Edgar Filing: EDT LEARNING INC

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

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FORM 10-Q

(Mark One)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2001 OR

[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.

For the transition period from _________ to _________

Commission File Number 1-13725

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EDT Learning, Inc.
(Exact name of Registrant as specified in its charter)

Delaware 76-0545043
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)

2999 North 44th Street, Suite 650, Phoenix, Arizona 85018
(address of principal executive offices) (Zip code)

(602) 952-1200
(Registrant's telephone number, including area code)

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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 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 [ ]

THE NUMBER OF SHARES OF COMMON STOCK OF THE REGISTRANT, PAR VALUE $.001 PER
SHARE, OUTSTANDING AT AUGUST 6, 2001, WAS 10,542,034.

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FORM 10-Q REPORT INDEX

10-Q PART AND ITEM NO.

PART I--FINANCIAL INFORMATION PAGE
----

Item 1--Consolidated Financial Statements (unaudited)

Consolidated Balance Sheets as of June 30, 2001 and
March 31, 2001.................................................... 3

Consolidated Statements of Operations for the Three
Months Ended June 30, 2001 and June 30, 2000...................... 4

Consolidated Statement of Changes in Shareholders'
Deficit as of June 30, 2001....................................... 5

Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2001 and June 30, 2000...................... 6

Notes to Consolidated Financial Statements........................ 7

Item 2--Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 10

PART II--OTHER INFORMATION

Item 1--Legal proceedings................................................. 13

Item 2--Change in securities and use of proceeds.......................... 13

Item 3--Defaults of senior securities..................................... 13
Item 4--Submission of matters to a vote of security holders............... 13

Item 5--Other information................................................. 13

Item 6--Exhibits and Reports on Form 8-K.................................. 13

Signature......................................................... 14

PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

JUNE 30, MARCH 31,
2001 2001
-------- --------
(UNAUDITED)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 948 $ 1,051
Receivables from affiliated practices, net of allowance
for doubtful accounts of $1,014 and $1,147, respectively 302 195
Prepaid and other current assets ......................... 179 128
Notes receivable from Affiliated Practices--current, net.. 313 261
-------- --------
Total current assets ................................... 1,742 1,635

Property and equipment, net ................................. 3,001 3,279
Intangible assets, net ...................................... 2,798 3,107
Notes receivable from Affiliated Practices, net ............. 961 1,059
Other assets ................................................ 174 111
-------- --------
Total assets ........................................... $ 8,676 $ 9,191
======== ========

LIABILITIES AND SHAREHOLDERS' DEFICIT

CURRENT LIABILITIES:
Current portion of long term debt ........................ $ 534 $ 471
Accounts payable and accrued liabilities ................. 810 959
Current portion of deferred revenue ...................... 860 1,052
Accrued employment agreement ............................. 248 248
Current portion of capital lease liabilities ............. 355 345
-------- --------
Total current liabilities .............................. 2,807 3,075

Long term debt, less current maturities ..................... 11,301 11,461
Capital lease liabilities ................................... 543 643
Deferred revenue ............................................ 464 666

Commitments and contingencies

SHAREHOLDERS' DEFICIT
Common stock, $.001 par value 40,000,000 shares
authorized, 11,721,664 issued .......................... 12 12
Additional paid-in capital ............................... 25,841 25,809
Accumulated deficit ...................................... (31,166) (31,349)
Less: 1,149,116 treasury shares at cost .................. (1,126) (1,126)
-------- --------
Total shareholders' deficit ............................ (6,439) (6,654)
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Total liabilities and shareholders' deficit ............ $ 8,676 $ 9,191
======== ========

The accompanying notes are an integral part of the
consolidated financial statements.

EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)

THREE MONTHS ENDED
JUNE 30,
----------------------
2001 2000
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Revenues
Learning ................................................... $ 159 $ --
Dental contracts ........................................... 1,768 2,218
-------- --------
Total revenues ......................................... 1,927 2,218

Operating expenses
Research and development ................................... 227 --
Sales and marketing ........................................ 203 --
General and administrative ................................. 663 1,818
Depreciation and amortization .............................. 532 5,582
-------- --------
Total operating expenses ............................... 1,625 7,400

Earnings (loss) from operations ............................... 302 (5,182)

Interest expense ........................................... 288 389
Interest income ............................................ (76) (54)
Other income ............................................... (93) (9)
-------- --------
Income (loss) before income taxes .......................... 183 (5,508)
Income taxes ........................................... -- --
-------- --------
Net income (loss) ............................................. $ 183 $ (5,508)
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Basic and diluted earnings (loss) per share ................... $ .02 $ (0.54)
======== ========

Weighted average number of share outstanding--basic and diluted 10,573 10,175
======== ========

The accompanying notes are an integral part of the
consolidated financial statements.

EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
(UNAUDITED)
(IN THOUSANDS)

ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT STOCK DEFICIT
------ ------ ------- ------- ----- -------

Balances, April 1, 2001 11,722 $12 $25,809 $(31,349) $(1,126) $(6,654)

Issuance of warrants .. -- -- 32 -- -- 32
Net income ............ -- -- -- 183 -- 183
------ --- ------- -------- ------- -------

Balances, June 30, 2001 11,722 $12 $25,841 $(31,366) $(1,126) $(6,439)
====== === ======= ======== ======= =======

The accompanying notes are an integral part of the
consolidated financial statements.

EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)

THREE MONTHS
ENDED JUNE 30,
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2001 2000
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Net cash used in operating activities ....................... $ (15) $(211)

Cash flows from investing activities:
Repayment of notes receivable ............................ 76 16
Proceeds from property and equipment ..................... 31 --
Issuance of notes receivable ............................. -- (12)
Capital expenditures ..................................... (8) (44)
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Net cash provided by (used in) investing activities .... 99 (40)
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Cash flows from financing activities:
Repayment of long-term debt and capital leases liabilities (187) (133)
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Net cash used in financing activities .................. (187) (133)
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Net change in cash and cash equivalents ..................... (103) (384)
Cash and cash equivalents, beginning of period .............. 1,051 553
------- -----

Cash and cash equivalents, end of period .................... $ 948 $ 169
======= =====
Supplemental disclosures of cash flow information:
Convertible subordinated notes offset against receivables
from Affiliated Practices ................................. -- $ 540
Conversion of receivables from Affiliated Practices to
notes receivables ......................................... -- $ 999
Treasury stock acquired for payment of receivable from
Affiliated Practices and purchase of property and equipment -- $ 772
Notes payable offset against future membership fees ......... -- $ 214

The accompanying notes are an integral part of the
consolidated financial statements.

EDT LEARNING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. ORGANIZATION AND BASIS OF PRESENTATION

EDT Learning, Inc., formerly e-dentist.com, Inc. (the "Company") provides a
comprehensive array of e-Learning content, handling and delivery services that
are customized to each client. The Company also provides practice management
services to dental practices throughout the United States.

The unaudited consolidated financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Pursuant to such regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the presentation and disclosures
herein are adequate to make the information not misleading, but do not purport
to be a complete presentation inasmuch as all note disclosures required by
generally accepted accounting principles are not included. In the opinion of
management, the consolidated financial statements reflect all elimination
entries and normal adjustments that are necessary for a fair presentation of the
results for the interim periods ended June 30, 2001 and 2000.

Fiscal operating results for interim periods are not necessarily indicative
of the results for full years. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements of the Company
and related notes thereto, and management's discussion and analysis related
thereto, all of which are included in the Company's annual report on Form 10-K
for the year ended March 31, 2001, as filed with the SEC.

RECENT EVENTS, LIQUIDITY AND MANAGEMENT PLANS

A name change of the Company to "EDT Learning, Inc." was approved by the
Board of Directors in June 2001 and was approved by the shareholders at the
August 2, 2001 Annual Shareholders Meeting. The name change was done to more
accurately reflect the Company's current business model and expansion of its
business offering which focuses on providing e-Learning tools and systems to
corporate clients inside and outside the dental industry.

