K12 Inc · S-1/A · On 10/9/07
Filed On 10/9/07 1:25pm ET · SEC File 333-144894 · Accession Number 950133-7-4085
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
10/09/07 K12 Inc S-1/A 3:218 Bowne of Dc 01/FA
Pre-Effective Amendment to Registration Statement (General Form) · Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A K12 Inc. S-1/A HTML 1,201K
2: EX-10.10 Material Contract HTML 22K
3: EX-23.1 Consent of Experts or Counsel HTML 4K
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As filed
with the Securities and Exchange Commission on October 9,
2007
SECURITIES AND EXCHANGE
COMMISSION
Washington, D.C.
20549
Amendment No. 2
to
Form S-1
REGISTRATION
STATEMENT
UNDER
THE SECURITIES ACT OF
1933
K12 INC.
(Exact name of registrant as
specified in its charter)
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8211
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95-4774688
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(State or Other Jurisdiction
of
Incorporation or Organization)
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(Primary Standard Industrial
Classification Number)
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(IRS Employer
Identification No.)
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(Address, including zip code,
and telephone number, including area code, of Registrant’s
principal executive offices)
Ronald J.
Packard
Chief Executive Officer
K12 Inc.
2300 Corporate Park Drive
(Name, address, including zip
code, and telephone number, including area code, of agent for
service)
Copies to:
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William P. O’Neill, Esq.
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Howard D. Polsky, Esq.
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Richard D. Truesdell, Jr., Esq.
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Blaise F. Brennan, Esq.
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Senior Vice President, General Counsel and Secretary
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Davis Polk & Wardwell
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Latham & Watkins LLP
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K12 Inc.
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450 Lexington Avenue
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555 Eleventh Street, N.W
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2300 Corporate Park Drive
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New York, NY 10017
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Washington, D.C. 20004
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Herndon, VA 20171
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(212) 450-4674
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(202) 637-2200
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(703) 483-7000
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Approximate date of commencement of proposed sale to the
public: As soon as practicable after the
effective date of this registration statement.
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
CALCULATION
OF REGISTRATION FEE
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Title of Each Class of
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Proposed Maximum
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Amount of
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Securities to be Registered
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Aggregate Offering Price(a)(b)
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Registration Fee
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Common stock, $0.0001 par value
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$172,500,000
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$5,296(c)
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(a)
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Estimated solely for the purpose of
calculating the registration fee in accordance with
Rule 457(o) promulgated under the Securities Act of 1933.
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(b)
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Including shares of common stock
which may be purchased by the underwriters to cover
overallotments, if any.
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(c)
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Previously paid.
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The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933, or until the Registration
Statement shall become effective on such date as the Commission,
acting pursuant to said Section 8(a), may determine.
The
information in this prospectus is not complete and may be
changed. We may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these
securities, and we are not soliciting offers to buy these
securities in any state or jurisdiction where the offer or sale
is not permitted.
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PROSPECTUS
(Subject to Completion)
Shares
K12 Inc.
Common Stock
K12 Inc. is
offering shares
of its common stock. This is our initial public offering and no
public market exists for our shares. We anticipate that the
initial public offering price will be between
$ and
$ per share.
Investing in our common stock involves risks. See
“Risk Factors” beginning on page 8 to read about
factors you should consider before buying shares of our common
stock.
We intend to apply to list our common stock on the New York
Stock Exchange under the symbol “LRN.”
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Underwriting
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Proceeds to
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Discounts and
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Proceeds to
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Selling
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Price to Public
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Commissions
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K12 Inc.
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Stockholders
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Per Share
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$
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$
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$
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$
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Total
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$
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$
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$
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$
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The underwriters may also purchase up to an
additional shares
of common stock from the selling stockholders at the public
offering price, less the underwriting discount within
30 days from the date of this prospectus to cover over
allotments, if any.
Neither the Securities and Exchange Commission nor any other
regulatory body has approved or disapproved of these securities
or passed upon the accuracy or adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares of common stock to
purchasers on or
about ,
2007.
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| Morgan
Stanley |
Credit
Suisse |
,
2007
TABLE OF
CONTENTS
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Page
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Prospectus Summary
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1
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Risk Factors
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8
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Cautionary Notice Regarding Forward-Looking Statements
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Use of Proceeds
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Dividend Policy
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Capitalization
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Dilution
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Selected Consolidated Financial Data
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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Business
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Regulation
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Management
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Compensation Discussion and Analysis
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80
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Certain Relationships and Related-Party Transactions
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93
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Principal and Selling Stockholders
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95
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Description of Capital Stock
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98
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Certain United States Federal Income Tax Considerations to
Non-U.S.
