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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): December 13, 2002
--------------
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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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Pro Forma Financial Information (unaudited)
EDT LEARNING, INC. AND LEARNLINC CORPORATION PRO FORMA
UNAUDITED COMBINED FINANCIAL STATEMENTS
Introduction.................................................... 4
Pro Forma Combined Balance Sheet as of September 30, 2002....... 5
Pro Forma Combined Statement of Operations for the year
ended March 31, 2002.......................................... 6
Pro Forma Combined Statement of Operations for the six months
ended September 30, 2002...................................... 7
Notes to Pro Forma Combined Financial Statements................ 8
(b) Financial Statements of Business Acquired
LEARNLINC CORPORATION FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants.............. 10
Balance Sheets as of September 30, 2002 (Unaudited) and
December 31, 2001 and 2000.................................... 11
Statements of Operations for the nine months ended
September 30, 2002 and 2001 (Unaudited) and for
the years ended December 31, 2001 and 2000.................... 12
Statements of Shareholders' Deficit for the years
ended December 31, 2001 and 2000 and for the nine
months ended September 30, 2002 (Unaudited)................... 13
Statements of Cash Flows for the nine months ended
September 30, 2002 and 2001 (Unaudited) and for the
years ended December 31, 2001and 2000......................... 14
Notes to Financial Statements................................... 16
Consent of Hansen, Barnett & Maxwell.............................. 23
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EDT Learning, Inc.
By: /s/ James M. Powers, Jr.
------------------------------------
James M. Powers, Jr.,
Chairman of the Board, President and
Chief Executive Officer
Date: February 10, 2003
3
EDT LEARNING, INC. AND LEARNLINC CORPORATION
PRO FORMA UNAUDITED COMBINED FINANCIAL STATEMENTS
INTRODUCTION
The following pro forma combined financial statements reflect the
acquisition of certain assets of LearnLinc Corporation (LearnLinc) on December
13, 2002. The pro forma combined financial statements also reflect the
acquisition of certain assets of Quisic Corporation (Quisic) on June 17, 2002,
the acquisition of all the outstanding capital stock of ThoughtWare
Technologies, Inc. (ThoughtWare) on January 15, 2002 and the acquisition of all
of the outstanding capital stock of Learning-Edge, Inc. (Learning-Edge) on
October 1, 2001.
The pro forma combined balance sheet is derived from the historical
consolidated balance sheet of EDT Learning as of September 30, 2002 and the
historical balance sheet of LearnLinc as of September 30, 2002 and is presented
as if the acquisition had been consummated on September 30, 2002. The pro forma
combined statement of operations for the year ended March 31, 2002 is derived
from the historical consolidated statement of operations of EDT Learning for the
year ended March 31, 2002, the historical statement of operations of LearnLinc
for the year ended December 31, 2001, the historical statement of operations of
Quisic for the year ended December 31, 2001, the interim statement of operations
of ThoughtWare for the nine months ended December 31, 2001 and the interim
statement of operations of Learning-Edge for the six months ended September 30,
2001. The pro forma combined statement of operations for the six months ended
September 30, 2002 is derived from the interim consolidated statement of
operations of EDT Learning for the six months ended September 30, 2002, the
interim statement of operations of LearnLinc for the six months ended September
30, 2002 and the results of operations of Quisic for the period from April 1,
2002 to June 16, 2002. The pro forma adjustments have been prepared as if the
acquisitions of LearnLinc, Quisic, Learning-Edge and ThoughtWare had been
consummated on April 1, 2001.
The pro forma combined financial statements are not necessarily indicative
of the results of the future operations of EDT Learning. The pro forma combined
statements of operations do not reflect the anticipated cost savings resulting
from integration of the operations of EDT Learning and LearnLinc or costs to be
incurred to integrate the two companies. The pro forma adjustments described in
the accompanying notes are based on estimates derived from information currently
available.
The pro forma combined financial statements should be read in conjunction
with the notes thereto and the historical financial statements of LearnLinc
included in Item 7(b) of this Form 8-K/A. In addition, reference should be made
to the historical financial statements of EDT Learning included in Form 10-K for
the year ended March 31, 2002 and included in Form 10-Q for the six months ended
September 30, 2002 filed with the Securities and Exchange Commission. Reference
should be made to the historical statements of Quisic included in Form 8-K/A,
which contained the audited financial statements of Quisic for the years ended
December 31, 2001 and 2000 filed with the Securities and Exchange Commission.
Reference should be made to the historical financial statements of ThoughtWare
included in Form 8-K/A, which contained the audited financial statements of
ThoughtWare for the year ended December 31, 2001 and the unaudited financial
statements of ThoughtWare for the year ended December 31, 2000 filed with the
Securities and Exchange Commission. Reference should also be made to the
historical financial statements of Learning-Edge included in Form 8-K/A, which
contained the audited financial statements of Learning-Edge, Inc. for the year
ended December 31, 2000 and the unaudited financial statements of Learning-Edge,
Inc. for the nine months ended September 30, 2001 filed with the Securities and
Exchange Commission.
