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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant To Section 13 Or 15(d)
Of The Securities Exchange Act Of 1934
For the fiscal year ended December 31, 2002
Commission File No. 000-29953
EDULINK, INC.
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(Exact name of registrant as specified in its charter)
Nevada 95-4562316
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
201 Wilshire Blvd.
Second Floor
Santa Monica, California, 90401
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(Address of principal executive offices)
(310) 393-4901
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(Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of each class)
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 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. [X]
As of March 31, 2003, 821,695,100 shares of Common Stock were outstanding, and
the aggregate market value of the Common Stock (based upon the closing price of
$0.0025 per share on the OTC Bulletin Board on March 31, 2002) held by
non-affiliates was approximately $1,500,000.
1.
TABLE OF CONTENTS
Page
PART I
Item 1. BUSINESS..........................................................3
RISK FACTORS.....................................................16
Item 2. PROPERTIES.......................................................20
Item 3. LEGAL PROCEEDINGS................................................20
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..............20
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS..............................................21
Item 6. SELECTED FINANCIAL DATA..........................................22
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS........................................23
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......27
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................27
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................27
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............28
Item 11. EXECUTIVE COMPENSATION...........................................29
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.......................................................32
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................32
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K......................................................33
Unless otherwise indicated, all references to "EduLink," "we," "us" and
"our" refer to EduLink, Inc. and its predecessor.
CAUTIONARY NOTICE
REGARDING FORWARD-LOOKING STATEMENTS
This report contains statements that we believe are "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. All statements other than statements of historical fact in this report,
including statements regarding our competitive strengths, business strategy,
expected benefits of any acquisition, future financial position, budgets,
projected costs and plans and objectives of management are forward-looking
statements. In addition, forward-looking statements generally can be identified
by the use of forward-looking terminology such as "may," "will," "expect,"
"should," "intend," "estimate," "anticipate," "believe," "plan," "continue" or
similar terminology. We undertake no obligation to publicly update or revise any
forward-looking statements contained in this report. These forward-looking
statements are not guarantees of future performance and are subject to risks,
uncertainties and other factors, some of which are beyond our control, that
could cause actual results to differ materially from those we express or imply
in those forward-looking statements. These factors include, but are not limited
to, those we describe in "Risk Factors" and elsewhere in this report, and these
factors expressly qualify all written and oral forward-looking statements
attributable to us.
2.
PART I
Item 1. BUSINESS
Overview
EduLink was originally incorporated in January 1994 as a Nevada
corporation under the name URREA Enterprises, Inc. as a development stage
company that attempted to engage in the business of extracting minerals.
However, URREA's developmental operations did not generate revenues. URREA's
common stock was traded on the OTC Bulletin Board.
In October 1999, URREA and EduLink agreed to merge, with URREA surviving
the merger and the stockholders of EduLink receiving an aggregate of 7,776,000
shares of URREA common stock. At the time, URREA had no assets or liabilities
and a net asset value of $0. EduLink entered into the merger in order to achieve
the value of being a company whose common equity is traded on the OTC Bulletin
Board, including obtaining liquidity for its shareholders.
Prior to the merger with EduLink, URREA effected a forward stock split of
its issued and outstanding shares on a 50:1 basis, which increased its
outstanding shares of common stock from 5,180,450 to 259,022,500, as well as the
number of shares of common stock to be issued and delivered to the stockholders
of EduLink from 7,776,000 to 388,800,000. At the closing on October 27, 1999,
EduLink merged with and into URREA in exchange for 388,800,000 shares of URREA
common stock and immediately after the merger URREA changed its name to EduLink,
Inc. EduLink is not in any manner conducting the mineral extraction business
that URREA attempted to engage in prior to the merger.
Our Services
We are currently engaged in the design, development and production of a
web-based integrated learning content management and delivery system, with its
first application consisting of an integrated educational service, called the
EduLink "Smart Schoolhouse," which is intended to be marketed to and utilized by
students, parents, teachers and school administrators. In connection with the
design and development of this system, we have also developed and produced
certain proprietary software, which is discussed more fully below. The Smart
Schoolhouse system will include:
o a comprehensive school information and content management and
communications system; and
o standards based and nationally recognized 3rd through 12th grade
curriculum with appropriate instructional strategies and student
assessment. It is intended that this service will be utilized by
four separate categories of end users: students, parents,
teachers, and school administrators. The total service will be
provided to schools, for a nominal subscription fee, over the
Internet. The total service will include a premium service that
provides access to certain designated software tools, special
pay-per-view events and specifically designated content. The
service provided to schools will also be provided to homes without
charge, except that we plan to charge schools and homes nominal
fees for the premium service.
From July 1996 through approximately April 1998, we developed an initial
3.
business plan for the Smart Schoolhouse system, built a prototype website,
produced a limited number of educational content lesson plans and developed an
initial template to construct educational content. After April 1998, we revised
the business plan for the Smart Schoolhouse system, redeveloped the structure
and methodology for building interdisciplinary and interactive lessons.
In the third quarter of 2001, we completed the design, development and
production of the material elements of the learning content management and
delivery system. The system combines instructional content and school
information with an integrated communications system that together deliver the
content and information across the Internet to the web-based users. Our website
is the key to our delivery system. The website serves as a user portal or
gateway to the Smart Schoolhouse system. The system relates to each element as a
separate object stored on our dedicated servers. The software architecture has
three tiers. They are:
o Presentation Layer - software responsible for delivering the
Graphic User Interface to the end user. EduLink's presentation
layer has two embedded software components.
o Web Browser - a user-supported web browser to allow users to
seamlessly and easily access system components.
o Web Servers - software elements that manage the connections
between the user and the EduLink servers. These software elements
are revolutionary because they are capable of performing over a
thousand transactions per second to create content and assemble it
into a presentable format.
The Company's hardware architecture has two components. They are:
o Application Layer - user computer systems that serve to host the
user-friendly web browser. This layer implements all the EduLink
specific application logic for the publish-and-subscribe access
schemes, implements all the EduLink tools, and facilitates the
interpretation, formulation and delivery of user requests and
queries and data inputs.
o Server Layer - EduLink servers that host the Company's web server,
application software and database. The server layer provides for
the storing and retrieval of information.
The Company's architecture also incorporates a number of elements. These
are:
o XML based system for curriculum content.
o A graphical icon-based interface as part of the Content Editor,
allowing teachers, students and parents to rapidly reconfigure
content.
The current status of the development of our proposed products and
services is set forth below in the section entitled "Current Status of our
Proposed Products and Services."
The Company originally estimated that it needed a total of approximately
4.
$8.5 million to produce, alpha test, beta test and launch the system for the 7th
and 8th grades only. The Company subsequently (in August 2001) determined that
To successfully launch the system, it was necessary to include curricula for
all grades from 3rd through 12th as well as the homeschool market, and the
Company therefore also needed to license and make third party content available
through its system. The Company estimated that it needed an additional $5
million through June 2002 to complete the modifications required for the
system's application for the entire 3rd through 12th grades and to the
homeschool market, to license and integrate third party content, to complete
production of additional enabling tools, to create proprietary curriculum for
two additional grade levels, to launch the system and conduct marketing
activities up to the end of the customary school year (i.e., June 2002), and to
provide the infrastructure to market and exploit the Company's technologies
outside of the grade 3-12 education market. Therefore, having taken into account
the revised capital requirements, the Company estimated that it needed to raise
a total of $13.5 million, of which it had raised a total of $8,062,578, net of
expenses, as of September 30, 2001, primarily through the private placement of
its Common Stock. As of December 31, 2001, the Company had raised only $200,000
of the additional $5.5 million in capital it needed, and had not completed the
production of additional enabling tools, had not licensed additional third party
curriculum content, had not upgraded the technology and had not the completed
the infrastructure to exploit its technologies outside of the grade 3-12
education market. And as of December 31, 2002, the Company had raised only an
additional $150,000. The Company now estimates that it needs to raise a total of
$5 million in capital to upgrade its technology, license and integrate third
party content for the 3rd through 12th grades, produce additional enabling
tools, conduct marketing activities and launch the system in September 2003 for
the education market. The Company intends to raise the additional $5 million in
capital it needs to complete those modifications and enabling tools, to
integrate third party content and to beta test the system while working with
various school districts, school district alliances and/or State Departments of
Education. Concurrently, the Company intends to obtain additional content from
educational publishers, universities and other content providers and to launch
the system upon the start of the next customary school year (i.e.,
August-September 2003), as well as to create the infrastructure to market and
exploit its technology in other markets.
The Company raised $8,412,578, net of expenses, as of December 31, 2002,
toward the goal of a total of $13.5 million, primarily through the private
placement of its common stock.
The Company now expects that expenses (including software development
costs and general and administrative costs) will be approximately $5 million per
year from April 1, 2003 to March 31, 2004, to license additional third party
curriculum content, to produce additional software tools, to alpha test and beta
test the content so licensed and the tools so produced, to upgrade technologies,
to continue operations, to provide necessary support and maintenance services to
licensees, to increase marketing activities for the Smart Schoolhouse system and
to continue and increase development, marketing and support activities relating
to the Company's technologies for application in markets outside of the 3rd
through 12th grade U.S. education market.
Smart Schoolhouse System
We now anticipate that the proposed Smart Schoolhouse system will
provide:
5.
o Educational Curriculum Content Licensed for Distribution to
EduLink: 3rd-12th grade materials organized as units of
instruction, books, lessons, activities, problems, assessment,
images; news feeds and audio. This content will be aligned
whenever possible to National or State content Standards.
National Content Standards refers to the guidelines and
educational standards and curriculum frameworks recommended by
several organizations focused on education, including: the
National Council of Teachers of English, the California Language
Arts Content Standards, the National Center for History in the
Schools, the National Center for History Standards, the National
Geography Alliance, the American Association for the Advancement
of Science, the Center for Research on Evaluation, Standards and
Student Testing, the National Council of Teachers of Math, and
the Council for Basic Education.
o The integration of quality multi-media educational content in a
web-based environment. "Multimedia content" means content which
incorporates text, photos, audio, video and/or animation.
Multimedia content can include public domain material, or
proprietary material which requires the securing of a license,
such as archived audio, video, still pictures and data from
nationally recognized content organizations like National
Geographic, CNN and Reuters. EduLink has had discussions
regarding licensing arrangements with National Geographic, CNN
and Reuters, but no long-term licensing agreements have been
reached. EduLink does not intend to develop or create its own
multimedia content, nor does it intend to compile an index of
websites containing multimedia content. However, all multimedia
content proposed to be utilized will be hosted by EduLink inside
the proposed Smart Schoolhouse system.
o A means to enhance student collaboration through the Internet
either at home, via a computer with Internet access, or at
school, via a computer with Internet access. Collaboration, in
this context, means that students from different physical
locations can assist each other in working out assigned problems
by utilizing their access to the proposed Smart Schoolhouse
system via the Internet, and the "Chat" areas within the proposed
Smart Schoolhouse system, inclusive of the Virtual Labs and the
Cognitive Mapping Tool, meaning areas which allow for
communications by typing messages in designated spaces.
o A comprehensive information management and communication service
with programs uniquely tailored to school, teacher, student and
parent needs, such as an electronic filtered 24-hour daily news
feed; Chat rooms (on-line chat areas), free ` Mail (on-line
E-Mail) with encryption functions limited for use by subscribers
to the System, a calendar of events, schedules and announcements.
Our content and database engineers have written the
specifications and have completed the initial web-based
engineering which will
6.
allow for the integration of these services whether the software
itself is created by Edulink or by third party vendors. The
targeted users for this service are students, parents, teachers
and school administrators.
o Online Virtual Labs with emphasis on inquiry. A web-based format
has been produced to standardize electronic icons, schoolhouse
structure and unit lesson and activities. Two Virtual Labs have
been created and tested. The targeted users for this service are
teachers and students.
o An electronic essay grader and a student essay tutorial program.
The electronic essay grader refers to a software tool which
grades student essays based upon the input of relative values
allocated to various possible answers to the question posed. The
student essay tutorial program means software that will guide
students as to how to write essays. Our content engineers have
finished a written description of an electronic grading system
for designated student work. Our database engineers have
developed initial algorithms for the web-based electronic essay
grader. The targeted users for this service are teachers.
o Teacher, student and parent tools to enhance learning. These
tools include existing reference web-based software, such as
thesaurus, dictionary, encyclopedia, atlas, word processor and
calculator. These tools also include non-reference type tools
designed by our technology engineers to help students learn by
working systematically through a problem, including:
o an Inquiry Step Tool, meaning a tool which sets out in a
linear fashion the steps a student should take to solve a
problem, inclusive of identifying the problem, formulating
hypotheses and conducting research;
o a Cognitive Mapping Tool, meaning a tool which promotes the
discovery and segregation of various elements associated
with a problem (i.e., identifying the elements, determining
how to retrieve the elements using the student's prior
knowledge and determining how to organize the elements into
categories and subcategories) and facilitates an examination
of the elements and the logical ways to connect them so as
to arrive at a solution. This tool is intended to provide
the student with a "map" of his thought processes, and for
example, prompt the student for more information or ask if
one response might better fit into another category; and
o an Intelligent Student Coaching Tool, meaning a tool which
will inform the student, on-line, when he is not properly
processing the problem (i.e. the student improperly
formulates a hypothesis). Existing reference web-based tools
have been identified and located and the content engineers
have developed a written description of non-reference
web-based tools that are to be developed. Our database
engineers have designed the database in order to integrate
the tools into the database. The targeted
7.
users for this service are teachers, students and parents.
o The Content Editor Tool, which is a teacher authoring tool
kit (inclusive of a web-based lesson design template) to
publish teacher created lessons inside the proposed Smart
Schoolhouse system. Our database engineers have designed,
developed and produced the Content Editor Tool and it has
undergone alpha testing. A teacher authoring tool means a
software tool which allows a teacher to gather digital data
(inclusive of multimedia content) from various locations and
formats in a user-friendly manner, so as to create and/or
edit lesson plans. In order to utilize portions of any
material which is not stored within the Smart Schoolhouse
system, together with portions of lessons, activities or
other material stored within the Smart Schoolhouse system,
the teacher must place that outside material inside the
proposed Smart Schoolhouse system (meaning inputting the
text thus converting it to a digital format). The targeted
users for this service are teachers.
o Tutorial services for use by students in the home. EduLink
plans to hire teachers as tutors, accessible through
Edu-Chat e-mail, chat rooms and/or telephone lines. Tutorial
services will be offered to students for a nominal fee. The
targeted users for this service are students.
o The School Store. The School Store means an area planned to
be within the Smart Schoolhouse system, which allows a user
to purchase products such as school sweaters, notebooks and
sportswear. The software to facilitate this part of the
proposed Smart Schoolhouse system is being designed by hired
technology engineers. In order to operate such a store,
EduLink must conclude agreements with product suppliers who
will warehouse and ship products as they are ordered by
users of the system. The targeted users for this service are
students, parents, teachers and administrators.
o An educational system that is adaptable to a worldwide
educational audience. The proposed Smart Schoolhouse system
is adaptable to a world wide educational audience because
its targeted users, i.e., students, parents, teachers and
schools, have universal educational characteristics. The
curriculum structure can be made specific to a country's
educational requirements. The structure of the proposed
Smart Schoolhouse system can be used in any country, but the
educational content must be created or obtained specifically
so as to satisfy the language and educational requirements
of the country in question. EduLink has no expertise in
terms of non-U.S. educational content; thus, in order to
bring the proposed Smart Schoolhouse system to other
countries, EduLink must form alliances with entities based
in the particular country, which have the expertise
necessary to create the appropriate educational content and
which will provide the funds required to create the
applicable educational content. EduLink currently is
negotiating with one entity for purposes of expanding the
8.
proposed Smart Schoolhouse system to a country outside of
the U. S. The targeted users for this service are
administrators, teachers, parents and students of the
applicable foreign country.