Holders
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101
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Shares Eligible for Future Sale
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104
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Underwriting
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106
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Notice to Canadian Residents
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110
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Sales Outside the United States Other Than Canada
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111
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Legal Matters
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114
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Experts
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114
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Where You Can Find More Information
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114
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Index to Consolidated Financial Statements
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F-1
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You should rely only on the information contained in this
prospectus. We and the underwriters have not authorized anyone
to provide you with different or additional information. This
prospectus is not an offer to sell or a solicitation of an offer
to buy our common stock in any jurisdiction where it is unlawful
to do so. The information contained in this prospectus is
accurate only as of its date, regardless of the date of delivery
of this prospectus or of any sale of our common stock.
Until and
including ,
2007, 25 days after the commencement of this offering, all
dealers that affect transactions in these securities, whether or
not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
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This summary highlights selected information contained
elsewhere in this prospectus and does not contain all of the
information you should consider in making your investment
decision. You should read the following summary together with
the more detailed information regarding us and our common stock
being sold in the offering, including the risks of investing in
our common stock discussed under “Risk Factors”
beginning on page 10 and our consolidated financial
statements and the related notes appearing elsewhere in this
prospectus, before making an investment decision. For
convenience in this prospectus, “the Company,”
“K12,”
“K12,”
“we,” “us,” and “our” refer to K12
Inc. and its subsidiaries, taken as a whole. References to
fiscal years refer to the fiscal year ended June 30 of the
year indicated.
K12
Inc.
Our
Company
We are a technology-based education company. We offer
proprietary curriculum and educational services created for
online delivery to students in kindergarten through
12th grade, or K-12. Our mission is to maximize a
child’s potential by providing access to an engaging and
effective education, regardless of geographic location or
socio-economic background. Since our inception, we have invested
more than $95 million to develop curriculum and an online
learning platform that promotes mastery of core concepts and
skills for students of all abilities. This learning system
combines a cognitive research-based curriculum with an
individualized learning approach well-suited for virtual schools
and other educational applications. From fiscal year 2004 to
fiscal year 2007, we increased average enrollments in the
virtual public schools we serve from approximately 11,000
students to 27,000 students, representing a compound annual
growth rate of approximately 35%. From fiscal year 2004 to
fiscal year 2007, we increased revenues from $71.4 million
to $140.6 million, representing a compound annual growth
rate of approximately 25%, and improved from a net loss of
$7.4 million to net income of $3.9 million.
We believe we are unique in the education industry because of
our direct involvement in every component of the educational
development and delivery process. Most educational content,
software and service providers typically concentrate on only a
portion of that process, such as publishing textbooks, managing
schools or providing testing and assessment services. This
traditional segmented approach has resulted in an uncoordinated
and unsatisfactory education for many students. Unburdened by
legacy, we have taken a holistic approach to the design of our
learning system. We have developed an engaging curriculum which
includes online lessons delivered over our proprietary school
platform. We combine this with a rigorous system to test and
assess students and processes to manage school performance and
compliance. In addition, our professional development programs
enable teachers to better utilize technology for instruction.
Our end-to-end learning system is designed to optimize the
performance of the schools we serve and enhance student academic
achievement.
As evidence of the benefit of our holistic approach, the virtual
public schools we serve generally test near, and in some cases
above, state averages on standardized achievement tests. These
results have been achieved despite the enrollment of a
significant number of new students each school year who have had
limited exposure to our learning system prior to taking these
required state tests. Students using our learning system for at
least three years usually perform better on standardized tests
relative to state averages than students using it for one year
or less. The efficacy of our learning system has also helped us
achieve high levels of customer satisfaction. According to a
2006 internal survey of parents of students enrolled in virtual
public schools we serve (with an approximately 33% response
rate), approximately 97% of respondents stated that they were
either satisfied or very satisfied with our curriculum and 95%
of respondents stated that they would recommend our curriculum
to other families.
We deliver our learning system to students primarily through
virtual public schools. As with any public school, these schools
must meet state educational standards, administer proctored
exams and are subject to fiscal oversight. The fundamental
difference is that students attend virtual public schools
primarily over the Internet instead of traveling to a physical
classroom. In their online learning environment, students
receive assignments, complete lessons, and obtain instruction
from certified teachers with whom they interact online,
telephonically, and face-to-
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face. Virtual public schools provide families with a publicly
funded alternative to a traditional classroom-based education
when relocating or private schooling is not an option, making
them the “most public” of schools.