4
EDT LEARNING, INC. AND LEARNLINC CORPORATION
UNAUDITED PROFORMA COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 2002
(IN THOUSANDS)
PRO FORMA PRO FORMA
EDT LEARNING LEARNLINC ADJUSTMENTS AS ADJUSTED
------------ --------- ----------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 832 $ 1 $ -- $ 833
Accounts Receivable, net 1,022 106 3 (A) 1,131
Prepaid expenses and other current assets 118 10 128
Inventory 5 5
Notes receivable, net 310 -- 310
-------- -------- -------- --------
Total current assets 2,282 122 3 2,407
Property and equipment, net 1,519 54 (4)(A) 1,569
Goodwill 9,600 -- 348 (A) 9,948
Intangible assets, net 1,504 -- 500 (A) 2,004
Notes receivable, net 488 -- 488
Other assets 262 -- 262
-------- -------- -------- --------
Total assets $ 15,655 $ 176 $ 847 $ 16,678
======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Current portion of long term debt $ 725 $ 49 $ 451 (A) $ 1,225
Accounts payable and accrued liabilities 1,770 233 (42)(A) 1,961
Current portion of deferred revenue 340 387 (55)(A) 672
Current portion of capital lease liabilities 399 -- 399
-------- -------- -------- --------
Total current liabilities 3,234 669 354 4,257
Long term debt, less current maturities 5,746 -- -- 5,746
Capital lease liabilities 308 -- 308
Deferred revenue 84 -- 84
Commitments and contingencies
Shareholders' deficit:
Common stock 18 1 (1)(A) 18
Additional paid-in capital 33,659 5,757 (5,757)(A) 33,659
Accumulated deficit (26,253) (6,174) 6,174 (A) (26,253)
Deferred compensation -- (77) 77 (A)
Less: Treasury shares (1,141) -- -- (1,141)
-------- -------- -------- --------
Total shareholders' deficit 6,283 (493) 493 6,283
-------- -------- -------- --------
Total liabilities and shareholders' deficit $ 15,655 $ 176 $ 847 $ 16,678
======== ======== ======== ========
SEE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
5
EDT LEARNING, INC., LEARNING-EDGE, INC., THOUGHTWARE TECHNOLOGIES, INC.,
QUISIC CORP. AND LEARNLINC CORP.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
EDT LEARNING- THOUGHTWARE
LEARNING EDGE TECHNOLOGIES QUISIC LEARNLINC
FOR THE FOR THE FOR THE CORPORATION CORPORATION
FISCAL SIX NINE FOR THE FOR THE
YEAR MONTHS MONTHS YEAR YEAR PRO
ENDED ENDED ENDED ENDED ENDED PRO FORMA
MARCH 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, DECEMBER 31, FORMA AS
2002 2001 2001 2001 2001 ADJUSTMENTS ADJUSTED
---- ---- ---- ---- ---- ----------- --------
Revenues
Learning ......................... $ 2,682 $ 530 $ 1,493 $ 6,184 $ 2,529 $ (50)(B) $ 13,368
Dental contracts ................. 6,582 -- -- -- -- -- 6,582
-------- -------- -------- -------- -------- -------- --------
Total revenues ................ 9,264 530 1,493 6,184 2,529 (50) 19,950
Operating expenses:
Costs of revenue ................ -- 608 887 3,747 570 (50)(B) 5,762
Research and development ........ 2,323 -- 908 5,030 672 -- 8,933
Sales and marketing ............. 1,123 402 1,611 4,201 561 -- 7,898
General and administrative ...... 2,692 638 3,234 9,642 1,032 -- 17,238
Depreciation and amortization ... 2,089 88 131 5,049 109 199 (C),(F) 7,665
Impairment of long-lived
assets ........................ -- -- -- 6,217 -- -- 6,217
-------- -------- -------- -------- -------- -------- --------
Total operating expenses ..... 8,227 1,736 6,771 33,886 2,944 149 53,713
Earnings (loss) from operations ... 1,037 (1,206) (5,278) (27,702) (415) (199) (33,763)
Interest expense ................ (1,040) (54) (65) (45,540) (94) (45)(D) (46,838)
Interest income ................. 238 -- 37 -- -- -- 275
Other income (expense) .......... 1,305 -- -- (763) -- -- 542
-------- -------- -------- -------- -------- -------- --------
503 (54) (28) (46,303) (94) (45) (46,021)
Income (loss) before taxes ........ 1,540 (1,260) (5,306) (74,005) (509) (244) (79,784)
Income tax expense .............. -- -- -- 1 -- -- 1
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
extraordinary item ............ $ 1,540 $ (1,260) $ (5,306) $(74,006) $ (509) $ (244)(E) $(79,785)
======== ======== ======== ======== ======== ======== ========
Earnings (loss) per common share:
Basic ........................... $ 0.13 $ (4.82)
======== ========
Diluted ......................... $ 0.12
========
Number of shares used in
calculation of earnings
(loss) per share:
Basic ......................... 11,930 (H) 16,568
======== ========
Diluted ....................... 12,466
========
SEE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
6
EDT LEARNING, INC. AND LEARNLINC CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
EDT QUISIC LEARNLINC
LEARNING CORPORATION CORPORATION
FOR THE SIX FOR THE PERIOD FOR THE SIX
MONTHS ENDED FROM APRIL 1 MONTHS ENDED PRO PRO FORMA
SEPTEMBER 30, TO JUNE 16, SEPTEMBER 30, FORMA AS
2002 2002 2002 ADJUSTMENTS ADJUSTED
---- ---- ---- ----------- --------
Revenues
Learning ..................................... $ 2,272 $ 335 $ 774 $ -- $ 3,381
Dental contracts ............................. 1,993 -- -- -- 1,993
-------- -------- -------- -------- --------
Total revenues ........................... 4,265 335 774 -- (G) 5,374
Operating expenses
Cost of revenue .............................. -- 472 216 -- 688
Research and development ..................... 1,810 408 177 -- 2,395
Sales and marketing .......................... 851 383 129 -- 1,363
General and administrative ................... 1,463 708 119 -- 2,290
Depreciation and amortization ................ 991 466 138 64 (F) 1,659
-------- -------- -------- -------- --------
Total operating expenses ................. 5,115 2,437 779 64 (G) 8,395
Earnings (loss) from operations ................. (850) (2,102) (5) (64) (3,021)
Interest expense ............................. (766) (348) (1) (8)(D) (1,123)
Interest income .............................. 92 -- -- -- 92
Other income ................................. 815 -- 2 -- 817
-------- -------- -------- -------- --------