Our Proprietary Software
Our proprietary software includes our delivery and content management
system and our tools. We have one patent claim pending with the U. S. Patent and
Trademark Office for "System and Method For Developing Instructional Material
Using a Content Database" (our Content Editor), and have one additional patent
claim filed "System and Method for Automating a Purchase Approval Process". Our
delivery system and content management includes:
o our content server, consisting of EduLink's proprietary data model
and a licensed database known as Structured Information
Management, or SIM;
o an authoring system, consisting of the Company's Content Editor
Tool with use of the licensed XMETAL product from SoftQuad;
o a rendering engine, consisting of the Company's style and content
composition software; and
o our form generator.
This system may be easily adapted for use in many information intensive
applications, both within and outside of education markets.
We have designed and developed the following software tools for use in
the Smart Schoolhouse system: the Content Editor Tool, Cognitive Mapper, Map
Maker, Crossword Puzzle Builder, Integrated Working Environment, Teacher/
Student/Parent Planner, 3-D Virtual World, Chart Maker, Math Plotter, Virtual
Microscope, Calculator, Homework Builder/Grader, Student Portfolio, Test
Generator and Progress Report Generator. Software tools which have been designed
but not yet developed include Study Pal, School Store Query, Master Scheduler,
Essay Grader, Speed Reader and Remediation Tool.
Customers and Users
We intend that the proposed Smart Schoolhouse system will be used by
school administrators, teachers, students and parents. There will be no
requirement that schools use the proposed Smart Schoolhouse system. Instead,
schools will be able to voluntarily adapt to the proposed Smart Schoolhouse
system because the school is not charged for the service and as such, they will
be able to utilize the system when and how they please.
School Administrators
It is planned that the portions of the proposed Smart Schoolhouse system
designed for school administrators will serve as the administrative arm of the
proposed Smart Schoolhouse system in a particular school and that it will, among
other things, detail school district resources and Internet technology
capabilities. EduLink intends to provide a full array of services to school
administrators including:
o a web-based home page to the school with active links to
9.
additional web pages about the school, its community, faculty and
staff and school information;
o comprehensive calendar and scheduling capabilities which will
automatically be propagated to teacher, student, and parent desktops;
o school-wide and staff-only announcement capabilities which will also
be propagated to the appropriate persons;
o collaboration capabilities both within the school and with outside
educators using the proposed Smart Schoolhouse system;
o home pages for administrative staff, with information (such as
education and areas of interest) for use in establishing collaborative
connections with outside educators; and
o site administrators associated with the school, to permit them to
register themselves and their classes with the proposed Smart
Schoolhouse system. It is planned that all information to support
these basic functions will reside on EduLink host computers.
Administrators will have the same basic abilities as teachers to
examine the curriculum (unit, lessons and activities) offered by
EduLink. Administrators will also have access to the common set of
office tools: word processing, dictionary and thesaurus. We also plan
to furnish news feeds to administrators.
EduLink believes that administrators will want this information described
above because it is essential to their daily operations, housed in one place and
will be easily accessible.
Teachers
It is planned that teachers will have access to all proposed Smart
Schoolhouse system curriculum units, lessons, news feeds, video teasers, the
Virtual Labs and the inquiry-based problems and tools. Teachers will be able to
use the proposed Smart Schoolhouse system to enhance their existing programs and
to allow them more time to individualize instruction. By using the time saving
tools, such as the electronic essay grader and the inquiry step tool, teachers
can become facilitators of the student's learning experiences rather than
dispensers of knowledge. Teachers will be able to guide students into inquiry
learning while encouraging them to interact and collaborate with
other students. Teachers will be able to use the proposed Smart Schoolhouse
system to assess student performance, to collaborate with students on writing
and problem solving exercises, to create lessons from the news feeds and from
the bank of archived resources using EduLink electronic authoring tools, to
exchange information instantaneously with other educators, and to communicate
quickly and directly to parents.
Teachers can encourage students to interact and collaborate via the
proposed Smart Schoolhouse system by explaining orally in the classroom, or in
writing through e-mail or individual chat sessions or group chat sessions in
chat rooms. Teachers can use this proposed Smart Schoolhouse system to assess
student performance by observing the student's work while using the Cognitive
Mapping and Inquiry Step tools, and this assessment can be accomplished by
reviewing the student's work after completion (it will be stored) or by
10.
reviewing the Student's work "real time," i.e., while in progress, which
therefore enables the teacher to collaborate with the student while in the
problem solving process. It is anticipated that a teacher/student collaboration
will include e-mails, individual chat sessions, group chat sessions and other
interactive collaboration within the Virtual Lab environment. EduLink intends to
save teachers' time in some areas (i.e., by the use of electronic essay graders,
use of the system's lessons and activities) while causing them to expend some of
the time saved in other areas (such as those that are designed to promote
critical thinking and assessment of thinking skills). A teacher will be able to
"pick and choose" from the services offered in that a teacher can, for example,
opt to communicate with parents via the proposed Smart Schoolhouse system or
elect not to do so; a teacher can use one, more than one or none of EduLink's
lessons and activities within a unit in the classroom; a teacher can use
traditional curriculum textbook material while also using related EduLink
lessons, activities or Virtual Lab inquiry-based problems as a supplement. The
proposed Smart Schoolhouse system is not intended to replace traditional
curriculum, but rather to be used by teachers as an additional asset to draw
from. Moreover, even if the proposed Smart Schoolhouse system is accepted into a
school it does not mean every teacher within that school will desire or be given
the opportunity to access the proposed Smart Schoolhouse system; and EduLink
assumes that, initially, those teachers within an EduLink affiliated school who
have technological awareness will be more likely to desire and be given the
opportunity to use the system in the classroom. It is the school, through
administrators (usually with guidance from teachers) that will elect to
affiliate with EduLink, and because EduLink is not attempting to replace the
traditional curriculum, no formal adoption of the proposed Smart Schoolhouse
system's curriculum is required.
Additionally, it is planned that the archived resources will be developed
from strategic alliances that EduLink plans to make with national and regional
organizations to license their electronic educational media resources. It is
anticipated that the image and informational banks of archived resources will be
integrated into the EduLink database. Moreover, the proposed Smart Schoolhouse
system will provide a repository for teaching and learning practices as well as
a distribution outlet for teachers employed by EduLink affiliated schools around
the world to publish and license their lessons. To facilitate this publishing
aspect, EduLink intends to build and integrate into its database a web-based
teacher-authoring tool (including a web-based lesson design template).
Students
It is intended that students will be able to access the proposed Smart
Schoolhouse system at any time through a computer that has Internet access,
including through a home computer. This will allow them to supplement and
enhance their learning, and collaborate with other students and teachers.
Students will be able to review their course work, obtain materials and
interactive resources related to their course work and, if necessary, receive
direct tutorial aid. EduLink expects that the interactive resources will include
videos, audios and still pictures that will have the capacity to be stopped and
played back within the proposed Smart Schoolhouse system, making each resource
interactive. EduLink expects to offer students direct tutorial aid in the home,
for a fee, through its e-mail program and the Edu-Chat program as well as by
telephone connection.
The portion of the proposed Smart Schoolhouse system designed for
students is intended to have, among other things, the applicable educational
information for the grade of the particular student courses, daily lessons and
11.
related materials, as well as a school information guide to help organize a
student's schedule, events, sports activities and clubs. Students will be able
to access via the Internet student-run web pages, current news events, updated
bus schedules and a daily read out of their teachers, classes and activities.
Students will also have their assignment lists and personal "lockers" with their
own private passwords to record their outside activities, appointments and
errands.
The proposed Smart Schoolhouse system, and all of the elements to be
designed for student use, inclusive of applicable tools, will be structured so
that it can be used by all age groups (i.e., 3rd graders through 12th graders)
but the curriculum content itself and the language appearing within the proposed
Smart Schoolhouse system to direct the student's use of the various components
of the proposed Smart Schoolhouse system (including the tools) will be made age
appropriate.
Parents
It is planned that through the use of the proposed Smart Schoolhouse
system, parents will have the ability to interact directly with a variety of
persons involved in their child's education, including teachers, guidance
counselors and career counselors. For college-bound students, all of the
pertinent information relating to prospective colleges, scholarships, financial
aid and sample SAT and ACT tests will be available to parents. Parents will also
be able to maintain direct contact with teachers, school administrators, coaches
and other parents through a special PTA menu. They will be able to schedule
"chat" sessions on a regular basis and at their own convenience. "Chat" sessions
and bulletin board postings will allow parents to participate by sharing
experiences with parents of same age students around the city, state, nation,
and world. Parents using their own personal access code will be able to interact
with their child's school program from any computer with access to the Internet.
Parents will be able to enter the School Store and shop for educational
merchandise at discounted rates. The majority of the School Store merchandise
will be rated and endorsed by EduLink.
EduLink believes that parents will want access to the proposed Smart
Schoolhouse system not only to provide their children with access to the
proposed Smart Schoolhouse system at home, but also to allow the parents to
become more involved in their child's educational experiences.
The parents of homeschoolers will also be able to access the proposed
Smart Schoolhouse system. EduLink also believes there is a significant
opportunity in the homeschoolers market and plans to focus on trying to gain
penetration into this market. In order to penetrate this market, curriculum
content may have to be modified in order to satisfy various states' educational
agendas; however, the National Standards upon which EduLink's curriculum content
is to be based are generally more rigorous and demanding than the standards set
forth in the various 50 United States; accordingly, we expect that the
modifications that might be required with respect to any specific state would
generally not be significant.
Delivery of and Access to the Smart Schoolhouse System
It is intended that school administrators, teachers, students and parents
will access the Smart Schoolhouse system website through desktop computers using
his or her personal account. Within each end user group, a member of the
particular group will only have access to certain information and services. For
12.
example, students will receive access codes allowing them access to the
curriculum services, but not to the grades or records of other students. Only a
student's teacher and school administrator will have such access. Each end user
will have a personal identification code, which will allow them access to their
private information.
EduLink will host the system for Internet use. Through the Internet,
administrators, teachers, parents and students will be able to access and use
the system. The content and services provided by the system will be delivered
via the web to the users. The computers hosting the system will be provided by
EduLink.
It is expected that the school, not EduLink, will operate as the system
administrator. When the school registers itself with EduLink, a site
administrator (such as the principal or an assistant principal) will be selected
by the registering school. The site administrator will be furnished with a
special access code, which will permit the site administrator to provide and
manage access privileges for the administrators, teachers, students and parents
associated with that school.
EduLink anticipates that schools (administrators), teachers, students,
and parents, will each furnish pertinent data that will be maintained on the
EduLink computers. It is expected that this will include general contact
information, and also (for all except the parents) the additional profile
information necessary to maintain such user's calendar, activities and
interests, progress on assignments, class schedules, course work and other
EduLink preferences. The school, teacher, parent and student information will be
gathered by using electronic templates that identify specific fields of
information. The data content from these templates will be stored on the EduLink
host computers.
Current Status of Our Proposed Services and Products
Smart Schoolhouse System
EduLink has conducted alpha tests and now expects to beta test the Smart
Schoolhouse system for the 3rd through 12th grades and the home schooling market
in Summer of 2003, and to launch the service for the 3rd through 12th grades and
the home schooling market in September 2003 following the completion of the beta
test and resultant modifications to the system, if any. The launch will
incorporate our proprietary 7th and 8th grade curriculum content, as well as
other curriculum content licensed from third parties for all grades 3 through
12.
The technology consultants we have hired, Science Applications
International Corporation, have designed and built the material elements of the
EduLink architecture and the delivery and content management system, and have
completed the design, development and production of the material aspects of
numerous software tools, including the following tools: Content Editor Tool;
Cognitive Mapping Tool; Map Maker Tool; 3-D Virtual World Tool; Virtual
Microscope; Crossword Puzzle Builder; Chart Maker Tool; Math Plotter Tool;
Progress Report Generator; Teacher/Student/Parent Planner; Calculator; Homework
Builder/Grader Tool; Student Portfolio; and Test Generator. In addition, we have
completed the design for, and expect to continue development of, the following
tools: Study Pal; Speed Reader Tool; Essay Grader Tool; Smart Technology for
Remediation; Master Scheduling Tool; and School Store Query Tool.
13.
The software relating to the Smart Schoolhouse system's information and
communication system (i.e. e-mail, chat, schedules, school store) has been
designed by our technology engineers but not yet integrated and it is now
Edulink's intent to license some of these software items from third parties and
integrate them into the system.. The graphics within the Smart Schoolhouse
system are also being designed by SAIC and we have completed the initial
graphics relating to the student, teacher, parent and administrator desktops,
and the 7th and 8th grade proprietary curriculum as well as the graphics
associated with the completed software tools described above. Over 5 of the 10
units of the proprietary curriculum content for the 7th and 8th grades (units,
lessons, activities, inquiry based problems) have been created by our content
design team. We have also received third party U. S. History educational content
from the University of California at Los Angeles.
Proprietary Software
In addition to the software tools which have been designed, developed and
produced, the design and development of the material elements of our system
architecture and our delivery and content management system have been completed,
and these elements provide for the following functionalities:
o The Learning Content Management System understands and captures the
environment in which its users interact. The system defines each of the objects
which the system represents, and the relationships between and among each of
these objects in a way that represents the real world. The XML Data Type
Definition defines each of the objects specifically or generally. Users,
generally have access to similar information. However, Teachers must have a
relationship to a class where their role is a Teacher. A Student is a person who
participates in a class as a pupil. The system registers users as Students,
Teachers, and Parents not for the benefit of the system, but for the benefit of
the users who need and want information presented to them in a certain way.
Telling the system "I am a Student" will not necessarily make a user a Student.
It will give the user a Student view of the information and expose the user to
the Student's learning process. A Student and a Parent can create a class and in
effect become a Teacher. With self-study also being part of the system, a Home
Study Parent can easily use the system to educate that Parent's child.
o The Learning Content Management System provides teachers with a
multi-tiered approach to managing educational information or content. The system
has the ability to store, search, browse categories, view, author, and
re-purpose educational information or content. The system is designed to rapidly
use and re-purpose content which can then be presented by teachers to their
students in the form of activities, lesson plans, or units. The main features of
the system are as follows:
o Storage: The system manages and stores text intensive information. This
textual information can be broken or indexed according to categories. In
addition to documents, the system also stores and indexes web sites, video
files, images, and audio files.
o Search: Content within the system can be searched at a number of
levels. Teachers can search for information using keywords, phrases, or
categories. The search capability allows them to narrow their criteria, meaning
narrow the search to a combination of words in the same sentence or paragraph,
not just within the same document. Searching by category can further refine the
criteria. Categories of information or materials can include, among other
things, articles, research papers, contracts, e-mail, news or lessons. The same
14.
refined search functionality is available to the teacher for web sites, images,
video clips, audio files, and other items. Content from external sources can be
imported and searched from the system. Using the Content Editor, teachers can
import content from external web sites and store the content within the system.
o Retrieval: The search results display the document name with a portion
of the text containing the keyword or phrase. Teachers are able to hyperlink and
view the entire text of the document. Keywords or phrases given as search
criteria are highlighted in the documents contained in the search results. The
keyword or phrase is indicated in red, while the sentence is highlighted in
blue. All occurrences of the keyword or phrase are highlighted through out the
document. The first place either the keyword or phrase appears in the document
will be initially displayed to the teacher. This eliminates the need to browse
through a lengthy document to search for the highlighting.
o Re-purposing /Authoring: The system's Content Editor assists the
teacher (or any user) in re-purposing content initially searched for and
retrieved. The Content Editor gives the teacher a view of the basic document
(i.e., an activity, a report, manual, brief, contract, or lesson) and icons
representing different types of resources that might be added to the document.
