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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
For Annual and Transition Reports
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2003.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _________ TO _________.
COMMISSION FILE NUMBER _________
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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 N. 44TH STREET, SUITE 650
PHOENIX, ARIZONA 85018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) (602) 952-1200
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Securities registered pursuant to Section 12(b) of the Act Name of Exchange on Which Registered
COMMON, $0.001 PAR VALUE PER SHARE AMERICAN STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [X]
The aggregate market value of the registrant's voting and non-voting Common
Stock held by non-affiliates of the registrant computed by reference to the
price at which the common equity was last sold on the American Stock Exchange as
of September 30, 2002, was approximately $5,487,080.
The number of shares of Common Stock of the registrant, par value $0.001
per share, outstanding at June 13, 2003 was 15,773,471, net of shares held in
treasury.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement relating to the Annual Meeting
of Stockholders of the registrant to be held on August 15, 2003 are incorporated
by reference into Part III of this Report.
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FORM 10-K REPORT INDEX
PART I
Item 1. Business................................................................................... 4
Item 2. Properties................................................................................. 9
Item 3. Legal Proceedings.......................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders........................................ 10
Item 4A. Executive Officers......................................................................... 10
PART II
Item 5. Market for Registrant's Common Stock and Related Shareholder Matters....................... 12
Item 6. Selected Financial Data.................................................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 15
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................. 30
Item 8. Financial Statements and Supplementary Data................................................ 32
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure....... 63
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 63
Item 11. Executive Compensation .................................................................... 63
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Shareholder Matters..................................................................... 63
Item 13. Certain Relationships and Related Transactions............................................. 63
Item 14. Controls and Procedures.................................................................... 64
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 64
2
FORWARD - LOOKING STATEMENTS
Unless the context requires otherwise, references in this document to "EDT
Learning," "EDT" the "Company," "we," "us," and "our" refer to EDT Learning,
Inc.
Statements contained in this Annual Report on Form 10-K that involve words
like "anticipates," "expects," "intends," "plans," "believes," "seeks,"
"estimates" and similar expressions are intended to identify forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995, the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended. These are statements that relate to future periods and
include, but are not limited to, statements as to our ability to: sell our
products and services; improve the quality of our software; derive overall
benefits of our products and services; introduce new products and versions of
our existing products; sustain and increase revenue from existing products;
integrate current and emerging technologies into our product offerings; control
our expenses including those related to sales and marketing; research and
development and general and administrative expenses; control changes in our
customer base; support our customers and provide sufficient technological
infrastructure; obtain sales or increase revenues; impact the results of legal
proceedings; control and implement changes in our employee headcount; obtain
sufficient cash flow; manage liquidity and capital resources; realize positive
cash flow from operations; or realize net earnings.
Such forward-looking statements involve certain risks and uncertainties
that could cause actual results to differ materially from anticipated results.
These risks and uncertainties include, but are not limited to, our dependence on
our products or services, market demand for our products and services, our
ability to attract and retain customers and channel partners, our ability to
expand our technological infrastructure to meet the demand from our customers,
our ability to recruit and retain qualified employees, the ability of channel
partners to successfully resell our products, the status of the overall economy,
the strength of competitive offerings, the pricing pressures created by market
forces, and the risks discussed herein (See "Managements Discussion and Analysis
of Financial Condition and Results of Operations"). All forward-looking
statements included in this report are based on information available to us as
of the date hereof. We expressly disclaim any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein, to reflect any change in our expectations or in events,
conditions or circumstances on which any such statement is based. Readers are
urged to carefully review and consider the various disclosures made in this
report and in our other reports filed with the SEC that attempt to advise
interested parties of certain risks and factors that may affect our business.
Our reports are available free of charge as soon as reasonably practicable after
we file them with the SEC and may be obtained through our Website located at
www.edtlearning.com.
The Company's trademarks and service marks include EDT Learning.com, EDT
Learning, e-Learning Simplified, MeetingLinc, LearnLinc, SupportLinc, and
ConferenceLinc, graphics associated with that four-product suite of Web
collaboration products, ThoughtWare, Quisic, and Learning-Edge. We also refer to
trademarks of other corporations and organizations in this report.
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PART I
ITEM 1. BUSINESS
OVERVIEW
We develop and sell software that provides real-time collaboration and
training using Web based tools that we believe increase worker productivity and
save money. Our four-product suite led by LearnLinc (which also includes
MeetingLinc, ConferenceLinc, and SupportLinc) is an award winning virtual
classroom, Web conferencing, collaboration and technical support suite of
software. With our Web collaboration, conferencing and virtual classroom
products we provide simple, reliable and cost-effective tools for remote
presentations, meetings and online events. Our software is based on a
proprietary architecture and code that finds its origins as far back as 1994, in
the beginnings of the Web collaboration industry. LearnLinc has been translated
into seven languages, and is now available in version 7.0. Our customers can
choose from several different pricing options involving either the purchase of
the software with hosting by the customer or the rental of the software with
hosting by the Company. Our customers may choose between our products on a
stand-alone basis or integrated with one of our other award winning products
depending upon their own particular needs. Customers wishing to collaborate and
present, may choose between MeetingLinc, LearnLinc, ConferenceLinc and
SupportLinc to deliver live events over the Internet in a one-to-one,
one-to-many, and many-to-many communication formats. Uses for our four-product
suite of Web collaboration software include online business meetings, sales
presentations, employee training sessions, product demonstrations and technical
support assistance. We sell our software solutions to large and medium-sized
corporations inside and outside of the Fortune 1000 targeting a wide array of
vertical markets. We market our products using a direct sales force and an
indirect distribution channel consisting of referral partners, international and
national value added resellers ("VAR") network, and OEM partners. Our revenues
from our Web collaboration software are a mixture of high margin software sales
and monthly recurring revenues from annual maintenance and support agreements
and subscription agreements.
As of March 31, 2003, we also offered to our customers a wide array of
e-Learning and training products and services. Our sales and marketing efforts
have recently been focused toward our virtual classroom Web casting and online
collaboration four-product suite lead by LearnLinc. We also continue to offer,
for those seeking to manage users and e-Learning content, EDT's Learning
Management System, which has been combined with a suite of workforce management
solutions (the ThoughtWare Suite) that includes Career Planner, Job Seeker, and
Performance Coach. For the development of custom online content, we offer an
award winning content development software, i-Canvas, and award winning custom
content services that have been providing proven results for over 15 years.
Finally, we offer a library of online courses focused on the training of
executives on essential business topics. The Executive Leadership Series with
the flagship course being a 75 hour online "mini-MBA" program developed in
conjunction with the prestigious Tuck School of Business at Dartmouth.
The Company began operations in March of 1998 under the name Pentegra
Dental Group, Inc. Its formation included the simultaneous roll-up of 50
businesses and an initial public offering. The Company's initial goals were to
provide training and practice enhancement services nationwide to our affiliated
dental practices including the use of our proprietary Web-based management and
financial reporting system. Beginning in April of 2000, the Company modified its
affiliated service agreements and commensurate with that change the Company
recorded certain one-time charges against earnings during the fiscal year ending
March 31, 2001. The Company evolved from its legacy business into its current
e-Learning focus during its fiscal year 2002, and accordingly, changed its name
to EDT Learning, Inc. (now trading as AMEX:EDT). As a result of that change in
business model and underlying agreements, comparisons to the financial results
of periods prior to fiscal year 2002 may not be appropriate or relevant.
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PRODUCTS AND SERVICES
The Company's current products and services fall into four major
categories:
o The four-product suite lead by LearnLinc - Software that manages and
delivers live online collaboration and training.
o i-Canvas and EDT's Learning Manager - Software that lets non-technical
users create online courses and manage users.
o Executive Training Library - a library of online courses that includes
130 hours of online business courses with topics that include
accounting, finance, marketing and managerial economics.
o Custom Course Development Services - development services that create
online courses and learning material for the training of employees and
vendors or the education of customers on products features and
benefits using the Internet.
While we are a comprehensive provider of e-Learning products and services,
over the past 12 months we shifted our focus away from our lower margin custom
content service business toward our higher margin software products. As part of
that strategy we now place special emphasis on the development and sale of
LearnLinc and the related Web collaboration products in that suite.
THE WEB COLLABORATION SUITE:
o LEARNLINC an Internet based software that is designed for training and
education of remote students. With LearnLinc, instructors
and students can collaborate and learn remotely providing an
enhanced learning environment that replicates and surpasses
traditional instructor-led classes. Instructors can create
courses and classes, add varied agenda items, enroll
students, deliver live instruction, and deliver engaging
content that includes audio, video, and interactive
multimedia. LearnLinc in combination with
TestLinc(TM)permits users to administer comprehensive tests,
organize multiple simultaneous breakout sessions and record,
edit, play back and archive entire sessions for future use.
o MEETINGLINC an online collaboration software designed to facilitate the
sharing of documents, PowerPoint(TM)presentations, graphics
and applications between meeting participants without
leaving their desks. MeetingLinc allows business
professionals, government employees, and educators the
ability to communicate more effectively and economically
through interactive online meetings using voice-over-IP
technology to avoid the expense of travel and long distance
charges. MeetingLinc allows remote participants to give
presentations, demonstrate their products and services,
annotate on virtual whiteboards, edit documents
simultaneously, and take meeting participants on a Web tour.
Like all of our Web collaboration products in the suite,
MeetingLinc includes integrated voice and video conferencing
services.
o CONFERENCELINC a presentation software designed to deliver the message in a
one-to-many format providing professional management of Web
conferencing events. ConferenceLinc manages events such as
earning announcements, press briefings, new product
announcements, corporate internal mass communications and
external marketing events. ConferenceLinc is built on the
MeetingLinc foundation so that is combines the best
interactive features with an easy to use interface providing
meaningful and measurable results to presenters and
participants alike. Its design includes features that take
the hassle out of planning, and supporting a hosted Web
seminar while providing an easy to use participant
interface. ConferenceLinc includes automatic email
invitations, "one click join" capabilities, online
confirmations, update notifications, and customized attendee
registration. With ConferenceLinc, presenters have the
ability to not only present content but also gain audience
feedback using real-time polling, live chat, question and
answer sets and even post event assessments. The entire
presentation is easily recordable for viewing offline or
review after "the show" with the recorder capturing not only
the content but also the audio, video, and all participants'
feedback.
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o SUPPORTLINC an online technical support and customer sales support
software designed to give customer service organizations the
ability to provide remote hands-on support for products,
systems, or software applications. SupportLinc manages the
support call volume and enhances the effectiveness of
traditional telephone-based customer support systems.
SupportLinc's custom interface is designed to be simple to
use improving the interaction and level of support for both
the customer and the technical support agent.
Our Web collaboration suite of four products is also sold as an enterprise
installation permitting the customer to purchase the entire suite for
organization-wide use. The enterprise edition provides for unlimited use for an
unlimited number of users and integrates all four of our Web collaboration
products. Corporations, educational institutions and governments alike may
purchase or lease any one product or a combination of the products to suit their
individual needs. Because our Web collaboration products are available for sale
as an application service provider ("ASP") hosted solution or as a
behind-the-firewall customer installation, customers can choose the financial
model that works best for their budget and IT capabilities. Customers who
purchase our software have the option to also purchase a customer support and
maintenance agreement that varies in term from one to five years, and typically
costs 15% of the purchase price of the product.
I-CANVAS AND EDT'S LEARNING MANAGEMENT SYSTEM:
Our i-Canvas software permits the development by non-technical users of
engaging Web-based content that can be easily published to the Internet. Our
learning management system was created to be a Web-based content delivery and
data management system. It was developed to specific design requirements to meet
the skill level of its customer base. Specifically, content needed to be
delivered over low bandwidth connections and needed to be cross browser
compatible. In addition, the Company needed to be able to integrate student
profiles with its other online products and report the information to its
customers' learning administrators. Our learning systems includes a suite of
human resource software and tools which include:
o Learning Trakker (helps managers effectively track and administer the
learning and development processes);
o People Search (provides tools for sourcing, screening and selecting
qualified individuals);
o Performance Coach (equips managers, supervisors and team leaders with
the tools to establish goals and, provide consistent, meaningful
feedback to employees); and
o Career Planner (provides employers and employees with tools to match
their career objectives with internal opportunities).
THE EXECUTIVE TRAINING LIBRARY:
An off-the-shelf online library of content on business-specific topics such
as innovation, leadership, and communication co-developed with respected names
in business such as the Tuck School of Business at Dartmouth College. Our
courses include interactive activities and simulations that let employees try
new skills in a safe environment where practice, failure, feedback, and success
are part of learning. Real-world scenarios, coupled with engaging media, makes
employees active participants, which transforms learning into practical results.
This library has been specifically developed for executives and their learning
styles. The content is engaging, allowing for deeper exploration in specific
content areas while keeping students on track with challenging exercises and
assessments. Adult learning principles are strictly adhered to in content
presentations, with the emphasis on a problem-solving instructional approach
that we believe transfers to on-the-job situations. Both the student and the
organization have complete information on course progress and results. The full
online "mini-MBA" program developed in conjunction with the Tuck Business School
at Dartmouth provides over 75 hours of in depth training with modules including
the Financial Accounting Series, the Finance Series, the Managerial Economics
Series and the Marketing Series.
CUSTOM COURSE DEVELOPMENT SERVICES:
The Company has produced a streamlined content creation system that reduces
development time and the expense of delivering interactive training. This rapid
development process incorporates the use of our own i-Canvas software
development tool. This content authoring development tool translates content
into html, eliminating the need for programmers to manipulate content into code.
This makes it simple for content experts to arrange, re-arrange, add or delete
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any type of rich media file within training modules because the process-driven
authoring tool guides them through each step with years of best practice
standards already built in. The result is increased delivery speed, lower cost,
greater flexibility, and better response to business change requirements.
SALES AND MARKETING
The Company's marketing strategy is focused on building and expanding
relationships in its existing customer base and distribution channels to further
penetrate the Fortune 1000 and mid markets. We expect over the coming year to
increase our software sales providing higher margin revenues backed by
multi-year support and maintenance agreements. Our marketing program includes
market analysis, direct email campaigns, outbound call center solicitation,
public relations, lead generation systems, and efforts to educate organizations
in our target markets. With acquisition of the LearnLinc product, we have
implemented both a direct and indirect sales strategy to more fully leverage our
market coverage.
Direct Sales: Our direct sales force is relatively small and focuses on
mid-sized and enterprise level customers. The sales team is organized by
geographic territory and each sales representative is assigned specific vertical
markets that include financial services, transportation, hospitality, healthcare
and franchises. Since November 2002, a majority of our LearnLinc revenues were
provided by direct sales to customers. The remaining portion of our LearnLinc
revenues were indirect sales provided by our referral partners, value added
resellers and OEM partners in national and international markets.
Indirect Sales: We have engaged organizations that market and sell our
products and services through their sales distribution channels and are
generally either referral partners, VAR's or OEM distributors. As of March 31,
2003, we had 60 organizations selling our products with 32 of those partners
providing indirect sales in North America including the United States, Canada
and Mexico, and have 28 partners providing indirect sales in 13 countries
outside North America, including the United Kingdom, Spain, Italy, Germany,
Australia, and Japan. Referral partners execute referral agreements providing
for the payment of a fee upon the closing of a sale, with a Distribution
Agreement typically having a one-year renewable term. Our value added resellers
and OEM partners execute agreements to resell our products to their customers
through direct sales and in some cases through integration of our products into
their products or service offerings. Our distribution agreements typically have
terms of one to three years and are automatically renewed for an additional like
term unless either party terminates the agreement for breach or other financial
reasons. In most of these agreements, the distribution partner purchases the
product from us and resells the product to its customers. Under those
agreements, we record only the amount paid to us by the distributor as revenue
and recognize revenue when all revenue recognition criteria have been met.
CUSTOMERS
Our corporate customer list includes those inside and outside of the
Fortune 1000, including Hilton Hotels, International Paper, JP Morgan Chase,
Aetna, Travelers Insurance, Wells Fargo, Discover Card, and United Airlines. We
also serve the higher educational and governmental markets including The State
University of New York, The Supreme Court of Arizona, Kent State University, and
the United Nations. Our reach includes customers both within the United States,
Canada, Mexico, and outside the U.S. in 13 other countries.
AWARDS
We are proud of the recognition received by the Company from industry
leading experts, software associations, and e-Learning organizations. Together
with the companies we acquired we have been honored with more than 55 awards
from notable e-Learning authorities such as The American Society for Training
and Development (ASTD), BRANDON HALL MAGAZINE, and NEW MEDIA MAGAZINE. The list
of awards include four National Telly Awards; six Software Service Provider of
the Year Awards, two Gold Medals from e-Learning authority Brandon Hall, and
most notably two first-place awards by a vote of e-Learning professionals:
o I-CANVAS - First prize in the Software Simulation Shootout "Best of
the Best" award in the Brandon Hall sponsored competition at Online
Learning 2001 Conference and Exposition, beating industry leaders,
Macromedia and Click2Learn.
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o LEARNLINC - First prize in the Software Simulation Shootout "Best of
the Best" award in the Brandon Hall sponsored competition at Online
Learning 2002 Conference and Exposition, beating industry leaders,
WebEx and PlaceWare.
TECHNOLOGY & INTELLECTUAL PROPERTY
Most of our existing technology and intellectual property were originally
developed by organizations that we have obtained by acquisition over the past 18
months. Conservatively, tens of millions of dollars have been spent and over a
decade of human effort have been invested by those organizations in product
development prior to our acquisition. With our continued investment in our
proprietary systems and software applications, our organization and our
customers are reaping the benefit of that endeavor without direct investment by
the Company. For our ASP customers, we host our software and provide Internet
connectivity from our dedicated servers in Los Angeles, California, Phoenix,
Arizona, and Troy, New York. We run a network infrastructure both on-premises in
our Phoenix and Troy offices and through leased data centers. Our ASP network
located in California is redundant in design and secure from unauthorized
access. Our CD-ROM based Web collaboration software products are client / server
applications that operate in a Windows environment. Our ASP Web collaboration
software, Executive Training Series courses and LMS offerings operate in a Linux
environment using an Oracle database.
RESEARCH & DEVELOPMENT
The Company invested a substantial portion of its working capital and
resources to the continued development of its e-Learning software and
technologies. As of March 31, 2003 we employed 18 full-time engineers,
programmers and developers who were focused on developing new features and
enhancements to our existing software offering and expanding that offering with
new products and services. The primary focus of our research and development
efforts are on improving the functionality and performance of LearnLinc,
MeetingLinc, ConferenceLinc and SupportLinc as well as developing new features
that meet changing market demands. We invested over $3.2 million in direct and
indirect research and development activities in the fiscal year ending March 31,
2003. We expect to continue to make significant investments in research and
development for the next several years.
CUSTOMER SERVICE
We offer technical and customer support through a customer support team
that has been together for over ten years. We offer differing levels of support
depending upon the maintenance and support agreement executed by the customer
that includes telephone support through a toll-free number from 8:30 a.m. until
8:30 p.m. Eastern Time and an email request system. We also offer access to
self-help information that includes a database of frequently asked questions,
quick reference and advanced end-user guides, online tutorials, and access to a
real-time searchable knowledge database. Most of our requests for technical
support are questions concerning general product functionality with some
assistance with technical computer and firewall issues. Our response times vary
depending upon the issue, but the vast majority of our customer support
questions are addressed during the initial technical support call. Customer
issues and support tickets are tracked within our CRM database for use by our
technical support teams and customers searching the knowledge database.
COMPETITION
Because we are a comprehensive provider of e-Learning products and
services, we face varying levels of competition from many providers, but no one
provider is a direct competitor to all of our products and services. With our
emphasis being our Web collaboration four-product suite, we face competition
from various Web conferencing and collaboration software companies including
WebEx, PlaceWare, Centra, as well as providers of similar software such as IBM,
Oracle, and Microsoft. The Web collaboration, virtual classroom and Web
conferencing industry continue to change and evolve rapidly, and we expect
continued consolidation within the industry. Most notably, Microsoft recently
acquired PlaceWare for over $200 million announcing their intention to expand in
the online collaboration software business. Many of our current and potential
competitors have longer operating histories, significantly greater financial,
technical and other resources and greater name recognition than we have. Our
competitors may establish in the future indirect relationships with third
parties or with each other to increase the competition we currently face or may
introduce products or services that have better capabilities or performance,
lower prices, or broader distribution. We have identified what we believe to be
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the principal competitive factors in our markets, including ease of use; breadth
of features; quality and reliability of our products; pricing pressures; access
to indirect channel sales and the effectiveness of our direct sales force;
ability to develop and support software enhancements; the scalability of our ASP
services; and limitations presented by the use of the public Internet. Although
we believe our products compete favorably, we may not be able to maintain a
competitive position against current and potential competitors, especially those
with greater financial resources.
ACQUISITIONS
As a part of our consolidation strategy, we acquired four e-Learning
companies in the past 18 months providing the Company with expertise, tangible
and intangible assets, technology, customer base, recurring revenues, and a
global VAR network.
October 2001 - Learning-Edge, Inc. ("Learning-Edge"), a Phoenix based
provider of custom content development services. We acquired from Learning-Edge
substantially all of its assets, which include an existing customer base, and an
award winning Content Development Tool (i-Canvas).
January 2002 - ThoughtWare Technologies, Inc. ("ThoughtWare"), a Memphis
based provider of workforce management software. We acquired from ThoughtWare a
small recurring revenue base, and HR workforce performance software that
supports human capital development (Learning Tracker; People Search; Performance
Coach and Career Planner).
June 2002 - Quisic Corporation ("Quisic"), a Los Angeles based provider of
custom content development services and e-Learning software. We acquired from
Quisic certain assets primarily consisting of approximately 130 hours
off-the-shelf library of online courses (including the 75 hour Tuck Business
School at Dartmouth with content focused on accounting, finance, management, and
marketing).
November 2002 - Mentergy, Inc. ("Mentergy"), a provider of virtual
classroom software. We acquired from Mentergy all assets associated with
LearnLinc and TestLinc software, an existing customer base, a VAR network and a
recurring revenue stream.
EMPLOYEES
As of March 31, 2003, the Company employed 46 full time people with the
majority of those located at our corporate offices in Phoenix, Arizona. Our
employee base consists of 7 performing general and administrative functions, 21
performing customer support, sales and marketing functions and 18 performing
programming, research and development functions. None of the Company's employees
are represented by collective bargaining agreements.
