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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2002 OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM _________ TO _________
COMMISSION FILE NUMBER 1-13725
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EDT LEARNING, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0545043
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2999 NORTH 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(602) 952-1200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
The number of shares of Common Stock of the Registrant, par value $.001 per
share, outstanding at August 9, 2002, was 16,638,471.
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FORM 10-Q REPORT INDEX
10-Q PART AND ITEM NO.
PART I -- FINANCIAL INFORMATION PAGE
----
Item 1 -- Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets as of June 30, 2002 and
March 31, 2002.................................................. 3
Consolidated Statements of Operations for the Three
Months Ended June 30, 2002 and June 30, 2001.................... 4
Consolidated Statement of Changes in Shareholders'
Equity for the Three Months Ended June 30, 2002................. 5
Consolidated Statements of Cash Flows for the Three
Months Ended June 30, 2002 and June 30, 2001.................... 6
Notes to Consolidated Financial Statements...................... 7
Item 2 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations............................. 10
PART II -- OTHER INFORMATION
Item 1 -- Legal proceedings............................................... 15
Item 2 -- Change in securities and use of proceeds........................ 15
Item 3 -- Defaults of senior securities................................... 15
Item 4 -- Submission of matters to a vote of security holders............. 15
Item 5 -- Other information............................................... 15
Item 6 -- Exhibits and Reports on Form 8-K................................ 15
Signature................................................................. 16
2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, MARCH 31,
2002 2002
-------- --------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 1,078 $ 1,498
Accounts receivable, net of allowance for doubtful
accounts of $802 and $754, respectively ...................... 1,364 824
Prepaid and other current assets .............................. 182 427
Notes receivable from affiliated practices--current, net ...... 360 536
-------- --------
Total current assets ........................................ 2,984 3,285
Property and equipment, net ...................................... 1,766 2,137
Goodwill ......................................................... 9,584 7,479
Intangible assets, net ........................................... 1,843 1,984
Notes receivable from affiliated practices, net .................. 352 493
Other assets ..................................................... 232 209
-------- --------
Total assets ................................................ $ 16,761 $ 15,587
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long term debt ............................. $ 903 $ 1,337
Accounts payable and accrued liabilities ...................... 1,865 2,203
Current portion of deferred revenue ........................... 565 853
Current portion of capital lease liabilities .................. 396 430
-------- --------
Total current liabilities ................................... 3,729 4,823
Long term debt, less current maturities .......................... 5,826 5,367
Capital lease liabilities ........................................ 415 536
Deferred revenue ................................................. 156 195
-------- --------
Total liabilities ........................................... 10,126 10,921
Commitments and contingencies
SHAREHOLDERS' EQUITY
Common stock, $.001 par value 40,000,000 shares authorized,
17,813,726 and 15,281,485 issued, respectively ............... 18 15
Additional paid-in capital .................................... 33,657 31,336
Accumulated deficit ........................................... (25,899) (25,544)
Less: 1,179,630 treasury shares at cost ....................... (1,141) (1,141)
-------- --------
Total shareholders' equity .................................. 6,635 4,666
-------- --------
Total liabilities and shareholders' equity .................. $ 16,761 $ 15,587
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
3
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
JUNE 30,
--------------------
2002 2001
-------- --------
Revenues
Learning .......................................... $ 1,131 $ 159
Dental contracts .................................. 1,171 1,768
-------- --------
Total revenues ................................ 2,302 1,927
Operating expenses
Research and development .......................... 892 227
Sales and marketing ............................... 360 203
General and administrative ........................ 728 663
Depreciation and amortization ..................... 509 532
-------- --------
Total operating expenses ...................... 2,489 1,625
Earnings (loss) from operations ...................... (187) 302
Interest expense .................................. (385) (288)