We offer virtual schools our proprietary curriculum, online
learning platform and varying levels of academic and management
services, which can range from targeted programs to complete
turnkey solutions, under long-term
contracts. These
contracts
provide the basis for a recurring revenue stream as students
progress through successive grades. Additionally, without the
requirement of a physical classroom, virtual schools can be
scaled quickly to accommodate a large dispersed student
population, and allow more capital resources to be allocated
towards teaching, curriculum and technology rather than towards
a physical infrastructure.
Substantially all of our enrollments are served through
25 virtual public schools to which we provide full turnkey
solutions and seven virtual public schools to which we provide
limited management services, located in 17 states and the
District of Columbia. Parents can also purchase our curriculum
and online learning platform directly to facilitate or
supplement their children’s education. Additionally, we
have piloted our curriculum in brick and mortar classrooms with
promising academic results. We also believe there is additional
widespread applicability for our learning system internationally.
Our
Market
The U.S. market for K-12 education is large and growing.
For example:
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According to the National Center for Education Statistics
(NCES), a division of the U.S. Department of Education,
there were more than 49 million students in K-12 public
schools during the
2005-06
school year. In addition, according to National Home Education
Research, approximately two million students are home schooled
and, according to a March 2006 NCES report, approximately five
million students are enrolled in private schools.
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According to the NCES, the public school system alone
encompassed more than 98,000 schools and 17,000 school
districts during the
2005-06
school year.
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The NCES estimates that total spending in the public K-12 market
was $558 billion for the
2005-06
school year.
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Parents and lawmakers are demanding increased standards and
accountability in an effort to improve academic performance in
U.S. public schools. As a result, each state is now
required to establish performance standards and to regularly
assess student progress relative to these standards. We expect
continued focus on academic standards, assessments and
accountability in the near future.
Many parents and educators are also seeking alternatives to
traditional classroom-based education that can help improve
academic achievement. Demand for these alternatives is evident
in the growing number of choices available to parents and
students. For example, charter schools emerged in 1988 to
provide an alternative to traditional public schools. Similarly,
acceptance of online learning initiatives, including not only
virtual schools but also online testing and Internet-based
professional development, has become widespread. As of September
2006, 38 states had some form of online learning initiative.
Virtual public schools represent one approach to online learning
that is gaining acceptance. According to the Center for
Education Reform, as of January 2007 there were 173 virtual
schools with total enrollment exceeding 92,000 students,
operating in 18 states compared to just 86 virtual
schools in 13 states with total enrollment of approximately
31,000 students in the 2004-05 school year. Virtual schools
can offer a comprehensive curriculum and flexible delivery
model; therefore, we believe that a growing number of families
will pursue virtual public schools as an attractive public
school alternative. Given these statistics and the nascence of
this market, we believe there is a significant opportunity for a
high-quality, trusted, national education provider to serve
virtual public schools.
Our
Competitive Strengths
We believe the following to be our key competitive strengths:
Proprietary Curriculum Specifically Designed for a
Technology-Enabled Environment. We specifically
designed our curriculum for online learning, in contrast to
other online curriculum providers who often just digitize
classroom textbooks for transmission over the Internet. Our
cognitive research-based curriculum contains more
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than 11,000 discrete lessons that utilize a combination of
innovative technologies, including flash animations, online
interactivity and real-time individualized feedback, which we
combine with textbooks and other offline course materials to
create an engaging and highly effective curriculum and drive
greater, more consistent academic achievement.
Flexible, Integrated Online Learning
Platform. Our online learning platform provides a
highly flexible and effective means for delivering educational
content to students and allows us to update the content on a
real-time basis. Our platform offers assessment capabilities to
identify the current and targeted academic level of achievement
for each student, measures mastery of each learning objective,
updates each student’s lesson plan for completed lessons
and enables us to track the effectiveness of each lesson with
each student on a real-time basis.
Expertise in Opening Channels for Virtual
Schooling. Our education policy experts and
established relationships with key educational authorities have
allowed us to help individual educational policymakers
understand the benefits of virtual schools and establish highly
effective, publicly funded education alternatives for parents
and their children.
Track Record of Student Achievement and Customer
Satisfaction. The virtual public schools we serve
generally test near, and in some cases above, state averages on
standardized achievement tests. The efficacy of our learning
system has also helped us achieve high levels of customer
satisfaction, which has been a strong contributor to our growth,
helps drive new student referrals and leads to re-enrollments.
Highly Scalable Model. We have built our
educational model, systems and management team to successfully
and efficiently serve the academic needs of a large, dispersed
student population. Our ability to leverage the historical
investment we made in developing our learning system and our
ability to deliver our offering over the Internet enables us to
successfully serve a greater number of students at a reduced
level of capital investment.
