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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, 2002
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, 11TH 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 25, 2002, as reported on the Nasdaq National Market,
was approximately $18,200,000.
The number of shares of the registrant's class A common stock outstanding
on September 25, 2002 was 52,018,855 and the number of shares of the
registrant's class B common stock outstanding on September 25, 2002 was
1,805,132.
DOCUMENTS INCORPORATED BY REFERENCE
Certain portions of the registrant's definitive Proxy Statement for the
Annual Meeting of Stockholders to be held on December 5, 2002 are incorporated
by reference into Part III of this Form 10-K. Unless the context otherwise
requires, in this Form 10-K, the terms "we," "our," the "Company" and "Edison"
refer to Edison Schools Inc. and its subsidiaries.
EDISON SCHOOLS INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 30, 2002
PART I PAGE
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Item 1. - Business.......................................... 4
Item 2. - Properties ....................................... 21
Item 3. - Legal Proceedings................................. 21
Item 4. - Submission of Matters to a Vote of Security Holders 22
- Executive Officers and Directors of the Registrant 23
PART II PAGE
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Item 5. - Market for Registrant's Common Equity and Related
Stockholder Matters................................ 25
Item 6. - Selected Financial Data............................ 26
Item 7. - Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 28
Item 7A. - Quantitative and Qualitative Disclosures About
Market Risk ....................................... 51
Item 8. - Financial Statements and Supplementary Data........ 52
Item 9. - Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................ 52
PART III PAGE
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Item 10. - Directors and Executive Officers of the Registrant 53
Item 11. - Executive Compensation............................ 53
Item 12. - Security Ownership of Certain Beneficial Owners and
Management........................................ 53
Item 13. - Certain Relationships and Related Transactions.... 53
PART IV PAGE
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Item 14. - Exhibits, Financial Statements and Reports on
Form 8-K ........................................ 54
SIGNATURES..................................................... 55
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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 2003. All
forward-looking statements included in this Annual Report are based on
information available to us up to and including the date of this document, and
we expressly disclaim any obligation to alter or update our forward-looking
statements, whether as a result of new information, future events or otherwise.
We are a Delaware corporation, and our principal executive offices are
located at 521 Fifth Avenue, 11th 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 I
ITEM 1. BUSINESS
Edison is 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. 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. In the 2001-2002 school year, we served approximately
74,000 students in 133 schools located in 22 states across the country and the
District of Columbia. This represents an increase of 17,000 students and one new
state from the 2000-2001 school year. For the 2001-2002 school year,
approximately 52,000 students were enrolled in our schools in grades pre-K-5,
approximately 17,000 in grades 6-8 and approximately 5,000 in grades 9-12. In
the 2002-2003 school year, we expect to enroll approximately 80,000 students in
150 schools located in 23 states and the District of Columbia. Additionally,
during the summer of 2002, we served approximately 35,000 students in our summer
school program. Our net revenue was $465.1 million in fiscal 2002. 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 we
believe 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 in schools that
adopt this part of our model;
- an enriched technology program;
- 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 in
schools that adopt this part of our model; and
- an emphasis on parental involvement and character development.
We have an experienced and talented management team led by H. Christopher
Whittle, founder of several media enterprises, including the first national
electronic news system for middle and high schools in the United States, Benno
C. Schmidt, Jr., former President of Yale University, Christopher D. Cerf,
former Associate Counsel to President Clinton from 1994 to 1996, John E. Chubb,
senior fellow at the Brookings Institution and noted author and speaker on
education reform, and Charles J. Delaney, former president of UBS Capital
America. In addition, the management team includes a number of former public
school system superintendents.
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INDUSTRY BACKGROUND
During the 2000-2001 school year, over 14,500 school districts comprising
approximately 90,640 K-12 schools enrolled an estimated 47.2 million students.
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 27% of students
in grades 4 and 8 met grade level standards in mathematics in 2000, the last
year for which results are available. In reading, only approximately 32% of
students in grades 4 met grade level standards in 2000, and only approximately
33% of students in grades 4 and 8 met grade level standards in 1998. 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.
Public education is currently high on national, state and local political
agendas. President Bush and 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. Key reform initiatives include the following:
- NO CHILD LEFT BEHIND. On January 8, 2002, President Bush
signed into law the No Child Left Behind Act (NCLBA), a
comprehensive education reform package that will have a wide
range of effects on the education establishment. Many of the
provisions of the NCLBA are designed to lift the achievement
level of under-performing students in traditionally
low-achieving schools. This new legislation mandates that
schools that fail to meet adequate yearly progress must take a
series of steps to remedy their poor academic performance.
These steps may include: providing supplemental services to
its students; offering school choice options to its students;
spending more Title I funds on professional development for
teachers; reopening the school as a charter school; and
contracting with a private management company. Additionally,
all newly hired teachers must be highly qualified -- a new
teacher must hold at least a bachelor's degree and must
demonstrate knowledge of the subjects he or she is teaching by
passing a rigorous state test.
- CHARTER SCHOOLS. Since Minnesota first enacted legislation in
1991, 39 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 2,700 charter schools in operation, with
an estimated enrollment of over 575,000 students in 36 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. Legislation in Wisconsin has provided
vouchers in Milwaukee since 1990, and legislation in Ohio has
provided for vouchers in Cleveland since 1996. In June 2002,
the Supreme Court ruled that the Cleveland program did not
violate the First Amendment of the U.S. Constitution, which
has encouraged voucher advocates across the country, although
in August 2002 a Florida circuit court ruled that the state's
1999 voucher legislation
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violated the state constitution. Voucher legislation has also
been introduced in several other states, and private
philanthropists have funded a number of 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, among others, Maryland, New
Jersey, Michigan and Pennsylvania. One of those states,
Maryland, has opted to contract with us to provide educational
services at three identified schools in Baltimore. As a result
of a program instituted under Pennsylvania's Act 46, the
School Reform Commission of the School District of
Philadelphia has contracted with us to manage 26 schools.
Additionally, as a result of a program instituted under
Pennsylvania's Educational Empowerment Act, we are currently
managing 10 schools in Chester, Pennsylvania.
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 2001-2002
school year, we operated 83 contract schools with a total enrollment of 50,000
students and 50 charter schools with a total enrollment of 24,000 students. Of
these contract schools, 16 were operated under charters granted by school
districts, which provided the facilities. 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 67 contract schools were operated under management agreements with
local school boards. We also operated summer school programs during the summer
of 2002 serving approximately 35,000 students at 178 school sites in partnership
with 51 school districts.
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 five percentiles
per year against national norm-referenced tests from the
1995-1996 school year through the 2000-2001 school year; and
- support systems designed to ensure consistent, replicable and
effective implementation of our educational model as we expand
into a wide range of communities across the nation.
Examples of the latter include a national teacher and principal recruiting
system; an infrastructure to support teacher and principal training both before
and after a school opens; a national distribution network for curriculum
materials, technology equipment and supplies; and information and support
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.
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RESEARCH BEHIND THE EDISON SOLUTION
The Edison school design and curriculum grew out of a comprehensive
three-year research project conducted by a team of approximately 30 full-time
professional employees and numerous outside experts under the leadership of
Benno C. Schmidt, Jr., the former President of Yale University. Our design team
included respected education researchers, curriculum developers, teachers,
principals, school administrators, writers, technology specialists and experts
in school finance and management. Together, they brought a wide range of
perspectives on improving education through the reform of curriculum,
instruction, assessment, professional development, school organization and most
other elements of education. The research leading to the development of our
solution was extensive and systematic; our staff members interviewed educators,
reviewed a wide range of school programs and attempted to assemble the best
scientific evidence of the effects of potential reforms in K-12 education.
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 normally 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 by the end of 11th grade, and we offer a wide range of advanced
placement courses to students in the 11th and 12th grades.
Professional development. Our professional development program provides
opportunities for teachers and principals to learn how to implement our program
and develop their skills as educators. We typically provide teachers and
principals with two weeks of training before a school first opens and additional
support and training during the school's initial year. In addition, in schools
that have chosen a longer day teachers generally have two periods every day for
professional development, and our school calendars provide at least three days
for ongoing training each year. We also offer several major national curriculum
conferences annually for different specialists within our schools and many
regional conferences.
Proven instruction methods. We use instruction methods derived from
systematic research. For example, our elementary schools implement either
Success for All, a K-5 reading program developed at Johns Hopkins University and
refined through experimental studies directed by Johns Hopkins University, or
Open Court, another research-based program from SRA-McGraw Hill. 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
7
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. We have introduced a monthly electronic 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. With
the 2002-2003 school year, we have begun to introduce state-specific monthly
benchmark content in a number of states in which we operate. This state-specific
content will help teachers adjust their instruction in order to improve student
mastery of state learning outcomes.
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, those schools that adopt 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 members 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 multi-grade groups,
called houses, of 100 to 180 students each. Students typically remain within the
same house until they graduate from the particular academy. Each house is led by
four to six teachers, who usually work with students of every level of the house
for the duration of their academy experience and are responsible for the core
academic program of instruction in math, science, history, geography, civics,
economics, reading and language arts.
Longer school day and year. In contract and charter schools that choose
to adopt this part of our program, our students are in school an average of
1,500 hours each year after the first year of their school's operation and our
school year is approximately 200 days. Based on these figures, we believe many
of our students spend 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 typical 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. Our schools feature significant
technology resources. We generally provide each of our teachers with a laptop
computer. Computer labs are available in all schools to facilitate assessment of
student learning, and each classroom has at least one computer available for
student use. In schools where program funding allows, 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 also 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. In contrast to the small steps that
school reform usually must take, we believe it is important that schools launch
a comprehensive package of change all at once. We therefore make a substantial
initial investment to purchase computers and other technology, implement our
curriculum and train teachers prior to commencing management of a school. This
enables our schools 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
8
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
operational vice presidents to work closely with the new principals for several
months to thoroughly introduce them to our education system. In addition, new
principals receive two weeks of formal training on our education system.
Dedicated teachers. We believe our schools attract motivated and
dedicated teachers due to the following factors:
- our innovative curriculum and approach to education;
- our commitment to professional development of teachers;
- increased access to resources and technology; and
- generally competitive salary levels.
Our schools are staffed by four levels of teachers: lead teacher,
senior teacher, teacher and resident teacher. We believe this four-tier
seniority system provides an attractive career path and allows new teachers to
be mentored by more experienced teachers. Teachers are hired based on classroom
and educational experience, expertise in a particular subject area, evidence of
leadership abilities in the context of teams, and interaction with staff,
students and families. Lead teachers have responsibility for the organizational
management of the teaching team, and classroom instruction is the primary focus
of senior teachers, teachers and resident teachers. 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. In addition, by co-signing the Quarterly Learning
Contract, parents commit to monitor the progress of their children in meeting
stated educational goals. Further, where funding is sufficient for
implementation, we believe our program of providing, following the first year of
a school's operation, computers to the families of our students above the second
grade has increased parents' level of involvement in the school.
Edison Extra (Summer School). During the summer of 2002, Edison Extra,
Edison's extended learning division, served approximately 35,000 students in
summer school programs at 178 school sites in 51 districts in Missouri. Edison
manages none of these schools during the regular academic year. Edison Extra's
program serve students in grades K-12 and includes instruction in all subject
areas. The programs typically provide 168 hours of instruction for students
during a five-week period. Edison Extra creates site-specific educational
programming, with core classes in academic subject areas in the morning and
elective courses in the afternoon.
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
9
on an especially dynamic principal. Edison has designed its support systems with
the objective of not only creating excellence, but also being able to replicate
it in a consistent manner in a widely diverse array of schools across the
country.
Operational Vice President structure. Edison's operational professionals
- -- including regional operational vice presidents and operations vice presidents
or directors who offer additional support in specific geographic areas --
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. They work closely with regional achievement
directors from the education division to assess school progress against specific
achievement goals. In meeting their responsibility, operational 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 Division. Our Education Division oversees the implementation,
modification, support and effectiveness of our educational design. The Education
Division's 65 employees, together with approximately 150 of our teachers who we
annually certify as trainers, provide a continuous stream of support to our
schools through the coordination of school wide and national training programs,
development of curricular standards and assessment of design effectiveness at
each school. The Achievement Department within the Education Division deploys
senior educators with a span of control of roughly 10 schools apiece to help
schools focus their instructional programs intensely on raising achievement. The
Education 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 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 operational vice presidents.
Recruiting. Strong educational leadership and teaching ability are vital
to the successful implementation of the Edison design. Our Recruitment
Department works year-round to attract outstanding principal candidates through
a variety of recruitment strategies, including direct headhunting, national
advertising and cultivation of outstanding internal candidates. The department
also recruits outstanding teacher candidates through a network of school-based
recruitment coordinators and through targeted recruitment efforts at over 100
college campuses, 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
either 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. We often will
provide construction management and real estate development and financial
advisory services to charter schools. For more information on our real estate
arrangements, see "Properties."
Start-up. As a management agreement is finalized, the assigned operational
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 Supply Chain Management 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.
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
10
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 business services managers to manage the
day-to-day administrative operations at Edison schools. Business services
managers, who handle either a single school or a cluster of schools, are
responsible for managing the school's budget, processing all site expenditures
and coordinating student transportation, food and personnel services. We also
employ 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 the school or community technology
manager, trains the technology manager and provides additional field support as
needed.
Family and community partnerships. Formal parent orientation begins once
the student body has been selected, but all parent meetings and community
information sessions that lead up to final student selection are part of
families' introduction to Edison and the contract or charter school. The parent
orientation process is organized at each site by the school's student support
manager, a professional member of the school staff who facilitates community
interaction and coordinates 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. In addition to local
training, 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
Achievement Profile (MAP) for each school site. The MAP provides a snapshot of
benchmark results, information related to attendance, enrollment, student and
teacher mobility, quality of instruction, student management, teaching
materials, and professional development. These reports are available online to
site and central personnel. Monthly financial estimates are also generated. In
addition, we compile a year-end Student Report Card for each school site. The
report includes information about student performance on standardized tests;
levels of parent, staff, and student satisfaction; the degree to which the
school adhered to and implemented the Edison school design, 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
For the 2002-2003 school year, we are operating 150 schools located in 23
states and the District of Columbia with a combined student enrollment of
approximately 80,000. This represents an increase of approximately 6,000
students and one new state from the 2001-2002 school year. We also offered
summer school programs at four of our schools and 178 non-Edison schools in the
summer of 2002.
11
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 is currently operating 99
contract schools, is the major provider of contract schools for traditional K-12
instruction in the United States, although other providers are now also
operating contract schools.
We consider grades pre-K-5, 6-8 and 9-12 to each be a school, and we count
grades pre-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 pre-K-5 school. In some cases, we count grades pre-K-6 as
one school if it is the local practice to configure elementary schools in this
manner. For the 2002-2003 school year, we have 112 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 73% of our students participated in the federal
free and reduced lunch program during the 2001-2002 school year. These students
come 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 2002-2003 school year.
NUMBER
OF YEAR TYPE OF
CLIENT LOCATION SCHOOLS COMMENCED GRADES SCHOOL EXPIRATION DATE
- ------ -------- ------- --------- ------ -------- ---------------
Chula Vista Elementary School District Chula Vista, California 1 1997 K-6 Contract* June 2008
Ravenswood City School District East Palo Alto, California 2 1998 K-8 Contract June 2003
Fresno Unified School District Fresno, California 1 1999 K-6 Contract* June 2004
Long Beach Unified School District Long Beach, California 1 2000 K-5 Contract June 2005
Napa Unified School District Napa, California 1 1998 K-6 Contract* June 2003
San Francisco Unified School District San Francisco, California 1 1998 K-5 Contract* June 2006
West Covina Unified School District West Covina, California 2 1998 K-8 Contract* June 2003
Academy School District No. 10 Colorado Springs, Colorado 1 1998 K-5 Contract June 2005
Colorado Springs School District No. 11 Colorado Springs, Colorado 2 1996 K-8 Contract* June 2006
Wyatt-Edison Charter School Denver, Colorado 2 1998 K-8 Charter June 2003
Board of Area Cooperative Educational Hamden, Connecticut 2 1998 K-8 Contract June 2003
Services
Friendship Public Charter School Washington, D.C. 4 1998 K-11 Charter June 2003
Southeast Academy of Scholastic Washington, D.C. 2 2000 K-8 Charter June 2005
Excellence Public Charter School
Thomas A. Edison Charter School of Wilmington, Delaware 2 2000 K-8 Charter June 2005
Wilmington, Inc.
Dade County Public Schools Miami, Florida 1 1996 K-5 Contract June 2006
Drew Charter School, Inc. Atlanta, Georgia 1 2000 K-6 Charter June 2005
Chicago Charter School Foundation Chicago, Illinois 3 1999 K-12 Charter June 2007
12
NUMBER
OF YEAR TYPE OF
CLIENT LOCATION SCHOOLS COMMENCED GRADES SCHOOL EXPIRATION DATE
- ------ -------- ------- --------- ------ -------- ---------------
Peoria Public Schools Peoria, Illinois 4 1999 K-8 Contract June 2004
Springfield Public Schools Springfield, Illinois 1 2000 K-6 Contract June 2005
Perry Township Indianapolis, Indiana 1 2002 K-5 Contract June 2007
Davenport Community School District Davenport, Iowa 1 1999 K-5 Contract June 2004
Wichita School District No. 259 Wichita, Kansas 2 1995 K-8 Contract June 2005
New Baltimore City Board of School Baltimore, Maryland 3 2000 pre-K-6 Contract June 2005
Commissioners and the Maryland State
Department of Education
Seven Hills Charter School Worcester, Massachusetts 2 1996 K-8 Charter June 2006
Battle Creek School District Battle Creek, Michigan 3 1998 K-8 Contract June 2003
Detroit Academy of Arts and Sciences Detroit, Michigan 3 1997 K-10 Charter June 2006
Detroit-Edison Public School Academy Detroit, Michigan 2 1998 K-8 Charter June 2002**
YMCA Service Learning Academy Detroit, Michigan 2 1999 K-8 Charter June 2004
Edison-Oakland Public School Academy Ferndale, Michigan 2 1999 K-8 Charter June 2004
School District of the City of Flint Flint, Michigan 4 1997 K-12 Contract June 2005
Inkster Public School District Inkster, Michigan 4 2000 pre-K-12 Contract June 2005
School District of the City of Pontiac Pontiac, Michigan 2 1998 K-8 Contract June 2003
Duluth Public Schools Academy Duluth, Minnesota 3 1997 K-9 Contract* June 2003
Hope Community Academy Charter School St. Paul, Minnesota 1 2000 K-4 Charter June 2003
Derrick Thomas Charter School Kansas City, Missouri 1 2002 K-5 Charter June 2007
Kansas City Municipal School District Kansas City, Missouri 1 1999 K-5 Contract June 2004
Westport Allen-Edison Village Educational Kansas City, Missouri 2 1999 K-8 Charter June 2004
School
Westport Community Secondary Schools Kansas City, Missouri 2 1999 6-12 Contract* June 2004
Schomburg Charter School, Inc. Jersey City, New Jersey 1 2000 K-5 Charter June 2002**
New Covenant Charter School Albany, New York 2 2000 K-7 Charter June 2004
Harriet Tubman Charter School Bronx, New York 1 2001 K-5 Charter June 2006
Stepping Stone Academy Charter School Buffalo, New York 1 2001 K-5 Charter June 2006
Riverhead Charter School Riverhead, New York 1 2001 K-4 Charter June 2006
Charter School of Science and Technology Rochester, New York 2 2000 K-9 Charter June 2005
13
NUMBER
OF YEAR TYPE OF
CLIENT LOCATION SCHOOLS COMMENCED GRADES SCHOOL EXPIRATION DATE
- ------ -------- ------- --------- ------ -------- ---------------
Charter School For Applied Technologies Tonawanda, New York 2 2001 K-6 Charter June 2006
Clark County School District Las Vegas, Nevada 7 2001 K-8 Contract June 2006
Nash-Rocky Mount Public Schools Whitakers, North Carolina 1 1999 K-5 Contract June 2004
Alliance Community Schools, Inc. Dayton, Ohio 4 1999 K-7 Charter June 2004
Chester - Upland School District Chester, Pennsylvania 10 2001 K-12 Contract June 2006***
Mariana Bracetti Academy Charter School Philadelphia, Pennsylvania 2 2000 6-9 Charter June 2006
School District of Philadelphia Philadelphia, Pennsylvania 26 2002 K-9 Contract June 2007
Renaissance Academy-Edison Charter Phoenixville, Pennsylvania 3 2000 K-9 Charter June 2005
School
Lincoln-Edison Charter School York, Pennsylvania 1 2000 K-5 Contract* June 2005
Dallas Independent School District Dallas, Texas 7 2000 Pre-K-6 Contract June 2005****
Tyler Independent School District Tyler, Texas 1 1999 6-8 Contract June 2006
Milwaukee Science Education Milwaukee, Wisconsin 2 2000 Pre-K-8 Charter June 2005
Consortium, Inc.
Milwaukee Urban League Academy Milwaukee, Wisconsin 1 2001 Charter June 2006
of Business and Economics, Inc. ---
150
===
* Indicates charter schools operated under a charter granted by the local
school board.
** Contract has not yet been renewed, although we are still providing
management services.
*** Contract remain in force, although discussions are in progress to
change the nature of this relationship.
**** Notice of early termination at the end of the 2002-2003 school year has
been received.
During school year 2001-2002 we changed our relationship with one charter
board for which we managed three schools. That relationship was discontinued
altogether prior to the end of the school year. A management contract with one
district client representing two schools was not renewed. Further, management
agreements with six clients representing 13 schools were discontinued prior to
their expiration. Finally, we also discontinued management of two of four
schools under one district contract. The 20 closed schools enrolled
approximately 7,400 students in the aggregate.
COMPETITIVE STRENGTHS
Our experience suggests that the following are some of the competitive
strengths that will allow us to continue to grow:
- Quantifiable academic improvement. Student achievement in our
schools has been substantial, as measured by a range of state
and local tests. From the 1995-1996 school year through the
2000-2001 school year, for those schools that we have operated
long enough to generate trend data, typically by a school's
second year with Edison, our students, on average, gained six
percentage points per year against state criterion-referenced
tests and five percentiles per year against national
norm-referenced tests.
14
- Parental satisfaction. Our schools enjoy high parental
satisfaction. According to a survey prepared for us by an
independent market research firm for the 2001-2002 school
year, covering all 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 28% of parents who gave on average a
grade of A or A- in a national sample of U.S. public schools
for the 2000-2001 school year in a similar study conducted by
a different market research firm.
- Extensive infrastructure. We have a series of systems and
support personnel that permit us to implement our curriculum
and school design in contract and charter schools in
communities across the United States. The systems were
developed over our previous six years of operating schools and
include curriculum development, recruiting capabilities,
assessment mechanisms, professional development systems,
financial management and acquisition systems, and systems to
assess prospective management agreements.
- Achievement Management Systems. In order to manage effectively
our national network of schools, we have developed a unique
Achievement Management System. The Achievement Management
System includes our Benchmark Assessment System, our Monthly
Achievement Profile (MAP), and our Achievement Directors. The
Benchmark Assessment System is an on-line assessment tool
designed to track student proficiency on state-mandated high
stakes tests. With the data derived from the Benchmark system,
teachers and administrators can obtain real time data on
student progress against state standards. Similarly, the
Monthly Achievement Profile is a reporting framework that
provides Edison's management with all information relevant to
the implementation of the Edison School Design. The MAP
includes Benchmark results, student discipline information,
teacher training and turnover information, and indications of
the rate of completion of other aspects of the design, such as
the delivery of curriculum materials. The Achievement
Directors and Vice Presidents, who are part of the Education
Division, then bring these tools together to develop detailed
student achievement plans and to coach principals and lead
teachers in implementing them.
- 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 Charles J. Delaney, former president of UBS
Capital America. Our management team also features a number of
former school system superintendents, including Deborah M.
McGriff, former superintendent of the Detroit 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. Since
then, Edison's management team has continued to assess the
effectiveness of each element of the company's systems, and
has developed tools (such as the Benchmarks and MAP) to
improve their impact.
GROWTH STRATEGY AND BUSINESS DEVELOPMENT
We believe the competitive strengths described above uniquely position
Edison to improve public schools in a variety of capacities other than the
direct management of schools that has constituted the core of our business to
date. Accordingly, we have begun to diversify our sales approach to include more
consultative services, as well as summer and after school programs. Our
experience in working with districts in our contract schools and summer school
program suggests that there is a significant market for Edison's services among
the over 7,400 school districts in the United States with more than 1,000
students. The combined operating budgets of such districts total approximately
$300 billion, based on data from the 1999-2000 school year.
