-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MOwuLL6G7qtHIeK9i3TRitSQ9Bx8p4I6JMt5VrZu1BunaFpDGnkpXjBXqXzqJGfa +mXkOraFDsR0SnNvi/RFZw== 0000950147-02-000868.txt : 20020715 0000950147-02-000868.hdr.sgml : 20020715 20020715163153 ACCESSION NUMBER: 0000950147-02-000868 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20020331 FILED AS OF DATE: 20020715 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDT LEARNING INC CENTRAL INDEX KEY: 0001042291 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-OFFICES & CLINICS OF DOCTORS OF MEDICINE [8011] IRS NUMBER: 760545043 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13725 FILM NUMBER: 02703060 BUSINESS ADDRESS: STREET 1: 2999 NORTH 44TH STREET STREET 2: SUITE 650 CITY: PHOENIX STATE: AZ ZIP: 85018 BUSINESS PHONE: 6029521200 MAIL ADDRESS: STREET 1: 2999 N 44TH STREET STREET 2: SUITE 650 CITY: PHOENIX STATE: AZ ZIP: 85018 FORMER COMPANY: FORMER CONFORMED NAME: PENTEGRA DENTAL GROUP INC DATE OF NAME CHANGE: 19970822 FORMER COMPANY: FORMER CONFORMED NAME: E-DENTIST COM INC DATE OF NAME CHANGE: 20001114 10-K 1 e-8697.txt ANNUAL REPORT FOR YEAR ENDING 03-31-2002 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED MARCH 31, 2002. [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM _________ TO _________. COMMISSION FILE NUMBER _________ EDT LEARNING, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0545043 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2999 N. 44TH STREET, SUITE 650 PHOENIX, ARIZONA 85018 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (602) 952-1200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] The number of shares of Common Stock of the Registrant, par value $.001 per share, outstanding at June 11, 2002 was 14,134,096. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's definitive Proxy Statement relating to the Annual Meeting of Stockholders of the Registrant to be held on August 16, 2002 are incorporated by reference into Part III of this Report. ================================================================================ FORM 10-K REPORT INDEX PART I Items 1. and 2. Business and Properties.................................................................... 4 Item 3. Legal Proceedings.......................................................................... 6 Item 4. Submission of Matters to a Vote of Security Holders........................................ 6 Item 4A. Executive Officers......................................................................... 6 PART II Item 5. Market for Registrant's Common Stock and Related Shareholder Matters....................... 8 Item 6. Selected Financial Data.................................................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 10 Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................. 17 Item 8. Financial Statements and Supplemental Data................................................. 18 Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure....... 43 PART III Item 10. Directors and Executive Officers of the Registrant......................................... 43 Item 11. Executive Compensation .................................................................... 43 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................ 43 Item 13. Certain Relationships and Related Party Transactions....................................... 43 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 43
2 FORWARD - LOOKING STATEMENTS Statements contained in this Report, which are not historical in nature, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are included in Item 1. "Business", Item 5. "Market for Registrant's Common Stock and Related Shareholder Matters" and Item 7. "Management's Discussion and Analysis of Financial Condition and Results of Operations." In addition, forward looking information is provided regarding the development of an eBusiness strategy, the modifications of Management Services Agreements with Affiliated Practices, projections of the Company's future earnings, funding of the Company's operations and capital expenditures, payment or nonpayment of dividends and liquidity needed for the future. Such forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from anticipated results. These risks and uncertainties include, but are not limited to, risks associated with affiliations, fluctuation in operating results because of affiliations, changes in government regulations, competition, growth of existing dental practices and the potential need for additional funding. These risks and other factors as may be identified from time to time are described in further detail in the Company's reports filed with the Securities and Exchange Commission or in the Company's press releases. 3 PART I ITEMS 1. AND 2. BUSINESS AND PROPERTIES OVERVIEW Headquartered in Phoenix, Arizona, EDT Learning is a leading provider of custom, comprehensive e-Learning business solutions for corporate clients seeking to train non-technical users (individuals with less computer experience.) The Company supports organizations requiring internal training, product demonstration and customer education programs with the goal of mapping e-Learning solutions to business results. The Company began in March of 1998 as a dental practice management company under the name Pentegra Dental Group, Inc. Its formation included the simultaneous rollup of dental practices and an initial public offering raising $25 million in initial capital. The Company's initial goals were to provide training and practice enhancement services to its affiliated dental practices spread over 31 states. As early as 1997 the Company delivered proprietary learning systems communication to its remote affiliated offices through its user interface and database driven communication system that employed the Internet and browser technology. The Company subsequently shifted its focus away from the dental practice management industry and toward the e-Learning sector in the summer of 2001 and changed its name to EDT Learning, Inc. (now trading as AMEX:EDT). Beginning in April of 2000, the Company modified the affiliated service agreements with its affiliated dental practices to provide for a fixed fee, limited practice management services and a reduction in the agreement term from 40 years to five years. Commensurate with that change in fiscal 2001, the Company recorded a one-time $23 million charge against earnings related to the elimination of goodwill previously associated with those affiliated service agreements. The Company changed its business model from a dental practice management company to an e-Learning company in the first quarter of fiscal 2001. The Company is currently implementing its e-Learning strategy, has a limited operating history with regard to its e-Learning business and is continuing the development and enhancement of its e-Learning product and service offerings and related revenue streams. The Company acquired two e-Learning entities during 2002 and one e-Learning company subsequent to year end and is currently integrating the operations of these entities. The Company reported a working capital deficit and negative cash flow from operations for fiscal year 2002. Also, the Company's management service agreements with the affiliated dental practices begin to expire on April 1, 2003 and will continue to expire through December 31, 2003, which will reduce revenues and cash flow from this source and accordingly could negatively affect the Company's liquidity and operating results. These items discussed above and the limited operating history as an e Learning company raise substantial doubt about the Company's ability to continue as a going concern. Management's plan with regard to these matters include continued development, marketing and licensing of its e-Learning products and services through both internal growth and acquisition. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient revenues from its products and services to provide adequate cash flows to sustain operations. E-LEARNING PRODUCTS AND SERVICES EDT Learning offers a powerful combination of customizable products including: * An award winning proprietary instructional design tool (IST) and custom content development system; * User-intuitive online instruction delivery in both instructor-led live (synchronous) and student self-paced (asynchronous) formats; * A comprehensive learning management system (LMS); and, * An award-winning suite of Human Resource software and tools which include: * Learning Manager (helps managers effectively track and administer the learning and development processes); * People Search (provides tools for sourcing, screening and selecting qualified individuals); * Performance Coach (equips managers, supervisors and team leaders with the tools to establish goals and, provide consistent, meaningful feedback to employees); and, 4 * Career Planner (provides employers and employees with tools to match their career objectives with internal opportunities. The Internet has the potential to significantly improve the procurement, deployment and management of learning. However, existing offerings do not take full advantage of the Internet and were not designed to serve as an integrated solution capable of improving the manner in which learning is developed, delivered, and managed across the extended enterprise. The Company believes it is positioned to capture the cross-selling opportunity and to leverage its existing infrastructure using the scale provided by an integrated product. The need to adhere to a structured process for content development cannot be overlooked even though the pressure to produce new programs faster and less expensively is increasing. The Company has produced a streamlined content creation system that reduces development time and the expense of delivering interactive training. This rapid development process incorporates the use of the proprietary IST development tool. This content authoring development tool translates content into html, eliminating the need for programmers to manipulate content into code. This makes it simple for content experts to arrange, re-arrange, add or delete any type of rich media file within training modules because the process-driven authoring tool guides them through each step with years of best practice standards already built in. The result is increased delivery speed, lower cost, greater flexibility, and better response to business change requirements. The Company offers custom Self-Paced, Interactive Learning solutions developed specifically to help organizations solve business objectives. This training method is rapidly emerging as a more mainstream alternative to traditional methods (training delivered in a room with a live instructor to a live audience). While instructor-led sessions have their advantages, the economics and logistical headaches involved in coordinating an instructor, student body, course outline and classroom have forced many organizations to find other ways to supplement instructor-led training. The Company believes when students control their own pace and sequence, they can better manage their time and complete the course-work with higher material retention. Combined with the Company's LMS, Self-Paced students can easily see where they are in a module at any given time because the LMS records and displays that information in real-time. Both the student and the organization have complete information on course progress and results. In addition to interactive web-based asynchronous training, the Company offers a synchronous (live instructor-led) learning solution utilizing advanced audio and graphics. The student is provided this instructor-led classroom experience through the use of third party software and a Java-enabled application. This live online classroom enables the student to interact with instructors and other students and offers advanced features such as real-time surveys, un-interrupted questioning of the instructor, and chat with other students. The Company's innovative solution delivers engaging interactive content over the Internet while voice portions are delivered using an analog phone line to maximize bandwidth connections. The Company's LMS was created to be a web-based content delivery and data management system. It was developed to specific design requirements to meet the skill level of its customer base. Specifically, content needed to be delivered over low bandwidth connections and needed to be cross browser compatible. In addition, the Company needed to be able to integrate student profiles with its other online products and report the information to its customers' learning administrators. The testing system is database enabled which provides the flexibility for the learning administrator to create test questions and determine specific testing requirements. The LMS can provide multiple test environments to meet user needs and the administrator also has the ability to change the questions. COMPETITIVE ADVANTAGE To be able to compete in this growing and evolving market, the Company has identified what it believes is a competitive advantage, a desirable and differentiated e-Learning solution and an effective marketing strategy. The Company's established competencies, size, and comprehensive solution all contribute to what it believes to be a significant barrier to entry in its specific part of the e-Learning market. By combining a proprietary instructional design tool, user-intuitive online delivery, the Company's LMS, and a suite of WorkForce Management Solutions, the Company provides uniquely effective and efficient custom e-Learning solutions. The Company believes that this comprehensive approach allows organizations to implement e-Learning faster, more efficiently and without the risks inherent in integrating multiple vendors and products. SALES AND MARKETING The Company's marketing strategy is focused on building and expanding relationships in its existing customer base, establishing channels to penetrate the Fortune 1000, and attempting to penetrate the mid market. Although currently 5 a majority of the Company's e-Learning revenue is short-term content development revenue, the Company looks to obtain multi-year agreements providing long-term revenues and a backlog of training revenues. The Company utilizes both direct and indirect sales through channel partners to achieve market coverage. Our direct sales force focuses on mid-sized and enterprise level customers. Our channel sales force focuses on potential resellers of our product that are currently selling off-the-shelf content or partners with similar customer profiles. The sales team is organized by territory and named accounts. The Company has historical expertise and a customer base of leading corporations in focused markets, with special emphasis in Product Training; Call Center Training; Software Training; Human Resources Training and Soft Skills Education. Its client list includes those inside and outside of the Fortune 1000 including Federal Express, Hilton Hotels, International Paper, Time Warner, Oral-B, Zeiss Optical, Wells Fargo, Bank of America, Discover Card, Deluxe Checks, and many others. EMPLOYEES As of March 31, 2002, the Company employed 52 persons at its corporate offices and 9 persons at its Memphis, Tennessee office. None of the Company's employees are represented by collective bargaining agreements. The Company considers its employee relations to be good. DENTAL PRACTICE SERVICES The Company continues to provide services to its Affiliated Practices in accordance with the modified service agreements. The actual terms of the various service agreements vary slightly on a case-by-case basis, depending on negotiations with the individual Affiliated Practices. Those modified service agreements require in general that the Company provide: access to online practice enhancement services; access to online tools and payroll services; access to certain on-site consulting and seminar programs; and the use of the tangible assets owned by the Company located at each affiliated dental practice location. The service fees payable to the Company under the modified service agreements are guaranteed by the owner-dentists. At March 31, 2002, 2001 and 2000, the Company had service agreements with 62, 85 and 96 practices in 22, 28 and 29 states respectively. ITEM 3. LEGAL PROCEEDINGS The Company has pending lawsuits against eight Affiliated Practices for defaulting in the payment of the required Service Fees. In each of those cases, the Company is seeking damages equal to past due and remaining service fees, consequential damages equal to the value of the intangible practice asset and attorney's fees. Three Affiliated Practices have in response filed a counter-claim alleging breach of contract, misrepresentation and securities violations. The Company believes that those counter-claims are without merit and that the Company will prevail both in the recovery of damages from the Affiliated Practices as well as a defense to the alleged counter-claims. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders in the fourth quarter of fiscal 2002. ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information concerning the executive officers of the Company (ages are as of March 31, 2002): James M. Powers, Jr. 46 Chairman, President and Chief Executive Officer Charles M. Sanders 45 Senior Vice President, Chief Operation Officer and Chief Financial Officer James L. Dunn, Jr. 40 Senior Vice President, General Counsel and Chief Development Officer 6 JAMES M. POWERS, JR., MBA CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER James Powers, Jr., has served as Chairman, President and CEO of the Company since December 1998. Mr. Powers guided the Company through its initial growth and acquisition phase and subsequent transformation from a dental practice management company to a provider of uniquely effective and efficient custom e-Learning solutions supporting companies in multi-industries. Dr. Powers joined the Company through the merger with Liberty Dental Alliance, Inc., a Nashville based company where he was the Founder, Chairman and President. Prior to founding Liberty, he was a Founder and Chairman of Clearidge, Inc., a privately held bottled water company in Nashville, Tennessee, that became one of the largest, independent bottlers in the Southeast and was sold to Suntory, Inc. Powers also is a Founder and Director of Barnhill's Country Buffet, Inc., a chain of 43 restaurants in the Southeast. He received a Doctor of Dental Surgery Degree from The University of Tennessee and received his MBA from Vanderbilt University's Owen Graduate School of Management. CHARLES SANDERS SENIOR VICE PRESIDENT, CHIEF OPERATING OFFICER & CHIEF FINANCIAL OFFICER Charles Sanders, joined the Company as Senior Vice President, Chief Operating Officer in October 1999 and accepted the Chief Financial Officer responsibilities in August 2000. Mr. Sanders is an integration specialist and an experienced veteran of over 20 years in the healthcare industry. He most recently was president of a $250 million division of a large physician management company where he substantially increased profitability and was responsible for marketing, operations, finance, human resources, and information systems serving over 3875 employed and affiliated physicians located in five states. Mr. Sanders' extensive background in operations, finance and information technology includes experience as the CFO of a $75 million multi-site medical facility and the regional IT director of a national HMO. Mr. Sanders received a B.S.B.A. from Northern Arizona University in 1979. JAMES L. DUNN, JR., JD, CPA GENERAL COUNSEL, SENIOR VICE PRESIDENT, AND CHIEF DEVELOPMENT OFFICER James L. Dunn, Jr., assisted with the formation of the Company and was an integral part of the road show management team during the Company's initial public offering. While the Company's focus was as a consolidator of dental practices in the dental industry, Mr. Dunn was responsible for all development and consolidation activities including the acquisition of dental practices and dental practice management companies. In the first twelve months of operation, he managed the acquisition of over fifty (50) dental practices thereby doubling the Company's annual revenue to $57 Million. Mr. Dunn assumed the role of General Counsel in March of 2000 and managed the legal transition of the Company from its dental management beginnings to its current e-learning focus. He is an attorney and CPA receiving his law degree from Southern Methodist University School of Law in 1987 and his Bachelor's Degree in Business Administration-Accounting from Texas A & M University in 1984. 7 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION, HOLDERS AND DIVIDEND The Company's Common Stock has been traded on the American Stock Exchange system under the symbol "EDT" since August 25, 2000, prior to that the Company's Common Stock was traded on the American Stock Exchange System under the symbol "PEN". The following table sets forth the range of the reported high and low sales prices of the Company's Common Stock for the year, ended March 31, 2002 and 2001: 2002 HIGH LOW ----- ----- ----- First Quarter $0.63 $0.41 Second Quarter $0.50 $0.31 Third Quarter $1.79 $0.44 Fourth Quarter $1.45 $0.90 2001 HIGH LOW ----- ----- ----- First Quarter $1.63 $0.50 Second Quarter $0.63 $0.38 Third Quarter $0.44 $0.19 Fourth Quarter $0.73 $0.22 As of June 11, 2002, there were approximately 296 holders of record of Common Stock, as shown on the records of the transfer agent and registrar of Common Stock. The number of record holders does not bear any relationship to the number of beneficial owners of the Common Stock. The last reported sale price of the Common Stock on the American Stock Exchange as of March 31, 2002 was $1.00 per share. The Company has not paid any cash dividends on its Common Stock in the past and does not plan to pay any cash dividend on its Common Stock in the foreseeable future. The Company's Board of Directors intends, for the foreseeable future, to retain earnings to finance the continued operation and expansion of the Company's business. 8 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data of the Company that has been derived from consolidated financial statements that have been audited. The selected financial data should be read in conjunction with the Company's consolidated financial statements and notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report. STATEMENT OF OPERATIONS DATA:
FOR THE PERIOD FROM INCEPTION, THREE MONTHS FEBRUARY 21, YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED ENDED 1997 THROUGH MARCH 31, MARCH 31, MARCH 31, MARCH 31, MARCH 31, DECEMBER 31, 2002 2001 2000 1999 1998 1997 -------- -------- -------- -------- -------- -------- Net revenue ............................... $ 9,264 $ 8,320 $ 56,988 $ 38,824 $ -- $ -- Operating expenses ........................ 8,227 32,708 59,476 36,940 1,800 1,354 -------- -------- -------- -------- -------- -------- Earnings (loss) from operations ........... 1,037 (24,388) (2,488) 1,884 (1,800) (1,354) -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item ........... 1,540 (24,987) (3,497) 1,717 (1,960) (1,354) Income tax expense (benefit) .............. -- -- 2,213 (525) -- -- -------- -------- -------- -------- -------- -------- Net income (loss) before extraordinary item ..................... 1,540 (24,987) (5,710) 2,242 (1,960) (1,354) Extraordinary item, net ................... 4,265 70 350 -- -- -- -------- -------- -------- -------- -------- -------- Net income (loss) ......................... 5,805 (24,917) (5,360) 2,242 (1,960) (1,354) Preferred stock dividend .................. -- -- -- -- (1,070) -- -------- -------- -------- -------- -------- -------- Income (loss) attributable to common stock ........................... $ 5,805 $(24,917) $ (5,360) $ 2,242 $ (3,030) $ (1,354) ======== ======== ======== ======== ======== ======== Earnings (loss) per common share - basic: Earnings (loss) before extraordinary item ................... $ 0.13 $ (2.38) $ (0.55) $ 0.29 Extraordinary item ..................... 0.36 .01 0.03 -- -------- -------- -------- -------- Net earnings (loss) .................... $ 0.49 $ (2.37) $ (0.52) $ 0.29 ======== ======== ======== ======== Earnings (loss) per common share - diluted: Earnings (loss) before extraordinary item ................... $ 0.12 $ (2.38) $ (0.55) $ 0.29 Extraordinary item ..................... 0.34 .01 0.03 -- -------- -------- -------- -------- Net earnings (loss) .................... $ 0.47 $ (2.37) $ (0.52) $ 0.29 ======== ======== ======== ======== BALANCE SHEET DATA: Cash and cash equivalents ................. $ 1,498 $ 1,051 $ 553 $ 1,047 $ 6,708 -- Working capital (deficit) ................. (1,538) (1,440) 1,330 4,224 3,640 -- Total assets .............................. 15,587 9,191 37,906 37,127 10,633 -- Long-term debt, less current maturities ............................. 6,499 11,461 14,829 13,134 368 -- Total shareholder's equity (deficit) .............................. 3,534 (6,654) 19,007 20,760 6,996 --