Our
Growth Strategy
We intend to pursue the following strategies to drive our future
growth:
Generate Enrollment Growth at Existing Virtual Public
Schools. In the
2007-08
school year, we are serving virtual public schools in
17 states and the District of Columbia. We intend to
continue to drive increased enrollments at the virtual public
schools we serve through targeted marketing and recruiting
efforts as well as through referrals.
Enhance Curriculum to Include a Complete High School
Offering. We believe that serving virtual public
high schools represents a significant growth opportunity for
online education delivery given the increased independence of
high school students and the wide variance in academic
achievement levels and objectives of students who are entering
high school. In the
2005-06 and
2006-07
school years, we began enrolling 9th and 10th grade
students, respectively, and with the launch of our 11th and
12th grades in the
2007-08
school year, we are able to provide a complete high school
offering to satisfy the broad range of high school student
interests.
Expand Virtual Public School Presence into Additional
States. The flexibility and comprehensiveness of
our learning system allows us to efficiently adapt our
curriculum to meet the individual educational standards of any
state with minimal capital investment. We intend to continue to
seek opportunities to assist states in establishing virtual
public schools and to
contract with them to provide our
curriculum, online learning platform and related services.
Strengthen Awareness and Recognition of the
K12
Brand. The
K12
brand already enjoys strong recognition within the virtual
public school community. We have developed a comprehensive brand
strategy and intend to invest in further developing awareness of
both the
K12
brand and the core philosophy behind our learning system outside
the virtual public school community.
Pursue International Opportunities to Offer Our Learning
System. We believe there is strong worldwide
demand for high-quality, flexible education alternatives. Given
the highly flexible design and technology-based nature of our
platform, it can be adapted to other languages and cultures
efficiently and with modest capital investment. Additionally,
our ability to operate virtually is not constrained by the need
for a physical classroom or local teachers, which makes our
learning system ideal for use internationally.
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Develop Additional Channels Through Which to Deliver our
Learning System. We intend to regularly evaluate
additional delivery channels and to pursue opportunities where
we believe there is likely to be significant demand for our
offering, such as direct classroom instruction, hybrid classroom
models, supplemental educational offerings, and individual
products packaged and sold directly to parents and students.
Certain
Risk Factors
Investing in our common stock involves substantial risk. You
should carefully consider all the information in this prospectus
prior to investing in our common stock and review the section
entitled “Risk Factors” immediately following this
prospectus summary. These risks and uncertainties include, but
are not limited to, the following:
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Most of our revenues depend on per pupil funding amounts
remaining near the levels existing at the time we execute
service agreements with the virtual public schools we serve. If
those funding levels are materially reduced, new restrictions
adopted or payments delayed, our business, financial condition,
results of operations and cash flows could be adversely affected.
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The poor performance or misconduct of other virtual public
school operators could tarnish the reputation of all virtual
public school operators, which could have a negative influence
on our business.
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Opponents of virtual public schools have sought to challenge the
establishment and expansion of such schools through the judicial
process. If their interests prevail, it could damage our ability
to sustain or grow our current business in certain jurisdictions.
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We have a limited operating history, and sustained losses of
approximately $90 million before only recently achieving
profitability. If we fail to remain profitable or achieve
further marketplace acceptance for our products and services,
our business, financial condition and results of operations will
be adversely affected.
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Highly qualified teachers are critical to the success of our
learning system. If we are not able to continue to recruit,
train and retain quality certified teachers, our lessons might
not be effectively delivered to students, compromising their
academic performance and our reputation with the virtual public
schools we serve. As a result, our brand, business and operating
results may be adversely affected.
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Our
Corporate Information
We were incorporated in Delaware in December 1999. Our principal
executive offices are located at 2300 Corporate Park Drive,
Herndon,
VA 20171. Our telephone number is
(703) 483-7000.
Our
website address is
www.K12.com. These are textual
references only. We do not incorporate the information on, or
accessible through, any of our
websites into this prospectus,
and you should not consider any information on, or that can be
accessed through, our
websites as part of this prospectus.