During fiscal 2001, the Company incurred a net loss of $24.9 million and
had an accumulated deficit of $31.3 million at March 31, 2001. In addition, the
Company had cash flow from operations of $1.4 million during the year ending
March 31, 2001. During the quarter ended June 30, 2001, the Company had a net
income of $183,000 and has an accumulated deficit of $31.2 million at June 30,
2001. In addition, the Company used cash flow from operations of $15,000 during
the quarter ended June 30, 2001.

On June 29, 2001, Bank One, Texas, NA extended the terms of the credit
facility through July 2, 2002. In connection with the extension, the Company
will issue 393,182 warrants to acquire shares of the Company's common stock at
$0.42 per share. The warrants were valued at $32,000. Until the credit facility
is paid in full, the bank will have the right to maintain a 3% fully diluted
interest in the Company through the issuance of additional warrants. The Company
also paid $61,000 in fees to the bank as part of the extension.

Terms of the extension include monthly principal payments of $25,000 and
modification of the financial covenants. The Company has prepared financial
projections through the term of the extension and believes it will be in
compliance with the financial covenants.

As discussed above, the bank credit facility due date has been extended to
July 2, 2002. Based upon its current strategy, the Company projects to have
sufficient funds to meet its operating capital requirements through fiscal 2002,
however, there would not be sufficient cash flow to fund the credit facility
obligation due July 2, 2002. Management believes it will be able to replace the
credit facility with other bank financing alternatives or refinancing of its
current line of credit. There is no assurance that other financing will be
available to refinance the current line of credit in sufficient amounts, if at
all, and there can be no assurance that the related terms and conditions will be
acceptable to the Company. Failure of the Company to obtain such alternative
financing or refinancing of its current line of credit would have a material and
adverse effect on the Company's financial position.

In order to increase its liquidity, the Company has developed the following
strategies; (i) implement its revised eCommerce and e-Learning based strategic
alternative described above, (ii) reducing costs in the Company's corporate
office, and (iii) raising additional capital through a private placement.
However, there can be no assurance that the Company's strategies will be
achieved.

2. SIGNIFICANT ACCOUNTING POLICIES

EARNINGS PER SHARE

Earnings per share are computed based upon the weighted average number of
shares of Common Stock and Common Stock equivalents outstanding during each
period. Diluted earnings per share are not separately presented because such
amounts would be the same as amounts computed for basic earnings per share.

Outstanding options to purchase approximately 1,684,563 and 1,219,273
shares of Common Stock at exercise prices above the market value of Common Stock
were excluded from the calculation of earnings per share for the three months
ended June 30, 2001 and 2000, respectively, because their effect would have been
antidilutive.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of liabilities and disclosures of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of expenses during the reporting period. Actual results
could differ from those estimates.

NEW PRONOUNCEMENTS

On June 30, 2001, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 141 (SFAS 141), "Business Combinations"
which requires that all business combinations be accounted for using the
purchase method. In addition, this Statement requires that intangible assets be
recognized as assets apart from goodwill if certain criteria are met. As the
provisions of this Statement apply to all business combinations initiated after
June 30, 2001, Management will consider the impact of this statement for future
combinations.

On June 30, 2001, the Financial Accounting Standard Board issued Statement
of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other
Intangible Assets" which established Standards for reporting acquired goodwill
and other intangible assets. This Statement accounts for goodwill based on the
reporting units of the combined entity into which an acquired entity is
integrated. In accordance with the statement, goodwill and indefinite lived
intangible assets will not be amortized but will be tested for impairment at
least annually at the reporting unit level and the amortization period of
intangible assets with finite lives will not be limited to forty years. The
provisions of this Statement are required to be applied starting with fiscal
years beginning after December 15, 2001 with early application permitted for
entities with fiscal years beginning after March 15, 2001. The Company has
$205,000 of goodwill included in its balance sheet at June 30, 2001. Goodwill
amortization for the three months ended June 30, 2001 was $23,000 and is
currently expected to approximate $92,000 for the year ended March 31, 2002
before the provisions of SFAS 142 are applied. Implementation of SFAS 142 by the
Company would result in elimination of amortization of goodwill from acquisition
under the purchase method of accounting. The statement does not result in the
elimination of amortization of the Company's service agreements because under
the scope of the statement only goodwill resulting from acquisitions under the
purchase method of accounting, and not other identifiable intangible assets, is
subject to being no longer amortized.