In order to effectively tap this market, we have revised the structure of
our development division to focus on five separate product channels:
15
Contract Schools. The contract channel will continue to seek contracts
with school districts under which Edison would manage one or more district
schools. Because we have found that larger districts are generally better able
to manage the budget flexibility required to successfully contract with us, the
contract channel will focus its efforts on the more than 800 school districts
with over 10,000 students enrolled. Together, these districts have annual
operating budgets of nearly $160 billion. The contract channel will also seek to
develop opportunities to run schools whose management is assumed by state
government (as we have done in Maryland), an action that we anticipate will be
increasingly common, given the increasing political support for school
accountability measures. The contract channel will also work to develop new
district charter schools, as the process of converting these schools to charter
status is similar to the process for establishing a contract school. Development
vice presidents working in the contract channel are assigned a group of states
and are expected to contact schools district within those states to explore the
possibility of an Edison partnership. The sales cycle for contract schools
ranges from nine to 18 months.
Charter Schools. The charter school channel will continue to work to
develop new charter schools in states with favorable charter legislation. This
requires developing relationships with local community groups, developing
charter applications, obtaining charters from state authorizers, selecting a
school site, managing the construction or renovation of the building, and
arranging third-party financing (such as a bank mortgage). A Development vice
president assigned to the charter channel must determine which jurisdictions are
most suitable to the development of a charter school. The important criteria
include: 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. Typically, the development process for a charter school ranges from 18
to 27 months, beginning with Edison's first contact with a community group
interested in setting up a new charter school.
Affiliates. Though not previously the focus of our development efforts, we
have found significant interest in the Edison solution among school districts
with fewer than 10,000 students. However, these small districts are not usually
able to undertake the shift in budget structure required to support a contract
school. Accordingly, we have developed a new product offering, Edison
Affiliates, specifically designed for the more than 6,600 school districts with
between 1,000 and 10,000 students. The Affiliates offering allows small
districts to implement our Achievement Management Systems in their schools
without requiring district-wide adoption of Edison's curriculum or business
systems. Districts that subscribe to the Affiliates program receive regular
visits from an Edison Achievement Advisor (equivalent to an Achievement
Director), access to the Benchmark Assessment System and a modified version of
the MAP, and a suite of school communication software tools, such as homework
planners and integrated school calendars. Our development efforts for the
2002-2003 school year are focused on twelve states that have a preponderance of
districts in the 1,000 to 10,000 student range: California, Colorado, Georgia,
Illinois, Indiana, Michigan, Missouri, New York, North Carolina, Ohio, Texas and
Virginia. We anticipate that the sales cycle for the Affiliates services will be
nine to 12 months in most cases.
Edison Extra. The Extra channel focuses on developing summer and after
school programs with school districts. In building our successful summer school
program in Missouri over the last three years, we have come to recognize that
school districts see value in an education provider that can develop a turn-key
summer or after school program, as they are primarily focused on the core school
program. Accordingly, the Extra channel will work this year to find school
districts both inside and outside Missouri that are interested in developing,
expanding, or enhancing their summer programs. We anticipate that such programs
will be district-funded, as they were in Missouri, but, as summer school funding
varies considerably from state to state, it may be necessary to develop a
parent-pay program as well. The Extra channel will also work to put its
curriculum design and management system to work in an after school setting. We
anticipate that student fees will support several of these programs, depending
on local conditions.
International. Over the past few years, we have received a considerable
volume of requests from school officials, politicians and others outside the
United States interested in seeing Edison replicate its efforts in their
schools. Interest has been particularly strong in the United Kingdom.
Accordingly, we have dedicated a small part of our business development efforts
to exploring the potential for a partnership with one or more Local Education
Authorities in the United Kingdom. Any partnership there will draw upon Edison's
core competencies, but is likely to be more consultative than our traditional
school management approach.
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
16
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
2000-2001 school year, our sixth academic year, these tests have provided
hundreds of measures of our students' achievement.
Student academic achievement in our schools has been substantial, as
measured by these independent external assessments. The following summarizes
available results for schools that were open during the 2000-2001 school year:
- On criterion-referenced tests - tests that gauge the ability
of students to achieve specified standards, and increasingly
the type of test being used by the states to hold schools
accountable - Edison schools have, from 1995 to 2001,
increased the percentage of students achieving standards by an
average of six percentage points every year.
- On norm-referenced tests - tests that gauge the achievement of
students relative to their peers nationwide - Edison schools
have, from 1995 to 2001, increased the national percentile
rank of students by an average of five percentiles every year.
- In the 2000-2001 school year, Edison schools improved on their
historical rate of gain. On criterion - referenced tests - the
most common tests in Edison schools - the average gain was
seven percentage points, one point higher than the average
gain from 1995 to 2001. On norm-referenced tests - the
accountability measure in roughly a third of Edison schools -
the rate of gain held steady at five percentiles
- Edison schools not only have a strong record of helping more
students each year achieve state standard; they have sharply
reduced the numbers of students failing state tests
altogether. From 1995 to 2001, Edison schools reduced the
failure rate on criterion-referenced tests an average of six
percentage points per year. In the 2000-2001 school year,
Edison schools reduced failure rates an average of nine
percentage points per school.
LABOR RELATIONS
We are committed to developing a positive relationship with teachers'
unions at both the local and national levels. We work in successful partnership
with local teachers' unions in numerous schools across the country, and believe
our distinctive curriculum and school design can be successfully delivered in
the 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, unions do not represent teachers at
charter schools in the United States. In contrast, at least in those states with
strong public employee labor laws, schoolteachers in traditional public schools
generally have elected to organize. Approximately 46% of the students we educate
attend schools operated under collective bargaining agreements, many
specifically modified to accommodate the Edison design. In some charter schools,
the charter incorporates by reference portions of collective bargaining
agreements.
Although we strive to maintain 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 still 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.
For several reasons, we believe that our relations with unions at all
levels will continue to improve:
- as an organization, we remain committed to that improvement;
17
- 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.
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
generally last for 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. We
deliver and support our curriculum, manage the school's budget, provide periodic
assessment reports to the school district, hire teachers and, in collaboration
with the school district, choose the school's principal.
Charter schools. Our management agreements for operating charter schools
are negotiated with the charter boards, which generally consist of community
groups or established non-profit entities. Public school districts typically can
also issue charters and may retain us to operate charter schools. The terms and
conditions of these management agreements are similar to our management
agreements for contract schools. We often also help the charter boards arrange
for financing to obtain the facilities for the charter schools and often provide
interim financing. 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 collateral.
GOVERNMENT LAWS AND REGULATIONS
Federal and state education programs. The schools we manage receive funds
derived from numerous federal and state programs to be used for specific
educational purposes. If, on behalf of those schools, we fail to comply with the
requirements of the various programs, we could be required to repay the funds
and those schools could be determined ineligible for receipt of future federal
funds. Most of the schools we manage receive funds under Title I of the
Elementary and Secondary Education Act of 1965. This program supports
educationally disadvantaged children in areas of high poverty. Some of our
schools also receive funds from other programs under this act, including Title
II, Part A, which provides funding for the professional development of teachers,
Title II, Part D, which provides funding for technology programs, Title VII,
which provides funding for bilingual education programs, Title V, which provides
funding for innovative education programs, and the Public Charter School
Program, 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 the
schools we manage 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.
No Child Left Behind Act (NCLB). This act is the 2001 reauthorization of
the Elementary and Secondary Education Act of 1965. It contains numerous
requirements pertaining to the receipt of a range of federal funds, including
Title I. The two most significant of these requirements are new standards
pertaining to teacher qualifications, and the requirement that schools make
adequate yearly progress (AYP) toward state standards for students. The AYP
requirements must be met not
18
only by the aggregate school population, but also by ethnic/racial subgroups,
students with disabilities, and English language learners. Schools that fail to
make AYP toward meeting state standards may lose some of their student
enrollment due to school choice provisions, may be required to allocate a
portion of their Title I funding toward the provision of supplemental services
to some students, and may be subject to state takeover or other forms of
district or state intervention. Failure to meet teacher qualification and
related standards may result in the loss of NCLB funds at the school or district
that failed to meet the Act's requirements.
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. In our contract
schools, we typically share responsibility with school districts for ensuring
that the requirements of this act are met. If we are found in violation of this
act in one of our schools, we may incur costs relating to the provision of
compensatory education services, and may be liable for reasonable attorney fees
incurred by the families of individual students with disabilities.
Family Educational Rights and Privacy Act. The schools we manage 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 prior consent
of his or her parents. The law also gives parents certain rights with respect to
their minor children's education records. The failure of our schools to comply
with this law may result in termination of their eligibility to receive federal
education funds.
Gun-Free Schools Act. The Gun-Free Schools Act, which became effective in
1994, requires the schools we manage to effect certain policies, assurances and
reports regarding the discipline of students who bring weapons to our schools.
If those schools violate any of these requirements, they may be deemed
ineligible to receive certain Federal education funds.
Federal Civil Rights Laws. The schools we manage must comply with federal
civil rights laws or those schools could be determined ineligible to receive
funds from federal programs or face criminal or civil penalties. These laws
include the following:
- TITLE VI OF THE CIVIL RIGHTS ACT OF 1964. Title VI prohibits
recipients of federal financial assistance from discriminating
on the basis of race, color or national origin.
- TITLE IX OF THE EDUCATION AMENDMENTS OF 1972. Title IX
prohibits discrimination on the basis of gender by recipients
of federal financial assistance.
- SECTION 504 OF THE REHABILITATION ACT OF 1973. Section 504
prohibits discrimination on the basis of disability by
recipients of federal financial assistance.
- AMERICANS WITH DISABILITIES ACT OF 1990. This act prohibits
discrimination in employment against a qualified individual
with a disability and requires that buildings, facilities and
vehicles associated with public services be accessible to
individuals with disabilities.
- AGE DISCRIMINATION ACT OF 1975. This act prohibits recipients
of federal financial assistance from discriminating on the
basis of age.
- AGE DISCRIMINATION IN EMPLOYMENT ACT OF 1967. This act
prohibits discrimination on the basis of age in employment.
- EQUAL PAY ACT OF 1963. This act prohibits discrimination on
the basis of gender in the payment of wages.
- TITLE VII OF THE CIVIL RIGHTS ACT OF 1964. Title VII prohibits
discrimination on the basis of gender in employment.
19
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 Conditions
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 are 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 among teachers, students and families. In
addition, we have taken the following steps to ensure safety at our schools:
- We have engaged a national school security consultant to
oversee the design and effectiveness of security at our
schools;
- We have developed a security review process for our schools.
Each year approximately 50 schools will participate in a
review that includes three site visits, a complete security
walkthrough and evaluation, a set of crisis management and
safety training sessions for principals and all school staff,
and a crisis drill and security walkthrough follow-up;
- We have developed a week-long security officer training
program that all Edison security officers attend; and
- We have entered into national contracts with several safety
companies for items such as security cameras, metal detectors
and emergency kits.
HUMAN RESOURCES
As of June 30, 2002, we had 389 full-time headquarters employees. In
addition, 107 principals, approximately 4,900 teachers and over 2,200 members of
administrative staff and management worked in our schools for the 2001-2002
school year.
COMPETITION
We have a number of direct competitors, although to date the companies
that are most similar to us in terms of corporate strategy have focused
primarily or exclusively on operating charter schools rather than contracting
with school districts. Companies that compete with us include Chancellor-Beacon
Academies, Mosaica Education, Charter Schools USA, The Leona Group, National
Heritage Academy, SABIS Educational Systems and Victory Schools. In addition,
other private school operators, post-secondary education providers or childcare
providers could possibly enter our market. For example, Bright Horizons Family
Solutions, a provider of corporate sponsored childcare, recently opened its
first private school, and it or other childcare providers could seek
opportunities in the charter or contract schools market. KIPP, a national
non-profit organization, provides support and training to schools using the KIPP
model as developed in KIPP Academies in Houston and New York City.
20
ITEM 2. PROPERTIES
Of the 150 schools we are currently operating in fiscal 2003, the 99
contract schools generally operate in existing facilities provided by our school
district clients, though we manage the maintenance and operation of these
facilities. Of our 99 contract schools, 16 are operated under a charter held by
a public school district which provides a facility.
Significant real estate investments are often necessary when we establish
a charter school for a charter board and existing facilities are not available.
Generally, these investments are 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 typically
costs from $4.0 million to $10.0 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.
In July 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 management of Ksixteen
included all the members of our former real estate department. Edison and
Ksixteen entered into a master development agreement pursuant to which Ksixteen
performed construction management and real estate development and financing
services on behalf of charter schools that have entered into management
agreements with us. Effective July 1, 2001, we acquired the remaining 65% of
Ksixteen and intend to operate our real estate function internally in the
future.
Our executive offices are located in New York, New York in a leased
facility consisting of approximately 75,600 square feet.
In fiscal 2000, we purchased property in New York, New York for the
purchase price of $10 million and entered into an agreement with the Museum of
African Art to develop the property for a mixed use project consisting of new
corporate headquarters, a charter school and a facility to house the Museum. In
the fourth quarter of fiscal 2002, we decided to discontinue the project and
recorded an impairment charge of approximately $3.6 million reflecting soft
costs invested in the project since inception.
ITEM 3. LEGAL PROCEEDINGS
Class Action Lawsuits under the Federal Securities Laws. Between May
15, 2002 and July 3, 2002, ten class action lawsuits were filed against Edison
and certain of its officers and directors in the United States District Court
for the Southern District of New York. The ten lawsuits are captioned (1) Dively
v. Edison Schools, Inc., Civ. Action No. 02-CV-3692; (2) Barry v. Edison
Schools, Inc., Civ. Action No. 02-CV-3704; (3) Devine v. Edison Schools, Inc.,
Civ. Action No. 02-CV-3726; (4) Cooper v. Edison Schools, Inc., Civ. Action No.
02-CV-3828; (5) Neuenfeldt v. Edison Schools, Inc., Civ. Action No. 02-CV-3912;
(6) Berman v. Edison Schools, Inc., Civ. Action No. 02-CV-4269; (7) Minich v.
Edison Schools, Inc., Civ. Action No. 02-CV-4410; (8) Vanlaere v. Edison
Schools, Inc., Civ.Action No. 02-CV-4692; (9) Seiden v. Edison Schools, Inc.,
Civ. Action No. 02-CV-5078; and (10) Grace v. Edison Schools, Inc., Civ. Action
No. 02-CV-5198. The Barry, Devine and Seiden lawsuits name as an additional
defendant PricewaterhouseCoopers LLP. The Grace lawsuit names as additional
defendants Merrill Lynch & Co., Inc., Banc of America Securities LLC, Credit
Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Corp. and J.P.
Morgan Securities Inc. These lawsuits are largely identical and each alleges
that Edison and certain of its officers and directors violated Sections 10(b)
and 20(a) of the Securities Exchange Act of 1934. They seek an unspecified
amount of compensatory damages, costs and expenses related to bringing the
actions, and in a few instances, injunctive relief. Plaintiffs allege that
Edison's public disclosures from November 1999 to March 2002 regarding its
financial condition were materially false and misleading because Edison
allegedly improperly inflated its total revenues by including certain payments,
including payments for teacher salaries, that were paid directly to third
parties by local school districts and charter school boards that contracted with
Edison. Each of the lawsuits references the May 14, 2002, cease-and-desist order
issued by the United States Securities and Exchange Commission on consent
against Edison. Several of the lawsuits also mention two restatements of
Edison's financial statements, one regarding a warrant purchased in 1998 by a
philanthropic organization and the other regarding a severance agreement between
Edison and one of its senior officers, made by Edison as a result of the May 14,
2002 cease-and-desist order. The Grace lawsuit also contains an allegation that
Edison, certain of its officers and directors, and the investment banks that
underwrote Edison's November 1999 offering of class A common stock violated
Sections 11 and 15 of the
21
Securities Act of 1933 by issuing a prospectus containing untrue statements of
material fact or omissions of material fact, regarding Edison's financial
condition and its inclusion in its stated revenue of certain payments made
directly to third parties by local school districts and charter school boards
that contracted with Edison. In July 2002, several plaintiffs filed motions to
be appointed lead plaintiff and also moved to consolidate the ten lawsuits in
one action. As of the date of this Annual Report, there has been no ruling by
the court on these motions. Edison believes that it has strong defenses to the
claims raised by these lawsuits. However, if Edison were not to prevail, the
amounts involved could be material to Edison.
Derivative Lawsuits. Between May 15, 2002, and July 19, 2002, three
lawsuits were filed derivatively on behalf of Edison against certain of Edison's
officers and directors in the Supreme Court for the State of New York, County of
New York. The derivative lawsuits are captioned (1) Urbach, et al. v.
Christopher D. Cerf, et al., Index No. 02/111413; (2) Devine, et al. v.
Christopher D. Cerf, et al., Index No. 02/111414; and (3) Goldstein v. Schmidt,
Jr., et al., Index No. 02/602659. Plaintiffs in these lawsuits contend that
Edison's officers and directors committed various common law torts against the
Company in connection with the allegedly improper inflation of Edison's total
revenues by including certain expenses, including teacher salaries, that were
paid directly by local school districts. In particular, the plaintiffs allege
that the officers and directors named as defendants violated their fiduciary
duties to Edison by failing to implement and maintain an adequate internal
accounting control system, causing Edison to conceal from the public its true
financial condition, and using material non-public information to sell shares of
Edison common stock and thereby reap millions of dollars in illegal insider
trading gains. These lawsuits seek compensatory damages in the amount of the
profits that the individual defendants allegedly made, as well as a constructive
trust over such profits. The Company has negotiated a stipulation in the first
two derivative actions which allows (1) plaintiffs until November 22, 2002 to
file a consolidated amended complaint and (2) defendants until January 22, 2003
to file a responsive pleading to plaintiffs' consolidated complaint. The Company
is in the process of attempting to negotiate a comparable stipulation in the
third derivative action. The Company believes that Edison's officers and
directors also have strong defenses to these lawsuits. See "Additional Risk
Factors That May Affect Future Results -- We have been named in several
shareholder class action and shareholder derivative lawsuits."
We are also 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, Peoria,
Illinois and Las Vegas, Nevada questioning the authority of these school
districts to enter into management agreements with us. In addition, the school
district of York, Pennsylvania has appealed the decision of the state
charter-granting authority to grant a charter to one of our clients. 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 2002.
22
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Our executive officers and directors, and their ages as of September 20,
2002, are as follows:
NAME AGE POSITION
- ---- --- --------
H. Christopher Whittle............... 55 Chief Executive Officer and
Director
Benno C. Schmidt, Jr................. 60 Chairman of the Board of Directors
Christopher D. Cerf.................. 47 President, Chief Operating Officer
and Director
Charles J. Delaney................... 42 Vice Chairman and Director
Christopher J. Scarlata.............. 33 Chief Financial Officer and Senior
Vice President
John E. Chubb, Ph.D.................. 48 Chief Education Officer and
Executive Vice President
Reverend Floyd H. Flake.............. 57 Director
Joan Ganz Cooney..................... 72 Director
Timothy P. Shriver................... 43 Director
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 Chief Executive
Officer since July 1998. He served as President from March 1997 through July
2002. 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., a corporation wholly owned by Mr. Whittle with the
current primary purpose of holding 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 President since July 2002 and as Chief
Operating Officer since May 1999. He has also served as a director since
November 2000. 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.
Charles J. Delaney has served as our Vice Chairman since July 1, 2002 and
as a director since July 1999. Prior to joining Edison, Mr. Delaney was the
President of UBS Capital Americas, which is the manager for two private equity
funds that make investments in the U.S. and Latin America, from January 2000
through June 2002. Mr. Delaney served as President of UBS Capital or its
predecessor companies from May 1989 to June 2002. UBS Capital Americas and UBS
Capital LLC are affiliated with UBS AG.
Christopher Scarlata has served as Chief Financial Officer and Executive
Vice President since August 1, 2002. From April 2001 through July 2002 he was
our Controller. Prior to joining us, he served as Controller for Walker Digital
LLC from
23
March 2000 through December 2000 and as assistant controller for Mitchell
Madison Group LLC from 1996 through February 2000. Before that, Mr. Scarlata was
an auditor for PricewaterhouseCoopers LLP.
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.
Reverend Floyd H. Flake has served as a director since November 2000.
He served as President of Edison Charter Schools from May 2000 until September
2002, and currently serves the Company as a consultant. Reverend Flake has
served as the president of Wilberforce University since July 2002. 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. He has also
been the senior pastor of the Allen African Methodist Episcopal Church in
Jamaica, Queens since 1976. Reverend Flake currently serves on the Board of
Directors of the Fannie Mae Foundation, The Princeton Review, The New York City
Investment Fund Civic Capital Corporation, The Initiative for a Competitive
Inner City, and the Federal Deposit Insurance Corporation Advisory Committee on
Banking Policy. Reverend Flake is also a Senior Fellow at the Manhattan
Institute for Social and Economic Policy, an Adjunct Fellow on the Advisory
Board of the Brookings Institute Center on Urban and Metropolitan Policy and a
member of the NYC 2012 Olympic Committee.
Joan Ganz Cooney has served as a director since November 2000. Ms.
Cooney is the Chairman, Executive Committee, of the Sesame Workshop, formerly
the Children's Television Workshop. Ms. Cooney co-founded the Children's
Television Workshop as its Executive Director in 1968 and was named its
President-Chief Executive Officer in 1970 and Chairman-Chief Executive Officer
in 1988. She assumed her present responsibilities in 1990. Ms. Cooney is on the
Boards of Directors of the Museum of Television and Radio and The New York and
Presbyterian Hospitals, Inc. She is a Life Trustee of the National Child Labor
Committee and of WNET, Channel 13.
Timothy P. Shriver has served as a director since September 2001. He
has served as President and Chief Executive Officer of Special Olympics, Inc.
since July 1996. Mr. Shriver serves on the Board of Trustees for Phoenix Home
Life Mutual Insurance Company and is on the Boards of Directors for the
Education Compact for Learning and Citizenship. In 1994, Shriver helped launch
and currently chairs the Collaborative for Academic, Social & Emotional Learning
(CASEL), a national organization promoting effective school-based prevention
programming.
24
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, 2001:
First Quarter.......................... $34.25 $21.25
Second Quarter......................... $32.81 $23.00
Third Quarter.......................... $38.75 $19.50
Fourth Quarter......................... $28.00 $15.90
Fiscal Year Ended June 30, 2002:
First Quarter.......................... $23.10 $11.95
Second Quarter......................... $20.51 $10.76
Third Quarter.......................... $21.68 $10.28
Fourth Quarter......................... $13.79 $0.72
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 25, 2002, we had approximately 178 holders of record of
class A common stock and 36 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 July 3, 2001 and September 4, 2001, we issued an aggregate of 1,360,954
shares of our class A common stock to the stockholders of LearnNow, Inc. in
connection with our acquisition of LearnNow. The class A common stock issued in
this transaction was issued in reliance on the exemption from registration set
forth under Rule 506 of the Securities Act. No underwriters were involved in
this issuance of securities.
On July 31, 2002 we issued warrants for the purchase of up to 10,710,973
shares of our class A common stock in connection with the establishment of a
revolving credit agreement with Merrill Lynch Mortgage Capital Inc. and a Credit
and Security Agreement with School Services LLC. The warrants have an exercise
price of $1.00 per share and are exercisable at any time following their
issuance and prior to July 31, 2007. The warrants issued in these transactions
were issued in reliance on the exemption from registration set forth under
Section 4(2) of the Securities Act. No underwriters were involved in this
issuance of securities. See "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources."
25
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
our consolidated 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, 2000, 2001 and 2002, and the balance sheet data as of
June 30, 2001 and 2002, 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, 1998 and 1999 and the balance sheet
data as of June 30, 1998, 1999 and 2000 are derived from our audited
consolidated financial statements that are not included in this Annual Report.
Please see Note 2 of the notes to our consolidated financial statements for (i)
information on direct site expenses which are paid by our clients on our behalf
and (ii) information concerning the calculation of basic and diluted net loss
per share. Please see Management's Discussion and Analysis of Financial
Condition and Results of Operations - "Overview" and "Results of Operations" for
information concerning the calculation of EBITDA, net of other charges, gross
site contribution and gross site margin.