4
The
Offering
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Common Stock offered by us
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shares
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Common Stock outstanding after the
offering
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shares
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Overallotment option
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shares from the selling
stockholders
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Proposed New York Stock Exchange symbol |
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“LRN” |
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Use of proceeds from this offering |
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We estimate that our net proceeds from this offering will be
approximately $ million,
based on an assumed initial public offering price of
$ per share (which is the midpoint
of the range on the cover page of this prospectus). We intend to
use the net proceeds from this offering for general corporate
purposes, including working capital, capital expenditures and
the development of new courses and product offerings as well as
to repay approximately $12.5 million of borrowings under
our revolving credit facility. The net proceeds will also
provide us with the financial flexibility to make acquisitions
and strategic investments. We will receive no proceeds from the
sale of common stock to be sold by the selling stockholders if
the underwriters exercise their overallotment option. See
“Use of Proceeds.” |
The number of shares of common stock outstanding after this
offering is based on 111,798,779 shares outstanding as of
June 30, 2007 and:
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gives effect to the automatic conversion of all of the
outstanding shares of our preferred stock into
101,386,536 shares of our common stock immediately prior to
the completion of this offering;
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excludes 18,477,803 shares of common stock issuable upon
the exercise of options outstanding as of June 30, 2007 at
a weighted average exercise price of $1.81 per share,
2,328,358 shares of preferred stock (or upon the
consummation of the offering an equivalent amount of common
stock) that may be issued upon the exercise of warrants
outstanding as of June 30, 2007, all of which are currently
exercisable at a purchase price of $1.34 per share, and
108,649 shares of common stock that may be issued upon the
exercise of warrants outstanding as of June 30, 2007, all
of which are exercisable at a purchase price of $1.60 per
share; and
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excludes an
additional shares
of common stock reserved for issuance under our equity incentive
plans.
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Except as otherwise indicated, all information contained in this
prospectus assumes:
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a
for
stock split of our common stock to be effected prior to
completion of this offering;
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an initial offering price of $ per
share (which is the midpoint of the range on the cover page of
this prospectus); and
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the underwriters’ option to purchase up
to additional
shares of common stock is not exercised.
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5
SUMMARY
CONSOLIDATED FINANCIAL DATA
We derived the summary consolidated financial data presented
below as of
June 30, 2006 and
2007 and for each of the
three years ended
June 30, 2005,
2006 and
2007, from our
audited consolidated financial statements included elsewhere in
this prospectus. We derived the summary consolidated financial
data presented below as of
June 30, 2005 from our audited
consolidated financial statements that are not included in this
prospectus. Our historical results are not necessarily
indicative of future operating results. You should read the
information set forth below in conjunction with
“Selected
Consolidated Financial and Operating Data,”
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations” and our consolidated
financial statements and their related notes included elsewhere
in this prospectus.
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|
|
|
|
Year Ended June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(dollars in thousands, except per share data)
|
|
|
|
|
Consolidated Statement of
Operations Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
140,556
|
|
|
$
|
116,902
|
|
|
$
|
85,310
|
|
|
Cost and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Instructional costs and services
|
|
|
76,064
|
|
|
|
64,828
|
|
|
|
49,130
|
|
|
Selling, administrative, and other
operating expenses
|
|
|
51,159
|
|
|
|
41,660
|
|
|
|
30,031
|
|
|
Product development expenses
|
|
|
8,611
|
|
|
|
8,568
|
|
|
|
9,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total costs and expenses
|
|
|
135,834
|
|
|
|
115,056
|
|
|
|
88,571
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
4,722
|
|
|
|
1,846
|
|
|
|
(3,261
|
)
|
|
Interest expense, net
|
|
|
(639
|
)
|
|
|
(488
|
)
|
|
|
(279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) before income
taxes
|
|
|
4,083
|
|
|
|
1,358
|
|
|
|
(3,540
|
)
|
|
Income tax expense
|
|
|
(218
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
3,865
|
|
|
|
1,358
|
|
|
|
(3,540
|
)
|
|
Dividends on preferred stock
|
|
|
(6,378
|
)
|
|
|
(5,851
|
)
|
|
|
(5,261
|
)
|
|