Resources are simply different types of information such as articles, contracts,
website links, research reports, video clips, images or tasks. The teacher
determines the type of resource(s) desired, then drags and drops the appropriate
icon to the text. If an existing resource is desired, the teacher may implement
the system's search functionality. The search will automatically categorize
according to the type of resource. The teacher will then be able to preview and
insert the resource into the text of the document. The resource will be inserted
where the teacher dropped the icon. New resources or content can also be created
with the use of templates. Templates provide the teacher with an easy-to-follow
outline of expected information, based upon pre-determined standards. When a
teacher re-purposes information or changes a resource previously included within
a document and once the modified information or resources have been stored in
the system, it becomes subject to the system's search.
o Security/Delivery/Rendering/Tracking: The system has built in controls
and security. All teachers must register with the system and at that time the
new registrant's type will be established. There are different levels of user
types and a user's ability to access certain information and functionalities
will depend on the user type. To gain access to certain information, a student
must join a group. Access into a group must be requested and only the group's
creator can confirm acceptance. A group can consist of one member or any number
of members. Once a student has gained group acceptance, the group's information
and response requests become visible to that student. This process ensures order
and structure and prevents open access to specific group information. The
student's view is dynamically updated to include current group information.
Manual configuration is not required. The teacher is able to communicate and
exchange documents with all the members of the group. The group's creator is
able to view responses and track group members not responding. As new
information or documents become available, the student's view is updated.
Marketing
Smart Schoolhouse System
EduLink plans to market the proposed Smart Schoolhouse system to public
and private schools throughout the United States and to homes with school-aged
children. In addition, EduLink intends to market the proposed Smart Schoolhouse
15.
system to a worldwide market and outside the core 3rd through 12th grade market.
EduLink intends to reach schools and homes by several methods, including direct
sales,sales to State departments of education and to large school district
alliances, with companies that have a substantial regional and national presence
in school and/or home markets (such as local telephone companies, cable
companies, computer companies local marketing companies, non profit technology
consulting firms and internet service providers), cross promotion with companies
attempting to reach demographics similar to those of EduLink, and public
relations activities that will illustrate the value of EduLink's overall content
management system.
The type of alliances EduLink envisions include co-branding agreements
with well known portals such as Yahoo; bundling agreements with computer
companies like Dell and telcos like Verizon; co-promotional agreements with
sponsors and advertisers which provide promotional material about EduLink
through the distribution of their own products or within their own environment,
such as Pepsi Cola and Wal-Mart; and companies engaged by States and large
school districts to provide technological advice, such as JES & Company. The
companies used in the previous sentence are examples of the type of alliances
EduLink envisions; EduLink does not currently have any alliance or agreement in
place with any of these companies.
Current Status - Marketing The Smart Schoolhouse System
EduLink has concluded a co-marketing alliance with SAIC and is currently
working with Sun Microsystems to market Sun Microsystems-developed education
portals, incorporating the core elements of our Learning Content Management
System. Joint presentations have been made by Sun Microsystems and EduLink to
Florida's Department of Education and Florida's Rural Learning Alliance, and we
are continuing discussions with these entities. Edulink has also made
presentations of its core Content Management System for implementation in the
Digital California Portal, for use by the State of Maryland Department of
Education, for inclusion in pilot programs conducted in the States of Oklahoma
and Texas and for use within public schools in Mexico.
Application Outside of the Education Markets
EduLink believes that its proprietary software technology, particularly
the content management and interface aspects, can be used in any number of
applications outside of the grade 3-12 education market. We contracted with Cap
Ventures, a consulting firm with specialized expertise in content and knowledge
management software, to prepare a business plan for us. The business plan was
completed and delivered. We have prepared a PowerPoint demo for presentation of
our core content management system to markets outside of the grade 3-12
education market. We have commenced discussions with a number of software and
technology companies to explore structures, such as licenses or joint ventures,
as well as to a number of potential licensees, including governmental entities
and higher education institutions.
Potential Sources of Revenue
Smart Schoolhouse System
If EduLink is able to fully develop and market the proposed Smart
Schoolhouse system, it expects to derive revenue from one or more of the
16.
following sources:
o Fees from schools;
o Home subscriptions for premium services and tools;
o Tutorial services;
o Transactional revenue from the school store and links to other
websites;
o Traditional corporate advertising within the commercial zones of
the Smart Schoolhouse system;
o Corporate sponsorship in various forms, including corporate
underwriting;
o Distribution fees from the proprietors of content and software
distributed through the system;
o International franchises of the proposed Smart Schoolhouse system;
and
o Federal grants.
Applications Outside of the Smart Schoolhouse
If EduLink is able to market its proprietary software for application
outside of the grade 3-12 education market in the United States, we expect to
derive revenue from licensing fees, maintenance fees and in-service training
fees as a result of issuing licenses directly to enterprises or from licensing
activities generated by resellers or joint ventures that could be formed with
software, hardware or other technology companies and/or telecommunication
companies, among others.
Competition
The market for companies providing educational related materials is
highly and intensely competitive. EduLink will be in direct competition with
companies with significantly longer operating histories, significantly greater
financial, technical, product development and marketing resources, greater name
recognition and larger customer bases than that of EduLink. Competitors of
EduLink include education curriculum software companies such as Blackboard, Big
Chalk, Net Schools, WebCt, Edscape Corporation, Lightspan Networks, Inc.,
Softkey International, Inc., National Education Corporation, Davidson and
Associates, Inc., Scholastic Corporation, Broderbund Software, Inc., Knowledge
Adventures, Inc., Jostens LLC, PBS Mathline, CTB McGraw Hill, Net School/ACTV
Inc., e Schooland, and CCC, Inc. Moreover, other entities not currently in this
industry may in the future attempt to launch a business similar to or identical
to that of EduLink's. EduLink's competitors may develop products comparable or
superior to those developed by EduLink, adapt more quickly than EduLink to new
technologies, evolving industry trends or customer requirements, or devote
greater resources to the development, promotion and license of their products
than EduLink. Accordingly, there can be no assurance that competition will not
intensify or that EduLink will be able to compete effectively in its proposed
17.
market. However, to EduLink's knowledge, there are no other companies currently
engaged in the business of providing all of the various elements of the proposed
Smart Schoolhouse system from a single system, which EduLink intends to provide.
There are various software companies that are providing organizational
information between teachers and administrators, but we are not aware of any
company currently providing organizational information between parent and
teacher, parent and student, teacher and student, parents and administrators,
and student and administrator, inside one system. EduLink does not believe it
will be in competition with companies that provide extra curriculum games that
are designed to be educational because EduLink's content is focused on a
national standards based curriculum that relates directly to history, math,
science and literature.
Employees
As of December 31, 2002, EduLink had three employees, Michael Rosenfeld,
Dr. Ronald Rescigno and Ian Rescigno. The Company entered into employment
agreements with each of the foregoing full-time employees on September 1, 1999,
which agreements provide as follows:
Ronald Rescigno has been employed as President of EduLink since September
1, 1999, and his employment agreement runs through December 31, 2004.
Compensation originally equaled $150,000 per year (the monthly pro-rata
compensation from September 1 - December 31, 1999 was waived), plus a bonus
equal to the greater of 10% of the Net Pre-Tax Profits or 10% of the Net Cash
Flow of EduLink computed annually, but not to exceed an amount equal to $300,000
for each of the calendar years 2000 and 2001 and $450,000 for each of the
calendar years 2002, 2003 and 2004; in addition, Dr. Rescigno is entitled to
four weeks vacation, annually, fifteen paid sick days annually, and insurance
benefits. The agreement also originally provided that warrants to purchase
5,717,650 shares of EduLink's common stock at $.0022 per share were to be issued
to Dr. Rescigno upon completion of each of the Design Phase, the Build-Out
Elements, the Beta Test and the National launch of the proposed Smart
Schoolhouse system for the 7th and 8th grades. These warrants were to vest
ratably over 7 years from the date of issuance. In 2000, following the issuance
of warrants for completion of the Design Phase but prior to the issuance of any
of the remaining warrants, the agreement was amended to eliminate the right to
receive the remaining warrants in exchange for $50,000 additional salary in 2000
and a base salary of $300,000 in 2001. Dr. Rescigno must devote all of his work
efforts to EduLink, Inc. for the term of his employment agreement.
Michael Rosenfeld has been employed as Chief Executive Officer of EduLink
since September 1, 1999, and his employment agreement runs through December 31,
2004. Compensation originally equaled $150,000 per year (the monthly pro-rata
compensation from September 1 - December 31, 1999 was waived), plus a bonus
equal to the greater of 10% of the Net Pre-Tax Profits or 10% of the Net Cash
Flow of EduLink computed annually, but not to exceed an amount equal to $300,000
for each of the calendar years 2000 and 2001 and $450,000 for each of the
calendar years 2002, 2003, and 2004; in addition, Mr. Rosenfeld is entitled to
four weeks vacation, annually, fifteen paid sick days, annually, and insurance
benefits. The agreement also originally provided that warrants to purchase
5,717,650 shares of EduLink's common stock at $.0022 per share were to be issued
to Mr. Rosenfeld upon completion of each of the Design Phase, the Build-Out
Elements, the Beta Test and the National launch of the proposed Smart
Schoolhouse system for the 7th and 8th grades. These warrants were to vest
ratably over 7 years from the date of issuance. In 2000, following the issuance
of warrants for completion of the Design Phase but prior to the issuance of any
of the remaining warrants, the agreement was amended to eliminate the right to
receive the remaining warrants in exchange for $50,000 additional salary in 2000
18.
and a base salary of $300,000 in 2001. Mr. Rosenfeld may render outside services
so long as it does not interfere with his obligation as an officer of EduLink.
Ian Rescigno has been employed as Senior Vice President of Operations for
EduLink since September 1, 1999, and his employment agreement runs through
December 31, 2004. Compensation originally equaled $90,000 per year (the monthly
pro-rata compensation from September 1 - December 31, 1999 was waived), plus a
bonus equal to the greater of 10% of the Net Pre-Tax Profits or 10% of the Net
Cash Flow of EduLink computed annually, but not to exceed an amount equal to
$180,000 for each of the calendar years 2000 and 2001 and $270,000 for each of
the calendar years 2002, 2003, and 2004; in addition, the employee is entitled
to four weeks vacation, annually, and fifteen paid sick days, annually, and
insurance benefits. The agreement also originally provided that warrants to
purchase 5,717,650 shares of EduLink's common stock at $.0022 per share were to
be issued to Mr. Rescigno upon completion of each of the Design Phase, the
Build-Out Elements, the Beta Test and the National launch of the proposed Smart
Schoolhouse system for the 7th and 8th grades. These warrants were to vest
ratably over 7 years from the date of issuance. In 2000, following the issuance
of warrants for completion of the Design Phase but prior to the issuance of any
of the remaining warrants, the agreement was amended to eliminate the right to
receive the remaining warrants in exchange for $30,000 additional salary in
2000. In February 2000, Mr. Rescigno was issued additional warrants to purchase
34,305,000 shares of common stock at an exercise price of $.0022 per share. Mr.
Rescigno must devote all of his work efforts to EduLink, Inc. for the term of
his employment agreement.
Each of these employees waived compensation during the second quarter of 2002
and deferred receipt of any compensation from July 1, 2002 through December 31,
2002.
RISK FACTORS
The following important factors, among others, could cause our actual
operating and financial results to differ materially from those contained in
this report and our other oral and written communications. The risks and
uncertainties described below are not the only ones we face. Additional risks
and uncertainties, including those that we do not know about now or that we
currently deem immaterial, may also adversely affect our business.
We Have Generated No Revenues To Date And Expect To Incur Losses For The
Foreseeable Future, Which Could Cause The Value Of Our Common Stock To Decline
Since our inception, we have generated no revenues. We do not anticipate
generating revenues until our Smart Schoolhouse system is launched, which is
currently anticipated to be in September 2003. However, if our Internet
educational services are not accepted and adopted by a significant number of
school districts and schools we will not generate significant revenues or become
profitable. As of December 31, 2002, our accumulated deficit was $14,953,836.
For the fiscal years ended December 31, 1999, 2000, 2001 and 2002 the report of
our independent certified public accountants contained a going concern
qualification. We expect to continue to experience significant operating losses
in the future as we continue our development efforts. Our future losses could
cause the market value of our common stock to decline.
We Will Need Additional Capital In The Future To Support The Final Development
And Launch Of Our Smart Schoolhouse System, And To Fund Our Capital Needs After
19.
The Launch, And If We Do Not Have Available Financing We Could Have To Curtail
Our Operations
Our current cash resources is not be sufficient to meet our immediate
requirements nor is it sufficient to meet our requirements for the next twelve
months. We are not currently generating revenues to fund our ongoing operations
and, if we do not raise additional capital we will not be able to fund our
ongoing basic cash requirements.
We currently anticipate that $5 million will be needed to complete
modifications to the system for application to the home school market, to
license third-party curriculum content, complete the alpha and beta testing of
our Smart Schoolhouse system for grades 3 through 12, to complete the
development of additional enabling tools, to upgrade our technology, to engage
additional managerial, marketing and staff personnel, and carry through the
rescheduled September 2003 launch through the spring 2004. Additionally,
following the spring 2004, we currently anticipate the need for an additional $5
million per year thereafter to fund continuing operations, upgrade existing
content, upgrade technology, and produce and license additional content, beta
test and launch additional tools and content for our Smart Schoolhouse system.
During the year ended December 31, 2001, we used $2,831,871 million in our
operating activities. During the year ended December 31, 2002, we used $442,734
in our operating activities. Changes in our development program or other changes
affecting our operating expenses could, however, alter the timing and amount of
our expenditures and when we will require additional funding. The additional
funding we require may not be available to us on favorable terms or at all. If
we cannot obtain adequate funding, we will be required to shut-down our
operations.
We Have No Operating History, Which Makes It Difficult To Value Our Common Stock
We are a development stage company with no operating history. We
commenced our current operations in July 1996 and have not yet commercially
offered our services. We may not grow or achieve profitability. We face a number
of risks encountered by development stage companies in the Internet information
industry, including:
o the uncertainty of market acceptance of our services;
o our need to introduce reliable and robust products and services
that meet the demanding needs of customers;
o our need to first create and then expand our marketing, sales and
support organizations, as well as our distribution channels;
o our ability to anticipate and respond to market competition; and
o our need to manage expanding operations.
Our business strategy may not be successful, and we may not successfully
address these risks.
Our Smart Schoolhouse System Is Currently In Development And We May Not Be Able
To Complete That Development In A Timely And Cost Effective Manner, Or At All
20.
We are currently developing our Smart Schoolhouse system for the 3rd
through 12th grades and the home school market, with initial or "alpha" testing
among a limited user group completed as of December 2001. The second or "beta"
round of testing among a wider group that includes more "real world" users is
now intended to begin in the Summer of 2003 and we expect it to be completed
prior to the anticipated September 2003ommercial launch of the 3rd through 12th
grade and home school portions of the Smart Schoolhouse system. However, this
schedule assumes that the alpha and beta tests do not reveal significant defects
or faults in the system. If significant defects or faults are found, EduLink may
not be able to meet this schedule, which would delay the commercial launch and
therefore delay the generation of revenue. This, in turn, could cause the market
value of our common stock to decline.
Other factors, including many of the risk factors identified in this
section, could also delay the development of our Smart Schoolhouse system,
including among others the failure to raise additional capital and the failure
to recruit needed employees, with the same negative effect on EduLink and its
common stock.
We May Establish Alliances Or Acquire Technologies Or Companies In The Future,
Which Could Result In The Dilution Of Our Stockholders And Disruption Of Our
Business
We are continually evaluating potential business alliances and external
investments in technologies related to our business. Acquisitions of companies,
divisions, businesses or products and strategic alliances entail numerous risks,
any of which could materially harm our business in several ways, including:
o diversion of management's attention from our core business
objective and other business concerns;
o failure to integrate the acquired company or business into our
existing business;
o potential loss of key employees from either our existing business
or the acquired business;
o dilution of our existing stockholders as a result of issuing
equity securities; and
o assumption of liabilities of the acquired company.
Some or all of these problems may result from current or future
alliances, acquisitions or investments. Furthermore, we may not realize any
value from these alliances, acquisitions or investments.