LEGACY AFFILIATED DENTAL SERVICE REVENUE
As a part of our legacy dental management business we provided services to
certain affiliated practices in accordance with modified management service
agreements. Those services generally were access to online enhancement, access
to online payroll processing, access to online consulting and seminars. For the
fiscal years ending March 31, 2003 and 2002, we earned dental revenues of $3.1
million and $6.6 million, respectively. As anticipated and previously announced,
nearly all of those legacy management service agreements terminated during
fiscal 2003 and only $200,000 is anticipated to be earned as dental revenues for
fiscal 2004.
ITEM 2. PROPERTIES
We maintain corporate headquarters in Phoenix, Arizona and have occupied
that 14,000 square foot Class A facility since the Company's inception in 1998.
The Phoenix lease began in 1998 and has a term of ten years. The Phoenix offices
can accommodate up to 85 employees and is fully equipped with up to date
computer equipment and server facilities. The Phoenix lease requires a monthly
rent and operating expenses of $29,000 and $1,000 respectively. We also maintain
a 2,500 square foot Class B facility in Troy, New York costing $4,800 per month
with an emphasis in that location on research and development, and technical
support. As a part of the ThoughtWare acquisition we leased facilities in
Memphis, Tennessee consisting of 2,700 square feet with a three-year term
costing $4,400 per month. Those Memphis operations were consolidated into
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Phoenix operations and we are currently seeking to vacate those premises with
the assumption of the lease by a sub-tenant. Our subsidiary, TW Acquisition
Subsidiary, Inc., is obligated under an operating lease in Carlsbad, California
consisting of 3,300 square feet with a three-year remaining term costing
approximately $8,000 per month and the space has been sub-leased for the
remaining term for approximately $7,200 per month.
ITEM 3. LEGAL PROCEEDINGS
As of March 31, 2003, the Company has pending as plaintiff seven collection
lawsuits against affiliated practices for the collection of contractual service
fees and the principal of promissory notes.
The Company is a defendant and counterclaimant in a lawsuit with Computer
Associates a former vendor asserting damages of approximately $389,000, with
allegations of breach of contract revolving around the purchase of software and
certain services provided by Computer Associates. The Company is vigorously
defending the lawsuit and believes that it will prevail on the merits and its
counterclaims, but cannot predict with certainty the ultimate outcome. The
Company has not accrued for any obligations that might result for an unfavorable
resolution of this matter.
The Company is a third party defendant in a lawsuit between former
employees of Quisic Corporation and certain shareholders of Quisic Corporation.
Although the Company engaged in an asset purchase transaction with Quisic
Corporation, those former employees allege successor liability on the part of
the Company, and are seeking from the primary Quisic shareholder defendants,
damages of $4.6 million. The plaintiffs primarily are seeking from the Company
access to the consideration paid and certain Quisic assets. The Company is
vigorously defending the lawsuit and believes that it will prevail on the
merits, but cannot predict with certainty the ultimate outcome. The Company has
not accrued for any obligations that might result for an unfavorable resolution
of this matter.
The Company is involved as a defendant in a lawsuit recently filed by
plaintiffs who are creditors of Quisic Corporation who are seeking from certain
Quisic shareholders damages of $1.2 million. Those plaintiff creditors are not
seeking monetary damages from the Company, but are seeking to establish that
they are entitled to certain consideration paid by the Company. Although the
Company engaged in an asset purchase transaction with Quisic Corporation, those
creditors believe that certain of the Quisic assets of the Company are subject
to their claims as creditors against Quisic Corporation. The Company is
vigorously defending the lawsuit and believes that it will prevail, but cannot
predict with certainty the ultimate outcome. The Company has not accrued for any
obligations that might result for an unfavorable resolution of this matter.
The Company's wholly owned subsidiary, TW Acquisition Subsidiary, Inc. is
the respondent in a claim asserted by the Tennessee Department of Revenue
alleging sales tax liability of approximately $380,000 from sales made by its
predecessor ThoughtWare Technologies, Inc. TW Acquisition Subsidiary, Inc. is
vigorously defending the assessment and cannot predict with certainty the
ultimate outcome. The Company has accrued $380,000 with respect to this matter.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders in the fourth
quarter of fiscal 2003.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information concerning the
executive officers of the Company (ages are as of March 31, 2003):
James M. Powers, Jr. 47 Chairman, President and Chief Executive Officer
James L. Dunn, Jr. 41 Senior Vice President, General Counsel, and Chief
Development Officer
Brian L. Berry 42 Vice President of Finance
Preston A. Zuckerman 57 Senior Vice President and Chief e-Learning Architect
Lucille Holliday 55 Senior Vice President of Sales
10
JAMES M. POWERS, JR.
Chairman, President and Chief Executive Officer
Dr. James Powers, Jr. has served as Chairman, President and CEO of the Company
since December 1998. Dr. Powers guided the Company through its initial growth
and acquisition phase and subsequent transformation from a dental practice
management company to a provider of Web-based training and Web conferencing
solutions. Dr. Powers joined the Company through the merger with Liberty Dental
Alliance, Inc., a Nashville based company where he was the founder, Chairman and
President from 1997 to 1998. Dr. Powers was a founder and Chairman of Clearidge,
Inc., a privately held bottled water company in Nashville, Tennessee from 1993
to 1999. Dr. Powers led Clearidge through 13 acquisitions over three years to
become one of the largest, independent bottlers in the Southeast. Dr. Powers
also is a founder and Director of Barnhill's Country Buffet, Inc., a privately
held chain of 48 restaurants in the Southeast. He received a Doctor of Dental
Surgery Degree from The University of Tennessee and received his MBA from
Vanderbilt University's Owen Graduate School of Management.
JAMES L. DUNN, JR.
General Counsel, Senior Vice President, and Chief Development Officer
James L. Dunn, Jr., is a co-founder of the Company and has been an integral part
of the senior management team since the Company's initial public offering in
1998. Mr. Dunn as Chief Development Officer was responsible for all merger and
acquisition activities successfully managing the acquisition of over 100 dental
practices and 3 dental practice management companies. The Company's acquisitions
that he led doubled the Company's annual revenues within the first twelve months
of operations. Mr. Dunn's leadership was instrumental in the reorganization of
the Company around its current e-Learning focus and is responsible for the
acquisition of four e-Learning companies in the past 18 months. He assumed the
role of General Counsel in March of 2000 and is also responsible for all legal
affairs of the Company. He is an attorney and CPA receiving his law degree from
Southern Methodist University School of Law in 1987 and his Bachelor's Degree in
Business Administration-Accounting from Texas A & M University in 1984.
BRIAN L. BERRY
Vice President of Finance
Brian L. Berry was appointed Vice President of Finance in August 2002. Mr. Berry
joined the Company as Corporate Controller in October 1998. From 1996 to 1997,
Mr. Berry was Corporate Controller for Falcon Power Inc., a multi-state group of
construction equipment dealerships. In 1995 Mr. Berry worked as a consultant
providing accounting and financial advice to various companies. From 1983 to
1995, Mr. Berry worked for Coopers & Lybrand LLP, a predecessor to
PriceWaterhouseCoopers LLP. Mr. Berry is a certified public accountant and
received a B.S.B.A. from The Ohio State University in 1983.
PRESTON A. ZUCKERMAN
Senior Vice President and Chief e-Learning Architect
Preston Zuckerman assumed the role of Senior Vice President and Chief e-Learning
Architect for the Company in September 2001 when EDT acquired Learning-Edge. Mr.
Zuckerman founded Learning-Edge in 1988 as one of the first custom e-Learning
development companies in the U.S. He served as its CEO and Chief e-Learning
Architect from that time. He has been a leader in the training and communication
fields for many years, and Learning-Edge received numerous awards for its work.
Prior to founding Learning-Edge, he spent 16 years directing the training and
publications departments for Four-Phase Systems (currently Motorola Computer
Group) and ITT Corporation. During that period, he successfully introduced
criterion-referenced, self-paced, and media-based instruction within both
organizations. Mr. Zuckerman started his career as a Computer Specialist and
Instructor in the U.S. Navy where he served for seven years.
LUCILLE HOLLIDAY
Senior Vice President of Sales
Lucille Holliday assumed the role of Senior Vice President of Sales for the
Company in February 2002. Prior to joining EDT Learning, Ms. Holliday served as
vice president of sales for the LearnLinc division of Mentergy, Inc., an
international leader in the field of e-learning solutions utilizing virtual
classroom software and custom courseware development. During her tenure with
Mentergy, Ms. Holliday was responsible for recruitment, development and
management of field and corporate-based sales executives, development and
implementation of strategic plans in support of company goals, and preparation
and analysis of business plans and performance forecasts. Her 20 years of sales
experience includes national and regional management positions at such industry
leaders as Element K, a leading provider of e-Learning solutions; Prometric,
Thomson Learning, the global leader in computer-based certification test
delivery; and the education division for IKON office solutions, a premier
provider of technical education services.
11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS
MARKET INFORMATION, HOLDERS AND DIVIDENDS
The Company's Common Stock has been traded on the American Stock Exchange
system under the symbol "EDT" since August 25, 2000. Prior to that, the
Company's Common Stock was traded on the American Stock Exchange system under
the symbol "PEN". The following table sets forth the range of the reported high
and low sales prices of the Company's Common Stock for the years ended March 31,
2003 and 2002:
2003 HIGH LOW
----- ----- -----
First Quarter $1.40 $0.76
Second Quarter $0.90 $0.33
Third Quarter $0.57 $0.25
Fourth Quarter $0.57 $0.25
2002 HIGH LOW
----- ----- -----
First Quarter $0.63 $0.41
Second Quarter $0.50 $0.31
Third Quarter $1.79 $0.44
Fourth Quarter $1.45 $0.90
As of June 20, 2003, there were approximately 283 holders of record of
Common Stock, as shown on the records of the transfer agent and registrar of
Common Stock. The number of record holders does not bear any relationship to the
number of beneficial owners of the Common Stock.
The Company has not paid any cash dividends on its Common Stock in the past
and does not plan to pay any cash dividend on its Common Stock in the
foreseeable future. The Company's Board of Directors intends, for the
foreseeable future, to retain earnings to finance the continued operation and
expansion of the Company's business.
EQUITY COMPENSATION PLANS
The table below provides information relating to our equity compensation
plans as of March 31, 2003:
Number of Securities
Remaining Available for
Number of Securities to be Weighted-Average Exercise Future Issuance Under
Issued Upon Exercise Of Price of Outstanding Compensation Plans
Outstanding Options, Options, Warrants and (Excluding Securities
Plan Category Warrants and Rights Rights Reflected in First Column)
------------- ------------------- ------ --------------------------
Equity compensation plans
approved by security holders 1,835,865 1.82 1,169,135
Equity compensation plans
approved by security
holders 450,000 8.50
--------- ---------
Total 2,285,865 1,169,135
========= =========
12
In December 2001, the Company, under the initiative of the Compensation
Committee with the approval of the Board of Directors, issued its chief
executive officer an incentive stock grant under the 1997 Stock Compensation
Plan of 450,000 restricted shares of the Company's common stock as a means to
retain and incentivize the chief executive officer. The shares 100% vest after
10 years from the date of grant. The shares were valued at $405,000 based on the
closing price of the stock on the date of grant, which is recorded as
compensation expense ratably over the vesting period. The vesting of the
incentive shares accelerates based on the Company's share price as follows:
PERFORMANCE CRITERIA SHARES VESTED
-------------------- -------------
Share price trades for $4.50 per share for 20 consecutive days 150,000 shares
Share price trades for $8.50 share for 20 consecutive days 150,000 shares
Share price trades for $12.50 per share for 20 consecutive days 150,000 shares
SALES OF UNREGISTERED SECURITIES
In addition to the 450,000 stock grant listed above, set forth below are
the securities we issued in fiscal 2002 which have not been registered under the
Securities Act of 1933, as amended (the "Securities Act"). Further included is
the consideration, if any, we received for such securities and information
relating to the section of the Securities Act, or rule of the Securities and
Exchange Commission, under which exemption from registration was claimed.
In March 2002, the Company completed a Private Placement Offering (the
"Offering") raising capital of $5,775,000. Under the terms of the Offering, the
Company issued convertible redeemable subordinated notes and warrants to
purchase 5,775,000 shares of the Company's common stock. The notes bear interest
at 12% per annum and require quarterly interest payments with the principal due
at maturity on March 29, 2012. The note holders may convert the notes into
shares of the Company's common stock at a price equal to $1.00 per share. The
Company may force redemption of the notes into shares of the Company's common
stock at the conversion price, if at any time the closing price of the Company's
common stock equals or exceeds $3.00 per share for twenty consecutive trading
days. The notes are subordinated to any present or future senior indebtedness,
with no waiver required.
The exercise price for the warrants is $3.00 per share. The Company may
force redemption of the warrants into shares of the Company's common stock at
the exercise price, if at any time the closing price of the Company's common
stock equals or exceeds $5.50 per share for twenty consecutive trading days. The
warrants expire on March 29, 2005.
Murphy & Durieu acted as the placement agent on the Offering and received a
sales commission equal to 10% of the gross proceeds of the Offering or $577,500
and a nonaccountable expense reimbursement of expenses equal to 3% of the gross
proceeds or $173,250.
The issuance of these securities was made in reliance upon the exemptions
from registration set forth in Section 4(2) of the Securities Act and Regulation
D under the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth selected financial data of the Company that
has been derived from consolidated financial statements that have been audited.
The Company began operations in March of 1998 under the name Pentegra Dental
Group, Inc. Its formation included the simultaneous roll-up of 50 businesses and
an initial public offering. Beginning in April of 2000, the Company modified its
affiliated service agreements and commensurate with that change the Company
recorded certain charges against earnings during the fiscal year ending March
31, 2001. The Company evolved from its legacy business into its current
e-Learning focus during its fiscal year 2002, and accordingly, changed its name
to EDT Learning, Inc. (now trading as AMEX:EDT). As a result of that change in
business model and underlying agreements, comparisons to the financial results
of periods prior to fiscal year 2002 may not be appropriate or relevant. The
selected financial data should also be read in conjunction with the Company's
consolidated financial statements and notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" included
elsewhere in this report.
13
STATEMENT OF OPERATIONS DATA:
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001 2000 1999
-------- -------- -------- -------- --------
Revenues:
Licenses ............................... $ 447 $ 92 $ -- $ -- $ --
Service and maintenance ................ 3,629 2,590 -- -- --
-------- -------- -------- -------- --------
Total e-Learning revenue ............ 4,076 2,682 -- -- --
Dental contracts ....................... 3,129 6,582 8,320 56,988 38,824
-------- -------- -------- -------- --------
Net revenue ............................... 7,205 9,264 8,320 56,988 38,824
Operating expenses ........................ 10,682 8,128 32,708 59,476 36,940
-------- -------- -------- -------- --------
Earnings (loss) from operations ........... (3,477) 1,136 (24,388) (2,488) 1,884
-------- -------- -------- -------- --------
Income (loss) before income
taxes and extraordinary item ........... (3,756) 1,540 (24,987) (3,497) 1,717
Income tax expense (benefit) .............. -- -- -- 2,213 (525)
-------- -------- -------- -------- --------
Net income (loss) before
extraordinary item ..................... (3,756) 1,540 (24,987) (5,710) 2,242
Extraordinary item, net ................... -- 4,265 70 350 --
-------- -------- -------- -------- --------
Net income (loss) ......................... $ (3,756) $ 5,805 $(24,917) $ (5,360) $ 2,242
======== ======== ======== ======== ========
Earnings (loss) per common share - basic:
Earnings (loss) before
extraordinary item ................... $ (0.24) $ 0.13 $ (2.38) $ (0.55) $ 0.29
Extraordinary item ..................... -- 0.36 0.01 0.03 --
-------- -------- -------- -------- --------
Net earnings (loss) .................... $ (0.24) $ 0.49 $ (2.37) $ (0.52) $ 0.29
======== ======== ======== ======== ========
Earnings (loss) per common share - diluted:
Earnings (loss) before
extraordinary item ................... $ (0.24) $ 0.12 $ (2.38) $ (0.55) $ 0.29
Extraordinary item ..................... -- 0.34 0.01 0.03 --
-------- -------- -------- -------- --------
Net earnings (loss) .................... $ (0.24) $ 0.47 $ (2.37) $ (0.52) $ 0.29
======== ======== ======== ======== ========
BALANCE SHEET DATA:
Cash and cash equivalents ................. $ 409 $ 1,498 $ 1,051 $ 553 $ 1,047
Working capital (deficit) ................. (2,660) (1,538) (1,440) 1,330 4,224
Total assets .............................. 12,423 15,587 9,191 37,906 37,127
Long-term debt, less current
maturities ............................. 7,901 7,631 11,461 14,829 13,134
Long-term debt discount ................... (2,038) (2,264) -- -- --
Total shareholders' equity (deficit) ...... 2,320 4,666 (6,654) 19,007 20,760
14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K THAT INVOLVE WORDS LIKE
"ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES"
AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE
SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED. SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANTICIPATED RESULTS.
THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, OUR DEPENDENCE ON
OUR PRODUCTS OR SERVICES, MARKET DEMAND FOR OUR PRODUCTS AND SERVICES, OUR
ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND CHANNEL PARTNERS, OUR ABILITY TO
EXPAND OUR TECHNOLOGICAL INFRASTRUCTURE TO MEET THE DEMAND FROM OUR CUSTOMERS,
OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES, THE ABILITY OF CHANNEL
PARTNERS TO SUCCESSFULLY RESELL OUR SERVICES, THE STATUS OF THE OVERALL ECONOMY,
THE STRENGTH OF COMPETITIVE OFFERINGS, THE PRICING PRESSURES CREATED BY MARKET
FORCES, AND THE OTHER RISKS DISCUSSED HEREIN. ALL FORWARD-LOOKING STATEMENTS
INCLUDED IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO US AS OF THE DATE
HEREOF. WE EXPRESSLY DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY
ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, TO
REFLECT ANY CHANGE IN OUR EXPECTATIONS OR IN EVENTS, CONDITIONS OR CIRCUMSTANCES
ON WHICH ANY SUCH STATEMENT IS BASED. OUR REPORTS ARE AVAILABLE FREE OF CHARGE
AS SOON AS REASONABLY PRACTICABLE AFTER WE FILE THEM WITH THE SEC AND MAY BE
OBTAINED THROUGH OUR WEBSITE.
OVERVIEW
As of March 31, 2003 we offered to our customers a wide array of e-Learning
and training products and services. Our four-product suite (LearnLinc,
MeetingLinc, ConferenceLinc, and SupportLinc) also lets customers collaborate
and present over the Internet in one-to-one, one-to-many, and many-to-many
communication formats. Our Web collaboration suite of products is sold in both
an application service provider ("ASP") or hosted basis (a periodic license) and
on a purchase client hosted basis (client server software sold as a
non-periodic, perpetual license). While we are a comprehensive provider of
e-Learning products, over the past 12 months we shifted our focus away from our
lower margin custom content service business and toward our higher margin
software products with particular emphasis since December of 2002 on our Web
collaboration and virtual classroom suite led by LearnLinc.
In addition to our web collaboration and virtual classroom software, we
also offer software that facilitates the management of users and e-Learning
content through EDT's Learning Management System (LMS). Our LMS has been
combined with a suite of workforce management solutions (the ThoughtWare Suite),
which includes Career Planner, Job Seeker, and Performance Coach. Our LMS
software is offered in an ASP format using a periodic per user per period annual
license agreement.
For the development of custom online content we offer an award winning
content development software, (i-Canvas) which is sold on an individual user
perpetual license basis. We continue to provide to our customers award winning
custom content services including the development of online course material
specific to our customers. Custom content services are bid on a
project-by-project basis and revenue is recognized on the
percentage-of-completed contract method.
Finally, we offer a library of online courses focused upon the training of
executives on essential business topics, including an online "mini-MBA" program.
Customers subscribe for a period of time per course, with the license providing
for access over typically one year from date the students first access of the
course.
The Company began operations in March of 1998 under the name Pentegra
Dental Group, Inc. Its formation included the simultaneous roll-up of 50
businesses and an initial public offering. The Company's initial goals were to
provide training and practice enhancement services nationwide to our affiliated
dental practices including the use of our proprietary Web-based management and
financial reporting system. Beginning in April of 2000, the Company modified its
affiliated service agreements and commensurate with that change the Company
recorded certain charges against earnings during the fiscal year ending March
31, 2001. The Company evolved from its legacy business into its current
e-Learning focus during its fiscal year 2002, and accordingly, changed its name
15
to EDT Learning, Inc. (now trading as AMEX:EDT). As a result of that change in
business model and underlying agreements, comparisons to the financial results
of periods prior to fiscal year 2002 may not be appropriate or relevant.
During the year ended March 31, 2003, the Company had two reportable
segments, e-Learning and dental practice management. The e-Learning segment
included revenues and operating expenses related to the development and sale of
the Company's e-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.
YEARS ENDED
MARCH 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Revenues: (IN THOUSANDS)
Licenses ................................ $ 447 $ 92 $ --
Service and maintenance ................. 3,629 2,590 --
-------- -------- --------
Total e-Learning revenues ............ 4,076 2,682 --
Dental practice management .............. 3,129 6,582 8,320
-------- -------- --------
Total revenues ...................... $ 7,205 $ 9,264 $ 8,320
======== ======== ========
Operating expenses:
e-Learning .............................. $ 6,748 $ 3,446 $ --
Dental practice management (1) .......... 3,934 4,682 32,708
-------- -------- --------
Total operating expenses ............ $ 10,682 $ 8,128 $ 32,708
======== ======== ========
Earnings (loss) from operations:
e-Learning .............................. $ (2,672) $ (764) $ --
Dental practice management .............. (805) 1,900 (24,388)
-------- -------- --------
Total earnings (loss) from operations $ (3,477) $ 1,136 $(24,388)
======== ======== ========
Capital expenditures:
e-Learning .............................. $ 64 $ 40 $ --
Dental practice management .............. -- -- 138
-------- -------- --------
Total capital expenditures .......... $ 64 $ 40 $ 138
======== ======== ========
MARCH 31
-------------------
2003 2002
------- -------
Total assets:
e-Learning .............................. $11,081 $ 8,237
Dental practice management .............. 1,342 7,350
------- -------
Total assets .......................... $12,423 $15,587
------- -------
RESULTS OF OPERATIONS
As of March 31, 2003, we offered to our customers a wide array of
e-Learning and training products and services. Since December of 2002 we have
placed special emphasis on sales and marketing efforts that have been directed
at our virtual classroom Web casting and online collaboration four-product suite
led by LearnLinc. We continue to offer for those seeking to manage users and
e-Learning content EDT's Learning Management System, which has been combined
with a suite of workforce management solutions - which includes Career Planner,
Job Seeker, and Performance Coach. For the development of custom online content
we offer an award winning content development software, i-Canvas and award
winning custom content services, which have been providing proven results for
over 15 years. Finally, we offer a library of online courses focused upon the
training of executives on essential business topics.