Preferred stock accretion
|
|
|
(22,353
|
)
|
|
|
(18,697
|
)
|
|
|
(15,947
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders
|
|
$
|
(24,866
|
)
|
|
$
|
(23,190
|
)
|
|
$
|
(24,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common
stockholders per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(2.44
|
)
|
|
$
|
(2.30
|
)
|
|
$
|
(2.46
|
)
|
|
Basic and diluted (pro
forma)(1)
|
|
$
|
0.03
|
|
|
$
|
n/a
|
|
|
|
n/a
|
|
|
Weighted average shares used in
computing per share amounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
10,208,507
|
|
|
|
10,083,721
|
|
|
|
10,062,587
|
|
|
Basic (pro
forma)(1)
|
|
|
111,595,043
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
Diluted (pro
forma)(1)
|
|
|
111,642,987
|
|
|
|
n/a
|
|
|
|
n/a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating
activities
|
|
$
|
5,563
|
|
|
$
|
3,625
|
|
|
$
|
9,697
|
|
|
Depreciation and amortization
|
|
$
|
7,404
|
|
|
$
|
4,986
|
|
|
$
|
5,509
|
|
|
Capital
expenditures(2)
|
|
$
|
13,418
|
|
|
$
|
10,842
|
|
|
$
|
5,133
|
|
|
EBITDA(3)
|
|
$
|
12,126
|
|
|
$
|
6,832
|
|
|
$
|
2,248
|
|
|
Average
enrollments(4)
|
|
|
27,005
|
|
|
|
20,220
|
|
|
|
15,097
|
|
6
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Consolidated Balance Sheet
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,660
|
|
|
$
|
9,475
|
|
|
$
|
19,953
|
|
|
Total assets
|
|
|
61,212
|
|
|
|
48,485
|
|
|
|
41,968
|
|
|
Total short-term debt
|
|
|
1,500
|
|
|
|
—
|
|
|
|
—
|
|
|
Total long-term obligations
|
|
|
7,135
|
|
|
|
4,025
|
|
|
|
4,466
|
|
|
Convertible redeemable preferred
stock
|
|
|
229,556
|
|
|
|
200,825
|
|
|
|
176,277
|
|
|
Total stockholders’ deficit
|
|
|
(197,807
|
)
|
|
|
(173,451
|
)
|
|
|
(150,299
|
)
|
|
Working capital
|
|
|
8,548
|
|
|
|
15,421
|
|
|
|
22,953
|
|
|
|
|
|
(1)
|
|
Pro forma net income per common
share gives effect to the automatic conversion of all of our
outstanding shares of preferred stock into common stock
immediately prior to the completion to this offering. Assuming
the completion of this offering on June 30, 2007, all of
our outstanding shares of preferred stock would convert into
101,386,536 shares of common stock.
|
|
|
|
|
(2)
|
|
Capital expenditures consist of the
purchase of property and equipment and new capital lease
obligations.
|
|
(3)
|
|
EBITDA consists of net income
(loss) minus interest income, plus interest expense, plus income
tax expense and plus depreciation and amortization. Interest
income consists primarily of interest earned on short-term
investments or cash deposits. Interest expense primarily
consists of interest expense for capital leases, long-term and
short-term borrowings. We use EBITDA as a measure of operating
performance. However, EBITDA is not a recognized measurement
under U.S. generally accepted accounting principles, or GAAP,
and when analyzing our operating performance, investors should
use EBITDA in addition to, and not as an alternative for, net
income (loss) as determined in accordance with GAAP. Because not
all companies use identical calculations, our presentation of
EBITDA may not be comparable to similarly titled measures of
other companies. Furthermore, EBITDA is not intended to be a
measure of free cash flow for our management’s
discretionary use, as it does not consider certain cash
requirements such as tax payments.
|
| |
|
|
|
We believe EBITDA is useful to an
investor in evaluating our operating performance because it is
widely used to measure a company’s operating performance
without regard to items such as depreciation and amortization,
which can vary depending upon accounting methods and the book
value of assets, and to present a meaningful measure of
corporate performance exclusive of our capital structure and the
method by which assets were acquired.
|
Our management uses EBITDA:
|
|
|
| |
•
|
as a measurement of operating performance, because it assists us
in comparing our performance on a consistent basis, as it
removes depreciation, amortization, interest and taxes; and
|
| |
| |
•
|
in presentations to the members of our board of directors to
enable our board to have the same measurement basis of operating
performance as is used by management to compare our current
operating results with corresponding prior periods and with the
results of other companies in our industry.
|
The following table provides a reconciliation of net income
(loss) to EBITDA:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
(dollars in thousands)
|
|
|
|
|
Net income (loss)
|
|
$
|
3,865
|
|
|
$
|
1,358
|
|
|
$
|
(3,540
|
)
|
|
Interest expense, net
|
|
|
639
|
|
|
|
488
|
|
|
|
279
|
|
|
Income tax expense
|
|
|
218
|
|
|
|
—
|
|
|
|
—
|
|
|
Depreciation and amortization
|
|
|
7,404
|
|
|
|
4,986
|
|
|
|
5,509
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
|
|
$
|
12,126
|
|
|
$
|
6,832
|
|
|
$
|
2,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
|
|
To ensure that all schools are
reflected in our measure of enrollments, we consider our
enrollments as of the end of September to be our opening
enrollment level, and the number of students enrolled at the end
of May to be our ending enrollment level. To provide
comparability, we do not consider enrollment levels for June,
July and August as all schools are not open during these months.
For each period, average enrollments represent the average of
the month end enrollment levels for each month that has
transpired between September and the end of the period, up to
and including the month of May.
|
7
Investing in our common stock involves a high degree of risk.