Interest income ................................... 36 76
Other income ...................................... 181 93
-------- --------
Income (loss) before income taxes ................. (355) 183
Income taxes .................................. -- --
-------- --------
Net income (loss) .................................... $ (355) $ 183
======== ========
Earnings (loss) per common share, basic and diluted .. $ (0.02) $ 0.02
======== ========
Number of shares used in calculation of earnings
(loss) per share, basic and diluted ................ 14,507 10,573
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
4
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
(IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN ACCUMULATED TREASURY SHAREHOLDERS
SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY'
--------- --------- --------- --------- --------- ---------
Balances, April 1, 2002 ........ 15,281 $ 15 $ 31,336 $ (25,544) $ (1,141) $ 4,666
Issuance of common stock ....... 2,533 3 2,321 -- -- 2,324
Net loss ....................... -- -- -- (355) -- (355)
--------- --------- --------- --------- --------- ---------
Balances, June 30, 2002 ........ 17,814 $ 18 $ 33,657 $ (25,899) $ (1,141) $ 6,635
========= ========= ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
5
EDT LEARNING, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
THREE MONTHS ENDED
JUNE 30,
--------------------
2002 2001
-------- --------
Net cash used in operating activities ................. $ (832) $ (15)
Cash flows from investing activities:
Repayment of notes receivable ...................... 337 76
Proceeds from practice terminations ................ 382 31
Capital expenditures ............................... (72) (8)
-------- --------
Net cash provided by investing activities ........ 647 99
-------- --------
Cash flows from financing activities:
Repayment of long-term debt ........................ (97) (97)
Repayment of capital lease liabilities ............. (155) (90)
Proceeds from stock option exercise ................ 17 --
-------- --------
Net cash used in financing activities ............ (235) (187)
-------- --------
Net change in cash and cash equivalents ............... (420) (103)
Cash and cash equivalents, beginning of period ........ 1,498 1,051
-------- --------
Cash and cash equivalents, end of period .............. $ 1,078 $ 948
======== ========
Supplemental disclosure of cash flow information:
Issuance of common stock ........................... $ 2,307 $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE
CONSOLIDATED FINANCIAL STATEMENTS
6
EDT LEARNING, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. ORGANIZATION AND BASIS OF PRESENTATION
Headquartered in Phoenix, Arizona, EDT Learning, Inc., ("the Company") is a
leading provider of custom, comprehensive e-Learning business solutions for
corporate clients seeking to train non-technical users (individuals with less
computer experience). The Company supports organizations requiring internal
training, product demonstration and customer education programs with the goal of
mapping e-Learning solutions to business results.
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 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 unaudited consolidated financial statements included herein have been
prepared by the Company, pursuant to the rules and regulations of the Securities
and Exchange Commission (the "SEC"). Pursuant to such regulations, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted. The Company believes the presentation and disclosures
herein are adequate to make the information not misleading, but do not purport
to be a complete presentation inasmuch as all note disclosures required by
generally accepted accounting principles are not included. In the opinion of
management, the consolidated financial statements reflect all elimination
entries and normal recurring adjustments that are necessary for a fair statement
of the results for the interim periods ended June 30, 2002 and 2001.
Fiscal operating results for interim periods are not necessarily indicative
of the results for full years. It is suggested that these consolidated financial
statements be read in conjunction with the financial statements of the Company
and related notes thereto, and management's discussion and analysis related
thereto, all of which are included in the Company's annual report on Form 10-K
for the year ended March 31, 2002, as filed with the SEC.
The accompanying financial statements have been prepared on a basis which
assume 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.
RECENT EVENTS, LIQUIDITY AND MANAGEMENT PLANS
The Company changed its business model from a dental practice management
company to an e-Learning company in the first quarter of fiscal 2001. The
Company is currently implementing its e-Learning strategy, has a limited
operating history with regard to its e-Learning business and is continuing the
development and enhancement of its e-Learning product and service offerings and
related revenue streams. The Company acquired two e-Learning entities during
fiscal 2002 and one e-Learning company during the three months ended June 30,
2002 and is currently integrating the operations of these entities.