FISCAL YEARS ENDED JUNE 30,
---------------------------------------------------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
(RESTATED*) (RESTATED*)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AND STUDENT DATA)
STATEMENT OF OPERATIONS DATA:
Gross Student Funding .............................. $ 69,407 $ 132,762 $ 224,578 $ 375,818 $ 520,295
========== ========== ============ =========== ============
Net Revenue ........................................ $ 65,630 $ 125,085 $ 208,971 $ 350,508 $ 465,058
---------- ---------- ------------ ----------- ------------
Education and operating expenses:
Direct site expenses:
Company paid ............................. 27,420 49,905 93,087 162,028 211,438
Client paid .............................. 28,379 56,515 83,909 129,172 178,702
Administration, curriculum and development ...... 18,258 49,984 54,232 57,851 71,230
Impairment charges .............................. -- -- -- -- 36,878
Depreciation and amortization ................... 7,232 12,526 20,906 33,595 37,396
Pre-opening expenses ............................ 2,486 5,457 8,372 8,641 6,153
Design team compensation ........................ 2,724 -- -- -- --
---------- ---------- ------------ ----------- ------------
Total education and operating expenses ....... 86,499 174,387 260,506 391,287 541,797
---------- ---------- ------------ ----------- ------------
Loss from operations ............................... (20,869) (49,302) (51,535) (40,779) (76,739)
Other income (expense), net ........................ (1,046) (131) 905 2,870 (8,261)
---------- ---------- ------------ ----------- ------------
Loss before provision for taxes .................... (21,915) (49,433) (50,630) (37,909) (85,000)
Provision for state and local taxes ................ -- -- -- (603) (1,040)
---------- ---------- ------------ ----------- ------------
Net loss ........................................... (21,915) (49,433) (50,630) (38,512) (86,040)
Dividends on preferred stock ....................... (4,290) -- -- -- --
Preferred stock accretion .......................... (278) (1,027) -- -- --
---------- ---------- ------------ ----------- ------------
Net loss attributable to common
stockholders .................................... $ (26,483) $ (50,460) $ (50,630) $ (38,512) $ (86,040)
========== ========== ============ =========== ============
Basic and diluted net loss per share
attributable to common stockholders ............. $ (8.52) $ (16.24) $ (1.83) $ (0.80) $ (1.61)
========== ========== ============ =========== ============
Weighted average number of common shares outstanding
used in computing basic and
diluted net loss per share attributable
to common stockholders .......................... 3,107,356 3,107,356 27,685,203 47,966,741 53,564,244
========== ========== ============ =========== ============
STUDENT AND PER STUDENT DATA:
Student enrollment (1) ............................. 12,600 23,900 37,500 57,000 74,000
Total revenue per student .......................... $ 5,209 $ 5,234 $ 5,573 $ 6,149 $ 6,285
Net loss per student ............................... $ (1,739) $ (2,068) $ (1,350) $ (676) $ (1,163)
EBITDA, net of other charges, per student .......... $ (820) $ (603) $ (501) $ (98) $ (712)
Cash used in operating activities per student ...... $ (837) $ (673) $ (1,105) $ (469) $ (320)
Cash used in investing activities per student ...... $ (1,594) $ (1,269) $ (2,376) $ (1,358) $ (650)
Cash provided by financing activities per student .. $ 1,776 $ 2,797 $ (4,140) $ 2,591 $ 219
OTHER OPERATING DATA:
Capital expenditures ............................... $ 21,181 $ 34,023 $ 75,899 $ 68,348 $ 33,163
Gross site contribution ............................ $ 9,831 $ 18,665 $ 31,975 $ 59,308 $ 74,918
Gross site margin .................................. 15.0% 14.9% 15.3% 16.9% 16.1%
EBITDA, net of other charges ....................... $ (10,328) $ (14,404) $ (18,797) $ (5,567) $ (52,680)
Cash used in operating activities .................. $ (10,550) $ (17,624) $ (41,429) $ (26,710) $ (23,706)
Cash used in investing activities .................. $ (20,082) $ (28,783) $ (89,115) $ (77,410) $ (48,064)
Cash provided by financing activities .............. $ 22,383 $ 66,838 $ 155,266 $ 147,670 $ 16,223
Total number of schools ............................ 25 51 79 113 133
26
AS OF JUNE 30,
-----------------------------------------------------
2000 2001
1998 1999 (RESTATED) (RESTATED) 2002
---- ---- ---------- ---------- ----
(dollars in thousands)
BALANCE SHEET DATA:
Cash and cash equivalents ........... $ 7,492 $ 27,923 $ 52,644 $ 96,195 $ 40,648
Working capital ..................... (2,316) 18,554 57,351 111,731 12,328
Total assets ........................ 58,294 106,870 245,010 394,498 381,376
Total debt, including current portion 17,151 21,535 36,280 45,524 68,775
Total stockholders' equity .......... 24,190 58,962 172,813 298,367 232,384
- ---------------
(1) Does not include students enrolled in our summer school program.
* The selected financial data has been restated for fiscal 2000 and 2001 to
reflect the adjustments more fully described in Note 3 to the consolidated
financial statements.
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 "Item 6.
Selected Financial Data" and our financial statements and the related notes
included in this Annual Report. Information presented herein has been restated
for fiscal 2000 and 2001 to reflect the adjustments more fully described in
Note 3 to the consolidated financial statements. 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 Risk Factors That May
Affect Future Results."
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 approximately 74,000 students in 133 schools located
in 22 states across the country and the District of Columbia in the 2001-2002
school year. Additionally, we served approximately 35,000 students in our summer
school program during the summer of 2002. For the 2002-2003 school year, we
expect enrollment of approximately 80,000 students in 150 schools located in 23
states and the District of Columbia. Our net revenue in fiscal 2002 was $465.0
million.
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, 2002, our accumulated deficit since
November 1996 was approximately $256.6 million. In addition, prior to November
1996, we incurred losses of approximately $61.8 million, which are reflected in
our additional paid-in capital.
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;
- Books and other materials to support the Edison curriculum and
school design; and
- Upgrades in facilities.
27
GROSS STUDENT FUNDING
Gross student funding represents the gross contractual funding for our
schools before all expenses. The difference between gross student funding and
net revenues consists of costs that Edison is not primarily obligated to pay.
Gross student funding is not equivalent to revenue as defined by generally
accepted accounting principles.
NET REVENUE
Revenues are principally earned from contractual agreements to manage and
operate contract and charter schools. The Company also earns revenue from summer
school and after-school program fees. The Company recognizes revenue for each
managed school pro rata over the eleven months from August through June,
typically the period over which we perform our services, in accordance with
Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements."
Most of our management agreements provide that we earn a fee based upon
the number of children that attend our schools and, therefore, we only earn
revenue to the extent students attend our schools. In most instances, there is a
`base' fee per pupil and several `categorical' fee components paid only for
students in certain categories (e.g., low-income, English as a second language,
etc.). In some of our charter schools, our fee has a fixed component and
variable component. Even in contracts where we have a fixed fee component, we
have generally agreed to forego or reduce our fee if there is a budget shortfall
at the charter school.
The Company is generally responsible to its clients for all aspects of the
management of its schools including but not limited to the academic achievement
of the students; selection, training and compensation of school personnel;
procurement of curriculum and equipment necessary for operations of the school;
and the safe operation of the school facilities. Gross student funding
represents gross contractual funding for our schools before all costs. Net
revenue represents gross student funding less costs that we are not primarily
obligated to pay. The Company follows the guidance of EITF 99-19,"Reporting
Revenue Gross as a Principal versus Net as an Agent," and EITF 01-14, "Income
Statement Characterization of Reimbursements Received for 'Out-of-Pocket'
Expenses Incurred" regarding classification of revenues. Specifically, the
Company recognizes revenues net of expenses that the Company is not primarily
obligated to pay.
The Company recognizes per-pupil funding from local, state and federal
sources, including Title I and special education funding. Significant management
estimates and assumptions are required to determine these funding levels,
particularly in interim periods. On a quarterly basis, the Company records
adjustments to revenue, if necessary, for enrollment fluctuations, changes to
per-pupil funding estimates, and changes to estimates for federal and state
categorical grant funding. Anticipated losses on contracts are charged to
earnings when identified.
In January 2002, the Emerging Issues Task Force ("EITF") issued EITF 01-14
"Income Statement Characterization of Reimbursements Received for
`Out-of-Pocket' Expenses Incurred." EITF 01-14 clarifies EITF 99-19, "Reporting
Revenue Gross as a Principal versus Net as an Agent," which provides guidance on
whether revenues should be presented gross or net of certain costs. After
consultation with its independent auditors, the Company believes that EITF 01-14
should be interpreted to require it to present as revenue and expense only those
direct site expenses that the Company is primarily obligated to pay. In
accordance with the transition provisions of EITF 01-14, the Company adopted
EITF 01-14 effective January 1, 2002 and has reclassified all historical
periods to conform with the new presentation and, in the interest of
transparency, added a "gross student funding" line to its statements of
operations. Gross student funding is not equivalent to revenue as defined by
GAAP.
In November 2001, the EITF issued EITF 01-09, "Accounting for
Consideration Given by a Vendor to a Customer." EITF 01-09 addresses the
appropriate income statement characterization of consideration given by a vendor
to a customer, specifically whether that consideration should be presented in
the vendor's income statements as a reduction of revenue or as an expense. In
consultation with its independent auditors the Company determined that
consideration given to two customers was, in effect, an adjustment of the
Company's contract price and should be accounted for as a reduction in revenue
rather than as an expense subsequent to the promulgation of EITF 01-09. In
accordance with the transition provisions of EITF 01-09, the Company adopted
EITF 01-09 effective January 1, 2002 and has reclassified all historical periods
to conform with the new presentation.
28
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, which are often paid for by our clients on our
behalf, in which case they are disclosed as "direct site expense - client paid."
The remaining direct site expenses include on-site administration, facility
maintenance, utilities and, in some cases, student transportation. 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 net revenue less direct site
expenses. Gross site margin is gross site contribution expressed as a percentage
of net revenue. Prior to our adoption of EITF 99-19, EITF 01-14 and EITF 01-09,
we calculated gross site margin as gross site contribution expressed as a
percentage of what is now defined as gross student funding. Although gross site
contribution is the same dollar amount in each calculation, under the new
treatment the gross site margin percentage is higher as a result of using net
revenues. 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
margins vary considerably from school to school and sometimes year-to-year for
the same school. Gross site contribution does not reflect all site-related
costs, including depreciation and amortization or interest expense and principal
repayment related to site-level investments, or on-site pre-opening expenses,
and accordingly gross site contribution does not represent site-level
profitability.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES
Support from our central office is important for the successful delivery
of our curriculum and school design. Administration, curriculum and development
expenses include those amounts related to the creation and enhancement of our
curriculum, and our general, administrative and sales and marketing functions.
These costs include costs for curriculum, assessment and training professionals,
sales and marketing personnel, financial reporting, legal, technological
support, travel expenses and other development activities.
PRE-OPENING EXPENSES
Pre-opening expenses consist principally of various administrative and
personnel costs incurred prior to the opening of a new school or the expansion
of an existing school, particularly the costs for the initial training and
orientation of professional staff, recruitment and travel expenses and expenses
for temporary offices and staff. In connection with the establishment of a new
school, we seek to hire the school's principal several months in advance of the
school's opening. This allows the principal to hire staff, most of whom receive
substantial professional training in the Edison education design prior to the
first day of school. Pre-opening expenses generally are first incurred in the
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. The
depreciation and amortization of investments in our central office is also
included.
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
29
and academic goals, both of which we believe are critical to the success of our
business. Therefore, our budgets are designed to achieve the proper balance
between financial performance and academic standards.
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. Over the last three years
our schools have operated at 96.0% or higher of the enrollment levels assumed
in our budget. 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.
REENGINEERING
On August 21, 2002, the Company announced several initiatives emerging
from a company-wide "reengineering" effort. The initiatives are intended to
redesign Edison's infrastructure to improve service delivery to its schools;
increase student achievement and customer satisfaction; and accelerate Edison's
path to profitability. Among other changes, the Company announced significant
improvements in its headquarters operations including an enhanced customer
service function; strengthening of its financial reporting and facilities
financing unit; a ramp up of its communications function; a more efficient
organization of its general financial function, and an alignment of its internal
functions with a consolidated and streamlined regional structure. The Company
anticipates $6.0 million of charges associated with one-time costs related to
the reengineering.
FINANCIAL PERFORMANCE
We have incurred substantial net losses in every fiscal period since we
began operations. For the fiscal year ended June 30, 2002, our net loss was
$86.0 million. As of June 30, 2002, our accumulated deficit since November 1996,
when we converted from a partnership to a corporation, was approximately $256.6
million. In addition, prior to November 1996, we incurred losses of
approximately $61.8 million, which are reflected in our additional paid-in
capital.
The following table sets forth various financial data expressed as a
percentage of net revenue for the periods indicated:
FISCAL YEAR ENDED JUNE 30,
--------------------------------
2000 2001 2002
---------- --------- ------
Net revenue ............................. 100.0% 100.0% 100.0%
----- ----- -----
Education and operating expenses:
Direct site expenses:
Company paid ....................... 44.5 46.2 45.5
Client paid ........................ 40.1 36.8 38.4
Administration, curriculum and
development expenses ................. 26.0 16.5 15.3
Impairment charges .................... -- -- 8.0
Depreciation and amortization ......... 10.0 9.6 8.0
Pre-opening expenses .................. 4.0 2.5 1.3
----- ----- -----
Total education and operating expenses 124.6 111.6 116.5
----- ----- -----
Loss from operations .................... (24.6) (11.6) (16.5)
Other income (expense), net ............. 0.4 0.8 (1.8)
----- ----- -----
Loss from operations before provision for (24.2) (10.8) (18.3)
taxes
Provision for state and local taxes ..... -- (0.2) (0.2)
----- ----- -----
Net loss ................................ (24.2)% (11.0)% (18.5)%
===== ===== =====
In order to achieve profitability, we believe it will be necessary to
improve gross site margin while maintaining educational quality and continuing
to reduce central expenses as a percentage of net revenue. The latter
improvement is largely dependent on our ability to increase our net revenue
through expanded student enrollment while controlling central costs.
30
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.
MANAGEMENT AGREEMENTS: RENEWALS AND TERMINATIONS
Our management agreements generally have a term of five years. When we
expand by adding an additional school under an existing management agreement,
the term with respect to that school generally expires at the end of the initial
five-year period. We cannot be assured that a management agreement will be
renewed at the end of its term. Two management agreements covering five schools
expired at the end of the 2001-2002 school year and were not renewed.
Additionally, two management agreements representing three schools expired at
the end of the 2001-2002 school year and have not been renewed, although we are
continuing to manage those schools while discussing renewal of those agreements.
With respect to one of these agreements, covering one school, the state has
directed the school to bid out the renewal of the agreement to multiple
companies.
In addition, termination of a management agreement may occur prior to its
expiration date for a variety of reasons. Six management agreements covering 37
of the schools we are operating for the 2002-2003 school year and accounting for
___% of our total revenue for the year are terminable by the school district or
charter board at will, with or without good reason. Moreover, all of our
management agreements may be terminated for cause, including in some cases a
failure to meet specified educational standards, such as academic performance
based on standardized test scores. In addition, as a result of payment disputes
or changes within a school district, such as changes in the political climate,
from time to time we 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. We may also seek the early termination of, or not seek to renew, a
limited number of management agreements in any year. Six management agreements
covering 13 schools, three due to expire at the end of the 2002-2003 school
year, one at the end of the 2003-2004 school year, one at the end of the
2004-2005 school year, and one at the end of the 2005-2006 school year were
terminated at the end of the 2001-2002 school year. In addition, under a
management agreement expiring at the end of the 2004-2005 school year, the
number of schools managed was reduced from four to two during the 2001-2002
school year. It is likely that each year some management agreements will expire
unrenewed or be terminated prior to expiration.
Management agreements representing 22 schools, accounting for ____ of our
total revenue for fiscal 2002, will expire at the end of the 2002-2003 school
year, and agreements representing 22 schools, accounting for ___% of our total
revenue for fiscal 2002, will expire at the end of the 2003-2004 school year.
With regard to one of these agreements covering two schools, we have been
informed that the board will not renew the agreement when it expires in June
2003. Additionally, we have received formal notice that a management agreement
covering seven schools and due to expire at the end of the 2004-2005 school year
will be terminated at the end of the 2002-2003 school year.
See "Additional Risk Factors That May Affect Future Results -- Our
management agreements with school districts and charter boards are terminable
under specified circumstances and generally expire after a term of five years."
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,
municipal bonds, 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, 2002, we had approximately $80.9 million in loans
and advances outstanding net of allowances and guaranteed loans of $20.9 million
to our charter
31
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.
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 have recognized, and expect to continue to recognize, expenses
related to the option amendments over the vesting periods of the individual
stock options. These additional expenses were approximately $1.4 million for
fiscal 2001 and $1.0 million for fiscal 2002, and are expected to be $600,000
for fiscal 2003 and $200,000 for fiscal 2004.
To the extent we discretionarily accelerate stock options or otherwise
modify the terms of stock options in the future, we could incur additional
non-cash charges. We may also, from time to time, grant options below fair
market value which could result in further charges at the time of grant.
In November 1999, our CEO exercised options to purchase 725,000 shares
of common stock at $3.00 per share through the issuance of a promissory note for
$2,175,000. In addition, we loaned $4,445,700 in November 1999 and $1,248,500 in
April 2000 to our CEO to pay estimated income taxes resulting from the
transaction. These notes mature five years from their date of issuance. In the
past, we have accounted for the transaction as an option exercise and carried
the loans as notes receivable on our balance sheets and recognized periodic
interest income. The notes were issued with recourse solely to the shares
exercised and contain a floating rate of interest. Therefore, we have determined
that it is more appropriate to treat the options as not having been exercised
and account for them as a variable stock award pursuant to the provisions of
Emerging Issues Task Force Issue 95-16, "Accounting for Stock Compensation
Arrangements with Employer Loan Features under APB Opinion 25." Accordingly, the
Company has restated its fiscal 2000 and 2001 financial statements to reflect
compensation in the form of a charge or credit to operations and an offsetting
adjustment to additional paid-in capital for periodic changes in the market
value of the 725,000 common shares subject to exercise, until such notes are
paid. In addition, the loans related to estimated income taxes have been
restated to be expensed when originally issued. Interest income previously
recognized under the notes has been reversed. Interest received under the notes
will be credited to additional paid-in capital.
In connection with the restatement, the Company recognized, in fiscal
2000, a compensation charge of approximately $13.6 million and a reduction in
interest income of $450,829. In fiscal 2001, the market value of the Company's
common stock decreased from $23.19 per share at the beginning of year to $22.84
per share at June 30, 2001. As a result, the Company recognized a compensation
credit of $253,750 and a reduction in interest income previously provided of
$684,834. In fiscal 2002, the market price of the Company's common stock
declined from $22.84 per share at the beginning of the year to a value below the
exercise price of $3.00 per share by year end. Accordingly, the remaining amount
of compensation expense recognized in prior years, including a portion related
to fiscal 1999, of $14,384,000 was reversed and no interest income was
recognized for the year.
LOANS TO EXECUTIVES
Benno C. Schmidt, Jr. borrowed $1.6 million from the Company on June 5,
1992 and $200,000 from the Company on January 23, 1996, as evidenced by
promissory notes. The loans were recourse and were collateralized by a life
insurance policy on Mr. Schmidt. The amounts due from Mr. Schmidt under these
loans could be offset by the Company against the amount owed by the Company to
Mr. Schmidt under his severance agreement. In October 1999, the promissory notes
were amended to change the interest rate to the prime rate in effect from time
to time and to extend the date for payment of all principal and accrued interest
until the earlier of February 15, 2002 or the termination of Mr. Schmidt's
employment with the Company. Prior to this amendment, the notes bore interest at
an annual compound rate of 5.83%, and all principal and accrued interest payable
under the notes were due on the earlier of February 15, 2000 or the termination
of Mr. Schmidt's employment with the Company. In February 2002, the term of the
loans was extended to June 15, 2002. In June 2002, the term of the loans was
extended to August 31, 2002. The loans have not been repaid. The Company has
given notice to Mr. Schmidt that the loans are now due, and with his cooperation
is working to expedite collection of the outstanding balance of principal and
interest under
32
the loans, which totaled $1.8 million and $1.3 million, respectively, as of
September 30, 2002. Mr. Schmidt is the Company's Chairman of the Board of
Directors.
H. Christopher Whittle borrowed $6.6 million from the Company on November
15, 1999 and $1.2 million from the Company on April 13, 2000. The loans
represented the total amount required for Mr. Whittle to purchase the shares
upon exercise of his March 1997 option to purchase 270,000 shares of class A
common stock and 30,000 shares of class B common stock at $3.00 per share and
his December 1997 option to purchase 382,500 shares of class A common stock and
42,500 shares of Class B Common Stock at $3.00 per share and to pay related
income tax obligations. The Company also agreed to loan Mr. Whittle any
additional amount necessary to pay any additional taxes or tax penalties
incurred by him in connection with his purchase of the shares. The loans are
collateralized only by the shares and bear interest at the greater of the prime
rate or the Company's actual borrowing rate, if any, from time to time, with
payment of the principal amount and accrued interest on the November 1999 loan
due in full in November 2004 and payment of the principal amount and accrued
interest on the April 2000 loan due in full in April 2005. The balance of
principal and interest outstanding under these loans was $7.9 million and $1.8
million, respectively, as of September 30, 2002. Mr. Whittle is the Company's
Chief Executive Officer and one of the Company's directors. Proceeds from
collection of these notes will be credited to additional paid-in capital (See
Note 3 to the consolidated financial statements).
Tonya G. Hinch borrowed $100,000 from the Company on July 5, 2000 as
evidenced by a letter agreement. The loan does not bear interest and is due on
June 30, 2003. The loan is recourse only to the net proceeds to Ms. Hinch from
the sale of shares of the Company's class A common stock and class B common
stock acquired by Ms. Hinch through the exercise of employee stock options. Ms.
Hinch served as Executive Vice President of our School Support Division until
June 10, 2002.
Adam Feild borrowed $100,000 from the Company on December 6, 1999 as
evidenced by a promissory note. The note is unsecured and bears interest at an
annual rate of 8.5%. The note is due on December 31, 2005. The balance of
principal and accrued interest under this loan was $100,000 and $25,925,
respectively, as of September 30, 2002. The loan is recourse only to the net
proceeds to Mr. Feild from the sale of shares of the Company's class A common
stock and class B common stock acquired by Mr. Feild through the exercise of
employee stock options. Mr. Feild served as the Company's Chief Financial
Officer and Executive Vice President until July 30, 2002.
INCOME TAXES
We have not recorded any provision for federal income taxes because we
have incurred net losses from our inception through June 30, 2002. As of June
30, 2002, we had approximately $289 million of net operating loss carryforwards
for federal income tax purposes. Approximately $45 million are expected to
expire between fiscal 2010 and 2018, and approximately $244 million are expected
to expire between fiscal 2019 and 2022. 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.
For fiscal 2002, we have recorded a provision for taxes that reflects
state and local income taxes arising from our operations of several sites.
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. Summer
school revenues and expenses are also recognized in the first and fourth fiscal
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 Risk Factors That May Affect Future Results - Our financial
results are subject to seasonal patterns and other fluctuations from quarter to
quarter."
33
RESULTS OF OPERATIONS
FISCAL YEAR ENDED JUNE 30, 2002 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2001
NET REVENUE. Our net revenue increased to $465.1 million for fiscal 2002
from $350.5 million for the prior year, an increase of 32.7%. The increase was
primarily due to a 29.8% increase in student enrollment from 57,000 in the
2000-2001 school year to 74,000 in the 2001-2002 school year, reflecting both
the opening of new schools and the expansion of existing schools. Additionally,
revenue generated from our summer school program increased net revenue by 2.2%
in fiscal 2002.
DIRECT SITE EXPENSES. Our direct site expenses increased to $390.1 million
for fiscal 2002 from $291.2 million for the prior year, an increase of 34.0%.
The increase in direct site expenses was primarily due to the 29.8% increase in
student enrollment. The largest element of direct site expenses is personnel
costs. Personnel costs included in direct site expenses increased to $326.4
million for fiscal 2002 from $243.7 million for the prior year. Of the total
direct site expense, $178.7 million was client paid, up from $129.2 million in
the same period of the prior year. These client paid expenses consist entirely
of personnel costs at our schools.
GROSS SITE MARGIN AND CONTRIBUTION. Our gross site contribution was $74.9
million for fiscal 2002 compared to $59.3 million for the prior year. The
corresponding gross site margin decreased to 16.1% for fiscal 2002 compared to
16.9% for fiscal 2001. The decrease in gross site margin was due to direct site
costs growing more rapidly than net revenue, primarily as a result of
disappointing results for one of our new clients in fiscal 2002.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES. Our administration,
curriculum and development expenses increased to $71.2 million for fiscal 2002
from $57.9 million for fiscal 2001, an increase of 23.0%. The increase was due,
in part, to greater personnel costs resulting from an increase of approximately
107 new headquarters employees, which reflects a substantial increase in staff
in our school operations and education divisions and an increase in our central
office administrative staff to enhance legal, contracting, and financial
reporting functions. Other charges included within administration, curriculum
and development expenses that contributed to the increase on a net basis include
(1) approximately $7.5 million of costs related to an inquiry by the Securities
and Exchange Commission and our sales and marketing activities in Philadelphia,
and (2) specific event related charges comprised of $4.0 million of costs
related to a write-down of a note as a result of a discontinued new school
project and a $5.5 million reserve of costs related to a reserve against notes
to charter schools as a result of the difficult credit environment affecting the
Company's ability to arrange third party lender financing coupled with the
credit risk of specific charter school notes and management's intention to
accelerate the refinancing of individual notes to third party lenders. These
costs were offset by $14.4 million of income from a non-cash stock compensation
adjustment (see note 3 of the notes to the consolidated financial statements).