The Company has implemented its e-Learning strategy. The Company acquired
the assets of two e-Learning entities during fiscal 2003 and acquired two
e-Learning entities during fiscal 2002.
16
On October 1, 2001, the Company acquired all of the outstanding capital
stock of Learning-Edge, Inc.; an Arizona based private e-learning company. The
Company issued 1,950,000 common shares and $1.1 million of debt under the terms
of the acquisition agreement. The debt bears interest at rates ranging from 7.5%
to 9.0% and is due in two equal installments on October 1, 2003 and on October
1, 2004, respectively. The Company also assumed approximately $2.9 million of
Learning-Edge debt as part of this acquisition. The operating results of
Learning-Edge are included with the Company as of October 1, 2001.
On January 15, 2002, the Company acquired all of the outstanding capital
stock of ThoughtWare Technologies, Inc.; a Tennessee based private company. The
Company issued 1,550,000 common shares under the terms of the acquisition
agreement. The Company also assumed approximately $1.5 million of ThoughtWare
debt as part of this acquisition. Since January 2002, operating results of
ThoughtWare are included with the Company's results from operations. On March
29, 2003, the Company settled various disputes it had with the former
shareholders of ThoughtWare Technologies, Inc. The settlement resulted in
365,000 of the shares issued in connection with the acquisition being returned
to the Company. The Company valued the shares using the share price at the date
of acquisition and recorded the returned shares as a $507,000 decrease to
shareholders' equity and goodwill.
On June 14, 2002, the Company acquired certain assets of Quisic
Corporation; a California based private e-Learning company for in an asset
purchase and common stock purchase transaction that involved the issuance of
2,000,000 common shares to certain shareholders of Quisic. An additional 500,000
shares of common stock of the Company are contingently issuable upon the
achievement of certain cash basis sales targets, as defined, for the 12-month
period following the close of the acquisition. Such shares have been issued, are
currently held in escrow, have been excluded in the purchase accounting
presented below and are excluded from the share information presented in the
consolidated balance sheets and statements of shareholders' equity and presented
in the calculation of loss earnings per share. If the contingency is satisfied,
the issuable shares will be valued based on the market value of the Company's
common stock on such date, and will be reflected in the Company's consolidated
balance sheet as an increase to goodwill and shareholders' equity. The operating
results of Quisic have been included in the consolidated operations of the
Company commencing June 17, 2002.
The purchase agreement also provides for the Company to remit to the
seller, during the 5 year period following the close of the acquisition, 100% of
the first $1,250,000 of proceeds and 50% of the remaining proceeds from the
sales of software licenses for certain specified products, as defined, and
collection of notes. The Company intends to account for any such amounts
collected as additional purchase consideration in accordance with EITF No. 95-8
at the time such amounts are remitted to the seller. Since the closing date of
the acquisition and through March 31, 2003, the Company has collected funds
subject to this provision of the agreement totaling $150,000, all of which has
been withheld and not remitted to the seller as of March 31, 2003 in accordance
with the Company's understanding of the escrow and indemnity provisions of the
Asset Purchase Agreement.
Effective November 4, 2002, the Company acquired certain assets of
Mentergy, Inc. ("Mentergy"), a wholly owned subsidiary of Mentergy, Ltd, in
exchange for $500,000 and the assumption of $462,000 of liabilities. In
addition, the Company has agreed to pay a royalty of 20% for all revenues
collected from the sale or license of LearnLinc software over a three-year
period. The first $600,000 of sales is not subject to the royalty. The maximum
amount due under the Royalty Agreement is $5,000,000. The operating results are
included with the Company's as of November 4, 2002.
As a part of our legacy business we provided services to certain affiliated
practices in accordance with modified service agreements. Those services
generally included access to online enhancement, access to online payroll
processing, access to online consulting and seminars. For the fiscal years
ending March 31, 2003 and 2002, we earned dental revenues of $3.1 million and
$6.6 million, respectively. As anticipated and previously announced, nearly all
of those legacy service agreements terminated during fiscal 2003. In fiscal
2004, $200,000 is anticipated in dental revenues and $235,000 from the
collection of notes receivable from those dental practices that had executed a
legacy management services agreement ("Affiliated Practices").
The operations of the Company involve many risks, which, even through a
combination of experience, knowledge and careful evaluation, may not be
overcome. These risks include the fact that the market for e-learning products
and services is in the early stages of development and may not grow to a
sufficient size or at a sufficient rate to sustain the Company's business. The
Company also faces intense competition from other e-learning providers and may
be unable to compete successfully. Many of the Company's existing and potential
17
competitors have longer operating histories and significantly greater financial,
technical and other resources and therefore may be able to more quickly respond
to changing opportunities or customer requirements. New competitors are also
likely to enter this market in the future due to the lack of significant barrier
to entry in the market share.
REVENUES
Total revenues generated for the year ended March 31, 2003 ("fiscal 2003")
and March 31, 2002 ("fiscal 2002") were $7.2 million and $9.3 million
respectively, a decrease of $2.1 million. e-Learning revenues for fiscal 2003
and fiscal 2002 were $4.1 million and $2.7 million respectively, an increase of
$0.4 million in licenses and $1.0 million in e-Learning service and maintenance
revenues. The increase is a result of the Company's continuing expansion into
the e-Learning marketplace and has been fueled by the acquisitions in fiscal
2003 of certain assets of LearnLinc and Quisic and the acquisitions in fiscal
2002 of ThoughtWare and Learning-Edge. Revenue from dental contracts decreased
by $3.5 million from $6.6 million in fiscal 2002 to $3.1 million in fiscal 2003
due to the previously announced and planned modification and termination of
certain dental management service contracts. As anticipated and previously
announced, nearly all of those legacy management service agreements terminated
during fiscal 2003 and only $200,000 is anticipated to be earned as dental
revenue for fiscal 2004.
Total revenues generated for the year ended March 31, 2002 ("fiscal 2002")
and March 31, 2001 ("fiscal 2001") were $9.3 million and $8.3 million
respectively, an increase of $1.0 million. The Company recognized $2.7 million
in e-Learning revenues in fiscal 2002 ($0.1 million of license revenue and $2.6
million of service and maintenance revenue). There were no e-Learning revenues
in fiscal 2001. Revenue from dental contacts decreased by $1.7 million in fiscal
2002 as compared to fiscal 2001 due to the announced and planned modification
and terminations of certain dental management contracts.
OPERATING EXPENSES
Operating expenses consist of research and development, sales and
marketing, general and administrative, depreciation and amortization expenses.
The Company incurred operating expenses of $10.7 million in fiscal 2003, an
increase of $2.6 million from $8.1 million in fiscal 2002 primarily due to an
increase in salaries and wages of $1.6 million relating to the acquisition of
Quisic and LearnLinc and a $0.8 million and $0.1 million increase in bad debt
expense due to reserves against amounts due from Affiliated Practices and
e-Learning related receivables, respectively. The Company has reduced head count
from a high of 83 in June of 2002 to 46 at March 31, 2003. In addition, the
Company has streamlined its operations by closing non-essential facilities and
consolidating those functions in its Phoenix and Troy locations.
Fiscal 2002 operating expenses were $8.1 million, a $24.6 million decrease
from fiscal 2001 operating expenses of $32.7 million. The decrease is primarily
due to the Company's strategic change in business and the absence of the $23
million impairment charge recorded fiscal 2001.
Research and development expenses represent expenses incurred in connection
with the provision of e-learning services, development of new products and new
product versions and consist primarily of salaries and benefits, communication
equipment and supplies. Research and development expenses for fiscal 2003 and
fiscal 2002 were $3.2 million and $2.3 million respectively, an increase of $0.9
million. The increase is a result of the Company's acquisition of two e-Learning
company's assets and staff. There were no research and development expenses
during fiscal 2001.
Sales and marketing expenses consist primarily of sales and marketing
salaries and benefits, travel, advertising, and other marketing literature.
Sales and marketing expenses were $1.7 million and $1.1 million for fiscal 2003
and fiscal 2002 respectively, an increase of $0.6 million. The increase is a
result of the Company's acquisition of two e-Learning company's assets and
staff. There were no sales and marketing expenses during fiscal 2001.
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 expense,
professional services, travel, office costs and other general corporate
expenses. During fiscal 2003 and 2002, general and administrative expenses were
18
$3.3 million and $2.7 million respectively, an increase of $0.6 million. General
and administrative expenses increased primarily due to the Company's change in
strategy and the acquisitions of Quisic and LearnLinc and was composed of
increases in bad debt expense of $0.9 million; general insurance of $0.2
million; rent of $0.2 million; investor relations of $0.1 million; and decreases
in professional services of $0.2 million; compensation and related benefit
expense of $0.4 million and office expenses of $0.1 million. The Company has
undertaken efforts to reduce overhead, with those efforts including the
elimination of facilities, equipment, and personnel.
During fiscal 2002 and 2001, general and administrative expenses were $2.7
million and $7.3 million respectively, a decrease of $4.6 million. General and
administrative expenses decreased primarily due to the Company's change in
strategy and reduction in dental practice management activity and was composed
of decreases in bad debt expense of $2.3 million; salaries and wages of $1.1
million; professional services of $546,000; office and telephone of $304,000;
insurance of $185,000 and travel expenses of $167,000.
Fiscal 2003 and 2002 depreciation and amortization expense was $2.0 million
for each year. In fiscal 2002, amortization expense includes $0.1 million of
goodwill amortization. Beginning in fiscal 2003 the Company ceased amortizing
goodwill in accordance with SFAS No. 142. Fiscal 2002 depreciation and
amortization expenses were $2.0 million, a $0.4 million decrease from fiscal
2001 depreciation and amortization expenses of $2.4 million. The decrease is
primarily due to the modification and terminations of the service agreements
that returned ownership of dental practice equipment to the related dental
practices. A portion of this decrease was offset by an increase in depreciation
of the property and equipment from the addition of plant, property, and
equipment from acquisitions associated with the Learning-Edge and ThoughtWare
acquisitions.
INTEREST EXPENSE
Interest expense of $1.4 million in fiscal 2003 increased $0.3 million from
$1.1 million in fiscal 2002. The increase was primarily a result of interest
accretion of the discount and beneficial conversion feature on the convertible
redeemable subordinated notes that were issued at the end of fiscal 2002
totaling $0.2 million. Interest expense of $1.1 million in fiscal 2002 decreased
$0.3 million from $1.4 million in fiscal 2001. The decrease was primarily a
result of decreases in debt balances and related interest rates.
GAIN ON TERMINATION AND RESTRUCTURING OF SERVICE CONTRACTS WITH AFFILIATED
PRACTICES
The gains of $0.9 million in fiscal 2003 and $1.3 million in fiscal 2002
relate to a variety of transactions with Affiliated Practices, including the
results of negotiated settlements, the results of litigation to enforce
contracts and modified service agreements.
INCOME TAX EXPENSE
The Company recorded no tax benefit during fiscal 2003 because it concluded
it is not likely it would be able to recognize the tax asset created due to the
lack of operating history of its e-Learning business strategy. At March 31,
2003, the Company has a net deferred tax asset of $9.9 million with a
corresponding valuation allowance. The Company's tax benefits are scheduled to
expire over a period of six to fourteen years.
The Company recorded no tax expense during fiscal 2002 due to the
utilization of its net operating loss carry-forward. At March 31, 2002, the
Company has a net deferred tax asset of $5.8 million with a corresponding
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES
The Company has a working capital deficiency, incurred an operating loss
and had negative cash flows from operations during fiscal 2003. As part of the
Company's legacy business, services were provided to affiliated dental practices
in accordance with modified service agreements. Those services generally were
access to online enhancement, online payroll processing and online consulting
and seminars. As anticipated and previously announced, nearly all of those
legacy service agreements terminated during fiscal 2003 which will reduce
revenues and cash flow from this source and accordingly will negatively affect
the Company's liquidity and operating results. These matters, among others,
including those discussed above and the limited operating history as an
e-Learning company, raise substantial doubt about the Company's ability to
continue as a going concern.
19
Management's plan with regard to these matters include continued
development, marketing and licensing of its e-Learning products and services.
Although management continues to pursue these plans, there is no assurance that
the Company will be successful in obtaining sufficient revenues from its
products and services to provide adequate cash flows to sustain operations.
In order to increase its liquidity, the Company has developed a plan
consisting of the following strategies; (i) implement its e-Learning based
strategic business plan and (ii) restructure or extend outstanding obligations
to reduce cash outflows for debt service and (iii) seek if necessary funding
from the placement of debt or equity securities providing additional capital.
However, there can be no assurance that the Company's e-Learning strategies will
be achieved or that creditors of the Company will accept delayed or reduced sums
or that the Company will be able to acquire additional sums.
The Company's service agreements with affiliated dental practices nearly
all terminated during fiscal 2003 which will reduce revenues and cash flow from
this source and accordingly could negatively affect the Company's liquidity and
operating results. During fiscal 2003 and fiscal 2002, the Company received $1.9
million and $2.9 million respectively, in cash from terminating the service
agreements with affiliated practices. These cash collections accelerate the date
at which the Company will be required to sustain its operations solely on cash
collections derived from e-Learning revenues. However, there can be no assurance
that the Company's e-Learning strategies will be achieved. The Company currently
does not have existing working capital and does not generate positive cash flows
from operations. As a result, we may not have sufficient financial resources to
satisfy our obligations as they come due in the near term.
At March 31, 2003, the Company had a working capital deficit of $2.7
million. Current assets included $0.4 million in cash and $0.7 million in
accounts receivable and $0.3 million in notes receivable. Current liabilities
consisted of $0.8 million of deferred revenue, $1.2 million of current
maturities of long-term debt and capital leases and $2.0 million in accounts
payable and accrued liabilities.
Cash used in operating activities was $2.0 million during fiscal 2003 and
$2.2 million during fiscal 2002. Cash used in operating activities during fiscal
2003 was primarily attributable to a net loss of $3.8 million, gains recorded on
practice terminations of $0.9 million and decreases in deferred revenue and
accounts payable and accrued liabilities of $0.5 million and $0.2 million
respectively. These items were partially offset by $2.0 million of depreciation
and amortization expense, $0.3 million of bad debt expense, impairment of assets
of $0.4 million and discount accretion on debt of $0.2 million. Cash used in
operating activities during fiscal 2002 was primarily attributable to an
extraordinary gain on debt forgiveness of $4.3 million, a decrease in deferred
revenue of $2.2 million, an increase in accounts receivable of $1.3 million,
gains recorded on practice terminations of $1.3 million, recovery of bad debts
of $0.6 million and an increase in accounts payable and accrued liabilities of
$0.6 million. These items were partially offset by net income of $5.8 million
and depreciation and amortization expense of $2.1 million. Cash provided by
operating activities was $1.4 million during fiscal 2001 primarily due to an
asset impairment of $23 million, depreciation and amortization expense of $2.4
million and bad debt expense of $1.7 million. These items were partially offset
by a net loss of $24.9 million and a decrease in accounts payable and accrued
liabilities of $0.9 million.
Cash provided by investing activities was $1.8 million, $3.5 million and
$0.3 million in fiscal years 2003, 2002 and 2001 respectively. Cash provided by
investing activities during fiscal 2003 was primarily due to proceeds received
from practice terminations of $1.9 million offset by $0.1 million for the
issuance of notes receivable. Cash provided by investing activities during
fiscal 2002 was primarily due to proceeds received from practice terminations of
$2.9 million and the repayment of notes receivable of $0.7 million. These items
were offset by acquisitions, net of cash acquired of $0.1 million. Cash provided
by investing activities in fiscal 2001 was the result of note receivable
collections of $0.5 million partially offset by $0.1 million of capital
expenditures.
Cash used in financing activities was $0.8 million during fiscal 2003, $0.9
million during fiscal 2002 and $1.2 million during fiscal 2001. Cash used in
financing activities during fiscal 2003 was due to the repayment of debt and
capital leases of $0.8 million. Cash used in financing activities during fiscal
2002 was primarily attributable to the repayment of debt and capital leases of
$5.8 million and financing costs incurred of $0.8 million. These uses of cash
were partially offset by the proceeds of the Private Placement Offering (the
"Offering") of $5.8 million. Cash used in financing activities during fiscal
2001 was due to the repayment of debt and capital leases of $1.2 million.
20
In March 2002, the Company completed an Offering to raise capital of
$5,775,000. Under the terms of the Offering, the Company issued convertible
redeemable subordinated notes (the "Convertible Notes") and warrants to purchase
5,775,000 shares of the Company's common stock (the "Warrants"). The Convertible
Notes bear interest at 12% per annum and require quarterly interest payments
with the principal due at maturity on March 29, 2012. The Convertible Note
holders may convert the Convertible Notes into shares of the Company's common
stock at a price equal to $1.00 per share. The Company may force redemption of
the Convertible Notes into shares of the Company's common stock at the
conversion price, if at any time the closing price of the Company's common stock
equals or exceeds $3.00 per share for twenty consecutive trading days. The
Convertible Notes are subordinated to any present or future senior indebtedness
that the Company may acquire or issue in the future.
The exercise price for the Warrants is $3.00 per share. The Company may
force redemption of the Warrants into shares of the Company's common stock at
the exercise price, if at any time the closing price of the Company's common
stock equals or exceeds $5.50 per share for twenty consecutive trading days. The
Warrants expire on March 29, 2005. The fair value of the Warrants was estimated
using a Black-Scholes pricing model with the following assumptions: contractual
and expected life of three years, volatility of 75%, dividend yield of 0%, and a
risk-free rate of 3.87%. The fair value was then used to calculate a discount of
$1,132,000, which and is being amortized to interest expense over ten years, the
term of the Convertible Notes. As the carrying value of the Convertible Notes is
less than the conversion value, a beneficial conversion feature of $1,132,000
was calculated and recorded as an additional discount to the Convertible Notes
and is being amortized to interest expense over the term of the Convertible
Notes. Upon conversion, any remaining discount associated with the beneficial
conversion feature will be expensed in full at the time of conversion.
The proceeds from the Offering were used to retire the Bank One credit
facility and to provide working capital for the Company. The Company paid $4.4
million to Bank One to retire the $8.6 million credit facility resulting in a
$4.2 million extraordinary gain. The credit facility was collateralized by liens
on certain of the Company's assets, including its rights under the management
services agreements, accounts receivable and notes receivable. All security
interests and liens held by Bank One were released with payment of the facility.
In October 2001, the Company issued $1.1 million of subordinated promissory
notes to the shareholders of Learning-Edge, Inc. under the terms of the
acquisition agreement (the "Learning-Edge Notes"). During fiscal 2003, $35,000
of accrued interest on one of the notes was added to the principal balance.
During fiscal 2002, $55,000 of these notes were returned by the holders to
offset amounts owed to the Company. The Learning-Edge Notes, which total $1.07
million at March 31, 2003, bear interest at rates ranging from at 7.5% to 9.0%.
At March 31, 2003, $47,000 of these notes are currently past due and the
remaining $1.02 million is due in two equal installments on April 5, 2005 and on
October 1, 2005, respectively. If the Company raises additional capital equal to
or in excess of $3 million, 25% of the principal of the Learning-Edge Notes is
to be repaid. For each $500,000 raised above $3 million, the repayment
percentage increase by 15%. If more than $5 million is raised, 100% of the
principal of the Learning-Edge Notes is to be repaid. The holders of the
Learning-Edge Notes waived the accelerated payment schedule in relation to the
Offering.
In fiscal 2002 and 2001, the Company entered into capital lease agreements
for the purchase of equipment of $373,000 and $22,000, respectively, and did not
enter into any capital lease agreements for the purchase of equipment in fiscal
2003.
At March 31, 2003, the Company had $0.85 million in outstanding Convertible
Subordinated Notes Series A Securities ("Series A Securities") that were issued
in connection with the acquisition of certain Affiliated Practices. The Series A
Securities bear interest at 12% and can be converted to Common Stock of the
Company at conversion prices ranging from $6.75 to $7.00 per share. The
conversion period began on November 1, 1999 and ends on July 1, 2004. The
principal amount of the Series A Securities, if not converted, is payable on
July 1, 2004. During fiscal 2003 and 2002, $307,000 and $656,000 of previously
issued Series A Securities respectively, were returned by the holders to offset
amounts owed to the Company.
At March 31, 2003, the Company had $0.43 million in outstanding notes
payable to certain shareholders formerly owning preferred stock. The notes bear
6% interest and were originally payable on the earlier of March 30, 2003 or the
date upon which the Company offers and sells an amount of equity securities
equal or greater to the gross proceeds of the IPO. During fiscal 2003, $57,750
of accrued interest on certain of these notes was added to the principal balance
and the maturity date was extended to April 1, 2005. The new principal balance
21
on the extended notes is $250,250 and the interest rate was increased to 10%.
The remaining $179,375 is currently past due. During fiscal 2003 and 2002,
$26,250 and $43,750 respectively, of these notes payable were returned by the
holders to offset amounts owed to the Company.
In connection with the acquisition of certain assets of LearnLinc
Corporation, the Company issued a $250,000 note payable. The note bears interest
at 6% with quarterly interest payments and is due on December 13, 2003.
CONTRACTUAL OBLIGATIONS
The following schedule details all of the Company's indebtedness and the
required payments related to such obligations at March 31, 2003 (in thousands):
DUE IN DUE IN DUE IN
LESS THAN DUE IN YEAR YEARS FOUR DUE AFTER
TOTAL ONE YEAR YEAR TWO THREE AND FIVE FIVE YEARS
----- -------- -------- ----- -------- ----------
Long term debt ................. $ 8,629 $ 731 $ 1,364 $ 759 $ -- $ 5,775
Capital lease obligations ...... 738 525 198 15 -- --
Operating lease obligations .... 2,527 636 556 551 501 283
Base salary commitments
under employment
agreements .................. 840 465 375 -- -- --
------- ------- ------- ------- ------- -------
Total contractual obligations... $12,734 $ 2,357 $ 2,493 $ 1,325 $ 501 $ 6,058
======= ======= ======= ======= ======= =======
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and
results of operations are based upon its consolidated financial statements,
which have been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these financial statements in
conformity with accounting principles generally accepted in the United States of
America requires management to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. The more significant areas
requiring use of estimates relate to revenue recognition, accounts receivable
and notes receivable valuation reserves, realizability of intangible assets,
realizability of deferred income tax assets, and the evaluation of contingencies
and litigation. Management bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances. The results of such estimates form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results may materially differ from these
estimates under different assumptions or conditions.