The Company reported a working capital deficit and negative cash flow from
operations for fiscal year 2002 and the three months ended June 30, 2002. Also,
the Company's management service agreements with the affiliated dental practices
begin to expire on April 1, 2003 and will continue to expire through December
31, 2003, which will reduce revenues and cash flow from this source and
accordingly could negatively affect the Company's liquidity and operating
results. During the quarter ended June 30, 2002, the Company used cash flows
from operations of $832,000 and reported a working capital deficit of $745,000.
These items 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
7
cash flows to sustain operations. 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.
In order to increase its liquidity, the Company has developed the following
strategies; (i) implement its revised eCommerce and e-Learning based strategic
alternative described above, (ii) reducing costs in the Company's corporate
office, and (iii) raising additional capital through a private placement.
However, there can be no assurance that the Company's strategies will be
achieved.
2. SIGNIFICANT ACCOUNTING POLICIES
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 asset and
liabilities. The more significant areas requiring use of estimates relate to
revenue recognition, bad debts, intangible assets, income taxes and
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 which 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 differ from these
estimates under different assumption or conditions.
The Company has not added to or changed its critical accounting policies
significantly since March 31, 2002 other than in relation to the new
prouncements discussed below. For a description of these policies, refer to note
3 of the consolidated financial statements in the Company's annual report on
Form 10-K for the year ended March 31, 2002.
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 to purchase approximately 1,699,646 and 1,684,563
shares of Common Stock at exercise prices above market value were excluded from
the calculation of earnings per share for the three months ended June 30, 2002
and 2001, respectively, because their effect would have been antidilutive.
NEW PRONOUNCEMENTS
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations"
was issued. The standard requires that legal obligations associated with the
retirement of long-lived intangible assets be recorded at fair value when
incurred and will be effective for the Company on January 1, 2003. The adoption
of this statement is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued.
This statement provides guidance on the classification of gains and losses from
the extinguishment of debt and on the accounting for certain specified lease
transactions. Under the new guidance of SFAS No. 145, losses from early
extinguishments of debt will be classified as extraordinary items when the
losses are considered unusual in nature and infrequent in occurrence. SFAS No.
145 will be effective for the Company on April 1, 2004.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
and is effective for the Company on January 1, 2003. The Company is currently
reviewing the provisions of SFAS No. 146 to determine the standard's impact upon
adoption.
TRANSITIONAL DISCLOSURE UNDER SFAS NO. 142
On April 1, 2002, the Company adopted SFAS 142, "Goodwill and Other
Intangible Assets" and as a result, the Company's goodwill is no longer
amortized. SFAS 142 requires that goodwill be tested annually for impairment
using a two-step process. The first step is to identify a potential impairment
and, in transition, this step must be measured as of the beginning of the fiscal
8
year. However, a company has six months from the date of adoption to complete
the first step. The second step of the goodwill impairment test measures the
amount of the impairment loss (measured as of the beginning of the year of
adoption) if any, and must be completed by the end of the Company's fiscal year.
Any impairment loss resulting from the transitional impairment test will be
reflected as the cumulative effect of a change in accounting principle. The
Company has not yet determined what effect these impairment tests will have on
the Company's earnings and financial position.
Had the Company adopted SFAS No. 142 on April 1, 2001, net income would
have increased by $23,000 for the three months ended June 30, 2001 due to the
non amortization of goodwill. The adoption of this statement would not have
affected basic and diluted earnings per share of $0.02 for the three months
ended June 30, 2001.
3. SEGMENT INFORMATION
During the periods ended June 30, 2002 and 2001, the Company had two
reportable segments, learning and dental practice management. The learning
segment included revenues and operating expenses related to the development and
sale of the Company's learning products. The dental practice segment included
revenues from service contracts, operating expenses related to the delivery of
the dental services and other non-operating expenses.
There are no intersegment revenues. The Company does not review assets by
operating segment.