If We Cannot Deliver The Features And Functionality Our Customers Demand, We
Will Be Unable To Retain Or Attract New Customers
Our success depends upon our ability to determine the features and
functionality our customers demand and to design and implement these features
and functionality in our Smart Schoolhouse system to meet their needs in an
efficient manner. We cannot guarantee that we can successfully determine
customer requirements or that our future services will adequately satisfy
customer demands. To date, the design of our Smart Schoolhouse system has been
based on our internal efforts and feedback from a limited number of potential
21.
customers. In addition, we may experience difficulties that could delay or
prevent the successful development, introduction or marketing of new features
and service enhancements in our Smart Schoolhouse system. If we cannot
effectively deploy, maintain and enhance our services, we may not generate
sufficient revenue, our expenses may increase, we may not be able to recover our
costs and our competitive position may be harmed.
Our Success Depends On Our Ability To Build And Expand Our Sales Force
In order to build our customer base and revenues, we need to build and
expand our sales operations. There is strong competition for qualified sales
personnel in our business, and we may not be able to attract and retain
sufficient new sales personnel to build and expand our operations. New sales
personnel will require training and will take time to achieve full productivity,
so the costs associated with hiring sales personnel will impact our financial
results before the revenues generated from any additional sales, likely
increasing our losses.
We Have Limited Resources And May Be Unable To Manage Our Anticipated Growth
If we fail to develop and maintain our services as we experience
anticipated rapid growth after the launch of our Smart Schoolhouse system,
demand for our services and our revenues could decrease. Our development and
expansion has placed, and will continue to place, significant strain on our
managerial, operational, and financial resources. Due to the limited deployment
of our services, we are unable to assess our ability to grow the business and
manage a substantially larger operation.
The Operation Of Our Smart Schoolhouse System Will Depend On Internet Access
Operated And Controlled By Others. If Our Customers Do Not Have Continued Access
To Sufficient Capacity On Reliable Networks, We May Be Unable To Deliver
Services And Our Revenues Could Be Affected
Our success will depend, in large part, upon a robust communications
industry and infrastructure for providing Internet access and carrying Internet
traffic. The Internet may not prove to be a viable commercial medium because of
a variety of factors including inadequate development of the necessary
infrastructure such as reliable network backbone; timely development of
complementary products such as high speed modems; delays in the development or
adoption of new standards and protocols required to handle increased levels of
Internet activity; or increased government regulation.
Moreover, we rely on the Internet and, accordingly, depend upon the
continuous, reliable and secure operation of Internet servers and related
hardware and software. Several large Internet commerce companies have suffered
highly publicized system failures which resulted in adverse reactions to their
stock prices, significant negative publicity and, in certain instances,
litigation. We may also suffer service outages from time to time. To the extent
that our service is interrupted, users will be inconvenienced or adversely
effected, and our reputation may be diminished.
We also depend upon third parties to provide users with web browsers and
Internet and on-line services necessary for access to our Smart Schoolhouse
system. From time to time, our users may experience difficulties with Internet
and other on-line services due to system failures, including failures unrelated
to our systems. Any sustained disruption in Internet access provided by third
parties could adversely impact our business.
22.
We Depend On Recruiting And Retaining Qualified Personnel And Our Inability To
Do So Would Seriously Harm Our Business
Because of the technical nature of our services and the market in which
we compete, our success depends on the continued services of our current
executive officers and our ability to attract and retain qualified personnel,
including personnel with Internet software expertise. Competition for qualified
personnel is intense. New employees generally require substantial training,
which requires significant resources and management attention. Even if we invest
significant resources to recruit, train and retain qualified personnel, we may
not be successful in our efforts.
The Convergence of Currently Distinct Industries May Adversely Affect Us
Due to the relative infancy of the Internet and its rapid growth, it is
not possible to predict the paths along which future development will proceed.
The Company cannot anticipate the effects that a convergence of currently
distinct industries may have on the Company's business. An example is the
AOL-Time/Warner merger and the continuing effect that combination has on the
entertainment and internet service provider markets. In the event a similar
convergence takes place in the educational services or other related industries,
the long term effect on our business plan may be material and adverse.
Rapid Changes In Technology May Adversely Affect Us
To remain competitive, we must continue to enhance and improve the
responsiveness, functionality and features of our Smart Schoolhouse system. The
Internet and the e-commerce industries are characterized by rapid technological
change, changes in user requirements and preferences, frequent new product and
service introductions embodying new technologies and the emergency of new
industry standards and practices that could render our Internet services and
proprietary technology and systems obsolete. Our success will depend, in part,
on our ability to license leading technologies useful in our business, enhance
our existing services, develop new services and technology that address the
increasingly sophisticated and varied needs of prospective customers, and
respond to technological advances and emerging industry standards and practices
on a cost-effective and timely basis.
The development of a Website and other proprietary technology entails
significant technical, financial and business risks. There can be no assurance
that we will successfully implement new technologies or adapt our Website and
proprietary technology to customer requirements or emerging industry standards.
If we are unable, for technical, legal, financial or other reasons, to adapt in
a timely manner in response to changing market conditions or customer
requirements, our business could be materially adversely effected. Further, the
adoption of new Internet, networking or telecommunications technologies may
require us to devote substantial resources to modify and adapt our products and
services.
Our Quarterly Operating Results Are Subject To Fluctuations, And Our Stock Price
May Decline If We Do Not Meet The Expectations Of Investors
We anticipate that after the launch of our Smart Schoolhouse system our
quarterly operating results will be difficult to predict and may fluctuate
significantly from quarter to quarter due to a number of factors, many of which
will be outside our control. These factors will likely include, but are not
23.
limited to:
o delays in our fund raising initiatives;
o delays in market acceptance or implementation by our customers of
our Smart Schoolhouse system;
o changes in demand by our customers for existing and additional
services;
o introduction of new services by us or our competitors;
o changes in our pricing policies or those of our competitors or
suppliers; and
o changes in accounting standards, including standards relating to
revenue recognition, business combinations and stock-based
compensation.
We believe period-to-period comparisons of our operating results are not
currently meaningful and will not be meaningful for the foreseeable future.
Quarterly revenues and operating results are not predictors of our future
performance. In some future quarter our operating results may be below the
expectations of public market analysts and investors and, as a result, the price
of our common stock may fall.
System Failures Could Reduce Revenues, Increase Costs Or Result In Liability
Claims And Seriously Harm Our Business
Any disruption to our services, information systems or communications
networks could result in the inability of our customers to receive our services
for an indeterminate period of time. Our services may not function properly if
our systems fail, or if there is an earthquake, fire, flood or other natural
disaster, or an act of war. Any disruption to our services could cause us to
lose customers or revenue, or face litigation, customer service or repair work
that would involve substantial costs and distract management from operating our
business. We currently do not have fully redundant systems for our services at
an alternate site. Our operations depend upon our ability to maintain and
protect our computer systems located at SAIC's facilities in Orlando, Florida.
We Could Face Claims That Our Services Infringe On Intellectual Property. These
And Other Claims Which May Arise Could Result In Significant Expenses And
Distract Our Management
Third parties may claim that our current or future products infringe
their proprietary rights or assert other claims against us. As the number of
entrants into our market increases, the possibility of an intellectual property
or other claim against us grows. Any intellectual property or other claim, with
or without merit, would be time-consuming and expensive to litigate or settle
and could divert management attention from focusing on our core business. As a
result of such a dispute, we may have to pay damages, incur substantial legal
fees, develop costly non-infringing technology, if possible, or enter into
license agreements, which may not be available on terms acceptable to us. This
would increase our expenses and could decrease the functionality of our service,
which would make our services less attractive to our current or potential
customers.
24.
If The Use Of The Internet By School Districts, Schools, Students and Parents
Does Not Continue To Grow, Our Business Will Be Harmed
Our future success is dependent on continued growth in the use of the
Internet by school districts, schools, students and parents. The use and
acceptance of the Internet by schools, students and parents may not increase for
a number of reasons, including the cost and availability of Internet access and
concerns about privacy, security, reliability, and concerns related to students'
unintended access to adult oriented websites.
Capacity constraints caused by growth in the general use of the Internet
may impede further development of the Internet to the extent that users
experience delays, transmission errors and other difficulties. If the necessary
infrastructure, products, services or facilities are not developed, or if the
Internet does not become a viable and widespread commercial medium, we may not
be able to grow our business.
Government Regulations And Standards May Harm Our Business And Could Increase
Our Costs Or Reduce Our Opportunities To Earn Revenues
In addition to regulations applicable to business in general, we may also
be subject to direct regulation of the Internet by governmental agencies. A
number of legislative and regulatory proposals under consideration by federal,
state, and local governmental organizations may lead to laws or regulations
concerning various aspects of the Internet, including on-line content, user
privacy, taxation, access charges and liability for third-party activities.
Additionally, it is uncertain how existing laws governing issues such as
taxation on intellectual property, libel, user privacy and property ownership,
will be applied to our services. The adoption of new laws or the application of
existing laws may expose us to significant liabilities and additional
operational requirements, which could decrease the demand for our services and
increase our cost of doing business.
Item 2. PROPERTIES
At December 31, 2002 EduLink utilized a portion of the offices used by
Michael Rosenfeld at 450 North Roxbury Drive, Suite 602, Beverly Hills,
California 90210 as its administrative offices. EduLink also had its production
offices located at 5743 Corsa Avenue, Suite 207, Westlake Village, California
91362. EduLink paid $30,491, $62,067, $68,426 and $31,711 in 2002, 2001, 2000,
and 1999, respectively, to the landlords of the premises, which are not
affiliates of EduLink. In January 2002, the lease for the Westlake Village
office expired in accordance with its terms, and the Company no longer leases
facilities at that location.
Item 3. LEGAL PROCEEDINGS
None.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a stockholder vote in the fourth quarter of
2002.
25.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
EduLink's common stock was traded on Nasdaq's OTC Bulletin Board under
the symbol "MYIQ.OB" from November 23, 1999 until May 3, 2000 when it was
removed from the OTC Bulletin Board. Trading on the OTC Bulletin Board resumed
on July 24, 2000 after the common stock was registered under the Securities
Exchange Act of 1934.
The following table sets forth the range of high and low bid prices for
our common stock for each quarterly period from January 1, 2000 through December
31, 2000, and from January 1, 2001 through December 31, 2001, as reported by
brokers and dealers making a market in the capital stock. Such quotations
reflect inter-dealer prices without retail markup, markdown or commission, and
may not necessarily represent actual transactions:
HIGH LOW
Fiscal 2000
First Quarter $ 1.420 $ 0.080
Second Quarter 0.325 0.210
Third Quarter 0.220 0.075
Fourth Quarter 0.265 0.018
Fiscal 2001
First Quarter $ 0.580 $ 0.013
Second Quarter 0.123 0.011
Third Quarter 0.040 0.012
Fourth Quarter 0.029 0.013
Fiscal 2002
First Quarter $ .015. $ .01.
Second Quarter 0.006. 0.0035
Third Quarter 0.006 0.0035
Fourth Quarter 0.006 0.002
As of January 31, 2003, there were 13,186 record holders of Edulink's
common stock.
EduLink has not paid any cash or other dividends on its common stock
since its inception and does not anticipate paying any such dividends in the
foreseeable future. EduLink intends to retain any earnings for use in its
operations and to finance the expansion of its business.
During the year ended December 31, 2000, EduLink sold 149,800,000 shares
of its common stock at an aggregate offering price of $7,490,000 pursuant to the
December 1999 private placement of common stock. These sales were exempt from
registration under the Securities Act of 1933 pursuant to the exemption
contained in Section 4(2) of such act.
During the year ended December 31, 2000, EduLink granted 34,305,000
warrants to an officer for services rendered valued at $3,082,500.
Bridge notes represent notes payable at 10% (annual percentage rate
10.47%) per annum and are currently due for payment. EduLink issued 20,869,412
and 11,435,294 warrants to purchase shares of common stock to the 1998 and 1996
bridge loan lenders, respectively, at an average exercise price of $0.034 per
share. These warrants expire either four years from the date of grant or four
years from the date of an initial public offering.
26.
During the year ended December 31, 2000, 8,004,706 warrants issued to
1996 bridge loan lenders and 4,288,235 warrants issued to investors expired and
were canceled.
During the year ended December 31, 2000, two of the 1998 bridge note
lenders converted $100,000 of the loan balance and $24,000 of accrued interest
into 2,480,000 shares of common stock.
Bridge notes payable at September 30, 2002 represented notes payable at 10%
(annual percentage rate 10.47% per annum) and are currently due for payment..
Bridge notes represent two notes payable at 10% (annual percentage rate 10.47%)
per annum as follows:
Bridge note #1 $ 100,000
Bridge note #2 (a) 250,000
----------
TOTAL $ 350,000
==========
(a) During December 2001, the Company obtained a loan for $250,000 to be
received in two installments. The first installment of $100,000 was received in
December 2001. The second installment of $150,000 was received in January 2002.
The note matured on March 31, 2002 and was extended orally to August 31, 2003.
The note may be converted at the lender's request into common stock The number
of shares will be determined by dividing $0.05 into that portion of the money
owed by the Company.
The lender was also assigned an aggregate of 6,000,000 existing warrants to
purchase shares of the Company's common stock at an exercise price of $0.0022
per share. Of these warrants, 2,400,000 were assigned upon the debtor's receipt
of the first $100,000 loan installment, and 3,600,000 are to be assigned upon
the debtor's receipt of the last $150,000 loan installment.
The proceeds of the $250,000 loan have been allocated between the note payable
and the warrants based on their relative fair value. The resulting interest
expense associated with these warrants assigned was $129,168 was recorded during
the three months ended March 31, 2002.
NOTE 4 - RELATED PARTY TRANSACTIONS
During the twelve months ended December, 2002, the Company received a loan from
its Chief Executive Officer for $90,500 in order to continue business
operations. The loan is non-interest-bearing and payable on demand.
During the three months ended June 30, 2002, two principal shareholders and one
officer waived a total of $97,500 their salaries owed to them, which has been
expensed and accounted for as additional paid-in capital. During the six months
ended December 31, 2002, the same principal shareholders, and officers deferred
a total $201,550 of the salaries owed to them.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
27.
Item 6. SELECTED FINANCIAL DATA
Year Ended December 31, 2002 as compared to Year Ended December 31, 2001
For The Years Ended December 31,
Income statement: 2002 2001
--------------------------------
Revenue $ -- $ --
Interest income $ 130 $ 24,792
Software development costs $ 12,884 $ 1,165,269
General and administrative expenses $ 905,644 $ 1,704,170
Total Operating Expenses $ 918,528 $ 2,869,439
Net loss from operations $ 918,398 $ 2,844,647
Basic and diluted loss per share $ 0.00 $ 0.00
Weighted average shares outstanding $821,695,100 $809,318,480
As Of December 31,
2002 2001
--------------------------------
Balance Sheet Data
Cash and cash equivalents $ 917 $ 103,151
Total assets 46,687 $ 156,865
Stockholders' equity (deficit) $(1,382,597) $ (681,223)
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion is provided to afford the reader an
understanding of the material matters of EduLink's financial condition, results
of operation, capital resources and liquidity. It should be read in conjunction
with the financial statements and notes thereto and other information appearing
elsewhere in this report.
Overview
EduLink, Inc. is a development stage company engaged in the design and
development of a seamless integrated Internet educational service, called the
Smart Schoolhouse system, for schools and homes, that is intended to be marketed
to and utilized by students, parents, teachers and school administrators. The
planned service will be delivered over the Internet to personal computer users.
