 and
1999 are as follows (dollars in thousands, except for per share amounts):
QUARTER
--------------------------------------------------------------
2000 FIRST SECOND THIRD FOURTH
------------- ------------- ------------- ------------
Revenues from educational services............................ $ 41,151 $ 61,596 $ 61,531 $ 60,300
Loss from operations.......................................... (15,472) (6,208) (6,571) (9,694)
Net loss ................................................... (15,669) (6,044) (6,138) (8,739)
Loss per common share
Basic and diluted..................................... (.46) (.16) (.14) (.20)
QUARTER
--------------------------------------------------------------
1999 FIRST SECOND THIRD FOURTH
------------- ------------- ------------- ------------
Revenues from educational services............................ $ 24,004 $ 35,576 $ 36,391 $ 36,791
Loss from operations.......................................... (8,640) (6,606) (5,801) (28,255)
Net loss ................................................... (8,231) (5,879) (6,051) (29,272)
Loss per common share
Basic and diluted..................................... (.32) (.22) (.21) (.99)
16. SUBSEQUENT EVENTS
INVESTMENT IN KSIXTEEN LLC
Effective July 1, 2000, Edison obtained a 35% interest in Ksixteen LLC
("Ksixteen"), a company organized to provide construction management and real
estate development and financial advisory services to charter schools. The
Company and Ksixteen have also entered into a master development agreement
effective July 1, 2000 pursuant to which Ksixteen performs (at the Company's
direction) construction management and real estate development and financing
services on behalf of charter schools that have entered into management
agreements with the Company.
INVESTMENT IN ALLIANCE-EDISON
Effective July 21, 2000, the Company acquired a 54.3% interest for $3.5
million in Alliance-Edison LLC ("Alliance-Edison"), a company established for
the purpose of constructing the Dayton View Academy charter school in Dayton,
Ohio. Alliance-Edison's only asset is the Dayton View Academy charter school
facility, which has been constructed under a five year ground lease (renewable
for additional terms up to a total of 35 years) with the Dayton Metropolitan
Housing Authority (the "Ground Lease"). Pursuant to the Ground Lease,
Alliance-Edison has the option to purchase the land at the conclusion of the
lease term. The Company has also guaranteed approximately $1.6 million of debt
incurred by Alliance-Edison.
SECONDARY OFFERING
In August 2000, the Company completed a secondary offering of an
additional 3,350,000 shares of Class A Common for net proceeds of approximately
$71.2 million. Also in August 2000, a philanthropic foundation exercised 600,000
warrants to purchase Class A Common and paid to the Company approximately $4.8
million. Such shares obtained in the warrant exercise were sold along with the
Company's shares in the secondary offering.
78
79
EXHIBIT INDEX
EXHIBIT DESCRIPTION FORM NUMBER
- ------- ----------- ---- ------
NUMBER
- ------
3.1* Sixth Amended and Restated Certificate of Incorporation of the Registrant........................... S-1 3.1
3.2* Second Amended and Restated By-Laws of the Registrant............................................... S-1 3.2
4.1** Specimen common stock certificate................................................................... S-1 4.1
4.2** See Exhibits 3.1 and 3.2 for provisions of the Certificate of Incorporation and By-Laws of the
Registrant defining the rights of holders of class A common stock of the Registrant................. S-1 4.2
10.1** 1998 Site Option Plan............................................................................... S-1 10.1
10.2**# 1999 Stock Option Plan.............................................................................. S-1 10.2
10.3**# 1999 Key Stock Incentive Plan....................................................................... S-1 10.3
10.4**# 1999 Stock Incentive Plan........................................................................... S-1 10.4
10.5** Third Amended and Restated Shareholders' Agreement, dated as of July 2, 1999, by and among the
Registrant and certain stockholders, as amended..................................................... S-1 10.5
10.6** Warrant Purchase Agreement, dated as of January 15, 1998, between the Registrant and Phoenix Leasing
Incorporated........................................................................................ S-1 10.7
10.7** Warrant, dated as of January 15, 1998, issued to Phoenix Leasing Incorporated....................... S-1 10.8
10.8** Warrant Purchase Agreement, dated as of November 25, 1997, between the Registrant and BankBoston,
N.A ................................................................................................ S-1 10.9
10.9** Warrant, dated as November 25, 1997, issued to BankBoston N.A....................................... S-1 10.10
10.10** Warrant Agreement, dated as of February 1, 1997, between the Registrant
and Comdisco, Inc................................................................................... S-1 10.11
10.11** Amended Warrant Purchase Agreement, dated as of June 1, 1998, between the Registrant and the
D2F2 Foundation..................................................................................... S-1 10.12
10.12** Option Agreement, dated as of March 14, 1995, between the Registrant and Dillon, Read and Co. Inc... S-1 10.13
10.13** Warrant Agreement, dated as of January 1, 1996, between the Registrant and Comdisco, Inc............ S-1 10.14
10.14** Warrant Agreement, dated as of July 5, 1995, between the Registrant and Comdisco, Inc............... S-1 10.15
10.15** Warrant Purchase Agreement, dated as of June 30, 1997, between the Registrant and Phoenix Leasing
Incorporated and related warrant.................................................................... S-1 10.16
10.16** Warrant Purchase Agreement, dated as of June 30, 1997, between the Registrant and LINC Capital
Management and related warrant...................................................................... S-1 10.17
79
80
EXHIBIT DESCRIPTION FORM NUMBER
- ------- ----------- ---- ------
NUMBER
- ------
10.17** Stock Subscription Warrant, dated as of August 20, 1997, issued to Transamerica Business Credit
Corporation......................................................................................... S-1 10.18
10.18** Stock Subscription Warrant, dated as of October 30, 1997, issued to Transamerica Business Credit