Income (loss) before income taxes ............ (709) (2,450) (4) (72) (3,235)
Income taxes ............................. -- -- -- -- --
-------- -------- -------- -------- --------
Net income (loss) ............................... $ (709) $ (2,450) (4) $ (72)(G) $ (3,235)
======== ======== ======== ======== ========
Earnings (loss) per common share,
basic and diluted ............................. $ (0.05) $ (0.19)
======== ========
Number of shares used in calculation of
earnings (loss) per share, basic and diluted .. 15,572 (H) 16,622
======== ========
SEE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
7
NOTES TO PRO FORMA UNAUDITED COMBINED FINANCIAL STATEMENTS
On December 13, 2002, the Company acquired certain assets of LearnLinc
Corporation (LearnLinc), a wholly-owned subsidiary of Mentergy, Inc., in
exchange for $500,000 and the assumption of $462,000 of liabilities. In
addition, the Company will pay a royalty of 20% for all revenues collected from
the sale or license of LearnLinc software over a three-year period. The maximum
amount due under the Royalty Agreement is $5,000,000. The purchase price has
initially been calculated as follows:
LEARNLINC
--------------
(IN THOUSANDS)
Issuance of debt ........................................ $ 500
Acquisition costs ....................................... 60
------
Net purchase price, including acquisition costs ...... $ 560
Assumed liabilities ..................................... 462
------
Total purchase price ................................. $1,022
======
The following is a summary of the significant assumptions and adjustments
used in preparing the pro forma unaudited combined balance sheet as of September
30, 2002 and the pro forma unaudited combined statements of operations for the
year ended March 31, 2002 and for the six months ended September 30, 2002.
(A) The total purchase price has initially been allocated to assets
acquired and liabilities assumed based upon their estimated fair
values in accordance with Statement of Financial Accounting Standards
(SFAS) No. 141, "Business Combinations". The excess purchase price
over the estimated fair value of the tangible and identifiable
intangible assets acquired and liabilities assumed has been assigned
to goodwill.
The purchase price of LearnLinc has initially been allocated as follows:
PURCHASE
HISTORICAL PRICE PRO FORMA
AMOUNT ALLOCATION ADJUSTMENT
------ ---------- ----------
(IN THOUSANDS)
Current assets ..................................... $ 121 $ 124 $ 3
Property and equipment ............................. 54 50 (4)
Goodwill ........................................... -- 348 348
Identifiable intangible assets ..................... -- 500 500
Current liabilities, including deferred revenue .... (668) (1,022) (354)
Common stock ....................................... (1) -- 1
Capital in excess of par value ..................... (5,757) -- 5,757
Accumulated deficit ................................ 6,174 -- (6,174)
Deferred compensation .............................. 77 -- (77)
------- ------- -------
$ -- $ -- $ --
======= ======= =======
(B) Reflects the elimination of sales between EDT Learning and
Learning-Edge prior to the acquisition.
(C) Reflects the increase in amortization related to the Learning-Edge
acquisition.
(D) Reflects interest expense related to the $500,000 and $1.1 million of
debt issued by EDT Learning in connection with the LearnLinc and
Learning-Edge acquisitions.
8
(E) The historical results of EDT Learning for the year ended March 31,
2002 included a $4,265,000 extraordinary gain related to forgiveness
of debt. This item has not been included in the related unaudited pro
forma consolidated statements of operations.
(F) Reflects amortization of the identifiable intangible assets recorded
as part of the LearnLinc and Quisic asset acquisitions.
(G) Reflects the condensed historical results of LearnLinc's operations
not otherwise included in the related pro forma information:
SIX MONTHS
ENDED
SEPTEMBER 30,
NINE MONTHS LESS THREE 2002
ENDED MONTHS ENDED INCLUDED IN
SEPTEMBER 30, MARCH 31, PRO FORMA
LearnLinc Corporation 2002 2002 STATEMENTS
--------------------- ---- ---- ----------
Revenues ................... $ 1,083 $ 309 $ 774
Loss from operations ....... $ (145) $ (140) $ (5)
Net loss ................... $ (147) $ (143) $ (4)
(H) Weighted average shares of common stock outstanding is summarized
below:
SIX MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, MARCH 31,
2002 2002
------ ------
EDT Learning historical weighted average
common stock equivalents:
Basic .................................... 15,572 11,930
Diluted .................................. 15,572 12,466
EDT Learning shares issued for the
acquisition of Learning-Edge ............... -- 975
EDT Learning shares issued for the
acquisition of ThoughtWare ................. -- 1,163
EDT Learning issued for the acquisition of
certain assets of Quisic ................... 1,050 2,500
------ ------
Total number of shares used in net income
per share calculation:
Basic .................................... 16,622 16,568
====== ======
Diluted .................................. 16,622 17,104
====== ======
9
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
LearnLinc Corporation
We have audited the accompanying balance sheets of LearnLinc Corporation (the
Company) as of December 31, 2001 and 2000 and the related statements of
operations, shareholder's deficit and cash flows for the years ended December
31, 2001 and 2000. 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 in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LearnLinc Corporation at
December 31, 2001 and 2000 and the results of its operations and its cash flows
for the years ended December 31, 2001 and 2000 in conformity with accounting
principles generally accepted in the United States of America.