The Company originally estimated that it needed a total of approximately
$8.5 million to produce, alpha test, beta test and launch the system for the 7th
and 8th grades only. The Company subsequently (in August 2001) determined that
to successfully launch the system, it was necessary to include curricula for all
grades from 3rd through 12th as well as the homeschool market, and the Company
therefore also needed to license and make third party content available
through its system. The Company estimated that it needed an additional $5
million through June 2002 to complete the modifications required for the
system's application for the entire 3rd through 12th grades and to the
28.
homeschool market, to license and integrate third party content, to complete
production of additional enabling tools, to create proprietary curriculum for
two additional grade levels, launch the system and conduct marketing activities
up to the end of the customary school year (i.e., June 2002), and to provide the
infrastructure to market and exploit the Company's technologies outside of the
grade 3-12 education market. Therefore, taking into account the revised capital
requirements, the Company estimated it needed to raise a total of $13.5 million,
of which it had raised a total of $8,062,578, net of expenses, as of September
30, 2001, primarily through the private placement of its Common Stock. As of
December 31, 2001, the Company had raised only $200,000 of the additional $5.5
million in capital it needed, and had not completed the modifications required
for the production of additional enabling tools, the license of additional third
party curriculum content, or the completion of the infrastructure to exploit its
technologies outside of the grade 3-12 education market. And as of December 31,
2002, the Company had raised only an additional $150,000. The Company now
estimates that it needs to raise a total of $5 million in capital to upgrade its
technology, license and integrate third party content for the 3rd through 12th
grades, produce additional enabling tools, conduct marketing activities and
launch the system in September 2003. The Company intends to raise the additional
$5 million in capital it needs to complete those modifications and enabling
tools and to beta test the system while working with various school districts,
school district alliances and/or State Departments of Education. Concurrently,
the Company intends to obtain additional content from educational publishers,
universities and other content providers and to launch the system upon the start
of the next customary school year (i.e., August-September 2003),as well as to
create the infrastructure to market and exploit its technology in other markets.
The Company raised $8,412,578, net of expenses, as of December 31, 2002,
toward the goal of a total of $13.5 million, primarily through the private
placement of its common stock.
The Company now expects that expenses (including software development
costs and general and administrative costs) will be approximately $5 million per
year from April 1, 2003 to March 31, 2004, to license additional third party
curriculum content, to produce additional software tools, to alpha test and beta
test the content so licensed and the tools so produced, to upgrade technologies,
to continue operations, to provide necessary support and maintenance services to
licensees, to increase marketing activities for the Smart Schoolhouse system and
to continue and increase development, marketing and support activities relating
to the Company's technologies for application in markets outside of the 3rd
through 12th grade U.S. education market.
Results of Operations
Year Ended December 31, 2002 as compared to Year Ended December 31, 2001
For The Years Ended December 31,
Income statement: 2002 2001
--------------------------------
Revenue $ -- $ --
Interest income $ 130 $ 24,792
Software development costs $ 12,884 $ 1,165,269
29.
General and administrative expenses $ 905,644 $ 1,704,170
Net loss $ 918,398 $ 2,844,647
Revenue
EduLink is a development stage enterprise and has spent most of its
efforts during the past five years in developing its Smart Schoolhouse system
web-based software initially for the 7th and 8th grades, and now also for 3rd
through 6th and 9th through 12th grades as well as the home-school market, which
is intended to be launched upon the start of next customary school year in
September 2003 following the completion of the beta test and resultant
modifications to the system, if any. Accordingly, EduLink has not generated any
revenues to date. EduLink's cumulative losses from inception through December
31, 2002 are $15,020,756.
..
Software Development Costs
Software development costs decreased by $1,152,385 to $ 12,884 for the
year ended December 31, 2002, from $ 1,165,269 for the year ended December 31,
2001. The decrease in software development costs in 2002 resulted from the
completion of a substantial part of Edulink's software development activities in
2000 and due to limited funds.
General and Administrative Expenses
General and administrative expenses decreased to $798,526 for the year
ended December 31, 2002 to $905,644 COMPARED with $1,704,170 for the year ended
December 31, 2001. Higher fees were paid for legal and accounting, printing and
reproduction, and rent expenses incurred during the year ended December 31, 2001
compared to those during the year ended December 31, 2002 as described below.
In February 2000, EduLink issued warrants to an officer to purchase
34,305,000 shares of common stock at an exercise price of $0.0022. The
$3,082,500 non-cash compensation charge associated with these warrants was
recorded during the year ended December 31, 2000.
In August 2000, the Company amended its employment contracts with its
President, its Chief Executive Officer, and its Senior Vice President. The
amendments terminated provisions relating to the issuance of 17,152,950 warrants
to each of the officers upon completion of each of the build-out elements, the
beta test, and the national launch of the Smart Schoolhouse system. In
consideration for the warrant termination, each of its President and Chief
Executive Officer received $50,000 and its Senior Vice President received
$30,000, and the Company recognized $130,000 of aggregate compensation expense.
The Company's payroll and payroll related expense decreased by $519,149
to $164,169 for the year ended December 31, 2002, from $683,318 for the year
ended December 31, 2001. During the year ended December 31, 2001 the Company
paid additional compensation totaling $380,000 to its officers. During the year
ended December 31, 2002, portions of salaries were waived and portions were
deferred by management employees as a result of limited funds.
30.
THE COMPANY'S LEGAL AND ACCOUNTING EXPENSES DECREASED BY $143,581 TO
$92,539 for the year ended December 31, 2002 from $236,120 for the year ended
December 31, 2001. The decrease was the result of lower expenses incurred for
services rendered in connection with legal and accounting services related to
public company filling requirements, as well as trademark, copyright and other
matters.
The Company's rent expenses decreased $31,576 to $30,491 for the year
ended December 31, 2002, from $62,067 for the year ended December 31, 2001. The
decrease was the result of having closed the additional office in Westlake,
California towards the latter part of 2001.
The Company's consulting fees decreased to $134,979 for the year ended
December 31,2002 from $274,529 for the year ended December 31, 2001. The
decrease was primarily due limited available funds.
The Company's telephone expenses decreased BY $11,256 TO $10,049 for the year
ended December 31, 2002, from $21,305 for the year ended December 31, 2001.
The Company's travel and entertainment expenses decreased by $137,117 TO $35,880
for the year ended December 31, 2002, from $172,997 for the year ended December
31, 2001. The lower expenses on telephone, travel and entertainment in 2002 were
due to limited available funds.
Year Ended December 31, 2001 as compared to Year Ended December 31,
2000
For The Years Ended December 31,
Income statement: 2001 2000
--------------------------------
Revenue $ - $ -
Interest income $ 24,792 $ 112,499
Software development costs $ 1,165,269 $ 3,120,301
General and administrative expenses $ 1,704,170 $ 4,418,303
Net loss $ 2,844,647 $ 7,426,105
Software Development Costs
Software development costs decreased by $1,955,032 to $1,165,269 for the
year ended December 31, 2001, from $3,120,301 for the year ended December 31,
2000. The decrease in software development costs in 2001 resulted from the
completion of a substantial part of Edulink's software development activities in
2000.
General and Administrative Expenses
General and administrative expenses decreased to $1,704,170 for the year
ended December 31, 2001, compared with $4,418,303 for the year ended December
31, 2000. The decrease was attributable mainly to non-recurring non-cash
compensation charges incurred in 2000 in connection with the issuance of
warrants for services rendered by employees. Moreover, higher fees were paid for
legal and accounting, printing and reproduction, and rent expenses incurred
during the year ended December 31, 2000 compared to those during the year ended
December 31, 2001 as described below.
31.
In February 2000, EduLink issued warrants to an officer to purchase
34,305,000 shares of common stock at an exercise price of $0.0022. The
$3,082,500 non-cash compensation charge associated with these warrants was
recorded during the year ended December 31, 2000.
In August 2000, the Company amended its employment contracts with its
President, its Chief Executive Officer, and its Senior Vice President. The
amendments terminated provisions relating to the issuance of 17,152,950 warrants
to each of the officers upon completion of each of the build-out elements, the
beta test, and the national launch of the Smart Schoolhouse system. In
consideration for the warrant termination, each of its President and Chief
Executive Officer received $50,000 and its Senior Vice President received
$30,000, and the Company recognized $130,000 of aggregate compensation expense.
The Company's payroll and payroll related expense increased by $300,233
to $683,318 for the year ended December 31, 2001, from $383,085 for the year
ended December 31, 2000. During the year ended December 31, 2001 the Company
paid additional compensation totaling $380,000 to its officers. In addition,
payroll expenses in the year ended December 31, 2000 were lower because $60,000
of the salary paid to one of the Company's executive officers in that period was
deemed to be the repayment of an advance previously made to the Company by such
officer, and was therefore not included in the Company's payroll expense for
that period.
The Company's legal and accounting expenses decreased by $135,500 to
$236,120 for the year ended December 31, 2001 from $371,620 for the year ended
December 31, 2000. The decrease was the result of lower expenses incurred for
services rendered in connection with legal and accounting services related to
public company filling requirements, as well as trademark, copyright and other
matters.
The Company's rent expenses decreased $6,359 to $62,067 for the year
ended December 31, 2001, from $68,426 for the year ended December 31, 2000. The
decrease was the result of having closed the additional office in Westlake,
California towards the latter part of 2001.
The Company's printing and reproduction expense decreased by $35,251 to
$4,854 for the year ended December 31, 2001, from $40,105 for the year ended
December 31, 2000. The higher expenses in the year ended December 31, 2000 were
related to the Company's Form 10 Registration Statements, which became effective
in July 2000.
The Company's consulting fees increased to $341,449 for the year ended
December 31, 2001, from $68,368 for the year ended December 31, 2000. The
increase was primarily due to the use of consulting services for capital raising
and software promotion in 2001.
The Company's telephone expenses increased by $10,842 to $22,297 for the
year ended December 31, 2001, from $11,455 for the year ended December 31, 2000.
The Company's travel and entertainment expenses increased by $96,910 to $172,997
for the year ended December 31, 2001, from $76,087 for the year ended December
31, 2000. The higher expenses on telephone, travel and entertainment in 2001
were due to increased business development efforts being made.
Year Ended December 31, 2000 as compared to Year Ended December 31, 1999
For The Years Ended December 31,
32.
Income statement: 2000 1999
--------------------------------
Revenue $ - $ -
Interest income $ 112,499 $ -
Software development costs $ 3,120,301 $ (121,070)
General and administrative expenses $ 4,418,303 $ 275,026
Net loss $ 7,426,105 $ 153,956
Interest Income
Interest income in 2000 arose from investment of capital raised through
the private placement of common stock.
Software Development Costs
Software development costs increased to $3,120,301 for the year ended
December 31, 2000, from a credit of $121,070 for the year ended December 31,
1999. The credit to software development cost in 1999 arose from the adjustment
of a disputed liability relating to work done in 1997 and 1998, which was
recorded in the books in those years. The increase in software development costs
in 2000 arose from the increase in EduLink's software development activities.
During 2000, the Company started software development work, and paid
approximately $3 million to the software development vendor. In addition, the
Company paid various consulting firms and individual contractors for the
development and promotion of the Smart Schoolhouse system.
In 2000, there was a credit to software development cost of approximately
$0.5 million. This adjustment arose from the reduction of common stock shares
issued to a vendor for a disputed liability relating to work done in 1997 and
1998. The adjustment resulted in a credit to software development cost in 2000.
General and Administrative Expenses
General and administrative expenses increased to $4,418,303 for the year
ended December 31, 2000, compared with $275,026 for the year ended December 31,
1999. The increase was attributable to non-cash compensation charges incurred in
connection with the issuance of warrants for services rendered by employees,
increased fees paid to legal and accounting professionals, and increased
payroll, consulting and rent expenses described below.
In February 2000, EduLink issued warrants to an officer to purchase
34,305,000 shares of common stock at an exercise price of $0.0022. The
$3,082,500 non-cash compensation charge associated with these warrants was
recorded during the year ended December 31, 2000.
In June 2000, EduLink issued warrants to each of its three officers to
purchase 5,717,650 shares of common stock at an exercise price of $0.0022 per
share for the completion of Design Phase elements. The warrants will vest
ratably in equal annual installments over seven years. EduLink recognized
$87,983 of aggregate compensation expense in 2000 related to the issuance of
these warrants.
In August 2000, the Company amended its employment contracts with its
President, its Chief Executive Officer, and its Senior Vice President. The
amendments terminated provisions relating to the issuance of 17,152,950 warrants
issuable to each of the officers upon completion of each of the build-out
elements, the beta test, and the national launch of the Smart Schoolhouse
33.
system. In consideration for the warrant termination, each of its President and
Chief Executive Officer received $50,000 and its Senior Vice President received
$30,000, and the Company recognized $130,000 of aggregate compensation expense.
The Company's payroll and payroll related expense increased by $337,873
to $383,086 for the year ended December 31, 2000, from $45,213 for the year
ended December 31, 1999. This increase was the result of expenses associated
with five-year employment contracts the Company entered into with three officers
in September 1999. In addition, the Company hired a full time employee and a
temporary worker in 2000.
The Company's legal and accounting expenses increased by $341,452 to
$371,620 for the year ended December 31, 2000, from $30,168 for the year ended
December 31, 1999. The increase was the result of expenses incurred for services
rendered in connection with the registration of EduLink's common stock under the
Securities Exchange Act of 1934 and additional legal and accounting services
related to public company filling requirements, as well as trademark, copyright
and other matters.
The Company's consulting fees increased to $68,368 for the year ended
December 31, 2000, from $0 for the year ended December 31, 1999. The increase
was primarily due to the use of consulting services for capital raising and
software promotion in 2000.
The Company's rent expenses increased by $36,715 to $68,426 for the year
ended December 31, 2000, from $31,711 for the year ended December 31, 1999. The
increase was the result of having an additional office in Westlake, California.
Liquidity and Capital Resources
Since 1996, EduLink has financed its working capital needs through
capital contributions by stockholders, private placement of common equity and
bridge loans. As of December 31, 2001, the Company had cash of approximately
$103,151. Cash used in operations was $2,831,871 for the year ended December 31,
2001, and $9,678,584 from inception through December 31, 2001. Cash used in
operations during each of these periods was primarily for expenses related to
the design and development of computer software and general and administrative
expenses. Since 1996 and through December 31, 2002, the Company has raised
$8,162,578 through sales of common stock and approximately $100,000 through
bridge loans.
The Company's current cash resources will not be sufficient to meet its
Immediate requirements.. The Company is not currently generating revenues to
fund its ongoing operations and without additional capital the Company will not
be able to operate.
As indicated above under the caption "Overview," the estimated cost of
EduLink's development program and its projected expenses over the next twelve
months will require $5 million in capital to provide the anticipated cash
requirements up to the planned launch of the Smart Schoolhouse system for the
3rd through 12th grades. Changes in the Company's development program or other
changes affecting operating expenses could alter the timing and amount of
expenditures and therefore the amount and timing of when the Company will
require additional funding. EduLink currently plans to raise funds through
either revenues generated from licensing its software or the private placement
of its equity or debt securities, or a combination of both, in order to meet its
34.
ongoing cash needs. However, the additional funding the Company requires may not
be available on acceptable terms or at all. If the Company cannot obtain
adequate funding, it will be required to shutdown operations.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk
EduLink's exposure to market risk is principally confined to cash in bank
and money market accounts, which have short maturities and therefore we believe
to be minimal and immaterial market risk.
Item 7B
Interest Risk
There are no funds in checking or savings accounts and accordingly
there are no rate fluctuation risks.
Foreign Currency Exchange Risk
EduLink does not have any foreign currency exposure because it currently
does not transact business in foreign currencies.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item are set forth on pages F-1 to F-23
of this report.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
No changes in or disagreements with our accountants have occurred.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers of the Registrant
Information regarding our directors and executive officers as of March
26, 2002 is set forth below. Each officer's term of office will expire at the
first Board of Directors meeting held after our next annual meeting of
stockholders. There is no arrangement or understanding between any of the
executive officers or any other person pursuant to which such executive officer
was selected for the office held. Ronald Rescigno, Co-chair of the Board of
Directors and President of EduLink, is the father of Ian Rescigno, EduLink's
Senior Vice-President - Operations. The following table sets forth information
regarding EduLink's directors and executive officers:
NAME AGE POSITION
---- --- --------
Michael Rosenfeld 61 Co-Chairman of the Board of Directors and
Chief Executive Officer
Ronald Rescigno 68 Co-Chairman of the Board of Directors and
President
35.