IMPAIRMENT CHARGES. Our impairment charges consist of one - time and
specific event related charges including $33.3 million related to the write-off
of goodwill triggered by the reduction in the Company's share price and a $3.6
million charge related to management's decision to discontinue our corporate
headquarters project.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $37.4 million for fiscal 2002 from $33.6 million for fiscal 2001, an increase
of 11.3%. 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 and central
office growth.
PRE-OPENING EXPENSES. Our pre-opening expenses decreased to $6.2 million
for fiscal 2002 from $8.6 million for fiscal 2001, a decrease of 27.9%. This
decrease was associated primarily with opening new schools for the 2001-2002
school year, with approximately 17,000 new students enrolled, of which 2,000
students were from existing LearnNow schools, compared to approximately 19,500
new students enrolled in the prior school year.
Excluding non-cash stock-based compensation income of $13.3 million and
expense of $1.6 million in fiscal 2002 and 2001, respectively, administration,
curriculum and development and pre-opening expenses as a percentage of net
revenues increased to 19.5% for fiscal 2002 from 18.5% for the prior year.
Excluding the specific event related charges of $9.5 million related to our
notes receivable (as discussed in administration, curriculum and development
expenses), administration, curriculum and development, and pre-opening expenses
as a percentage of net revenue decreased to 17.5% for fiscal 2002 from 18.5% for
fiscal 2001.
34
EDUCATION AND OPERATING EXPENSES. Our total education and operating
expenses as a percentage of net revenue increased to 116.5% for fiscal 2002 from
111.6% for fiscal 2001. Excluding one-time and specific event related charges of
$32.0 million, including $14.4 million of income from a non-cash stock
compensation adjustment; $4.0 million of costs related to a discontinued new
school project; $5.5 million of costs related to a reserve against loans to
charter schools; $33.3 million of costs related to the write-off of goodwill;
and a $3.6 million cost related to the discontinued corporate headquarters
project, education and operating expenses as a percentage of net revenue
decreased to 109.6% for fiscal 2002 from 111.6% for fiscal 2001. 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 net 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, interest income, income tax expense, depreciation and amortization,
loss on investment, loss on disposal of fixed assets and stock-based
compensation charges. These costs are discussed above. This amount for fiscal
2002 was a negative $52.7 million compared to a negative $5.6 million for fiscal
2001. Excluding the one-time and specific event related charges of $46.4
(including $36.9 million of impairment charges discussed above, $4.0 million
write-down of notes and $5.5 million reserve against notes receivable), EBITDA,
net of other charges, for fiscal 2002 was a negative $6.3 million compared to a
negative $5.6 million for fiscal 2001. The decline in EBITDA, net of other
charges, resulted primarily from a decrease in gross site margin offset by
decreased administration, curriculum and development, and pre-opening expenses
as a percentage of revenues. On a per-student basis, EBITDA, net of other
charges and excluding one-time and specific event related charges, improved to
negative $85 in fiscal 2002 compared to negative $98 for the prior year.
LOSS FROM OPERATIONS. Our loss from operations increased to $76.7 million
for fiscal 2002 from $40.8 million for fiscal 2001, an increase of 88.0%.
Excluding one-time and specific event related charges of $32.0 million as
mentioned above our loss from operations increased to $44.7 million for fiscal
2002 from $40.8 million for fiscal 2001, an increase of 9.6%. The increase
primarily resulted from higher administration, curriculum, and development
expenses as well as higher depreciation and amortization.
OTHER INCOME AND EXPENSE. Other income, net, was negative $8.3 million for
fiscal 2002 compared to $2.9 million in fiscal 2001. The decline was primarily
due to the $6.8 million reduction in the carrying value of our investment in
Apex Learning, Inc and a $3.6 million increase in loss on disposal of fixed
assets.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
increased to $86.0 million for fiscal 2002 from $38.5 million for fiscal 2001,
an increase of 123.4%. Excluding one-time and specific event related charges of
$32.0 million, our net loss increased to $54.0 million for fiscal 2002 from
$38.5 million for fiscal 2001, an increase of 40.3%.
FISCAL YEAR ENDED JUNE 30, 2001 COMPARED TO FISCAL YEAR ENDED JUNE 30, 2000
NET REVENUE. Our net revenue increased to $350.5 million for fiscal 2001
from $209.0 million for the prior year, an increase of 67.7%. The increase was
primarily due to a 52% increase in student enrollment from 37,500 in the
1999-2000 school year to 57,000 in the 2000-2001 school year, reflecting both
the opening of new schools and the expansion of existing schools.
DIRECT SITE EXPENSES. Our direct site expenses increased to $291.2 million
for fiscal 2001 from $177.0 million for the prior year, an increase of 64.5%.
The increase in direct site expenses was primarily due to the 52% increase in
student enrollment. The largest element of direct site expenses is personnel
costs. Personnel costs included in direct site expenses increased to $243.7
million for fiscal 2001 from $152.8 million for the prior year. Of the total
direct site expenses, $129.2 million was client paid, up from $83.9 million in
the same period of the prior year. These client paid expenses consist entirely
of personnel costs at our schools.
GROSS SITE MARGIN AND CONTRIBUTION. Our gross site contribution was $59.3
million for fiscal 2001 compared to $32.0 million for the prior year. The
corresponding gross site margin increased to 16.9% for fiscal 2001 compared to
15.3% for fiscal 2000. The increase in gross site contribution of $27.3 million
resulted from the increase in revenue and decreases in the cost of providing
services.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES. Our administration,
curriculum and development expenses increased to $57.8 million for fiscal 2001
from $54.2 million for fiscal 2000, an increase of 6.6%. Excluding a
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specific event related charge of $13.6 million related to a stock-based
compensation charge in fiscal 2000, our administration, curriculum and
development expenses increased to $57.8 million for fiscal 2001 from $40.6
million for fiscal 2000, an increase of 42.4%. The increase was substantially
due to greater personnel costs resulting from an increase of 80 new headquarters
employees, which reflects a substantial increase in staff in our school
operations and education divisions and an increase in our central office
administrative staff to enhance legal, contracting, and financial reporting
functions. In addition, we wrote down our curriculum materials inventory by $3.9
million to reflect costs of returning and/or reselling surplus materials.
DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $33.6 million for fiscal 2001 from $20.9 million for fiscal 2000, an increase
of 60.8%. 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 and central
office growth.
PRE-OPENING EXPENSES. Our pre-opening expenses increased to $8.6 million
for fiscal 2001 from $8.4 million for fiscal 2000, an increase of 2.4%. This
increase was associated primarily with opening new schools and expanding
existing schools for the 2000-2001 school year, with 19,500 new students
enrolled compared to approximately 13,600 new students enrolled one year
earlier.
Excluding non-cash stock-based compensation charges of $1.6 million in
fiscal 2001 and $11.8 million in fiscal 2000, administration, curriculum and
development and pre-opening expenses as a percentage of revenues decreased to
18.5% for fiscal 2001 from 24.3% for the prior year.
EDUCATION AND OPERATING EXPENSES. Our total education and operating
expenses as a percentage of total revenue decreased to 111.6% for fiscal 2001
from 124.6% for fiscal 2000. Excluding specific event related stock compensation
charges of $13.6 million in fiscal 2000 our total education and operating
expenses as a percentage of total revenue decreased to 111.6% for fiscal 2001
from 118.2% for fiscal 2000. 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, interest income, income tax expense, depreciation and amortization, and
stock-based compensation charges. These costs are discussed above. This amount
for fiscal 2001 was a negative $5.6 million compared to a negative $18.8 million
for fiscal 2000. The improved EBITDA, net of other charges, resulted primarily
from increased gross site margin and decreased administration, curriculum and
development, and pre-opening expenses as a percentage of revenues. On a
per-student basis, negative EBITDA, net of other charges, improved to $98 in
fiscal 2001 compared to $501 for the prior year.
LOSS FROM OPERATIONS. Our loss from operations decreased to $40.8 million
for fiscal 2001 from $51.5 million for fiscal 2000, a decrease of 20.8%.
Excluding one-time and specific event related charges of $13.6 million as
mentioned above, our loss from operations increased to $40.8 million for fiscal
2001 from $37.9 million for fiscal 2000, an increase of 7.7%. The increase
primarily resulted from higher administration, curriculum, and development
expenses as well as higher depreciation and amortization.
OTHER INCOME AND EXPENSE. Other income, net was $2.9 million for fiscal
2001 compared to $900,000 in fiscal 2000. The improvement was primarily due to
$10.3 million of interest income resulting from larger invested cash balances
and notes receivable, partially offset by interest expense from expanded
borrowings and a write-off of fixed assets at the schools that closed in fiscal
2001. Additionally, for fiscal 2001, we recognized $291,000 in losses as our
pro-rata share of the Ksixteen net loss for that period.
NET LOSS AND NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. Our net loss
decreased to $38.5 million for fiscal 2001 from $50.6 million for fiscal 2000, a
decrease of 23.9%. Excluding one-time and specific event related charges of
$13.6 million, our net loss increased to $38.5 million for fiscal 2001 from
$37.0 million for fiscal 2000, an increase of 4.1%.
36
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, 2002, we had raised $509.0
million of equity capital. During the same period, we used $178.6 million of
cash for operating activities and $293.4 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, 2002, our cash available for operations was approximately
$40.7 million.
On October 3, 2001, the Company formed Edison Receivables Company LLC
("Edison Receivables") for the purpose of purchasing and financing certain
receivables of the Company. The Company owns all of the membership interests in
Edison Receivables, a Delaware limited liability company with a separate legal
existence from the Company. The Company has sold or contributed certain accounts
receivable arising from the Company's provision of school management services in
the ordinary course of its business and related security to Edison Receivables.
Edison Receivables has its own separate creditors who are entitled to be
satisfied out of Edison Receivables' assets prior to any value in it becoming
available to the Company. The Company has no right, title or interest in Edison
Receivables' assets, including the accounts receivable assigned to it by the
Company.
In November 2001, Edison Receivables entered into a $35.0 million
revolving credit facility (the "MLMCI Facility") with Merrill Lynch Mortgage
Capital Inc. ("MLMCI"), collateralized by certain accounts receivable purchased
from or contributed by the Company. Borrowings are limited to specified
percentages of eligible accounts receivable, as defined. The MLMCI Facility
originally had a term of one year, with interest determined on a Eurodollar or
prime rate basis at the Company's option and a commitment fee of .50% per annum
on the unused portion of the commitment. As of June 30, 2002, $34.0 million was
outstanding under this line of credit bearing interest at LIBOR plus 3.5% and
was collateralized by receivables with a book value of $62.8 million that were
sold in a true sale to Edison Receivables by the Company. The agreement requires
that the Company observe certain financial covenants and restrictions including
a minimum consolidated tangible net worth and a maximum consolidated debt to
equity ratio.
On July 31, 2002, the MLMCI Facility was amended to add School Services
LLC ("School Services") as an additional lender and MLMCI as agent of the
lenders, increase the line of credit to $55.0 million, and extend the term of
the agreement and the line of credit provided thereunder to June 30, 2003. The
agreement and the line of credit were subsequently extended to July 15, 2003.
The interest rate under the amended MLMCI Facility was increased to LIBOR plus
7.0% or prime plus 4.5% at the Company's option. We agreed to pay certain fees
and costs related to the MLMCI Facility, aggregating approximately $3.2 million.
Additionally, on July 31, 2002 the Company entered into a two-year Credit
and Security agreement (the "New Credit Facility") with School Services, which
provides for a term loan in the amount of $10.0 million, collateralized by
property held by 110th and 5th Associates, LLC, a wholly owned subsidiary of the
Company, and a revolving loan not to exceed $10.0 million, collateralized by all
the Company's assets other than the property collateralizing the term loan.
Interest on both the term and revolving loans was set at 12.0% per annum. The
Company borrowed $250,000 on July 31, 2002 under the New Credit Facility. The
facility will also be reduced by the amount of certain fees and costs which the
Company has agreed to pay School Services and its affiliates, aggregating
approximately $2.8 million. Additionally, we agreed to pay a fee of $1.6 million
at loan maturity or the earlier prepayment of the term loan component of the
facility. This facility is secured by certain real property owned by the Company
and certain of its subsidiaries, notes payable from charter schools and other
debtors of the Company and all other assets of the Company generally, other than
accounts receivable sold to Edison Receivables. This facility matures on June
30, 2004. However, the loan commitment is to be reduced by an agreed upon
percentage of the net proceeds of any refinancing paid to the Company. The
agreement requires the Company to observe certain financial covenants and
restrictions including a minimum consolidated tangible net worth, a maximum
consolidated debt to equity ratio and a minimum EBITDA requirement for fiscal
2003.
In connection with the establishment of the amended MLMCI Facility and the
New Credit Facility, the Company also issued warrants for the purchase of up to
10,710,973 shares of Class A common stock of the Company, which equals 16.6% of
the total outstanding shares of common stock of the Company, including the
shares issuable upon exercise of the warrants.
37
The warrants have an exercise price of $1.00 per share and are exercisable at
any time following their issuance and prior to July 31, 2007.
We expect our cash on hand, together with borrowings under financing
arrangements, as mentioned above, 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 2003. Our near-term capital
needs are generally growth related and are dependent upon our rate of growth and
our mix of charter schools and contract schools, as charter schools usually
require us to advance funds to help charter boards obtain, renovate and complete
school facilities. We anticipate refinancing with third-party lenders up to
$50.0 million of loans we have made to charter boards to fund our current growth
plans for the 2003-2004 school year. While we have completed such financings in
the past, we cannot be certain we will obtain such financing on favorable terms,
if any. To the extent we cannot raise sufficient funds through the refinancing
of our loans to charter boards with third-party lenders, we may seek additional
capital through offerings of debt or equity securities and expanded financing
arrangements or reduce our growth plans. 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.
Our longer term cash requirements are for capital to fund capital
expenditures related to growth, anticipated working capital needs and general
corporate purposes. We expect to fund such expenditures and other longer term
liquidity needs with cash generated from operations, the proceeds from offerings
of debt or equity securities and expanded financing arrangements. Depending on
the terms of any financing arrangements, such funding may be dilutive to
existing shareholders, and we cannot be certain that we will be able to obtain
additional financing on favorable terms, if at all.
We ran summer school programs for 51 districts in the state of Missouri
during May, June and July of 2002. We spent approximately $19 million, which
includes teachers' salaries, curriculum and other educational/promotional
materials, over the two month period. Of the amounts we recognized as revenue
for the 2002 summer program, payment terms of the related billings range from 12
to 18 months. Therefore, cash receipts of revenue will lag outlay of cash for
expenditures by more than one year. Of the amounts we recognized as revenue for
the 2001 summer school program, 83.5% of the revenue had been collected as of
September 25, 2002 with the remainder scheduled for collection through January
2003.
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 revenue 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 fiscal 2002, we used $23.7 million for operating activities. This use
primarily resulted from a $86.0 million net loss, a $20.9 million net increase
in working capital accounts, $1.9 million increase in accrued interest on notes
receivable and stock-based compensation income of $13.3 million, partially
offset by depreciation and amortization totaling $39.8 million, $5.4 million of
asset write-off and disposals, $9.5 million of notes receivable write-off and
allowances, impairment charges totaling $36.9 million and $6.8 million reduction
in the carrying value of our investment in Apex Learning Inc. (see Note 12 of
the consolidated financial statements).
For fiscal 2001, we used $26.7 million for operating activities. This use
primarily resulted from a $38.5 million net loss and a $27.9 million net
increase in working capital accounts, partially offset by $32.3 million of
depreciation and amortization, $800,000 write-off of accounts receivable, $1.6
million in stock-based compensation expense and $5.2 million of asset write-off
and disposal.
CASH USED IN INVESTING ACTIVITIES
For fiscal 2002, we used $48.1 million in investing activities.
Additionally there were non-cash transactions of $16.0 million. During this
period, we invested $17.1 million in our schools and central office. These
amounts include the investments we made in technology and curriculum in each of
the schools we open. We have also advanced funds to our charter board clients
for their affiliates to help maintain and complete school facilities. The
amounts advanced during fiscal 2002 to our charter board clients or their
affiliates were $41.9 million. During this period, we also received $15.0
million in
38
repayments on advances previously made. During fiscal 2002, we increased
security deposits by $2.1 million, funded a $1.0 million philanthropic
contribution, and incurred $1.2 million of deferred contract costs.
For fiscal 2001, we used $77.4 million in investing activities.
Additionally there were non-cash transactions of $21.4 million. During this
period, we invested $46.9 million in our schools and central office. These
amounts include the investments we made in technology and curriculum in each of
the schools we opened. We have also advanced funds to our charter board clients
or their affiliates to help obtain, renovate and complete school facilities. The
amounts advanced for fiscal 2001 were $46.4 million. During this period, we also
received $14.8 million in repayments on advances previously made. Also, we
disposed of leasehold improvements totaling $10.7 million. During fiscal 2001,
we paid $7.0 million for the balance on the purchase price of a lot located in
the Harlem section in the borough of Manhattan in New York City. Additionally,
we had business acquisition costs of $3.0 million during the same period.
CASH FROM FINANCING ACTIVITIES
For fiscal 2002, we received $16.2 million from our financing activities.
These amounts include borrowing $34.0 million on our credit facility, amounts
received from the exercise of stock options and warrants of $1.8 million, cash
received from a minority investee of $2.1 million, and the release of
approximately $700,000 of restricted cash. These proceeds were partially offset
by the repayments of notes payable of $21.0 million and $1.3 million of deferred
financing costs.
For fiscal 2001, we received $147.7 million from our financing activities.
In August 2000, we completed a follow-on public offering in which we sold
3,350,000 shares of class A common stock for net proceeds of approximately $71.0
million. Also in August 2000, a philanthropic foundation exercised warrants to
purchase 600,000 shares of class A common stock and paid us $4.8 million. In
March 2001, we completed another public offering of an additional 3,351,026
shares of class A common stock for net proceeds of approximately $81.0 million.
Additionally, we received $5.3 million from exercises of stock options and
warrants. In fiscal 2001, we received $4.2 million in proceeds from financing
arrangements for computers and other technology and $4.7 million from facilities
financings. These proceeds were partially offset by the repayments of notes
payable and capital lease obligations of approximately $18.5 million and $5.2
million in funding of restricted cash.
PHILANTHROPY
Philanthropic entities supported 11 of the 133 schools we operated in the
2001-2002 school year. We tend to use philanthropy in those areas where the
per-pupil expenditures would otherwise make it difficult to achieve satisfactory
financial performance, such as California where all of our schools have been
supported by philanthropic entities. These philanthropic entities provide funds
directly to our school board or charter board clients, and not to Edison.
Generally, the philanthropic support helps fund the initial capital investment
in curriculum, technology, and facilities necessary to open a school and is not
used for ongoing annual operations. 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. 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; $9.7 million of this amount has been
used to date in schools operated by us. We issued a warrant to the D2F2
Foundation 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.
Additionally, we have entered into an agreement with one client whereby we
committed to raise $10.5 million in unrestricted philanthropic funds, to be
contributed over a two year period ending June 30, 2003. The funds are to be
used for schools the Company manages and are to be expended on agreed upon costs
including school facility, technology and curriculum materials. To date, we have
secured commitments from two philanthropic organizations to contribute
approximately $3.9 million and commitments from two senior Company officers for
an additional $1.2 million. During fiscal 2002, $2.8 million of commitments from
the two philanthropic entities was received and we donated $1.2 million. Our
commitment will be amortized, net of third party donations received, over the
contract life (five years) as a reduction in revenue. Contributions received
from senior officers will serve to reduce the Company's obligation and be
credited to additional paid-in capital.
CHARTER SCHOOL FACILITY FINANCINGS
Significant real estate investments are often necessary when we establish
a charter school for a charter board and existing facilities are not available.
While the charter board is generally responsible for locating and financing its
own school building, they typically do not have the resources required to obtain
the financing necessary to secure and maintain the
39
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 appropriate
facilities. 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
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 determine the most
economically viable option available for each school, and we purchase real
estate only if we determine it is the best available financing option. In the
past, we have utilized a variety of third party financing, including bank debt,
municipal bonds, sale/lease-back arrangements and philanthropy.
We expect to continue to advance funds to our charter board clients as
well as spend, to the extent capital is available, 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, 2002, we had guarantees totaling $20.9
million for facility-related debt of three of our charter school clients,
representing nine schools in fiscal 2002. The underlying debt comes due in
fiscal 2003 and fiscal 2006.
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 exceed the term of the management agreement for those
schools. For eight of our charter schools, we have entered into long-term leases
for the school facility that exceeds the current term of the management
agreement by as much as 15 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, 2002, our aggregate future lease obligations totaled
$49.6 million, with varying maturities over the next 20 years.
In nine 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, 2002, the amount of loans we
had guaranteed totaled $20.9 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. 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. We have also set aside restricted cash as collateral, in the amount of
$500,000 for the loans we guarantee. As of June 30, 2002, we had advances or
loans to charter school boards totaling a net of approximately $80.9 million
related to the purchase or renovation of school facilities we manage. We often
have not charged interest on these loans and advances. Approximately $19.8
million of these loans, representing 20 schools, are uncollateralized or
subordinated to a senior lender. We currently expect to make additional advances
of at least $7.0 million during the 2003 fiscal year. If these advances or loans
are not repaid when due, our financial results could be adversely affected.
In the fourth quarter of fiscal 2002, the Company has written down a loan
of approximately $4.0 million related to a discontinued new school project.
Additionally, in the fourth quarter of fiscal 2002, as a result of the difficult
credit environment affecting the Company's ability to arrange third party lender
financing coupled with the credit risk of specific charter school notes and
management's intention to accelerate the refinancing of individual loans with
third-party lenders, an allowance for loan losses of approximately $5.5 million
was established. These amounts are included in administration, curriculum and
development expense in the statements of operations.
INVESTMENT IN APEX ONLINE LEARNING INC.
In July 1999, we acquired a 16.5% ownership interest in APEX Online
Learning Inc. ("APEX"), 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
with APEX on June 30, 2000 and, as a result, we are no longer accounting for
this investment on the equity basis.
40
During the third quarter of fiscal 2002, we recorded a non-cash charge to
reduce the carrying value of our 19.7% cost basis investment in APEX to reflect
an other-than-temporary decline in value of $6.8 million (representing the
excess of carrying value over fair value, which results in a carrying value of
$1.3 million as of March 31, 2002). We determined that our investment was
impaired given the terms of a third quarter fiscal 2002 transaction involving
APEX equity instruments between two existing investors. Management assessed this
impairment to be other than temporary based on the sharp decline in fair value
as determined and in consideration of the overall market condition for private
equity companies. Prior thereto, we had concluded there was not an other than
temporary impairment based, in part, on its application of customary valuation
techniques which indicated that fair value approximated carrying value. Among
the key assumptions included in the valuation were market conditions for
educational related companies, trends in APEX operating results and valuations
of market comparables.
ANTICIPATED CAPITAL EXPENDITURES
Capital expenditures for fiscal 2003 are expected to be approximately
$26.0 million, which includes approximately $11.0 million for computers and
other technology at our schools, approximately $11.0 million for curriculum
materials, approximately $1.0 million for the purchase and improvement of
property at our schools, and $3.0 million for technology, leasehold
improvements, and other capital items at our headquarters. Additionally, we
expect to make additional advances or loans approximating $7.0 million to new
charter board clients to help secure and renovate school properties during the
2002-2003 school year pursuant to our philanthropic commitments, a portion of
which we expect will be refinanced through third parties. In addition, we expect
to make charitable donations of approximately $3.0 million to benefit one of our
clients.
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
In addition to other information in this report, you should consider
carefully the following risk factors. These risks may impair our operating
results and business prospects and the market price of our stock.
This report contains forward-looking statements that involve risks and
uncertainties. Such statements are based on our current expectations,
assumptions, estimates and projections about the company and our industry. These
forward-looking statements involve risks and uncertainties. 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. We undertake no obligation to update
publicly any forward-looking statements for any reason even if new information
becomes available or other events occur in the future. You should also refer to
the information set forth in this Annual Report, including our financial
statements and the related notes.
WE HAVE A HISTORY OF LOSSES AND MAY NOT ACHIEVE PROFITABILITY IN THE FUTURE
We have incurred substantial net losses in every fiscal period since we
began operations. For fiscal 2002, our net loss was $86.0 million. As of June
30, 2002, our accumulated deficit since November 1996, when we converted from a
partnership to a corporation, was approximately $256.6 million. In addition,
prior to November 1996, we incurred losses of approximately $61.8 million, which
are reflected in our additional paid-in capital. We have not yet demonstrated
that we can profitably manage public schools. In order to achieve profitability,
we believe it will be necessary to improve gross site margin while maintaining
educational quality and continuing to reduce central expenses as a percentage of
net revenue. We have recently undertaken a "reengineering" process intended to
increase our efficiency and help us attain profitability while improving client
service. There can be no assurance, however, that we will be successful in
meeting the objectives of the reengineering. 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 additional
capital and continue operations.