/s/ HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
January 15, 2003
10
LEARNLINC CORPORATION
BALANCE SHEETS
DECEMBER 31,
SEPTEMBER 30, ----------------------------
2002 2001 2000
------------ ------------ ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 750 $ 750 $ 43,116
Accounts receivable, net of allowance
for uncollectible accounts of $142,427
(unaudited), $51,240, and $95,792,
respectively 105,327 360,436 378,691
Inventory 4,667 7,882 3,598
Other current assets 10,000 1,040 53,815
------------ ------------ ------------
TOTAL CURRENT ASSETS 120,744 370,108 479,220
PROPERTY AND EQUIPMENT, NET 53,912 152,531 242,244
------------ ------------ ------------
TOTAL ASSETS $ 174,656 $ 522,639 $ 721,464
============ ============ ============
LIABILITIES AND SHAREHOLDER'S DEFICIT
CURRENT LIABILITIES
Current portion of notes payable $ 48,744 $ 55,536 $ 37,182
Accounts payable 200,752 64,213 52,681
Accrued expenses 32,084 51,112 169,349
Deferred revenue 387,038 494,988 379,501
------------ ------------ ------------
TOTAL CURRENT LIABILITIES 668,618 665,849 638,713
LONG-TERM NOTES PAYABLE -- -- 2,111,160
------------ ------------ ------------
TOTAL LIABILITIES 668,618 665,849 2,749,873
------------ ------------ ------------
SHAREHOLDER'S DEFICIT
Common Stock, $0.0001 par value;
8,000,000 shares authorized;
5,446,431 shares issued and
outstanding, respectively 545 545 545
Additional paid-in capital 5,756,892 5,883,812 3,489,799
Deferred compensation (77,223) -- --
Accumulated deficit (6,174,176) (6,027,567) (5,518,753)
------------ ------------ ------------
TOTAL SHAREHOLDER'S DEFICIT (493,962) (143,210) (2,028,409)
------------ ------------ ------------
TOTAL LIABILITIES AND SHAREHOLDER'S DEFICIT $ 174,656 $ 522,639 $ 721,464
============ ============ ============
The accompanying notes are an integral part of these financial statements.
11
LEARNLINC CORPORATION
STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------- ----------------------------
2002 2001 2001 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
SALES $ 1,083,239 $ 2,167,620 $ 2,529,415 $ 2,819,580
COST OF SALES 318,119 502,097 570,364 493,542
------------ ------------ ------------ ------------
GROSS MARGIN 765,120 1,665,523 1,959,051 2,326,038
------------ ------------ ------------ ------------
OPERATING EXPENSES
Selling, general, and administrative expenses 599,971 1,475,690 1,701,461 3,093,455
Product development expenses 310,216 571,789 672,716 1,179,111
------------ ------------ ------------ ------------
TOTAL OPERATING EXPENSES 910,187 2,047,479 2,374,177 4,272,566
------------ ------------ ------------ ------------
LOSS FROM OPERATIONS (145,067) (381,956) (415,126) (1,946,528)
------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE)
Interest expense (4,155) (71,380) (93,697) (56,372)
Other income 2,613 9 9 9,863
------------ ------------ ------------ ------------
(1,542) (71,371) (93,688) (46,509)
------------ ------------ ------------ ------------
NET LOSS $ (146,609) $ (453,327) $ (508,814) $ (1,993,037)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.03) $ (0.08) $ (0.09) $ (0.39)
============ ============ ============ ============
BASIC AND DILUTED WEIGHTED-AVERAGE
COMMON SHARES OUTSTANDING 5,446,431 5,446,431 5,446,431 5,093,755
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
12
LEARNLINC CORPORATION
STATEMENTS OF SHAREHOLDER'S DEFICIT
FOR THE YEARS ENDED DECEMBER 30, 2000 AND 2001 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2002 (UNAUDITED)
PREFERRED STOCK COMMON STOCK
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------
BALANCE AT JANUARY 1, 2000 2,818,318 $ 3,844,398 2,585,840 $ 259
Common stock issued for exercise of options -- -- 7,800 1
Preferred stock dividends -- -- -- --
Accretion of preferred stock to redemption value -- 55,614 -- --
Cancellation of dividends payable -- -- -- --
Common stock issued for conversion of note payable -- -- 34,483 3
Common stock issued for conversion of preferred stock (2,818,318) (3,900,012) 2,818,308 282
Net distribution to shareholder -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 -- -- 5,446,431 545
Forgiveness of shareholder note payable -- -- -- --
Net contribution from shareholder -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2001 -- -- 5,446,431 545
Options of the parent corporation issued to employees
of Company with no exercise price -- -- -- --
Amortization of compensation cost -- -- -- --
Net distribution to shareholder -- -- -- --
Net loss -- -- -- --
------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2002 (UNAUDITED) -- $ -- 5,446,431 $ 545