3. SEGMENT INFORMATION

During the period ended June 30, 2001, the Company had two reportable
segments, learning and dental practice management. The learning segment included
revenues and operating expenses related to the development and sale of the
Company's learning products. The dental practice segment included revenues from
service contracts, operating expenses related to the delivery of the dental
services and other non-operating expenses.

There are no intersegment revenues. The Company does not review assets by
operating segment.

THREE MONTHS ENDED
JUNE 30,
---------------------
2001 2000
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Revenues
Learning ........................................ $ 159 $ --
Dental practice management ...................... 1,768 2,218
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Total revenues .............................. 1,927 2,218
------- -------
Operating expenses
Learning ........................................ 430 --
Dental practice management ...................... 1,195 7,400
------- -------
Total operating expenses .................... 1,625 7,400
------- -------
Earnings (loss) from operations
Learning ........................................ (271) --
Dental practice management ...................... 573 (5,182)
------- -------
Total earnings (loss) for operating ......... 302 (5,182)
------- -------
Non operating expenses
Learning ........................................ -- --
Dental practice management ...................... 119 326
------- -------
Total non-operating expenses ................ 119 326
------- -------
Income (loss) before income taxes
Learning ........................................ (271) --
Dental practice management ...................... 454 (5,508)
------- -------
Total income (loss) before income taxes ..... $ 183 $(5,508)
======= =======

4. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

The Company has pending lawsuits against five Affiliated Practices for
defaulting in the payment of the required Service Fees. In each of those cases,
the Company is seeking damages equal to past due and remaining service fees,
consequential damages equal to the value of the intangible practice asset and
attorney's fees. Three Affiliated Practices have in response filed a
counter-claim alleging breach of contract, misrepresentation and securities
violations. The Company believes that those counter-claims are without merit and
that the Company will prevail in defense to the alleged counterclaims.

The Company is also the defendant in a recently filed lawsuit in which the
plaintiff claims breach of the premises lease associated with an Affiliated
Practice. The Company as a defendant tenant is seeking indemnity from the
Affiliated Practice and believes that it will recover any damages suffered from
the responsible Affiliated Practice.

ACCRUED EMPLOYMENT AGREEMENT

The accrued employment is payable to the former Chief Dental Officer of the
Company. Pursuant to the terms of the agreement, as amended, the remaining
balance of $248,000 is payable on July 31, 2001. Payment of the remaining
balance is in dispute.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF THE
COMPANY AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE
ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET
FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH
AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND
VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS
OF OPERATIONS AND GROWTH OF EXISTING AND NEW AFFILIATED DENTAL PRACTICES, AND
RISKS DETAILED IN THE COMPANY'S SEC FILINGS.

OVERVIEW

As an extension of its educational and training background, the Company has
broadened its reach to focus on the larger growing e-Learning and corporate
training market. With the launch of the Company's state of the art learning
management system and its e-Learning engine, the Company now provides a
comprehensive array of e-Learning content, hosting and delivery services to
corporations, inside and outside the dental and healthcare industries. The
Company's synchronous and asynchronous content delivery solutions provide an
array of e-Learning products that are customized to each corporate client. The
Company is positioning itself in the corporate training sector of the e-Learning
marketplace leveraging its existing infrastructure and using scale provided by
an integrated product.

The Company continues to provide services to its Affiliated Practices in
accordance with the modified Service Agreements and derive revenues. The actual
terms of the various Service Agreements vary slightly on a case-by-case basis,
depending on negotiations with the individual Affiliated Practices. Those
Modified Agreements require in general that the Company provide: access to
online practice enhancement services; access to online tools and payroll
services; access to certain on-site consulting and seminar programs; and the use
of the tangible assets owned by the Company located at each affiliated dental
practice location. The service fees payable under the modified Service
Agreements are guaranteed by the owner-dentists.

RECENT EVENTS, LIQUIDITY AND MANAGEMENT PLANS

acceptable to the Company. Failure of the Company to obtain such alternative
financing or refinancing of its current line of credit would have a material and
adverse effect on the Company's financial position.