THREE MONTHS ENDED
JUNE 30,
--------------------
2002 2001
-------- --------
Revenues
Learning ............................................ $ 1,131 $ 159
Dental practice management .......................... 1,171 1,768
-------- --------
Total revenues .................................. 2,302 1,927
-------- --------
Operating expenses
Learning ............................................ 1,252 430
Dental practice management .......................... 1,237 1,195
-------- --------
Total operating expenses ........................ 2,489 1,625
-------- --------
Earnings (loss) from operations
Learning ............................................ (121) (271)
Dental practice management .......................... (66) 573
-------- --------
Total earnings (loss) for operating ............. (187) 302
-------- --------
Non operating expenses
Learning ............................................ -- --
Dental practice management .......................... 168 119
-------- --------
Total non-operating expenses .................... 168 119
-------- --------
Income (loss) before income taxes
Learning ............................................ (121) (271)
Dental practice management .......................... (234) 454
-------- --------
Total income (loss) before income taxes ......... $ (355) $ 183
======== ========
4. BUSINESS COMBINATIONS
QUISIC CORPORATION
On June 17, 2002, the Company acquired certain assets of Quisic
Corporation; a California based private e-learning company for 2,500,000 common
shares. The operating results of Quisic are included with the Company's as of
June 17, 2002.
9
The purchase price has been calculated as follows:
(IN THOUSANDS)
Issuance of EDT Learning common stock valued
at $0.92 per share ..................................... $2,300
Acquisition costs ......................................... 100
------
Net purchase price, including acquisition costs ........ $2,400
Assumed liabilities ....................................... 223
------
Total purchase price ................................... $2,623
======
The total purchase price has been allocated to assets acquired and
liabilities assumed based upon their estimated fair values in accordance with
Statement of Financial Accounting Standards (SFAS) No. 141, "Business
Combinations". The excess purchase price over the estimated fair value of the
tangible and identifiable intangible assets acquired and liabilities assumed has
been assigned to goodwill.
The purchase price has preliminarily been allocated as follows:
PURCHASE
PRICE
ALLOCATION
--------------
(IN THOUSANDS)
Current assets............................................. $ 186
Property and equipment..................................... 75
Goodwill................................................... 2,155
Identifiable intangible assets............................. 207
Current liabilities, including deferred revenue............ (323)
Common stock, net of treasury shares....................... (3)
Capital in excess of par value............................. (2,297)
-------
$ --
=======
5. COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
The Company has pending lawsuits against eight Affiliated Practices for
defaulting in the payment of the required Service Fees. In each of those cases,
the Company is seeking damages equal to past due and remaining service fees,
consequential damages equal to the value of the intangible practice asset and
attorney's fees. Three Affiliated Practices have in response filed a
counter-claim alleging breach of contract, misrepresentation and securities
violations. The Company believes that those counter-claims are without merit and
that the Company will prevail both in the recovery of damages from the
Affiliated Practices as well as in the defense to the alleged counterclaims.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF EDT
LEARNING, INC. AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL
FUTURE ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT
SET FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE
ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH
AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND
VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS
OF OPERATIONS AND GROWTH OF EXISTING AFFILIATED DENTAL PRACTICES, RISKS RELATED
TO THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN AND RISKS DETAILED IN
EDT LEARNING'S SEC FILINGS.
10
OVERVIEW
Headquartered in Phoenix, Arizona, EDT Learning is a leading provider of
custom, comprehensive e-Learning business solutions for corporate clients
seeking to train non-technical users (individuals with less computer
experience). The Company supports organizations requiring internal training,
product demonstration and customer education programs with the goal of mapping
e-Learning solutions to business results.
RESULTS OF OPERATIONS
As an extension of its educational and training background, the Company has
broadened its reach to focus on the larger growing e-Learning and corporate
training market. With the launch of the Company's state of the art learning
management system and its e-Learning engine, the Company now provides a
comprehensive array of e-Learning content, hosting and delivery services to
corporations, inside and outside the dental and healthcare industries. The
Company's synchronous and asynchronous content delivery solutions provide an
array of e-Learning products that are customized to each corporate client. The
Company is positioning itself in the corporate training sector of the e-Learning
marketplace leveraging its existing infrastructure and using scale provided by
an integrated product.