THE PRIVATE, FOR-PROFIT MANAGEMENT OF PUBLIC SCHOOLS REMAINS 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
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company to provide core instructional services was in 1992, and we opened our
first schools in August 1995. The development of this market has been
accompanied by significant press coverage and public debate concerning
for-profit management of public schools. If this business model fails to gain
acceptance among the general public, educators, politicians and school boards,
we may be unable to grow our business and the market price of our class A common
stock would be adversely affected.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO IMPROVE THE ACADEMIC
ACHIEVEMENT OF THE STUDENTS ENROLLED IN OUR SCHOOLS AND WE MAY FACE DIFFICULTIES
IN DOING SO IN THE FUTURE
We believe that our growth will be dependent upon our ability to
demonstrate general improvements in academic performance at our schools. Our
management agreements contain performance requirements related to test scores.
To the extent 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, is
perceived to decline, 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 earn for operating each school primarily
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 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. 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, but not limited to,
the following:
- we generally require our teachers to work a longer day and a
longer year than most public schools;
- we tend to have a larger proportion of our schools in
challenging locations, such as low-income urban areas, which
may make attracting principals and teachers more difficult;
and
- we believe we generally impose more accountability on
principals and teachers than do public schools as a whole.
These factors may increase the challenge we face in an already difficult
market for attracting principals and teachers. We have also experienced higher
levels of turnover among teachers than is generally found in public schools
nationally, which we attribute in part to these factors. If we fail to attract
and retain highly skilled principals and teachers in sufficient numbers, we
could experience client dissatisfaction and lost growth opportunities, which
would adversely affect our business.
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
42
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 as well as our ability to attract future clients would be damaged.
WE DEPEND UPON COOPERATIVE RELATIONSHIPS WITH TEACHERS' UNIONS, BOTH AT THE
LOCAL AND NATIONAL LEVELS
Union cooperation at the local level is often critical to us in obtaining
new management agreements and renewing existing management agreements. In those
school districts subject to collective bargaining, provisions of collective
bargaining agreements must typically be modified 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, albeit
ultimately unsuccessfully, 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. 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, local teachers' unions
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 maintain our 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, which
could cause our financial results to suffer.
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. We cannot
be assured that any management agreements will be renewed at the end of their
terms. In addition, some of our management agreements may be terminated 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 in some
cases for failure to meet specified educational standards, such as academic
performance based on standardized test scores. As a result of payment disputes
or changes within a school district, such as changes in the political climate,
we do 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. We may also seek the early termination of, or not seek to renew,
a limited number of management agreements in any year. If a significant number
of management contracts are not renewed or are terminated, it could have a
material adverse effect on our financial condition and results of operations.
OUR LARGEST MANAGEMENT AGREEMENT TO DATE IS TERMINABLE "AT WILL" BY THE CLIENT
AND UNDER OTHER SPECIFIED CIRCUMSTANCES
On August 1, 2002, the company signed an agreement to manage 26 schools in
Philadelphia. It is our largest cluster of schools to date. This agreement has
been and continues to be the subject of substantial attention in education and
business circles as well as in the local and national press. The contract is
subject to termination at will by the school district. The contract is also
subject to termination if we fail to meet our obligations, including meeting
specified student achievement targets. If the contract is terminated, or if we
fail to successfully deliver the program, raise student achievement or manage
the program's costs, our financial results, operations and reputation may be
adversely affected.
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OUR MANAGEMENT AGREEMENTS INVOLVE FINANCIAL RISK
Under the majority of our management agreements, we agree to operate a
school in return for per-pupil funding that generally does not vary with our
actual costs. To the extent our actual costs under a management agreement exceed
our budgeted costs, or our actual revenue is less than planned because we are
unable to enroll as many students as we anticipated or for any other reason, we
could lose money at that school. In addition, from time to time we have
disagreements with our clients as to the actual amount of, or the method of
calculating, the revenue owed to us under the terms of the management
agreements, resulting in lower revenue than planned. 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 recognize 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 recognize less funding 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 based on 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 AND UNCERTAINTIES INHERENT IN THE PROCESS THROUGH WHICH
WE DEVELOP NEW BUSINESS COULD DELAY NEW BUSINESS AND AFFECT OUR RATE OF GROWTH
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 9 and 27 months. Our sales cycle for contract schools
is generally lengthy 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. In
addition, we are increasingly presented with potential opportunities to take
over the management of several schools in a single district or area at the same
time, which likewise have a lengthy sales cycle. The outcome of these
opportunities can have a meaningful effect on our rate of growth. As a result of
our 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. Press speculation
concerning the outcome of these processes may adversely affect our stock price
from time to time.
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, are 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 larger amounts for a
new construction, which typically range from $4.0 million to $10.0 million, per
facility. 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, 2002, we have outstanding loans or advances to charter
boards of $80.0 million, net of allowances, to finance the purchase or
renovation of school facilities we manage. Approximately $19.8 million of these
loans, representing 16 schools, are uncollateralized or subordinated to a senior
lender. In addition, with respect to the loans that are collateralized, if we
were required to foreclose on the collateral securing those loans, we might not
be able to liquidate the collateral for proceeds
44
sufficient to cover the loan amount. If any of these advances or loans are not
repaid when due, our financial results could be adversely affected.
Some of our charter schools recently obtained tax-exempt financing to
repay these loans and advances, but there can be no assurance that our other
charter schools will be able to obtain such tax-exempt financing. While we are
currently exploring a variety of other financing structures to assist charter
schools in repaying these loans and advances, there can be no assurance that we
will be able to implement any of these financing structures.
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. For nine of our charter schools, we have entered into a long-term lease
for the school facility that exceeds the current term of the management
agreement by as much as 15 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. For example, as of December 2001, we terminated a management agreement
covering three schools for which we continue to have a long-term lease
obligation in connection with the school's facilities. Although we have signed a
lease with the school covering the 2002-2003 school year, we have no assurance
that that lease will be renewed or that we will be able to find other tenants to
lease the facility.
As of June 30, 2002, our aggregate future lease obligations totaled $49.6
million, with varying maturities over the next 20 years. In nine 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. As of June
30, 2002 the amount of loans we had guaranteed totaled $20.9 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. 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, we have generally indemnified our
charter school and contract school partners from any liability or damages
occurring or allegedly occurring or arising out of any environmental conditions
at the school site, if such conditions were caused or created by substances
brought on the site by Edison.
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 managed school pro rata over the
11 months from August through June, typically the period over
which we perform our services and, except for revenue related
to our summer school programs, we recognize no school revenue
in July. Most of our site costs are also recognized over the
11 months from August through June. For this reason, the first
quarter of our fiscal year has historically reflected less
revenue and lower expenses than the other three quarters, and
we expect this pattern to continue.
- Our recognition of site-related expenses in the first fiscal
quarter is proportionally greater than the revenue recognition
because some site expenses are incurred in July and no revenue
is recorded in July, with the exception of revenue related to
our summer school programs. 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.
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- We recognize revenue from our summer school programs during
the first and fourth fiscal quarters. To the extent our summer
school program becomes a more significant part of our
business, this could significantly alter seasonal patterns.
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 that provide these services, and they
have to date primarily focused on the operation of charter schools. Some of
these companies have begun to compete with us for contract schools. In addition,
a variety of other types of companies and entities could enter the market,
including colleges and universities, private companies that operate higher
education or professional education schools. Our existing competitors and new
market entrants could have financial, marketing and other resources
significantly greater than ours. We also compete for public school funding with
existing public schools, who may elect not to enter into management agreements
with private managers or who may pursue alternative reform initiatives, such as
magnet schools and inter-district choice programs. In addition, in jurisdictions
where voucher programs have been authorized, we will begin to compete with
existing private schools for public tuition funds. Voucher programs provide for
the issuance by local or other governmental bodies of tuition vouchers to
parents worth a certain amount of money that they can redeem at any approved
school of their choice, including private schools. If we are unable to compete
successfully against any of these existing or potential competitors, our
revenues could be reduced, resulting in increased losses.
FAILURE TO RAISE NECESSARY ADDITIONAL CAPITAL COULD RESTRICT OUR GROWTH AND
HINDER OUR ABILITY TO COMPETE
We have had negative cash flow in every fiscal period since we began
operations. We have regularly needed to raise funds in order to operate our
business and fund our growth, including the construction and renovation of
charter school facilities, and may need to raise additional funds in the future.
We cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all, or that our charter clients will be able to repay
our loans and advances to them. 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. If we cannot raise funds on
acceptable terms, if and when needed, or if our charter clients are unable to
repay our loans and advances to them, or if we are required to repay any loans
that we have guaranteed, 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.
THE TERMS OF OUR CREDIT AGREEMENTS IMPOSE SIGNIFICANT RESTRICTIONS ON OUR
BUSINESS
Under the MLMCI Facility and the New Credit Facility, we are required to
comply with certain financial covenants, including maintaining specified
financial ratios. Our ability to meet future financial ratios and comply with
other covenants can be affected by events beyond our control, such as general
economic conditions. Our failure to comply with such covenants would prevent us
from borrowing additional amounts under our credit facilities and could result
in a default under those facilities, which could cause the indebtedness
outstanding under the facilities to become immediately due and payable. If we
are unable to meet our debt obligations, we could be forced to restructure or
refinance our indebtedness, seek additional equity capital or sell assets. We
may be unable to obtain financing or sell assets on satisfactory terms, or at
all.
WE HAVE ISSUED WARRANTS FOR THE PURCHASE OF CLASS A COMMON STOCK IN CONNECTION
WITH CERTAIN CREDIT FACILITIES THAT, IF EXERCISED, WILL DILUTE OUR CURRENT
EQUITY HOLDERS AND COULD HAVE AN ADVERSE EFFECT ON THE MARKET PRICE FOR THE
SHARES OF CLASS A COMMON STOCK
Warrants issued in connection with the establishment of the Credit
Facilities are for the purchase of up to 10,710,973 shares of class A common
stock at $1 per share. The shares to be issued in connection with the Warrants
equal approximately 16.6% of the total outstanding shares of common stock of the
Company, (including the shares issuable upon exercise of the Warrants but prior
to any resale of such shares by the holders). The issuance of such shares will
dilute the current stockholders of the Company and could have an adverse effect
on the market price for the shares of class A common stock. In addition, the
46
shares issuable upon exercise of the Warrants are being registered pursuant to a
registration statement, and any sales of such shares may have a further adverse
effect on the market price for the shares of the class A common stock.
WE MAY NOT BE ABLE TO RECOVER THE PROPERTY VALUE ASSOCIATED WITH OUR TERMINATION
OF THE EDISON CORPORATE HEADQUARTERS PROJECT
We previously purchased property in New York, New York for the purchase
price of $10 million, and entered into an agreement 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. We
recently terminated our plans to develop this property and construct new
corporate headquarters. Accordingly, we may choose to sell the property to the
Museum or another third party. While we hope to be able to sell the property at
a price equal to or greater than our purchase price, we have no guarantee that
we will be able to do so, and may choose to sell the property at a loss.
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 4% of our gross
student funding revenue for fiscal 2002. During the same period, we estimate
that funding from other federal and state programs accounted for approximately
an additional 10% of our total revenue. A number of factors relating to these
government programs could lead to adverse effects on our business and financial
results:
- 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.
- 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 recognize less revenue for operating
the school.
- 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.
- 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, thus decreasing the amount
of funding available to us.
- The company's Edison Extra summer school program, which served
approximately 35,000 students in Missouri during the summer of
2002, is funded through state summer school funds. If the
Missouri state government fails to maintain current funding
levels for summer school programs, Edison Extra revenue would
be adversely affected.
- 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.
- The federal No Child Left Behind Act of 2001, which includes
the Title I program referenced above, contains a range of new
accountability measures for public schools. Schools that fail
to make adequate yearly progress (AYP) toward meeting state
standards may lose some of their student enrollment due to
school choice provisions, may be required to allocate a
portion of their Title I funding toward the provision of
supplemental services to some students, and may be subject to
state takeover or other forms of district or state
intervention. If schools run by the company fail to make AYP,
these new requirements could adversely affect the company's
revenue and/or reputation.
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WE ARE 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. 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.
FAILURE OF OUR CHARTER BOARD CLIENTS TO OBTAIN FEDERAL TAX-EXEMPT STATUS COULD
JEOPARDIZE THE SCHOOL'S CHARTER AND RESTRICT OUR ABILITY TO FINANCE THE SCHOOL
Many of our charter school clients apply for federal tax-exempt status.
One state in which we currently operate seven charter schools and hope to open
additional charter schools in the future, and one other state, requires charter
schools to secure federal tax-exempt status. One of our charter school clients
in the first state received notice from the Internal Revenue Service of an
appealable denial of its application for federal tax-exempt status. While this
charter school client was ultimately successful in obtaining tax-exempt status,
there can be no assurance that other charter school clients will not experience
difficulty in obtaining such status. Any failure to receive or delay in
receiving federal tax-exempt status by a charter school in this state could
jeopardize the school's charter and its ability to repay amounts owed to us. The
failure to receive federal tax-exempt status by a charter school in any state
could also, among other things, inhibit that charter school's ability to solicit
charitable contributions or participate in tax-exempt financing.
WE EARN 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, thus adversely affecting our financial
results.
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 recently-passed bill in
California prohibits the state department of education from contracting with a
private, for-profit education manager to manage public schools for which the
state assumes control pursuant to a new state educational reform measure.
Additionally, Idaho's charter school law may, subject to interpretation,
restrict our ability to manage schools in that state. To the extent that states
or the federal government were to adopt legislation prohibiting for-profit
entities from operating public schools, the market for our services would
decline and our business results 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. If the state charter authority were to revoke the charter,
which could occur based on actions of the charter holder outside of our control,
we would lose the right to operate that school. In addition, many state charter
school statutes require periodic reauthorization. Charter schools accounted for
33.0% of our gross student funding in fiscal 2001, or approximately $171.0
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 additional losses.
48
OUR STOCK PRICE HAS BEEN VOLATILE AND WE EXPECT IT TO CONTINUE TO BE VOLATILE IN
THE FUTURE
The market price of our class A common stock has fluctuated 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 the public perception of our schools' academic
performance;
- termination or non-renewal of existing management agreements;
- changes in market valuations of similar companies;
- speculation in the press or investment community;
- actions by institutional shareholders;
- pending and potential litigation;
- 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.
WE HAVE BEEN NAMED IN SEVERAL SHAREHOLDER CLASS ACTION AND SHAREHOLDERS
DERIVATIVE LAWSUITS.
We have been named in several putative class actions lawsuits filed in the
Southern District of New York, and a few shareholder derivative actions, also
filed in New York. We intend to vigorously defend these lawsuits. However, there
can be no assurance that the Company will be successful, and an adverse
resolution of the lawsuits could have a material adverse effect on our financial
position and results of operations in the period in which the lawsuits are
resolved. We are not presently able to reasonably estimate potential losses, if
any, related to the lawsuits. Lawsuits may cause defaults under our material
agreements, prevent us from obtaining additional funds under our existing line
of credit or obtain additional financing, and such litigation could result in
substantial costs and divert management's attention and resources.
WE MAY FACE ADDITIONAL SECURITIES LITIGATION OR OTHER LITIGATION
In addition to the securities class action litigation currently being
brought against us as more fully described in the risk factor above, we may also
in the future be the target of similar litigation. Additional securities
litigation could result in substantial costs and divert management's attention
and resources. We may also face other types of litigation. For example, the
Company and a private pension fund were unable to close a proposed financing
transaction and the Company chose instead to do a transaction with School
Services LLC. The Company could face litigation in connection with that
decision. While we intend to vigorously defend against any such lawsuit, there
can be no assurance that the Company will be successful, and an adverse
resolution of any lawsuit could have a material adverse effect on our financial
position, shareholder equity, and results of operations in the period in which
the lawsuits are resolved.
WE MUST COMPLY WITH THE TERMS OF A SETTLEMENT AGREEMENT ENTERED INTO BY THE
COMPANY AND THE SECURITIES AND EXCHANGE COMMISSION
On May 14, 2002, the Company entered into a settlement agreement with the
Securities and Exchange Commission, pursuant to which the Company agreed to
enhance disclosure of its revenue recognition practices, by adopting a statement
of
49
operations presentation that includes a line item for "Gross Student Funding,"
as well as full disclosure of all expenses paid by Edison and all expenses paid
by the local districts, and its internal accounting system by creating an
Internal Audit Department. The Company intends to fully comply with the terms
and conditions of the settlement agreement. However, if we fail to comply with
the settlement agreement, or are perceived by the Securities and Exchange
Commission to have failed to comply, we may face additional scrutiny from the
Commission, which could have a material adverse effect on our financial
condition and results of operations.
WE MAY BE DELISTED FROM THE NASDAQ NATIONAL MARKET, WHICH COULD RESULT IN A
LIMITED PUBLIC MARKET FOR OUR CLASS A COMMON STOCK
On August 27, 2002, we received notice from Nasdaq that the price of our
class A common stock had closed below the minimum $1.00 per share for 30
consecutive trading days as required for continued listing under Nasdaq's
marketplace rules. The notification letter stated that we had 90 days, or until
November 25, 2002, to regain compliance with the rule, i.e., for our securities
to close above $1.00 for ten (10) consecutive trading days. In and of itself,
the notification letter does not result in delisting; under Nasdaq's rules, on
receipt of a staff determination letter (which the Company has not received), an
issuer may file and argue for an extension or exception to Nasdaq's listing
requirements, and the Association may grant such extensions or exceptions where
it deems appropriate. Delisting from the Nasdaq market could adversely affect
the liquidity and price of our class A common stock and could have a long-term
impact on our ability to raise future capital.
Additionally, Nasdaq's listing requirements provide that companies must
have an audit committee composed of at least three independent directors. On the
advice of their legal advisors, three of our directors who are affiliates of
School Services resigned from the board of directors prior to the time that we
and School Services entered into material negotiations regarding the Credit and
Security Agreement between the Company and School Services. Two of these
directors were members of the audit committee. As a result, we currently do not
have an audit committee, although we are actively seeking qualified candidates
to serve on our audit committee. Delisting from the Nasdaq National Market could
adversely affect the liquidity and price of our class A common stock and it
could have a long-term impact on our ability to raise future capital.
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 us. These provisions include:
- - the high-vote nature of our 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 our 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 9 of the notes to our financial statements, we had
outstanding long-term notes payable of $21.2 million and $9.8 million at June
30, 2001 and 2002, respectively. Interest rates on the notes are fixed and range
from 9.5% to 18.7% per annum and have terms of 30 to 48 months.
50
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 $96.2 million and $40.6 million
at June 30, 2001 and June 30, 2002, 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 ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
51
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 December 5, 2002, 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 Regulation 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.
52
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 consolidated financial
statements of Edison Schools Inc. are filed as part of this
Form 10-K on the pages indicated:
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Report of Independent Accountants........................ 56
Consolidated Balance Sheets as of June 30, 2001
(restated) and 2002 .................................. 57
Consolidated Statements of Operations for the years
ended June 30, 2000 (restated), 2001 (restated),
and 2002.............................................. 58
Consolidated Statements of Changes in Stockholders'
Equity for the years ended June 30, 2000 (restated),
2001 (restated) and 2002.............................. 59
Consolidated Statements of Cash Flows for the years
ended June 30, 2000 (restated), 2001 (restated) and
2002.................................................. 60
Notes to Consolidated Financial Statements .............. 61
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 May 15, 2002, we filed a report on Form 8-K announcing that on May 14,
2002, we issued a press release regarding our financial results for the
quarterly period ended March 31, 2002 and a press release regarding the
settlement of an investigation by the Securities and Exchange Commission into
our accounting practices and policies.
53
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 30 th day of
September, 2002.
EDISON SCHOOLS INC.
BY: /s/ H. Christopher Whittle
--------------------------------------
H. Christopher Whittle
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 indicated on the 30 th day of September, 2002.
SIGNATURE TITLE
--------- -----
/s/ H. Christopher Whittle Chief Executive Officer and Director
- -------------------------------------- (Principal Executive Officer)
H. Christopher Whittle
/s/ Benno C. Schmidt, Jr. Chairman of the Board of Directors
- --------------------------------------
Benno C. Schmidt, Jr.
/s/ Christopher J. Scarlata Senior Vice President and Chief Financial Officer
- -------------------------------------- (Principal Accounting Officer)
Christopher J. Scarlata
/s/ Christopher D. Cerf President, Chief Operating Officer and Director
- --------------------------------------
Christopher D. Cerf
/s/ Charles J. Delaney Vice Chairman and Director
- --------------------------------------
Charles J. Delaney
/s/ Joan Ganz Cooney Director
- --------------------------------------
Joan Ganz Cooney
/s/ Reverend Floyd H. Flake Director
- --------------------------------------
Reverend Floyd H. Flake
/s/Timothy P. Shriver Director
- --------------------------------------
Timothy P. Shriver
54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Edison Schools Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows present fairly, in all material respects, the financial position
of Edison Schools Inc. (the "Company") at June 30, 2001 and 2002, and the
results of its operations and its cash flows for each of the three years in the
period ended June 30, 2002, 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.
As more fully discussed in Note 3, the Company has restated its
consolidated financial statements for fiscal 2000 and 2001.
PricewaterhouseCoopers LLP
New York, New York
September 5, 2002, except for Note 20, for which the date is September 30, 2002
55
EDISON SCHOOLS INC.
CONSOLIDATED BALANCE SHEETS
JUNE 30,
--------------------------------
2001
(RESTATED) 2002
---------- ----
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 96,195,471 $ 40,647,746
Accounts receivable ........................................................ 62,925,703 68,589,011
Notes receivable, net ...................................................... 7,761,724 12,480,667
Other receivables .......................................................... 8,751,450 9,551,760
Other current assets ....................................................... 3,067,695 8,665,897
------------- -------------
Total current assets .............................................. 178,702,043 139,935,081
Property and equipment, net ................................................... 119,231,169 111,105,656
Restricted cash ............................................................... 8,523,630 6,714,733
Notes receivable, net, less current portion ................................... 53,811,652 68,411,821
Other receivables, less current portion ....................................... 3,389,757 231,335
Long-term receivables ......................................................... 4,002,719 26,460,798
Investments ................................................................... 7,768,342 1,250,000
Other assets .................................................................. 19,068,868 27,266,647
------------- -------------
Total assets ...................................................... $ 394,498,180 $ 381,376,071
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings ...................................................... $ -- $ 34,000,000
Current portion of long term debt .......................................... 17,669,020 18,363,640
Accounts payable ........................................................... 19,498,283 24,686,391
Accrued expenses ........................................................... 29,803,715 50,556,576
------------- -------------
Total current liabilities ......................................... 66,971,018 127,606,607
------------- -------------
Long term debt, less current portion .......................................... 21,244,179 9,806,955
Stockholders' notes payable ................................................... 6,610,594 6,604,220
Other liabilities ............................................................. 825,492 2,487,570
------------- -------------
Total liabilities ................................................. 95,651,283 146,505,352
------------- -------------
Minority interest in subsidiary ............................................... 479,460 2,486,499
------------- -------------
Commitments and contingencies (Note 17)
Stockholders' Equity:
Class A common, par value $.01; 150,000,000 shares authorized; 49,249,005
and 52,018,855 shares issued and outstanding in 2001 and 2002,
respectively ......................................................... 492,490 520,189
Class B common, par value $.01; 5,000,000 shares
authorized; 2,433,126 and 1,805,132 shares issued and
outstanding in 2001 and 2002, respectively ........................... 24,331 18,051
Additional paid-in capital ................................................. 470,807,570 489,279,231
Unearned stock-based compensation .......................................... (2,386,678) (823,123)
Accumulated deficit ........................................................ (170,570,276) (256,610,128)
------------- -------------
Total stockholders' equity ........................................ 298,367,437 232,384,220
------------- -------------
Total liabilities and stockholders' equity ........................ $ 394,498,180 $ 381,376,071
============= =============
The accompanying notes are an integral part of these consolidated financial
statements.