Management believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.
REVENUE RECOGNITION
The Company's service revenue is primarily comprised of custom content
service contracts, Web hosting services, and software support and services. For
contracts and revenues related exclusively to custom content services, the
Company recognizes revenue and profit as work progresses on custom content
service contracts using the percentage-of-completion method, which relies on
estimates of total expected contract revenue and costs. The Company follows this
method since reasonably dependable estimates of the costs applicable to various
stages of a custom content service contract can be made. Recognized revenues and
profit are subject to revisions as the custom content service contract
progresses to completion. Revisions in profit estimates are charged to income in
the period in which the facts that give rise to the revision become known.
Customers sometimes request modifications to projects in progress which may
result in significant revisions to cost estimates and profit recognition, and
the Company may not be successful in negotiating additional payments related to
the changes in scope of requested services. Provisions for any estimated losses
on uncompleted custom content service contracts are made in the period in which
such losses become evident. There were no such losses at March 31, 2003 for
custom content service.
22
In connection with the Company's sales of software licenses in fiscal 2003,
the Company adopted Statement of Position ("SOP") 97-2 as issued by the American
Institute of Certified Public Accountants. In accordance with SOP 97-2, the
Company recognizes revenue from the sale of software licenses if all of the
following conditions are met:
o There is persuasive evidence of an arrangement with the customer;
o The product has been delivered to the customer;
o Collection of the fees is probable; and
o The amount of the fees to be paid by the customer is fixed or
determinable.
For arrangements requiring customer acceptance, revenue is deferred until
the earlier of the end of the acceptance period or until written notice of
acceptance is received from the customer. We consider all arrangements with
payment terms longer than normal not to be fixed or determinable. For
arrangements involving extended payment terms, revenue recognition occurs when
payments are due and collection is probable.
The Company has engaged organizations that market and sell its products and
services through their sales distribution channels and are generally either
referral partners, VAR's or OEM distributors. The Company's distribution
agreements typically have terms of one to three years and are automatically
renewed for an additional like term unless either party terminates the agreement
for breach or other financial reasons. In most of these agreements, the
distribution partner purchases the product from the Company and resells the
product to their customers. Under those agreements, the Company records only the
amount paid by the distributor as revenue and recognizes revenue when all
revenue recognition criteria have been met.
The Company executes contracts that govern the terms and conditions of each
software license, maintenance and support and other services arrangements. These
contracts may be elements in a multiple-element arrangement. Revenue under
multiple-element arrangements, which may include several different software
products and services sold together, is allocated to each element based on the
residual method in accordance with SOP 98-9.
Support and hosting revenue is recognized ratably over the support term,
typically 12 months, and revenues related to implementation, consulting,
education and other services are generally recognized as the services are
performed. Although the Company may provide implementation and consulting
services on a time and materials basis, a significant portion of these services
have been provided on a fixed-fee basis.
The Company has embarked upon a new strategy focusing on e-Learning. Prior
to the transition, the Company operated as a dental practice management company.
Under the terms of the modified service agreements with the Affiliated
Practices, the Company recognizes revenue ratably over the terms of the service
agreement. The Company is no longer being reimbursed for expenses paid on the
practices' behalf. As a result, the components of net revenues have changed with
the new management services agreements resulting in a reduction in reported
service agreement revenues and related dental operating expenses.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with
Statements of Financial Accounting Standards ("SFAS") No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,"
whereby costs for the development of new software products and substantial
enhancements to existing software products are expensed as incurred until
technological feasibility has been established, at which time any additional
costs are capitalized. Technological feasibility is established upon completion
of a working model. Costs of maintenance and customer support are charged to
expense when related revenue is recognized or when those costs are incurred,
whichever occurs first. Software development costs incurred subsequent to the
establishment of technological feasibility have not been significant to date,
and all software development costs have been charged to research and development
expense in the accompanying consolidated statements of operations.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful life of the various classes
of depreciable assets. During fiscal 2003, the Company changed the estimated
useful life on certain classes of its property and equipment to more accurately
reflect the change in the Company's business. The following classes of
depreciable assets were changed as follows:
23
Furniture & Fixtures from 7 years to 5 years
Equipment from 7 years to 5 years
Computer Equipment from 5 years to 3 years
Leasehold Improvements shorter of 5 years or lease term
INTANGIBLE ASSETS
On April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" and as a result, the Company's goodwill is no longer
amortized. SFAS No. 142 requires that goodwill be tested annually (or more
frequently if impairment indicators arise) for impairment. Upon initial
application of SFAS No. 142, the Company determined there was no impairment of
goodwill. The Company has established the date of March 31 on which to value its
goodwill.
The Company has made acquisitions of companies having operations or
technology in areas within its strategic focus and has recorded goodwill and
other intangible assets associated with its acquisitions. Future adverse changes
in market conditions or poor operating results of the underlying acquired
operations could result in losses or an inability to recover the carrying value
of the goodwill and other intangible assets thereby possibly requiring an
impairment charge in the future. As of March 31, 2003, the Company has
identified no such impairment.
Debt issuance costs are amortized using the effective interest rate method
over the ten-year term of the related debt obligations.
Other intangibles primarily consist of the Quisic and LearnLinc purchase
consideration that was allocated to purchased software and customer relationship
intangibles. Such other intangible are amortized over their expected benefit
period of twenty four to thirty six months.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The carrying amount of a long-lived asset is considered
impaired when anticipated undiscounted cash flows expected to result from the
use of the asset and its eventual disposition are less than its carrying amount.
CONCENTRATION OF CREDIT RISK
Accounts receivable and notes receivables represent services rendered by
the Company for e-Learning customers and the Affiliated Practices. The Company
does not perform periodic credit reports or receive collateral related to the
receivables.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its Affiliated Practices and customers to make
required payments. If the financial condition of the Company's practices and
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes in
accordance with SFAS No. 109 "Accounting for Income Taxes." Under this method,
deferred taxes are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured using the
enacted marginal tax rates currently in effect when the differences reverse.
The Company has recorded a full valuation allowance to reduce the carrying
value of its net deferred tax assets because it has concluded that it is not
likely it will be recognized due to the lack of operating history and
implementation of its e-Learning business plan and the modification of its
management service agreements. The Company has considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need
for the valuation allowance. In the event the Company was to determine that it
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such a determination was made.
24
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," for disclosure purposes. Under SFAS No. 123, the Company measures
compensation expense for its stock-based employee compensation plan using the
intrinsic value method prescribed in Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations. The
Company provides pro forma disclosure of the effect on net income or loss as if
the fair value based method prescribed in SFAS No. 123 has been applied in
measuring compensation expense.
GUARANTEES AND INDEMNIFICATIONS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission
of FIN 34." The following is a summary of the Company's agreements that the
Company has determined are within the scope of FIN No. 45:
The Company provides a 90-day warranty for certain of its products.
Historically, the Company's performance under the warranty has been minimal, and
as such, no warranty accrual has been provided for in the accompanying
consolidated financial statements.
Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the officer
or director's serving in such capacity. The term of the indemnification period
is for the officer's or director's lifetime. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. However, the Company has a directors
and officer liability insurance policy that limits its exposure and enables it
to recover a portion of any future amounts paid. As a result of its insurance
policy coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal and has no liabilities recorded for these
agreements as of March 31, 2003.
The Company enters into indemnification provisions under (i) its agreements
with other companies in its ordinary course of business, typically with business
partners, contractors, and customers, landlords and (ii) its agreements with
investors. Under these provisions the Company generally indemnifies and hold
harmless the indemnified party for losses suffered or incurred by the
indemnified party as a result of the Company's activities or, in some cases, as
a result of the indemnified party's activities under the agreement. The maximum
potential amount of future payments the Company could be required to make under
these indemnification provisions is unlimited. The Company has not incurred
material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of March 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS", which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred with the associated asset retirement costs being capitalized as a part
of the carrying amount of the long-lived asset. SFAS No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and reconciliation of changes in the components of those
obligations. The statement is effective for fiscal years beginning after June
15, 2002. The Company does not expect the adoption of SFAS No. 143 to have a
material effect on the Company's consolidated financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS," which addresses accounting and financial reporting for the
impairment or disposal of long-lived assets. This standard was effective for the
Company's consolidated financial statements beginning January 1, 2002. The
implementation of SFAS No. 144 did not have a material impact on the Company's
consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "RESCISSION OF FASB STATEMENTS
NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS." SFAS No. 145 rescinded three previously issued statements and
25
amended SFAS No. 13, "ACCOUNTING FOR LEASES." The statement provides reporting
standards for debt extinguishments and provides accounting standards for certain
lease modifications that have economic effects similar to sale-leaseback
transactions. The statement is effective for certain lease transactions
occurring after May 15, 2002 and all other provisions of the statement shall be
effective for fiscal years ending after May 15, 2002. The implementation of SFAS
No. 145 will effect the classification of extraordinary items presented in the
Company's consolidated statements of operations. Such gains will no longer be
considered extraordinary in nature and will be reclassified to operations.
In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES," which updates accounting and
reporting standards for personnel and operational restructurings. The Company
will be required to adopt SFAS No. 146 for exit, disposal or other restructuring
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not expect the adoption of SFAS No. 146 to have a
material effect on the Company's consolidated financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT TO SFAS NO. 123." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method on accounting for stock-based employee compensation. The
Company currently does not intend to adopt SFAS No. 123 and accordingly does not
expect the implementation of SFAS No. 148 to have a material effect on the
Company's consolidated financial position or results of operations.
In January 2003, FIN No. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES"
was issued. This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation
of certain entities. FIN No. 46 will require identification of the Company's
participation in variable interests entities ("VIEs"), which are defined as
entities with a level of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand-alone basis, or whose equity
holders lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN No. 46 also sets forth certain disclosures
regarding interests in VIE that are deemed significant, even if consolidation is
not required. The adoption of FIN No. 46 did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" was issued. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003. Adoption of this statement is not expected to have a significant effect on
the Company's consolidated financial position or results of operations.
In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003. The adoption of SFAS No. 150 is not expected to have a significant
effect on the Company's consolidated financial position, results of operations,
or cash flows.
ADDITIONAL RISK FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND THE MARKET
PRICE OF OUR COMMON STOCK
You should carefully consider the risks described below. The risks and
uncertainties described below are not the only ones we face. If any of the
following risks actually occur, our business, financial condition or results of
operations could be materially and adversely affected. In that case, the trading
price of our common stock could be adversely affected.
WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR
BUSINESS.
We have a limited operating history in the e-Learning business and
particularly as a provider of web conferencing and web collaboration software.
While the organizations that we have acquired have been engaged in the
26
e-Learning business for over ten years, we only recently acquired those assets
and you should not rely on our historical results as an indication of our future
performance. Over the past 12 months we have made significant changes to our
product mix and service mix, our growth strategies, our sales and marketing
plans, and other operational matters, including a significant reduction in our
employee base. As a result, it may be difficult to evaluate an investment in our
company, and we cannot be certain that our business model and future operating
performance will yield the results that we intend. In addition, the competitive
and rapidly changing nature of the e-Learning and Web conferencing markets makes
it difficult for us to predict future results. Our business strategy may be
unsuccessful and we may be unable to address the risks we face.
THE COMPANY FACES RISKS ENCOUNTERED BY EARLY-STAGE COMPANIES IN INTERNET-RELATED
BUSINESSES AND MAY BE UNSUCCESSFUL IN ADDRESSING THESE RISKS.
The Company faces risks frequently encountered by early-stage companies in
new and rapidly evolving markets. Specific risks the Company faces relate to the
demand for e-Learning products and services, and broad and timely acceptance of
the Company's e-Learning products and services. The Company may fail to
adequately address these risks and, as a consequence, its business may suffer.
To address these risks, the Company must:
o successfully introduce and attract new customers to its e-Learning
products;
o successfully implement its sales and marketing strategy to generate
sufficient revenues to sustain operations;
o foster existing relationships its customers to provide for continued
or recurring business; and
o successfully address and establish new products and technologies.
THE COMPANY'S QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE
SIGNIFICANTLY.
The Company's operating results have varied significantly from quarter to
quarter and are likely to continue to fluctuate as a result of a variety of
factors, many of which the Company cannot control. Factors that may adversely
affect the Company's quarterly operating results include:
o the size and timing of product orders;
o the mix of revenue from custom services and software products;
o the market acceptance of the Company's products and services;
o the Company's ability to develop and market new products in a timely
manner and the market acceptance of these new products;
o the timing of revenues and expenses relating to the Company's product
sales; and,
o the timing of revenue recognition.
Expense levels are based, in part, on expectations as to future revenue and
to a large extent are fixed in the short term. To the extent the Company is
unable to predict future revenue accurately, the Company may be unable to adjust
spending in a timely manner to compensate for any unexpected revenue shortfall.
WE HAVE SIGNIFICANT OPERATING LOSSES AND HAVE LIMITED FINANCIAL RESOURCES
We have incurred substantial operating losses and have limited financial
resources at our disposal. We have substantial current and long-term obligations
that we will not be able to satisfy without additional debt and/or equity
capital and ultimately generating profits and cash flows from our e-Learning
operations. As we transition from the management of dental practices, from which
we received substantial cash flows during the past two years, to being a
provider of e-Learning services, we will need to show growth and financial
improvement in our e-Learning operating segment. We may not be successful in
raising additional debt or equity capital and may not become profitable in our
e-Learning business. As a result, we may not have sufficient financial resources
to satisfy our obligations as they come due in the near term.
27
OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A
GOING CONCERN
Our consolidated financial statements have been prepared on a basis which
assumes that we will continue as a going concern and which contemplates the
realization of our assets and the satisfaction of our liabilities and
commitments in the normal course of business. The Company has a significant
working capital deficiency, and has suffered substantial recurring losses and
negative cash flows from operations. Also, the Company's management service
agreements with the affiliated dental practices nearly all expired during fiscal
2003 and will continue to expire through December 31, 2003, which will reduce
revenues and cash flows from this source and accordingly will negatively affect
the Company's liquidity and operating results. These matters, among others, and
the limited operating history as an e-Learning company, caused our independent
accountants to express their substantial doubt about as to our ability to
continue as a going concern.
YOUR OWNERSHIP INTEREST IN THE COMPANY WILL BE DILUTED UPON ISSUANCE OF SHARES
WE HAVE RESERVED FOR FUTURE ISSUANCE
On March 31, 2003, 17,018,184 shares of our common stock were outstanding,
of which 1,244,713 were held in treasury, and 14,845,000 additional shares of
our common stock were reserved for issuance. The issuance of these additional
shares will reduce your percentage ownership in the Company.
The following shares were reserved for issuance as of March 31, 2003:
o Issued and outstanding stock options to purchase shares totaling
approximately 1,836,000;
o Issued and outstanding warrants to purchase shares totaling
approximately 6,663,000;
o A restricted stock grant to receive shares totaling approximately
450,000;
o Shares issuable upon the conversion of convertible redeemable
subordinated notes totaling approximately 5,775,000; and
o Shares issuable upon the conversion of convertible Series A
subordinated notes totaling approximately 121,000.
The existence of these reserved shares coupled with other factors, such as
the relatively small public float, could adversely affect prevailing market
prices for our common stock and our ability to raise capital through an offering
of equity securities.
THE LOSS OF THE SERVICES OF THE COMPANY'S SENIOR EXECUTIVES AND KEY PERSONNEL
WOULD LIKELY CAUSE THE COMPANY'S BUSINESS TO SUFFER.
The Company's success depends to a significant degree on the performance of
the senior management team listed elsewhere in this Memorandum. The loss of any
of these individuals could harm the Company's business. The Company does not
maintain key person life insurance for any officers or key employees other than
James Powers. The Company's success also depends on its ability to attract,
integrate, motivate and retain additional highly skilled technical, sales and
marketing, and professional services personnel. To the extent the Company is
unable to attract and retain a sufficient number of additional skilled
personnel, the Company's business will suffer.
THE COMPANY'S INTELLECTUAL PROPERTY MAY BECOME SUBJECT TO LEGAL CHALLENGES,
UNAUTHORIZED USE OR INFRINGEMENT, ANY OF WHICH COULD DIMINISH THE VALUE OF ITS
PRODUCTS AND SERVICES.
The Company's success depends in large part on its proprietary technology.
If the Company fails to successfully enforce its intellectual property rights,
the value of these rights, and consequently the value of its products and
services to its customers, could diminish substantially. It may be possible for
third parties to copy or otherwise obtain and use its intellectual property or
trade secrets without the Company's authorization, and it may also be possible
for third parties to independently develop substantially equivalent intellectual
property. Currently, the Company does not have patent protection in place
related to its products and services. Litigation may be necessary in the future
to enforce the Company's intellectual property rights, to protect trade secrets
or to determine the validity and scope of the proprietary rights of others. From
time to time the Company has received, and may in the future receive, notice of
claims of infringement of other parties' proprietary rights. Such claims could
result in costly litigation and could divert management and technical resources.
These types of claims could also delay product shipment or require the Company
28
to develop non-infringing technology or enter into royalty or licensing
agreements, which agreements, if required, may not be available on reasonable
terms, or at all.
A DETERIORATION OF GENERAL ECONOMIC CONDITIONS MAY MATERIALLY AND ADVERSELY
AFFECT THE COMPANY'S BUSINESS.
The Company's revenues are subject to fluctuation as a result of general
economic conditions. The Company's customers may reduce their expenditures for
education and training during economic downturns. Therefore, a continued
economic downturn could adversely affect the Company's business.
WE OFFER OUR WEB COLLABORATION PRODUCTS ON AN ASP BASIS SO IF WE DO NOT INCREASE
THE CAPACITY OF OUR INFRASTRUCTURE IN EXCESS OF CUSTOMER DEMAND, CUSTOMERS MAY
EXPERIENCE SERVICE PROBLEMS.
We expect the demand on our ASP business to increase significantly.
Accordingly, we must increase our capacity to keep pace with that growth in
demand. To accommodate increased customer usage requires a significant increase
in the capacity of our infrastructure and may cause us to invest significant
resources or capital. If we fail to increase our capacity in a timely and
efficient manner, customers may experience service problems that could cause us
to lose customers and decrease our revenue.
COMPETITION IN THE WEB CONFERENCING SERVICES MARKET IS INTENSE AND WE MAY BE
UNABLE TO COMPETE SUCCESSFULLY, PARTICULARLY AS A RESULT OF RECENT ANNOUNCEMENTS
FROM LARGE SOFTWARE COMPANIES.
The market for web conferencing services is relatively new, rapidly
evolving and intensely competitive. Competition in our market will continue to
intensify and may force us to reduce our prices, or cause us to experience
reduced sales and margins, loss of market share and reduced acceptance of our
services. Many of our competitors have larger and more established customer
bases, longer operating histories, greater name recognition, broader service
offerings, more employees and significantly greater financial, technical,
marketing, public relations and distribution resources than we do. We expect
that we will face new competition as others enter our market to develop web
conferencing services. These current and future competitors may also offer or
develop products or services that perform better than ours. In addition,
acquisitions or strategic partnerships involving our current and potential
competitors could harm us in a number of ways.
FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS
OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF INTERNET-BASED
BUSINESS AND SERVICES.
As commercial use of the Internet increases, federal, state and foreign
agencies could enact laws or adopt regulations covering issues such as user
privacy, content and taxation of products and services. If enacted, such laws or
regulations could limit the market for our products and services. Although they
might not apply to our business directly, we expect that laws or rules
regulating personal and consumer information could indirectly affect our
business. It is possible that such legislation or regulation could expose
companies involved in providing Internet-based services to liability, which
could limit the growth of Web use generally and thereby reduce demand for our
products and services. Such legislation or regulation could dampen the growth in
Web usage and decrease its acceptance as a medium of communications and
commerce.
WE DEPEND LARGELY ON ONE-TIME SALES TO GROW REVENUES.
A high percentage of our revenue is attributable to one-time purchases by
our customers rather than long term recurring contracts. As a result, our
inability to continue to obtain new agreements and sales may result in lower
than expected revenue, and therefore, harm our ability to sustain operations or
profitability on a consistent basis, which could also cause our stock price to
decline. Further, because we face competition from larger better capitalized
companies, we could face increased downward pricing pressure that could cause a
decrease in our gross margins.
29
OUR OPERATING RESULTS MAY SUFFER IF WE FAIL TO DEVELOP AND FOSTER OR VALUE ADDED
RESELLER OR DISTRIBUTION RELATIONSHIPS.
We have an existing channel and distribution network that provides growing
revenues and contributes to our high margin software sales. These distribution
partners are not obligated to distribute our services at any particular minimum
level. As a result, we cannot accurately predict the amount of revenue we will
derive from our distribution partners in the future. Our inability of our
distribution partners to sell our products to their customers and increase their
distribution of our products could result in significant reductions in our
revenue, and therefore, harm our ability to sustain profitability on a
consistent basis.
THE GROWTH OF OUR BUSINESS SUBSTANTIALLY DEPENDS ON OUR ABILITY TO SUCCESSFULLY
DEVELOP AND INTRODUCE NEW SERVICES AND FEATURES IN A TIMELY MANNER.
We acquired our Web collaboration, Web conferencing and virtual classroom
software in November of 2002. With our focus upon that product suite our growth
depends on our ability to continue to develop new features, products and
services around that suite and line of products. We may not successfully
identify, develop and market new products and features in a timely and
cost-effective manner. If we fail to develop and maintain market acceptance of
our existing and new products to offset our continuing development costs, then
our net losses will increase and we may not be able to sustain profitability on
a consistent basis.
IF WE FAIL TO OFFER COMPETITIVE PRICING, WE MAY NOT BE ABLE TO ATTRACT AND
RETAIN CUSTOMERS.