============ ============ ============ ============
ADDITIONAL TOTAL
PAID-IN DEFERRED ACCUMULATED SHAREHOLDER'S
CAPITAL COMPENSATION DEFICIT DEFICIT
------------ ------------ ------------ ------------
BALANCE AT JANUARY 1, 2000 $ -- $ -- $ (5,161,344) $ (5,161,085)
Common stock issued for exercise of options 5,970 -- -- 5,971
Preferred stock dividends -- -- (95,902) (95,902)
Accretion of preferred stock to redemption value -- -- (55,614) (55,614)
Cancellation of dividends payable -- -- 1,787,144 1,787,144
Common stock issued for conversion of note payable 49,997 -- -- 50,000
Common stock issued for conversion of preferred stock 3,899,730 -- -- 3,900,012
Net distribution to shareholder (465,898) -- -- (465,898)
Net loss -- -- (1,993,037) (1,993,037)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2000 3,489,799 -- (5,518,753) (2,028,409)
Forgiveness of shareholder note payable 2,182,647 -- -- 2,182,647
Net contribution from shareholder 211,366 -- -- 211,366
Net loss -- -- (508,814) (508,814)
------------ ------------ ------------ ------------
BALANCE AT DECEMBER 31, 2001 5,883,812 -- (6,027,567) (143,210)
Options of the parent corporation issued to employees
of Company with no exercise price 166,272 (166,272) -- --
Amortization of compensation cost -- 89,049 -- 89,049
Net distribution to shareholder (293,192) -- -- (293,192)
Net loss -- -- (146,609) (146,609)
------------ ------------ ------------ ------------
BALANCE AT SEPTEMBER 30, 2002 (UNAUDITED) $ 5,756,892 $ (77,223) $ (6,174,176) $ (493,962)
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
13
LEARNLINC CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
---------------------------- ----------------------------
2002 2001 2001 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (146,609) $ (453,327) $ (508,814) $ (1,993,037)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation 74,939 72,000 108,659 100,217
Amortization of deferred compensation 89,049 -- -- --
(Gain) loss on sale of property and equipment (2,612) -- -- 638
Changes in operating assets and liabilities:
Accounts receivable 255,109 9,484 16,304 643,739
Other assets (5,745) 33,904 50,442 71,762
Accounts payable 136,539 (2,132) 11,532 (68,638)
Accrued expenses (19,028) 32,284 (591) (184,994)
Deferred revenue (107,950) 12,379 115,487 (17,635)
------------ ------------ ------------ ------------
NET CASH FROM OPERATING ACTIVITIES 273,692 (295,408) (206,981) (1,447,948)
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment -- -- -- (195,063)
Proceeds from sale of property and equipment 12,126 -- -- --
------------ ------------ ------------ ------------
NET CASH FROM INVESTING ACTIVITIES 12,126 -- -- (195,063)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments of notes payable (6,792) (25,655) (27,806) (324,738)
Proceeds from issuance of note payable -- -- -- 148,288
Proceeds from shareholder note payable -- -- -- 2,065,000
Proceeds from exercise of stock options -- -- -- 5,971
Net contributions (distributions) from
(to) shareholder (279,026) 278,697 192,421 (465,898)
------------ ------------ ------------ ------------
NET CASH FROM FINANCING ACTIVITIES (285,818) 253,042 164,615 1,428,623
------------ ------------ ------------ ------------
DECREASE IN CASH AND CASH EQUIVALENTS -- (42,366) (42,366) (214,388)
CASH AND CASH EQUIVALENTS, BEGINNING
OF PERIOD 750 43,116 43,116 257,504
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 750 $ 750 $ 750 $ 43,116
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
14
LEARNLINC CORPORATION
STATEMENTS OF CASH FLOWS
(CONTINUED)
FOR THE NINE MONTHS FOR THE YEARS ENDED
ENDED SEPTEMBER 30, DECEMBER 31,
--------------------------- ---------------------------
2002 2001 2001 2000
------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest $ 1,682 $ 8,713 $ 9,778 $ 16,166
NON-CASH INVESTING AND FINANCING ACTIVITIES
Value of options of shareholder corporation issued to
employees of Company with no exercise price $ 166,272 $ -- $ -- $ --
Property and equipment transferred to shareholder
corporation 14,166 -- -- --
Property and equipment transferred from shareholder
corporation -- 18,945 18,945 --
Forgiveness of shareholder note payable and
accrued interest -- -- 2,182,647 --
Conversion of preferred stock to common stock and
the accretion of the remaining discount -- -- -- 3,900,012
Accrual of dividends -- -- -- 95,902
Settlement of notes payable with common stock -- -- -- 50,000
Cancellation of dividends payable -- -- -- 1,787,144
The accompanying notes are an integral part of these financial statements.