In connection with the execution of its e-learning strategy, the Company
acquired certain assets of Quisic Corporation; a California based private
company in June, 2002. The Company issued 2,500,000 common shares under the
terms of the agreement. Since the acquisition date, operating results of Quisic
are included with the Company's results from operations.
The Company continues to provide services to its Affiliated Practices in
accordance with the modified service agreements. The actual terms of the various
service agreements vary slightly on a case-by-case basis, depending on
negotiations with the individual Affiliated Practices. Those modified service
agreements require in general that the Company provide: access to online
practice enhancement services; access to online tools and payroll services;
access to certain on-site consulting and seminar programs; and the use of the
tangible assets owned by the Company located at each affiliated dental practice
location. The service fees payable to the Company under the modified service
agreements are guaranteed by the owner-dentists.
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
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. The Company cannot assure investor s that it will
be able to contend effectively with such increased competition.
REVENUES
Total revenues generated for the three months ended June 30, 2002 and 2001
were $2.3 million and $1.9 million respectively, an increase of $375,000. The
Company recognized $1.1 million in learning revenues in the three months ended
June 30, 2002 compared with $159,000 of learning revenues in the three months
ended June 30, 2001, an increase of $972,000. 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 2002 of Learning-Edge, Inc., ThoughtWare
Technologies, Inc. and the acquisition this quarter of certain assets of Quisic
Corporation. Revenue from dental contacts decreased by $597,000 during the three
months ended June 30, 2002 as compared to the three months ended June 30, 2001
due to the modification and termination of certain dental contracts. Dental
contract revenue will continue to decline as the contracts reach their
expiration dates, generally over the next 9 to 18 months, which will reduce
revenue and cash flow from this source and accordingly could negatively affect
the Company's liquidity and operating results.
11
OPERATING EXPENSES
Operating expenses consist of research and development, sales and
marketing, general and administrative and depreciation and amortization
expenses. The Company incurred operating expenses of $2.5 million and $1.6
million for the three months ended June 30, 2002 and 2001, respectively, an
increase of $864,000.
Research and development expenses include 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 were $892,000 for the
three months ended June 30, 2002 compared with $227,000 for the three months
ended June 30, 2001, an increase of $665,000. The increase is a result of the
Company's continuing expansion into the e-Learning marketplace.
Sales and marketing expenses consist primarily of sales and marketing
salaries and benefits, travel, advertising, and other marketing literature.
Sales and marketing expenses were $360,000 for the three months ended June 30,
2002 compared with $203,000 for the three months ended June 30, 2001, an
increase of $157,000. The increase is a result of the Company's continuing
expansion into the e-Learning marketplace.
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 (primarily related to practice development),
office costs and other general corporate expenses.
For the three months ended June 30, 2002 and 2001, general and
administrative expenses were $728,000 and $663,000 respectively, an increase of
$65,000. General and administrative expenses increased primarily due increases
in professional services of $111,000 and occupancy of $49,000. These increases
were offset by a decrease in bad debt expense of $95,000.
Depreciation and amortization expenses were $509,000 and $532,000 for the
three months ended June 30, 2002 and 2001, respectively, an decrease of $23,000.
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 depreciation
of the property and equipment purchased in the acquisitions of Learning-Edge,
Inc., ThoughtWare Technologies, Inc. and certain assets of Quisic Corporation.
INCOME TAX EXPENSE
The Company recorded no tax benefit during the three months ended June 30,
2002 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 eBusiness plan. At
June 30, 2002, the Company has a net deferred tax asset of $5.9 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 the three months ended June 30,
2001 due to the utilization of its net operating loss carryforward.