Because the Web conferencing market is relatively new and still evolving,
the prices for these services are subject to rapid and frequent changes. In many
cases, businesses provide their services at significantly reduced rates, for
free or on a trial basis in order to win customers. Due to competitive factors
and the rapidly changing marketplace, we may be required to significantly reduce
our pricing structure, which would negatively affect our revenue, margins and
our ability to sustain profitability on a consistent basis. We have an existing
channel and distribution network that provides growing revenues and contributes
to our high margin software sales. These distribution partners are not obligated
to distribute our services at any particular minimum level. As a result, we
cannot accurately predict the amount of revenue we will derive from our
distribution partners in the future. Our inability of our distribution partners
to sell our products to their customers and increase their distribution of our
products could result in significant reductions in our revenue, and therefore,
harm our ability to sustain profitability on a consistent basis.
OUR INTERNATIONAL DISTRIBUTOR NETWORK MAY CAUSE COSTS THAT ARE NOT ANTICIPATED.
We continue to expand internationally through our value added reseller
network and OEM partners. We have limited experience in international operations
and may not be able to compete effectively in international markets. We face
certain risks inherent in conducting business internationally, such as: our
inability to establishing and maintain effective distribution channels and
partners; the varying technology standards from country to country; our
inability to effectively protect our intellectual property rights or the code to
our software; our inexperience with inconsistent regulations and unexpected
changes in regulatory requirements in foreign jurisdictions; language and
cultural differences; fluctuations in currency exchange rates; our inability to
effectively collecting accounts receivable; or our inability to manage sales and
other taxes imposed by foreign jurisdictions.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following discusses our exposure to market risk related to changes in
interest rates, equity prices and foreign currency exchange rates. Market risk
generally represents the risk of loss that may result from the potential change
in the value of a financial instrument as a result of fluctuations in interest
rates and market prices. We have not traded or otherwise bought and sold
derivatives nor do we expect to in the future. We also do not invest in market
risk sensitive instruments for trading purposes.
30
The primary objective of the Company's investment activity is to preserve
principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, the Company maintains its portfolio
of cash equivalents in a variety of money market funds.
As of March 31, 2003, the carrying value of our outstanding convertible
redeemable subordinated notes was approximately $3.7 million at a fixed interest
rate of 12%. In certain circumstances, we may redeem this long-term debt. Our
other components of indebtness bear fixed interest rates of 6% to 9%. Because
the interest rates on these instruments are fixed, a hypothetical 10% change in
interest rates would not have a material impact on our financial condition,
revenues or operations. Increases in interest rates could, however, increase the
interest expense associated with future borrowings, if any. We do not hedge
against interest rate increases.
31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
INDEX TO FINANCIAL STATEMENTS
PAGE(S)
-------
FINANCIAL STATEMENTS:
Report of Independent Certified Public Accountants ........................ 33
Report of Independent Accountants ......................................... 34
Consolidated Balance Sheets at March 31, 2003 and 2002 .................... 35
Consolidated Statements of Operations for the years ended March 31,
2003, 2002 and 2001 ..................................................... 36
Consolidated Statements of Shareholders' Equity (Deficit) for the
years ended March 31, 2003, 2002 and 2001 ............................... 37
Consolidated Statements of Cash Flows for the years ended March 31,
2003, 2002 and 2001 ..................................................... 38
Notes to Consolidated Financial Statements ................................ 39
FINANCIAL STATEMENTS SCHEDULE:
Report of Independent Certified Public Accountants ........................ 67
Report of Independent Accountants ......................................... 68
Schedule II - Valuation and Qualifying Accounts for the years ended
March 31, 2003, 2002 and 2001 ........................................... 69
All other schedules are omitted because they are not applicable.
32
Report of Independent Certified Public Accountants
The Board of Directors and Shareholders
EDT Learning, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of EDT Learning,
Inc. and its subsidiaries (the "Company") as of March 31, 2003, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall consolidated financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of EDT
Learning, Inc. and its subsidiaries as of March 31, 2003, and the consolidated
results of their operations and their cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has a significant working capital
deficiency and has suffered a substantial recurring loss from operations. These
matters, among others, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 2. Continuation of the Company is dependent on the Company's
ability to raise additional equity or debt capital, to increase its learning
revenues, to generate positive cash flows from operations and to achieve
profitability. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As described in Note 3 to the consolidated financial statements, the Company
adopted the provisions of SFAS No. 142 "Goodwill and Other Intangible Assets,"
effective April 1, 2002.
/s/ BDO Seidman, LLP
Costa Mesa, California
June 6, 2003
33
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
EDT Learning, Inc. and Subsidiaries
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, shareholders' equity (deficit) and cash
flows present fairly, in all material respects, the financial position of EDT
Learning, Inc. and its Subsidiaries at March 31, 2002 and the results of their
operations and their cash flows for each of the two years in the period ended
March 31, 2002 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has experienced recurring negative cash flows
from operations and working capital deficits that raise substantial doubt about
its ability to continue as a going concern. Management's plans in regard to
these matters are also described in Note 2. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
/s/PricewaterhouseCoopers LLP
Phoenix, Arizona
July 11, 2002
34
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, MARCH 31,
2003 2002
-------- --------
ASSETS
Current Assets:
Cash and cash equivalents ................................................ $ 409 $ 1,498
Accounts receivable, net of allowance for doubtful accounts of $425 and
$754, respectively ..................................................... 675 824
Notes receivable, net of allowance for doubtful accounts of $553 and
$402, respectively .................................................... 270 536
Prepaid expenses and other current assets ................................ 33 427
-------- --------
Total current assets ................................................... 1,387 3,285
Property and equipment, net .............................................. 485 2,137
Goodwill ................................................................. 8,823 7,479
Intangible assets, net ................................................... 1,346 1,984
Notes receivable, net of allowance for doubtful accounts of $607 and
$690, respectively .................................................... 326 493
Other assets ............................................................. 56 209
-------- --------
Total assets ............................................................ $ 12,423 $ 15,587
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt ........................................ $ 728 $ 1,337
Accounts payable and accrued liabilities ................................. 2,040 2,203
Current portion of capital lease liabilities ............................. 462 430
Current portion of deferred revenue ...................................... 817 853
-------- --------
Total current liabilities .............................................. 4,047 4,823
Long term debt, less current maturities, net of discount of $2,038
and $2,264, respectively ................................................. 5,863 5,367
Capital lease liabilities, less current maturities .......................... 193 536
Deferred revenue, less current portion ...................................... -- 195
-------- --------
Total liabilities ...................................................... 10,103 10,921
-------- --------
Commitments and contingencies
Shareholders' Equity:
Common stock, $.001 par value 40,000,000 shares authorized, 17,018,184 and
15,281,485 issued, respectively ........................................ 17 15
Additional paid-in capital ............................................... 32,854 31,336
Accumulated deficit ...................................................... (29,300) (25,544)
Less: 1,244,713 and 1,179,630 treasury shares at cost, respectively ...... (1,251) (1,141)
-------- --------
Total shareholders' equity ............................................. 2,320 4,666
-------- --------
Total liabilities and shareholders' equity ............................. $ 12,423 $ 15,587
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS. PLEASE REFER TO THE REPORTS OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS.
35
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
-------- -------- --------
Revenues:
Licenses ....................................................... $ 447 $ 92 $ --
Service and maintenance ........................................ 3,629 2,590 --
-------- -------- --------
Total e-Learning revenue ................................... 4,076 2,682 --
Dental contract revenue ........................................ 3,129 6,582 8,320
-------- -------- --------
Total revenues ............................................... 7,205 9,264 8,320
-------- -------- --------
Operating expenses:
Research and development ....................................... 3,236 2,323 --
Sales and marketing ............................................ 1,660 1,123 --
General and administrative ..................................... 3,345 2,692 7,340
Depreciation and amortization .................................. 2,051 1,990 2,368
Impairment of assets ........................................... 390 -- 23,000
-------- -------- --------
Total operating expenses ..................................... 10,682 8,128 32,708
-------- -------- --------
Earnings (loss) from operations ................................... (3,477) 1,136 (24,388)
-------- -------- --------
Interest expense .................................................. (1,401) (1,139) (1,358)
Interest income ................................................... 126 238 352
Gain on termination of service agreements
with Affiliated Practices .................................... 914 1,297 --
Other income ...................................................... 82 8 407
-------- -------- --------
(279) 404 (599)
-------- -------- --------
Income (loss) before income taxes and extraordinary item .......... (3,756) 1,540 (24,987)
Income tax expense ................................................ -- -- --
-------- -------- --------
Income (loss) before extraordinary item ........................... (3,756) 1,540 (24,987)
Extraordinary item - gain on debt forgiveness (net of tax
effect of $0) .................................................... -- 4,265 70
-------- -------- --------
Net income (loss) ................................................. $ (3,756) $ 5,805 $(24,917)
======== ======== ========
Earnings (loss) per common share - basic:
Earnings (loss) before extraordinary item ...................... $ (0.24) $ 0.13 $ (2.38)
Extraordinary item ............................................. -- 0.36 0.01
-------- -------- --------
Net earnings (loss) ............................................ $ (0.24) $ 0.49 $ (2.37)
======== ======== ========
Earnings (loss) per common share - diluted:
Earnings (loss) before extraordinary item ...................... $ (0.24) $ 0.12 $ (2.38)
Extraordinary item ............................................. -- 0.34 0.01
-------- -------- --------
Net earnings (loss) ............................................ $ (0.24) $ 0.47 $ (2.37)
======== ======== ========
Number of shares used in calculation of earnings (loss) per share:
Basic .......................................................... 15,710 11,930 10,496
Diluted ........................................................ 15,710 12,466 10,496
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS. PLEASE REFER TO THE REPORTS OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS.
36
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS)
TOTAL
ADDITIONAL SHAREHOLDERS'
COMMON PAID IN ACCUMULATED TREASURY EQUITY
SHARES AMOUNT CAPITAL DEFICIT STOCK (DEFICIT)
------ ------ ------- ------- ----- ---------
Balances, April 1, 2000 .............. 10,821 $ 11 $ 25,604 $ (6,432) $ (176) $ 19,007
Issuance of common stock ............. 998 1 307 -- -- 308
Shares repurchased ................... (97) -- (102) -- (950) (1,052)
Net loss ............................. -- -- -- (24,917) -- (24,917)
Balances, March 31, 2001 ............. 11,722 12 25,809 (31,349) (1,126) (6,654)
Issuance of common stock ............. 3,559 3 3,219 -- -- 3,222
Issuance of warrants ................. -- -- 44 -- -- 44
Issuance of warrants in connection
with convertible redeemable
subordinated notes ................. -- -- 1,132 -- -- 1,132
Beneficial conversation feature
associated with convertible
redeemable subordinated notes ...... -- -- 1,132 -- -- 1,132
Shares repurchased ................... -- -- -- -- (15) (15)
Net income ........................... -- -- -- 5,805 -- 5,805
Balances, March 31, 2002 ............. 15,281 15 31,336 (25,544) (1,141) 4,666
Option exercises ..................... 24 -- 20 -- -- 20
Issuance of common stock in connection
with Quisic acquisition ............ 2,000 2 1,838 -- -- 1,840
Escrow shares returned in connection
with the ThoughtWare acquisition ... (365) -- (507) -- -- (507)
Vesting of restricted stock grant .... -- -- 51 -- -- 51
Restoration of shares previously
reflected as cancelled ............ 65 -- 110 -- (110) --
Other ................................ 13 -- 6 -- -- 6
Net loss ............................. -- -- -- (3,756) -- (3,756)
-------- -------- -------- -------- -------- --------
Balances, March 31, 2003 ............. 17,018 $ 17 $ 32,854 $(29,300) $ (1,251) $ 2,320
======== ======== ======== ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL
STATEMENTS. PLEASE REFER TO THE REPORTS OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS.
37
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE FOR THE FOR THE
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
-------- -------- --------
Cash flows from operating activities
Net income (loss) .......................................... $ (3,756) $ 5,805 $(24,917)
Adjustments to reconcile net income (loss) to cash provided
by (used in) operating activities:
Provision for (recovery of) bad debts ................... 291 (603) 1,705
Impairment of assets .................................... 390 -- 23,000
Depreciation and amortization ........................... 2,051 2,089 2,368
Stock compensation expense .............................. 51 44 --
Extraordinary gain on debt forgiveness .................. -- (4,265) (70)
Gain on practice terminations ........................... (914) (1,295) --
Accretion of debt discount to interest expense ......... 226 -- --
Changes in operating assets and liabilities, net of business
acquisitions:
Accounts receivable ................................... (4) (1,275) 110
Prepaid expenses and other current assets ............. 400 222 111
Other assets .......................................... (67) (88) 75
Accounts payable and accrued liabilities .............. (205) (576) (925)
Deferred revenue ...................................... (498) (2,229) (85)
-------- -------- --------
Net cash provided by (used in) operating activities . (2,035) (2,171) 1,372
-------- -------- --------
Cash flows from investing activities
Proceeds from practice terminations ..................... 1,893 2,900 --
Collection of notes receivable .......................... -- 743 533
Capital expenditures .................................... (64) (40) (138)
Proceeds from sale of equipment ......................... 7 -- --
Acquisitions, net of cash acquired ...................... 35 (118) --
Issuance of notes receivable ............................ (97) -- (24)
-------- -------- --------
Net cash provided by investing activities ........... 1,774 3,485 371
-------- -------- --------
Cash flows from financing activities
Proceeds from issuance of subordinated notes and warrants -- 5,775 --
Proceeds from exercise of stock options ................. 20 -- --
Repayment of long-term debt ............................. (537) (5,415) (941)
Repayment of capital lease liabilities .................. (311) (395) (304)
Financing costs incurred ................................ -- (832) --
-------- -------- --------
Net cash used in financing activities ................... (828) (867) (1,245)
-------- -------- --------
Net change in cash and cash equivalents ............. (1,089) 447 498
Cash and cash equivalents, beginning of period ............. 1,498 1,051 553
-------- -------- --------
Cash and cash equivalents, end of period ................... $ 409 $ 1,498 $ 1,051
======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
PLEASE REFER TO THE REPORTS OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS.
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Headquartered in Phoenix, Arizona, EDT Learning, Inc. ("EDT Learning" or
the "Company") is a leading provider of e-Learning and Web collaboration
software and services. The Company's software has become well recognized for
providing industry-leading software with the most robust set of features and
functionality. With over 15 years of combined e-Learning expertise, EDT Learning
provides proven solutions to corporate, government, and education clients alike.
As a comprehensive provider of e-Learning software and services, EDT Learning's
products and services are offered either as an integrated suite or sold
separately.
The Company began in March of 1998 as a dental practice management company
under the name Pentegra Dental Group, Inc. Its formation included the
simultaneous rollup of dental practices ("Affiliated Practices") and an initial
public offering raising $25 million in initial capital. The Company's initial
goals were to provide training and practice enhancement services to its
affiliated dental practices spread over 31 states. The Company subsequently
shifted its focus away from the dental practice management industry and toward
the e-Learning sector in the summer of 2001, and changed its name to EDT
Learning, Inc. The Company has elected not to enter into new dental practice
management contacts, and intends to not renew existing dental practice
management contracts as they expire.
2. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared on a
basis which assumes that the Company will continue as a going concern and which
contemplates the realization of assets and the satisfaction of liabilities and
commitments in the normal course of business. The Company changed its business
model from a dental practice management company to an e-Learning company in the
summer of 2001. The Company is currently implementing its e-Learning strategy
and has a limited operating history in the e-Learning business. The Company
acquired the assets of two e-Learning entities during fiscal 2003 and acquired
two e-Learning entities during fiscal 2002 (see Note 11).
The Company has a working capital deficiency, incurred an operating loss
and had negative cash flows from operations during fiscal 2003. As part of the
Company's legacy business, services were provided to affiliated dental practices
in accordance with modified service agreements. Those services generally were
access to online enhancement, online payroll processing and online consulting
and seminars. As anticipated and previously announced, nearly all of those
legacy service agreements terminated during fiscal 2003 which will reduce
revenues and cash flow from this source and accordingly will negatively affect
the Company's liquidity and operating results. These matters, among others,
including those discussed above and the limited operating history as an
e-Learning company, raise substantial doubt about the Company's ability to
continue as a going concern.
Management's plan with regard to these matters include continued
development, marketing and licensing of its e-Learning products and services
through both internal growth and acquisition. Although management continues to
pursue these plans, there is no assurance that the Company will be successful in
obtaining sufficient revenues from its products and services to provide adequate
cash flows to sustain operations. Continuation of the Company is dependent on
the Company's ability to raise additional equity or debt capital, to increase
its e-Learning revenues, to generate positive cash flows from operations and to
achieve profitability. The consolidated financial statements do not include any
adjustments related to the recoverability of assets and classification of
liabilities that might result from the outcome of this uncertainty.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements of the Company include the accounts
of the Company and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
39
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and
liabilities. The more significant areas requiring use of estimates relate to
revenue recognition, accounts receivable and notes receivable valuation
reserves, realizability of intangible assets, realizability of deferred income
tax assets, and the evaluation of contingencies and litigation. Management bases
its estimates on historical experience and on various other assumptions that are
believed to be reasonable under the circumstances. The results of such estimates
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
materially differ from these estimates under different assumptions or
conditions.
SEGMENT INFORMATION
The Company operated in two industry segments during fiscal years 2003 and
2002. The Company serves the e-Learning industry with a combination of
customizable products and services. The Company also served the dental industry
through its remaining service agreements with Affiliated Practices. The Company
presents its consolidated financial statements to reflect how the "key operating
decision maker" views the business and has made the appropriate enterprise wide
disclosures in accordance with Statements of Financial Accounting Standards
("SFAS") No. 131, "Disclosures about Segments of an Enterprise and Related
Information."
REVENUE RECOGNITION
The Company's service revenue is primarily comprised of custom content
service contracts, Web hosting services, and software support and services. The
Company recognizes revenue and profit as work progresses on e-Learning custom
content services contracts using the percentage-of-completion method, which
relies on estimates of total expected contract revenue and costs. The Company
follows this method since reasonably dependable estimates of the costs
applicable to various stages of a contract can be made. Recognized revenues and
profit are subject to revisions as the contract progresses to completion.
Revisions in profit estimates are charged to income in the period in which the
facts that give rise to the revision become known. Customers sometimes request
modifications to custom content services contracts in progress which may result
in significant revisions to cost estimates and profit recognition, and the
Company may not be successful in negotiating additional payments related to the
changes in scope of requested services. Provisions for any estimated losses on
uncompleted custom content services contracts are made in the period in which
such losses become evident. There were no such losses at March 31, 2003.
In connection with the Company's initial sales of software licenses in
fiscal 2003, the Company adopted Statement of Position ("SOP") No. 97-2 as
issued by the American Institute of Certified Public Accountants. In accordance
with SOP No. 97-2, the Company recognizes revenue from the sale of software
licenses if all of the following conditions are met:
o There is persuasive evidence of an arrangement with the customer;
o The product has been delivered to the customer;
o Collection of the fees is probable; and
o The amount of the fees to be paid by the customer is fixed or
determinable.
For arrangements requiring customer acceptance, revenue is deferred until
the earlier of the end of the acceptance period or until written notice of
acceptance is received from the customer. We consider all arrangements with
payment terms longer than normal not to be fixed or determinable. For
arrangements involving extended payment terms, revenue recognition occurs when
payments are due and collection is probable.
The Company has engaged organizations that market and sell its products and
services through their sales distribution channels and are generally either
referral partners, VAR's or OEM distributors. The Company's distribution
agreements typically have terms of one to three years and are automatically
renewed for an additional like term unless either party terminates the agreement
for breach or other financial reasons. In most of these agreements, the
distribution partner purchases the product from the Company and resells the
product to their customers. Under those agreements, the Company records only the
amount paid by the distributor as revenue and recognizes revenue when all
revenue recognition criteria have been met.
40
The Company executes contracts that govern the terms and conditions of each
software license, maintenance and support and other services arrangements. These
contracts may be elements in a multiple-element arrangement. Revenue under
multiple-element arrangements, which may include several different software
products and services sold together, is allocated to each element based on the
residual method in accordance with SOP 98-9.
Support and hosting revenue is recognized ratably over the support term,
typically 12 months, and revenues related to implementation, consulting,
education and other services are generally recognized as the services are
performed. Although the Company may provide implementation and consulting
services on a time and materials basis, a portion of these services have been
provided on a fixed-fee basis.
The Company has embarked upon a new strategy focusing on e-Learning. Prior
to the transition, the Company operated as a dental practice management company.
Under the terms of the modified service agreements with the Affiliated
Practices, the Company recognizes revenue ratably over the terms of the service
agreement. The Company is no longer being reimbursed for expenses paid on the
practices' behalf. As a result, the components of net revenues have changed with
the new management services agreements resulting in a reduction in reported
service agreement revenues and related dental operating expenses.
SOFTWARE DEVELOPMENT COSTS
The Company accounts for software development costs in accordance with SFAS
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," whereby costs for the development of new software products
and substantial enhancements to existing software products are expensed as
incurred until technological feasibility has been established, at which time any
additional costs are capitalized. Technological feasibility is established upon
completion of a working model. Costs of maintenance and customer support are
charged to expense when related revenue is recognized or when those costs are
incurred, whichever occurs first. Software development costs incurred subsequent
to the establishment of technological feasibility have not been significant to
date, and all software development costs have been charged to research and
development expense in the accompanying consolidated statements of operations.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt investments with remaining
maturities of three months or less at the date of acquisition to be cash
equivalents.
The Company maintains cash balances at various financial institutions.
Accounts at each institution are insured by the Federal Deposit Insurance
Corporation up to $100,000. The Company's accounts at these institutions may, at
times, exceed the federally insured limits.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful life of the various classes
of depreciable assets. During fiscal 2003, the Company changed the estimated
useful life on certain classes of its property and equipment to more accurately
reflect the change in the Company's business. The following classes of
depreciable assets were changed as follows:
Furniture & Fixtures from 7 years to 5 years
Equipment from 7 years to 5 years
Computer Equipment from 5 years to 3 years
Leasehold improvements shorter of 5 years or lease term
Maintenance and repairs are charged to expense whereas renewals and major
replacements are capitalized. Gains and losses from dispositions are included in
operations.
INTANGIBLE ASSETS
On April 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets" and as a result, the Company's goodwill is no longer
amortized. SFAS No. 142 requires that goodwill be tested annually (or more
frequently if impairment indicators arise) for impairment. Upon initial
application of SFAS No. 142, the Company determined there was no impairment of
41
goodwill. The Company has established the date of March 31 on which to conduct
its annual impairment test.
Had the Company adopted SFAS No. 142 on April 1, 2001, net income would
have increased by $91,000 for the year ended March 31, 2002 due to the
non-amortization of goodwill. The adoption of this statement would have
increased the basic and diluted earnings per share before extraordinary item to
$0.14 and $0.13 from $0.13 and $0.12 for the year ended March 31, 2002.