Dorothy Tucker 53 Senior Vice President - Operations
Shawn Gross 31 Director
MICHAEL ROSENFELD is Co-Chairman and Chief Executive Officer of EduLink.
Mr. Rosenfeld has spent approximately the last thirty years practicing
entertainment law with an emphasis on the music recording and publishing
industry. Mr. Rosenfeld formerly was of counsel to Rosenfeld, Meyer & Susman,
LP, an entertainment law firm with offices in Beverly Hills, California, from
January 1995 through December 1997. He has been Chief Executive Officer and
Co-Chairman of the Board of Directors of EduLink since January 1998 and devotes
substantially all his working time and energies on the business of EduLink. Mr.
Rosenfeld received his Bachelors of Arts degree from UCLA in 1964, and his
L.L.B. from UCLA in 1967, where he was a member of the UCLA Law Review.
RONALD R. RESCIGNO, Ed.D., D.H.L., Co-Chairman and President, EduLink
Inc. Effective January 1997, Dr. Rescigno retired as a public school
superintendent in California. Dr. Rescigno served in the public schools of the
United States for 39 years, 17 as a school superintendent. Dr. Rescigno was
Superintendent of the Hueneme School district located in Port Hueneme,
California from 1983 through 1996. Since January 1997 Dr. Rescigno has been
President and Co-Chairman of the Board of Directors of EduLink. Dr. Rescigno
holds two doctorates; the degree of Doctor of Humane Letters (honoris causa)
awarded by Wilkes University, Wilkes-Barre, Pennsylvania, in 1989 for his
international work in student learning and the integration of computer networked
technology and a Doctor of Education degree awarded by the University of North
Colorado, Greeley, Colorado in 1978. Dr. Rescigno received his Bachelor of
Science degree from Wilkes College, Wilkes-Barre, Pennsylvania in 1958 and a
Master of Arts degree from Columbia University, New York, New York, in 1967. He
is the author of the book Smarter Classrooms - Smarter World and produced a
video on the same subject. He is currently working on a sequel to the above book
describing his vision of the cyberspace school - i.e., the proposed Smart
Schoolhouse system.
IAN RESCIGNO, Vice President - Operations, has responsibilities which
include video production, content licensing and acquisition, strategic content
partnerships, project management. Mr. Rescigno was the founder and president of
Eco International, Inc. ("Eco") from 1989 through December 1996. Mr. Rescigno
has been working for EduLink in varying capacities since January 1997. After
graduating from UCLA in 1988, Mr. Rescigno formed ECO International, Inc. ECO
established a training and consultancy center in manufacturing technologies in
Bulgaria for the purpose of improving the technological capabilities and
efficiency of the Bulgarian industry through the accelerated introduction of
computers in automation of manufacturing. ECO conducted research to develop and
integrate different elements of advanced manufacturing technologies, such as
CAD/CAM, FMS cells, industrial robotics, computerized factory management,
automated inventory and distribution systems.
DOROTHY TUCKER, Ph.D., is a Director of the Company. Since January 1995,
Dr. Tucker has been President of Dorothy M. Tucker, Associates, psychological
consultants to corporations and governmental agencies, including the Los Angeles
Police Department and General Electric. Dr. Tucker received her Ph.D. in
Psychology from California School of Professional Psychology and her Ph.D. in
Counselor Education from Ohio State University. She currently serves as a member
of the California State Bar Board of Governors and the President's Task Force on
Urban Initiatives.
36.
SHAWN GROSS is a Director of the Company. Mr. Gross was, until he
resigned in the fourth Quarter of 2002, the Corporate Manager for Strategic
Alliances at Sun Microsystems' Global Education and Research division, where he
focused on the acquisition of new partners who support the implementation of
Sun's vision into the worldwide K - 12 educational market. Mr. Gross also served
as a governmental relations liaison for Sun in Washington, D.C. regarding
education technology policy, including service as an Honorary Executive to the
Congressional Web Based Education Commission, contributing author to the
National Education Technology Plan, Chairperson of the DC Mayor's Task Force on
Education Technology, and author of a handbook on portal implementation
technology guide for the 1997 Summit of the Americas. Mr. Gross holds a B.A. in
International Studies, an M.B.A. and a Masters of Public Policy and
International Affairs
Item 11. EXECUTIVE COMPENSATION
On September 1, 1999, employment agreements were entered into between
EduLink and each of Dr. Rescigno, Ian Rescigno and Michael Rosenfeld. The terms
of these employment agreements include an employment term through December 31,
2004, annual base compensation of $150,000 for each of Dr. Rescigno and Mr.
Rosenfeld, and $90,000 for Ian Rescigno, and bonuses based upon formulae
relating to EduLink's revenue. Each of the foregoing executive officers waived
the right to receive such annual base compensation in 1999. In addition, each of
Mr. Rosenfeld, Dr. Rescigno and Ian Rescigno have the right to receive options
to purchase shares of EduLink's common stock as each of four separate
deliverables are completed within specific time limits. Pursuant to the terms of
Mr. Rosenfeld's agreement, he is to receive the sum of $10,000 per month in lieu
of $10,000 in monthly compensation otherwise payable to him until his receipt of
sums advanced to EduLink by Mr. Rosenfeld on an interest free basis during 1999.
Mr. Rosenfeld and Dr. Rescigno also had each previously been granted options to
purchase 57,176,471 shares of common stock of EduLink. On February 1, 2000,
EduLink amended its employment agreement with Ian Rescigno, Senior Vice
President-Operations of EduLink, to issue warrants, exercisable through January
31, 2007, to purchase 34,305,000 shares of common stock at an exercise price of
$.0022 per share.
In August 2000, the Company amended the employment contracts of Mr.
Rosenfeld, Dr. Rescigno and Ian Rescigno. The amendments terminated provisions
relating to the issuance of warrants to purchase an aggregate of 17,152,950
shares of common stock to each officer upon completion of each of the build-out
elements, the beta test, and the national launch of the Smart Schoolhouse
system. In consideration for the warrant termination, Mr. Rosenfeld and Dr.
Rescigno each received $50,000 and Ian Rescigno received $30,000. In addition,
Mr. Rosenfeld and Dr. Rescigno each received additional compensation for year
2001 equal to $150,000.
During the year ending December 31, 2002, Mr. Rosenfeld, Dr. Rescigno
and Ian Rescigno waived compensation for the three month period April 1, 2002
through June 30, 2002 and deferred receipt of compensation for the six month
period July 1, 2002 through December 31, 2002.
Summary Compensation Table
The following table sets forth the annual compensation paid to executive
officers of EduLink for the fiscal years ended December 31, 2000 and 2001. Prior
to 2000, no executive officer received annual compensation in excess of
37.
$100,000.
All Other
Name and Principal Position Year Salary ($) Compensation
Dr. Ronald Rescigno, 2002 $ 37,500 (4)
Co-Chair and President (1) 2001 $300,000 --
2000 $150,000 $ 79,328 (2)
Michael Rosenfeld, 2002 $ 37,500 (4)
Chief Executive Officer 2001 $300,000 --
and Co-Chair (1) 2000 $ 30,000 $ 79,328 (2)
Ian Rescigno, 2002 $ 22,500 (4)
Senior Vice President - 2001 $ 90,000 --
Operations (1) 2000 $ 90,000 $3,141,827 (3)
- --------------
(1) The indicated officer agreed to waive all compensation through 1999.
(2) Of the indicated amount deemed to have been received in 2000: (a) $50,000
is cash compensation received as consideration for the voluntary
termination of warrants to purchase 17,152,950 shares of common stock at
an exercise price of $.0022 per share, and (b) $29,328 is compensation
deemed to have been received in connection with the grant of a warrant to
purchase 5,717,650 shares of common stock because the $.0022 per share
exercise price of the warrant was less than the $.0637 per share deemed
fair market value of the common stock on the date such warrant was
issued.
(3) Of the indicated amount deemed to have been received in 2000: (a)
$3,082,500 is compensation deemed to have been received in connection
with the grant of a warrant to purchase 34,305,000 shares of common stock
because the $.0022 per share exercise price of the warrant was less than
the $.0921 per share deemed fair market value of the common stock on the
date such warrant was issued, (b) $30,000 is cash compensation received
as consideration for the voluntary termination of warrants to purchase
17,152,950 shares of common stock at an exercise price of $.0022 per
share, and (c) $29,327 is compensation deemed to have been received in
connection with the grant of a warrant to purchase 5,717,650 shares of
common stock because the $.0022 per share exercise price of the warrant
was less than the $.0637 per share deemed fair market value of the common
stock on the date such warrant was issued.
(4) The indicated officer agreed to waive compensation for the three month
period April 1, 2002 through June 30, 2002 and to defer any compensation
for the six month period July 1, 2002 through December 31, 2002.
Equity Incentive Plan
EduLink intends to adopt an equity-based incentive plan in order to
attract and retain key employees and directors of EduLink.
Compensation of Directors in 2001
During the fiscal year ended December 31, 2001, the Company granted an
option to purchase 7,000,000 shares of the Company's Common Stock to one of its
directors, Shawn Gross. The exercise price of such option is $0.025 per share,
38.
with an expiration date of November 19, 2008. Mr. Gross' option vested as
follows: (i) options to purchase 3,000,000 shares of Common Stock vested on each
of November 19, 2001, and February 19, 2002, and (ii) options to purchase
1,000,000 shares of Common Stock vested on May 19, 2002.
No other compensation was paid to directors in 2001. And no compensation
was paid to directors in 2002.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of March 26, 2002,
regarding the beneficial ownership of EduLink's outstanding common stock as of
the date hereof by:
* each person who is known by it to be the beneficial owner of 5% or
more of its outstanding common stock;
* each director and executive officer individually; and
* all executive officers and directors as a group, as of the date of
this Registration Statement.
EduLink believes that each of the beneficial owners of the common stock
listed in the table, based on information furnished by such owner, has sole
investment and voting power with respect to such shares.
BENEFICIAL OWNERSHIP
Name and Address of Beneficial Owner Number Percentage (1)
- ------------------------------------ ------ -------------
Michael Rosenfeld (2) 144,978,830(3) 16.93%
RONALD RESCIGNO (2) 172,233,276(4) 19.53%
IAN RESCIGNO (2) 38,822,600(5) 4.51%
DOROTHY TUCKER (2) 5,717,647(6) 0.79%
SHAWN GROSS (2) 7,000,000(7) 0.84%
ALL EXECUTIVE OFFICERS AND 368,752,353 36.88%
DIRECTORS AS A GROUP (5 PERSONS)
(1) Calculated on the basis OF 821,695,100 shares of common stock issued and
outstanding on March 21, 2003. For purposes of this table, a person or
group of persons is deemed to have "beneficial ownership" of any shares
which such person has the right to acquire within 60 days after the date
of this filing. For purposes of computing the percentage of outstanding
shares held by each person or group of persons named above on the date of
this filing, any security which such person or group of persons has the
right to acquire within 60 days after such date is deemed to be
outstanding for the purpose of computing the percentage ownership for
such person or persons, but is not deemed to be outstanding for the
purpose of computing the percentage ownership of any other person.
39.
(2) Address is c/o EduLink, Inc., 201 Wilshire Boulevard, Second Floor, Santa
Monica, CA 90401.
(3) Includes 31,456,309 shares issuable upon exercise of warrants, at an
exercise price of $.0022 per share, which expire on August 14, 2004, and
further includes 3,317,650 shares issuable upon exercise of warrants,at
a an exercise price of $.0022 per share, which expire on June 7, 2007.
(4) Includes 57,176,470 shares issuable upon exercise of warrants, at an
exercise price of $.0022 per share, which expire on August 14, 2004, and
further includes 3,317,650 shares issuable upon exercise of warrants, at
exercise price of $.0022 per share, which expire on June 7, 2007.
(5) Includes 33,921,807 shares issuable upon exercise of warrants, at an
exercise price of $.0022 per share, which expire on February 1, 2007, and
further INCLUDES 5,176,650 shares issuable upon exercise of warrants, at
an exercise price of $.0022 per share, which expire on June 7, 2007.
(6) Consists of 5,717,647 shares issuable upon exercise of warrants, at an
exercise price of $.0022 per share, which expire on September 14, 2003.
(7) Consists of 7,000,000 shares issuable upon exercise of an option, at an
exercise price of $.025 per share, which expires on November 19, 2008.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Rosenfeld advanced funds to or on behalf of EduLink during 1999 equal
to $112,902 at an implied interest rate of 8.9%, and EduLink agreed to repay
these funds to Mr. Rosenfeld on a periodic basis, such payments being made in
lieu of, and serving to reduce, the monthly compensation otherwise payable to
him under the terms of his EduLink employment agreement. The entire loan was
repaid to Mr. Rosenfeld in 2000, with interest due on the loan repaid
thereafter. In addition, Mr. Rosenfeld has waived his right to receive
reimbursement for $140,403 in sums advanced by him to or on behalf of EduLink
during the years 1996, 1997 and 1998. Dr. Rescigno was reimbursed $22,500 by
EduLink in December 1999 and January 2000 for expenses incurred in 1998 and 1999
relating to secretarial services, office supply purchases and travel expenses
incurred by him on behalf of EduLink.
EduLink utilizes a portion of Mr. Rosenfeld's offices. EduLink paid
$30,491, $40,963, $37,335 and $31,711 in 2002, 2001, 2000, and 1999,
respectively, to the landlord of the premises, which is not an affiliate of
EduLink.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)(1) List of financial statements:
The following is a list of the financial statements of EduLink, Inc.
together with the report of independent certified public accountants, included
in this report:
Page
Report of Independent Certified Public Accountants..................... F-1
Balance sheets as of December 31, 2002 and 2001 ........................ F-2
Statements of operations for each of the years in the period ended
40.
December 31, 2002, 2001, 2000 and 1999 and from the period from
January 25, 1996 (inception) to December 31, 2001................... F-4
Statements of shareholders' deficit for the period from January 25,
1996 (inception) to December 31, 2002............................... F-5
Statements of cash flows for each of the years in the period ended
December 31, 2002, 2001, 2000 and 1999 and from the period from
January 25, 1996 (inception) to December 31, 2001 .................. F-7
Notes to financial statements.......................................... F-10
(a)(2) List of financial schedules:
The following is a list of data submitted herewith:
None.
(b) (3) Exhibits:
Exhibit Description
2.1 Agreement and Plan of Merger between URREA Enterprises
and EduLink Inc.*
3.1 Articles of Incorporation of URREA Enterprises, Inc.*
3.2 Articles of Merger for URREA Enterprises, Inc.*
3.3 By-laws of EduLink Inc.*
10.1 Form of Warrant Agreement with Michael Rosenfeld (Rosenfeld
Warrant Agreement).*
10.2 Amendment to Rosenfeld Warrant Agreement, dated September 15,
1999.*
10.3 Form of Warrant Agreement with Ronald C. Rescigno (Rescigno
Warrant Agreement).*
10.4 Amendment to Rescigno Warrant Agreement, dated September 15,
1999.*
10.5 Warrant Agreement with Dorothy Tucker, dated September 15,
1999.*
10.6 Warrant Agreement with Kathleen McGuire, dated September 15,
1999.*
10.7 Warrant Agreement with Ian Rescigno, dated February 1, 2000. *
10.8 Warrant Agreement with Ian Rescigno, dated June 7, 2000. *
10.9 Warrant Agreement with Ronald C. Rescigno, dated June 7, 2000. *
10.10 Warrant Agreement with Michael Rosenfeld, dated June 7, 2000. *
10.11 Specimen of common stock certificate*
10.12 Agreement with Saatchi & Saatchi North America, Inc. dated
41.