REVENUES

Total revenues generated for the three months ended June 30, 2001 and 2000
were $1.9 million and $2.2 million, respectively, a decrease of $291,000. The
Company recognized $159,000 in learning revenues in the three months ended June
30, 2001. The were no learning revenues in the three months ended June 30, 2000.
Revenue from dental contacts decreased by $450,000 during the three months ended
June 30, 2001 as compared to the three months ended June 30, 2000. The decrease
in dental contract revenue is due to the modification and termination of certain
dental contracts.

OPERATING EXPENSES

The Company incurred operating expenses of $1.6 million and $7.4 million
for the three months ended June 30, 2001 and 2000, respectively. Operating
expenses consist of research and development, sales and marketing, general and
administrative and depreciation and amortization expenses.

Research and development expenses include expenses associated with the
development of new products and new product versions and consist primarily of
salaries and benefits, communication equipment and supplies. Research and
development expenses were $227,000 for the three months ended June 30, 2001.
There were no research and development expenses during the three months ended
June 30, 2000.

Sales and marketing expenses consist primarily of sales and marketing
salaries and benefits, travel, advertising, and other marketing literature.
Sales and marketing expenses were $203,000 for the three months ended June 30,
2001. There were no sales and marketing expenses during the three months ended
June 30, 2000.

General and administrative expenses consist of the corporate expenses of
the Company. These corporate expenses include salaries and benefits of
executive, finance and administrative personnel, rent, bad debt expenses,
professional services, travel (primarily related to practice development),
office costs and other general corporate expenses. For the three months ended
June 30, 2001 and 2000, general and administrative expenses were $663,000 and
$1.8 million, respectively a decrease of $1.2 million. General and
administrative expenses decreased primarily due to decreases in professional
services of $394,000; salaries and wages of $339,000; bad debt expenses of
$238,000, and travel of $51,000 for the quarter ended June 30, 2001 from the
same quarter in 2000.

INCOME TAX EXPENSE

The Company recorded no tax expense during the three months ended June 30,
2001 due to the expected utilization of the Company's net operating loss
carry-forwards. At June 30, 2001, the Company has a net deferred tax asset of
$9.5 million with a corresponding valuation allowance. The Company also has $6.1
million of available deductions related to the increase in tax basis of the
assets acquired in the dental practice affiliations.

For the three months ended June 30, 2000, the Company recorded a valuation
allowance for its entire deferred tax asset of $1.6 million because it concluded
it is not likely it would be able to recognize the tax asset due to the lack of
operating history of its implementation of its learning business plan,
modification of its management service agreements and maturity of its line of
credit.

LIQUIDITY AND CAPITAL RESOURCES

At June 30, 2001 the Company had a working capital deficit of $1.1 million.
Current assets included $948,000 in cash and $615,000 in accounts and notes
receivable. Current liabilities consisted of $889,000 of current maturities of
long-term debt and capital leases. $860,000 of deferred revenue and $810,000 in
accounts payable and accrued liabilities.

Cash generated from investing activities for the three months ended June
30, 2001 and 2000 resulted from the collection of notes receivable of $76,000
and $16,000, respectively. The Company also received $31,000 from the
disposition of property and equipment for the three months ended June 30, 2001.
Cash used in investing activities was $8,000 and $44,000 for the purchases of
capital equipment for the three months ended June 30, 2001 and 2000,
respectively. Uses of cash also include the issuance of notes receivable to
affiliated practices of $12,000 in the three months ended June 30, 2000.

Cash used in financing activities for the three months ended June 30, 2001
and 2000 included payments on the Company's long-term debt and capital leases of
$187,000 and $133,000, respectively.

NEW PRONOUNCEMENTS

ITEM 1. LEGAL PROCEEDINGS

ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS

None

ITEM 3. DEFAULTS OF SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

None

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, EDT Learning, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.

EDT LEARNING, INC.

Dated: August 14, 2001 By: /s/ Charles Sanders
-------------------------------------
Charles Sanders
Sr. Vice President-Chief Financial
Officer