The Company has made acquisitions of companies having operations or
technology in areas within its strategic focus and has recorded goodwill and
other intangible assets associated with the acquisitions (see Note 11). Future
adverse changes in market conditions or poor operating results of the underlying
acquired operations could result in losses or an inability to recover the
carrying value of the goodwill and other intangible assets thereby possibly
requiring an impairment charge in the future. As of March 31, 2003, the Company,
based in part on a third party limited scope valuation, has identified no such
impairment.
Debt issuance costs are amortized using the effective interest rate method
over the ten-year term of the related debt obligations. At March 31, 2003 and
2002, debt issuance costs, net of accumulated amortization, were $772,000 and
$883,000, respectively. Amortization of debt issuance costs have been reflected
in interest expense in the accompanying consolidated statements of operations
and total $138,000, $99,000, and $0 for the years ended March 31, 2003, 2002,
and 2001, respectively.
Other intangibles primarily consist of the Quisic and LearnLinc purchase
consideration (see Note 11), which was allocated to purchased software and
customer relationship intangibles (see Note 7). Such other intangibles are
amortized over their expected benefit period of twenty-four to thirty-six
months.
LONG-LIVED ASSETS
The Company reviews for the impairment of long-lived assets whenever events
or changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. The carrying amount of a long-lived asset is considered
impaired when anticipated undiscounted cash flows expected to result from the
use of the asset and its eventual disposition are less than its carrying amount.
The Company recorded an impairment charge totaling $390,000, $0, and $23 million
for the years ended March 31, 2003, 2002, and 2001, respectively.
CONCENTRATION OF CREDIT RISK
Accounts receivable and notes receivable represent services rendered by the
Company for e-Learning customers and the Affiliated Practices. The Company does
not perform periodic credit reports or receive collateral related to the
receivables.
The Company maintains allowances for doubtful accounts for estimated losses
resulting from the inability of its Affiliated Practices and customers to make
required payments. If the financial condition of the Company's practices and
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
As of March 31, 2003 and 2002, the Company had an allowance for doubtful
accounts of $1.6 million and $1.8 million for its accounts receivable and notes
receivable, respectively.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes in
accordance with SFAS No. 109 "Accounting for Income Taxes." Under this method,
deferred taxes are determined based on differences between the financial
reporting and tax basis of assets and liabilities and are measured using the
enacted marginal tax rates currently in effect when the differences reverse.
The Company has recorded a full valuation allowance to reduce the carrying
value of its net deferred tax assets because it has concluded that it is not
likely it will be recognized due to the lack of operating history and
implementation of its e-Learning business plan and the modification of its
management service agreements. The Company has considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need
for the valuation allowance. In the event the Company was to determine that it
42
would be able to realize its deferred tax assets in the future in excess of its
net recorded amount, an adjustment to the deferred tax asset would increase
income in the period such a determination was made.
STOCK-BASED COMPENSATION
The Company has adopted SFAS No. 123, "Accounting for Stock-Based
Compensation," for disclosure purposes. Under SFAS No. 123, the Company measures
compensation expense for its stock-based employee compensation plan using the
intrinsic value method prescribed in Accounting Principles Board ("APB") No. 25,
"Accounting for Stock Issued to Employees" and its related interpretations. The
Company provides pro forma disclosure of the effect on net income or loss as if
the fair value based method prescribed in SFAS No. 123 has been applied in
measuring compensation expense.
The fair value for options granted was estimated at the date of grant using
a Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended March 31, 2003, 2002 and 2001:
2003 2002 2001
---- ---- ----
Risk free interest rate 3.07-4.32% 3.87% 4.93-6.29%
Dividend yield 0% 0% 0%
Volatility factors of the expected
market price of the Company's
common stock 41% 75% 65%
Weighted-average expected life of
options 5-9 years 5-9 years 5-9 years
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
2003 2002 2001
-------- ------- ---------
Net Income (loss), as reported .. $ (3,756) $ 5,805 $ (24,917)
Plus: Stock-based employee
compensation expense
included in reported net
income (loss) ............... -- -- --
Less: Total stock-based
employee compensation
expense determined using fair
value based method .......... (270) (286) (302)
-------- ------- ---------
Pro forma net income (loss) ..... $ (4,026) $ 5,519 $ (25,219)
======== ======= =========
Earnings (loss) per share:
Basic - pro forma ............... $ (0.26) $ 0.46 $ (2.40)
======== ======= =========
Basic - as reported ............. $ (0.24) $ 0.49 $ (2.37)
======== ======= =========
Diluted - pro forma ............. $ (0.26) $ 0.44 $ (2.40)
======== ======= =========
Diluted - as reported ........... $ (0.24) $ 0.47 $ (2.37)
======== ======= =========
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. Outstanding options and warrants to purchase 8,498,617, 1,945,602, and
2,533,516 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
years ended March 31, 2003, 2002 and 2001, respectively, because their effect
would have been antidilutive. Furthermore, a restricted stock grant of 450,000
shares (see Note 17) and 500,000 shares contingently issuable in the Quisic
acquisition (see Note 11) has been excluded from the 2003 earnings per share
calculation.
43
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, accounts receivables and
accounts payable approximate fair values due to the short-term maturities of
these instruments. The carrying amounts of the Company's long-term borrowings
and notes receivables from Affiliated Practices as of March 31, 2003 and 2002,
approximate their fair value based on the Company's current incremental
borrowing rates for similar type of borrowing arrangements.
GUARANTEES AND INDEMNIFICATIONS
In November 2002, the Financial Accounting Standards Board ("FASB") issued
FASB Interpretation ("FIN") No. 45 "Guarantor's Accounting and Disclosure
Requirements for Guarantees, including Indirect Guarantees of Indebtedness of
Others -- an interpretation of FASB Statements No. 5, 57 and 107 and rescission
of FIN 34." The following is a summary of the Company's agreements that the
Company has determined are within the scope of FIN No. 45:
The Company provides a 90-day warranty for certain of its products.
Historically, the Company's performance under the warranty has been minimal, and
as such, no warranty accrual has been provided for in the accompanying
consolidated financial statements.
Under its bylaws, the Company has agreed to indemnify its officers and
directors for certain events or occurrences arising as a result of the officer
or director's serving in such capacity. The term of the indemnification period
is for the officer's or director's lifetime. The maximum potential amount of
future payments the Company could be required to make under these
indemnification agreements is unlimited. However, the Company has a directors
and officer liability insurance policy that limits its exposure and enables it
to recover a portion of any future amounts paid. As a result of its insurance
policy coverage, the Company believes the estimated fair value of these
indemnification agreements is minimal and has no liabilities recorded for these
agreements as of March 31, 2003.
The Company enters into indemnification provisions under (i) its agreements
with other companies in its ordinary course of business, typically with business
partners, contractors, and customers, landlords and (ii) its agreements with
investors. Under these provisions the Company generally indemnifies and hold
harmless the indemnified party for losses suffered or incurred by the
indemnified party as a result of the Company's activities or, in some cases, as
a result of the indemnified party's activities under the agreement. The maximum
potential amount of future payments the Company could be required to make under
these indemnification provisions is unlimited. The Company has not incurred
material costs to defend lawsuits or settle claims related to these
indemnification agreements. As a result, the Company believes the estimated fair
value of these agreements is minimal. Accordingly, the Company has no
liabilities recorded for these agreements as of March 31, 2003.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the FASB issued SFAS No. 143, "ACCOUNTING FOR ASSET
RETIREMENT OBLIGATIONS", which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred with the associated asset retirement costs being capitalized as a part
of the carrying amount of the long-lived asset. SFAS No. 143 also includes
disclosure requirements that provide a description of asset retirement
obligations and reconciliation of changes in the components of those
obligations. The statement is effective for fiscal years beginning after June
15, 2002. The Company does not expect the adoption of SFAS No. 143 to have a
material effect on the Company's consolidated financial position or results of
operations.
In August 2001, the FASB issued SFAS No. 144, "IMPAIRMENT OR DISPOSAL OF
LONG-LIVED ASSETS," which addresses accounting and financial reporting for the
impairment or disposal of long-lived assets. This standard was effective for the
Company's consolidated financial statements beginning January 1, 2002. The
implementation of SFAS No. 144 did not have a material impact on the Company's
consolidated financial position or results of operations.
In April 2002, the FASB issued SFAS No. 145, "RESCISSION OF FASB STATEMENTS
NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND TECHNICAL
CORRECTIONS." SFAS No. 145 rescinded three previously issued statements and
amended SFAS No. 13, "ACCOUNTING FOR LEASES." The statement provides reporting
standards for debt extinguishments and provides accounting standards for certain
lease modifications that have economic effects similar to sale-leaseback
44
transactions. The statement is effective for certain lease transactions
occurring after May 15, 2002 and all other provisions of the statement shall be
effective for fiscal years ending after May 15, 2002. The implementation of SFAS
No. 145 will effect the classification of extraordinary items presented in the
Company's consolidated statements of operations. Such gains will no longer be
considered extraordinary in nature and will be reclassified to operations.
In June 2002, the FASB issued SFAS No. 146, "ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES," which updates accounting and
reporting standards for personnel and operational restructurings. The Company
will be required to adopt SFAS No. 146 for exit, disposal or other restructuring
activities that are initiated after December 31, 2002, with early application
encouraged. The Company does not expect the adoption of SFAS No. 146 to have a
material effect on the Company's consolidated financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148, "ACCOUNTING FOR STOCK-BASED
COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT TO SFAS NO. 123." SFAS
No. 148 provides alternative methods of transition for a voluntary change to the
fair value based method on accounting for stock-based employee compensation. The
Company currently does not intend to adopt SFAS No. 123 and accordingly does not
expect the implementation of SFAS No. 148 to have a material effect on the
Company's consolidated financial position or results of operations.
In January 2003, FIN No. 46, "CONSOLIDATION OF VARIABLE INTEREST ENTITIES"
was issued. This interpretation clarifies the application of Accounting Research
Bulletin No. 51, "Consolidated Financial Statements," relating to consolidation
of certain entities. FIN No. 46 will require identification of the Company's
participation in variable interests entities ("VIEs"), which are defined as
entities with a level of invested equity that is not sufficient to fund future
activities to permit them to operate on a stand-alone basis, or whose equity
holders lack certain characteristics of a controlling financial interest. For
entities identified as VIEs, FIN No. 46 sets forth a model to evaluate potential
consolidation based on an assessment of which party to the VIE, if any, bears a
majority of the exposure to its expected losses, or stands to gain from a
majority of its expected returns. FIN No. 46 also sets forth certain disclosures
regarding interests in VIE that are deemed significant, even if consolidation is
not required. The adoption of FIN No. 46 did not have a material impact on the
Company's consolidated financial position, results of operations or cash flows.
In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES" was issued. This statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." This
statement is effective for contracts entered into or modified after June 30,
2003. Adoption of this statement is not expected to have a significant effect on
the Company's consolidated financial position or results of operations.
In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS
WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
statement is effective for financial instruments entered into or modified after
May 31, 2003. The adoption of SFAS No. 150 is not expected to have a significant
effect on the Company's consolidated financial position, results of operations,
or cash flows.
RECLASSIFICATIONS
Certain prior year balances in the consolidated financial statements have
been reclassified to conform to the fiscal 2003
presentation.
4. SEGMENT INFORMATION
During the year ended March 31, 2003, the Company had two reportable
segments, e-Learning and dental practice management. The e-Learning segment
included revenues and operating expenses related to the development and sale of
the Company's e-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 inter-segment revenues.
45
YEARS ENDED
MARCH 31,
--------------------------------
2003 2002 2001
-------- -------- --------
Revenues: .................................. (IN THOUSANDS)
Licenses ................................ $ 447 $ 92 $ --
Service and maintenance ................. 3,629 2,590 --
-------- -------- --------
Total e-Learning revenues ............ 4,076 2,682 --
Dental practice management .............. 3,129 6,582 8,320
-------- -------- --------
Total revenues ...................... $ 7,205 $ 9,264 $ 8,320
======== ======== ========
Operating expenses:
e-Learning .............................. $ 6,748 $ 3,446 $ --
Dental practice management (1) .......... 3,934 4,682 32,708
-------- -------- --------
Total operating expenses ............ $ 10,682 $ 8,128 $ 32,708
======== ======== ========
Earnings (loss) from operations:
e-Learning .............................. $ (2,672) $ (764) $ --
Dental practice management .............. (805) 1,900 (24,388)
-------- -------- --------
Total earnings (loss) from operations $ (3,477) $ 1,136 $(24,388)
======== ======== ========
Capital expenditures:
e-Learning .............................. $ 64 $ 40 $ --
Dental practice management .............. -- -- 138
-------- -------- --------
Total capital expenditures .......... $ 64 $ 40 $ 138
======== ======== ========
MARCH 31
-----------------------
2003 2002
------- -------
Total assets:
e-Learning .................................. $11,081 $ 8,237
Dental practice management .................. 1,342 7,350
------- -------
Total assets .............................. $12,423 $15,587
------- -------
(1) Includes the $390,000 and $23 million asset impairment charge upon
termination and restructuring of certain service agreements in fiscal 2003 and
2001, respectively.
5. NOTES RECEIVABLE
Notes receivable consisted of the following:
MARCH 31,
--------------------
2003 2002
------- -------
(IN THOUSANDS)
Notes receivable ........................... $ 1,756 $ 2,121
Less: allowance for doubtful accounts ...... (1,160) (1,092)
------- -------
596 1,029
Less: notes receivable, current ............ (270) (536)
------- -------
$ 326 $ 493
======= =======
Notes receivables are substantially with Affiliated Practices and are
uncollateralized, ranging in length from one to nine years. The notes bear
interest at March 31, 2003 at fixed rates ranging from 6% to 10% with interest
and principal payments due monthly.
The collection schedule of notes receivable for each of the next five years
subsequent to March 31, 2003 were as follows (in thousands):
46
2004 .................................................. $ 772
2005 .................................................. 498
2006 .................................................. 191
2007 .................................................. 85
2008 .................................................. 43
Thereafter ............................................ 167
------
$1,756
======
6. PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following:
MARCH 31,
---------------------
2003 2002
------- -------
(IN THOUSANDS)
Furniture & fixtures ..................... $ 253 $ 1,029
Equipment ................................ 373 1,612
Computer equipment ....................... 644 1,604
Leasehold improvements ................... 24 106
------- -------
Total property and equipment .......... 1,294 4,351
Less: accumulated depreciation ........... (809) (2,214)
------- -------
Property and equipment, net ........... $ 485 $ 2,137
======= =======
Depreciation expense for the years ended March 31, 2003, 2002 and 2001 was
$1.2 million, $869,000 and $1.1 million, respectively.
7. GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill consisted of the following:
MARCH 31,
-------------------
2003 2002
------ ------
(IN THOUSANDS)
Goodwill ............................... $8,823 $7,479
====== ======
The changes in the carrying amount of the goodwill for the years ended
March 31, 2002 and 2003:
LEARNING
SEGMENT
----------
Balance, March 31, 2001 ................................. $ 235
Learning-Edge acquisition ............................ 4,133
ThoughtWare acquisition .............................. 3,208
Amortization ......................................... (97)
-------
Balance, March 31, 2002 ................................. 7,479
Quisic acquisition ................................... 1,695
Mentergy acquisition ................................. 348
Mentergy acquisition adjustment ...................... (20)
Learning-Edge acquisition adjustment ................. (7)
ThoughtWare acquisition adjustment ................... (27)
ThoughtWare escrow shares acquisition adjustment ..... (507)
Dexpo transfer to intangibles ........................ (138)
-------
Balance, March 31, 2003 ................................. $ 8,823
=======
47
Intangible assets consisted of the following (in thousands):
MARCH 31, 2003
--------------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
------ ------------ ---
AMORTIZED INTANGIBLE ASSETS:
Deferred offering costs .......... $ 1,020 $ (249) $ 771
Purchased software ............... 675 (118) 557
Customer relationship ............ 32 (14) 18
------- ------- -------
$ 1,727 $ (381) $ 1,346
======= ======= =======
MARCH 31, 2002
--------------------------------------
GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION NET
------ ------------ ---
AMORTIZED INTANGIBLE ASSETS:
Management services agreements ... $ 3,002 $(1,965) $ 1,037
Deferred offering costs .......... 994 (111) 883
Other ............................ 108 (44) 64
------- ------- -------
$ 4,104 $(2,120) $ 1,984
======= ======= =======
AGGREGATE AMORTIZATION EXPENSE FOR INTANGIBLES (ALL YEARS PRESENTED) AND
GOODWILL (FISCAL 2002 AND 2001):
For the year ended March 31, 2003 $0.9 million
For the year ended March 31, 2002 $1.1 million
For the year ended March 31, 2001 $1.3 million
ESTIMATED AMORTIZATION EXPENSE:
Fiscal Year
-----------
2004 $ 327
2005 $ 312
2006 $ 193
2007 $ 86
2008 $ 86
48
8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities consisted of the following:
MARCH 31,
---------------
2003 2002
------ ------
(IN THOUSANDS)
Accounts payable trade ............................. $ 681 $ 970
Amount payable to former Chief Dental Officer ...... -- 40
Accrued state sales tax ............................ 384 384
Accrued interest ................................... 310 121
Amount payable to Quisic shareholders (see Note 11) 150 --
Amounts related to acquisitions .................... 73 184
Accrued salaries and related benefits .............. 160 188
Deferred rent liability ............................ 89 --
Lease termination liability ........................ 101 --
Other .............................................. 92 316
------ ------
Total accounts payable and accrued liabilities .. $2,040 $2,203
====== ======
9. TERMINATION OF SERVICE AGREEMENTS WITH AFFILIATED PRACTICES
During the year ended March 31, 2003 and 2002, the Company received $1.9
and $2.9 million, respectively, in cash from terminating the service agreements
with Affiliated Practices and recognized gains of $0.9 million and $1.3 million,
respectively, from such terminations. These gains are separately stated in the
accompanying consolidated statements of operations for the years ended March 31,
2003 and 2002.
10. EXTRAORDINARY ITEMS
In March 2002, the Company retired its outstanding line of credit of $8.6
million for $4.4 million resulting in a $4.2 million gain (See Note 12).
In December 2001, a former member of the Board of Directors forgave
$101,000 previously due from the Company (See Note 17).
In January 2001, former Liberty Dental Alliance, Inc. stockholders forgave
$70,000 previously due from the Liberty Merger Agreement.
11. BUSINESS COMBINATIONS
QUISIC CORPORATION
On June 14, 2002, the Company acquired certain assets of Quisic Corporation
("Quisic"), a California based private Company in exchange for 2,000,000 shares
of the Company's common stock and the assumption of $223,000 of liabilities. An
additional 500,000 shares of common stock of the Company are contingently
issuable upon the achievement of certain cash basis sales targets, as defined,
for the 12-month period following the close of the acquisition. Such shares have
been issued, are currently held in escrow, have been excluded in the purchase
accounting presented below and are excluded from the share information presented
in the consolidated balance sheets and statements of shareholders' equity
(deficit) and presented in the calculation of (loss) earnings per share. If the
contingency is satisfied, the issuable shares will be valued based on the market
value of the Company's common stock on such date, and will be reflected in the
Company's consolidated balance sheet as an increase to goodwill and
shareholders' equity (deficit). The operating results of Quisic have been
included in the consolidated operations of the Company commencing June 17, 2002.
The purchase agreement also provides for the Company to remit to the
seller, during the 5 year period following the close of the acquisition, 100% of
the first $1,250,000 of proceeds and 50% of the remaining proceeds from the
sales of software licenses for certain specified products, as defined, and
collection of notes. Since the closing date of the acquisition and through March
31, 2003, the Company has collected funds subject to this provision of the
agreement totaling $150,000, all of which has been withheld and not remitted to
49
the seller as of March 31, 2003 in accordance with the Company's understanding
of the escrow and indemnity provisions of the Asset Purchase Agreement (see Note
8).
The purchase price has been calculated as follows:
QUISIC
--------------
(IN THOUSANDS)
Issuance of EDT Learning common stock
valued at $0.92 per share ............................... $1,840
Acquisition costs ......................................... 100
------
Net purchase price, including acquisition costs ........ 1,940
Assumed liabilities ....................................... 223
------
Total purchase price ................................... $2,163
======
The total purchase price has been allocated to assets acquired and
liabilities assumed based upon their estimated fair values in accordance with
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 Quisic has been allocated as follows:
PURCHASE
PRICE
ALLOCATION
--------------
(IN THOUSANDS)
Current assets ......................................... $ 186
Property and equipment ................................. 75
Goodwill ............................................... 1,695
Identifiable intangible assets ......................... 207
Current liabilities, including deferred revenue ........ (323)
Common stock ........................................... (3)
Additional paid-in capital ............................. (1,837)
-------
$ --
=======
LEARNLINC CORPORATION
Effective November 4, 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 has agreed to pay a royalty of 20% for all revenues
collected from the sale or license of LearnLinc software over a three-year
period. The first $600,000 of sales are not subject to the royalty. The maximum
amount due under the Royalty Agreement is $5,000,000. From the date of
acquisition through March 31, 2003, the Company has generated $344,000 in
revenues from the sale or license of LearnLinc software. The operating results
of LearnLinc have been included in the consolidated operations of the Company
commencing November 4, 2002.
The purchase price has been calculated as follows:
LEARNLINC
--------------
(IN THOUSANDS)
Issuance of debt and payment of cash ...................... $ 500
Acquisition costs ......................................... 60
------
Net purchase price, including acquisition costs ........ 560
Assumed liabilities ....................................... 462
------
Total purchase price ................................... $1,022
======
The total purchase price has been allocated to assets acquired and
liabilities assumed based upon their estimated fair values in accordance with
SFAS No. 141, "Business Combinations". The excess purchase price over the
50
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 been allocated as follows:
PURCHASE
PRICE
ALLOCATION
--------------
(IN THOUSANDS)
Current assets ........................................... $ 124
Property and equipment ................................... 50
Goodwill ................................................. 348
Identifiable intangible assets ........................... 500
Note Payable ............................................. (500)
Current liabilities, including deferred revenue .......... (522)
-----
$ --
=====
LEARNING-EDGE, INC.