NEW PRONOUNCEMENTS
In June 2001, SFAS No. 143, "Accounting for Asset Retirement Obligations"
was issued. The standard requires that legal obligations associated with the
retirement of long-lived intangible assets be recorded at fair value when
incurred and will be effective for the Company on January 1, 2003. The adoption
of this statement is not expected to have a material impact on the Company's
consolidated financial position, results of operations or cash flows.
In April 2002, SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and
64, Amendment of FASB Statement No. 13, and Technical Corrections" was issued.
This statement provides guidance on the classification of gains and losses from
the extinguishment of debt and on the accounting for certain specified lease
transactions. Under the new guidance of SFAS No. 145, losses from early
extinguishments of debt will be classified as extraordinary items when the
losses are considered unusual in nature and infrequent in occurrence. SFAS No.
145 will be effective for the Company on April 1, 2004.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities" was issued. This statement provides guidance on the
recognition and measurement of liabilities associated with disposal activities
12
and is effective for the Company on January 1, 2003. The Company is currently
reviewing the provisions of SFAS No. 146 to determine the standard's impact upon
adoption.
LIQUIDITY AND CAPITAL RESOURCES
The Company changed its business model from a dental practice management
company to an e-Learning company in the first quarter of fiscal 2001. The
Company is currently implementing its e-Learning strategy, has a limited
operating history with regard to its e-Learning business and is continuing the
development and enhancement of its e-Learning product and service offerings and
related revenue streams. The Company acquired two e-Learning entities during
fiscal 2002 and one e-Learning company during the three months ended June 30,
2002 and is currently integrating the operations of these entities.
The Company reported a working capital deficit and negative cash flow from
operations for fiscal year 2002. Also, the Company's management service
agreements with the affiliated dental practices begin to expire on April 1, 2003
and will continue to expire through December 31, 2003, which will reduce
revenues and cash flow from this source and accordingly could negatively affect
the Company's liquidity and operating results. During the quarter ended June 30,
2002, the Company used cash flows from operations of $832,000 and reported a
working capital deficit of $745,000. These items 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.
In order to increase its liquidity, the Company has developed a plan
consisting of the following strategies; (i) continued implementation of its
e-Learning based strategic business plan through both internal growth and
acquisition and (ii) acceleration of cash collections from affiliated dental
practices by offering a sale of the dental practices management service
agreements earlier than contractually required.
The Company has made other acquisitions, and management expects that other
e-learning businesses will be acquired in the future. There can be no assurance
that the Company will be able to identify or reach mutually agreeable terms with
acquisition candidates and their owners, or that the Company will be able to
profitably manage additional businesses or successfully integrate such
additional businesses into the Company at all, or without substantial costs,
delays or other problems. There can be no assurance that businesses acquired
will achieve sales and profitability that justify the investment made by the
Company. Any inability on the part of the Company to control these risks
effectively and integrate and manage acquired businesses could have a material
adverse effect on the Company. Acquisitions may result in increased depreciation
and amortization expense; increase interest expense, increased financial
leverage or decrease operating results.
The Company's service agreements with affiliated dental practices begin to
expire on April 1, 2003 and will continue to expire through December 31, 2003,
which will reduce revenues and cash flow from this source and accordingly could
negatively affect the Company's liquidity and operating results. During the
quarter ended June 30, 2002, the Company received $382,000 in cash from
terminating the service agreements with Affiliated Practices. These cash
collections accelerate the date at which the Company would 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 or that the affiliated dental practices will
continue to agree upon terms acceptable to the Company.
At June 30, 2002, the Company had a working capital deficit of $745,000.
Current assets included $1.1 million in cash and $1.7 million in accounts and
notes receivable. Current liabilities consisted of $565,000 of deferred revenue,
$1.3 million of current maturities of long-term debt and capital leases and $1.9
million in accounts payable and accrued liabilities.
During the three months ended June 30, 2002 and 2001, the Company used
$832,000 and $15,000 respectively for operating activities, primarily from the
use of working capital.