January 5, 2000. *
Exhibit Description
10.13 Employment Agreement between Michael Rosenfeld and EduLink Inc.,
dated September 4, 1999. *
10.14 Amendment to Rosenfeld Employment Agreement, dated February 1,
2000. *
10.15 Amendment to Rosenfeld Employment Agreement, dated August 21,
2000. *
10.16 Amendment to Rosenfeld Employment Agreement, dated November 1,
2000. *
10.17 Employment Agreement between Ronald C. Rescigno and EduLink
Inc., dated September 4, 1999. *
10.18 Amendment to Dr. Rescigno Employment Agreement dated February 1,
2000. *
10.19 Amendment to Dr. Rescigno Employment Agreement, dated August 21,
2000. *
10.20 Amendment to Dr. Rescigno Employment Agreement, dated
November 1, 2000. *
10.21 Employment Agreement between Ian Rescigno and EduLink Inc.,
dated September 4, 1999. *
10.22 Amendment to Ian Rescigno Employment Agreement, dated
February 1, 2000. *
10.23 Amendment to Ian Rescigno Employment Agreement, dated
August 21, 2000. *
10.24 Agreement with Science Applications International Corporation,
dated October 1, 1999. *
10.25 Agreement with McGuire and Associates, dated February 1, 2000.*
10.26 License Agreement with The Regents of the University of
California, dated September 12, 2000. *
10.27 Agreement with Howard Ash, dated November 1, 2000. *
10.28 License Agreement with Science Applications International
Corporation, dated December 27, 2000. *
10.29 Agreement with Science Applications International Corporation,
dated May 15, 2001.*
- --------------------------
* Previously Filed
42.
(b) (4) Reports on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 2002.
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, as of March 29, 2002.
EDULINK, INC.
By: /s/ Michael Rosenfeld
----------------------------------------
Michael Rosenfeld
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacity indicated as of March 29, 2002.
/s/ Michael Rosenfeld
- -----------------------------------------------
Michael Rosenfeld, Co-Chairman of the
Board of Directors and Chief Executive Officer
/s/ Ronald Rescigno
- -----------------------------------------------
Ronald Rescigno, Co-Chairman of the
Board of Directors and President
/s/ Dorothy Tucker
- -----------------------------------------------
Dorothy Tucker, Director
- -----------------------------------------------
Shawn Gross, Director
EDULINK, INC.,
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
December 31, 2002
- -------------------------------------------------------------------------------
Page
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
CONTENTS
December 31, 2002
- --------------------------------------------------------------------------------
Page
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-1
FINANCIAL STATEMENTS
Balance Sheets F-2-3
Statements of Operations F-4
Statements of Shareholders' Deficit F-5-6
Statements of Cash Flows F-7-9
Notes to Financial Statements F-10-22
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Shareholders
EduLink, Inc.,
dba The Learning Priority
We have audited the accompanying balance sheets of EduLink, Inc., dba The
Learning Priority (a development stage company) as of December 31, 2002 and
2001, and the related statements of operations, shareholders' deficit, and cash
flows for each of the three years in the period ended December 31, 2002, and
for the period from January 25, 1996 (inception) to December 31, 2002.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the 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. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of EduLink, Inc., dba The Learning
Priority as of December 31, 2002 and 2001, and the results of its operations and
its cash flows for each of the three years in the period ended December 31,
2002, and for the period from January 25, 1996 (inception) to December 31, 2002
in conformity with accounting principles generally accepted in the United States
of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. During the years ended December 31,
2002, 2001, and 2000, the Company incurred net losses of $918,398, $2,844,647,
and $7,426,105, respectively and had net cash used in operating activities of
$442,734, $2,831,871, and $5,391,439, respectively, In addition, the Company's
accumulated deficit was $14,953,836 as of December 31, 2002. These factors,
among others, as discussed in Note 2 to the financial statements, raise
substantial doubt about the Company's 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.
SINGER LEWAK GREENBAUM & GOLDSTEIN LLP
Los Angeles, California
March 26, 2003
F-1
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
ASSETS
2002 2001
---------- ----------
Current assets
Cash $ 917 $ 103,151
Prepaid assets and other current assets 25,000 27,545
---------- ----------
Total current assets $ 25,917 $ 103,696
Property and equipment, net 18,572 23,971
Deposit 2,198 2,198
---------- ----------
Total assets $ 46,687 $ 156,865
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEETS
December 31,
- --------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
2002 2001
------------ ------------
Current liabilities
Bridge notes payable, net of
unamortized discount $ 350,000 164,150
Accounts payable 645,872 633,313
Compensation payable 229,954 --
Due to related party 90,500 --
Accrued interest 94,958 40,625
Other current liabilities 18,000 --
------------ ------------
Total current liabilities 1,429,284 838,088
------------ ------------
Commitments and contingencies
Shareholders' equity (deficit)
Common stock, $0.001 par value
1,500,000,000 shares authorized
821,695,100 and 799,977,500 shares
issued and outstanding 821,696 821,696
Shares committed to be issued 100,000 100,000
Additional paid-in capital 12,649,543 12,432,519
Deficit accumulated during the
development stage (14,953,836) (14,035,438)
------------ ------------
Total shareholders' equity
(deficit) (1,382,597) (681,223)
------------ ------------
Total liabilities and
shareholders'
equity (deficit) $ 46,687 $ 156,865
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
For the Years Ended December
31, 2002, 2001, and 2000 and for the Period
from January 25, 1996 (Inception) to
December 31, 2002
- --------------------------------------------------------------------------------
For the
Period from
January 25,
For the Year Ended 1996
December 31, (Inception) to
------------------------------------------------- December 31,
2002 2001 2000 2002
--------------- ---------------- -------------- --------------
Income
Interest $ 130 $ 24,792 $ 112,499 $ 144,239
------------- ------------- ------------- -------------
Expenses
Software development costs 12,884 1,165,269 3,120,301 7,220,268
General and administrative 905,644 1,704,170 4,418,303 7,877,807
------------- ------------- ------------- -------------
Total expenses 918,528 2,869,439 7,538,604 15,098,075
------------- ------------- ------------- -------------
Net loss $ (918,398) $ (2,844,647) $ (7,426,105) $ (14,953,836)
============= ============= ============= =============
Basic and diluted loss per share $ (0.00) $ (0.00) $ (.01) $ (0.03)
============= ============= ============= =============
Weighted-average shares used in
computation of basic and diluted
loss per share 821,695,100 809,318,480 737,055,116 564,383,189
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
F-4
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' DEFICIT
For the Period from January 25, 1996 (Inception) to December 31, 2002
- -------------------------------------------------------------------------------
Deficit
Shares Accumulated
Common Stock Committed Additional During the
---------------------------- to be Paid-In Development
Shares Amount Issued Capital Stage Total
------ ------ ------ ------- ----- -----
Balance, January 25, 1996 (Inception) - $ - - $ - $ - $ -
Sale of common stock 28,302,353 28,302 594,575 622,877
Shares issued to founders 233,280,000 233,280 (233,280) -
Shares issued for professional services 43,454,118 43,454 (3,454) 40,000
Shares issued for investment banking
services 58,320,000 58,320 (33,320) 25,000
Net loss (479,267) (479,267)
------------- ------------ ----------- ------------ ----------- ----------
Balance, December 31, 1996 363,356,471 363,356 - 324,521 (479,267) 208,610
Sale of common stock 17,152,942 17,153 410,968 428,121
Conversion of bridge notes 6,003,529 6,004 172,375 178,379
Shares issued for professional services 2,287,058 2,287 2,713 5,000
Net loss (2,091,226) (2,091,226)
------------- ------------ ----------- ------------ ----------- ----------
Balance, December 31, 1997 388,800,000 388,800 - 910,577 (2,570,493) (1,271,116)
Net loss (1,040,237) (1,040,237)
------------- ------------ ----------- ------------ ----------- ----------
Balance, December 31, 1998 388,800,000 388,800 - 910,577 (3,610,730) (2,311,353)
Acquisition of URREA Enterprises, Inc. 259,022,500 259,023 (259,023) -
Loan from shareholder contributed
to capital 140,403 140,403
Common stock subscription received 100,000 100,000
Common stock to be issued for
settlement of dispute 571,750 571,750
Compensation waived by officers 130,000 130,000
Net loss (153,956) (153,956)
------------- ------------ ----------- ------------ ----------- ----------
The accompanying notes are an integral part of these financial statements.
F-5
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF SHAREHOLDERS' DEFICIT
For the Period from January 25, 1996 (Inception) to December 31, 2001
- -------------------------------------------------------------------------------------------------------------------------------
Deficit
Shares Accumulated
Common Stock Committed Additional During the
--------------------------- to be Paid-In Development
Shares Amount Issued Capital Stage Total
------ ------ ------ ------- ----- -----
Balance, December 31, 1999 647,822,500 $ 647,823 $ 671,750 $ 921,957 $(3,764,686) $ (1,523,156)
Common stock issued 2,000,000 2,000 (100,000) 98,000 -
Sale of common stock 148,300,000 148,300 7,140,450 7,288,750
Warrants issued to officers 3,082,500 3,082,500
Options issued to officers 87,983 87,983
Conversion of bridge notes 2,480,000 2,480 121,520 124,000
Common stock canceled (225,000) (225) 225 -
Common stock canceled (500,000) (500) (24,500) (25,000)
Common stock subscription received 100,000 100,000
Common stock issued for services 100,000 100 (5,000) 4,900 -
Change in settlement of dispute (Note 3) (566,750) (566,750)
Net loss (7,426,105) (7,426,105)
Balance, December 31, 2000 799,977,500 799,978 100,000 11,433,035 (11,190,791) 1,142,222
Common stock issued 2,000,000 2,000 (100,000) 98,000 -
Common stock issued for cash 14,000,000 14,000 686,000 700,000
Common stock subscription received - - 100,000 - 100,000
Common stock issued on exercise of
warrants 5,717,600 5,718 - 6,861 12,579
Options issued to Director 150,823 150,823
Options issued to consultants 10,000 10,000
Unamortized Debt Discount 47,800 47,800
Net loss (2,844,647) (2,844,647)
Balance, December 31, 2001 821,695,100 821,696 100,000 12,432,519 (14,035,438) (681,223)
Warrants issued as interest expense
for notes payable 81,818 81,818
Options issued to officers 37,706 37,706
Waived salaries 97,500 97,500
Net loss (918,398) (918,398)
Balance, December 31, 2002 821,695,100 $ 821,696 $ 100,000 $ 12,649,543 $(14,953,836) $ (1,382,597)
=========== ============ ========= ============ ============ ============
The accompanying notes are an integral part of these financial statements.
F-6
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the Years Ended December
31, 2002, 2001, and 2000 and for the
Period from January 25, 1996 (Inception)
to December 31, 2002
- -----------------------------------------------------------------------------------------------------------
For the
Period from
January 25,
For the Year Ended 1996
December 31, (Inception) to
------------------------------------------------- December 31,
2002 2001 2000 2002
--------------- ---------------- -------------- --------------
Cash flows from operating
activities
Net loss $ (918,398) $ (2,844,647) $ (7,426,105) $ (14,953,836)
Adjustments to reconcile net
loss to net cash used in
operating activities
Loan from shareholder
contributed to captial 140,403
Common stock to be issued
for software development
costs 571,750
Common stock issued for
professional services - - 70,000
Compensation waived by
officers - - - 130,000
Options issued to officers as
compensation 37,706 150,823 - 188,529
Options issued for services - 10,000 - 10,000
Warrants issued for services 81,818 - 3,170,483 3,252,301
Amortization of debt discount - 11,950 - 11,950
Cancellation of shares
committed - - (566,750) (566,750)
(Increase) decrease in
prepaid expenses
and other current assets 2,545 (2,120) (25,425) (25,000)
Due from related party - 10,000 (10,000) -
Deposit - - (2,198) (2,198)
Increase (decrease) in accts
payable 12,559 (130,002) (486,042) 645,872
Compensation payable 229,954 (50,000) 50,000 229,954
Accrued interest payable 2,582 12,125 17,500 61,808
Due to related party 90,500 - (112,902) 90,500
Other current liabilities 18,000 - - 18,000
--------------- ---------------- -------------- --------------
Net cash used in operating activities (442,734) (2,831,871) (5,391,439) (10,126,717)
--------------- ---------------- -------------- --------------
The accompanying notes are an integral part of these financial statements.
F-7
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001, and 2000 and
for the Period from January 25, 1996 (Inception) to December 31, 2002
- -----------------------------------------------------------------------------------------------------
For the
Period from
January 25,
1996
For the Year Ended (Inception)
December 31, to
--------------------------------------------- December 31,
2002 2001 2000 2002
------------- ----------- ----------- ------------
Cash flows from investing activities
Purchase of property and equipment $ - 296 (24,267) $ (18,572)
------------ ----------- ----------- -----------
Net cash provided by (used in)
investing activities - 296 (24,267) (18,572)
------------ ----------- ----------- -----------
Cash flows from financing
activities
Common stock subscription
received - 100,000 100,000 -
Proceeds from issuance of
bridge notes and loans payable 340,500 100,000 - 815,500
Repayment of bridge notes - - (50,000)
Proceeds from issuance of
common stock - 712,579 7,390,000 9,777,579
Cost of issuance of common
stocks - (126,250) (396,873)
------------ ----------- ----------- -----------
Net cash provided by financing
activities 340,500 912,579 7,363,750 10,146,206
------------ ----------- ----------- -----------
Net increase (decrease) in cash (102,234) (1,918,896) 1,948,044 917
Cash (book overdraft), beginning
of year 103,151 2,022,147 74,103 -
------------ ----------- ----------- -----------
Cash (book overdraft), end of year $ 917 $ 103,151 $ 2,022,147 $ 917
============ =========== =========== ===========
F-8
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2002, 2001, and 2000 and
for the Period from January 25, 1996 (Inception) to December 31, 2002
- --------------------------------------------------------------------------------
For the
Period from
January 25,
1996
For the Year Ended (Inception)
December 31, to
---------------------------------- December 31,
2002 2001 2000 2002
---------- ---------- ---------- ------------
Supplemental disclosures
of cash flow information
Interest paid $ $ - $ - $
========== ========== ========== =========
Income taxes paid $ 800 $ 800 $ 800 $ 4,000
========== ========== ========== =========
Supplemental schedule of non-cash investing and financing activities
During the year ended December 31, 2001, the Company issued 2,000,000
shares of common stock for a subscription received during the year ended
December 31, 2000.
During the year ended December 31, 2001, the Company issued 5,717,600
shares of common stock for the exercise of common stock warrants.
During the year ended December 31, 2000, the Company issued 2,480,000
shares of common stock to two of its bridge loan holders in exchange for
the conversion of $100,000 of the loan balance and $24,000 of accrued
interest.
During the year ended December 31, 2000, the Company recorded $3,170,483
of additional paid-in capital for warrants/options issued to its officers
for services rendered.
During the year ended December 31, 2000, the Company issued 100,000
shares of common stock to a vendor to fulfill its commitment to issue
such stock. In addition, during the year ended December 31, 2000, the
Company canceled shares committed to be issued in prior years worth
$566,750 in connection with software development activities (see Note 3).
The accompanying notes are an integral part of these financial statements.
F-9
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 1 - DESCRIPTION OF BUSINESS
URREA Enterprises, Inc. ("URREA"), a Nevada corporation, acquired
EduLink, Inc. ("OLD EduLink"), a California corporation engaged in the
development of educational software, on October 28, 1999. After the
acquisition, URREA changed its name to EduLink, Inc., dba The Learning
Priority (the "Company").