On October 1, 2001, the Company acquired all of the outstanding capital
stock of Learning-Edge, Inc.; an Arizona based private e-learning company. The
Company issued 1,950,000 common shares and $1.1 million of debt under the terms
of the acquisition agreement. The debt bears interest at rates ranging from 7.5%
to 9.0% and is due in two equal installments on October 1, 2003 and on October
1, 2004, respectively. If the Company raises additional capital in excess of $3
million, the payment schedule accelerates (see Note 12). The Company also
assumed approximately $2.9 million of Learning-Edge debt as part of this
acquisition. The operating results of Learning-Edge are included with the
Company's as of October 1, 2001.
The purchase price has been calculated as follows:
LEARNING-EDGE
--------------
(IN THOUSANDS)
Issuance of EDT Learning common stock valued at $0.51
per share .............................................. $ 995
Issuance of EDT Learning debt ............................. 1,102
Acquisition costs ......................................... 200
------
Net purchase price, including acquisition costs ........ 2,297
Assumed liabilities ....................................... 2,946
------
Total purchase price ................................... $5,243
======
The total purchase price has been allocated to assets acquired and
liabilities assumed based upon their estimated fair values in accordance with
SFAS No. 141, "Business Combinations". The excess purchase price over the
estimated fair value of the tangible assets acquired and liabilities assumed has
been assigned to goodwill. Upon completion of an assessment of Learning-Edge's
operations, no separately identifiable intangible assets were found to exist.
The purchase price was originally allocated as follows:
PURCHASE PRICE
ALLOCATION
----------------
(IN THOUSANDS)
Current assets ........................................... $ 826
Property and equipment ................................... 274
Other long-term assets, including goodwill of $4,133 ..... 4,143
Current liabilities ...................................... (2,867)
Long-term obligations, excluding current maturities ...... (1,381)
Common stock, net of treasury shares ..................... (2)
Capital in excess of par value ........................... (993)
-------
$ --
=======
51
THOUGHTWARE TECHNOLOGIES, INC.
On January 15, 2002, the Company acquired all of the outstanding capital
stock of ThoughtWare Technologies, Inc.; a Tennessee based private company. The
Company issued 1,550,000 common shares under the terms of the acquisition
agreement. The Company also assumed approximately $1.5 million of ThoughtWare
debt as part of this acquisition. The operating results of ThoughtWare are
included with the Company's as of January 1, 2002.
The purchase price has been calculated as follows:
THOUGHTWARE
---------------
(IN THOUSANDS)
Issuance of EDT Learning common stock valued at $1.39
per share .............................................. $2,155
Acquisition costs ......................................... 200
------
Net purchase price, including acquisition costs ........ 2,355
Assumed liabilities ....................................... 1,464
------
Total purchase price ................................... $3,819
======
The total purchase price has been allocated to assets acquired and
liabilities assumed based upon their estimated fair values in accordance with
SFAS No. 141. The excess purchase price over the estimated fair value of the
tangible assets acquired and liabilities assumed has been assigned to goodwill.
Upon completion of an assessment of ThoughtWare's operations, no separately
identifiable intangible assets were found to exist.
The purchase price was originally allocated as follows:
PURCHASE
PRICE
ALLOCATION
--------------
(IN THOUSANDS)
Current assets .......................................... $ 448
Property and equipment .................................. 163
Goodwill ................................................ 3,208
Current liabilities ..................................... (1,543)
Long-term obligations, excluding current maturities ..... (121)
Common stock, net of treasury shares .................... (2)
Capital in excess of par value .......................... (2,153)
-------
$ --
=======
On March 29, 2003, the Company settled various disputes it had with the
former shareholders of ThoughtWare Technologies, Inc. The settlement resulted in
365,000 of the shares issued in connection with the acquisition being returned
to the Company. The Company valued the shares using the share price at the date
of acquisition and recorded the returned shares as a $507,000 decrease to
shareholders' equity and goodwill.
PRO FORMA PRESENTATION
The following unaudited pro forma summary of financial information presents
the Company's combined results of operations as if the acquisitions of LearnLinc
and Quisic had occurred on April 1, 2001. After including the impact of certain
adjustments including: (i) the application of a normal profit margin to
contracts in process at the date of acquisition, (ii) decrease in depreciation
of property and equipment and (iii) amortization of the identifiable intangible
assets.
52
UNAUDITED
YEAR ENDED MARCH 31,
-----------------------
2003 2002
--------- ---------
PRO FORMA PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues ................................. $ 8,389 $ 17,977
Loss from operations ..................... (5,597) (27,149)
Net loss before extraordinary items ..... (6,231) (73,157)
Net loss ................................ (6,231) (68,892)
Loss per common share
Basic ................................ $ (0.39) $ (5.25)
Diluted .............................. $ (0.39) $ (5.06)
Weighted average shares outstanding:
Basic ................................ 16,137 13,930
Diluted .............................. 16,137 14,466
The pro forma financial information presented does not purport to indicate
what the combined results of operations would have been had the mergers occurred
at the beginning of the periods presented or the results of operations that may
be obtained in the future.
12. LONG-TERM DEBT
Long-term debt consisted of the following:
MARCH 31,
--------------------
2003 2002
------- -------
(IN THOUSANDS)
Convertible redeemable subordinated notes .. $ 5,775 $ 5,775
Convertible subordinated notes, Series A ... 849 1,156
Subordinated promissory notes .............. 1,072 1,047
Shareholders' notes payable ................ 430 398
Notes payable .............................. 503 592
------- -------
8,629 8,968
Less: current portion of long-term debt .... (728) (1,337)
discount ............................. (1,019) (1,132)
beneficial conversion feature ........ (1,019) (1,132)
------- -------
Long-term debt ............................. $ 5,863 $ 5,367
======= =======
In March 2002, the Company completed a Private Placement Offering (the
"Offering") raising capital of $5,775,000. Under the terms of the Offering, the
Company issued convertible redeemable subordinated notes ("the notes") and
warrants to purchase 5,775,000 shares of the Company's common stock. The notes
bear interest at 12% per annum and require quarterly interest payments with the
principal due at maturity on March 29, 2012. The note holders may convert the
notes into shares of the Company's common stock at a price equal to $1.00 per
share. The Company may force redemption of the notes into shares of the
Company's common stock at the conversion price, if at any time the closing price
of the Company's common stock equals or exceeds $3.00 per share for 20
consecutive trading days. The notes are subordinated to any present or future
senior indebtedness, with no waiver required.
The exercise price for the warrants is $3.00 per share. The Company may
force redemption of the warrants into shares of the Company's common stock at
the exercise price, if at any time the closing price of the Company's common
stock equals or exceeds $5.50 per share for 20 consecutive trading days. The
warrants expire on March 29, 2005. The fair value of the warrants was estimated
using a Black-Scholes pricing model with the following assumptions: contractual
and expected life of three years, volatility of 75%, dividend yield of 0%, and a
risk-free rate of 3.87%. The fair value was then used to calculate a discount of
$1,132,000, which is being amortized to interest expense over ten years, the
term of the notes. As the carrying value of the notes is less than the
53
conversion value, a beneficial conversion feature of $1,132,000 was calculated
and recorded as an additional discount to the notes and is being amortized to
interest expense over the term of the notes. Upon conversion, any remaining
discount associated with the beneficial conversion feature will be expensed in
full at the time of conversion.
The proceeds from the Offering were used to retire the Bank One credit
facility and to provide working capital for the Company. The Company paid $4.4
million to Bank One to retire the $8.6 million credit facility resulting in a
$4.2 million extraordinary gain. The credit facility was collateralized by liens
on certain of the Company's assets, including its rights under the management
services agreements, accounts receivable and notes receivable. The liens were
released in connection with the retirement of the facility.
In October 2001, the Company issued $1.1 million of subordinated promissory
notes to the shareholders of Learning-Edge, Inc. under the terms of the
acquisition agreement (the "Learning-Edge Notes"). During fiscal 2003, $35,000
of accrued interest on one of the notes was added to the principal balance.
During fiscal 2002, $55,000 of these notes were returned by the holders to
offset amounts owed to the Company. The Learning-Edge Notes bear interest at
rates ranging from at 7.5% to 9.0%. At March 31, 2003, $47,000 of these notes
are currently past due and the remaining $1.0 million is due in two equal
installments on April 5, 2005 and on October 1, 2005, respectively. If the
Company raises additional capital equal to or in excess of $3 million, 25% of
the principal of the Learning-Edge Notes is to be repaid. For each $500,000
raised above $3 million, the repayment percentage increases by 15%. If more than
$5 million is raised, 100% of the principal of the Learning-Edge Notes is to be
repaid. The holders of the Learning-Edge Notes waived the accelerated payment
schedule in relation to the Offering.
The Convertible Subordinated Notes Series A Securities ("Series A
Securities") were issued in connection with the acquisition of certain
Affiliated Practices. The Series A Securities bear interest at 12% and can be
converted to Common Stock of the Company at conversion prices ranging from $6.75
to $7.00 per share. The conversion period began on November 1, 1999 and ends on
July 1, 2004. The principal amount of the Series A Securities, if not converted,
is payable on July 1, 2004.
During fiscal 2003 and 2002, $307,000 and $656,000 of previously issued
Series A Securities respectively, were returned by the holders to offset amounts
owed to the Company.
In connection with the IPO, the Company issued $468,000 of notes payable to
certain shareholders formerly owning preferred stock. The notes bear 6% interest
and were originally payable on the earlier of March 30, 2003 or the date upon
which the Company offers and sells an amount of equity securities equal or
greater to the gross proceeds of the IPO. During fiscal 2003, $57,750 of accrued
interest on certain of these notes was added to the principal balance and the
maturity date was extended to April 1, 2005. The new principal balance on the
extended notes is $250,250 and the interest rate was increased to 10%. The
remaining $179,375 is currently past due. During fiscal 2003 and 2002, $26,250
and $43,750 respectively, of these notes payable were returned by the holders to
offset amounts owed to the Company.
In connection with the acquisition of certain assets of LearnLinc
Corporation, the Company issued a $250,000 note payable. The note bears interest
at 6% with quarterly interest payments and is due on December 13, 2003.
The aggregate maturities of long-term debt excluding capital leases for
each of the next five years subsequent to March 31, 2003 were as follows (in
thousands):
54
Amounts past due ................................. $ 234
2004 ............................................. 497
2005 ............................................. 1,364
2006 ............................................. 759
2007 ............................................. --
2008 ............................................. --
Thereafter ....................................... 5,775
------
$8,629
======
13. CAPITALIZATION
PREFERRED STOCK
The Company has the authority to issue ten million shares of preferred
stock, par value $.001 per share. At March 31, 2003 and 2002, no shares of
preferred stock were issued or outstanding.
COMMON STOCK
As of March 31, 2003, the Company is authorized to issue forty million
shares of common stock.
The Company has acquired treasury stock from certain Affiliated Practices
for the payment of receivables and purchase of property and equipment.
In December 2001, the Company, under the initiative of the Compensation
Committee with the approval of the Board of Directors, issued its chief
executive officer an incentive stock grant under the 1997 Stock Compensation
Plan of 450,000 restricted shares of the Company's common stock as a means to
retain and incentivize the chief executive officer. The shares 100% vest after
10 years from the date of grant. The shares were valued at $405,000 based on the
closing price of the stock on the date of grant, which is recorded as
compensation expense ratably over the vesting period. The vesting of the
incentive shares accelerates based on the Company's share price as follows:
PERFORMANCE CRITERIA SHARES VESTED
--------------------------------------------------------------- --------------
Share price trades for $4.50 per share for 20 consecutive days 150,000 shares
Share price trades for $8.50 share for 20 consecutive days 150,000 shares
Share price trades for $12.50 per share for 20 consecutive days 150,000 shares
In connection with the restricted stock grant, the Company loaned the Chief
Executive Officer $179,000 to fund the immediate tax consequences of the grant.
The Company recognized a $179,000 charge to income at the date of grant.
WARRANTS
The Company issued 887,752 warrants in total in fiscal 2002 to Bank One,
the Company's prior lender, and the Company's legal counsel to acquire the same
number of shares of the Company's common stock exercisable at prices ranging
from $0.42 to $1.50 per share (see Note 15). The Company valued and expensed
these warrants at $44,000 in fiscal 2002.
Omega Orthodontics, Inc. had warrants outstanding to purchase 2,430,000
shares of Omega common stock. As a result of the merger with the Company on July
1, 2000, these warrants constituted warrants to acquire, on the same terms and
conditions as were applicable under the original Omega warrants, 865,343 shares
of the Company's common stock exercisable at prices ranging from $18.53 to
$27.80 per share. These warrants expired on September 30, 2002.
55
14. INCOME TAXES
Significant components of the Company's deferred tax assets (liabilities)
were as follows (in thousands):
MARCH 31
----------------------
2003 2002
------- -------
Deferred tax assets:
Reserves for uncollectible accounts ........... $ 686 $ 696
Deferred revenue .............................. 271 --
Accrued expenses .............................. 158 --
Net operating loss carryforward ............... 8,779 5,623
Organizational costs .......................... -- 100
Other ......................................... 25 7
------- -------
Total deferred tax assets ..................... 9,919 6,426
------- -------
Deferred tax liabilities:
Property and equipment ........................ (36) (256)
Management services agreement ................. -- (335)
------- -------
Total deferred tax liabilities .............. (36) (591)
------- -------
Net deferred tax asset ........................... 9,883 5,835
Less: valuation allowance ..................... (9,883) (5,835)
------- -------
Net deferred tax asset ........................ -- --
Less: current portion ......................... -- --
------- -------
Noncurrent assets ............................. $ -- $ --
======= =======
Significant components of the provision for income taxes were as follows
(in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
------- ------- -------
Current tax expense:
Federal ............................... $ -- $ 2,023 $ --
State ................................. -- 384 --
------- ------- -------
Total current -- 2,407 --
------- ------- -------
Deferred tax expense:
Federal ............................... -- (2,023) --
State ................................. -- (384) --
------- ------- -------
Total deferred -- (2,407) --
------- ------- -------
Expense for income taxes ................. $ -- $ -- $ --
======= ======= =======
The differences between the statutory federal tax rate and the Company's
effective tax rate on continuing operations were as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
------- ------- -------
Tax (benefit) at U.S. Statutory rate (34%) ........ $(1,248) $ 1,974 $(8,472)
State income taxes (benefit), net of federal tax .. (167) 254 (1,012)
Nondeductible expenses and other .................. (491) 1,530 3,130
Change in valuation allowance, net ................ 1,906 (3,758) 6,354
------- ------- -------
Total tax expense (benefit) .................... $ -- $ -- $ --
======= ======= =======
At March 31, 2003, the Company had federal and State of Arizona net
operating loss carry-forwards available to reduce future taxable income of
approximately $24 million and $10 million, respectively, which begin to expire
in 2018 and 2003, respectively. The Company has certain net operating losses in
other states relating to its acquisitions (see Note 11). The Company is
56
currently quantifying such net operating losses and evaluating the Company's
ability to use them. The Company recorded a valuation allowance for its entire
deferred tax asset because it concluded it is not likely it would be able to
realize the tax assets due to the lack of operating history of its
implementation of the e-Learning plan. In accordance with Internal Revenue Code
Section 382, the annual utilization of net operating loss carry-forwards and
credits existing prior to a change in control, as defined, in the Company or a
company the Company has acquired may be substantially limited. Accordingly, the
utilization of a substantial portion of the Company's net operating loss
carry-forwards is limited as such net operating loss carry-forwards are related
to the acquisition of ThoughtWare Technologies, Learning-Edge, Inc. and other
acquired entities.
15. STOCK OPTION PLANS AND WARRANTS
The Company grants stock options under its 1997 Stock Compensation Plan
(the "Plan"). The Company recognizes stock-based compensation issued to
employees at the intrinsic value between the exercise price of options granted
and the fair value of stock for which the options may be exercised. However, pro
forma disclosures as if the Company recognized stock-based compensation at the
fair value of the options themselves are presented below.
Under the Plan, the Company is authorized to issue 3,500,000 shares of
Common Stock pursuant to "Awards" granted to officers and key employees in the
form of stock options.
There were 1,835,865 and 1,722,938 options granted under the Plan, at March
31, 2003 and 2002, respectively. The Compensation Committee administers the
Plan. These stock options have contractual terms of 10 years and have an
exercise price no less than the fair market value of the stock at grant date.
The options vest at varying rates over a one to five year period.
On April 25, 2003, the Company granted certain employees stock options to
purchase a total of 70,000 shares of common stock at an exercise price of $0.50.
Following is a summary of the status of the Company's stock options as of
March 31, 2003 and for the three years then ended:
NUMBER OF WEIGHTED WEIGHTED
SHARES AVERAGE AVERAGE
UNDERLYING EXERCISE FAIR-VALUE OF
OPTIONS PRICES OPTIONS GRANTED
---------- ---------- ---------------
Outstanding at March 31, 2000 .... 1,147,327 $ 4.74
Granted .......................... 804,901 0.68 $ 0.26
==========
Exercised ........................ --
Forfeited ........................ (309,055) 5.76
Expired .......................... --
---------- ----------
Outstanding at March 31, 2001 .... 1,643,173 2.50
Granted .......................... 515,765 0.65 $ 0.44
==========
Exercised ........................ (6,250) 0.50
Forfeited ........................ (429,750) 2.68
Expired .......................... --
---------- ----------
Outstanding at March 31, 2002 .... 1,722,938 1.90
Granted .......................... 383,130 0.65 $ 0.37
==========
Exercised ........................ (23,958) 0.81
Forfeited ........................ (246,245) 0.71
Expired .......................... --
---------- ----------
Outstanding at March 31, 2003 .... 1,835,865 $ 1.82
========== ==========
57
The following table summarizes information about stock options
outstanding at March 31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
---------- ------ ------------ ---------- ------
(SHARE DATA IN THOUSANDS)
$ 0.01 - $ 0.99 1,075,707 $ 0.55 8.03 561,030 $ 0.52
$ 1.00 - $ 1.99 108,551 $ 1.58 7.46 111,251 $ 1.57
$ 2.00 - $ 2.99 430,000 $ 2.22 6.28 326,000 $ 2.29
$ 3.00 - $ 8.50 221,607 $ 7.31 5.10 182,251 $ 7.49
---------- ----------
1,835,865 1,180,532
========== ==========
The following table summarizes information about stock purchase warrants
outstanding at March 31, 2003:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE
--------------------------------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE WEIGHTED AVERAGE AVERAGE
NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE
SHARES PRICE LIFE (YEARS) SHARES PRICE
---------- ------ ------------ ---------- ------
(SHARE DATA IN THOUSANDS)
$ 0.42 - $ 0.42 393,182 $ 0.42 7.25 393,182 $ 0.42
$ 0.44 - $ 0.44 132,972 $ 0.44 7.50 132,972 $ 0.44
$ 0.50 - $ 0.50 25,000 $ 0.50 2.75 25,000 $ 0.50
$ 1.00 - $ 1.00 67,201 $ 1.00 9.00 67,201 $ 1.00
$ 1.45 - $ 1.45 97,887 $ 1.45 8.83 97,887 $ 1.45
$ 1.50 - $ 1.50 171,510 $ 1.50 8.83 171,510 $ 1.50
$ 3.00 - $ 3.00 5,775,000 $ 3.00 2.00 5,775,000 $ 3.00
---------- ----------
6,662,752 6,662,752
========== ==========
16. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases a portion of its property and equipment under the terms
of capital and operating leases. The capital leases bear interest at varying
rates ranging from 8.9% to 22.8% and require monthly payments.
Assets recorded under capital leases, at March 31, 2003, consisted of the
following (in thousands):
Cost...................................................... $ 351
Less: accumulated amortization............................ (117)
--------
Total..................................................... $ 234
========
58
Future minimum lease payments under capital leases and noncancelable
operating leases with initial or remaining terms of one or more years consisted
of the following at March 31, 2003 (in thousands):
CAPITAL OPERATING
------- ---------
Amounts past due .............................. $ 81 $ 51
2004 .......................................... 444 585
2005 .......................................... 198 556
2006 .......................................... 15 551
2007 .......................................... -- 413
2008 .......................................... -- 88
Thereafter .................................... -- 283
------ ------
Total minimum obligations ..................... $ 738 $2,527
======
Less: amount representing interest ......... 83
------
Present value of minimum obligations .......... 655
Less: current portion ...................... (462)
------
Long-term obligation at March 31, 2003 ........ $ 193
======
The Company incurred rent expense of $542,000, $335,000 and $253,000 in
fiscal 2003, 2002 and 2001, respectively.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with Mr. Powers, Mr.
Dunn and Mr. Zuckerman, all of whom are officers and two of whom are directors
of the Company. Each of these agreements provides for an annual base salary in
an amount not less than the initial specified amount and entitles the employee
to participate in all EDT's compensation plans in which other executive officers
of EDT participate. Each agreement establishes a base annual salary and provides
for annual bonuses based on the Management Incentive Plan, as adopted by the
Board of Directors, is subject to the right of EDT to terminate said employment
at any time and Mr. Powers' and Mr. Dunn's provides for continuous employment
for a two-year term. Under each of the employment agreements, if EDT terminates
the employee's employment without cause (as therein defined), Mr. Powers, Mr.
Dunn and Mr. Zuckerman will be entitled to a payment equal to 12 months' salary.
Additionally, Mr. Powers, Mr. Dunn, and Mr. Zuckerman's employment agreements
provide for a severance payment equal to one (1) year's compensation in the
event of termination of employment following a change in control of the Company
(as defined therein). Each of the foregoing agreements also contains a covenant
limiting competition with EDT for one year following termination of employment.
The minimum aggregate salary provisions under the contracts totals $465,000 in
fiscal 2004 and $375,000 in fiscal 2005.
LITIGATION
As of March 31, 2003, the Company has pending as plaintiff seven collection
lawsuits against affiliated practices for the collection of contractual service
fees and the principal of promissory notes.
The Company is a defendant and counterclaimant in a lawsuit with Computer
Associates, a former vendor asserting damages of approximately $389,000, with
allegations of breach of contract revolving around the purchase of software and
certain services provided by Computer Associates. The Company is vigorously
defending the lawsuit and believes that it will prevail on the merits and its
counterclaims, but cannot predict with certainty the ultimate outcome. The
Company has not accrued for any obligations that might result from an
unfavorable resolution of this matter.
The Company is a third party defendant in a lawsuit between former
employees of Quisic Corporation and certain shareholders of Quisic Corporation.