15
LEARNLINC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to the Nine-Month Period
Ending September 30, 2002 is Unaudited)
NOTE 1--DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND PRINCIPAL BUSINESS ACTIVITIES - Interactive Learning
International, Inc was organized in March 1994 and changed its name to LearnLinc
Corporation (the Company) in July 1999. The Company was privately held by its
employees and a small number of outside investors until February 29, 2000, when
it was acquired by Gilat Communications, Ltd., an Israeli corporation, traded
publicly on the NASDQ exchange. The merger was accounted for as a pooling of
interests. In May 2001, Gilat Communications Ltd. changed its name to Mentergy
Ltd. In December 2001, Mentergy Ltd. transferred its ownership of LearnLinc
Corporation to Mentergy, Inc., a wholly owned subsidiary of Mentergy Ltd.
Mentergy Ltd. and Mentergy, Inc. are collectively referred to as the sole
shareholder or the parent company of LearnLinc Corporation.
The accompanying financial statements present the operations of the LearnLinc
Corporation (the Company) on a stand-alone basis for the nine months ended
September 30, 2002 and for the years ended December 31, 2001 and 2000. During
2001, the Company closed all of its checking accounts and the parent corporation
managed all operations of the Company. Any amounts owed to the parent
corporation for net cash payments are classified as a contribution of capital
from the parent corporation. Any amounts receivable from the parent for net cash
proceeds are classified as a distribution to the parent corporation.
The Company develops, markets and licenses interactive multimedia software. The
software is designed to create a student-centered, instructor-led distance
learning environment for business, educational and governmental use in a
"virtual classroom" via a personal computer.
BASIS OF PRESENTATION AND BUSINESS CONDITION- The accompanying financial
statements have been prepared on a going concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the ordinary course
of business. As shown in the financial statements, during the years ended
December 31, 2001 and 2000, the Company incurred losses of $508,814 and
$1,993,037, respectively. During the years ended December 31, 2001 and 2000, the
Company's operations used $206,981 and $1,447,948 of cash, respectively. On
September 25, 2002, Mentergy Ltd. announced that it had filed a request with an
Israeli court seeking protection from creditors. Although this filing related
only to creditors of Mentergy Ltd., it further impaired the Company's ability to
market its products or obtain additional financing. The Company's ability to
continue as a going concern is dependent upon its ability to generate sufficient
cash flows to meet its obligations on a timely basis, to obtain additional
financing as may be required, and ultimately to attain profitable operations.
Management has addressed this concern by selling substantially all the assets of
the Company to EDT learning on December 13, 2002 for $500,000. The sale also
included the assumption of certain liabilities.
USE OF 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 disclosure of contingent assets and
liabilities at the date of the financial statements. Estimates also affect the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH AND CASH EQUIVALENTS - Cash and cash equivalents include highly liquid
investments with original maturities of three months or less.
INVENTORY - Inventory is stated at the lower of cost or market as determined on
the first-in, first-out method. Inventory consists mainly of program CD's and
manuals.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. Depreciation
and amortization are calculated using the straight-line method over the
estimated useful lives of the assets (three to seven years). Upon retirement,
sale, or other disposition of assets, the cost and accumulated depreciation are
removed from the accounts and the resulting gain or loss is recognized.
16
LEARNLINC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to the Nine-Month Period
Ending September 30, 2002 is Unaudited)
The Company reviews its long-lived assets for impairment when events or changes
in circumstances indicate that the carrying value of an asset may not be
recoverable. The Company evaluates, at each balance sheet date, whether events
and circumstances have occurred which indicate possible impairment. The Company
uses an estimate of future undiscounted net cash flows from the related asset or
group of assets over the remaining life in measuring whether the assets are
recoverable. As of December 31, 2001, the Company did not consider any of its
long-lived assets to be impaired.
REVENUE RECOGNITION - The Company recognizes revenues in accordance with the
provisions of Statement of Position No. 97-2, "Software Revenue Recognition" and
related interpretations. The Company generates revenues from the sale of its
software products to end-users. It also generates revenues from the sale of
maintenance and support services on its software products.
PRODUCT REVENUE - Revenue from software license and technology development
fees is recognized upon the later of shipment of product or completion of
significant obligations to customers, provided collectiblity of the
resulting receivable is probable.
MAINTENANCE AND SUPPORT SERVICES - Maintenance revenue is deferred and
recognized ratably over the term of the agreement. Revenue from support
services is recognized as the related services are performed.
PRODUCT DEVELOPMENT EXPENSE - All costs incurred to establish the technological
feasibility of the Company's products have been charged to product development
and research expense in the periods such costs were incurred. The Company sells
its products immediately following the achievement of technological feasibility.
INCOME TAXES - Financial Accounting Standard No. 109, "Accounting for Income
Taxes" (FAS 109), requires the use of the asset and liability method of
accounting for income taxes. Under the asset and liability method, deferred
income taxes are recognized for the tax consequences of "temporary differences"
by applying enacted statutory tax rates applicable to future years to
differences between financial statement and tax bases of existing assets and
liabilities. Under FAS No. l09, the effect of tax rate changes on deferred taxes
is recognized in the income tax provision in the period that includes the
enactment date.
NET LOSS PER COMMON SHARE - Basic loss per common share is computed by dividing
net loss attributable to common stockholders by the weighted average number of
common shares outstanding. Diluted loss per common share is computed by dividing
net loss attributable to common stockholders by the weighted average number of
common shares and the dilutive potential common share equivalents outstanding.
Potential common share equivalents consist of shares issuable upon the exercise
of stock options, warrants and shares issuable upon the conversion of
convertible preferred stock. At December 31, 2001, the Company had no potential
common share equivalents issued or outstanding.