56
EDISON SCHOOLS INC
CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED JUNE 30
---------------------------------------------------
2000 2001
(RESTATED) (RESTATED) 2002
---------------------------------------------------
Gross Student Funding .................................. $ 224,577,591 $ 375,817,681 $ 520,294,982
============= ============= =============
Net revenue ............................................ $ 208,971,421 $ 350,507,972 $ 465,058,357
------------- ------------- -------------
Education and operating expenses:
Direct site expenses
Company paid .................................... 93,086,901 162,028,426 211,438,141
Client paid ..................................... 83,908,636 129,171,906 178,702,235
Administration, curriculum and development .......... 54,232,425 57,850,701 71,230,002
Impairment charges .................................. -- -- 36,878,442
Depreciation and amortization ....................... 20,905,833 33,594,738 37,395,770
Pre-opening expenses ................................ 8,371,923 8,641,021 6,152,694
------------- ------------- -------------
Total education and operating expenses ..... 260,505,718 391,286,792 541,797,284
------------- ------------- -------------
Loss from operations ................................... (51,534,297) (40,778,820) (76,738,927)
Other income (expense):
Interest income ..................................... 6,317,432 9,657,904 9,434,911
Interest expense .................................... (3,433,759) (5,417,357) (6,200,307)
Equity in loss of unconsolidated entity ............. (1,975,257) (291,400) --
Loss on investment .................................. -- -- (6,774,742)
Loss on disposal of fixed assets .................... -- (1,149,263) (4,783,616)
Other ............................................... (3,962) 70,540 62,475
------------- ------------- -------------
Total other ................................ 904,454 2,870,424 (8,261,279)
------------- ------------- -------------
Loss before provision for state and local taxes ........ (50,629,843) (37,908,396) (85,000,206)
Provision for state and local taxes .................... -- (603,328) (1,039,646)
------------- ------------- -------------
Net loss ............................................... $ (50,629,843) $ (38,511,724) $ (86,039,852)
============== ============= =============
Per common share data:
Basic and diluted net loss per share ................ $ (1.83) $ (0.80) $ (1.61)
============= ============== =============
Weighted average shares of common stock
outstanding used in computing basic and
diluted net loss per share ....................... 27,685,203 47,966,741 53,564,244
============= ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements
57
EDISON SCHOOLS INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JUNE 30, 2000, 2001 AND 2002
PREFERRED STOCK COMMON STOCK
---------------------------------- ------------------------------
SERIES A-G SERIES A-I
---------------------------------- ------------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ----------- --------- ----------
Balances, June 30, 1999 .......................... 28,211,173 $ 1,586,269 3,107,356 $ 31,074
Issuance of stock warrants .......................
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 .....................
Stock warrants exercised .........................
Stock options exercised ..........................
Deferred compensation related to stock
options .....................................
Stock-based compensation .........................
Variable stock-based compensation charge .........
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)
Fractional Class A and Class B common
shares issued due to rounding during
conversion
Conversion of Class B to Class A common stock ....
Net loss for the year ended June 30, 2000 ........
----------- ---------- -------- --------
Balances, June 30, 2000 .......................... -- -- -- --
Issuance of stock warrants .......................
Issuance of Class A common stock in
secondary offerings .........................
Stock warrants exercised .........................
Stock options exercised ..........................
Conversion of Class B to Class A common stock ....
Deferred compensation related to stock options ...
Stock-based compensation charge ..................
Variable stock-based compensation credit .........
Net loss for the year ended June 30, 2001 ........ ----------- ---------- -------- --------
Balances, June 30, 2001 .......................... -- -- -- --
Business acquisition .............................
Adjustment of secondary offerings cost ...........
Stock warrants exercised .........................
Stock options exercised ..........................
Conversion of Class B to Class A common
stock .......................................
Reduction in deferred compensation related
to stock options, net .......................
Stock-based compensation .........................
Variable stock-based compensation credit
Net loss for the year ended June 30, 2002 ........ ----------- ---------- -------- --------
Balances, June 30, 2002 .......................... -- $ -- -- $ --
=========== ========== ======== ========
CLASS A CLASS B
------------------------------------ ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ------------ ---------- ---------
Balances, June 30, 1999 ...........................
Issuance of stock warrants ........................
Issuance of Series F preferred stock, net .........
Issuance of Series I common stock, net ............
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 ..........................
Variable stock-based compensation charge ..........
Conversion of the Series A through G
Preferred stock and Series A through I
common stock to Class A and
Class B common stock ......................... 31,240,934 312,409 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 common stock ..... 80,539 805 (80,539) (805)
Net loss for the year ended June 30, 2000 .........
----------- ---------- -------- --------
Balances, June 30, 2000 ........................... 39,558,746 $ 395,588 3,448,004 $ 34,480
Issuance of stock warrants ........................
Issuance of Class A common stock in secondary
offerings .................................... 6,881,026 68,810
Stock warrants exercised .......................... 842,426 8,425 242 2
Stock options exercised ........................... 951,687 9,516
Conversion of Class B to Class A common stock ..... 1,015,120 10,151 (1,015,120) (10,151)
Deferred compensation related to stock options ....
Stock-based compensation charge ...................
Variable stock-based compensation credit ..........
Net loss for the year ended June 30, 2001 .........
----------- ---------- -------- --------
Balances, June 30, 2001 ........................... 49,249,005 $ 492,490 2,433,126 $ 24,331
Business acquisition .............................. 1,360,954 13,610
Adjustment of secondary offerings cost ............
Stock warrants exercised .......................... 563,455 5,634
Stock options exercised ........................... 217,447 2,175
Conversion of Class B to Class A common stock ..... 627,994 6,280 (627,994) (6,280)
Reduction in deferred compensation related
to stock options, net ........................
Stock-based compensation ..........................
Variable stock-based compensation credit .......... - - - -
Net loss for the year ended June 30, 2002 ......... ----------- ---------- -------- --------
Balances, June 30, 2002 ........................... $52,018,855 $ 520,189 $1,805,132 $ 18,051
=========== ========= ========== ========
ADDITIONAL
PAID-IN UNEARNED ACCUMULATED
CAPITAL STOCK-BASED DEFICIT TOTAL
(RESTATED) COMPENSATION (RESTATED) (RESTATED)
--------------- --------------- --------------- -------------
Balances, June 30, 1999 ........ $ 144,610,176 $ (5,836,556) $ (81,428,709) $ 58,962,254
Issuance of stock warrants ..... 400,489 400,489
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 ........ 746,813 755,783
Deferred compensation
related to stock options ... 1,260,645 (1,260,645) --
Stock-based compensation 3,937,197 3,937,197
Variable stock-based 7,895,250 7,895,250
compensation charge ........
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 common stock .......
Net loss for the year ended
June 30, 2000 .............. (50,629,843) (50,629,843)
------------- -------------- -------------- ------------
Balances, June 30, 2000 ........ $ 307,601,492 $ (3,160,004) $ (132,058,552) $172,813,004
Issuance of stock warrants ..... 582,722 582,722
Issuance of Class A common
stock in secondary
offerings .................. 151,661,865 151,730,675
Stock warrants exercised ....... 5,083,787 5,092,214
Stock options exercised ........ 5,033,677 5,043,193
Conversion of Class B to
Class A common stock ....... --
Deferred compensation
related to stock options ... 1,097,778 (1,097,778)
Stock-based compensation
charge ..................... 1,871,104 1,871,104
Variable stock-based
compensation credit ........ (253,751) (253,751)
Net loss for the year ended
June 30, 2001 .............. (38,511,724) (38,511,724)
-------------- ------------ ---------------- ------------
Balances, June 30, 2001 ........ $ 470,807,570 $ (2,386,678) $ (170,570,276) $298,367,437
Business acquisition ........... 31,296,743 31,310,353
Adjustment of secondary
offerings cost ............. 261,167 261,167
Stock warrants exercised ....... 431,436 437,070
Stock options exercised ........ 1,434,108 1,436,283
Conversion of Class B to
Class A common stock ....... --
Reduction in deferred
compensation related to
stock options, net ......... (567,788) 567,788 --
Stock-based compensation ....... 995,767 995,767
Variable stock-based
compensation credit ........ (14,384,005) (14,384,005)
Net loss for the year ended
June 30, 2002 .............. - - $(86,039,852) $ (86,039,852)
-------------- ------------ ------------ --------------
Balances, June 30, 2002 ........ $ 489,279,231 $ (823,123) $(256,610,128) $ 232,384,220
============= ============ ============= ==============
The accompanying notes are an integral part of these consolidated financial
statements
58
EDISON SCHOOLS INC
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30,
----------------------------------------------
2000 2001
(RESTATED) (RESTATED) 2002
--------------- ------------- -----------
Cash flows from operating activities:
Net loss .................................................................. $ (50,629,843) $ (38,511,724) $ (86,039,852)
Adjustments to reconcile net loss to net cash
Used in operating activities:
Depreciation and amortization ....................................... 19,310,639 31,561,703 37,291,909
Amortization of contract and deferred charter costs ................. 1,579,061 2,793,035 2,653,022
Amortization of original issue discount ............................. (1,763,254) (2,015,164) (109,245)
Write-off of accounts receivable .................................... -- 769,643 --
Stock-based compensation ............................................ 11,832,447 1,617,353 (13,337,960)
Write-off of notes receivable ....................................... -- -- 4,079,108
Provision for notes receivable ...................................... -- -- 5,542,192
Provision for fixed asset write-off ................................. (153,000) (154,115) --
Curriculum and equipment write-off .................................. 309,741 4,187,079 623,040
Loss (gain) on disposal of property and equipment ................... (268) 1,149,263 4,783,616
Interest on notes receivable ........................................ (123,913) (418,129) (1,872,539)
Equity loss and write-down of investment in unconsolidated entity ... 1,975,257 291,400 6,774,742
Impairment charges .................................................. -- -- 36,878,441
Minority interest in net loss of subsidiary ......................... -- (70,540) (62,475)
Changes in operating assets and liabilities:
Accounts and other receivables ................................... (22,976,095) (38,001,934) (29,692,923)
Other current assets ............................................. (2,180,627) 340,852 (2,315,611)
Accounts payable and accrued expenses ............................ 1,294,561 9,500,208 9,436,232
Other liabilities ................................................ 95,902 251,462 1,662,078
------------- ------------- -------------
Cash used in operating activities ............................. (41,429,392) (26,709,608) (23,706,225)
------------- ------------- -------------
Cash flows from investing activities:
Additions to property and equipment ....................................... (57,462,036) (46,950,918) (17,123,302)
Proceeds from disposition of property and equipment, net .................. 2,057,664 10,700,785 446,254
Proceeds from notes receivable and advances due
from charter schools ................................................... 2,782,474 14,840,866 15,037,975
Notes receivable and advances due from charter
schools ................................................................ (18,725,412) (46,355,359) (41,943,392)
Investment in unconsolidated entity ....................................... (10,000,000) -- --
Business acquisition, net ................................................. -- (3,035,000) 149,257
Other assets .............................................................. (7,767,634) (6,609,939) (4,631,167)
------------- ------------- -------------
Cash used in investing activities ............................. (89,114,944) (77,409,565) (48,064,375)
------------- ------------- -------------
Cash flows from financing activities:
Net borrowings under line of credit ....................................... -- -- 34,000,000
Proceeds from issuance of stock and warrants .............................. 165,609,859 173,011,926 1,823,073
Costs in connection with equity financing ................................. (13,362,202) (11,145,844) --
Costs in connection with debt financing ................................... -- -- (1,301,666)
Cash from minority investee ............................................... -- 550,000 2,069,514
Proceeds from notes payable ............................................... 13,001,328 8,898,445 --
Payments on notes payable and capital leases .............................. (9,027,134) (18,507,760) (21,032,184)
Restricted cash ........................................................... (955,887) (5,136,327) 664,138
------------- ------------- -------------
Cash provided by financing activities ......................... 155,265,964 147,670,440 16,222,875
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents .............................. 24,721,628 43,551,267 (55,547,725)
Cash and cash equivalents at beginning of period .............................. 27,922,576 52,644,204 96,195,471
------------- ------------- -------------
Cash and cash equivalents at end of period .................................... $ 52,644,204 $ 96,195,471 $ 40,647,746
============= ============= =============
Supplemental disclosure of cash flow information: Cash paid during the periods
for:
Interest ............................................................ $ 3,554,350 $ 5,545,060 $ 5,935,825
Taxes ............................................................... $ 730,611 $ 779,847
Supplemental disclosure of non-cash investing and financing activities:
Obligations assumed in connection with new contracts ...................... $ 2,694,293 $ 6,500,000
Property and equipment acquired under capitalized lease obligations ....... $ 18,853,332 $ 10,252,417
Additions to property and equipment included in accounts payable .......... $ 7,666,235 $ 2,543,497 $ 5,788,352
Additions to property and equipment financed by debt ...................... $ 10,770,375
The accompanying notes are an integral part of these consolidated financial
statements
59
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30 2000, 2001 AND 2002
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 22 states, and
Washington, D.C. The Company opened its first four schools in the fall of 1995,
and, for the year ended June 30, 2002, the Company operated 133 schools with
approximately 74,000 students.
The Company provides the education program, recruits and manages
personnel, and maintains and operates the facilities at each school it manages.
The Company also assists charter schools in obtaining facilities and the related
financing.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries, including Edison Receivables Company LLC ("Edison
Receivables") established in fiscal 2002, after the elimination of intercompany
transactions.
LIQUIDITY AND RISK
Since inception, the Company has incurred losses from operations and has
had negative cash flow from operations. The cash needs of the business have been
financed through a combination of debt and equity financing. In fiscal 2002, the
Company entered into a revolving credit facility for $35 million. The Company
entered into additional financings subsequent to year end (see Note 20). The
terms of these financings require the Company to comply with certain financial
covenants. The Company believes it will be able to comply with the terms of such
covenants based on its forecasted operating plan for fiscal 2003.
In order to achieve its operating plan, the Company plans to improve the
gross site contribution margins at the individual schools its manages while
maintaining educational quality and continuing to reduce central expenses as a
percentage of net revenue. The Company has undertaken a "reengineering" process
to increase efficiency and help attain profitability while improving client
service. Part of this initiative includes the streamlining of processes within
the Company, reductions in personnel and the implementation of cost control
measures.
In addition to the above, the Company is dependent upon the continuation
of its school management agreements for recurring revenues and growth. Some of
the management agreements may be terminated at will by the school district or
charter board. The Company may also seek the early termination of, or not seek
to renew, a limited number of management agreements in any year.
If the Company is unable to meet its plan, it may not be able to meet the
terms of the financings discussed above, resulting in the borrowings becoming
due. If this were to occur, the Company may be forced to restructure or
refinance its indebtedness, seek additional equity capital, sell assets or
reduce its growth plan. The Company cannot be certain that it will be able to
obtain additional financing on favourable terms, if at all.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, time deposits, highly liquid debt securities and money market
accounts, generally all with original maturities of three months or less. The
Company maintains funds in accounts in excess of federally insured 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 useful
life, which ever is shorter, for leasehold improvements and 3-5 years for all
other items).
From time to time, 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 long-lived 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 from the use of the asset. 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 based on appraised value of the
assets or the anticipated cash flows from the use of the asset, discounted at a
rate commensurate with the risk involved.
RESTRICTED CASH
Restricted cash consists of cash held in escrow in compliance with certain
debt agreements, credit issued for the benefit of certain technology suppliers,
collateral for certain insurance policies, amounts for guarantee of contract
performance in certain states and certain amounts restricted for use in the
start-up of future Edison schools. The Company classifies
60
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
restricted cash balances as current and non-current based on terms of related
agreements that govern the use of the restricted cash.
REVENUE RECOGNITION
Revenues are principally earned from contractual agreements to manage and
operate contract and charter schools. The Company also earns revenue from summer
school and after-school program fees. The Company recognizes revenue for each
managed school over the period we perform our service, pro rata over the typical
school year, eleven months from August through June, in accordance with Staff
Accounting Bulletin 101, "Revenue Recognition in Financial Statements."
Most of our management agreements provide that we earn a fee based upon
the number of children that attend our schools and, therefore, we only earn
revenue to the extent students attend our schools. In most instances, there is a
`base' fee per pupil and several `categorical' fee components paid only for
students in certain categories (e.g., low-income, English as a second language,
etc.). In some of our charter schools, our fee has a fixed component and
variable component. Even in contracts where we have fixed fee component, we have
generally agreed to forego or reduce our fee if there is a budget shortfall at
the charter school.
The Company is generally responsible to its clients for all aspects of the
management of its schools including but not limited to the: academic achievement
of the students; selection, training and compensation of school personnel;
procurement of curriculum and equipment necessary for operations of the school;
and the safe operation of the school facilities. Gross student funding
represents gross contractual funding for our schools before all costs. Net
revenue represents gross student funding less costs that we are not primarily
obligated to pay. The Company follows the guidance of the Emerging Issues Task
Force ("EITF") 99-19,"Reporting Revenue Gross as a Principal versus Net as an
Agent," and EITF 01-14 "Income Statement Characterization of Reimbursements
Received for `Out-of-Pocket' Expenses Incurred." regarding classification of
revenues. Specifically, the Company recognizes revenues net of expenses that the
Company is not primarily obligated to pay. For the fiscal years ended June 30,
2000, 2001 and 2002, the difference between gross student funding and net
revenues consisted of the following costs for which the Company is not primarily
obligated to pay:
YEARS ENDED JUNE 30,
(IN THOUSANDS)
2000 2001 2002
---- ---- ----
Gross student funding $224,578 $375,818 $520,295
Personnel costs (2,169) (7,000) (22,421)
Non-personnel costs* (13,438) (18,310) (32,816)
-------- -------- --------
Net revenue $208,971 $350,508 $465,058
-------- -------- --------
* Includes expenses related to services such as facility maintenance, utilities,
student transportation and others for which we are not primarily obligated to
pay.
The Company often purchases certain essential services, such as
transportation, from third parties and/or from our clients. In addition,
teachers in schools generally remain employees of our clients and are often paid
through the clients' payroll systems. Where such arrangements exist, the client
deducts the amounts they have expended for staff salaries and/or purchased
services from the amount owed to the Company when remitting payment. These
amounts are disclosed as "Direct Site Expenses - client paid" on the Company's
Statements of Operations.
The Company recognizes per-pupil funding from local, state and federal
sources, including Title I and special education funding. Significant management
estimates and assumptions are required to determine these funding levels,
particularly in interim periods. On a quarterly basis, the Company records
adjustments to revenue, if necessary, for enrollment fluctuations, changes to
per-pupil funding estimates, and changes to estimates for federal and state
categorical grant funding. Anticipated losses on contracts are charged to
earnings when identified.
61
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
PHILANTHROPY
The Company recognizes a receivable from a philanthropic foundation,
included in other receivables, for curriculum and technology purchased on behalf
of district clients in California which have been granted funds from the
foundation.
If the Company can not arrange for philanthropic entities to donate
approximately $10.5 million in total to a client, the Company will be required
to make such donation itself. (See note 17, Commitment and Contingencies - Fund
Raising Agreements).
PRE-OPENING COSTS
The Company expenses certain pre-opening 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 a less than fair value stated rate of interest. The
original issue discount is calculated using the difference between the stated
rate and 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 uncollectible when, based on its assessment of events and
circumstances, the collection of the note is not reasonably assured. If it is
probable that the Company will not collect all amounts due according to the
contractual terms of the note, the Company would provide an allowance for the
loan using the methodology under Statement of Financial Accounting Standards
("SFAS") 114 "Accounting by Creditors for Impairment of a Loan." An allowance is
established when the estimated discounted cash flows of the loan are lower than
the carrying value of that loan. Interest income is generally recognized on an
accrual basis. The Company evaluates loans for which an allowance for loss has
been established and recognizes interest income to the extent interest payments
are not past due in excess of ninety days.
DEFERRED CHARTER COSTS
Deferred charter costs arise when the Company provides cash to certain
charter schools, which issue non-interest bearing notes to the Company in
return. In these situations, 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 life of
the related contract.
Net deferred charter costs were $317,864 and $411,018 and accumulated
amortization was $4,084,913 and $4,188,774 as of June 30, 2001 and 2002,
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 Accounting Principles Board ("APB") No. 25 "Accounting for Stock
Issued to Employees." In accordance with this method, no compensation expense is
recognized in the accompanying financial statements in connection with the
awarding of stock option grants to employees provided that, as of the grant
date, all terms associated with the award are fixed and the fair value of the
company's stock, as of the grant date, is not greater than the amount an
employee must pay to acquire the stock as defined. To the extent that stock
options are granted to employees with variable terms or if the fair value of the
Company's stock as of the measurement date is greater than the amount an
employee must pay to acquire the stock, then the Company will recognize
compensation expense.
ADVERTISING EXPENSES
Advertising costs consist primarily of print media and brochures and are
expensed when the related advertising occurs. Advertising expense for the years
ended June 30, 2000, 2001, and 2002 amounted to approximately $1.7 million, $1.8
million and $862,000 respectively.
62
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
INCOME TAXES
Deferred taxes represent the tax effects of differences between the
financial reporting and tax bases of the Company's assets and liabilities at the
enacted tax rates in effect for the years in which the differences are expected
to reverse. The Company evaluates the recoverability of deferred tax assets and
establishes a valuation allowance when it is more likely than not that some
portion or all of the deferred tax assets will not 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's financial instruments, including
cash and cash equivalents, accounts receivable, short-term borrowings, accounts
payable and accrued liabilities, approximate fair value because of their short
maturities. The carrying amount of the Company's notes receivable, in the
aggregate, capital leases 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 financial
instruments at June 30, 2002.
NET LOSS PER SHARE
In accordance with SFAS 128, "Earnings per Share," basic earnings per
share is computed using the weighted average number of common shares outstanding
during the period. Diluted earnings per share is computed using the weighted
average number of common and common stock equivalent shares outstanding during
the period. Common stock equivalent shares, such as convertible preferred stock,
stock options, and warrants, have been excluded from the computation, as their
effect is antidilutive for all periods presented.
The pro forma basic and diluted net loss per share is computed by dividing
the net loss by the weighted average number of shares of common stock assuming
conversion of convertible preferred stock outstanding during the period under
the if-converted method. Each outstanding share of common and preferred stock
automatically converted into 0.45 shares of class A common stock and 0.05 shares
of Class B Common Stock in connection with the Company's initial public offering
in fiscal 2000.
The calculation of basic and fully diluted net loss per share for the year ended
June 30, 2000 is as follows:
Net loss ....................................................................... $(50,629,843)
============
Series A-I Common Stock outstanding at beginning of period,
converted to Class A and B Common Stock ........................................ 3,107,356
Add:
Weighted average effect of issuance of Class A and Class B
Common Stock through exercise of options and warrants ........................ 653,552
Weighted average effect of conversion of Series A-F Preferred and
Non-Voting Series G Preferred outstanding at the beginning of period to
Class A and B Common Stock ................................................. 17,574,172
Weighted average effect of conversion of Series F Preferred issued during
the period to Class A and B Common Stock ................................... 2,114,058
Weighted average effect of Class A and Class B Common Stock issued in
conjunction with the Company's initial public offering ..................... 4,236,065
------------
Weighted average shares of common stock outstanding used in computing basic
and fully diluted net loss per share ....................................... 27,685,203
============
Basic and fully diluted net loss per share ..................................... $ (1.83)
============
63
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The calculation of basic and fully diluted net loss per share for the year ended
June 30, 2001 is as follows:
Net loss ....................................................................... $(38,511,724)
============
Class A Common stock outstanding at beginning of period ........................ 39,558,746
Class B Common stock outstanding at beginning of period ........................ 3,448,004
Add:
Issuance of Class A Common stock (on a weighted average basis) ................. 5,974,982
Issuance (conversion) of Class B Common stock (on a weighted average ........... (1,014,991)
------------
basis)
Weighted average number of shares outstanding
used in computing basic and diluted net loss per share ........................ 47,966,741
============
Basic and diluted net loss per share .......................................... $ (0.80)
============
The calculation of basic and fully diluted net loss per share for the year ended
June 30, 2002 is as follows:
Net loss ....................................................................... $(86,039,852)
============
Class A Common stock outstanding at beginning of period ........................ 49,249,005
Class B Common stock outstanding at beginning of period ........................ 2,433,126
Add:
Issuance of Class A Common stock (on a weighted average basis) ................. 2,510,107
Issuance (conversion) of Class B Common stock (on a weighted average ........... (627,994)
------------
basis)
Weighted average number of shares outstanding
used in computing basic and diluted net loss per share ....................... 53,564,244
============
Basic and diluted net loss per share .......................................... $ (1.61)
============
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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 revenues,
certain district paid school expenses, recoverability of long-lived assets and
notes receivable, liabilities incurred from workers' compensation, commercial
and other claims and losses on school contracts. Other estimates include useful
lives of property and equipment and the deferred income tax valuation allowance.
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, summer
school programs, food services and various other activities are not evaluated on
an individual basis.
RECENTLY ISSUED ACCOUNTING STANDARDS
In January 2002, the Emerging Issues Task Force issued EITF 01-14 "Income
Statement Characterization of Reimbursements Received for "Out-of-Pocket"
Expenses Incurred." EITF 01-14 clarifies EITF 99-19, "Reporting Revenue
64
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Gross as a Principal versus Net as an Agent," that provides guidance on whether
revenues should be presented gross or net of certain costs. After consultation
with its independent auditors, the Company believes that EITF 01-14 should be
interpreted to require it to present as revenue and expense only those direct
site expenses that the Company is primarily obligated to pay.