Corporation......................................................................................... S-1 10.19
10.19** Stock Subscription Warrant, dated as of July 17, 1998, issued to TBCC Trust Funding II.............. S-1 10.20
10.20**# Letter Agreement, dated as of June 20, 2000, between the Registrant and Benno C. Schmidt, Jr........ S-1 10.23
10.21**# Letter Agreement, dated as of March 15, 1995, between the Registrant and John E. Chubb.............. S-1 10.26
10.22**# Letter Agreement, dated as of April 20, 1998, between the Registrant and James L. Starr............. S-1 10.27
10.23** Preferred Stock Purchase Agreement, dated as of July 2, 1999, between the Registrant and Apex Online
Learning Inc........................................................................................ S-1 10.28
10.24** Amended and Restated Shareholders Agreement, dated as of December 16, 1999, between the Registrant,
Apex online Learning Inc. and other parties......................................................... S-1 10.29
10.25** Lease Agreement, dated as of April 4, 1995, between the Registrant and 521 Fifth Avenue Associates,
as amended on June 6, 1996, December 8, 1997 and February 23,2000................................... S-1 10.30
10.26** Office Lease dated as of March 19, 1999, between the Registrant and 529 Fifth Company............... S-1 10.31
10.27**# Management Agreement, dated as of March 14, 1995, between the Registrant and WSI Inc., as amended
on November 15, 1996, March 1, 1997 and December 31, 1997........................................... S-1 10.32
10.28**# Promissory note, dated as of June 5, 1992, from Benno C. Schmidt, Jr. to the Registrant............. S-1 10.33
10.29**# Promissory note, dated as of January 23, 1996, from Benno C. Schmidt to the Registrant.............. S-1 10.34
10.30**# Allonges, dated as of October 4, 1999, to promissory notes, dated as of June 5, 1992 and January
23, 1996, from Benno C. Schmidt, Jr. to the Registrant............................................. S-1 10.35
10.31**# Form of Letter Agreement between the Registrant and H. Christopher Whittle.......................... S-1 10.36
10.32**# Letter Agreement, dated as of July 1, 1999, between the Registrant and Christopher D. Cerf.......... S-1 10.37
10.33**# Loan Agreement between the Registrant and WSI Inc................................................... S-1 10.39
80
81
EXHIBIT DESCRIPTION FORM NUMBER
- ------- ----------- ---- ------
NUMBER
- ------
10.34** Guaranty of Payment Agreement, dated as of September 3, 1998, between the Registrant and NCB
Development Corporation............................................................................. S-1 10.41
10.35** Guaranty of Payment Agreement, dated as of November 25, 1997, between the Registrant and
BankBoston, N.A..................................................................................... S-1 10.42
10.36** Stock Subscription Warrant, dated as of October 18, 1999, issued to TBCC Funding Trust II........... S-1 10.43
10.37* Preferred Stock Purchase Agreement, dated as of December 16, 1999, by and between Apex Online
Learning Inc., the Registrant and other parties..................................................... S-1 10.47
10.38*# Promissory note, dated April 13, 2000, from H. Christopher Whittle to the Registrant................ S-1 10.48
10.39* Contract of Sale, dated as of January 11, 2000, between the Registrant and Castle Senior
Living, LLC ........................................................................................ S-1 10.49
10.40* Letter of Intent, dated as of June 8, 2000, between the Registrant and IBM.......................... S-1 10.50
10.41* License Agreement, dated as of June 12, 2000, between the Registrant and IBM........................ S-1 10.51
10.42* Letter of Intent, dated as of April 10, 2000, between the Registrant and the Museum of African Art.. S-1 10.52
10.43* Term Lease Master Agreement, dated as of May 1, 2000, between the Registrant and Global Lyceum, Inc. S-1 10.53
10.44*# Promissory Note dated as of June 9, 2000 from Manuel J. Rivera to the Registrant.................... S-1 10.54
10.45 Agreement, dated as of June 29, 2000, between the Registrant and IBM Credit Corporation............. Enclosed herewith
10.46 Fundraising Agreement, dated as of June 23, 2000, between the Registrant and Alliance Facilities
Management, Inc..................................................................................... Enclosed herewith
10.47 Master Development Agreement between the Registrant and Ksixteen LLC................................ Enclosed herewith
10.48 Master Agreement to Lease Equipment, dated as of June 30, 2000, between the Registrant and Cisco
Systems Capital Corporation......................................................................... Enclosed herewith
10.49 Limited Liability Company Operating Agreement of Alliance Edison LLC................................ Enclosed herewith
10.50*** Revolving Credit Agreement, dated as of November 12, 1999, between the Registrant and Imperial
Bank................................................................................................ 10-Q 10.1
10.51*** Security Agreement, dated as of November 12, 1999, issued by the Registrant and Imperial Bank....... 10-Q 10.2
10.52*** Promissory Note, dated as of November 12, 1999, issued by the Registrant in the name of Imperial
Bank................................................................................................ 10-Q 10.3
81
82
EXHIBIT DESCRIPTION FORM NUMBER
- ------- ----------- ---- ------
NUMBER
- ------
10.53 Promissory Note, dated as of July 21, 2000, issued by the Registrant in the name of Alliance
Edison LLC ....................................................................................... Enclosed herewith
10.54 Payment Guaranty, dated as of July 21, 2000, between the Registrant and Keybank National
Association ...................................................................................... Enclosed herewith
27 Financial Data Schedule........................................................................... Enclosed herewith
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* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-39516).
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1 (File No. 333-84177).
*** Incorporated by reference to the Registrant's Quarterly Report on Form
10-Q for the quarter ended September 30, 1999 (File No. 000-27817).
# Management contract or compensatory plan or arrangement filed in
response to Item 14(a)(3) of the instructions to Form 10-K.
82