Although the Company engaged in an asset purchase transaction with Quisic
Corporation, those former employees allege successor liability on the part of
the Company, and are seeking from the primary Quisic shareholder defendants,
damages of $4.6 million. The plaintiffs primarily are seeking from the Company
access to the consideration paid and certain Quisic assets. The Company is
vigorously defending the lawsuit and believes that it will prevail on the
59
merits, but cannot predict with certainty the ultimate outcome. The Company has
not accrued for any obligations that might result from an unfavorable resolution
of this matter.
The Company is involved as a defendant in a lawsuit recently filed by
plaintiffs who are creditors of Quisic Corporation who are seeking from certain
Quisic shareholders damages of $1.2 million. Those plaintiff creditors are not
seeking monetary damages from the Company, but are seeking to establish that
they are entitled to certain consideration paid by the Company. Although the
Company engaged in an asset purchase transaction with Quisic Corporation, those
creditors believe that certain of the Quisic assets of the Company are subject
to their claims as creditors against Quisic Corporation. The Company is
vigorously defending the lawsuit and believes that it will prevail, but cannot
predict with certainty the ultimate outcome. The Company has not accrued for any
obligations that might result from an unfavorable resolution of this matter.
The Company's wholly owned subsidiary, TW Acquisition Subsidiary, Inc. is
the respondent in a claim asserted by the Tennessee Department of Revenue
alleging sales tax liability of approximately $380,000 from sales made by its
predecessor ThoughtWare Technologies, Inc. The Company is vigorously defending
the assessment and cannot predict with certainty the ultimate outcome. The
Company has accrued $380,000 with respect to this matter (see Note 8).
ROYALTY AGREEMENTS
In connection with the acquisition of certain assets of Mentergy, Inc., the
Company agreed to pay a royalty of 20% for all revenues collected from the sale
or license of LearnLinc software over a three-year period. The first $600,000 of
sales are not subject to the royalty. The maximum amount due under the Royalty
Agreement is $5,000,000. As a result of the acquisition of certain assets of
Quisic and the acquisition of ThoughtWare, the Company is party to other
agreements to pay royalties to third-party providers of online courseware. These
agreements call for payments to be made on a per user or percent of revenue
basis and expire in fiscal 2005 and 2010.
17. RELATED PARTY TRANSACTIONS
In December 2001, the Company, under the initiative of the Compensation
Committee with the approval of the Board of Directors, issued its chief
executive officer an incentive stock grant under the 1997 Stock Compensation
Plan of 450,000 restricted shares of the Company's common stock as a means to
retain and incentivize the chief executive officer. The shares 100% vest after
10 years from the date of grant. The shares were valued at $405,000 based on the
closing price of the stock on the date of grant, which is recorded as
compensation expense ratably over the ten-year vesting period.
The vesting of the incentive shares accelerates based on the Company's
share price as follows:
PERFORMANCE CRITERIA SHARES VESTED
--------------------------------------------------------------- --------------
Share price trades for $4.50 per share for 20 consecutive days 150,000 shares
Share price trades for $8.50 share for 20 consecutive days 150,000 shares
Share price trades for $12.50 per share for 20 consecutive days 150,000 shares
In connection with the restricted stock grant, the Company loaned the Chief
Executive Officer $179,000 to fund the immediate tax consequences of the grant.
The Company recognized a $179,000 charge to income at the date of grant.
In December 2001, a settlement agreement was reached with a member of the
Board of Directors and Chief Dental Officer of the Company regarding the amount
to be paid under terms of his amended employment agreement. The remaining
balance due was $248,000. Under the terms of the settlement, the Company agreed
to pay this individual $75,000 and issue 53,571 shares valued at $72,000. The
remaining balance of $101,000 was forgiven and has been reflected as
extraordinary income in Fiscal 2002.
During the year ended March 31, 2003, the Company made payments of $75,000
to the former Chief Financial Officer under terms of the separation agreement.
During the year ended March 31, 2001, the Company made a severance payment of
$64,000 to a former Chief Financial Officer.
60
During fiscal 2003 and 2001, the Company recognized $2,500 and $10,000 of legal
expense to a law firm of which a member of the Company's Board of Directors is a
partner.
18. SUPPLEMENTAL CASH FLOW INFORMATION
YEAR ENDED YEAR ENDED YEAR ENDED
MARCH 31, MARCH 31, MARCH 31,
2003 2002 2001
------ ------ ------
(IN THOUSANDS)
Cash paid during the period for:
Interest ................................................... $ 849 $1,137 $1,088
Income taxes ............................................... -- -- --
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of common stock in connection with
acquisitions .............................................. 1,840 3,150 308
Issuance of notes payable in connection
with acquisitions ........................................ 250 1,102 --
Notes payable offset against receivables from Affiliated
Practices .............................................. 362 656 808
Conversion of receivables from Affiliated Practices to notes
receivables ............................................... -- 204 1,911
Capital leases incurred for equipment ....................... -- 373 22
Treasury stock acquired for payment of receivable from
Affiliated Practices and purchase of property and
equipment ................................................. -- 15 1,052
Notes payable offset against future management service fees -- 122 1,500
Accrued interest capitalized to notes payable ............... 93 -- --
Escrow shares returned in connection with ThoughtWare
acquisition ............................................... 507 -- --
61
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table sets forth summary quarterly results of operations for
the Company for the years ended March 31, 2003 and 2002:
FIRST SECOND THIRD FOURTH
2003 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- --------
(IN THOUSANDS)
Net revenue ................................. $ 2,302 $ 1,962 $ 1,717 $ 1,224
Operating expenses .......................... 2,459 2,596 2,376 3,249
Earnings (loss) from operations ............. (157) (634) (659) (2,026)
Earnings (loss) before income taxes ......... (355) (354) (967) (2,080)
Income taxes ................................ -- -- -- --
Net (loss) .................................. $ (355) $ (354) $ (967) $ (2,080)
Net (loss) per share: (1)
Basic and diluted ......................... $ (0.02) $ (0.0) $ (0.06) $ (0.13)
Weighted average common share outstanding:
Basic and diluted ......................... 14,429 16,137 16,138 16,134
FIRST SECOND THIRD FOURTH
2002 QUARTER QUARTER QUARTER QUARTER
---- -------- -------- -------- --------
(IN THOUSANDS)
Net revenue ................................. $ 1,927 $ 1,836 $ 3,025 $ 2,476
Operating expenses .......................... 1,617 1,242 2,782 2,486
Earnings from operations .................... 310 594 243 (11)
Earnings before income taxes ................ 183 442 537 378
Income taxes ................................ -- -- -- --
Extraordinary items, net .................... -- -- 101 4,164
Net earnings ................................ $ 183 $ 442 $ 638 $ 4,542
Net earnings per share - basic: (1)
Earnings before extraordinary item ........ $ 0.02 $ 0.04 $ 0.04 $ 0.03
Extraordinary item ........................ -- -- 0.01 0.30
Net earnings .............................. $ 0.02 $ 0.04 $ 0.05 $ 0.32
Net earnings per share - diluted:
Earnings before extraordinary item ........ $ 0.02 $ 0.04 $ 0.04 $ 0.02
Extraordinary item ........................ -- -- 0.01 0.27
Net earnings .............................. $ 0.02 $ 0.04 $ 0.05 $ 0.30
Weighted average common shares outstanding:
Basic ..................................... 10,573 10,542 12,502 14,102
Diluted ................................... 10,573 10,542 13,111 15,375
----------
(1) Earnings per share are computed independently for each of the quarters
presented. Therefore, the sum of the quarterly earnings per share dues not
equal the total computed for the year due to stock transactions that
occurred.
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 3, 2003, EDT Learning, Inc. (the "Company") dismissed
PricewaterhouseCoopers LLP as its independent accountants and engaged BDO
Seidman, LLP. The Company's Audit Committee and Board of Directors participated
in and approved the decision to change independent accountants. BDO Seidman, LLP
audited the consolidated financial statements of the Company for the fiscal year
ending March 31, 2003.
The reports of PricewaterhouseCoopers LLP on the consolidated financial
statements for the fiscal years ended March 31, 2002 and 2001, respectively,
contained no adverse opinion or disclaimer of opinion and were not qualified as
to audit scope or accounting principle except that the report for the fiscal
year ended March 31, 2002 contained an explanatory paragraph expressing
substantial doubt regarding the Company's ability to continue as a going
concern.
In connection with its audits for the fiscal years ended March 31, 2002 and
2001, respectively, and through April 3, 2003, there have been no disagreements
with PricewaterhouseCoopers LLP on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of PricewaterhouseCoopers LLP
would have caused them to make reference thereto in their report on the
consolidated financial statements for such years.
During the fiscal years ended March 31, 2002 and 2001, respectively, and
through April 3, 2003, there have been no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).
For the two most recent fiscal years of the Company ended March 31, 2002
and 2001 and the subsequent interim period through April 3, 2003, the Company
did not consult with BDO Seidman, LLP regarding the application of accounting
principles to a specified transaction, type of audit opinion that might be
rendered on the Registrant's financial statements, or any other accounting,
auditing or reporting matters.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with respect to the Company's
directors and compliance by the Company's directors, executive officers and
certain beneficial owners of the Company's Common Stock with Section 16(a) of
the Securities and Exchange Act of 1934 will be set forth under the captions
"Election of Directors' and "Section 16 Reports" in the Company's definitive
Proxy Statement (the "2003 Proxy Statement") for its 2003 annual meeting of
stockholders, which sections are incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be set forth in the section
entitled "Executive Compensation" in the 2003 Proxy Statement, which section is
incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED SHAREHOLDER MATTERS
The information required by this item will be set forth in the section
entitled "Security Ownership of Certain Beneficial Owners and Management" in the
2003 Proxy Statement, which section is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item will be set forth in the section
entitled "Certain Transactions" in the 2003 Proxy Statement, which section is
incorporated herein by reference.
63
ITEM 14. CONTROLS AND PROCEDURES
We evaluated the design and operation of our disclosure controls and
procedures to determine whether they are effective in ensuring that we disclose
the required information in a timely manner and in accordance with the
Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules
and forms of the Securities and Exchange Commission. Management, including our
principal executive officer and principal financial officer, supervised and
participated in the evaluation. The evaluation was completed within the 90-day
period prior to the filing of this Annual Report on Form 10-K. The principal
executive officer and principal financial officer concluded, based on their
review, that our disclosure controls and procedures, as defined by Exchange Act
Rules 13a-14(c) and 15d-14(c), are effective and ensure that we disclose the
required information in reports that we file under the Exchange Act and that the
filings are recorded, processed, summarized and reported within the time periods
specified in Securities and Exchange Commission rules and forms. No significant
changes were made to our internal controls or other factors that could
significantly affect these controls subsequent to the date of their evaluation.
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of the inherent limitations in all control systems no
evaluation of controls can provide absolute assurance that all control issues if
any, within a company have been detected.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A)(1) FINANCIAL STATEMENTS
Reports of Independent Accountants
Consolidated Balance Sheets as of March 31, 2003 and 2002.
Consolidated Statements of Operations for the Years Ended March 31, 2003, 2002
and 2001.
Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended
March 31, 2003, 2002 and 2001.
Consolidated Statements of Cash Flows for the Years Ended March 31, 2003, 2002
and 2001.
Notes to the Consolidated Financial Statements.
(A)(2) FINANCIAL STATEMENT SCHEDULES
Reports of Independent Accountants
The following financial statement schedule is filed as a part of this Report
under Schedule II on page 69. Schedule II -- Valuation and Qualifying Accounts
for the three fiscal years ended March 31, 2003. All other schedules called for
by Form 10-K are omitted because they are inapplicable or the required
information is shown in the financial statements, or notes thereto, included
herein.
64
(A)(3) EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------ -----------------------
3.1(1) Restated Certificate of Incorporation of Pentegra Dental Group, Inc.
3.2(1) Bylaws of Pentegra Dental Group, Inc.
3.3(7) Restated Certificate of Incorporation of Pentegra Dental Group, Inc.
3.4(7) Amendment of Bylaws of Pentegra Dental Group, Inc.
3.5 Restated Certificate of Incorporation of e-dentist.com, Inc.
4.1(1) Form of certificate evidencing ownership of Common Stock of Pentegra
Dental Group, Inc.
4.2(1) Form of Registration Rights Agreement for Owners of Founding
Affiliated Practices
4.3(1) Registration Rights Agreement dated September 30, 1997 between
Pentegra Dental Group, Inc. and the stockholders named therein
4.4(2) Form of Stockholders' Agreement for Owners of Affiliated Practices
4.5(3) Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust
Company of Texas, N.A., as Trustee relating to the Convertible Debt
Securities
4.6(7) Form of certificate evidencing ownership of Common Stock of
e-dentist.com, Inc.
4.7(8) Form of Convertible Redeemable Subordinated Note
4.8(8) Form of Redeemable Warrant
+10.1(1) Pentegra Dental Group, Inc. 1997 Stock Compensation Plan
+10.2(1) Form of Service Agreement
10.3(4) Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A.
and Pentegra Dental Group, Inc.
10.4(5) Modification to Credit Agreement between Pentegra Dental Group, Inc.
and Bank One, Texas, N.A. dated September 9, 1998
10.5(5) Agreement and Plan of Merger among Pentegra Dental Group, Inc.,
Liberty Dental Alliance, Inc., Liberty Acquisition Corporation,
James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated as
of November 13, 1998
10.6(2) First Amendment to Credit Agreement by and among Pentegra Dental
Group, Inc. and Bank One, Texas, N.A. dated as of February 9, 1999
10.7(2) First Amendment to the Agreement and Plan of Merger by and among
Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc., Liberty
Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister
and William Kelly dated as of January 29, 1999
10.8(6) Third Amendment to Credit Agreement
+10.9(7) Employment Agreement dated November 12, 2000 between e-dentist.com
and James M. Powers, Jr.
+10.10(7) Employment Agreement dated February 15, 2001 between e-dentist.com
and Charles Sanders
+10.11(7) Employment Agreement dated February 15, 2001 between e-dentist.com
and James Dunn, Jr.
10.12(7) Asset Purchase Agreement by and among e-dentist.com, Inc. and
Dexpo.com, Inc.
10.13(7) Fourth Amendment of Credit Agreement
10.14(9) Plan of Reorganization and Agreement of Merger by and among EDT
Learning, Inc., Edge Acquisition Subsidiary, Inc. and the
Stockholders of Learning-Edge, Inc.
10.15(10) Plan of Reorganization and Agreement of Merger by and among EDT
Learning, Inc., TW Acquisition Subsidiary, Inc., ThoughtWare
Technologies, Inc. and the Series B Preferred Stockholder of
ThoughtWare Technologies, Inc.
10.16(11) Asset Purchase Agreement by and among EDT Learning, Inc., and Quisic
Corporation. Common Stock Purchase Agreement by and between EDT
Learning, Inc., Investor Growth Capital Limited, A Guernsey
Corporation and Investor Group, L.P., A Guernsey Limited Partnership
and Leeds Equity Partners III, L.P.
10.16(12) Asset Purchase Agreement by and among EDT Learning, Inc., and
Mentergy, Inc. and its wholly-owned subsidiaries, LearnLinc Corp and
Gilat-Allen Communications, Inc.
12 Ratio of Earnings to Fixed Changes
65
6(13) Letter re Change in Certifying Accountant
21.1 Subsidiaries of the Registrant
23.1 Consent of BDO Seidman, LLP
23.2 Consent of PricewaterhouseCoopers LLP
++99.1 Chief Executive Officer Section 906 Certification
++99.2 Principal Financial Officer Section 906 Certification
----------
(1) Previously filed as an exhibit to EDT Learning's Registration Statement on
Form S-1 (No. 333-37633), and incorporated herein by reference.
(2) Previously filed as an exhibit to EDT Learning's Registration Statement on
Form S-4 (No. 333-78535), and incorporated herein by reference.
(3) Previously filed as an exhibit to EDT Learning's Registration Statement on
Form S-4 (No. 333-64665), and incorporated herein by reference.
(4) Previously filed as an exhibit to EDT Learning's Quarterly Report on Form
10-Q for the fiscal quarter ended June 30, 1998.
(5) Previously filed as an exhibit to EDT Learning's Quarterly Report on Form
10-Q for the fiscal quarter ended September 30, 1998.
(6) Previously filed as an exhibit to EDT Learning's Annual Report on Form 10-K
for the year ended March 31, 2000.
(7) Previously filed as an exhibit to EDT Learning's Annual Report on Form 10-K
for the year ended March 31, 2001.
(8) Previously filed as an exhibit to EDT Learning's Annual Report on Form 10-K
for the year ended March 31, 2002.
(9) Previously filed as an exhibit to EDT Learning's Form 8-K filed October 16,
2001.
(10) Previously filed as an exhibit to EDT Learning's Form 8-K filed January 30,
2002
(11) Previously filed as an exhibit to EDT Learning's Form 8-K filed July 2,
2002.
(12) Previously filed as an exhibit to EDT Learning's Form 8-K filed December
20, 2002.
(13) Previously filed as an exhibit to EDT Learning's Form 8-K filed April 3,
2003.
+ Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to the requirements of Item 14(c) of Form
10-K.
++ Furnished herewith as an Exhibit
(B) REPORTS ON FORM 8-K.
A Report on Form 8-K was filed April 3, 2003 reporting the dismissal by EDT
Learning, Inc. of PricewaterhouseCoopers LLP as its independent accountants and
engagement of BDO Seidman, LLP. No financial statements were filed with this
report.
A Report on Form 8-K/A was filed February 10, 2003 disclosing the pro forma
unaudited combined financial statements reflecting the acquisition by EDT
Learning, Inc. of certain assets of LearnLinc Corporation on December 13, 2002,
certain assets of Quisic Corporation on June 17, 2002, all the outstanding
capital stock of Learning-Edge, Inc. on October 1, 2002 and all the outstanding
capital stock of ThoughtWare Technologies, Inc. on January 15, 2002.
A Report on Form 8-K/A was filed February 7, 2003 disclosing the pro forma
unaudited combined financial statements reflecting the acquisition by EDT
Learning Inc. of certain assets of Quisic Corporation on June 17, 2002, all the
outstanding capital stock of Learning-Edge, Inc. on October 1, 2002 and all the
outstanding capital stock of ThoughtWare Technologies, Inc. on January 15, 2002.
A Report on Form 8-K was filed December 20, 2002 reporting the acquisition of
certain assets by EDT Learning, Inc. of LearnLinc Corp., (a wholly-owned
subsidiary of Mentergy, Inc.) including LearnLinc(R), a live, virtual classroom
software, and TestLinc(TM), an online testing and assessment tool. No financial
statements were filed with this Report.
66
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders
EDT Learning, Inc. and Subsidiaries
Our audit of the 2003 consolidated financial statements referred to in our
report dated June 6, 2003 appearing in the 2003 Annual Report to Shareholders of
EDT Learning, Inc. also included an audit of the 2003 information included in
the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In
our opinion, this financial statement schedule presents fairly, in all material
respects, the 2003 information set forth therein when read in conjunction with
the related 2003 consolidated financial statements, included therein.
/s/ BDO Seidman, LLP
Costa Mesa, California
June 6, 2003
67
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors and Shareholders
EDT Learning, Inc. and Subsidiaries
Our audits of the consolidated financial statements referred to in our report
dated July 11, 2002 appearing in the 2002 Annual Report to Shareholders of EDT
Learning, Inc. (which report and consolidated financial statements are
incorporated by reference in this Annual Report on Form 10-K) also included an
audit of the financial statement schedule listed in Item 15(a)(2) of this Form
10-K. In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Phoenix, Arizona
July 11, 2002
68
EDT LEARNING, INC.
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
ADDITION DEDUCTIONS
-------- -----------------------
BALANCE AT CHARGED
THE TO BAD WRITE-OFFS BALANCE AT
FISCAL BEGINNING OF DEBT RECOVERIES CHARGED TO END OF
YEAR DESCRIPTION PERIOD EXPENSE (1) ALLOWANCE PERIOD
------ ----------- -------- -------- -------- -------- --------
2003 Accounts receivable - allowance
for doubtful accounts ........... $ 754 $ 765 $ 542 $ 552 $ 425
2002 Accounts receivable - allowance
for doubtful accounts ........... $ 1,147 $ 548 $ 455 $ 486 $ 754
2001 Accounts receivable - allowance
for doubtful accounts ........... $ 3,269 $ 1,172 $ -- $ 3,294 $ 1,147
2003 Notes receivable-allowance for
doubtful accounts ............... $ 1,092 $ 93 $ 25 $ -- $ 1,160
2002 Notes receivable-allowance for
doubtful accounts ............... $ 2,089 $ 12 $ 708 $ 301 $ 1,092
2001 Notes receivable-allowance for
doubtful accounts ............... $ 1,714 $ 533 $ -- $ 158 $ 2,089
(1) This amount represents recoveries for accounts which were not charged off;
accordingly, these recoveries are reflected as a decrease in allowance and
decrease to bad debt expense as the collection of recoveries are reflected
as applications to the respective accounts and notes receivable.
69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned; thereunto duly authorized, in the City of
Phoenix, State of Arizona, on June 30, 2003.
EDT LEARNING, INC.
By: /s/ JAMES M. POWERS, JR.
------------------------------------
James M. Powers, Jr.,
Chairman of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
NAME CAPACITY DATE
---- -------- ----
/s/ JAMES M. POWERS, JR. Chairman of the Board, President June 30, 2003
----------------------------- and Chief Executive Officer
James M. Powers, Jr. (Principal Executive Officer)
/s/ JAMES H. COLLINS Director June 30, 2003
-----------------------------
James H. Collins
/s/ DAVID A. LITTLE, D.D.S. Director June 30, 2003
-----------------------------
David A. Little, D.D.S.
/s/ DANIEL T. ROBINSON, JR. Director June 30, 2003
-----------------------------
Daniel T. Robinson, Jr.
/s/ GEORGE M. SIEGEL Director June 30, 2003
-----------------------------
George M. Siegel
/s/ PRESTON A. ZUCKERMAN Director June 30, 2003
-----------------------------
Preston A. Zuckerman
70
CERTIFICATION
I, James M. Powers, Jr. certify that:
1. I have reviewed this annual report on Form 10-K of EDT Learning, Inc.,
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ James M. Powers, Jr.
------------------------------------
James M. Powers, Jr.,
Chairman of the Board, President and
Chief Executive Officer
June 30, 2003
71
CERTIFICATION
I, Brian L. Berry certify that:
1. I have reviewed this annual report on Form 10-K of EDT Learning, Inc.,
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c. presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
By: /s/ Brian L. Berry
------------------------------------
Brian L. Berry
Vice President of Finance
June 30, 2003
72