In accordance with the transition provisions of EITF 01-14, the Company
adopted EITF 01-14 effective January 1, 2002 and has reclassified all historical
periods to conform with the new presentation and, in the interest of
transparency, added a "Gross student funding" line to its statement of
operations. Edison contracts with districts and charter boards to operate public
schools and under such contracts Edison is entitled to funding from local, state
and federal sources, including Title I and special educational funding, which
represents gross student funding. Gross student funding is not revenue as
defined by generally accepted accounting principles and represents the gross
contractual funding for the Company's schools before all expenses.
In November 2001, the Emerging Issues Task Force issued EITF 01-09,
"Accounting for Consideration Given by a Vendor to a Customer." EITF 01-09
addresses the appropriate income statement characterization of consideration
given by a vendor to a customer, specifically whether that consideration should
be presented in the vendor's income statements as a reduction of revenue or as
an expense. The Company determined that consideration given to two customers
was, in effect, an adjustment of the Company's contract price and should be
accounted for as a reduction in revenue rather than as an expense subsequent to
the promulgation of EITF 01-09. In accordance with the transition provisions of
EITF 01-09, the Company adopted EITF 01-09 effective January 1, 2002 and has
reclassified all historical periods to conform with the new presentation.
In August 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." This statement defines the
accounting and reporting for the impairment and disposal of long-lived assets
and is effective for the Company on July 1, 2002. The Company does not
anticipate that the adoption of SFAS 144 will have a material impact on the
consolidated financial statements.
In June 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities". This statement defines the accounting and
reporting for costs associated with exit or disposal activities and is effective
for exit or disposal activities that are initiated after December 31, 2002. The
Company does not anticipate that the adoption of SFAS 146 will have a material
impact on the consolidated financial statements.
RECLASSIFICATION
Certain reclassifications have been made to the 2000 and 2001 financial
statements to conform to the current year presentation.
3. RESTATEMENT
In connection with the annual review of the Company's financial
statements, the Company determined the need to restate certain items of its
balance sheets and statements of operations to properly reflect certain changes
to shareholder notes receivable, stockholders' equity, interest income and
compensation expense in fiscal 2000 and 2001.
In November 1999, the Company's CEO exercised options to purchase 725,000
shares of common stock at $3.00 per share through the issuance of a promissory
note for $2,175,000. In addition, the Company loaned $4,445,700 in November 1999
and $1,248,500 in April 2000 to the CEO to pay estimated income taxes resulting
from the transaction. These notes mature five years from their date of issuance.
In the past, the Company accounted for the transaction as an option exercise and
carried the loans as notes receivable on its balance sheets and recognized
periodic interest income. The notes were issued with recourse solely to the
shares exercised and contain a floating rate of interest. Therefore, the Company
has determined that it is more appropriate to treat the options as not having
been exercised and account for them as a variable stock award pursuant to the
provisions of Emerging Issues Task Force Issue 95-16, "Accounting for Stock
Compensation Arrangements with Employer Loan Features under APB Opinion 25."
Accordingly, the Company has restated its financial statements to reflect
compensation in the form of a charge or credit to operations and an offsetting
adjustment to additional paid-in capital for periodic changes in the market
value of the 725,000 common shares subject to exercise, until such notes are
paid. In addition, the loans related to estimated income taxes have been
restated to be expensed when issued. Interest income previously recognized under
the notes has been reversed. Interest received under the notes will be credited
to additional paid-in capital.
65
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In connection with the restatement, the Company recognized, in fiscal
2000, a compensation charge of $13,589,000 and a reduction in interest income of
$450,829. In fiscal 2001, the market value of the Company's common stock
decreased from $23.19 per share at the beginning of year to $22.84 per share at
June 30, 2001. As a result, the Company recognized a compensation credit of
$253,751 and a reduction in interest income previously provided of $684,834. In
fiscal 2002, the market price of the Company's common stock declined from $22.84
per share at the beginning of the year to a value below the exercise price of
$3.00 per share by year end. Accordingly, the remaining amount of compensation
expense recognized in prior years, including a portion related to fiscal 1999,
of $14,384,005 was reversed and no interest income was recognized for the year.
The table below details the effect on the June 30, 2000 and 2001
consolidated financial statements of the restatement (dollars in thousands):
2000 2001
---- ----
As As As As
Reported Restated Reported Restated
-------- -------- -------- --------
Balance sheets:
Shareholder notes
receivable:
Asset ............... $ 8,802 $ 2,781 $ 9,452 $ 2,936
Equity .............. (2,300) -- (2,489) --
Additional paid-in
capital ............... 301,881 307,601 465,341 470,808
Accumulated deficit ... 118,018 132,059 156,099 170,570
Stockholders' equity .. 178,833 172,813 304,883 298,367
Statements of
operations:
Administration,
curriculum and ...... 40,643 54,232 58,104 57,851
development expenses
Interest income ..... 6,768 6,317 10,343 9,658
Net loss ............ 36,590 50,630 38,081 38,512
4. NOTES RECEIVABLE
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. In order for the notes to be repaid, the Company
generally assists charter school boards in obtaining third party lender
financing. Often third party financing requires the Company to guarantee loans
on behalf of these charter schools. A 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 17).
Of the approximately $80.9 million in notes receivable, net at June 30,
2002, approximately $66.6 million was collateralized and the remaining balance
of $19.8 million was uncollateralized and, in some cases, subordinated to other
senior debt. Although the Company intends to refinance these notes, should the
Company be required to foreclose on the collateral to these notes, it may not be
able to liquidate such collateral for proceeds sufficient to cover the notes.
In the fourth quarter of fiscal 2002, the Company has written-down a note
receivable of approximately $4.0 million related to a discontinued new school
project. Additionally, as a result of the difficult credit environment affecting
the Company's ability to arrange third party lender financing in the fourth
quarter of 2002, coupled with the credit risk of specific charter school notes
and management's intention to accelerate the refinancing of individual notes
with third party lenders, the Company has determined that it will not collect
all of the amounts due pursuant to the contractual terms of the notes and has
established an allowance for loan losses of approximately $5.5 million. These
amounts are included in administration, curriculum and development expense in
the statements of operations. The allowance for loan losses applies to notes
receivable with an outstanding balance, at June 30, 2002, of $54.6 million.
There were no charge-offs during the quarter.
66
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Notes receivable consist of the following:
JUNE 30,
-------------------------------
2001 2002
----------- -------------
Notes receivable due from charter .............. $ 48,616,056 $ 86,434,680
schools(a)
Other financings due from charter .............. 12,957,320 --
schools(b)
Allowance for loan losses ...................... -- (5,542,192)
------------ ------------
61,573,376 80,892,488
Less, current portion*................. (7,761,724) (12,480,667)
------------ ------------
Total notes receivable............. $53,811,652 $ 68,411,821
============ ============
* Includes $1,180,394 of the allowance for loan losses in fiscal 2002.
(a) Notes receivable due from charter schools includes interest bearing notes
at interest rates ranging from 7% to 10.5% per annum. Management believes
that the stated rates reflect the fair market rates for these notes. The
notes amounted to $43,287,621 and $77,470,044 at June 30, 2001 and 2002,
respectively, and mature at various dates through the year 2005.
Notes receivable due from charter schools also include discounted and
non-interest bearing notes with an aggregate face value of $5,648,025 and
$9,371,773 at June 30, 2001 and 2002, respectively, less unamortized
imputed discount of $319,590 and $407,137 at June 30, 2001 and 2002,
respectively. Interest imputed on these notes ranges from 8% to 10% per
annum. This imputed rate is management's estimate of the fair market
interest rate for these loans based on the Company's estimated borrowing
rate at the time of the loan which ranged from approximately 8.5% to 10%
and management's assessment of the incremental risk associated with these
loans. The notes mature at various dates through the year 2006.
(b) Other financings due from charter schools were converted into non-interest
bearing notes receivable in fiscal 2002. These 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, 2000
was $12,766,158, less unamortized imputed discount of $1,093,551. In
November 2000, the Company received partial payment of $7,260,842 and
$4,343,113 was converted into a 20 year term loan with interest at 10% per
annum and regular amortization.
For fiscal 2001, other financings due from charter schools have been
discounted at a rate of 12% over the period of refinancing, consistent
with the treatment of non-interest bearing notes receivable. The face
value of borrowings under the revolving line of credit at June 30, 2001
was $12,957,320. The line of credit provides for borrowings up to
$15,000,000. On July 1, 2001, this revolving line of credit was converted
into a 20 year term loan with interest at 10% per annum and regular
amortization.
Aggregate maturities of notes receivable are as follows:
For the fiscal year ending June 30,
2003............................................. $13,661,060
2004............................................. 13,711,768
2005............................................. 961,987
2006............................................. 8,974,852
2007............................................. 2,613,712
Thereafter....................................... 46,918,438
-----------
86,841,817
Less: amount representing discount............... (407,137)
Less: allowance.................................. (5,542,192)
-----------
Total notes receivable........................... 80,892,488
67
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Less: current portion............................ (12,480,667)
-----------
Notes receivable, noncurrent..................... $68,411,821
===========
Additionally, the Company expects to receive payment on certain
outstanding loans as a result of third party refinancing, although here is no
guarantee that the charter boards will be able to obtain such refinancing. The
Company expects to make additional loans approximating $3.8 million for
commitments to a charter board client during fiscal 2003.
5. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
JUNE 30,
--------------------------------
2001 2002
------------- -------------
Land and buildings .............................................................. $ 7,457,480 $ 7,804,494
Leasehold improvements .......................................................... 34,419,968 34,267,385
Furniture, fixtures and equipment ............................................... 94,107,737 99,290,597
Software license ................................................................ 11,694,133 11,694,133
Educational software and textbooks .............................................. 37,350,776 39,011,470
------------- -------------
185,030,094 192,068,079
Accumulated depreciation and amortization ....................................... (65,798,925) (80,962,423)
------------- -------------
Property and equipment, net .................................................. $ 119,231,169 $ 111,105,656
============= =============
Depreciation expense amounted to $19,310,639, $31,367,287, and $35,691,452
for the years ended June 30, 2000, 2001, and 2002 respectively. Capitalized
interest of $521,593 was recorded for the year ended June 30, 2001, in
connection with the development of the Company's new computer system. The
Company wrote off approximately $4,187,000 consisting primarily of curriculum
material and approximately $623,000 consisting primarily of equipment during the
years ended June 30, 2001 and 2002, respectively. These amounts are included in
administration, curriculum and development expense in the statements of
operations.
Assets under capital leases as of June 30, 2001 and 2002 totaled
$23,178,963 and $29,912,579, respectively, and related accumulated amortization
totaled $7,410,437 and $9,855,563, respectively. At June 30, 2001 and 2002,
$22,637,359 and $29,390,639 of assets under capital lease are included in
furniture, fixture, and equipment with the remaining balances included in
leasehold improvements, respectively.
The Company disposed of leasehold improvements and furniture, fixtures,
and equipment of approximately $1,149,000 and $4,784,000 during the years ended
June 30, 2001 and 2002, respectively.
In June 1998, the Company exercised an option to purchase a charter school
building in Detroit, Michigan for $2,500,000 which the Company had been leasing
under a capitalized lease. In September 1998, the Company, which provides
services at the site, sold the building to the charter school for approximately
$6,300,000 and 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. The note was paid in May 2001.
In May 2001, two charter schools in Detroit, Michigan issued tax-exempt
bonds and used a portion of the proceeds to settle outstanding obligations due
the Company. The Company received from one school approximately $9,600,000 which
is included in proceeds from disposition of property and equipment in the
statement of cash flows for the year ended June 30, 2001. Additionally, the
Company received from the second school approximately $4,300,000 for notes
receivable, including the $1,900,000 note discussed above.
6. ACQUISITION OF UNDEVELOPED PROPERTY
During fiscal 2001, the Company purchased property in New York, New York
for $10 million and entered into an agreement with the Museum of African Art to
develop the property for a mixed use project consisting of a new corporate
headquarters, a charter school and a facility to house the Museum. Additionally,
in fiscal 2002, the Company purchased land for approximately $1.0 million
dollars for a new school development project that was subsequently discontinued.
68
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In the fourth quarter of fiscal 2002, the Company recorded an impairment
charge of approximately $3.6 million as a result of financial indicators present
which hindered the continuation of the project, as reflected in management's
decision to discontinue the project.
As of June 30, 2001 and 2002, other assets include approximately $10.6
million and $10.1 million of purchased land held for sale.
7. BUSINESS COMBINATIONS
Effective July 1, 2001, the Company acquired the remaining 65% outstanding
equity interest of Ksixteen, LLC not already owned by it for approximately
$130,000 in cash, giving it 100% ownership and enhanced operational
efficiencies. The acquisition was accounted for under the purchase method. The
purchase price exceeded the fair value of the net assets acquired by
approximately $806,000, which was recorded as goodwill.
Effective July 3, 2001, the Company acquired 100% of the outstanding
shares of LearnNow, Inc. as a means to enhance its growth prospects. LearnNow
was a privately-held school management company that operated seven charter
schools serving approximately 2000 students. During the third quarter of fiscal
2002, the Company finalized its determination of the purchase price and the
allocation thereof. The acquisition was accounted for under the purchase method
and included a cash payment of $3.0 million in fiscal 2001 and approximately
$31.3 million in Company class A common stock (approximately 1.3 million
shares). In connection with the acquisition, the Company assumed liabilities of
$3.6 million (primarily accounts payable, accrued personnel costs and other
accrued expenses); acquired tangible assets of $1.7 million (primarily
restricted cash, accounts receivable, notes receivable, fixed assets and other
assets). The allocation of the purchase price resulted in recorded intangibles
of approximately $36.2 million. Of this amount, LearnNow contracts of
approximately $4.5 million were classified as an intangible asset separate from
goodwill to be amortized over 15 years on a straight-line basis. The remaining
balance was classified as goodwill.
Following the acquisition, the LearnNow schools were incorporated into the
Company's school operating model and ceased to exist as a separate business
unit. Accordingly, in assessing goodwill for impairment, the Company determined
that the value of the common stock issued in the acquisition would be used as a
measure of impairment. Based on the significant decline in the Company's stock
price, goodwill was deemed to be fully impaired in the fourth quarter of 2002
resulting in a charge to earnings of approximately $32.5 million. Additionally,
approximately $.8 million of the original $4.5 million intangible asset was
deemed impaired as a result of certain terminated contracts and also charged to
earnings in the fourth quarter of fiscal 2002. Both charges are included in
impairment charges in the statements of operations for fiscal 2002.
At June 30, 2002, the carrying amount of the intangible asset was
$3,447,076, net of accumulated amortization of $298,333 and will be amortized
over 10 years.
The following selected pro forma information for the year ended June 30,
2001 is being provided to present a summary of the combined results of the
Company giving effect to the purchase accounting adjustments as if the
acquisitions had occurred as of July 1, 2000. The unaudited pro forma
information is for informational purposes only and may not necessarily reflect
the results of operations of the Company had the acquired businesses operated as
a part of the Company for the fiscal year ended June 30, 2001.
PRO FORMA INFORMATION
(in thousands, except per share data) EDISON SCHOOLS ACQUIRED ENTITIES CONSOLIDATED
- ------------------------------------- ---------------- ------------------- ------------
Net revenue ........... $ 350,508 $ 15,257 $ 365,765
Net loss .............. (38,512) (14,969) (53,481)
Loss per common share
Basic and diluted $ (1.11)
=========
69
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
8. ACCRUED EXPENSES
Accrued expenses consist of the following:
JUNE 30,
----------------------------
2001 2002
----------- ------------
Compensation and related benefits $25,658,847 $34,502,426
Taxes other than income ......... 1,965,057 2,002,577
Philanthropy contribution........ -- 6,500,000
Other ........................... 2,179,811 7,551,573
-----------
Total accrued expenses ....... $29,803,715 $50,556,576
=========== ===========
9. FINANCING
On October 3, 2001, the Company formed Edison Receivables, for the purpose
of purchasing and financing certain receivables of the Company. The Company owns
all of the membership interests in Edison Receivables, a Delaware limited
liability company with a separate legal existence from the Company. The Company
has sold or contributed certain accounts receivable arising from the Company's
provision of school management services in the ordinary course of its business
and related security to Edison Receivables. Edison Receivables has its own
separate creditors who are entitled to be satisfied out of Edison Receivables'
assets prior to any value in it becoming available to the Company. The Company
has no right, title or interest in Edison Receivables' assets, including the
accounts receivable assigned to it by the Company.
In November 2001, Edison Receivables entered into a $35.0 million
revolving credit facility with Merrill Lynch Mortgage Capital Inc. ("MLMCI"),
collateralized by certain accounts receivable purchased from or contributed by
the Company. Borrowings are limited to specified percentages of eligible
accounts receivable, as defined. The line of credit had a term of one year.
Interest is determined on a Eurodollar or prime rate basis at the Company's
option. The Company has agreed to pay a commitment fee of .50% per annum on the
unused portion of the commitment. As of June 30, 2002, $34.0 million was
outstanding under this line bearing interest at LIBOR plus 3.5% and was
collateralized by receivables with a book value of $62.8 million that were sold
to Edison Receivables by the Company. The agreement requires that the Company
observe certain financial covenants and restrictions including a minimum
consolidated tangible net worth and a maximum consolidated debt to equity ratio.
Long-term debt consists of the following:
JUNE 30,
------------------------------
2001 2002
------------ -------------
Notes payable(a) ................ $ 15,083,546 $ 5,152,175
Financing agreement(b) .......... 7,700,553 4,136,906
Capital lease obligations (Note 10) 16,129,100 18,881,514
------------ ------------
38,913,199 28,170,595
Current portion.................. (17,669,020) (18,363,640)
------------ ------------
Total long-term debt ......... $ 21,244,179 $ 9,806,955
============ ============
(a) Notes payable at June 30, 2001 and 2002 consist of notes with four
financing companies collateralized by computer equipment, furniture and
other assets of the Company. All notes are similarly structured and
generally provide for equal monthly installments, including interest and
principal, over a term of 30 to 48 months. Monthly payments to each
noteholder range from approximately $16,000 to $318,000. 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 9.5% to 18.68% 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 of America. At June 30, 2002, the finance agreement
totals approximately $4.1 million and bears interest at a rate of 15.01%.
In connection with amounts outstanding under the notes payable and capital
lease obligations, at June 30, 2001 and 2002, the Company had outstanding stock
purchase warrants to lenders that provide for the purchase of up to 15,000
shares of
70
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
common stock at a purchase price of $12.30 per share. The stock purchase
warrants are fully exercisable and expire 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.
The Company is subject to certain reporting debt covenants under several
of its debt agreements. If the Company were to fail to maintain a certain
minimum cash balance it would be required to post additional cash collateral.
Aggregate maturities of long-term debt, excluding capital lease obligations (see
Note 10), are as follows:
For the fiscal year ending June 30,
2003................................... $8,662,077
2004................................... 627,004
----------
Total............................... $9,289,081
==========
10. 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 30 to 48
months with interest rates of 8.18% to 16.09%. 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, 2002, 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,
2003 .................................................... $ 11,333,547 $ 6,853,089
2004 .................................................... 6,827,737 6,676,905
2005 .................................................... 3,077,148 6,408,235
2006 .................................................... 15,205 6,827,206
2007 .................................................... -- 6,889,198
Thereafter .............................................. -- 41,400,597
------------ ------------
Total commitments ....................................... 21,253,637 $ 75,055,230
============
Less amount representing interest ....................... (2,372,123)
------------
Present value of minimum lease payments ................. 18,881,514
------------
Less current installments of capital lease obligations .. (9,701,563)
------------
Capital lease obligations, excluding current installments $ 9,179,951
============
Total rental expense for each of the three years ended June 30, 2000, 2001
and 2002 related to operating leases amounted to approximately $4,495,000,
$5,686,000, and $6,382,000, respectively.
11. RELATED PARTY TRANSACTIONS
STOCKHOLDER NOTES RECEIVABLE
The stockholder notes receivable consist of two recourse notes from the
Chairman of the Company, with principal amounts of $1.6 million and $200,000,
which arose in connection with his employment agreements. The note agreements,
as amended October 15, 1999, bear interest at the prime rate per annum as
defined by J.P. Morgan Chase and do not require periodic interest or principal
payments until maturity. The notes are collateralized by the assignment of the
proceeds of a life insurance policy and, in the event of termination of the
Chairman's employment, can be offset against the severance pay obligation of the
Company. The receivable matured on August 30, 2002. The Company has given notice
to the Chairman that the notes are now due and, with full cooperation of the
Chairman, is working to expedite collection of the outstanding balances.
71
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
In November 1999, the Company's CEO exercised options to purchase 725,000
shares of common stock at $3.00 per share through the issuance of a promissory
note for $2,175,000. In addition, the Company loaned $4,445,700 in November 1999
and $1,248,500 in April 2000 to the CEO to pay estimated income taxes resulting
from the transaction. These notes mature five years from their date of issuance
and bear interest at the greater of the prime rate or the Company's actual
borrowing rate, in effect from time to time, at maturity. Since the notes were
issued with recourse solely to the shares exercised and contain a floating rate
of interest, for accounting purposes, the options are not treated as exercised
and the loans related to the estimated income taxes are treated as compensation
expense. See Note 3 for discussion of accounting treatment.
STOCKHOLDERS' NOTES PAYABLE
Certain stockholders were issued promissory notes dated December 18, 1997
for $4,407,903 and January 1, 1998 for $592,097 (see Note 13). In addition, as
part of the private placement (see Note 13), 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. For the years ended June 30, 2000, 2001 and 2002, interest expense
under the notes amounted to $502,781, $502,524, and $520,269, respectively.
Included in other liabilities at June 30, 2001 and 2002 is interest payable
under the notes of $825,492 and $1,084,676, respectively.
12. INVESTMENT IN APEX LEARNING, INC.
In July 1999, the Company entered into a preferred stock purchase
agreement with Apex Learning, Inc. ("APEX") providing for the purchase of up to
2,000,000 shares of APEX 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 represented approximately
16.5% ownership in the corporation. 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 through board representation and, therefore,
the investment has been accounted for prospectively under the cost method.
During the third quarter of fiscal 2002, the Company recorded a non-cash
charge to reduce the carrying value of its 19.7% cost basis investment in
privately-held APEX to reflect an other-than-temporary decline in value of $6.8
million (representing the excess of carrying value over fair value, which
results in a carrying value of approximately $1.3 million as of June 30, 2002).
APEX is a company that provides interactive advanced placement courses for high
school students over the internet. We determined that our investment was
impaired given the terms of a third quarter fiscal 2002 transaction involving
Apex equity instruments between two existing investors. Management assessed this
impairment to be other than temporary based on the sharp decline in fair value
as determined and in consideration of the overall market condition for private
equity companies. Prior thereto, the Company had concluded there was not an
other than temporary impairment based, in part, on its application of customary
valuation techniques which indicated that fair value approximated carrying
value. Among the key assumptions included in the valuation were market
conditions for educational related companies, trends in APEX operating results
and valuations of market comparables. No additional charges were recognized in
fiscal 2002.
13. COMMON AND PREFERRED STOCK
Common and preferred stock consist of the following:
JUNE 30, 2001 JUNE 30, 2002
-------------------------- ---------------------------
AUTHORIZED PAR OUTSTANDING OUTSTANDING
SHARES VALUE SHARES AMOUNT SHARES AMOUNT
----------- ----------- ------------ ----------- ---------- ------------
Class A common stock ................. 150,000,000 $ .01 49,249,005 $ 492,490 52,018,855 $ 520,189
Class B Common Stock ................. 5,000,000 $ .01 2,433,126 24,331 1,805,132 18,051
Preferred Stock ...................... 5,000,000 $ .01 - - - -
---------- ----------- ---------- -----------
Total common and preferred stock 51,682,131 $ 516,821 53,823,987 $ 538,240
========== =========== ========== ===========
72
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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
- holders of Class B Common Stock elect, as a separate class,
four of the 11 members of the Company's Board of Directors and
the holders of class A common stock elect, as a separate
class, 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.
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
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.
In connection with a private placement that closed in December 1997,
August 1998 and December 1998, the Company sold units consisting of a share of
stock, three options for fractional shares of common stock, and a note payable
for 22.8 cents per share. 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 initial
public offering ("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, 2002, stock options issued and outstanding
in conjunction with the private placement entitled the holders to purchase
355,707 shares of class A common stock and shares of Class B Common Stock.