9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. THESE STATEMENTS ARE BASED ON CURRENT PLANS AND EXPECTATIONS OF EDT LEARNING, INC. AND INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL FUTURE ACTIVITIES AND RESULTS OF OPERATIONS TO BE MATERIALLY DIFFERENT FROM THAT SET FORTH IN THE FORWARD-LOOKING STATEMENTS. IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER INCLUDE, AMONG OTHERS, RISKS ASSOCIATED WITH AFFILIATIONS, FLUCTUATIONS IN OPERATING RESULTS BECAUSE OF AFFILIATIONS AND VARIATIONS IN STOCK PRICE, CHANGES IN GOVERNMENT REGULATIONS, COMPETITION, RISKS OF OPERATIONS AND GROWTH OF EXISTING AFFILIATED DENTAL PRACTICES, RISKS RELATED TO THE COMPANY'S ABILITY TO CONTINUE AS A GOING CONCERN AND RISKS DETAILED IN EDT LEARNING'S SEC FILINGS. OVERVIEW Headquartered in Phoenix, Arizona, EDT Learning is a leading provider of custom, comprehensive e-Learning business solutions for corporate clients seeking to train non-technical users (individuals with less computer experience). The Company supports organizations requiring internal training, product demonstration and customer education programs with the goal of mapping e-Learning solutions to business results. HISTORY The Company began in March of 1998 as a dental practice management company under the name Pentegra Dental Group, Inc. Its formation included the simultaneous rollup of dental practices and an initial public offering raising $25 million in initial capital. The Company's initial goals were to provide training and practice enhancement services to its affiliated dental practices spread over 31 states. As early as 1997 the Company delivered proprietary learning systems communication to its remote affiliated offices through its user interface and database driven communication system that employed the Internet and browser technology. The Company subsequently shifted its focus away from the dental practice management industry and toward the e-Learning sector in the summer of 2001 and changed its name to EDT Learning, Inc. (now trading as AMEX:EDT). Beginning in April of 2000, the Company modified the affiliated service agreements with its affiliated dental practices to provide for a fixed fee, limited practice management services and a reduction in the agreement term from 40 years to five years. Commensurate with that change in fiscal 2001, the Company recorded a one-time $23 million charge against earnings related to the elimination of goodwill previously associated with those affiliated service agreements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to customer contracts, bad debts, intangible assets, income taxes, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. The Company recognizes revenue and profit as work progresses on learning contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a contract can be made. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Customers sometimes request modifications to 10 projects in progress which may result in significant revisions to cost estimates and profit recognition, and the Company may not be successful in negotiating additional payments related to the changes in scope of requested services. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses become evident. There were no such losses at March 31, 2002. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. The Company has made acquisitions of companies having operations or technology in areas within its strategic focus and has recorded goodwill and other intangible assets associated with the acquisitions. Future adverse changes in market conditions or poor operating results of the underlying acquired operations could result in losses or an inability to recover the carrying value of the goodwill and other intangible assets, thereby possibly requiring an impairment charge in the future. As of March 31, 2002, no such impairment has been identified by the Company. The Company has recorded a full valuation allowance to reduce the carrying value of its net deferred tax assets because it has concluded that it is not likely it will be recognized due to the lack of operating history and implementation of its learning business plan and the modification of its management service agreements. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event the Company were to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such determination was made. RESULTS OF OPERATIONS As an extension of its educational and training background, the Company has broadened its reach to focus on the larger growing e-Learning and corporate training market. With the launch of the Company's state of the art learning management system and its e-Learning engine, the Company now provides a comprehensive array of e-Learning content, hosting and delivery services to corporations, inside and outside the dental and healthcare industries. The Company's synchronous and asynchronous content delivery solutions provide an array of e-Learning products that are customized to each corporate client. The Company is positioning itself in the corporate training sector of the e-Learning marketplace leveraging its existing infrastructure and using scale provided by an integrated product. In connection with the execution of its e-learning strategy, the Company acquired two companies during the year ended March 31, 2002, Learning-Edge and ThoughtWare Technologies, Inc. On October 1, 2001, the Company acquired all of the outstanding capital stock of Learning-Edge, Inc.; an Arizona based private e-learning company. The Company issued 1,950,000 common shares and $1.1 million of debt under the terms of the acquisition agreement. The debt bears interest at rates ranging from 7.5% to 9.0% and is due in two equal installments on October 1, 2003 and on October 1, 2004, respectively. If the Company raises additional capital in excess of $3 million, the payment schedule accelerates (see Liquidity and Capital Resources). The Company also assumed approximately $2.9 million of Learning-Edge debt as part of this acquisition. The operating results of Learning-Edge are included with the Company as of October 1, 2001. On January 15, 2002, the Company acquired all of the outstanding capital stock of ThoughtWare Technologies, Inc.; a Tennessee based private company. The Company issued 1,550,000 common shares under the terms of the acquisition agreement. The Company also assumed approximately $1.5 million of ThoughtWare debt as part of this acquisition. Since January 2002, operating results of ThoughtWare are included with the Company's results from operations. The Company continues to provide services to its Affiliated Practices in accordance with the modified service agreements. The actual terms of the various service agreements vary slightly on a case-by-case basis, depending on negotiations with the individual Affiliated Practices. Those modified service agreements require in general that the Company provide: access to online practice enhancement services; access to online tools and payroll services; access to certain on-site consulting and seminar programs; and the use of the tangible assets owned by the Company located at each affiliated dental practice location. The service fees payable to the Company under the modified service agreements are guaranteed by the owner-dentists. 11 At March 31, 2002, 2001 and 2000, the Company had service agreements with 62, 85 and 96 practices in 22, 28 and 29 states respectively. The Company periodically assesses the need for impairment of its intangible assets related to its service agreements and recorded a $23 million impairment charge during the year ended March 31, 2001. The operations of the Company involve many risks, which, even through a combination of experience, knowledge and careful evaluation, may not be overcome. These risks include the fact that the market for e-learning products and services is in the early stages of development and may not grow to a sufficient size or at a sufficient rate to sustain the Company's business. The Company also faces intense competition from other e-learning providers and may be unable to compete successfully. Many of the Company's existing and potential competitors have longer operating histories and significantly greater financial, technical and other resources and therefore may be able to more quickly respond to changing opportunities or customer requirements. New competitors are also likely to enter this market in the future due to the lack of significant barrier to entry in the market share. The Company cannot assure investor s that it will be able to contend effectively with such increased competition. REVENUES Total revenues generated for the year ended March 31, 2002 ("fiscal 2002") and March 31, 2001 ("fiscal 2001") were $9.3 million and $8.3 million respectively, an increase of $1.0 million. The Company recognized $2.7 million in learning revenues in fiscal 2002. There were no learning revenues in fiscal 2001 due to the Company's previous business strategy. Revenue from dental contacts decreased by $1.7 million in fiscal 2002 as compared to fiscal 2001 due to the modification and termination of certain dental contracts. Dental contract revenue will continue to decline as the contracts reach their expiration dates, generally over the next 12 to 21 months. Total revenues generated for the year ended March 31, 2001 ("fiscal 2001") and March 31, 2000 ("fiscal 2000") were $8.3 million and $57.0 million respectively, a decrease of $48.7 million. The decrease is primarily due to the modification and termination of the service agreements and the resulting elimination of pass through revenue and expense reporting. Net revenue generated by paying the operating expenses of the Affiliated Practices was $46.4 million in fiscal 2000. There were no learning revenues in fiscal 2001 or fiscal 2000. OPERATING EXPENSES Operating expenses consist of research and development, sales and marketing, general and administrative, depreciation and amortization expenses and impairment of assets. The Company incurred operating expenses of $8.2 million in fiscal 2002, a decrease of $24.5 million from fiscal 2001, operating expenses of $32.7 million, primarily due to the Company's strategic change of business and the absence of the $23 million impairment charge recorded fiscal 2001. Fiscal 2001 operating expenses were $32.7 million, a $26.8 million decrease from fiscal 2000 operating expenses of $59.5 million. The decrease is primarily due to the elimination of pass thought revenue and expense reporting. Dental reimbursed expenses were $0 and $46.4 million in fiscal 2001 and 2000, respectively. General and administrative expenses decreased by $3.3 million and depreciation and amortization expenses decreased by $136,000 during fiscal 2001. These decreases were offset by the impairment charge of $23 million recorded in fiscal 2001. Research and development expenses include expenses incurred in connection with the provision of e-learning services, development of new products and new product versions and consist primarily of salaries and benefits, communication equipment and supplies. Research and development expenses were $2.3 million for fiscal 2002 and are a result of the Company's decision to implement its eCommerce and e-learning strategy. There were no research and development expenses during fiscal 2001or fiscal 2000. Sales and marketing expenses consist primarily of sales and marketing salaries and benefits, travel, advertising, and other marketing literature. Sales and marketing expenses were $1.1 million for fiscal 2002 and are a result of the Company's decision to implement its eCommerce and e-learning strategy. There were no sales and marketing expenses during fiscal 2001or fiscal 2000. General and administrative expenses consist of the corporate expenses of the Company. These corporate expenses include salaries and benefits of executive, finance and administrative personnel, rent, bad debt expense, 12 professional services, travel (primarily related to practice development), office costs and other general corporate expenses. During fiscal 2002 and 2001, general and administrative expenses were $2.7 million and $7.3 million respectively, a decrease of $4.6 million. General and administrative expenses decreased primarily due to the Company's change in strategy and reduction in dental practice management activity and was composed of decreases in bad debt expense of $2.3 million; salaries and wages of $1.1 million; professional services of $546,000; office and telephone of $304,000; insurance of $185,000 and travel expenses of $167,000. Fiscal 2001 general and administrative expenses were $7.3 million, a $3.3 million decrease from fiscal 2000 operating expenses of $10.6 million. The decrease is primarily due to decreases in bad debt expense of $2.8 million, professional fees of $209,000, seminars and education of $156,000, and salaries and wages of $97,000. Fiscal 2002 depreciation and amortization expenses were $2,089,000, a $279,000 decrease from fiscal 2001 depreciation and amortization expenses of $2,386,000. The decrease is primarily due to the modification and terminations of the service agreements that returned ownership of dental practice equipment to the related dental practices. A portion of this decrease was offset by depreciation of the property and equipment purchased in the acquisitions of Learning-Edge, Inc. and ThoughtWare Technologies, Inc. Fiscal 2001 depreciation and amortization expenses were $2,368,000, a $136,000 decrease from fiscal 2000 depreciation and amortization expenses of $2,504,000. The decrease is primarily due to the modification and terminations of the service agreements as noted above. DENTAL REIMBURSED EXPENSES Under the terms of the original services agreement with an Affiliated Practice, the Company served as the exclusive manager and administrator of all non-dental services relating to the operation of an Affiliated Practice. The obligations of the Company included assuming responsibility for the operating expenses incurred in connection with managing the dental centers. These expenses included salaries, wages and related costs of non-dental personnel, dental supplies and laboratory fees, rental and lease expenses, promotion and marketing costs, management information systems and other operating expenses incurred at the Affiliated Practices. In addition, the Company incurred general and administrative expenses related to the financial and administrative management of dental operations, insurance, training and development and other typical corporate expenditures. INCOME TAX EXPENSE The Company recorded no tax expense during fiscal 2002 due to the utilization of its net operating loss carryforward. At March 31, 2002, the Company has a net deferred tax asset of $5.8 million with a corresponding valuation allowance. Additionally, the Company also has $4.5 million of available deductions related to the increase in tax basis of the assets acquired in the Affiliations. The Company's tax benefits are scheduled to expire over a period of six to fourteen years. The Company recorded no tax benefit during fiscal 2001 because it concluded it is not likely it would be able to recognize the tax asset created due to the lack of operating history of its eBusiness plan. At March 31, 2001, the Company has a net deferred tax asset of $9.6 million with a corresponding valuation allowance. Income tax expense for fiscal 2000 totaled $2.2 million. The expense arose primarily because the Company recorded a valuation allowance for its entire deferred tax asset. The Company recorded the valuation allowance because it concluded it is not likely it would be able to recognize the tax assets because of no operating history of its new implementation of eBusiness plan and the modification of its management services agreements. RECENT ACCOUNTING PROUNCEMENTS In June 2001, the Financial Accounting Standard Board issued SFAS 142, "Goodwill and Other Intangible Assets" which established standards for reporting acquired goodwill and other intangible assets. This statement accounts for goodwill based on the reporting units of the combined entity into which an acquired entity is integrated. In accordance with the statement, goodwill and indefinite life intangible assets will not be amortized but will be tested for impairment at least annually at the reporting unit level and the amortization period of intangible assets with finite lives will not be limited to forty years. The provisions of this statement are required to be applied starting with fiscal years beginning after December 15, 2001 with early application permitted 13 for entities with fiscal years beginning after March 15, 2001. The statement is also effective for business combinations subsequent to June 30, 2001, whether or not the statement has been adopted in full. The Company has $7.6 million of goodwill included in its balance sheet at March 31, 2002. Of this balance, $7.3 million relates to acquisitions closed subsequent to June 30, 2001, and is not being amortized. Goodwill amortization for the year ended March 31, 2002 was $91,000 before the provisions of SFAS 142 were applied. Implementation of SFAS 142 by the Company would result in elimination of amortization of goodwill from acquisition under the purchase method of accounting. The statement does not result in the elimination of amortization of the Company's service agreements because under the scope of the statement only goodwill resulting from acquisitions under the purchase method of accounting, and not other identifiable intangible assets, is subject to being no longer amortized. SFAS 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this stop must be measured as of the beginning of the fiscal year. However, a company has six months from the date of adoption to complete the first step. The Company expects to complete that first step of the goodwill impairment test during the first quarter of fiscal 2003. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of the Company's fiscal year. Intangible assets deemed to have an indefinite life will be tested for impairment using a one-step process, which compares the fair value to the carrying amount of the asset as of the beginning of the fiscal year and pursuant to the requirements of SFAS 142 will be completed during the first quarter of fiscal 2003. Any impairment loss resulting from the transitional impairment test will be reflected as the cumulative effect of a change in accounting principle in the first quarter of fiscal 2003. The Company has not yet determined what effect these impairment tests will have on the Company's earnings and financial position. In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which addresses financial accounting and reporting for obligations associates with the retirement of tangible long-lived assets and the associates asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 is not expected to have a material impact on the financial position and results of operations of the Company. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not anticipate any financial statement impact with the adoption of this statement. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Recession of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 includes among other things, the rescission of SFAS No. 4, which required that gains and losses from early extinguishments of debt be classified as an extraordinary item, net of related income tax effects. Under the new guidance of SFAS No. 145, losses from early extinguishments of debt will be classified as extraordinary items when the losses are considered unusual in nature and infrequent in occurrence. SFAS No. 145 will be effective for the Company on April 1, 2004. LIQUIDITY AND CAPITAL RESOURCES The Company changed its business model from a dental practice management company to an e-Learning company in the first quarter of fiscal 2001. The Company is currently implementing its e-Learning strategy, has a limited operating history with regard to its e-Learning business and is continuing the development and enhancement of its e-Learning product and service offerings and related revenue streams. The Company acquired two e-Learning entities during 2002 and one e-Learning company subsequent to year end and is currently integrating the operations of these entities. The Company reported a working capital deficit and negative cash flow from operations for fiscal year 2002. Also, the Company's management service agreements with the affiliated dental practices begin to expire on April 1, 2003 and will continue to expire through December 31, 2003, which will reduce revenues and cash flow from this source and accordingly could negatively affect 14 the Company's liquidity and operating results. These items discussed above and the limited operating history as an e Learning company raise substantial doubt about the Company's ability to continue as a going concern. Management's plan with regard to these matters include continued development, marketing and licensing of its e-Learning products and services through both internal growth and acquisition. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient revenues from its products and services to provide adequate cash flows to sustain operations. In order to increase its liquidity, the Company has developed a plan consisting of the following strategies; (i) continued implementation of its e-Learning based strategic business plan through both internal growth and acquisition and (ii) acceleration of cash collections from affiliated dental practices by offering a sale of the dental practices management service agreements earlier than contractually required. The Company has made other acquisitions, and management expects that other e-learning businesses will be acquired in the future. There can be no assurance that the Company will be able to identify or reach mutually agreeable terms with acquisition candidates and their owners, or that the Company will be able to profitably manage additional businesses or successfully integrate such additional businesses into the Company at all, or without substantial costs, delays or other problems. There can be no assurance that businesses acquired will achieve sales and profitability that justify the investment made by the Company. Any inability on the part of the Company to control these risks effectively and integrate and manage acquired businesses could have a material adverse effect on the Company. Acquisitions may result in increased depreciation and amortization expense; increase interest expense, increased financial leverage or decrease operating results. The Company's service agreements with affiliated dental practices begin to expire on March 31, 2003 and will continue to expire through December 31, 2003, which will reduce revenues and cash flow from this source and accordingly could negatively affect the Company's liquidity and operating results. During fiscal 2002, the Company received $2.9 million in cash from terminating the service agreements with Affiliated Practices. These cash collections accelerate the date at which the Company would be required to sustain its operations solely on cash collections derived from e-learning revenues. However, there can be no assurance that the Company's e-learning strategies will be achieved or that the affiliated dental practices will continue to agree upon terms acceptable to the Company. At March 31, 2002, the Company had a working capital deficit of $1.5 million. Current assets included $1.5 million in cash and $1.4 million in accounts and notes receivable. Current liabilities consisted of $853,000 of deferred revenue, $1.8 million of current maturities of long-term debt and capital leases and $2.2 million in accounts payable and accrued liabilities. During fiscal 2002, the Company used $2.2 million for operating activities, primarily from the use of working capital. The Company generated $1.4 million cash from operating activities during fiscal 2001 and used $0.6 million for operating activities in fiscal 2000. The Company had outstanding total debt (secured and unsecured promissory notes) of $7.8 million at March 31, 2002. Of that amount, the Company has $4.6 million of convertible redeemable subordinated notes, which mature on March 29, 2012. The remaining balance of $3.2 million is owed to various parties with differing maturities as follows: $398,000 are unsecured notes which arose as part of the Company's initial public offering and are due on March 30, 2003; $121,000 are unsecured promissory notes of which were issued to former shareholders of Omega Orthodontics, Inc. or were assumed by the Company as part of its acquisition of Omega Orthodontics, Inc. and are due in fiscal 2003 and 2004. $1.5 million are unsecured promissory notes of which $1.1 million were issued to former shareholders of Learning-Edge, Inc. and $0.4 million were assumed by the Company as part of its acquisition of Learning-Edge, Inc. These notes mature in fiscal 2004 and 2005. $1.2 million are unsecured convertible promissory notes which were issued to dentists which the Company affiliated with as part of its dental practice management business and are due one half in November 2002 and one half in November 2003. 15 The following schedule details all of the Company's indebtedness and the required payments related to such obligations at March 31, 2002 (in thousands):