URREA issued 388,800,000 shares of common stock to acquire 100% of the
common stock of OLD EduLink. The acquisition was accounted for as an
issuance of stock by OLD EduLink for the net assets of URREA as the
shareholders of OLD EduLink owned 60% of the common stock of URREA after
the acquisition, resulting in a recapitalization of OLD EduLink. URREA
had no significant assets or liabilities at the date of acquisition and
did not have significant operations prior to the acquisition. Therefore,
no pro forma information is presented.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in
the financial statements, during the years ended December 31,2002. 2001
and 2000, the Company incurred losses of $918,398, $2,844,647, and
$7,426,105, respectively. As of December 31, 2002,Company incurred
cumulative losses, from inception, of $14,953,836. The Company is in the
development stage and is primarily engaged in research and development
activities. Accordingly, the accompanying statements of operations should
not be regarded as typical for normal periods of operation. The Company's
development stage status, recurring net losses, and capital deficit raise
substantial doubt about its ability to continue as a going concern.
Additional financing will be required in order for the Company to
complete its development stage activities. Management believes that it
will be able to obtain such financing from new investors.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Development Stage Enterprise
The Company is a development stage company as defined in Statement of
F-10
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting
by Development Stage Enterprises." The Company is devoting substantially
all of its present efforts to establish a new business, and its planned
principal operations have not yet commenced. All losses accumulated since
inception have been considered as part of the Company's development stage
activities.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Going Concern
The accompanying financial statements have been prepared on a going
concern basis which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown
in the financial statements, during the years ended December 31,2002,
2001, and 2000,the Company incurred losses of $918,398, $2,844,647,
and $7,426,105, respectively. As of December 31, 2002, the Company is
in the development stage and is primarily engaged in research and
development activities. Accordingly, the accompanying statements of
operations should not be regarded as typical for normal periods of
operation. The Company's development stage status, recurring net
losses, and capital deficit raise substantial doubt about its ability
to continue as a going concern. Additional financing will be required
in order for the Company to complete its development stage activities.
Management believes that it will be able to obtain such financing from
new investors.
The financial statements do not include any adjustments relating to the
recoverability and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern.
Development Stage Enterprise
The Company is a development stage company as defined in Statement of
Financial Accounting Standards ("SFAS") No. 7, "Accounting and Reporting
by Development Stage Enterprises." The Company is devoting substantially
all of its present efforts to establish a new business, and its planned
principal operations have not yet commenced. All losses accumulated since
inception have been considered as part of the Company's development stage
activities.
F-11
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Comprehensive Income
The Company utilizes SFAS No. 130, "Reporting Comprehensive Income." This
statement establishes standards for reporting comprehensive income and
its components in a financial statement. Comprehensive income as defined
includes all changes in equity (net assets) during a period from
non-owner sources. Examples of items to be included in comprehensive
income, which are excluded from net income, include foreign currency
translation adjustments and unrealized gains and losses on
available-for-sale securities. Comprehensive income is not presented in
the Company's financial statements since the Company did not have any of
the items of comprehensive income in any period presented.
Cash
The Company deposits its cash with what it considers high-credit, quality
financial institutions. At times, balances are in excess of the Federal
Deposit Insurance Corporation insured limit. As of December 31, 2002,
there were no uninsured portions.
Property and Equipment
Property and equipment are recorded at cost. Depreciation and
amortization are provided on a straight-line basis over an estimated
useful life of five years.
Impairment of Long-Lived Assets
The Company reviews long-lived assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. If the sum of the expected
future cash flows (undiscounted and without interest charges) is less
than the carrying amount of the asset, the Company would recognize an
impairment loss based on the estimated fair value of the asset.
Stock Split
In October 1999, the Company's Board of Directors declared a 50-for-1
stock split. All applicable share and per share data have been
retroactively restated for the stock split.
F-12
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," establishes and
encourages the use of the fair value based method of accounting for
stock-based compensation arrangements under which compensation cost is
determined using the fair value of stock-based compensation determined as
of the date of grant and is recognized over the periods in which the
related services are rendered. The statement also permits companies to
elect to continue using the current implicit value accounting method
specified in Accounting Principles Bulletin ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," to account for stock-based
compensation issued to employees. The Company has elected to use the
intrinsic value based method and has disclosed the pro forma effect of
using the fair value based method to account for its stock-based
compensation.
Software Development Costs
Development costs incurred in the research and development of new
software products are expensed as incurred until technological
feasibility in the form of a working model has been established. To date,
the Company has not completed its software development to the point of
technological feasibility, and accordingly, no costs have been
capitalized.
Income Taxes
The Company uses the asset and liability method of accounting for income
taxes. The asset and liability method accounts for deferred income taxes
by applying enacted statutory rates in effect for periods in which the
difference between the book value and the tax bases of assets and
liabilities are scheduled to reverse. The resulting deferred tax asset or
liability is adjusted to reflect changes in tax laws or rates. Because
the Company has incurred losses from operations, no benefit is realized
for the tax effect of the net operating loss carryforward and software
development costs capitalized for tax purposes due to the uncertainty of
its realization.
Loss per Share
Basic loss per share is computed by dividing loss available to common
shareholders by the weighted-average number of common shares outstanding.
Diluted loss per share is computed similar to basic loss per share except
that the denominator is increased to include the number of additional
common shares that would have been outstanding if the potential common
shares had been
F-13
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
issued and if the additional common shares were dilutive. Because the
Company has incurred net losses, basic and diluted loss per share are the
same.
Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
NOTE 3 - ACCOUNTS PAYABLE
On January 5, 2000, the Company entered into an agreement with its major
vendor and the vendor's affiliates to settle a disputed amount of a
contractual obligation arising from a software development contract. The
agreement calls for a settlement of the entire outstanding balance for
$1,000,000 within the period specified by the agreement. The Company has
agreed to pay the vendor at specified dates 15% of the net financing
proceeds it receives pursuant to its financing activities. During the
year ended December 31, 2000, the Company paid $600,000 to this vendor
and its affiliates in accordance with the settlement agreement. The
remaining balance of $400,000 is included in the accounts payable balance
at December 31, 2002.
In addition, the agreement states that the Company will assign to the
vendor intellectual property rights of the software developed if the
$1,000,000 obligation is not paid by December 31, 2002. As of December
31, 2002, the vendor agreed to extend this agreement until further
notice.
Further, the Company has agreed to issue approximately 11,435,000 shares
of common stock as part of the settlement agreement within 60 days of the
date of this agreement in lieu of shares and warrants that were agreed
upon previously. During the year ended December 31, 2000, the number of
shares agreed to be issued as part of the settlement agreement was
reduced to 100,000, which was issued to the vendor in December 2000. As a
result, $566,750 of the commitment to issue common stock was reversed.
Accordingly, the software development costs were also reduced by
$566,750.
F-14
NOTE 4 - BRIDGE NOTES PAYABLE
Bridge notes represent notes payable at 10% (annual percentage rate
10.47%) per annum and are currently due for payment. The Company issued
20,869,412 and 11,435,294 warrants to purchase shares of common stock to
the 1998 and 1996 lenders, respectively, at an average exercise price of
$0.034 per share. These warrants expire four years from the date of grant
or four years from the date of an initial public offering.
During the year ended December 31, 2000, two of the 1998 bridge note
lenders converted $100,000 of the loan balance and $24,000 of accrued
interest into 2,480,000 shares of common stock.
During the year ended December 31, 2000, 8,004,706 warrants issued to
1996 bridge loan lenders expired.
During December 2001, the Company obtained a loan for $250,000 to be
received in two installments. The first installment of $100,000 was
received on December 5, 2001. The second installment of $150,000 was
received on January 5, 2002. The note bears interest at 10% (annual
percentage rate 10.47%) and matured on March 31, 2002, but the
maturity date was orally extended by the lender to August 31, 2002.
The Company as of December 31, 2002 is in loan default. The loan may
be converted at the lender's request into common stock. The number of
shares will be determined by dividing $0.05 into that portion of the
money owed by the Company.
The lender was also assigned an aggregate of 6,000,000 existing warrants
to purchase shares of the Company's common stock at an exercise price of
$0.0022 per share.
The proceeds of the $250,000 loan have been allocated between the note
payable and the warrants based on their relative fair value. The
resulting interest is being amortized over the term of the loan. At
December 31, 2002, the loan is shown net of amortized interest of
$35,850.
F-15
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Lease
The Company co-leases its facility under an operating lease agreement
with an unrelated third party, which expired in November 2002, but was
extended on a month basis through December 31, 2002. Rent expense was
$30,491, $62,067, $68,426, and $31,711 for the years ended December
31, 2002, 2001, 2000, and 1999, respectively.
Employment Agreement
In September 1999, the Company entered into five-year employment
contracts with its President, Chief Executive Officer, and Senior Vice
President that provide for a minimum annual salary, incentives, and
bonuses, which are based on the Company's attainment of specified levels
of sales and earnings. The annual salaries for the three officers are
$150,000, $150,000, and $90,000, respectively.
In 2000, following the issuance of warrants for completion of the design
phase of the Company's educational software product but prior to the
issuance of any of the remaining warrants, the agreements were amended to
eliminate the right to receive the remaining warrants in exchange for
$50,000 additional salary in 2000 for each officer and a base salary of
$300,000 in 2001 for each of the President and Chief Executive Officer,
and $30,000 additional salary in 2000 for the Senior Vice President, who
also received in February 2000 additional warrants to purchase 34,305,000
shares of common stock at an exercise price of $.0022 per share.
NOTE 6 - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2002, a member of the Board of
Directors loaned the Company $90,500 for operating costs. This amount
is reflected as Due to Related Party on the balance sheet.
NOTE 7 - SHAREHOLDERS' EQUITY
Common Stock
During the period from January 25, 1996 (inception) to December 31, 1996,
the Company issued 28,302,353 shares of common stock in connection with a
private placement for $622,877, net of expenses of $202,213. In addition,
the Company issued 233,280,000 shares of common stock to its founders and
43,454,118 shares to professionals. Compensation expense of $40,000 was
recorded, representing the fair value of the services rendered. In
addition, 58,320,000 shares were issued to the investment bankers in
exchange for services valued at $25,000.
During the year ended December 31, 1997, the Company issued 17,152,942
shares of common stock in connection with a private placement for
$431,500, net
F-16
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
of expenses of $68,500. In addition, the Company issued 2,287,058 shares
of common stock to professionals for services valued at $5,000, which was
recorded as compensation expense.
Common Stock Warrants
During the year ended December 31, 2000, the Company granted 34,305,000
warrants to an officer for services rendered valued at $3,082,500.
During the year ended December 31, 2000, 8,004,706 warrants issued to
1996 bridge loan lenders and 4,288,235 warrants issued to investors
expired and were canceled.
F-17
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (Continued)
Common Stock Warrants (Continued)
A summary of the Company's warrant activity is listed below:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Stock Stock Remaining Price of Price of
Exercise Warrants Warrants Contractual Warrants Warrants
Price Outstanding Exercisable Life Outstanding Exercisable
- ------------------ ----------- --------------- ---------------- ----------- ---------------
$ 0.0022 179,646,185 166,373,069 2.25 years $ 0.0022 $ 0.0022
$ 0.0100 1,143,529 1,143,529 2.00 years $ 0.0100 $ 0.0100
$ 0.0350 46,598,824 46,598,824 2.06 years $ 0.0350 $ 0.0350
------------- -------------
227,388,538 214,115,422
============= =============
The fair value of the warrants was calculated using the Black-Scholes
option valuation model with the following weighted-average assumptions
for the years ended December 31, 2002 and 2001: dividend yields of 0% and
0%, respectively; risk free interest rates of 2% and 6%, respectively;
expected volatility of 100% and 100%, respectively; and expected lives of
four months and seven years, respectively.
The weighted-average fair value of the warrants issued during the years
ended December 31, 2002 and 2001 was $0.05 and $0.05, respectively.
Options
A summary of the Company's option activity is listed below:
Weighted- Weighted-
Weighted- Average Average
Average Exercise Exercise
Stock Stock Remaining Price of Price of
Exercise Options Options Contractual Options Options
Price Outstanding Exercisable Life Outstanding Exercisable
- -------------- ----------- --------------- ---------------- ----------- ----------------
$ 0.0250 3,000,000 3,000,000 4.88 years $ 0.0250 $ 0.0250
$ 0.2500 1,000,000 1,000,000 4.67 years $ 0.2500 $ 0.2500
---------- ------------
4,000,000 4,000,000
========== ============
F-18
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 7 - SHAREHOLDERS' EQUITY (Continued)
Options (Continued)
The Company has adopted the disclosure-only provisions of SFAS No. 123.
Accordingly, no compensation cost other than that required to be
recognized by APB 25 for the difference between the fair value of the
Company's common stock at the grant date and the exercise price of the
options has been recognized. Had compensation cost for the Company's
stock option plan been determined based on the fair value at the grant
date for awards consistent with the provisions of SFAS No. 123, the
Company's net loss and loss per share for the years ended December 31,
2002 and 2001 would have been increased to the pro forma amounts
indicated below:
2002 2001
--------------- --------------- -------------
Net loss as reported $ 918,398 $ (2,844,647) $ (7,426,105)
Net loss, pro forma $ 918,398 $ (2,874,647) $ (7,426,105)
Basic loss per share as reported $ - $ - $ (0.01)
Basic loss per share, pro forma $ - $ - $ (0.01)
The fair value of these options was estimated at the date of grant using
the minimum value method with the following weighted-average assumptions
for the year ended December 31, 2002: dividend yield of 0%, risk-free
interest rate of 2%, and expected life of four months. The
weighted-average exercise price was $0.05 at December 31, 2002.
The weighted-average fair value of the options issued during the year
ended December 31, 2002 was $0.01.
Compensation expense of $150,823 and $87,983 was recognized as a result
of the issuance of stock options during the years ended December 31, 2001
and 2000, respectively. No options were granted, expired or exercised,
during the year ended December 31, 2002.
F-19
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 8 - INCOME TAXES
The Company has incurred no income tax expenses since inception. The
actual tax benefit differs from the expected tax benefit computed by
applying the United States federal corporate tax rate of 34% to loss
before income taxes as follows:
2002 2001 2000
------------- --------------- --------------
Expected tax benefit $ (312,000) $ (990,000) $ (2,525,000)
State income taxes, net of federal
benefit (53,000) (165,968) (433,269)
Changes in valuation allowance 365,000 1,155,901 2,598,144
------------- --------------- --------------
Total $ - $ - $ -
============= =============== ==============
The tax effects of temporary differences that give rise to deferred tax
assets were as follows:
2002 2001 2000
------------- -------------- --------------
Net operating loss carryforwards $ 3,073,000 $ 2,712,000 $ 2,040,000
Software development costs
capitalized for tax purposes 2,883,000 2,883,000 2,417,000
------------- --------------- --------------
5,962,000 5,595,000 4,457,000
Less valuation allowance 5,962,000 5,595,000 4,457,000
------------- --------------- --------------
Total $ - $ - $ -
============= =============== ==============
At December 31, 2002, the Company had federal and state net operating
loss carryforwards of approximately $7,684,000 and $3,844,000,
respectively, which begin to expire in 2011 and 2002, respectively.
F-20
EDULINK, INC.,
dba THE LEARNING PRIORITY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002
- --------------------------------------------------------------------------------
NOTE 9 - SUMMARIZED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Summary data relating to the results of operations for each quarter of
the year ended December 31, 2001 is as follows:
For the Three Months Ended
-------------------------------------------------------------------
December 31, September 30, June 30 March 31,
2002 2002 2002 2002
------------ ------------- ------------- -------------
Income
Interest $ 0 $ 1 $ 17 $ 113
------------- ------------- ------------- -------------
Expense
Software development
costs 0 0 12,884
General and administrative costs 124,783 169,306 203,674 407,882
------------- ------------- ------------- -------------
Total expenses 420,653 124,783 169,306 203,674
------------- ------------- ------------- -------------
Net loss $ (124,783) $ (169,305) $ (203,657) $ (420,653)
============= ============= ============= =============
Basic and diluted
loss per share $ -- $ -- $ -- $ --
============= ============= ============= =============
Weighted-average
shares used in
computation of
basic and diluted loss per share 821,695,100 821,695,100 809,318,480 809,318,480
============= ============= ============= =============
NOTE 10 - SUBSEQUENT EVENTS
none
F-21