13
The Company had outstanding total debt (secured and unsecured promissory
notes) of $8.9 million at June 30, 2002. Of that amount, the Company has $5.8
million of convertible redeemable subordinated notes, which mature on March 29,
2012. The remaining balance of $3.1 million is owed to various parties with
differing maturities as follows: $389,000 are unsecured notes which arose as
part of the Company's initial public offering and are due on March 30, 2003;
$105,000 are unsecured promissory notes of which were issued to former
shareholders of Omega Orthodontics, Inc. or were assumed by the Company as part
of its acquisition of Omega Orthodontics, Inc. and are due in fiscal 2003 and
2004. $1.4 million are unsecured promissory notes of which $1.0 million were
issued to former shareholders of Learning-Edge, Inc. and $0.4 million were
assumed by the Company as part of its acquisition of Learning-Edge, Inc. These
notes mature in fiscal 2004 and 2005. $1.2 million are unsecured convertible
promissory notes which were issued to dentists which the Company affiliated with
as part of its dental practice management business and are due one half in
November 2002 and one half in November 2003.
The following schedule details all of the Company's indebtedness and the
required contractual payments related to such obligations at June 30, 2002 (in
thousands):
DUE IN LESS DUE IN ONE TO DUE IN FOUR DUE AFTER
TOTAL THAN ONE YEAR THREE YEARS TO FIVE YEARS FIVE YEARS
------- ------------- ----------- ------------- ----------
Long term debt ..................... $ 8,871 $ 903 $ 2,193 $ -- $ 5,775
Capital lease obligations .......... 947 482 453 12 --
Operating lease obligations ........ 2,695 580 1,064 782 269
------- ------- ------- ------- -------
Total commitments .................. $12,513 $ 1,965 $ 3,710 $ 794 $ 6,044
======= ======= ======= ======= =======
Cash generated from investing activities was $382,000 and $31,000 in cash
received from service agreement terminations and $337,000 and $76,000 from the
collection of notes receivable during the three months ended June 30, 2002 and
2001 respectively. Cash used in investing activities was $72,000 and $8,000 for
capital expenditures in the three months ended June 30, 2002 and 2001,
respectively.
During the three months ended June 30, 2002 and 2001, $252,000 and $187,000
respectively was used to repay long-term debt and capital leases. The Company
received $17,000 in cash from the exercise of stock options during the three
months ended June 30, 2002.
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.
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 June 30, 2002, the carrying value of our outstanding convertible
redeemable subordinated notes was approximately $3.6 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.
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PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has pending lawsuits against eight Affiliated Practices for
defaulting in the payment of the required Service Fees. In each of those cases,
the Company is seeking damages equal to past due and remaining service fees,
consequential damages equal to the value of the intangible practice asset and
attorney's fees. Three Affiliated Practices have in response filed a
counter-claim alleging breach of contract, misrepresentation and securities
violations. The Company believes that those counter-claims are without merit and
that the Company will prevail both in the recovery of damages from the
Affiliated Practices as well as in the defense to the alleged counter-claims.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None
ITEM 3. DEFAULTS OF SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit No. Description
----------- -----------
99.1 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 -- James M. Powers, Jr.
99.2 Certification Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 -- Charles Sanders
(b) REPORTS ON FORM 8-K
1) Current Report on Form 8-K/A dated January 15, 2002 was filed
April 1, 2002 (Item 7. Financial statements and exhibits) which
contained the audited financial statements of ThoughtWare
Technologies, Inc. for the year ended December 31, 2001 and the
unaudited financial statements of ThoughtWare Technologies, Inc.
for the year ended December 31, 2000.
2) Current Report on Form 8-K dated July 1, 2002 (Item 2.
Acquisition or Disposition of Assets).
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, EDT Learning, Inc., has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EDT LEARNING, INC.
Dated: August 14, 2002 By: /s/ Charles Sanders
------------------------------------
Charles Sanders
Sr. Vice President-Chief Financial
Officer
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