INTERIM FINANCIAL STATEMENTS - The accompanying financial statements include the
accounts of the Company for the nine months ended September 30, 2002. In the
opinion of management, all adjustments necessary for a fair presentation of the
financial statements as of September 30, 2002 and for the nine months ended
September 30, 2002 have been included in the accompanying financial statements
and consist of only normal recurring adjustments. The results of operations
presented in the accompanying financial statements for the nine months ended
September 30, 2002 are not necessarily indicative of the results that may be
expected for the full year ending December 31, 2002.
17
LEARNLINC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to the Nine-Month Period
Ending September 30, 2002 is Unaudited)
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
DECEMBER 31,
SEPTEMBER 30, ----------------------
2002 2001 2000
--------- --------- ---------
Furniture and fixtures $ 92,707 $ 92,707 $ 73,762
Computers and equipment 573,567 610,192 610,192
Purchased software 14,738 66,412 66,412
--------- --------- ---------
681,012 769,311 750,366
Accumulated depreciation (627,100) (616,780) (508,122)
--------- --------- ---------
NET PROPERTY AND EQUIPMENT $ 53,912 $ 152,531 $ 242,244
========= ========= =========
Depreciation and amortization expense for the nine months ended September 30,
2002 and for the years ended December 31, 2001 and 2000 was $74,939, $108,659
and $100,217, respectively.
NOTE 3 -- NOTES PAYABLE
Notes payable consisted of the following:
DECEMBER 31,
SEPTEMBER 30, -----------------------
2002 2001 2000
---------- ---------- ----------
Note payable to parent company bearing
interest at 4%; originally due April 2002;
forgiven as a capital contribution during
2001 $ -- $ -- $2,065,000
Notes payable to a leasing company bearing
interest at rates ranging from 13.9% to
16.2%; as of December 31, 2001, the
Company was in default on these leases;
the leases are classified as due on demand;
secured by computer hardware 48,744 55,536 83,342
---------- ---------- ----------
48,744 55,536 2,148,342
Less: current portion of notes payable 48,744 55,536 37,182
---------- ---------- ----------
LONG-TERM PORTION OF NOTES PAYABLE $ -- $ -- $2,111,160
========== ========== ==========
18
LEARNLINC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to the Nine-Month Period
Ending September 30, 2002 is Unaudited)
NOTE 4 -- REDEEMABLE PREFERRED STOCK
Upon the merger of the Company with the parent corporation, each Series A
Preferred, Series B Preferred and Series C Preferred shareholder was required to
redeem their preferred stock at $1.055, $1.3525 and $1.4475 per share of
preferred stock, respectively. Upon redemption, the remaining $55,614 accretion
to redemption value was recognized and the preferred shareholders waived all
accrued and unpaid dividends. Accordingly, 142,150, 1,293,300 and 1,382,868
shares of Series A, Series B and Series C Preferred Stock, respectively were
converted into 2,818,308 shares of the Company's common stock.
NOTE 5 -- STOCK OPTION AND WARRANT ARRANGEMENTS
Stock option and warrant activity is set forth as follows:
WEIGHTED
NUMBER OF AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
------ --------------- --------------
BALANCE - DECEMBER 31, 1999 697,100 $0.59 to $1.45 $1.29
Options granted 17,500 $1.45 $1.45
Options forfeited (42,200) $1.45 $1.45
Options exercised (7,800) $0.59 to $1.35 $0.77
Options exchanged (664,600) $0.59 to $1.45 $1.40
--------
BALANCE - FEBRUARY 2000 -- N/A $ --
========
In February 2000, as part of the merger with the parent corporation, the Company
exchanged its 664,600 options and warrants for 34,260 options and warrants to
purchase shares of the parent corporation. Subsequent to the merger and through
January 2002, the parent corporation issued various options to purchase the
parent corporation shares to employees of the Company. These options vested
between two and four years and expire ten years from the date of grant. Below is
a summary of the grants, forfeitures and total options and options exercisable
of the parent corporation options and warrants held by the Company's employees:
NUMBER OF WEIGHTED AVERAGE
SHARES PRICE PER SHARE EXERCISE PRICE
------ --------------- --------------
NINE MONTHS ENDED - SEPTEMBER 30, 2002
Granted 59,810 $0.00 $ --
Forfeited 5,484 $0.00 to $47.50 1.86
Total 77,444 $0.00 to $47.50 7.92
Exercisable 20,015 $8.00 to $47.50 27.16
YEAR ENDED - DECEMBER 31, 2001
Granted -- N/A N/A
Forfeited 1,611 $8.00 to $28.11 $ 23.12
Total 23,118 $8.00 to $47.50 26.96
Exercisable 19,483 $8.00 to $47.50 26.65
YEAR ENDED - DECEMBER 31, 2000
Granted 4,450 $8.00 to $47.50 $ 23.09
Forfeited 13,990 $11.44 to $28.11 27.86
Total 24,729 $11.44 to $28.11 26.71
Exercisable 18,251 $11.44 to $28.11 26.30
19
LEARNLINC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to the Nine-Month Period
Ending September 30, 2002 is Unaudited)
The Company applies APB Opinion No. 25 and related interpretations in accounting
for the stock option issuances; therefore, $89,049 in compensation expense was
recognized for employee option grants during the nine months ended September 30,
2002.