DUE IN LESS DUE IN ONE TO DUE IN FOUR TO DUE AFTER TOTAL THAN ONE YEAR THREE YEARS FIVE YEARS FIVE YEARS -------- ------------- ----------- ---------- ---------- Long term debt ................... $ 8,968 $ 1,337 $ 1,856 $ -- $ 5,775 Capital lease obligations ........ 1,127 530 580 17 -- Operating lease obligations ...... 2,843 583 1,087 889 284 -------- -------- -------- -------- -------- Total commitments ................ $ 12,938 $ 2,450 $ 3,523 $ 906 $ 6,059 ======== ======== ======== ======== ========
In March 2002, the Company completed a Private Placement Offering ("the Offering") raising capital of $5,775,000. Under the terms of the Offering, the Company issued convertible redeemable subordinated notes ("the notes") and warrants to purchase 5,775,000 shares of the Company's common stock. The notes bear interest at 12% per annum and require quarterly interest payments with the principle due at maturity on March 29, 2012. The note holders may convert the notes into shares of the Company's common stock at a price equal to $1.00 per share. The Company may force redemption of the notes into shares of the Company's common stock at the conversion price, if at any time the closing price of the Company's common stock equals or exceeds $3.00 per share for twenty consecutive trading days. The notes are subordinated to any present or future senior indebtedness, with no waiver required. The exercise price for the warrants is $3.00 per share. The Company may force redemption of the warrants into shares of the Company's common stock at the exercise price, if at any time the closing price of the Company's common stock equals or exceeds $5.50 per share for twenty consecutive trading days. The warrants expire on March 29, 2005. The fair value of the warrants was estimated using a Black-Scholes pricing model with the following assumptions: contractual and expected life of 3 years, volatility of 75%, divided yield of 0% and a risk-free rate of 3.87%. The fair value was then used to calculate the discount of $1,132,000 in accordance with APB No. 14, "Accounting for Convertible Debt and Debt issued with Stock Purchase Warrants," which will be amortized to interest expense over the next three years. As the carrying value of the notes is less than the conversion value, a beneficial conversion feature of $1,132,000 was calculated and recorded as an additional discount to the notes and will be amortized to interest expense over the term of the notes. Upon conversion, any remaining discount associated with the beneficial conversion feature will be expensed in full at the time of conversion. The proceeds from the Offering were used to retire the Bank One credit facility and to provide working capital for the Company. The Company paid $4.4 million to Bank One to retire the $8.6 million credit facility resulting in a $4.2 million extraordinary gain. The credit facility was collateralized by liens on certain of the Company's assets, including its rights under the management services agreements, accounts receivable and notes receivable. The liens were released in connection with the retirement of the facility. In October 2001, the Company issued $1.1 million of subordinated promissory notes to the shareholders of Learning-Edge, Inc. under the terms of the acquisition agreement (the "Learning-Edge Notes"). During fiscal 2002, $55,000 of these notes were returned by the holders to offset amounts owed to the Company. The Learning-Edge Notes bear interest rates ranging from at 7.5% to 9.0% and are due in two equal installments on October 1, 2003 and on October 1, 2004, respectively. If the Company raises additional capital equal to or in excess of $3 million, the payment schedule accelerates as follows: CAPITAL PRINCIPAL TO RAISED BE REPAID ---------------------------- ------------ $3.0 million 25% $3.0 to $3.5 million 40% $3.5 million to $4.0 million 55% $4.0 to $4.5 million 70% $4.5 million to $5.0 million 85% Greater than $5.0 million 100% The holders of the Learning-Edge Notes waived the accelerated payment schedule in relation to the Offering. In fiscal 2002, 2001 and 2000, the Company entered into capital lease agreements for the purchase of equipment of $373,000, $22,000 and $1.4 million, respectively. Cash generated from investing activities was from the $2.9 million in cash received from service agreement termination in fiscal 2002, from the collection of notes receivable of $743,000, $533,000 and $116,000 in fiscal 2002, 2001 and 2000, respectively. Cash used in investing activities was $40,000, $138,000 and $347,000 for the purchases of capital equipment in fiscal 2002, 2001 and 2000, respectively, and $118,000 related to acquisitions in fiscal 2002. Uses of cash 16 also include the issuance of notes receivable to Affiliated Practices of $0, $24,000 and $279,000 in fiscal 2002, 2001 and 2000, respectively. The Company received $5.8 million from the Offering in fiscal 2002. There were no draws on the Bank One credit facility in fiscal 2002 or 2001. In fiscal 2000, $2.1 million was drawn on the Bank One credit facility. During fiscal 2002, 2001 and 2000, $5.8 million, $1.2 million and $984,000 was used to repay long-term debt, including the retirement of the Bank One credit facility. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discusses our exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and market prices. We have not traded or otherwise bought and sold derivatives nor do we expect to in the future. We also do not invest in market risk sensitive instruments for trading purposes. The primary objective of the Company's investment activity is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, the Company maintains its portfolio of cash equivalents in a variety of money market funds. As of March 31, 2002, the carrying value of our outstanding convertible redeemable subordinated notes was approximately $3.5 million at a fixed interest rate of 12%. In certain circumstances, we may redeem this long-term debt. Our other components of indebtness bear fixed interest rates of 6% to 9%. Because the interest rates on these instruments are fixed, a hypothetical 10% change in interest rates would not have a material impact on our financial condition, revenues or operations. Increases in interest rates could, however, increase the interest expense associated with future borrowings, if any. We do not hedge against interest rate increases. 17 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA INDEX TO FINANCIAL STATEMENTS PAGE(S) ------- FINANCIAL STATEMENTS: Report of Independent Accountants........................................ 19 Consolidated Balance Sheets at March 31, 2002 and 2001................... 20 Consolidated Statements of Operations for the years ended March 31, 2002, 2001 and 2000.......................................... 21 Consolidated Statements of Shareholders' Equity (Deficit) for the years ended March 31, 2002, 2001 and 2000.............................. 22 Consolidated Statements of Cash Flows for the years ended March 31, 2002, 2001 and 2000.......................................... 23 Notes to Consolidated Financial Statements............................... 24 FINANCIAL STATEMENTS SCHEDULE: Report of Independent Accountants........................................ 46 Schedule II - Valuation and Qualifying Accounts for the years ended March 31, 2002, 2001 and 2000.......................................... 47 All other schedules are omitted because they are not applicable. 18 REPORT OF INDEPENDENT ACCOUNTANTS To The Board of Directors and Shareholders of EDT Learning, Inc. and Subsidiaries In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, shareholders' equity (deficit) and cash flows present fairly, in all material respects, the financial position of EDT Learning, Inc. and its Subsidiaries at March 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has experienced recurring negative cash flows from operations and working capital deficits that raise substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. PricewaterhouseCoopers LLP Phoenix, Arizona July 11, 2002 19 EDT LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
MARCH 31, MARCH 31, 2002 2001 -------- -------- ASSETS Current Assets: Cash and cash equivalents ........................................................... $ 1,498 $ 1,051 Accounts receivable, net of allowance for doubtful accounts of $754 and $1,147, respectively .............................................................. 824 195 Prepaid expenses and other current assets ........................................... 427 128 Notes receivable from affiliated practices-current, net of allowance for doubtful accounts of $402 and $323, respectively ........................................... 536 261 -------- -------- Total current assets .............................................................. 3,285 1,635 Property and equipment, net ......................................................... 2,137 3,279 Intangible assets, net .............................................................. 9,463 3,107 Notes receivable from affiliated practices, net of allowance for doubtful accounts of $690 and $1,766, respectively .................................................. 493 1,059 Other assets ........................................................................ 209 111 -------- -------- Total assets ....................................................................... $ 15,587 $ 9,191 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) Current liabilities: Current portion of long term debt ................................................... $ 1,337 $ 471 Accounts payable and accrued liabilities ............................................ 2,203 1,207 Current portion of deferred revenue ................................................. 853 1,052 Current portion of capital lease liabilities ........................................ 430 345 -------- -------- Total current liabilities ......................................................... 4,823 3,075 Long term debt, less current maturities ................................................ 5,367 11,461 Capital lease liabilities .............................................................. 536 643 Deferred revenue ....................................................................... 195 666 -------- -------- Total liabilities ................................................................. 10,921 15,845 Commitments and contingencies (Note 16) Shareholders' equity (deficit): Common stock, $.001 par value 40,000,000 shares authorized, 15,281,485 and 11,721,664 issued, respectively .................................................. 15 12 Additional paid-in capital .......................................................... 31,336 25,809 Accumulated deficit ................................................................. (25,544) (31,349) Less: Treasury shares at cost: 1,179,630 and 1,149,116, respectively ................ (1,141) (1,126) -------- -------- Total shareholders' equity (deficit) .............................................. 4,666 (6,654) -------- -------- Total liabilities and shareholders' equity (deficit) .............................. $ 15,587 $ 9,191 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 20 EDT LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2002 2001 2000 -------- -------- --------- Revenues: Learning ....................................................... $ 2,682 $ -- $ -- Dental contracts ............................................... 6,582 8,320 56,988 -------- -------- --------- Total revenues ............................................... 9,264 8,320 56,988 Operating expenses: Research and development ....................................... 2,323 -- -- Sales and marketing ............................................ 1,123 -- -- Dental reimbursed expenses ..................................... -- -- 46,386 General and administrative ..................................... 2,692 7,340 10,586 Depreciation and amortization .................................. 2,089 2,368 2,504 Impairment of assets ........................................... -- 23,000 -- -------- -------- --------- Total operating expenses ..................................... 8,227 32,708 59,476 -------- -------- --------- Earnings (loss) from operations ................................... 1,037 (24,388) (2,488) Interest expense ................................................. 1,040 1,358 1,310 Interest income .................................................. (238) (352) (208) Other income ..................................................... (1,305) (407) (93) -------- -------- --------- (503) 599 1,009 Income (loss) before income taxes and extraordinary item .......... 1,540 (24,987) (3,497) Income tax expense ................................................ -- -- 2,213 -------- -------- --------- Income (loss) before extraordinary item ........................... 1,540 (24,987) (5,710) Extraordinary item - gain on debt forgiveness (net of tax effect of $0) .................................................... 4,265 70 350 -------- -------- --------- Net income (loss) ................................................. $ 5,805 $(24,917) $ (5,360) ======== ======== ========= Earnings (loss) per common share - basic: Earnings (loss) before extraordinary item ...................... $ 0.13 $ (2.38) $ (0.55) Extraordinary item ............................................. 0.36 0.01 0.03 -------- -------- --------- Net earnings (loss) ............................................ $ 0.49 $ (2.37) $ (0.52) ======== ======== ========= Earnings (loss) per common share - diluted: Earnings (loss) before extraordinary item ...................... $ 0.12 $ (2.38) $ (0.55) Extraordinary item ............................................. 0.34 0.01 0.03 -------- -------- --------- Net earnings (loss) ............................................ $ 0.47 $ (2.37) $ (0.52) ======== ======== ========= Number of shares used in calculation of earnings (loss) per share: Basic ......................................................... 11,930 10,496 10,356 Diluted ....................................................... 12,466 10,496 10,356
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 21 EDT LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT) (IN THOUSANDS)
TOTAL COMMON ADDITIONAL SHAREHOLDERS' ------------------------ PAID IN ACCUMULATED TREASURY EQUITY SHARES AMOUNT CAPITAL DEFICIT STOCK (DEFICIT) --------- --------- --------- --------- --------- --------- Balances, April 1, 1999 .................... 9,103 $ 9 $ 21,823 $ (1,072) $ -- $ 20,760 Issuance of common stock ................... 1,893 2 3,836 -- -- 3,838 Shares repurchased ......................... (175) -- (297) -- (176) (473) Issuance of options for compensation ....... -- -- 54 -- -- 54 Net loss ................................... -- -- -- (5,360) -- (5,360) Tax benefit related to assets acquired ..... in affiliations ......................... -- -- 188 -- -- 188 --------- --------- --------- --------- --------- --------- Balances, March 31, 2000 ................... 10,821 11 25,604 (6,432) (176) 19,007 Issuance of common stock ................... 998 1 307 -- -- 308 Shares repurchased ......................... (97) -- (102) -- (950) (1,052) Net loss ................................... -- -- -- (24,917) -- (24,917) --------- --------- --------- --------- --------- --------- Balances, March 31, 2001 ................... 11,722 12 25,809 (31,349) (1,126) (6,654) Issuance of common stock ................... 3,559 3 3,219 -- -- 3,222 Issuance of warrants ....................... -- -- 44 -- -- 44 Issuance of warrants in connection with convertible redeemable subordinated notes ....................... -- -- 1,132 -- -- 1,132 Beneficial conversation feature associated with convertible redeemable subordinated notes ............ -- -- 1,132 -- -- 1,132 Shares repurchased ......................... -- -- -- -- (15) (15) Net income ................................. -- -- -- 5,805 -- 5,805 --------- --------- --------- --------- --------- --------- Balances, March 31, 2002 ................... 15,281 $ 15 $ 31,336 $ (25,544) $ (1,141) $ 4,666 ========= ========= ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS 22 EDT LEARNING, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FOR THE YEAR FOR THE YEAR FOR THE YEAR ENDED ENDED ENDED MARCH 31, MARCH 31, MARCH 31, 2002 2001 2000 -------- -------- -------- Cash flows from operating activities Net income (loss) .............................................. $ 5,805 $(24,917) $ (5,360) Adjustment to net income (loss) Provision for (recovery of) bad debts ....................... (603) 1,705 4,505 Impairment of assets ........................................ -- 23,000 -- Depreciation and amortization ............................... 2,089 2,368 2,504 Stock options and warrant expense ........................... 44 -- 54 Extraordinary gain on debt forgiveness ...................... (4,265) (70) (350) Gain on practice terminations ............................... (1,295) -- -- Deferred income taxes ....................................... -- -- 2,161 Changes in operating assets and liabilities Accounts receivable ....................................... (1,275) 110 (2,383) Prepaid expenses and other current assets ................. 222 111 (168) Other assets .............................................. (88) 75 -- Accounts payable and accrued liabilities .................. (576) (925) (1,591) Deferred revenue .......................................... (2,229) (85) -- -------- -------- -------- Net cash provided by (used in) operating activities ..... (2,171) 1,372 (628) -------- -------- -------- Cash flows from investing activities Proceeds from practice terminations ......................... 2,900 -- -- Repayment of notes receivable ............................... 743 533 116 Capital expenditures ........................................ (40) (138) (347) Acquisitions, net of cash acquired .......................... (118) -- (472) Issuance of notes receivable ................................ -- (24) (279) -------- -------- -------- Net cash provided by (used in) investing activities ....... 3,485 371 (982) -------- -------- -------- Cash flows from financing activities Proceeds from issuance of subordinated notes and warrants ... 5,775 -- -- Proceeds from line of credit ................................ -- -- 2,100 Repayment of long-term debt ................................. (5,415) (941) (806) Repayment of capital lease liabilities ...................... (395) (304) (178) Financing costs incurred .................................... (832) -- -- -------- -------- -------- Net cash provided by (used in) financing activities ......... (867) (1,245) 1,116 -------- -------- -------- Net change in cash and cash equivalents ................... 447 498 (494) Cash and cash equivalents, beginning of period ................. 1,051 553 1,047 -------- -------- -------- Cash and cash equivalents, end of period ....................... $ 1,498 $ 1,051 $ 553 ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS 23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION AND NATURE OF OPERATIONS Headquartered in Phoenix, Arizona, EDT Learning, Inc., ("the Company") is a leading provider of custom, comprehensive e-Learning business solutions for corporate clients seeking to train non-technical users (individuals with less computer experience). The Company supports organizations requiring internal training, product demonstration and customer education programs with the goal of mapping e-Learning solutions to business results. The Company began in March of 1998 as a dental practice management company under the name Pentegra Dental Group, Inc. Its formation included the simultaneous rollup of dental practices and an initial public offering raising $25 million in initial capital. The Company's initial goals were to provide training and practice enhancement services to its affiliated dental practices spread over 31 states. The Company subsequently shifted its focus away from the dental practice management industry and toward the e-learning sector in the summer of 2001 and changed its name to EDT Learning, Inc. 2. BASIS OF PRESENTATION The accompanying financial statements have been prepared on a basis which assume that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company changed its business model from a dental practice management company to an e-Learning company in the first quarter of fiscal 2001. The Company is currently implementing its e-Learning strategy, has a limited operating history with regard to its e-Learning business and is continuing the development and enhancement of its e-Learning product and service offerings and related revenue streams. The Company acquired two e-Learning entities during 2002 and one e-Learning company subsequent to year end and is currently integrating the operations of these entities. The Company reported a working capital deficit and negative cash flow from operations for fiscal year 2002. Also, the Company's management service agreements with the affiliated dental practices begin to expire on April 1, 2003 and will continue to expire through December 31, 2003, which will reduce revenues and cash flow from this source and accordingly could negatively affect the Company's liquidity and operating results. These items discussed above and the limited operating history as an e Learning company raise substantial doubt about the Company's ability to continue as a going concern. Management's plan with regard to these matters include continued development, marketing and licensing of its e-Learning products and services through both internal growth and acquisition. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient revenues from its products and services to provide adequate cash flows to sustain operations. The consolidated financial statements do not include any adjustments related to the recoverability of assets and classification of liabilities that might result from the outcome of this uncertainty. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements of the Company include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent asset and liabilities. The more significant areas requiring use of estimates relate to revenue recognition, bad debts, intangible assets, income taxes and contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumption or conditions. 