You should carefully consider the following risk factors and all
other information contained in this prospectus, including our
consolidated financial statements and the related notes, before
investing in our common stock. The risks and uncertainties
described below are not the only ones we face. Additional risks
and uncertainties that we are unaware of, or that we currently
believe are not material, also may become important factors that
affect us. If any of the following risks materialize, our
business, financial condition or results of operations could be
materially harmed. In that case, the trading price of our common
stock could decline, and you may lose some or all of your
investment.
Risks
Related to Government Funding and Regulation of Public
Education
Most of our revenues depend on per pupil funding amounts
remaining near the levels existing at the time we execute
service agreements with the virtual public schools we serve. If
those funding levels are materially reduced, new restrictions
adopted or payments delayed, our business, financial condition,
results of operations and cash flows could be adversely
affected.
The public schools we
contract with are financed with government
funding from federal, state and local taxpayers. Our business is
primarily dependent upon those funds. Budget appropriations for
education at all levels of government are determined through the
political process and, as a result, funding for the virtual
public schools we serve may fluctuate. This political process
creates a number of risks that could have an adverse affect on
our business including the following:
|
|
|
| |
•
|
legislative proposals could result in budget cuts for the
virtual public schools we serve, and therefore reduce or
eliminate the products and services those schools purchase from
us, causing our revenues to decline. From time to time,
proposals are introduced in state legislatures that single out
virtual public schools for disparate treatment. For example, in
its fiscal year
2007-09
education budget appropriation, the Indiana legislature decided
not to fund any virtual public school that provided for the
online delivery of more than 50 percent of its instruction
to students. As a result, we decided not to open a virtual
public school in Indiana that was already approved by a
chartering authority and therefore the anticipated associated
revenues were not realized. Other examples include laws that
decrease per pupil funding for virtual public schools or alter
eligibility and attendance criteria or other funding conditions
that could decrease our revenues and limit our ability to grow;
|
|
|
|
| |
•
|
as a public company, we will be required to file periodic
financial and other disclosure reports with the Securities and
Exchange Commission, or the SEC. This information may be
referenced in the legislative process, including budgetary
considerations, related to the funding of alternative public
school options, including virtual public schools. The disclosure
of this information by a for-profit education company,
regardless of parent satisfaction and student academic
achievement, may nonetheless be used by opponents of virtual
public schools to propose funding reductions; and
|
|
|
|
| |
•
|
from time to time, government funding to schools is not provided
when due, which sometimes causes the affected schools to delay
or cease payments to us for our products and services. These
payment delays have occurred in the past and can deprive us of
significant working capital until the matter is resolved, which
could hinder our ability to implement our growth strategies and
conduct our business. For example, in 2003 the Pennsylvania
state legislature withheld monthly payments for every school
because it was unable to approve an education budget for six
months, which necessitated our borrowing of funds to continue
operations.
|
The poor performance or misconduct of other virtual public
school operators could tarnish the reputation of all virtual
public school operators, which could have a negative impact on
our business.
As a relatively new form of public education, virtual school
operators will be subject to scrutiny, perhaps even greater than
that applied to traditional public schools or charter schools.
Not all virtual public school operators will have successful
academic programs or operate efficiently, and new entrants may
not perform well either. Such underperforming operators could
create the impression that virtual schooling is not an effective
way to educate students, whether or not our learning system
achieves solid performance. Moreover, some virtual school
operators
8
have been subject to governmental investigations alleging the
misuse of public funds or financial irregularities. These
allegations have attracted significant adverse media coverage
and have prompted legislative hearings and regulatory responses.
Although these investigations have focused on specific companies
and individuals, they may negatively impact public perceptions
of virtual public school providers generally, including us. The
precise impact of these negative public perceptions on our
business is difficult to discern, in part because of the number
of states in which we operate and the range of particular
malfeasance or performance issues involved. We have incurred
significant lobbying costs in several states advocating against
harmful legislation which, in our opinion, was aggravated by
negative media coverage of particular virtual school operators.
If these few situations, or any additional misconduct, cause all
virtual public school providers to be viewed by the public
and/or policymakers unfavorably, we may find it difficult to
enter into or renew
contracts to operate virtual schools. In
addition, this perception could serve as the impetus for more
restrictive legislation, which could limit our future business
opportunities.
Opponents of virtual public schools have sought to
challenge the establishment and expansion of such schools
through the judicial process. If these interests prevail, it
could damage our ability to sustain or grow our current business
or expand in certain jurisdictions.
We have been, and will likely continue to be, subject to
lawsuits filed against virtual public schools by those who do
not share our belief in the value of this form of public
education. Legal claims have involved challenges to the
constitutionality of authorizing statutes, methods of
instructional delivery, funding provisions and the respective
roles of parents and teachers. We currently face two such
lawsuits pertaining to the Wisconsin Virtual Academy and the
Chicago Virtual Charter School. See “Business —
Legal Proceedings”. An adverse judgment in these cases
could serve as a negative precedent in other jurisdictions where
we do business, and new lawsuits could result in unexpected
liabilities and limit our ability to grow.