Employee stock options of the parent corporation were recorded in accordance
with Accounting Principles Board Opinion No. 25 "Accounting for Stock Issued to
Employees." FASB No. 123, "Accounting for Stock Based Compensation" (FASB 123)
requires the recording or disclosure of the fair value of options issued to
employees. Had compensation cost for the stock option issuances been determined
based on the fair value at the grant dates, the Company's net loss and loss per
share for the nine months ended September 30, 2002 and the years ended December
31, 2001 and 2000 would have been increased as follows. Also included are the
weighted average assumptions used by the parent corporation to estimate the fair
value of each grant using the Black-Scholes option-pricing model:
DECEMBER 31,
SEPTEMBER 30, --------------------------
2002 2001 2000
----------- ----------- -----------
WEIGHTED AVERAGE FAIR VALUE PER SHARE $ 2.78 $ -- $ 13.93
NET LOSS
As reported $ (146,609) $ (508,814) $(1,993,037)
Proforma (161,323) (542,076) (2,014,345)
BASIC AND DILUTED LOSS PER SHARE
As reported $ (0.03) $ (0.09) $ (0.39)
Proforma (0.03) (0.10) (0.40)
WEIGHTED AVERAGE ASSUMPTIONS
Dividend yield 0% -- 0%
Expected volatility 150% -- 87%
Risk-free interest rate 2.28% -- 6.50%
Expected life of options, in years 0.75% -- 2.75%
The impact of SFAS No. 123 may not be representative of the effect on future
years because options vest over several years and additional option grants may
be made each year.
As a result of the asset sale mentioned in Note 10, all employees were
terminated on November 22, 2002. All unvested options were immediately
forfeited. The unamortized deferred compensation will be eliminated against
additional paid-in capital.
NOTE 6 -- INCOME TAXES
The difference between the federal statutory rate and the Company's effective
rate is primarily attributable to the maintenance of a full valuation allowance
against net deferred tax assets in 2001 and 2000. The temporary
20
LEARNLINC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to the Nine-Month Period
Ending September 30, 2002 is Unaudited)
difference giving rise to a significant portion of the net deferred tax asset at
December 31, 2001 and 2000 is the net operating loss carryover.
The Company has recorded a full valuation allowance against its net deferred tax
assets totaling approximately $2,338,460 and $2,223,742 at December 31, 2001 and
2000. The valuation allowance increased approximately $164,719 and $810,743
during the years ended December 31, 2000 and 2001.
At December 31, 2001, the Company had federal net operating loss carryovers for
income tax purposes of approximately $5,461,321. These loss carryovers may be
subject to annual limitation on their usage and will begin to expire in 2011.
NOTE 7 -- CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to concentrations of
credit risk consist principally of cash and cash equivalents and trade
receivables.
With respect to trade receivables, the Company's customers are primarily
concentrated in one line of business and are located throughout the United
States. The Company establishes allowances for doubtful accounts based upon
factors surrounding the credit risk of specific customers, historical trends and
other information.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
The Company leases office space and equipment under operating leases which
expires between May 2004 and May 2006. Total rent expense for the nine months
ended September 30, 2002 and the years ended December 31, 2001 and 2000 was
$91,319, $114,847 and $109,815, respectively. Future minimum payments required
under the operating leases described above are as follows:
YEARS ENDING DECEMBER 31,
-------------------------
2002 $108,356
2003 108,356
2004 46,861
2005 2,936
2006 2,936
NOTE 9 -- RELATED PARTY TRANSACTIONS
The Company has had sales to its parent corporation of $90,188, $525,782 and
$465,898 for the nine months ended September 30, 2002 and the years ended
December 31, 2001 and 2000, respectively. The parent corporation resold these
items during the same period for at least the original purchase price. These
inter-company sales were classified as distributions to the parent corporation.
During 2000, the Company borrowed $2,065,000 from its parent corporation which
was to be repaid in April 2002. Interest accrued at four percent (4%). On
December 31, 2001, the parent corporation forgave the note and all accrued
interest. Since the companies are related, the forgiveness of $2,182,647 was
recorded as a contribution of capital.
NOTE 10 -- SUBSEQUENT EVENTS
ACQUISITION OF COMPANY ASSETS
On December 13, 2002, the parent corporation sold certain assets of the Company
to EDT Learning, Inc. The purchase price for the acquisition was $500,000 and
the assumption of certain liabilities, with $250,000 being paid on December 13,
2002 and $250,000 due on December 13, 2003. In addition, the Company will
receive a royalty of
21
LEARNLINC CORPORATION
NOTES TO FINANCIAL STATEMENTS
(Information with Respect to the Nine-Month Period
Ending September 30, 2002 is Unaudited)
20% for all revenues collected from the sale or license of LearnLinc software
over a three year period. The maximum amount due under the Royalty Agreement is
$5,000,000.
STOCK OPTIONS
As a result of the above asset sale, all employees were terminated on November
22, 2002. All unvested options were immediately forfeited. The unamortized
deferred compensation will be eliminated against additional paid-in capital.
22
[LETTERHEAD OF HANSEN, BARNETT & MAXWELL]
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
333-71332 on Form S-8 of EDT Learning, Inc. of our report dated January 15, 2003
(relating to the 2001 and 2000 financial statements of LearnLinc Corporation)
appearing in this Form 8-K.
/s/ HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
February 7, 2003
23