24 SEGMENT INFORMATION The Company operates in two industry segments. The Company serves the learning industry with a combination of customizable products and services. The Company also serves the dental industry through its remaining service agreements with Affiliated Practices. The Company presents its financial statements to reflect how the "key operating decision maker" views the business and has made the appropriate enterprise wide disclosures in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." REVENUE RECOGNITION The Company recognizes revenue and profit as work progresses on learning contracts using the percentage-of-completion method, which relies on estimates of total expected contract revenue and costs. The Company follows this method since reasonably dependable estimates of the costs applicable to various stages of a contract can be made. Recognized revenues and profit are subject to revisions as the contract progresses to completion. Revisions in profit estimates are charged to income in the period in which the facts that give rise to the revision become known. Customers sometimes request modifications to projects in progress which may result in significant revisions to cost estimates and profit recognition, and the Company may not be successful in negotiating additional payments related to the changes in scope of requested services. Provisions for any estimated losses on uncompleted contracts are made in the period in which such losses become evident. There were no such losses at March 31, 2002. Under the terms of the original services agreement with an Affiliated Practice, the Company served as the exclusive manager and administrator of all non-dental services relating to the operation of an Affiliated Practice. The obligations of the Company included assuming responsibility for the operating expenses incurred in connection with managing the dental centers. These expenses included salaries, wages and related costs of non-dental personnel, dental supplies and laboratory fees, rental and lease expenses, promotion and marketing costs, management information systems and other operating expenses incurred at the Affiliated Practices. In addition, the Company incurred general and administrative expenses related to the financial and administrative management of dental operations, insurance, training and development and other typical corporate expenditures. As compensation for its services under the original services agreement and subject to applicable law, the Company was paid a management fee comprised of two components: (1) the costs incurred by it on behalf of the Affiliated Practice, and (2) a management fee either fixed in amount, an amount usually approximating 35% of the Affiliated Practice's operating profit, before dentist compensation or 15% of the Affiliated Practice's collected gross revenue ("service fee"). Therefore, net dental revenues represented amounts earned by the Company under the terms of its service agreements with the Affiliated Practices, which generally equated to the sum of the service fees and the operating expenses that the Affiliated Practices paid to the Company under the service agreements. The Company has embarked upon a new strategy focusing on eCommerce and e-Learning. Prior to the transition, the Company processed all payments to vendors and employed the team members of Affiliated Practices. The modified management services agreements caused the team members to cease working as employees for the Company and they became employees of the individual Affiliated Practices. In addition, processing of payments to practice vendors is being performed at the practice level, by practice employees. The Company is no longer being reimbursed for expenses paid on the practices' behalf. As a result, the components of net revenues have changed with the new management services agreements resulting in a reduction in reported service agreement revenues and related dental operating expenses. CASH AND CASH EQUIVALENTS The Company considers all highly liquid debt investments with original maturities of three months or less at the date of acquisition to be cash equivalents. The Company maintains cash balances at various financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. The Company's accounts at these institutions may, at times, exceed the federally insured limits. 25 PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is provided using the straight-line method over the estimated useful lives of the various classes of depreciable assets, ranging from three to seven years. Maintenance and repairs are charged to expense whereas renewals and major replacements are capitalized. Gains and losses from dispositions are included in operations. INTANGIBLE ASSETS The Company's acquisitions involve the purchase of tangible and intangible assets and the assumption of certain liabilities of the acquired companies. As part of the purchase allocation for acquired dental practices, the Company allocated the purchase price to the tangible assets acquired and liabilities assumed, based on estimated fair market values. In connection with each acquisition, the Company entered into a long-term management services agreement with each affiliated dental practice, which cannot be terminated individually by either party without cause. The cost of the management services agreement was originally being amortized on a straight-line basis over the lessor of its term or 25 years. The management services agreements were modified during fiscal 2001 and are now being amortized over the remaining term of the modified Service Agreements (not more than five years and generally through 2003). The Company has made acquisitions of companies having operations or technology in areas within its strategic focus and has recorded goodwill and other intangible assets associated with the acquisitions. Future adverse changes in market conditions or poor operating results of the underlying acquired operations could result in losses or an inability to recover the carrying value of the goodwill and other intangible assets thereby possibly requiring an impairment charge in the future. As of March 31, 2002, no such impairment has been identified by the Company. Debt issuance costs are amortized using the effective interest rate method. At March 31, 2002 and 2001, debt issuance costs, net of accumulated amortization were $883 and $83, respectively. LONG-LIVED ASSETS The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is considered impaired when anticipated undiscounted cash flows expected to result from the use of the asset and its eventual disposition are less than its carrying amount. The Company believes that no material impairment exists at March 31, 2002. CONCENTRATION OF CREDIT RISK Accounts receivable and notes receivables from Affiliated Practices represent services rendered by the Company for e-learning customers and the Affiliated Practices. The Company does not perform periodic credit reports or receive collateral related to the receivables. The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its practices and customers to make required payments. If the financial condition of the Company's practices and customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. As of March 31, 2002 and 2001, the Company had an allowance for doubtful accounts of $1.8 million and $3.2 million respectively, for its accounts receivable and notes receivables from Affiliated Practices. In the years ended March 31, 2002 and 2001, the Company recorded charges of $560,000 and $1.7 million respectively, to bad debt expense resulting from its inability to collect receivables from Affiliated Practices after exhausting various payment plans with the Affiliated Practices and settlement of litigation with certain practices. Although management believes the remaining receivables are collectable at March 31, 2002, it is reasonably possible that what the Company will collect may materially differ. During the year ended March 31, 2002, the Company recovered $1.2 million of accounts and notes receivables that had been previously charged to bad debt expense. During the years ended March 31, 2002 and 2001, the Company converted $204,000 and $1.9 million in receivables from Affiliated Practices into interest bearing note receivables. 26 INCOME TAXES The Company utilizes the liability method of accounting for income taxes. Under this method, deferred taxes are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted marginal tax rates currently in effect when the differences reverse. The Company has recorded a full valuation allowance to reduce the carrying value of its net deferred tax assets because it has concluded that it is not likely it will be recognized due to the lack of operating history and implementation of its learning business plan and the modification of its management service agreements. The Company has considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event the Company was to determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax asset would increase income in the period such a determination was made. STOCK-BASED COMPENSATION The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation," for disclosure purposes. Under SFAS No. 123, the Company measures compensation expense for its stock-based employee compensation plan using the intrinsic value method prescribed in Accounting Principles Board ("APB") no. 25, "Accounting for Stock Issued to Employees" and its related interpretations. The Company provides disclosure of the effect on net income or loss as if the fair value based method prescribed in SFAS No. 123 has been applied in measuring compensation expense. EARNINGS PER SHARE Earnings per share are computed based upon the weighted average number of shares of Common Stock and Common Stock equivalents outstanding during each period. Outstanding options and warrants to purchase 1,945,602, 2,533,516 and 2,012,670 shares of Common Stock at exercise prices above the market value of Common Stock were excluded from the calculation of earnings per share for the years ended March 31, 2002, 2001 and 2000, respectively, because their effect would have been antidilutive. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts of cash and cash equivalents, accounts receivables and accounts payable approximate fair values due to the short-term maturities of these instruments. The carrying amounts of the Company's long-term borrowings and notes receivables from Affiliated Practices as of March 31, 2002 and 2001, approximate their fair value based on the Company's current incremental borrowing rates for similar type of borrowing arrangements. RECENT ACCOUNTING PROUNCEMENTS In June 2001, the Financial Accounting Standard Board issued SFAS 142, "Goodwill and Other Intangible Assets" which established standards for reporting acquired goodwill and other intangible assets. This statement accounts for goodwill based on the reporting units of the combined entity into which an acquired entity is integrated. In accordance with the statement, goodwill and indefinite life intangible assets will not be amortized but will be tested for impairment at least annually at the reporting unit level and the amortization period of intangible assets with finite lives will not be limited to forty years. The provisions of this statement are required to be applied starting with fiscal years beginning after December 15, 2001 with early application permitted for entities with fiscal years beginning after March 15, 2001. The statement is also effective for business combinations subsequent to June 30, 2001, whether or not the statement has been adopted in full. The Company has $7.6 million of goodwill included in its balance sheet at March 31, 2002. Of this balance, $7.3 million relates to acquisitions closed subsequent to June 30, 2001, and is not being amortized. Goodwill amortization for the year ended March 31, 2002 was $91,000 before the provisions of SFAS 142 were applied. Implementation of SFAS 142 by the Company would result in elimination of amortization of goodwill from acquisition under the purchase method of accounting. The statement does not result in the elimination of amortization of the Company's service agreements because under the scope of the statement only goodwill resulting from acquisitions under the purchase method of accounting, and not other identifiable intangible assets, is subject to being no longer amortized. 27 SFAS 142 requires that goodwill be tested annually for impairment using a two-step process. The first step is to identify a potential impairment and, in transition, this stop must be measured as of the beginning of the fiscal year. However, a company has six months from the date of adoption to complete the first step. The Company expects to complete that first step of the goodwill impairment test during the first quarter of fiscal 2003. The second step of the goodwill impairment test measures the amount of the impairment loss (measured as of the beginning of the year of adoption), if any, and must be completed by the end of the Company's fiscal year. Intangible assets deemed to have an indefinite life will be tested for impairment using a one-step process, which compares the fair value to the carrying amount of the asset as of the beginning of the fiscal year and pursuant to the requirements of SFAS 142 will be completed during the first quarter of fiscal 2003. Any impairment loss resulting from the transitional impairment test will be reflected as the cumulative effect of a change in accounting principle in the first quarter of fiscal 2003. The Company has not yet determined what effect these impairment tests will have on the Company's earnings and financial position. In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations" which addresses financial accounting and reporting for obligations associates with the retirement of tangible long-lived assets and the associates asset retirement costs. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The adoption of SFAS 143 is not expected to have a material impact on the financial position and results of operations of the Company. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which establishes one accounting model to be used for long-lived assets to be disposed of by sale and broadens the presentation of discontinued operations to include more disposal transactions. SFAS No. 144 supercedes SFAS 121, "Accounting for the Impairment of Long-Lived Assets to Be Disposed Of" and the accounting and reporting provisions of APB Opinion No. 30. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company does not anticipate any financial statement impact with the adoption of this statement. In April 2002, the Financial Accounting Standards Board issued SFAS No. 145, "Recession of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections". SFAS No. 145 includes among other things, the rescission of SFAS No. 4, which required that gains and losses from early extinguishments of debt be classified as an extraordinary item, net of related income tax effects. Under the new guidance of SFAS No. 145, losses from early extinguishments of debt will be classified as extraordinary items when the losses are considered unusual in nature and infrequent in occurrence. SFAS No. 145 will be effective for the Company on April 1, 2004. RECLASSIFICATIONS Certain prior year balances in the consolidated financial statements have been reclassified to conform with the fiscal 2002 presentation. 4. SEGMENT INFORMATION During the year ended March 31, 2002, the Company had two reportable segments, learning and dental practice management. The learning segment included revenues and operating expenses related to the development and sale of the Company's learning products. The dental practice segment included revenues from service contracts, operating expenses related to the delivery of the dental services and other non-operating expenses. There are no intersegment revenues. The Company does not review assets by operating segment. 28
YEARS ENDED MARCH 31, --------------------------------------- 2002 2001 2000 -------- -------- -------- Revenues Learning ................................ $ 2,682 $ -- $ -- Dental practice management .............. 6,582 8,320 10,602 -------- -------- -------- Total revenues ...................... 9,264 8,320 10,602 -------- -------- -------- Operating expenses Learning ................................ 3,446 -- -- Dental practice management .............. 4,781 32,708(1) 13,090 -------- -------- -------- Total operating expenses ............ 8,227 32,708 13,090 -------- -------- -------- Earnings (loss) from operations Learning ................................ (764) -- -- Dental practice management .............. 1,801 (24,388) (2,488) -------- -------- -------- Total earnings (loss) from operations $ 1,037 $(24,388) $ (2,488) -------- -------- --------
(1) Includes the $23 million intangible asset impairment charge upon termination and restructuring of certain service agreements. 5. NOTES RECEIVABLE FROM AFFILIATED PRACTICES Notes receivable consisted of the following: MARCH 31, -------------------- 2002 2001 ------- ------- (IN THOUSANDS) Notes receivable ........................... $ 2,121 $ 3,409 Less: allowance for doubtful accounts ...... (1,092) (2,089) ------- ------- 1,029 1,320 Notes receivable, current .................. 536 261 ------- ------- $ 493 $ 1,059 ======= ======= Notes receivables are with Affiliated Practices and are uncollateralized, ranging in length from one to nine years. The notes bear interest at March 31, 2002 at fixed rates ranging from 6% to 10% with interest and principal payments due monthly. The collection schedule of notes receivable for each of the next five years subsequent to March 31, 2002 were as follows (in thousands): 2003 ........................................................ $ 938 2004 ........................................................ 539 2005 ........................................................ 197 2006 ........................................................ 186 2007 ........................................................ 108 Thereafter .................................................. 153 ------ $2,121 ====== 29 6. PROPERTY AND EQUIPMENT Property and equipment consisted of the following: MARCH 31, ------------------- 2002 2001 ------ ------ (IN THOUSANDS) Furniture & fixtures ....................... $1,029 $1,447 Equipment .................................. 1,612 2,454 Computer equipment ......................... 1,604 1,704 Leasehold improvements ..................... 106 185 ------ ------ Total property and equipment ............ 4,351 5,790 Less: accumulated depreciation ............. 2,214 2,511 ------ ------ Property and equipment, net ............. $2,137 $3,279 ====== ====== Depreciation expense for the years ended March 31, 2002, 2001 and 2000 was $869,000, $1.1 million and $1.3 million, respectively. 7. INTANGIBLE ASSETS Intangible assets consisted of the following: MARCH 31, --------------------- 2002 2001 ------- ------- (IN THOUSANDS) Goodwill ................................. $ 7,608 $ -- Management services agreements ........... 3,002 5,528 Deferred financing costs ................. 994 163 Other .................................... 108 123 ------- ------- 11,712 5,814 Less: accumulated amortization ........... 2,249 2,707 ------- ------- Intangible assets, net ................... $ 9,463 $ 3,107 ======= ======= Amortization expense for the years ended March 31, 2002, 2001 and 2000 was $1.2 million, $1.3 million and $1.2 million, respectively. As discussed in Note 1, the Company modified the terms of its existing Management Services Agreements. The Company recognized an impairment charge of $23 million in fiscal 2001 related to the modifications. 8. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following: MARCH 31, --------------- 2002 2001 ------ ------ (IN THOUSANDS) Accounts payable trade ............................. $ 970 $ 508 Amount payable to former Chief Dental Officer ...... 40 248 Accrued state sales tax ............................ 384 -- Accrued interest ................................... 121 344 Other .............................................. 688 107 ------ ------ Total accounts payable and accrued liabilities .. $2,203 $1,207 ====== ====== 9. TERMINATION OF SERVICE AGREEMENTS WITH AFFILIATED PRACTICES During the year ended March 31, 2002, the Company received $2.9 million in cash from terminating the service agreements with Affiliated Practices and recognized gains of $1.3 million from such terminations. These gains were recorded as other income in the accompanying consolidated statement of operations for the year ended March 31, 2002. 30 10. EXTRAORDINARY ITEM In March 2002, the Company retired its outstanding line of credit of $8.6 million for $4.4 million resulting in a $4.2 million gain (See Note 12). In December 2001, a former member of the Board of Directors forgave $101,000 previously due from the Company (See Note 17). In January 2001, former Liberty Dental Alliance, Inc. stockholders forgave $70,000 previously due from the Liberty Merger Agreement. In December 1999, a former member of the Board of Directors forgave $350,000 previously due from the Company (See Note 17). 11. BUSINESS COMBINATIONS LEARNING-EDGE, INC. On October 1, 2001, the Company acquired all of the outstanding capital stock of Learning-Edge, Inc.; an Arizona based private e-learning company. The Company issued 1,950,000 common shares and $1.1 million of debt under the terms of the acquisition agreement. The debt bears interest at rates ranging from 7.5% to 9.0% and is due in two equal installments on October 1, 2003 and on October 1, 2004, respectively. If the Company raises additional capital in excess of $3 million, the payment schedule accelerates (See Note 12). The Company also assumed approximately $2.9 million of Learning-Edge debt as part of this acquisition. The operating results of Learning-Edge are included with the Company's as of October 1, 2001. The purchase price has been calculated as follows: (IN THOUSANDS) Issuance of EDT Learning common stock valued at $0.51 per share .............................................. $ 995 Issuance of EDT Learning debt ............................. 1,102 Acquisition costs ......................................... 200 ------ Net purchase price, including acquisition costs ........ $2,297 Assumed liabilities ....................................... 2,946 ------ Total purchase price ................................... $5,243 ====== The total purchase price has been allocated to assets acquired and liabilities assumed based upon their estimated fair values in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations". The excess purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed has been assigned to goodwill. Upon completion of an assessment of Learning-Edge's operations, no separately identifiable intangible assets were found to exist. The purchase price has been allocated as follows: PURCHASE PRICE ALLOCATION --------------- (IN THOUSANDS) Current assets ........................................... $ 826 Property and equipment ................................... 274 Other long-term assets, including goodwill of $4,133 ..... 4,143 Current liabilities ...................................... (2,867) Long-term obligations, excluding current maturities ...... (1,381) Common stock, net of treasury shares ..................... (2) Capital in excess of par value ........................... (993) ------- $ -- ======= 31 The following unaudited pro forma summary of financial information presents the Company's combined results of operations as if the acquisition of Learning-Edge had occurred at the beginning of the periods presented, after including the impact of certain adjustments including: (i) the application of a normal profit margin to contract in process at the date of acquisition and (ii) decrease in depreciation of property and equipment. UNAUDITED YEAR ENDED MARCH 31, ----------------------- 2002 2001 ----------- ---------- PROFORMA PROFORMA (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues ..................................... $ 9,794 $ 9,485 Loss from operations ......................... (169) (25,351) Net income (loss) before extraordinary items . 280 (25,964) Net income (loss) ............................ 4,545 (25,894) Earnings (loss) per common share Basic .................................... $ 0.35 $ (2.08) Diluted .................................. $ 0.34 $ (2.08) Weighted average shares outstanding: Basic .................................... 12,905 12,446 Diluted .................................. 13,441 12,446 The pro forma financial information presented does not purport to indicate what the combined results of operations would have been had the merger occurred at the beginning of the periods presented or the results of operations that may be obtained in the future. THOUGHTWARE TECHNOLOGIES, INC. On January 15, 2002, the Company acquired all of the outstanding capital stock of ThoughtWare Technologies, Inc.; a Tennessee based private company. The Company issued 1,550,000 common shares under the terms of the acquisition agreement. The Company also assumed approximately $1.5 million of ThoughtWare debt as part of this acquisition. The operating results of ThoughtWare are included with the Company's as of January 1, 2002. The purchase price has been calculated as follows: (IN THOUSANDS) Issuance of EDT Learning common stock valued at $1.39 per share .............................................. $2,155 Acquisition costs ......................................... 200 ------ Net purchase price, including acquisition costs ........ $2,355 Assumed liabilities ....................................... 1,464 ------ Total purchase price ................................... $3,819 ====== The total purchase price has been allocated to assets acquired and liabilities assumed based upon their estimated fair values in accordance with SFAS No. 141. The excess purchase price over the estimated fair value of the tangible assets acquired and liabilities assumed has been assigned to goodwill. Upon completion of an assessment of ThoughtWare's operations, no separately identifiable intangible assets were found to exist. 32 The purchase price has been allocated as follows: PURCHASE PRICE ALLOCATION --------------- (IN THOUSANDS) Current assets .......................................... $ 448 Property and equipment .................................. 163 Goodwill ................................................ 3,208 Current liabilities ..................................... (1,543) Long-term obligations, excluding current maturities ..... (121) Common stock, net of treasury shares .................... (2) Capital in excess of par value .......................... (2,153) ------- $ -- ======= The following unaudited pro forma summary of financial information presents the Company's combined results of operations as if the acquisition of ThoughtWare and Learning-Edge had occurred at the beginning of the periods presented, after including the impact of certain adjustments including: (i) the application of a normal profit margin to contract in process at the date of acquisition and (ii) decrease in depreciation of property and equipment. UNAUDITED YEAR ENDED MARCH 31, ------------------------- 2002 2001 ----------- --------- PROFORMA PROFORMA (IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues ................................. $ 11,287 $ 12,061 Loss from operations ..................... (5,447) (28,747) Net loss before extraordinary items ...... (5,026) (29,179) Net loss ................................. (761) (29,109) Loss per common share Basic ................................ $ (0.05) $ (2.08) Diluted .............................. $ (0.05) $ (2.08) Weighted average shares outstanding: Basic ................................ 14,068 13,996 Diluted .............................. 14,068 13,996 The pro forma financial information presented does not purport to indicate what the combined results of operations would have been had the mergers occurred at the beginning of the periods presented or the results of operations that may be obtained in the future. 33 12. LONG-TERM DEBT Long-term debt consisted of the following:
MARCH 31, ------------------- 2002 2001 ------- ------- (IN THOUSANDS) Convertible redeemable subordinated notes, net of $1,132 unamortized discount and beneficial conversion feature of $1,132 ............................................ $ 3,511 $ -- Credit facility ........................................ -- 9,302 Convertible subordinated notes, Series A ............... 1,156 1,812 Subordinated promissory notes .......................... 1,047 -- Shareholders' notes payable ............................ 398 442 Notes payable .......................................... 592 376 ------- ------- 6,704 11,932 Less: Current portion of long-term debt ............... 1,337 471 ------- ------- Long-term debt ......................................... $ 5,367 $11,461 ======= =======
In March 2002, the Company completed a Private Placement Offering ("the Offering") raising capital of $5,775,000. Under the terms of the Offering, the Company issued convertible redeemable subordinated notes ("the notes") and warrants to purchase 5,775,000 shares of the Company's common stock. The notes bear interest at 12% per annum and require quarterly interest payments with the principle due at maturity on March 29, 2012. The note holders may convert the notes into shares of the Company's common stock at a price equal to $1.00 per share. The Company may force redemption of the notes into shares of the Company's common stock at the conversion price, if at any time the closing price of the Company's common stock equals or exceeds $3.00 per share for twenty consecutive trading days. The notes are subordinated to any present or future senior indebtedness, with no waiver required. The exercise price for the warrants is $3.00 per share. The Company may force redemption of the warrants into shares of the Company's common stock at the exercise price, if at any time the closing price of the Company's common stock equals or exceeds $5.50 per share for twenty consecutive trading days. The warrants expire on March 29, 2005. The fair value of the warrants was estimated using a Black-Scholes pricing model with the following assumptions: contractual and expected life of 3 years, volatility of 75%, dividend yield of 0%, and a risk-free rate of 3.87%. The fair value was then used to calculate a discount of $1,132,000 in accordance with APB 14, "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants", which will be amortized to interest expense over the next three years. As the carrying value of the notes is less than the conversion value, a beneficial conversion feature of $1,132,000 was calculated and recorded as an additional discount to the notes and will amortized to interest expense over the term of the notes. Upon conversion, any remaining discount associated with the beneficial conversion feature will be expensed in full at the time of conversion. The proceeds from the Offering were used to retire the Bank One credit facility and to provide working capital for the Company. The Company paid $4.4 million to Bank One to retire the $8.6 million credit facility resulting in a $4.2 million extraordinary gain. The credit facility was collateralized by liens on certain of the Company's assets, including its rights under the management services agreements, accounts receivable and notes receivable. The liens were released in connection with the retirement of the facility. In October 2001, the Company issued $1.1 million of subordinated promissory notes to the shareholders of Learning-Edge, Inc. under the terms of the acquisition agreement (the "Learning-Edge Notes"). During fiscal 2002, $55,000 of these notes were returned by the holders to offset amounts owed to the Company. The Learning-Edge Notes bear interest rates ranging from at 7.5% to 9.0% and are due in two equal installments on October 1, 2003 and on October 1, 2004, respectively. If the Company raises additional capital equal to or in excess of $3 million, the payment schedule accelerates as follows: 34 CAPITAL PRINCIPAL TO RAISED BE REPAID ------ --------- $3.0 million 25% $3.0 to $3.5 million 40% $3.5 million to $4.0 million 55% $4.0 to $4.5 million 70% $4.5 million to $5.0 million 85% Greater than $5.0 million 100% The holders of the Learning-Edge Notes waived the accelerated payment schedule in relation to the Offering. The Convertible Subordinated Notes Series A Securities (Series A Securities) were issued in connection with the acquisition of certain Affiliated Practices. The Series A Securities bear interest at 6% and can be converted to Common Stock of the Company at conversion prices ranging from $6.75 to $7.00 per share. The conversion period began on November 1, 1999 and ends on November 1, 2003. The principal amount of the Series A Securities, if not converted, is payable one-half on November 1, 2002 and one-half on November 1, 2003. During fiscal 2002, $656,000 of previously issued Series A Securities respectively, were returned by the holders to offset amounts owed to the Company. During fiscal 2001, $1,734,000 of previously issued Series A Securities and $242,000 of the remaining Series B Securities, respectively, were returned by the holders to offset amounts owed to the Company and prepay future service fees. In connection with the merger with Omega Orthodontics, Inc. in fiscal 2000, the Company assumed certain notes payable to Affiliated Practices. The notes were originally issued in connection with the affiliation agreements at the time the assets of the practices were acquired. At March 31, 2002 and 2001, the remaining principal on these notes was $121,000 and $331,000, respectively. During fiscal 2001, $355,000 of these notes were returned by the holders to offset amounts owed to the Company and prepay future service fees. The notes are due in monthly installments ranging from $1,213 to $4,860 through December 2003, and bear interest at 8.5%. In connection with the IPO; the Company issued $468,000 of notes payable to certain shareholders formerly owning preferred stock. The notes bear 6% interest and are payable on the earlier of March 30, 2003 or the date upon which the Company offers and sells an amount of equity securities equal or greater to the gross proceeds of the IPO. During fiscal 2002 and 2001, $43,750 and $17,500 respectively, of these notes payable were returned by the holders to offset amounts owed to the Company. The Company entered into an agreement with an officer to purchase substantially all the assets and the operations of Pentegra, Ltd. and Napili, International for total consideration of $200,000, consisting of an aggregate of $100,000 in cash and a $100,000 principal amount 9.0% promissory note. During fiscal 2001, the $100,000 promissory note was transferred to deferred revenue for payment of future management service fees. The aggregate maturities of long-term debt excluding capital leases for each of the next five years subsequent to March 31, 2002 were as follows (in thousands): 2003 ...................................................... $1,337 2004 ...................................................... 1,300 2005 ...................................................... 556 2006 ...................................................... -- 2007 ...................................................... -- Thereafter ................................................ 5,775 ------ $8,968 ====== 35 13. CAPITALIZATION PREFERRED STOCK The Company has the authority to issue ten million shares of preferred stock, par value $.001 per share. At March 31, 2002 and 2001, no shares of preferred stock were issued or outstanding. COMMON STOCK As of March 31, 2002, the Company is authorized to issue forty million shares of common stock. The Company has acquired treasury stock from certain Affiliated Practices for the payment of receivables and purchase of property and equipment. In December 2001, the Company, under the initiative of the Compensation Committee with the approval of the Board of Directors, issued its chief executive officer an incentive stock grant under the 1997 Stock Compensation Plan of 450,000 restricted shares of the Company's common stock as a means to retain and incentivize the chief executive officer. The shares 100% vest after 10 years from the date of grant. The shares were valued at $405,000 based on the closing price of the stock on the date of grant. The vesting of the incentive shares accelerates based on the Company's share price as follows:
PERFORMANCE CRITERIA SHARES VESTED --------------------------------------------------------------- ---------------- Share price trades for $4.50 per share for 20 consecutive days 150,000 shares Share price trades for $8.50 share for 20 consecutive days 150,000 shares Share price trades for $12.50 per share for 20 consecutive days 150,000 shares
In connection with the restricted stock grant, the Company loaned the Chief Executive Officer $179,000 to fund the immediate tax consequences of the grant. Although the loan is expected to be repaid at the time the stock grants are exercised, due to the treatment of the restricted stock as a variable grant the Company recognized a $179,000 charge to income at the date of grant. WARRANTS The Company has issued 887,752 warrants to Bank One and the Company's legal counsel to acquire the same number of shares of the Company's common stock exercisable at prices ranging from $0.42 to $1.50 per share. Omega Orthodontics, Inc. had warrants outstanding to purchase 2,430,000 shares of Omega common stock. As a result of the merger with the Company on July 1, 2000, these warrants now constitute warrants to acquire, on the same terms and conditions as were applicable under the original Omega warrants, 865,343 shares of the Company's common stock exercisable at prices ranging from $18.53 to $27.80 per share. 36 14. INCOME TAXES Significant components of the Company's deferred tax assets (liabilities) were as follows (in thousands):
MARCH 31 -------------------- 2002 2001 -------- -------- Deferred tax assets: Reserves for uncollectible accounts ............................. $ 696 $ 1,215 Net operating loss carryforward ................................. 5,623 8,665 Organizational costs ............................................ 100 241 Property and equipment .......................................... -- 56 Other ........................................................... 7 7 -------- -------- Total deferred tax assets ....................................... 6,426 10,184 Deferred tax liabilities: Excess book basis over tax basis of accrued revenues and expenses -- (591) Property and equipment .......................................... (256) -- Management services agreement ................................... (335) -- -------- -------- Total deferred tax liabilities ................................ (591) (591) Net deferred tax asset ............................................. 5,835 9,593 Less valuation allowance ........................................ (5,835) (9,593) -------- -------- Net deferred tax asset .......................................... $ -- $ -- -------- -------- Less current portion .......................................... -- -- -------- -------- Noncurrent assets ............................................... $ -- $ -- ======== ========
Significant components of the provision for income taxes were as follows: YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2002 2001 2000 ------- ------ ------- Current tax expense (benefit): Federal ....................... $ 2,023 $ -- $ (52) State ......................... 384 -- -- ------- ------ ------- Total current ............... 2,407 -- 52 Deferred tax expense (benefit): Federal ....................... (2,023) -- 1,984 State ......................... (384) -- 177 ------- ------ ------- Total deferred .............. (2,407) -- 2,161 ------- ------ ------- Expense (benefit) for income taxes $ -- $ -- $ 2,213 ======= ====== ======= The differences between the statutory federal tax rate and the Company's effective tax rate on continuing operations were as follows (in thousands):
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2002 2001 2000 ------- ------- ------- (IN THOUSANDS) Tax (benefit) at U.S. Statutory rate (34%) ..... $ 1,974 $(8,472) $(1,070) State income taxes (benefit), net of federal tax 254 (1,012) (106) Nondeductible expenses and other ............... 1,530 3,130 150 Change in valuation allowance .................. (3,758) 6,354 3,239 ------- ------- ------- Total tax expense (benefit) ................. $ -- $ -- $ 2,213 ======= ======= =======
At March 31, 2002, the Company had net operating loss carry-forwards available to reduce future taxable income of approximately $14.8 million, which begin to expire in 2018. The Company recorded a valuation allowance for its 37 entire deferred tax asset because it concluded it is not likely it would be able to realize the tax assets due to the lack of operating history of its implementation of the eBusiness plan. In addition, approximately $0.2 million of the valuation allowance will be allocated to shareholder equity when that portion of the deferred tax asset is recognized in the future. The Company also has $4.5 million of available deductions related to the increase in tax basis of the assets acquired in the Affiliations. The tax benefits will be recognized over a period of six to fourteen years. 15. STOCK OPTION PLANS The Company grants stock options under the 1997 Stock Compensation Plan, stock-based incentive compensation (the "Plan"). The Company recognizes stock-based compensation issued to employees at the intrinsic value between the exercise price of options granted and the fair value of stock for which the options may be exercised. However, pro forma disclosures as if the Company recognized stock-based compensation at the fair value of the options themselves are presented below. Under the Plan, the Company is authorized to issue 3,500,000 shares of Common Stock pursuant to "Awards" granted to officers and key employees in the form of stock options. There were 1,722,938 and 1,643,173 options granted under the Plan, at March 31, 2002 and 2001, respectively. The Compensation Committee administers the Plan. These stock options have contractual terms of 10 years and have an exercise price no less than the fair market value of the stock at grant date. The options vest at varying rates over a one to five year period. Following is a summary of the status of the Company's stock options as of March 31, 2002 and for the three years then ended: NUMBER OF WEIGHTED SHARES OF AVERAGE UNDERLYING EXERCISE OPTIONS PRICES ------- ------ Outstanding at April 1, 1999 ................. 596,666 $6.40 Exercisable at April 1, 1999 ................. 136,333 6.69 Granted ...................................... 608,994 3.17 Exercised .................................... -- -- Forfeited .................................... (58,333) 7.06 Expired ...................................... -- -- Outstanding at March 31, 2000 ................ 1,147,327 4.74 Exercisable at March 31, 2000 ................ 267,263 6.41 Granted ...................................... 804,901 0.68 Exercised .................................... -- Forfeited .................................... (309,055) 5.76 Expired ...................................... -- Outstanding at March 31, 2001 ................ 1,643,173 2.50 Exercisable at March 31, 2001 ................ 488,749 4.08 Granted ...................................... 515,765 0.65 Exercised .................................... (6,250) 0.50 Forfeited .................................... (429,750) 2.68 Expired ...................................... -- Outstanding at March 31, 2002 ................ 1,722,938 1.90 Exercisable at March 31, 2002 ................ 766,010 Weighted average fair value of options granted during the period: Fiscal 2000 ............................... $1.00 Fiscal 2001 ............................... $0.26 Fiscal 2002 ............................... $0.44 The fair value of each stock option granted by the Company is estimated on the date of grant using the Black-Scholes option pricing model for the three years ended March 31, 2002 with the following weighted-average assumptions: 38 dividend yield of 0% for each year; expected volatility of 67% for the year ended March 31, 2000, 65% for the year ended March 31, 2000 and 75% for the year ended March 31, 2002, risk-free interest rates are 6.2% for the year ended March 31, 2000, 4.93%-6.29% for the year ended March 31, 2001 and 3.87% for the year ended March 31, 2002, the expected average lives of the options range from six to ten years. The following table summarizes information about stock options outstanding at March 31, 2002:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ---------------------- WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE AVERAGE NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE SHARES PRICE LIFE (YEARS) SHARES PRICE -------- ----- ----------------------- --------- ------ (SHARE DATA IN THOUSANDS) $0.01-$0.99 887,076 $0.51 8.58 280,945 $0.51 $1.00-$1.99 184,125 $1.40 8.64 88,563 $1.67 $2.00-$2.99 430,000 $2.22 7.28 244,000 $2.31 $3.00-$8.50 221,737 $7.31 6.10 152,503 $7.55 --------- ------- 1,722,938 766,011 ========= =======
Had the compensation cost for the company's stock based compensation plans been determined using the fair value rather than the intrinsic value of the options, the Company's net income (loss) and diluted net income (loss) per share for 2002, 2001 and 2000 would have been approximately $5.8 million or $0.46, $(24.9) million or $(2.37) and $(5.4) million or $(0.52), respectively. 16. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases a portion of its property and equipment under the terms of capital and operating leases. The capital leases bear interest at varying rates ranging from 8.9% to 12.6% and require monthly payments. Assets recorded under capital leases, at March 31, 2002, consisted of the following (in thousands): Cost ................................................ $1,492 Less accumulated amortization ....................... 590 ------ Total ............................................... $ 902 ====== Future minimum lease payments under capital leases and noncancelable operating leases with initial or remaining terms of one or more years consisted of the following at March 31, 2002 (in thousands): CAPITAL OPERATING ------- --------- 2003 ........................................... $ 530 $ 583 2004 ........................................... 435 562 2005 ........................................... 145 525 2006 ........................................... 17 499 2007 ........................................... -- 390 Thereafter ..................................... -- 284 ------ ------ Total minimum obligations ...................... $1,127 $2,843 ====== Less amount representing interest ........... 161 ------ Present value of minimum obligations ........... 966 Less current portion ........................ 430 ------ Long-term obligation at March 31, 2002 ......... $ 536 ====== 39 The Company incurred rent expense of $335,000, $253,000 and $264,000 in fiscal 2002, 2001 and 2000, respectively. LITIGATION The Company has pending lawsuits against eight Affiliated Practices for defaulting in the payment of the required Service Fees. In each of those cases, the Company is seeking damages equal to past due and remaining service fees, consequential damages equal to the value of the intangible practice asset and attorney's fees. Three Affiliated Practices have in response filed a counter-claim alleging breach of contract, misrepresentation and securities violations. The Company believes that those counter-claims are without merit and that the Company will prevail both in the recovery of damages from the Affiliated Practices as well as a defense to the alleged counter-claims. 17. RELATED PARTY TRANSACTIONS In December 2001, the Company, under the initiative of the Compensation Committee with the approval of the Board of Directors, issued its chief executive officer an incentive stock grant under the 1997 Stock Compensation Plan of 450,000 restricted shares of the Company's common stock as a means to retain and incentivize the chief executive officer. The shares 100% vest after 10 years from the date of grant. The shares were valued at $405,000 based on the closing price of the stock on the date of grant. The vesting of the incentive shares accelerates based on the Company's share price as follows:
PERFORMANCE CRITERIA SHARES VESTED --------------------------------------------------------------- ------------- Share price trades for $4.50 per share for 20 consecutive days 150,000 shares Share price trades for $8.50 share for 20 consecutive days 150,000 shares Share price trades for $12.50 per share for 20 consecutive days 150,000 shares
Due to the above features, the Company has treated the restricted stock as a variable grant. For the fiscal year ended March 31,2002, the Company did not record compensation expense associated with the restricted stock due to the uncertainty that the performance criteria will be reached. In connection with the restricted stock grant, the Company loaned the Chief Executive Officer $179,000 to fund the immediate tax consequences of the grant. Although the loan is expected to be repaid at the time the stock grants are exercised, due to the treatment of the restricted stock as a variable grant the Company recognized a $179,000 charge to income at the date of grant. An employment bonus of $1,250,000 to a member of the Board of Directors and Chief Dental Officer of the Company was recorded prior to fiscal 1999. During fiscal 2001, 2000 and 1999, $152,000, $190,000 and $310,000 was paid respectively to this board member. In December 1999, the officer forgave $350,000 due him by the Company. The net extraordinary gain to the Company after a tax effect was $350,000. In December 2001, a settlement agreement was reached regarding the amount to be paid under the terms of the amended employment agreement. The remaining balance due was $248,000. Under the terms of the settlement, the Company agreed to pay this individual $75,000 and issue 53,571 shares valued at $72,000. The remaining balance of $101,000 was forgiven and has been reflected as extraordinary income. During the year ended March 31, 2001, the Company made a severance payment of $64,000 to the former Chief Financial Officer. During the year ended March 31, 2000, the Company made a severance payment of $30,000 to the former Chief Operating Officer. The Company also agreed to pay the former Chief Operating Officer $72,000 under the terms of the separation. During fiscal 2001, the Company recognized $10,000 of legal expense to a law firm of which a member of the Company's Board of Directors is a partner. At March 31, 2000, the Company had notes and accounts receivable from Affiliated Practices who also served as members of the Board of Directors. At March 31, 2000, the total notes receivable from board members were $361,000 and net of an allowance for doubtful accounts of $136,000. The accounts receivable from board members at March 31, 2000 were approximately $430,000 net of allowance for doubtful accounts of $198,000. 40 18. SUPPLEMENTAL CASH FLOW INFORMATION (in thousands)