The failure of the virtual public schools we serve to
comply with applicable government regulations could result in a
loss of funding and an obligation to repay funds previously
received, which could adversely affect our business, financial
condition and results of operations.
Once authorized by law, virtual public schools are generally
subject to extensive regulation. These regulations cover
specific program standards and financial requirements including,
but not limited to: (i) student eligibility standards;
(ii) numeric and geographic limitations on enrollments;
(iii) prescribed teacher funding allocations from per pupil
revenue; (iv) state-specific curriculum requirements; and
(v) restrictions on open-enrollment policies by and among
districts. State and federal funding authorities conduct regular
program and financial audits of virtual public schools,
including the virtual public schools we serve, to ensure
compliance with applicable regulations. Two virtual public
schools we serve are currently undergoing such audits. See
“Business — Distribution Channels”. If a
virtual public school we serve is found to be noncompliant, it
can be barred from receiving additional funds and could be
required to repay funds received during the period of
non-compliance, which could impair that school’s ability to
pay us for services in a timely manner, if at all. Additionally,
the indemnity provisions in our standard service agreements with
virtual public schools may require us to return any contested
funds on behalf of the school. For a more detailed discussion of
the regulations affecting our business, see
“Regulation.”
Virtual public schools are relatively new, and enabling
legislation therefore is often ambiguous and subject to
discrepancies in interpretation by regulatory authorities, which
may lead to disputes over our ability to invoice and receive
payments for services rendered.
Statutory language providing for virtual public schools is
sometimes interpreted by regulatory authorities in ways that may
vary from year to year, making compliance subject to
uncertainty. For example, in Colorado, the regulators’
approach to determining the eligibility of virtual school
students for funding purposes, which is based on a
student’s substantial completion of a semester in a public
school, has undergone varying interpretations. These regulatory
uncertainties may lead to disputes over our ability to invoice
and receive payments for services rendered, which could
adversely affect our business, financial condition and results
of operations.
9
The operation of virtual public schools depends on the
maintenance of the authorizing charter and compliance with
applicable laws. If these charters are not renewed, our
contracts with these schools would be terminated.
In many cases, virtual public schools operate under a charter
that is granted by a state or local authority to the charter
holder, such as a community group or an established
not-for-profit corporation, which typically is required by state
law to qualify for student funding. In fiscal year 2007,
approximately 90% of our revenues were derived from virtual
public schools operating under a charter. The service agreement
for these schools is with the charter holder or the charter
board. Non-profit charter schools qualifying for exemption from
federal taxation under Internal Revenue Code
Section 501(c)(3) as charitable organizations must also
operate in accordance with Internal Revenue Service rules and
policies to maintain that status and their funding eligibility.
In addition, all state charter school statutes require periodic
reauthorization. While none of the virtual public schools we
serve have failed to maintain their authorizing charter, if a
virtual public school we serve fails to maintain its tax-exempt
status and funding eligibility, or if its charter is revoked for
non-performance or other reasons that may be due to actions of
the independent charter board completely outside of our control,
our
contract with that school would be terminated.
Actual or alleged misconduct by our senior management and
directors would make it more difficult for us to enter into new
contracts or renew existing contracts.
If any of our directors, officers or key employees are accused
or found to be guilty of serious crimes, including the
mismanagement of public funds, the schools we serve could be
barred from entering into or renewing service agreements with us
or otherwise discouraged from contracting with us and, as a
result, our business and revenues would be adversely affected.
Risks
Related to Our Business and Our Industry
We have a limited operating history, and sustained losses
of approximately $90 million before only recently achieving
profitability. If we fail to remain profitable or achieve
further marketplace acceptance for our products and services,
our business, financial condition and results of operations will
be adversely affected.
The virtual public schools we serve began enrolling students in
the 2002-03 school year. As a result, we have only a limited
operating history upon which you can evaluate our business and
prospects. Since our inception, we have recorded losses totaling
approximately $90 million until we recently achieved
profitability. We recorded our first profit in the fiscal year
ended
June 30, 2006. There can be no assurance that we will
remain profitable, or that our products and services will
achieve further marketplace acceptance. Our marketing efforts
may not generate a sufficient number of student enrollments to
sustain our business plan; our capital and operating costs may
exceed planned levels; and we may be unable to develop and
enhance our service offerings to meet the demands of virtual
public schools and students to the extent that such demands and
preferences change. If we are not successful in managing our
business and operations, our financial condition and results of
operati