In June 1998, the Company, in exchange for $2,500,000, issued a warrant to
the D2F2 Foundation 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 had an expiration date of June 1, 2005, but had been fully exercised at
June 30, 2002. The warrant proceeds were required to be used by Edison to
provide services to selected schools, as approved from time to time by the D2F2
Foundation during the five years following the agreement's execution. Under the
terms of the warrant, if the full amount of the cash proceeds were not spent by
Edison during the five-year period, Edison would be required to return
unexpended amounts, and a pro rata portion of the warrant (or shares already
issued under the warrant, if applicable) could be canceled or redeemed at
Edison's option at their issuance price. This amount was received and properly
recorded as restricted cash in the Company's financial statements. The Company
has accounted for the proceeds in accordance with EITF 96-13 "Accounting for
Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock."
In August 2000, the Company completed a secondary public offering in which
it sold 3,350,000 shares of class A common stock for net proceeds of
approximately $71.0 million. In March 2001, the Company completed another
secondary offering of an additional 3,531,026 shares of class A common stock for
net proceeds of approximately $81.0 million.
73
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
14. 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, 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
Options granted in fiscal 2001 . 1,358,811 $24.72 80,320 $23.47
Options exercised in fiscal 2001 (957,059) $ 5.47
Options cancelled in fiscal 2001 (138,733) $10.75
---------
Under option at June 30, 2001 .. 9,249,818 $23.88 3,244,094 $11.08
Options granted in fiscal 2002 . 2,325,061 $23.21 617,443 $24.29
Options exercised in fiscal 2002 (188,987) $16.58
Options cancelled in fiscal 2002 (648,409) $19.20
---------
Under option at June 30, 2002 .. 10,737,483 $24.32 4,397,478 $14.45
==========
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, restricted stock, and other stock-based awards for a
maximum of 2,500,000 shares of class A common stock could be issued. In October
2000, the board of directors approved an amendment to the Incentive Plan to
increase the number of shares reserved for issuance to 4,500,000 shares of class
A common stock. The Company's stockholders approved this amendment in November
2000. In August 2001, the board of directors approved an amendment to the
Incentive Plan to increase the number of shares reserved for issuance to
6,500,000 shares of class A common stock. The Company's stockholders approved
this amendment in December 2001. 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, 2002, the Company has
1,956,075 shares of class A common stock reserved for future grants under the
Incentive Plan.
During fiscal 2000 and 2001, the Company granted options for 45,000 shares
and 10,000 shares of class A common stock, vesting over a three-year period, to
certain non-employees. The Company recorded approximately $62,000, $77,000, and
$148,000 of expenses related to the issuance of these options in fiscal 2000,
2001 and 2002, respectively.
In fiscal 2001, the Company modified a stock option award relating to
approximately 11,000 shares held by an employee and recognized a $234,000
non-cash charge resulting from this modification. An additional modification to
a stock option award for approximately 38,000 shares was made for certain former
employees who were allowed to retain their stock options and vesting rights
beyond their separation date. A charge of $181,000 was recognized in fiscal 2001
in connection with this modification.
74
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes information about stock options outstanding
at June 30, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ---------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
REMAINING AVERAGE OF AVERAGE OF
RANGE OF CONTRACTED EXERCISE SHARES EXERCISE
EXERCISE PRICES SHARES LIFE PRICES EXERCISABLE PRICES
- --------------------- ----------- ----------- ---------- ----------- ---------
$2.50........... 803,448 2.87 $ 2.50 797,515 $ 2.50
$3.00 - $8.00... 563,869 5.52 $ 4.91 505,395 $ 4.72
$8.01 - $12.30.. 1,038,505 7.05 $ 12.30 645,964 $ 12.30
$14.24 - $18.56. 1,299,606 7.00 $ 16.34 846,145 $ 16.03
$20.00 - $21.31. 1,090,895 8.09 $ 20.73 368,753 $ 20.73
$22.00 - $25.88. 3,261,999 8.86 $ 24.64 1,223,602 $ 24.27
$27.00 - $33.13. 1,279,161 5.52 $ 31.93 10,104 $ 29.45
$33.14 - $56.00. 1,400,000 5.46 $ 56.00 0 $ 56.00
--------- -------
10,737,483 4,397,478
========== =========
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, approximately $3.6 million
during fiscal 2000, approximately $983,000 during fiscal 2001 and approximately
$589,000 during fiscal 2002 in connection with these stock options.
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, 2000, 2001 and 2002 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:
YEARS ENDED JUNE 30,
----------------------------------------------
2000 2001 2002
--- ---------- ------------ ------------
Net loss - as reported................. $(50,629,843) $(38,511,724 $(86,039,852)
Net loss - pro forma basis............. $(52,552,660) $(38,917,336 $(92,609,642)
Basic and diluted net loss per share - as $ (1.83) $ (0.80) $ (1.61)
reported...............................
Basic net loss per share - pro forma basis $ (1.90) $ (0.81) $ (1.73)
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, 2000,
2001 and 2002: zero dividend yield; no volatility for fiscal years 2000 and 2001
and 70% volatility in fiscal 2002; a weighted average risk-free interest rate of
6.18%, 5.50% and 5.31% respectively; and expected lives of 8.86, 9.46 and 10.00
years, respectively.
75
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The following table summarizes the weighted-average grant-date fair values of
options granted:
EXERCISE PRICE EXERCISE PRICE EXERCISE PRICE
EQUALED FAIR GREATER THAN FAIR LESS THAN FAIR
VALUE AT VALUE AT VALUE AT
ISSUANCE ISSUANCE ISSUANCE
-------- -------- --------
Weighted average exercise price of
options granted during the year 2002 $17.07 $25.00 NA
Weighted average exercise price of
options granted during the year 2001 $24.95 NA $12.30
Weighted average exercise price of
options granted during the year 2000 $17.13 NA $13.13
Weighted average fair value of options
granted during the year 2002 ....... $17.07 $18.77 NA
Weighted average fair value of options
granted during the year 2001 ....... $24.95 NA $25.88
Weighted average fair value of options
granted during the year 2000 ....... $17.13 NA $19.19
15. INCOME TAXES
There is no provision for Federal income taxes for the years ended June
30, 2000, 2001 and 2002, since the Company has incurred net losses. The Company
has provided approximately $603,000 and $1.0 million in fiscal 2001 and 2002,
respectively for state and local taxes relating to jurisdictions that require
taxes to be recorded on bases other than income. 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,
--------------------------------
2001 2002
------------ -------------
Deferred tax assets:
Net operating loss carryforward $ 57,340,999 $ 111,627,715
Accrued liabilities ........... 5,651,544 3,850,809
Stock options ................. 10,088,398 2,998,280
Amortization .................. 199,595 4,851
Property and equipment ........ 853,571 4,746,315
------------- -------------
Total deferred tax assets .... 74,134,107 123,227,970
Valuation allowance ............. (74,134,107) (123,227,970)
------------- -------------
Net deferred tax asset ....... $ -- $ --
============= =============
For the years ended June 30, 2000, 2001 and 2002, the valuation allowance
increased by $14,570,051, $15,672,789 and $49,093,863, respectively.
At June 30, 2002, the Company had approximately $289.0 million of net
operating loss carryforwards available to reduce its future taxable income.
Under current Federal income tax law, approximately $45.0 million of such
carryforwards will expire between 2010 and 2018, approximately $244.0 million
will expire between 2019 and 2022.
16. EMPLOYEE BENEFIT PLANS
The Company provides a 401(k) and a 403(b) defined contribution plans for
substantially all full-time employees and teachers. The Company matches each
participant's contribution up to 50% of the first $1,000 contributed.
Participants become fully vested in the match after one year. Contributions to
the 401(k) and a 403(b) plans made by the Company for each of the three years
ended June 30, 2000, 2001 and 2002 amounted to $186,316, $334,191, and $416,440,
respectively.
76
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
17. COMMITMENTS AND CONTINGENCIES
LONG TERM LEASE OBLIGATIONS
The Company has entered into operating leases for five charter school
facilities with lease terms in excess of the initial term of the management
agreement for the schools operating in those facilities.
The first facility, currently housing two schools, has been leased for an
18-year term expiring in December 2016. The management agreement to operate in
this facility expired in December 2001, however, the Company continues to lease
the facility to the former client. The annual lease payment is approximately
$1,000,000 per year through fiscal 2016.
The second facility, currently housing two schools, has been leased for a
15-year term expiring in September 2013. The management agreement to operate in
this facility expired in December 2002. The annual lease payment is $782,400
through fiscal 2007 and increases to $932,400 for fiscal 2008 through fiscal
2013.
The third facility, currently housing one school, has been leased for a
20-year term expiring in June 2020. The management agreement to operate in this
facility expires in June 2003. The annual lease payment is $36,000 through
fiscal 2020.
The fourth facility, currently housing two schools, has been leased for a
20-year term expiring in November 2020. The management agreement to operate in
this facility expires in June 2005. The annual lease payment is $362,000 per
year and increases by 9% in fiscal 2006, 2011 and 2016 resulting in a final
year's annual rent of $468,800.
The fifth facility, currently housing two schools, has been leased for a
20-year term expiring in June 2020. The management agreement to operate in this
facility expires in June 2005. The annual lease payment is $689,760 through
fiscal 2004 and increases to $877,860 for fiscal 2005 through fiscal 2010 and
increases to $1,065,960 for fiscal 2011 through fiscal 2020.
The Company's lease obligations noted above all 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 AGREEMENTS
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, as amended,
the Company is required to transfer its interest in Alliance-Edison, $3.5
million included in other assets at June 30, 2001, 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
December 31, 2001, or (b) the Company fails to raise or contribute a total of
$2.0 million by June 30, 2002. On June 7, 2002, the Company contributed $2.0
million in fulfillment of its obligation. The Company will amortize this
contribution over the remaining life of the contract (2 years) with ACS, as a
reduction of revenue in accordance with EITF 01-09.
The Company has entered into an agreement with one of its clients whereby
it committed to raise $10.5 million in unrestricted philanthropic funds, to be
contributed over a two-year period ending June 30, 2003. The funds are to be
used for schools the Company manages and are to be expended on agreed upon costs
including school facility, technology, curriculum material, etc. To date the
Company has obtained commitments from two philanthropic organizations to
contribute approximately $3.9 million and commitments from two senior Company
officers for an additional $1.2 million. The Company will amortize its
commitment, net of third party donations received, over the contract life (5
years) as a reduction in revenue in accordance with EITF 01-09. Contributions
received from senior officers will serve to reduce the Company's obligation and
be credited to additional paid-in capital.
77
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
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, 2002, the aggregate termination benefits of the
executives and certain other employees approximated $2.5 million.
Additionally, the Company has a severance arrangement with its Chairman
that provides for the Chairman to terminate his employment for good reason,
including not being reappointed to the position of Chairman except for his
death, disability, or terminated for cause. Included in accrued expenses at June
30, 2001 and 2002 is approximately $3.2 million related to this severance
arrangement.
GUARANTEES
The Company has guaranteed certain debt obligations of charter school
boards with which it has management agreements. As of June 30, 2002, the Company
had provided guarantees totaling approximately $20.9 million. These debt
obligations mature from November 2003 to November 2005.
As of June 30, 2002, 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 satisfy certain financial reporting covenants. The Company was not in
compliance with a financial covenant under a guarantee of a charter school board
debt obligation with an outstanding balance of approximately $2.5 million at
June 30, 2002. The Company is in discussions with the lender to resolve this
matter.
LITIGATION
Between May 15, 2002 and July 3, 2002, ten class action lawsuits were
filed against the Company and certain of its officers and directors in the
United States District Court for the Southern District of New York. These
lawsuits are largely identical and each alleges that the Company and certain of
its officers and directors violated Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934. They seek an unspecified amount of compensatory damages,
costs and expenses related to bringing the actions, and in a few instances,
injunctive relief. Plaintiffs allege that Edison's public disclosures from
November 1999 to March 2002 regarding its financial condition were materially
false and misleading because the Company allegedly improperly inflated its total
revenues by including certain payments, including payments for teacher salaries,
that were paid directly to third parties by local school districts and charter
school boards that contracted with the Company. Several of the lawsuits also
mention two restatements of the Company's financial statements, one regarding a
warrant purchased in 1998 by a philanthropic organization and the other
regarding a severance agreement between the Company and one of its senior
officers, made by the Company as a result of the May 14, 2002 cease-and-desist
order. In July 2002, several plaintiffs filed motions to be appointed lead
plaintiff and also moved to consolidate the ten lawsuits in one action. There
has been no ruling by the court on these motions. The Company believes that it
has strong defenses to the claims raised by these lawsuits, however the outcome
of this Litigation cannot be determined at this time. If the Company were not to
prevail, the amounts involved could be material to the financial position,
results of operations and cash flows of the Company.
78
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
The Company is also involved in various legal proceedings from time to
time incidental to the conduct of its business. For example, we are currently
involved in lawsuits filed in Dallas, Texas, Baltimore, Maryland, Peoria,
Illinois and Las Vegas, Nevada questioning the authority of these school
districts to enter into management agreements with the Company. In addition, the
school district of York, Pennsylvania has appealed the decision of the state
charter-granting authority to grant a charter to one of the Company's customers.
We currently believe that any ultimate liability arising out of such proceedings
will not have a material adverse effect on the Company's financial position,
results of operations or cash flows.
18. 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 accounts receivable. 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.
Accounts receivable consist of primarily short-term and long-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. Uncollectible accounts have been
isolated and not significant to date; as a result, an allowance for doubtful
accounts is not deemed necessary at this time. The Company will establish an
allowance for doubtful accounts when it has determined that factors surrounding
the credit risk of specific customers, historical trends and other information
so warrant.
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 has established
an allowance for loan losses based upon its assessment of the credit risk of the
specific charter schools, recent trends and other information.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized unaudited quarterly data for the years ended June 30, 2002 and
2001 are as follows (dollars in thousands, except for per share amounts):
QUARTER
-------------------------------------------------------
2002 FIRST SECOND THIRD FOURTH
---------- --------- ---------- ----------
Net revenue .......... $ 89,745 $ 115,637 $ 121,904 $ 137,772
Gross site
contribution ......... 9,373 19,726 21,749 24,070
79
EDISON SCHOOLS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Loss from operations . (13,344) (10,538) (5,745) (47,112)
Net loss ............. (12,672) (11,661) (12,783) (48,924)
Loss per common share
Basic and diluted (0.24) (0.22) (0.24) (0.91)
QUARTER
----------------------------------------------------------------------------
2001 FIRST SECOND THIRD
----- ------ -----
As As As As As As
Reported Restated* Reported Restated* Reported Restated*
-------- -------- -------- -------- -------- --------
Net revenue ............... $ 60,299 $ 60,299 $ 95,538 $ 95,538 $ 92,815 $ 92,815
Cross site contribution.... 3,184 3,184 16,983 16,983 18,083 18,083
Loss from operations (20,808) (27,014) (4,067) (3,886) (6,616) 1,540
Net loss .................. (20,108) (26,495) (3,191) (3,191) (5,982) 1,997
Loss per common Share basic
and Diluted ............... (0.43) (0.57) (0.06) (0.06) (0.13) 0.04
QUARTER
----------------------------
FOURTH
------
As As
Reported Restated*
-------- --------
Net revenue ............... $101,856 $101,856
Cross site contribution.... 21,058 21,058
Loss from operations (9,541) (11,418)
Net loss .................. (8,799) (10,823)
Loss per common Share basic
and Diluted (0.17) (0.21)
- --------------
* Restated data for fiscal 2001 reflects the quarterly impact of the
restatement discussed in Note 3.
20. SUBSEQUENT EVENTS
On July 31, 2002, the revolving credit agreement with MLMCI was amended to
add School Services as an additional lender and MLMCI as agent of the lenders,
increase the line to $55.0 million, and extend the term of the agreement and the
line of credit provided thereunder to June 30, 2003. The agreement and the line
of credit were subsequently extended to July 15, 2003. The interest rate under
the amended credit facility was increased to LIBOR plus 7% or Prime plus 4.5% at
the Company's option.
In addition, the Company separately entered into a Credit and Security
Agreement, dated as of July 31, 2002, with School Services, pursuant to which
the Company has the right to borrow up to $20.0 million, at an interest rate set
at 12.0 percent per annum. The Company borrowed $250,000 on July 31, 2002 under
this facility. The facility will also be reduced by the amount of certain fees
and costs which the Company has agreed to pay School Services and its
affiliates. This facility is collateralized by certain real property owned by
the Company and certain of its subsidiaries, notes payable from charter schools
and other debtors of the Company and substantially all other assets of the
Company. This facility matures on June 30, 2004 but has significant prepayment
obligations tied to refinancings of notes receivable from charter schools and
such other debtors and to any sale or transfer of any such real property. The
agreement requires the Company to observe certain financial covenants and
restrictions including minimum consolidated tangible net worth, a maximum
consolidated debt to equity ratio and a minimum EBITDA requirement for fiscal
2003.
In connection with the establishment of the credit facilities described
above, the Company also issued warrants for the purchase of up to an aggregate
of 10,710,973 shares of class A common stock of the Company, which equals 16.6%
of the total outstanding shares of common stock of the Company, including the
shares issuable upon exercise of the warrants. The warrants have an exercise
price of $1.00 per share and are exercisable at any time following their
issuance and prior to July 31, 2007.
80
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------ -----------
3.1* Sixth Amended and Restated Certificate of Incorporation of
the Registrant
3.2* Second Amended and Restated By-Laws of the Registrant
4.1** Specimen common stock certificate
4.2** See Exhibits 3.1 and 3.2 for provisions of the Certificate of
Incorporation and By-Laws of the Registrant defining the rights
of holders of class A common stock of the Registrant
10.1** 1998 Site Option Plan
10.2**# 1999 Stock Option Plan.
10.3**# 1999 Key Stock Incentive Plan
10.4**# 1999 Stock Incentive Plan
10.5** Amended Warrant Purchase Agreement, dated as of June 1, 1998,
between the Registrant and the D2F2 Foundation
10.6**# Letter Agreement, dated as of June 20, 2000, between the
Registrant and Benno C. Schmidt, Jr.
10.6.1# Letter Agreement, dated May 8, 2002, between the Registrant and
Benno C. Schmidt, Jr.
10.7**# Letter Agreement, dated as of March 15, 1995, between the
Registrant and John E. Chubb
10.8** Preferred Stock Purchase Agreement, dated as of July 2, 1999,
between the Registrant and Apex Online Learning Inc.
10.9** Amended and Restated Shareholders Agreement, dated as of
December 16, 1999, between the Registrant, Apex Online
Learning Inc. and other parties
10.10** 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
10.11** Office Lease dated as of March 19, 1999, between the
Registrant and 529 Fifth Company
10.12**# Management Agreement, dated as of March 14, 1995, between the
Registrant and WSI Inc., as amended on November 15, 1996,
March 1, 1997 and December 31, 1997
10.13**# Promissory note, dated as of June 5, 1992, from Benno C.
Schmidt, Jr. to the Registrant.
10.14**# Promissory note, dated as of January 23, 1996, from Benno C.
Schmidt, Jr. to the Registrant
10.15**# 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
10.15.1 Allonges, dated as of February 13, 2002, to promissory notes,
dated as of June 5, 1992 and January 23, 1996, from Benno C.
Schmidt, Jr. to the Registrant is incorporated herein by
reference to the Registrant's Quarterly Report on Form 10-Q for
the period ended December 31, 2001.
10.15.2 Allonges, dated as of June 28, 2002, to promissory notes, dated
as of June 5, 1992 and January 23, 1996, from Benno C. Schmidt,
Jr. to the Registrant.
10.16**# Form of Letter Agreement between the Registrant and H.
Christopher Whittle
81
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.17**# Letter Agreement, dated as of July 1, 1999, between the
Registrant and Christopher D. Cerf
10.18**# Loan Agreement between the Registrant and WSI Inc
10.19** Guaranty of Payment Agreement, dated as of September 3, 1998,
between the Registrant and NCB Development Corporation
10.20** Guaranty of Payment Agreement, dated as of November 25, 1997,
between the Registrant and BankBoston, N.A
10.21** Stock Subscription Warrant, dated as of October 18, 1999,
issued to TBCC Funding Trust II
10.22* Preferred Stock Purchase Agreement, dated as of December 16,
1999, by and between Apex Online Learning Inc., the
Registrant and other parties
10.23*# Promissory note, dated April 13, 2000, from H. Christopher
Whittle to the Registrant
10.24* Contract of Sale, dated as of January 11, 2000, between the
Registrant and Castle Senior Living, LLC
10.25* Letter of Intent, dated as of June 8, 2000, between the
Registrant and IBM
10.26* License Agreement, dated as of June 12, 2000, between the
Registrant and IBM
10.27* Term Lease Master Agreement, dated as of May 1, 2000, between
the Registrant and Global Lyceum, Inc.
10.28*# Promissory Note dated as of June 9, 2000 from Manuel J.
Rivera to the Registrant
10.29*** Fundraising Agreement, dated as of June 23, 2000, between the
Registrant and Alliance Facilities Management, Inc
10.30*** Master Development Agreement between the Registrant and
Ksixteen LLC
10.31*** Master Agreement to Lease Equipment, dated as of June 30,
2000, between the Registrant and Cisco
10.32*** Limited Liability Company Operating Agreement of Alliance
Edison LLC
10.33*** Promissory Note, dated as of July 21, 2000, issued by the
Registrant in the name of Alliance Edison LLC
10.34*** Payment Guaranty, dated as of July 21, 2000, between the
Registrant and Keybank National Association
10.35 Amended and Restated Purchase and Contribution Agreement,
dated as of July 31, 2002, between Edison Schools Inc., as
Seller and Servicer, and Edison Receivables Company LLC, as
Buyer
82
EXHIBIT
NUMBER DESCRIPTION
------ -----------
10.36 Amended and Restated Credit and Security Agreement, dated as
of July 31, 2002, among Edison Receivables Company LLC, as
Borrower, School Services LLC and Merrill Lynch Mortgage
Capital Inc., as Lenders, and Merrill Lynch Mortgage Capital
Inc., as Agent
10.37 Pledge Agreement, dated as of July 31, 2002, made by Edison
Schools Inc., in favor of Edison Receivables Company LLC
10.38 Agreement of Issuance, dated as of July 31, 2002, between
Edison Schools Inc. and Edison Receivables Company LLC
10.39 Warrant Agreement, for 2,152,959 shares of class A common
stock, dated as of July 31, 2002, between Edison Schools Inc.
and Merrill Lynch Mortgage Capital Inc.
10.40 Warrant, for 2,152,959 shares of class A common stock, dated
as of July 31, 2002, issued by Edison Schools Inc. to Merrill
Lynch Mortgage Capital Inc.
10.41 Warrant Agreement, for 478,435 shares of class A common stock,
dated as of July 31, 2002, between Edison Schools Inc.
and School Services LLC
10.42 Warrant, for 478,435 shares of class A common stock, dated as
of July 31, 2002, issued by Edison Schools Inc. to School
Services LLC
10.43 Warrant Agreement, for 8, 079,579 shares of class A common
stock, dated as of July 31, 2002, between Edison Schools Inc.
and School Services LLC
10.44 Warrant, for 8, 079,579 shares of class A common stock, dated
as of July 31, 2002, issued by Edison Schools Inc. to School
Services LLC
10.45 Credit and Security Agreement, dated as of July 31, 2002, by
and between School Services LLC, Edison Schools Inc., 110th
and 5th Associates, LLC and Bayard Rustin Charter School, LLC
10.46 Pledge Agreement, dated as of July 31, 2002, made by Edison
Schools Inc. in favor of School Services LLC
10.47 Guaranty, dated as of July 31, 2002, made by 110th and 5th
Associates, LLC in favor of School Services LLC
10.48 Guaranty, dated as of July 31, 2002, made by Bayard Rustin
Charter School, LLC in favor of School Services LLC
10.49# Employment Agreement, dated as of September 30, 2002, between
the Registrant and Charles Delaney.
10.50 Letter Agreement, dated as of December 18, 2002, between the
Registrant and H. Christopher Whittle is incorporated herein by
reference to Exhibit 10.2 to the Registrant's Quarterly Report
on Form 10-Q for the period ended December 31, 2001.
10.51 Purchase and Contribution Agreement, dated October 31, 2001,
between the Company and Edison Receivables Company LLC is
incorporated herein by reference to Exhibit 10.01 to the
Registrant's Quarterly Report on Form 10-Q for the period ended
September 30, 2001.
10.52 Credit and Security Agreement, dated October 31, 2001, between
Edison Receivables Company LLC and Merrill Lynch Mortgage
Capital Inc. is incorporated by reference to Exhibit 10.02 to
the Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 2001.
10.53 Letter Agreement, dated September 30, 2002, between the
Registrant, Merrill Lynch Mortgage Capital Inc. and School
Services LLC.
21 Subsidiaries of the Registrant
23.1 Consent of PricewaterhouseCoopers LLP
83
27. FINANCIAL DATA SCHEDULE
99.1 Certification by Chief Executive Officer and Chief Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
* 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 for the Registrant's Annual Report on Form
10-K for the year ended June 30, 2000 (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.
84