YEAR ENDED YEAR ENDED YEAR ENDED MARCH 31, MARCH 31, MARCH 31, 2002 2001 2000 ---- ---- ---- Cash paid during the period for: Interest .................................................. $1,137 $1,088 $1,571 Income taxes .............................................. -- -- -- Supplemental disclosure of non-cash investing and financing activities: Issuance of common stock in connection with acquisitions ............................................. 3,150 308 3,838 Issuance of convertible subordinated notes in connection with acquisitions ........................................ 1,102 -- -- Convertible subordinated notes offset against receivables from Affiliated Practices ................................ 656 808 732 Conversion of receivables from Affiliated Practices to notes receivables .............................................. 204 1,911 971 Capital leases incurred for equipment ...................... 373 22 1,448 Treasury stock acquired for payment of receivable from Affiliated Practices and purchase of property and equipment ................................................ 15 1,052 473 Notes payable offset against future management service fees 122 1,500 --
41 19. QUARTERLY FINANCIAL DATA (UNAUDITED) The following table sets forth summary quarterly results of operations for the Company for the years ended March 31, 2002 and 2001 (in thousands):
FIRST SECOND THIRD FOURTH 2002 QUARTER QUARTER QUARTER QUARTER - ---- ------- ------- ------- ------- Net revenue .................................. $ 1,927 $ 1,836 $ 3,025 $ 2,476 Operating expenses ........................... 1,625 1,273 2,812 2,517 Earnings from operations ..................... 302 563 213 (41) Earnings before income taxes ................. 183 442 537 378 Income taxes ................................. -- -- -- -- Extraordinary items, net ..................... -- -- 101 4,164 Net earnings ................................. $ 183 $ 442 $ 638 $ 4,542 Net earnings per share - basic: (1) Earnings before extraordinary item ........ $ 0.02 $ 0.04 $ 0.04 $ 0.03 Extraordinary item ........................ -- -- 0.01 0.30 Net earnings .............................. $ 0.02 $ 0.04 $ 0.05 $ 0.32 Net earnings per share - diluted: Earnings before extraordinary item ......... $ 0.02 $ 0.04 $ 0.04 $ 0.02 Extraordinary item ......................... -- -- 0.01 0.27 Net earnings ............................... $ 0.02 $ 0.04 $ 0.05 $ 0.30 Weighted average common shares outstanding: Basic ..................................... 10,573 10,542 12,502 14,102 Diluted ................................... 10,573 10,542 13,111 15,375 FIRST SECOND THIRD FOURTH 2001 QUARTER QUARTER QUARTER QUARTER - ---- ------- ------- ------- ------- Net revenue .................................. $ 2,218 $ 2,210 $ 1,966 $ 1,925 Operating expenses ........................... 7,400 21,972 1,479 1,856 Earnings (loss) from operations .............. (5,182) (19,762) 487 69 Earnings (loss) before income taxes .......... (5,508) (19,973) 266 228 Income taxes ................................. -- -- -- -- Extraordinary items, net ..................... -- -- -- 70 Net (loss) earnings .......................... $ (5,508) $(19,973) $ 266 $ 298 Net earnings (loss) per share: (1) Basic and diluted earnings per share Earnings (loss) before extraordinary item $ (0.54) $ (2.00) $ 0.03 $ 0.02 Extraordinary item ...................... -- -- -- 0.01 Net earnings (loss) ...................... $ (0.54) (2.00) $ 0.03 $ 0.03 Weighted average common share outstanding: Basic and diluted ........................ 10,175 9,969 10,463 10,630
- ---------- (1) Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly earnings per share dues not equal the total computed for the year due to stock transactions that occurred. 20. SUBSEQUENT EVENT In June 2002, the Company acquired certain assets of Quisic Corporation, a California based private company. The consideration for the acquisition was approximately $2,300,000 of the Company's common stock. The transaction will be recorded as of June 17, 2002. 42 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item is set forth under the captions "Election of Directors" and "Section 16 Reports" will be set forth in the Company's definitive Proxy Statement (the "2002 Proxy Statement") for its 2002 annual meeting of stockholders, which sections are incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information required by this item will be set forth in the section entitled "Executive Compensation" in the 2002 Proxy Statement, which section is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item will be set forth in the section entitled "Security Ownership of Certain Beneficial Owners and Management" in the 2002 Proxy Statement, which section is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS The information required by this item will be set forth in the section entitled "Certain Transactions" in the 2002 Proxy Statement, which section is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(1) FINANCIAL STATEMENTS Report of Independent Accountants Consolidated Balance Sheets as of March 31, 2002 and 2001. Consolidated Statements of Operations for the Years Ended March 31, 2002, 2001 and 2000. Consolidated Statements of Shareholders' Equity (Deficit) for the Years Ended March 31, 2002, 2001 and 2000. Consolidated Statements of Cash Flows for the Years Ended March 31, 2002, 2001 and 2000. Notes to the Consolidated Financial Statements. (a)(2) FINANCIAL STATEMENT SCHEDULES Report of Independent Accountants The following financial statement schedule is filed as a part of this Report under Schedule II on page 47. Schedule II -- Valuation and Qualifying Accounts for the three fiscal years ended March 31, 2002. All other schedules called for by Form 10-K are omitted because they are inapplicable or the required information is shown in the financial statements, or notes thereto, included herein. 43 (a)(3) EXHIBITS EXHIBIT NUMBER DESCRIPTION OF EXHIBITS ------ ----------------------- 3.1(1) Restated Certificate of Incorporation of Pentegra Dental Group, Inc. 3.2(1) Bylaws of Pentegra Dental Group, Inc. 3.3(7) Restated Certificate of Incorporation of Pentegra Dental Group, Inc. 3.4(7) Amendment of Bylaws of Pentegra Dental Group, Inc. 3.5 Restated Certificate of Incorporation of e-dentist.com, Inc. 4.1(1) Form of certificate evidencing ownership of Common Stock of Pentegra Dental Group, Inc. 4.2(1) Form of Registration Rights Agreement for Owners of Founding Affiliated Practices 4.3(1) Registration Rights Agreement dated September 30, 1997 between Pentegra Dental Group, Inc. and the stockholders named therein 4.4(2) Form of Stockholders' Agreement for Owners of Affiliated Practices 4.5(3) Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust Company of Texas, N.A., as Trustee relating to the Convertible Debt Securities 4.6(7) Form of certificate evidencing ownership of Common Stock of e-dentist.com, Inc. 4.7 Form of Convertible Redeemable Subordinated Note 4.8 Form of Redeemable Warrant +10.1(1) Pentegra Dental Group, Inc. 1997 Stock Compensation Plan +10.2(1) Form of Service Agreement 10.3(4) Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A. and Pentegra Dental Group, Inc. 10.4(5) Modification to Credit Agreement between Pentegra Dental Group, Inc. and Bank One, Texas, N.A. dated September 9, 1998 10.5(5) Agreement and Plan of Merger among Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc., Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated as of November 13, 1998 10.6(2) First Amendment to Credit Agreement by and among Pentegra Dental Group, Inc. and Bank One, Texas, N.A. dated as of February 9, 1999 10.7(2) First Amendment to the Agreement and Plan of Merger by and among Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc., Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated as of January 29, 1999 10.8(6) Third Amendment to Credit Agreement +10.9(7) Employment Agreement dated November 12, 2000 between e-dentist.com and James M. Powers, Jr. +10.10(7) Employment Agreement dated February 15, 2001 between e-dentist.com and Charles Sanders +10.11(7) Employment Agreement dated February 15, 2001 between e-dentist.com and James Dunn, Jr. 10.12(7) Asset Purchase Agreement by and among e-dentist.com, Inc. and Dexpo.com, Inc. 10.13(7) Fourth Amendment of Credit Agreement 12 Ratio of Earnings to Fixed Changes 21.1 Subsidiaries of the Registrant 23.1 Consent of PricewaterhouseCoopers LLP - ---------- (1) Previously filed as an exhibit to EDT Learning's Registration Statement on Form S-1 (No. 333-37633), and incorporated herein by reference. (2) Previously filed as an exhibit to EDT Learning's Registration Statement on Form S-4 (No. 333-78535), and incorporated herein by reference. (3) Previously filed as an exhibit to EDT Learning's Registration Statement on Form S-4 (No. 333-64665), and incorporated herein by reference. (4) Previously filed as an exhibit to EDT Learning's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. (5) Previously filed as an exhibit to EDT Learning's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998. (6) Previously filed as an exhibit to EDT Learning's Annual Report on Form 10-K for the year ended March 31, 2000. 44 (7) Previously filed as an exhibit to EDT Learning's Annual Report on Form 10-K for the year ended March 31, 2001. + Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K. (B) REPORTS ON FORM 8-K. 1) Current Report on Form 8-K dated January 15, 2002 was filed January 30, 2002 (Item 2. Acquisition or Disposition of Assets). 2) Current Report on Form 8-K/A dated January 15, 2002 was filed April 1, 2002 (Item 7. Financial statements and exhibits) which contained the audited financial statements of ThoughtWare Technologies, Inc. for the year ended December 31, 2001 and the unaudited financial statements of ThoughtWare Technologies, Inc. for the year ended December 31, 2000. 3) Current Report on Form 8-K dated July 1, 2002 (Item 2. Acquisition or Disposition of Assets). 45 REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULES To the Board of Directors and Shareholders of EDT Learning, Inc. and Subsidiaries: Our audits of the consolidated financial statements referred to in our report dated July 11, 2002 appearing in the 2002 Annual Report to Shareholders of EDT Learning, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PricewaterhouseCoopers LLP Phoenix, Arizona July 11, 2002 46 EDT LEARNING, INC. VALUATION AND QUALIFYING ACCOUNTS SCHEDULE II
ADDITIONS DEDUCTIONS ---------------------- ------------------------ BALANCE AT THE CHARGED TO CHARGED TO WRITE-OFFS BALANCE AT FISCAL BEGINNING OF BAD DEBT OTHER CHARGED TO END OF YEAR DESCRIPTION PERIOD EXPENSE ACCOUNTS RECOVERIES ALLOWANCE PERIOD ---- ----------- ------ ------- -------- ---------- --------- ------ 2002 Receivables from Affiliated Practices-allowance for doubtful accounts............................. $ 1,147 $ 548 $ -- $ 455 $ 486 $ 754 2001 Receivables from Affiliated Practices-allowance for doubtful accounts.................... $ 3,269 $ 1,172 $ -- $ -- $ 3,294 $ 1,147 2000 Receivables from Affiliated Practices-allowance for doubtful accounts.................... $ 125 $ 3,244 $ -- $ -- $ 100 $ 3,269 2002 Notes receivable-allowance for doubtful accounts.................... $ 2,089 $ 12 $ -- $ 708 $ 301 $ 1,092 2001 Notes receivable-allowance for doubtful accounts.................... $ 1,714 $ 533 $ -- $ -- $ 158 $ 2,089 2000 Notes receivable-allowance for doubtful accounts.................... $ -- $ 1,261 $ 453 $ -- $ -- $ 1,714
47 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned; thereunto duly authorized, in the City of Phoenix, State of Arizona, on July 15, 2002. EDT LEARNING, INC. By: /s/ JAMES M. POWERS, JR. ------------------------------------ James M. Powers, Jr., Chairman of the Board, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed by the following persons on behalf of the Registrant and in the capacities and on the date indicated. NAME CAPACITY DATE - ---- -------- ---- /s/ JAMES M. POWERS, JR. Chairman of the Board, President July 15, 2002 - ----------------------------- and Chief Executive Officer James M. Powers, Jr. (Principal Executive Officer) /s/ JAMES H. COLLINS Director July 15, 2002 - ----------------------------- James H. Collins /s/ DAVID A. LITTLE, D.D.S. Director July 15, 2002 - ----------------------------- David A. Little, D.D.S. /s/ DANIEL T. ROBINSON, JR. Director July 15, 2002 - ----------------------------- Daniel T. Robinson, Jr. /s/ GEORGE M. SIEGEL Director July 15, 2002 - ----------------------------- George M. Siegel /s/ PRESTON A. ZUCKERMAN Director July 15, 2002 - ----------------------------- Preston A. Zuckerman 48 EX-3.5 3 ex3-5.txt RESTATED CERTIFICATE OF INCORPORATION Exhibit 3.5 CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF E-DENTIST.COM, INC. e-dentist.com, Inc. (the "Corporation"), a corporation organized under and by virtue of the General Corporation Law of the State of Delaware (the "DGCL"), hereby adopts this Certificate of Amendment (this "Certificate of Amendment"), which amends its Certificate of Incorporation (the "Certificate of Incorporation"), as described below, and does hereby further certify that: FIRST: The name of the Corporation is e-dentist.com, Inc. SECOND: The Board of Directors of the Corporation duly adopted a resolution proposing and declaring advisable the amendment to the Certificate of Incorporation as described herein, and the holders of at least a majority of the outstanding stock of the Corporation duly adopted and approved this Certificate of Amendment by vote at the Company's annual meeting, and written notice has been given, all in accordance with the provisions of Sections 242 and 228 of the DGCL. THIRD: The Article "FIRST" of the Corporation's Restated Certificate of Incorporation is amended to read in its entirety as follows: "FIRST. THE NAME OF THE CORPORATION IS EDT LEARNING, INC." FOURTH: This Certificate of Amendment shall be effective when filed with the Secretary of State for the State of Delaware. IN WITNESS WHEREOF, e-dentist.com, Inc. has caused this Certificate of Amendment of Certificate of Incorporation to be executed by Dr. James M. Powers, Jr. its President and Chief Executive Officer, on this 2nd day of August, 2001. e-dentist.com, Inc. By: /s/ JAMES M. POWERS, JR. ------------------------------------ Dr. James M. Powers, Jr., President and Chief Executive Officer EX-4.7 4 ex4-7.txt FORM OF CONV. REDEEMABLE SUBORDINATED NOTE Exhibit 4.7 THIS CONVERTIBLE REDEEMABLE SUBORDINATED NOTE (AND THE SHARES OF COMMON STOCK OF MAKER ACQUIRABLE UPON CONVERSION) HAS BEEN ACQUIRED FOR INVESTMENT AND HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY STATE SECURITIES ACT. THIS CONVERTIBLE REDEEMABLE SUBORDINATED NOTE (AND THE SHARES OF COMMON STOCK OF MAKER ACQUIRABLE UPON CONVERSION) MUST BE HELD INDEFINITELY AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS MAKER RECEIVES AN OPINION OF COUNSEL, OR OTHER EVIDENCE, REASONABLY ACCEPTABLE TO IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACTS. THE TRANSFER OF THIS CONVERTIBLE REDEEMABLE SUBORDINATED NOTE (AND THE SHARES OF COMMON STOCK OF MAKER ACQUIRABLE UPON CONVERSION) IS SUBJECT TO RESTRICTIONS AS PROVIDED IN THIS CONVERTIBLE REDEEMABLE SUBORDINATED NOTE. AN INVESTMENT IN THIS CONVERTIBLE REDEEMABLE SUBORDINATED NOTE IS HIGHLY SPECULATIVE. PAYEE MAY LOSE ITS ENTIRE INVESTMENT. CONVERTIBLE REDEEMABLE SUBORDINATED NOTE $<> March 29, 2002 FOR VALUE RECEIVED, the undersigned, EDT Learning, Inc., a Delaware corporation ("Maker"), hereby promises to pay to the order of <> ("Payee"), at <> <>, or such other place as Payee may from time to time direct Maker in writing, the principal sum of ____________________ and 00/100 Dollars ($<>), together with interest thereon which shall accrue at the rate of twelve percent (12.0%) per annum. Accrued interest shall be due and payable at the end of each calendar quarter following the date of this Convertible Redeemable Subordinated Note (the "Convertible Note") until the principal hereof is paid in full or converted into shares of the common stock of Maker, par value $0.001 per share ("Common Stock"), as herein provided. The principal, together with all accrued but unpaid interest hereon, shall mature and be due and payable on March 29, 2012. Except as otherwise set forth in Section 8, Maker shall have no right to prepay this Convertible Note prior to the date that this Convertible Note matures as set forth above. All payments on this Convertible Note shall be due and payable in lawful currency of the United States of America. This Convertible Note is one of several Convertible Redeemable Subordinated Notes dated of even date herewith and issued by Maker (collectively, the "Convertible Notes") as part of an offering of 60 (subject to increase to 110) units (the "Units") that was conducted by Maker and Murphy & Durieu, the placement agent for the offering, on a best efforts basis. Each Unit consists of one (1) Convertible Note and one (1) Warrant exercisable for 50,000 shares of Common Stock (collectively, the "Warrants"). 1. CONVERSION. Payee or the then current holder of this Convertible Note may elect to convert this Convertible Note (in whole but not in part) at any time following the date that is sixty (60) days following the date of this Note and prior to maturity. The principal portion of this Convertible Note will convert into duly authorized, validly issued, fully paid and nonassessable shares of Common Stock (the "Underlying Shares"). The conversion price for such conversion shall be a price per share equal to $1.00, or, in case an adjustment in the conversion price has taken place pursuant to the provisions hereof, at the then applicable conversion price as so adjusted (such price as in effect from time to time being referred to herein as the "Conversion Price"). Upon conversion, Payee (or the then current holder of this Convertible Note) shall be obligated to deliver to Maker (i) this Convertible Note for cancellation and (ii) written notice of the intent of Payee (or the then current holder of this Convertible Note) to convert this Note. Within fifteen (15) days after the giving of such notice, Maker shall issue the appropriate number of Underlying Shares in accordance with the Conversion Price and deliver to Payee a certificate or certificates therefor, registered in its name, representing such Underlying Shares against delivery to Maker of this Convertible Note marked "paid in full." Payee shall represent in writing to Maker prior to the receipt of the Underlying Shares that such Underlying Shares will be acquired by it for investment only and not for resale or with a view to the distribution thereof, and shall agree that any certificates representing the Underlying Shares may bear a legend, conspicuously noting such restriction, as Maker shall deem reasonably necessary or desirable to enable it to comply with any applicable federal or state laws or regulations. Upon conversion of this Convertible Note, the holder hereof shall not be entitled to receive any unaccumulated or unaccrued interest, provided that such holder shall be entitled to receive (by cash payment only) any interest on such portion that accrued prior to such conversion and remained unpaid. In connection with the conversion of this Convertible Note, no fractions of shares of Common Stock shall be issued, but Maker shall pay a cash adjustment in respect of such fractional interest in an amount equal to such fraction of a share multiplied by the Conversion Price. 2. ANTIDILUTION ADJUSTMENTS. The Conversion Price in effect at any time shall be subject to adjustment as follows: (a) In case Maker shall pay or make a dividend or other distribution on any class of capital stock of Maker in shares of Common Stock, the Conversion Price in effect at the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such dividend or other distribution shall be reduced by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination and the denominator of which shall be the sum of such number of shares and the total number of shares constituting such dividend or other distribution, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. (b) In case Maker shall issue rights or warrants to all holders of its shares of Common Stock entitling them to subscribe for or purchase Common Stock at a price per share less than the Fair Value (as defined below) per share of the Common Stock on the date fixed for the -2- determination of stockholders entitled to receive such rights or warrants, the Conversion Price in effect at the opening of business on the day following the date fixed for such determination shall be reduced to the amount determined by multiplying such Conversion Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination, plus the number of shares of Common Stock which the aggregate of the offering price of the total number of shares of Common Stock so offered for subscription or purchase would purchase if purchased at Fair Value, and the denominator of which shall be the number of shares of Common Stock outstanding at the close of business on the date fixed for such determination, plus the number of shares of Common Stock so offered for subscription or purchase, such reduction to become effective immediately after the opening of business on the day following the date fixed for such determination. (c) In case the outstanding shares of Common Stock shall be subdivided into a greater number of shares, the Conversion Price in effect at the opening of business on the day following the day upon which such subdivision becomes effective shall be proportionately reduced, and, conversely, in case the outstanding shares of Common Stock shall be combined into smaller number of shares, the Conversion Price in effect at the opening of business on the day following the day upon which such combination becomes effective shall be proportionately increased, such reduction or increase, as the case may be, to become effective immediately upon the opening of business on the day following the day upon which such subdivision or combination becomes effective. (d) In case Maker shall, by dividend or otherwise, distribute to all holders of shares of Common Stock evidences of indebtedness or assets (including securities, but excluding any rights or warrants referred to above, any dividend or distribution paid in cash out of the earned surplus of Maker and any dividend or distribution referred to above), the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the close of business on the date fixed for the determination of stockholders entitled to receive such distribution by a fraction, the numerator of which shall be the Fair Value per share of the Common Stock on the date fixed for such determination less the Fair Value of the portion of the assets or evidences of indebtedness so distributed allocable to one share of Common Stock and the denominator of which shall be such Fair Value per share of the Common Stock on the date fixed for such determination, such adjustment to become effective immediately prior to the opening of business on the day following the date fixed for the determination of stockholders entitled to receive such distribution. (e) In case the Common Stock shall be changed into the same or a different number of shares of any class or classes of stock, whether by capital reorganization, reclassification, or otherwise (other than a subdivision or combination of shares or a stock dividend described above, or a consolidation, merger or sale of assets described below), then and in each such event the Payee (or the then current holder of this Convertible Note) shall have the right thereafter to convert this Convertible Note into the kind and amount of shares of stock and other securities and property receivable upon such reorganization, reclassification or other change, by holders of the number of shares of Common Stock into which this Convertible -3- Note might have been converted immediately prior to such reorganization, reclassification or change. (f) No adjustment in the Conversion Price shall be required unless such adjustment (plus any adjustments not previously made by reason of this paragraph (f)) would require an increase or decrease of at least 1% in such price; provided, however, that any adjustments which, by reason of this paragraph (f), are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 2 shall be made to the nearest dollar. (g) Whenever the Conversion Price is adjusted as provided in this Convertible Note and upon the request of Payee (or the then current holder of this Convertible Note), Maker shall prepare an Officer's Certificate setting forth the adjusted Conversion Price and showing in reasonable detail the facts upon which such adjustment is based and the computation thereof, and such certificate shall promptly be forwarded to the Payee (or the then current holder of this Convertible Note). (h) Maker shall at all times reserve and keep available, free from preemptive rights, out of its authorized shares of Common Stock, for the purpose of effecting the conversion of the Convertible Notes, the full number of shares of Common Stock then issuable upon the conversion of all outstanding Convertible Notes and shall take all action necessary so that shares of Common Stock so issued will be validly issued, fully paid and nonassessable. (i) Maker will pay any and all stamp or similar taxes that may be payable in respect of the issuance or delivery of shares of Common Stock on conversion of this Convertible Note. Maker shall not, however, be required to pay any tax that may be payable in respect of any transfer involved in the issuance and delivery of shares of Common Stock in a name other than that of the Payee, and no such issuance or delivery shall be made unless and until the person requesting such issuance has paid to Maker the amount of any such tax, or has established to the satisfaction of Maker that such tax has been paid. (j) Maker agrees that in case of any consolidation of Maker with, or merger of Maker into, any other corporation, or in case of any merger of another corporation into Maker (other than a merger which does not result in any reclassification, conversion, exchange or cancellation of outstanding shares of Common Stock of Maker), or in case of any sale or transfer of all or substantially all of the assets of Maker, Maker shall require the corporation formed by such consolidation or resulting from such merger or which acquires such assets, as the case may be, to execute and deliver to the Payee (or the then current holder of this Convertible Note) an agreement providing that the Payee (or the then current holder of this Convertible Note) shall have the right thereafter to convert this Convertible Note into the kind and amount of securities, cash and other property receivable upon such consolidation, merger, sale or transfer by a holder of the number of shares of Common Stock of Maker into which this Convertible Note might have been converted immediately prior to such consolidation, merger, sale or transfer. Such agreement shall provide for adjustments which, for events subsequent to the effective date of such -4- consolidation, merger, sale or transfer, shall be as nearly equivalent as may be practicable to the adjustments provided for herein. The above provisions of this Convertible Note shall similarly apply to successive consolidations, mergers, sales or transfers. (k) "Fair Value" of the Common Stock shall be determined from time to time in good faith by the Board of Directors of Maker; provided, however, that if the Common Stock is then traded on the American Stock Exchange (or, if no longer traded on the American Stock Exchange, another national exchange or the NASDAQ Stock Market), then the Fair Value of the Common Stock shall be deemed to be equal to the average quoted closing price of the Common Stock over the five trading days prior to the date of determination. Any valuation made pursuant hereto will be binding upon Maker and all holders of Convertible Notes and their successors and assigns. (l) Except as otherwise explicitly set forth in this Section 2, there shall be no antidilution or other adjustments to the Conversion Price. 3. EVENTS OF DEFAULT AND REMEDIES. At the option of Payee (or the then current holder of this Convertible Note), the entire amount of the unpaid balance of this Convertible Note, shall immediately become due and payable upon the occurrence of one or more of the following events of default ("Events of Default"): (a) Failure of Maker to make any payment on this Convertible Note as and when the same becomes due and payable in accordance with the terms hereof, and such failure continues for a period of thirty (30) days after the receipt by Maker of written notice from Payee (or the then current holder of this Convertible Note) of the occurrence of such failure; or (b) Maker shall (i) voluntarily seek, consent to or acquiesce in the benefit or benefits of any Debtor Relief Law (as hereinafter defined) or (ii) become party to (or be made the subject of) any proceeding provided by any Debtor Relief Law, other than as a creditor or claimant, that could suspend or otherwise adversely affect the rights of Payee (or the then current holder of this Convertible Note) granted hereunder (unless in the event such proceeding is involuntary, the petition instituting the same is dismissed within 120 days of the filing of same). As used herein, the term "Debtor Relief Law" means the Bankruptcy Code of the United States of America and all other applicable liquidation, conservatorship, bankruptcy, moratorium, rearrangement, receivership, insolvency, reorganization or similar debtor relief laws from time to time in effect affecting the rights of creditors generally. In the event any one or more of the Events of Default specified above shall have occurred, the holder of this Convertible Note may proceed to protect and enforce its rights either by suit in equity or by action at law, or by other appropriate proceedings, whether for the specific performance of any covenant or agreement contained in this Convertible Note or in aid of the exercise of any power or right granted by this Convertible Note, or to enforce any other legal or equitable right of the holder of this Convertible Note. -5- 4. SUCCESSORS AND ASSIGNS. All of the covenants, stipulations, promises and agreements in this Convertible Note made by or on behalf of Maker shall bind its successors and assigns, whether so expressed or not; provided, however, that Maker may not, without the prior written consent of Payee (or the then current holder of this Convertible Note), assign any of its rights, powers, duties or obligations under this Convertible Note. 5. MAXIMUM INTEREST. Regardless of any provision contained herein, Maker shall never be required to pay and the holder hereof shall never be entitled to receive, collect or apply as interest hereon, any amount in excess of the highest lawful interest rate permitted under applicable law, and in the event the holder hereof receives, collects or applies, as interest, any such excess, such amounts which would be excessive interest shall be deemed a partial prepayment of principal and treated hereunder as such for all purposes; and, if the principal hereof is paid in full, any remaining excess shall be refunded to Maker. In determining whether or not the interest paid or payable, under any specific contingency, exceeds the highest lawful interest rate, Maker and the holder hereof shall, to the maximum extent permitted under applicable law (a) characterize any nonprincipal payment as an expense, fee or premium rather than as interest, (b) exclude prepayments and the effects thereof, and (c) pro rate, allocate and spread the total amount of interest throughout the entire contemplated term hereof; provided that if the indebtedness evidenced hereby is paid and performed in full prior to the end of the full contemplated term hereof, and if the interest received for the actual period of existence thereof exceeds the highest lawful interest rate, the holder hereof shall either apply as principal reduction or refund to Maker the amount of such excess, and in such event, the holder hereof shall not be subject to any penalties provided by any laws for contracting for, charging or receiving interest in excess of the highest lawful interest rate. 6. RESTRICTIONS ON TRANSFERABILITY. By taking this Convertible Note, Payee acknowledges that (a) this Convertible Note (and the shares of Common Stock of Maker acquirable upon conversion) has been acquired for investment and has not been registered under the Securities Act of 1933, as amended (the "Securities Act") or any state securities act and (b) this Convertible Note (and the shares of Common Stock of Maker acquirable upon conversion) must be held indefinitely unless (i) subsequent disposition thereof is registered under the Securities Act and all applicable state securities laws or (ii) an exemption from such registration is available and Maker receives an opinion of counsel, or other evidence, reasonably satisfactory to Maker stating that such disposition is made in compliance with an exemption from such registration, and prospectus delivery requirements. 7. SUBORDINATION. To the extent and in the manner hereinafter set forth in this Section 7, the indebtedness represented by this Convertible Note and any renewals or extensions thereof shall at all times be wholly subordinate and junior in right of payment to the prior payment in full of any and all Senior Indebtedness. (a) SENIOR INDEBTEDNESS. "Senior Indebtedness" means the principal of, premium, if any, and unpaid interest (including without limitation any interest accruing from and after the date of any filing made in respect of Maker or any of its Subsidiaries pursuant to Chapter 11 of Title 11 of the U.S. Code, whether or not a claim for such interest would be recognized or allowed in such proceeding) on the following, whether outstanding at the date hereof or thereafter incurred or created: (i) Indebtedness of Maker -6- for money borrowed (including purchase-money obligations), evidenced by notes or other written obligations, (ii) Indebtedness of Maker evidenced by notes, debentures, bonds or other securities issued under the provisions of an indenture or similar instrument, (iii) obligations of Maker as lessee under capital leases and under leases of property made as part of any sale and leaseback transactions, (iv) any Hedging Transactions, (v) Indebtedness of others of any of the kinds described in the preceding clauses (i) through (iv) assumed or guaranteed by Maker and (vi) renewals, extensions and refundings of, and Indebtedness and obligations of a successor person issued in exchange for or in replacement of, Indebtedness or obligations of the kinds described in the preceding clauses (i) through (v); PROVIDED, HOWEVER, that the following shall not constitute Senior Indebtedness: (A) any Indebtedness or obligation as to which, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is expressly provided that such Indebtedness or obligation is subordinate in right of payment to all other Indebtedness of Maker not expressly subordinated to such Indebtedness or obligation; (B) any Indebtedness or obligation which by its terms refers explicitly to the Convertible Notes and states that such Indebtedness or obligation shall not be senior in right of payment thereto; (C) any Indebtedness or obligation of Maker in respect of the Convertible Notes; (D) Indebtedness or other obligations of Maker to any stockholder, director, officer or employee of Maker or any of its Subsidiaries; and (E) Indebtedness guaranteed by Maker on behalf of any stockholder, director, officer or employee of Maker or any of its Subsidiaries. (b) PAYMENT OVER OF PROCEEDS UPON DISSOLUTION, ETC. In the event of any liquidation of Maker or of any execution, sale, receivership, insolvency, bankruptcy, readjustment, reorganization, marshaling of assets and liabilities, assignment for the benefit of creditors or other similar proceeding relative to Maker or its property (a "Creditors' Proceeding"), all principal and interest owing on all Senior Indebtedness shall first be paid in full before any payment is made upon the indebtedness evidenced by the Convertible Notes, and in any such event any payment or distribution of any kind or character, whether in cash, property or securities (other than in securities or other evidences of indebtedness, the payment of which is subordinated to the payment of all Senior Indebtedness that may at the time be outstanding) that shall be made upon or in respect of the Convertible Notes shall be paid over to the holders of such Senior Indebtedness, for application in payment thereof in accordance with the priorities then existing among such holders unless and until such Senior Indebtedness shall have been paid or satisfied in full. (c) NO PAYMENT WHEN SENIOR INDEBTEDNESS IN DEFAULT. (i) Upon the failure to pay (beyond any applicable cure or grace periods) any installment of principal, premium, interest, fees or any other amounts owing on any Senior Indebtedness when the same becomes due and payable, including without limitation a declaration that such principal amount of Senior Indebtedness has been declared to be due and payable prior to its maturity (a "Payment Default"), no payment of principal, premium (if any), interest or other amounts owing shall be made on the Convertible Notes or on account of the purchase or other acquisition of Convertible Notes unless and until (i) such default -7- shall have been cured or expressly waived or shall have ceased to exist or (ii) adequate provision has been made for the payment of such Senior Indebtedness in a manner satisfactory to the holders of at least 25% of the then outstanding amount of such Senior Indebtedness. (ii) Upon the occurrence of any default with respect to Senior Indebtedness (other than a Payment Default), which default would permit the holders of such Senior Indebtedness to cause such Senior Indebtedness to become due prior to its stated maturity (a "Nonpayment Default"), upon written notice thereof given to Maker and the holder of this Convertible Note by any holders of any Senior Indebtedness ("Payment Notice"), then, unless and until such Nonpayment Default shall have been cured or waived or shall cease to exist, no payment (other than in capital stock or evidences of Indebtedness, the payment of which is subordinated to the payment of all Senior Indebtedness, to the same extent as the Convertible Notes, that may at the time be outstanding) shall be made by Maker in respect of the Convertible Notes or to acquire any of the Convertible Notes; PROVIDED, HOWEVER, that this paragraph (ii) shall not prevent the making of any payment (x) which is made 180 days or more after the Payment Notice shall have been given or (y) if earlier, after the date on which such Senior Indebtedness shall have been paid in full in cash or in any other manner acceptable to holders of such Senior Indebtedness or the date on which application of this paragraph (ii) has been cured or waived in writing by the holders of such Senior Indebtedness (or their representatives) in accordance with the terms of the document pursuant to which it was issued. Maker shall promptly deliver such Payment Notice to the holders of the Convertible Notes. Notwithstanding the foregoing, (A) not more than one Payment Notice shall be given within a period of 365 consecutive days, and (B) no Nonpayment Default which existed or was continuing on the date of any Payment Notice (whether or not such event of default is on the same issue or Senior Indebtedness) may be made the basis for the giving of a subsequent Payment Notice. (d) PAYMENT PERMITTED IF NO DEFAULT. Except as provided in subsections (b) and (c) of this Section 7, nothing contained in this Convertible Note shall prevent Maker from making payments at any time of principal of (and premium, if any) or interest on the Convertible Notes. (e) NO WAIVER OF SUBORDINATION PROVISIONS. No right of any holder of any Senior Indebtedness to enforce subordination as herein provided shall at any time or in any way be affected or impaired by any failure to act on the part of Maker or the holders of Senior Indebtedness, or by any noncompliance by Maker with any of the terms, provisions and covenants of this Convertible Note, regardless of any knowledge thereof that any such holder of Senior Indebtedness may have or be otherwise charged with. Without in any way limiting the generality of the foregoing paragraph, the holders of Senior Indebtedness may, at any time and from time to time, without the consent of or notice to the holders of the Convertible Notes, without incurring responsibility to the holders of the Convertible Notes and without impairing or releasing the subordination provided in this -8- Section 7 or the obligation hereunder of the holders of the Convertible Notes to the holders of Senior Indebtedness, do any one or more of the following: (i) change the manner, place or terms of payment or extend the time of payment of, or renew or alter, Senior Indebtedness, or otherwise amend or supplement in any manner Senior Indebtedness or any instrument evidencing the same or any agreement under which Senior Indebtedness is outstanding; (ii) sell, exchange, release or otherwise deal with any property pledged, mortgaged or otherwise securing Senior Indebtedness; (iii) release any person liable in any manner for the collection of Senior Indebtedness; and (iv) exercise or refrain from exercising any rights against Maker and any other person. (f) NOTICE. Maker shall give prompt written notice to holders of the Convertible Notes of any fact known to Maker that would prohibit the making of any payment in respect of the Convertible Notes pursuant to this Section 7. (g) RELIANCE ON JUDICIAL ORDER OR CERTIFICATE OF LIQUIDATING AGENT. Upon any payment or distribution of assets of Maker referred to in this Section 7, the holders of the Convertible Notes shall be entitled to rely upon any order or decree entered by any court of competent jurisdiction in which such liquidation or Creditors' Proceeding is pending, or a certificate of the trustee in bankruptcy, receiver, liquidating trustee, custodian, assignee for the benefit of creditors, agent or other person making such payment or distribution, delivered to the holders of Convertible Notes, for the purpose of ascertaining the persons entitled to participate in such payment or distribution, the holders of the Senior Indebtedness and other Indebtedness of Maker, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Section 7. (h) CERTAIN CONVERSIONS DEEMED PAYMENT. For the purposes of this Section 7 only, (i) the issuance and delivery of junior securities upon conversion of Convertible Notes shall not be deemed to constitute a payment or distribution on account of the principal of or premium or interest on Convertible Notes or on account of the purchase or other acquisition of Convertible Notes, and (ii) the payment, issuance or delivery of cash, property or securities (other than junior securities) upon conversion of a Convertible Note shall be deemed to constitute payment on account of the principal of such Convertible Note. For the purposes of this subsection 7(h), the term "junior securities" means (A) shares of any stock of any class of Maker and (B) securities of Maker that are subordinated in right of payment to all Senior Indebtedness that may be outstanding at the time of issuance or delivery of such securities to substantially the same extent as, or to a greater extent than, the Convertible Notes are so subordinated as provided in this Section 7. Nothing contained in this Section 7 or elsewhere in this Convertible Note is intended to or shall impair, as among Maker, its creditors other than holders of Senior Indebtedness and the -9- holders of the Convertible Notes, the right, which is absolute and unconditional, of the holder of any Convertible Notes to convert such Convertible Note in accordance with Section 1. (i) HOLDERS OF CONVERTIBLE NOTES TO BE SUBROGATED TO RIGHTS OF HOLDERS OF SENIOR INDEBTEDNESS. Subject to the payment in full in cash, or in any other manner acceptable to holders of Senior Indebtedness (in their sole discretion), of all Senior Indebtedness, the holders of Convertible Notes shall be subrogated to the rights of the holders of Senior Indebtedness to receive payments or distributions of assets of Maker applicable to the Senior Indebtedness until all amounts owing on the Convertible Notes shall be paid in full in cash, and for the purpose of such subrogation no such payments or distributions to the holders of Senior Indebtedness by or on behalf of Maker, or by or on behalf of the holders of the Convertible Notes by virtue of this Section 7, which otherwise would have been made to the holders of the Convertible Notes shall, as between Maker, its creditors other than the holders of Senior Indebtedness and the holders of the Convertible Notes, be deemed to be payment by Maker to or on account of the Senior Indebtedness, it being understood that the provisions of this Section 7 are, and are intended, solely for the purpose of defining the relative rights of the holders of the Convertible Notes, on the one hand, and the holders of Senior Indebtedness, on the other hand. As used in this Section 7: "GAAP" shall mean generally accepted accounting principles as in effect in the United States of America from time to time and applied consistently throughout the relevant periods. "HEDGING TRANSACTION" shall mean, with respect to any Person, (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements of such Person, (ii) currency swap agreements and currency cap agreements of such Person and (iii) other written agreements or arrangements principally designed to protect such Person against fluctuations in interest rates or currency values or the price of any commodity used in the business of such Person. "INDEBTEDNESS" means (without duplication), when used with reference to any Person: (i) any obligation, contingent or otherwise, (A) in respect of borrowed money (whether or not the recourse of the lender is to the whole of the assets of such Person or only to a portion thereof), or (B) evidenced by bonds, notes, debentures or similar instruments or letters of credit or (C) representing the balance deferred and unpaid of the purchase price of any property, if and to the extent (but only to the extent) any of the foregoing indebtedness would appear as a liability upon a balance sheet of such Person and its Subsidiaries prepared on a consolidated basis in accordance with GAAP, and (ii) shall also include, regardless of whether such items would appear upon a balance sheet, (A) the principal component of any Capitalized Lease Obligations of such Person, (B) obligations secured by a Lien to which any property or asset, including leasehold interests and any other tangible or intangible property rights, owned by such Person is subject, whether or not -10- the obligations secured thereby shall have been assumed by such Person (PROVIDED, HOWEVER, that, if the obligations have not been assumed by such Person such obligations shall be deemed to be in an amount equal to the lesser of (1) the fair market value (as determined in good faith by the Board of Directors of Maker and as evidenced by a board resolution) of the property or properties to which the Lien relates or (2) the amount of the Indebtedness secured by such Lien) by such Person or shall otherwise be such Person's legal liability, (C) reimbursement obligations and all other liabilities (contingent or otherwise) of such Person in respect of letters of credit and letter of credit guarantees, (D) any obligation of such Person in respect of Hedging Transactions, and (E) guarantees by such Person of items which would be included within this definition, to the extent of such guarantees. "LIEN" shall mean any mortgage, pledge, lien, encumbrance or security interest of any kind (including, without limitation, any conditional sale or other title retention agreement), any lease in the nature thereof, any option or other agreement to sell and any filing of or agreement to give any financing statement under the Uniform Commercial Code (or equivalent statutes) of any jurisdiction, but shall not include any restriction on transfer imposed under federal or state securities laws. "PERSON" or "PERSON" shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. "SUBSIDIARY" shall mean, with respect to any Person: (i) a corporation in which such Person or one or more Subsidiaries of such Person own in the aggregate voting securities representing in excess of 50% of the total number of votes that could be cast in the election of directors of such corporation by the holders of all then outstanding voting securities of such corporation and (ii) any other Person (other than a corporation) of which such Person, one or more Subsidiaries of such Person, or such Person and one or more Subsidiaries of such Person directly or indirectly, has (X) at least a majority ownership interest or (Y) the power to elect or direct the election of at least a majority of the directors or other governing body. 8. REDEMPTION. This Convertible Note may be redeemed in whole, but not in part, at the election of Maker for the principal amount of this Convertible Note plus accrued but unpaid interest at any time after such time as the closing price of the Common Stock (as quoted on the American Stock Exchange, the NASDAQ Stock Market, or such other national exchange, if any, on which the Common Stock is then quoted) has equaled or exceeded an amount equal to the product of (i) three, multiplied by (ii) the amount of the Conversion Price then in effect, for a period of twenty (20) consecutive trading days. Maker shall provide Payee with written notice (the "Redemption Notice") at least thirty (30) days prior to the date this Convertible Note shall be redeemed (such date of redemption, the "Redemption Date") of its intent to redeem this Convertible Note. The Redemption Notice shall specify the Redemption Date, the principal amount of this Convertible Note and the amount of accrued but unpaid interest that will be outstanding as of the Redemption Date. Nothing contained herein shall be construed to prevent Payee from converting this Convertible Note subsequent to Payee's receipt of the Redemption Notice but prior to the Redemption Date. Upon redemption, Payee (or the then current holder of this Convertible Note) shall be obligated to deliver this Convertible Note to Maker for cancellation and Maker -11- shall be obligated to deliver to Payee (or the then current holder of this Convertible Note) a cashier's check in an amount equal to the principal amount of this Convertible Note plus accrued but unpaid interest. 9. PAYEE'S REGISTRATION RIGHTS. (a) Upon receipt of notice (the "Registration Request Notice") requesting registration under the Securities Act of Underlying Shares from the holders of Notes and Warrants representing more than fifty percent (50%) of the aggregate Underlying Shares, on only one occasion, at any time commencing on the date hereof and terminating two years thereafter, Maker will offer to Payee the opportunity to include its Underlying Shares in such registration. Maker will use its reasonable best efforts to file with the Securities and Exchange Commission (the "Commission") as promptly as practicable, a registration statement (the "Demand Registration Statement"), and will use its reasonable best efforts to have the Demand Registration Statement declared effective and remain effective until the earliest of (i) two years after the date it is declared effective, (ii) the date all the Underlying Shares registered thereby have been sold, or, (iii) in the reasonable opinion of the Maker's counsel, the Underlying Shares may be sold publicly without registration. Maker will also use its reasonable best efforts to qualify the Underlying Shares under the securities laws of the state where Payee resides provided Maker is not required to execute a general consent to service or to qualify to do business in such state. This offer to Payee shall be made within twenty (20) days after Maker receives the Registration Request Notice. If Payee elects to include its Underlying Shares in the Demand Registration Statement, it will, in a timely fashion, provide Maker and its counsel with such information and execute such documents as Maker's counsel may reasonably require to prepare and process the Demand Registration Statement, it shall have no further rights to registration of its Underlying Shares under this Section 9(a). In the event that Maker has filed a registration statement with the Commission relating to its securities within ninety (90) days prior to its receipt of the Registration Request Notice, which registration statement has not been declared effective, Payee agrees that Maker can thereafter delay the filing of the Demand Registration Statement for a period not to exceed ninety (90) days. Anything to the contrary notwithstanding, in no event shall Maker be required to file a Demand Registration Statement with the Commission prior to one hundred and eighty (180) days after the date hereof. As used in this Section 9 only, "Underlying Shares" shall be deemed include shares of Common Stock issuable both (i) upon conversion of the Notes and (ii) upon exercise of the Warrants. (b) If at any time after the date hereof, Maker proposes to file a registration statement under the Securities Act with respect to any of its securities (except one relating to stock option or employee benefit plans or a merger, acquisition or similar transaction), Maker shall give written notice of its intention to effect such filing to Payee at least thirty (30) days prior to filing such registration statement (the "Piggyback Registration Statement"). If the Payee's Underlying Shares have not been previously registered and Payee desires to include its Underlying Shares in the Piggyback Registration Statement, it shall notify Maker in writing within fifteen (15) days after receipt of such notice from Maker, in which event Maker shall include Payee's Underlying Shares in the Piggyback Registration Statement. If Payee elects to include its Underlying Shares in the Piggyback Registration Statement as set forth herein, it shall, in a timely manner, provide Maker and its counsel with such information and execute such documents as its counsel may reasonably require to prepare and process the Piggyback Registration Statement. Anything to the contrary -12- notwithstanding, in the event that the offering for which the Piggyback Registration Statement has been filed is to be effected through or with the assistance of an underwriter, Payee will consent to restrict the sale of its Underlying Shares or reduce the number of its Underlying Shares (on a pro rata basis with shares of Common Stock issued to any other stockholders of Maker prior to or after the date hereof, and that, as of the time of determination, have presently exercisable registration rights and are requested by such stockholders to be included in such Piggyback Registration Statement) that may be included in such Piggyback Registration Statement in accordance with the requirements of such underwriter. (c) Maker will provide Payee with a copy of the Demand Registration Statement or the Piggyback Registration Statement, as the case may be, and any amendments thereto, and copies of the final prospectus included therein in such quantities as may reasonably be required to permit Payee to sell its Underlying Shares after the Demand Registration Statement or the Piggyback Registration Statement is declared effective by the Commission. (d) Maker will bear all expenses (except underwriting discounts and commission, if any, and the legal fees and expenses, if any, of counsel to Payee) necessary and incidental to the performance of its obligations under this Section. (e) Maker and Payee, if Payee's Underlying Shares are included in a Demand Registration Statement or Piggyback Registration Statement pursuant to this Section, shall provide customary and appropriate cross indemnities to each other covering the information supplied by the indemnifying party for inclusion in the Demand Registration Statement or Piggyback Registration Statement. (f) Anything to the contrary notwithstanding, Maker shall not be required to register any Underlying Shares or provide notices under this Section 9 to a Payee whose Underlying Shares are either (i) are covered by a then currently effective registration statement or (ii) in the reasonable opinion of Maker's counsel, may be sold pursuant to the exemption from registration provided by Section (k) of Rule 144 promulgated under the Act. 10. REPRESENTATIONS AND WARRANTIES OF MAKER. Maker represents and warrants that, as of the date of this Convertible Note, it: (i) is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has all requisite corporate power to carry on its business as now conducted and to own its properties and assets it now owns; (ii) is duly qualified or licensed to do business as a foreign corporation in good standing in the jurisdictions in which ownership of property or the conduct of its business requires such qualification except jurisdictions in which the failure to qualify to do business will have no material adverse effect on its business or financial condition; (iii) has full power and authority to execute and deliver this Convertible Note, and that the execution and delivery of this Convertible Note will not result in the breach of or default under, with or without the giving of notice and/or the passage of time, any other agreement, arrangement or indenture to which it is a party or by which it may be bound, or the violation of any law, statute, rule, decree, judgment or regulation binding upon it; and (iv) has taken and will take all acts required, including but not limited to authorizing the signatory hereof on its behalf to execute this Convertible Note, so that upon the execution and delivery of this Convertible Note, it shall constitute the valid and legally binding obligation of Maker enforceable in accordance with the terms thereof. -13- 11. LIMITATION OF LIABILITY. A director, officer, employee or stockholder, as such, of Maker shall not have any liability for any obligations of Maker under this Convertible Note or for any claim based on, in respect or by reason of such obligations or their creation. Payee, by accepting this Convertible Note, waives and releases all such liability. The waiver and release are part of their consideration for the issuance of this Convertible Note. 12. GOVERNING LAW; VENUE. This Convertible Note shall be governed by and construed in accordance with the substantive laws (but not the rules governing conflicts of laws) of the State of Delaware. 13. NOTICE. Any notices required or permitted to be given under the terms of this Convertible Note shall be sent by certified or registered mail (with return receipt requested) or delivered personally or by courier (including a nationally recognized overnight delivery service) or by facsimile transmission. Any notice so given shall be deemed effective three days after being deposited in the U.S. Mail, or upon receipt if delivered personally or by courier or facsimile transmission, in each case addressed to a party at the following address or such other address as each such party furnishes to the other in accordance with this Section 13: If to the Company: EDT Learning, Inc. 2999 North 44th Street Suite 650 Phoenix, AZ 85018 Telephone: (602) 952-1200 Facsimile: (602) 952-0544 Attention: President If to the Payee: At the address set forth in the first paragraph of this Convertible Note 14. SEVERABILITY. In case any one or more of the provisions contained in this Convertible Note shall for any reason be held to be invalid, illegal and unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof. 15. LOSS, THEFT, DESTRUCTION OR MUTILATION. Upon receipt by Maker of evidence reasonably satisfactory to it of loss, theft, destruction or mutilation of this Convertible Note (and upon surrender of this Convertible Note if mutilated), and upon reimbursement of Maker's reasonable incidental expenses and in the case of loss, theft or destruction, indemnity and/or security as Maker shall, at its option, request, Maker shall make and deliver or caused to be made and delivered to Payee a new Convertible Note of like date and tenor in lieu of this Convertible Note. 16. MODIFICATION OF CONVERTIBLE NOTE OR WAIVER OF TERMS THEREOF RELATING TO PAYEE. No modification or waiver of any of the provisions of this Convertible Note shall be effective unless in writing and signed by Payee and then only to the extent set forth in such writing, or shall any such modification or waiver be applicable except in the specific instance for which it is given. This Convertible Note may not be discharged orally but only in writing duly executed by Payee. -14- EXECUTED as of the date set forth above. MAKER: EDT LEARNING, INC. By: ------------------------------------ James M. Powers, Jr., its President and Chief Executive Officer <> $<> -15- EX-4.8 5 ex4-8.txt FORM OF REDEEMABLE WARRANT Exhibit 4.8 RESTRICTION ON TRANSFER THIS WARRANT AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR QUALIFIED UNDER ANY STATE SECURITIES LAWS. THIS WARRANT MAY NOT BE TRANSFERRED, AND THE SHARES OF COMMON STOCK ISSUABLE UPON EXERCISE OF THIS WARRANT CANNOT BE SOLD OR TRANSFERRED, WITHOUT (I) THE OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY THAT SUCH TRANSFER MAY BE LAWFULLY MADE WITHOUT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED, AND ALL APPLICABLE STATE SECURITIES LAWS OR (II) SUCH REGISTRATION. WARRANT (REDEEMABLE) To Subscribe for and Purchase Common Stock of EDT LEARNING, INC. THIS CERTIFIES THAT, for value received, <>, or its registered assigns (the "Holder"), is entitled to subscribe for and purchase from EDT Learning, Inc., a Delaware corporation (the "Company"), at the exercise price of Three Dollars ($3.00) per share (the "Exercise Price") at any time from and after the date hereof to and including the third anniversary of the date of this Warrant (this "Warrant"), <> shares of the Company's common stock, par value $0.001 per share ("Common Stock"). The Exercise Price shall be subject to adjustment as provided in Section 5 hereof. This Warrant is one of several Warrants dated of even date herewith and issued by the Company (collectively, the "Warrants") as part of an offering of 60 (subject to increase to 110) units (the "Units") that was conducted by the Company and Murphy & Durieu, the placement agent for the offering, on a best efforts basis. Each Unit consists of one (1) Warrant exercisable for 50,000 shares of Common Stock and one (1) Convertible Redeemable Subordinated Note (collectively, the "Notes"). This Warrant is subject to the following provisions, terms and conditions: 1. (a) The rights represented by this Warrant may be exercised by the Holder hereof, in whole or in part, by written notice of exercise delivered to the Company and by the surrender of this Warrant (properly endorsed if required) at the principal office of the Company at 2999 North 44th Street, Suite 650, Phoenix, Arizona 85018 (or such other location as the Company may designate by notice in writing to the Holder hereof) and upon payment to it by certified check of the Exercise Price for the shares of Common Stock to be issued upon exercise (the "Warrant Shares"). The Company shall not be required to issue fractions of shares of Common Stock upon exercise of this Warrant. If any fraction of a share would, but for this Section, be issuable upon any exercise of this Warrant, and if the Company shall have elected not to issue such fraction of a share, in lieu of such fractional share the Company shall pay to the Holder, in cash, an amount equal to such fraction of the fair market value per share of outstanding Common Stock of the Company on the Business Day immediately prior to the date of such exercise (the fair market value for such purpose shall be the closing price of the Common Stock on the principal stock exchange on which the Common Stock is then traded or the principal quotation system in which bid and ask prices for the Common Stock are then maintained). The Company agrees that the shares so purchased shall be and are deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment tendered for such shares as aforesaid. Subject to the provisions of the next succeeding paragraph, certificates for the shares of stock so purchased (bearing an appropriate legend to indicate that the shares have not been registered under securities laws) shall be delivered to the Holder hereof within a reasonable time, not exceeding 10 days, after the rights represented by this Warrant shall have been so exercised, and, unless this Warrant has expired, a new Warrant reflecting the shares, if any, as to which this Warrant shall not then have been exercised shall also be delivered to the Holder hereof within such time. (b) This Warrant may be redeemed in whole, but not in part, at the election of the Company for the price of $0.001 per share of Common Stock for which this Warrant is exercisable at any time after such time as the closing price of the Common Stock (as quoted on the American Stock Exchange, the NASDAQ Stock Market, or such other national exchange, if any, on which the Common Stock is then quoted) has equaled or exceeded $5.50 per share for a period of twenty (20) consecutive trading days. The Company shall provide Holder with written notice (the "Redemption Notice") at least thirty (30) days prior to the date this Warrant shall be redeemed (such date of redemption, the "Redemption Date") of its intent to redeem this Warrant. The Redemption Notice shall specify the Redemption Date. Nothing contained herein shall be construed to prevent Holder from exercising this Warrant subsequent to Holder's receipt of the Redemption Notice but prior to the Redemption Date. Upon redemption, Holder (or the then current holder of this Warrant) shall be obligated to deliver this Warrant to the Company for cancellation and the Company shall be obligated to deliver to Holder (or the then current holder of this Warrant) a check in an amount equal to the product of (i) $0.001 multiplied by (ii) the number of shares of Common Stock for which this Warrant is then exercisable. 2. Notwithstanding the foregoing, however, the Company shall not be required to deliver any certificate for shares of stock upon exercise of this Warrant except in accordance with the provisions of this Agreement and the restrictive legend under the heading "Restriction on Transfer." 3. The Holder acknowledges that this Warrant as well as the Warrant Shares for which this Warrant may be exercised, have not been and, except as otherwise provided herein, will not be registered under the Securities Act of 1933, as amended (the "Act"), or qualified under applicable state securities laws and that the transferability thereof is restricted by the registration 2 provisions of the Act as well as such state laws. The Holder represents that it is acquiring the Warrant and will acquire the Warrant Shares for its own account, for investment purposes only and not with a view to resale or other distribution thereof, nor with the intention of selling, transferring or otherwise disposing of all or any part of such securities for any particular event or circumstance, except selling, transferring or disposing of them upon full compliance with all applicable provisions of the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Rules and Regulations promulgated by the Securities and Exchange Commission (the "Commission") thereunder, and any applicable state securities laws. The Holder further understands and agrees that (i) neither the Warrant nor the Warrant Shares may be sold unless they are subsequently registered under the Act and qualified under any applicable state securities laws or, in the opinion of the Company's counsel, an exemption from such registration and qualification is available; (ii) any routine sales of the Company's securities made in reliance upon Rule 144 promulgated by the Commission under the Act, can be effected only in the amounts set forth in and pursuant to the other terms and conditions, including applicable holding periods, of that Rule; and (iii) except as otherwise set forth herein, the Company is under no obligation to register the Warrant or the Warrant Shares on their behalf or to assist it in complying with any exemption from registration under the Act. The Holder agrees that each certificate representing any Warrant Shares for which this Warrant may be exercised will bear on its face a legend in substantially the following form: These securities have not been registered under the Securities Act of 1933 or qualified under any state securities laws. They may not be sold, hypothecated or otherwise transferred in the absence of an effective registration statement under that Act or qualification under applicable state securities laws without an opinion acceptable to counsel to the Company that such registration and qualification are not required. 4. The Company covenants and agrees that: (a) all shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be duly authorized and issued, fully paid and nonassessable and free from all preemptive rights of any stockholder, and from all taxes, liens and charges with respect to the issue thereof (other than transfer taxes); (b) during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized, and reserved for the purpose of issue or transfer upon exercise of the subscription rights evidenced by this Warrant, a sufficient number of shares of its Common Stock to provide for the exercise of the rights represented by this Warrant; and (c) during the period within which the rights represented by this Warrant may be exercised, the Company further will use reasonable best efforts to maintain the eligibility of the Common Stock for listing on the American Stock Exchange and quotation on the domestic over-the-counter market and use reasonable best efforts to keep the Common Stock so listed and quoted. 3 5. (a) If the Company shall, after the date of issuance of this Warrant, subdivide its outstanding shares of Common Stock into a greater number of shares or consolidate its outstanding shares of Common Stock into a smaller number of shares (any such event being called a "Common Stock Reorganization"), then the Exercise Price shall be adjusted, effective at such time, to a number determined by multiplying the Exercise Price then in effect by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately before such Common Stock Reorganization and the denominator of which shall be the number of shares outstanding after giving effect to such Common Stock Reorganization. (b) If the Company shall after the date of issuance of this Warrant issue or distribute to all or substantially all holders of shares of Common Stock evidences of indebtedness, any other securities of the Company or any property or assets other than cash, and if such issuance or distribution does not constitute a Common Stock Reorganization (any such nonexcluded event being herein called a "Non-Cash Dividend"), the Exercise Price shall be adjusted (but not increased), effective immediately after the record date at which the holders of shares of Common Stock are determined for purposes of such Non-Cash Dividend, to a number determined by multiplying the Exercise Price immediately before such Non-Cash Dividend by a fraction, the numerator of which shall be the last sales price per share of outstanding Common Stock of the Company on such record date less the then fair market value, as determined in good faith by the Board of Directors of the Company, of the evidences of indebtedness, securities, cash, or property or other assets issued or distributed in such Non-Cash Dividend with respect to one share of Common Stock and the denominator of which shall be the last sales price per share of outstanding Common Stock on such record date. (c) If after the date of issuance of this Warrant there shall be any consolidation or merger to which the Company is a party, other than a consolidation or a merger in which the Company is a continuing corporation and which does not result in any reclassification of, or change (other than a Common Stock Reorganization or a change in par value) in, outstanding shares of Common Stock, or any sale or conveyance of the property of the Company as an entirety or substantially as an entirety (any such event being called a "Capital Reorganization"), then, effective upon the effective date of such Capital Reorganization, the Holder shall have the right to purchase, upon exercise of this Warrant and in lieu of the shares of Common Stock immediately theretofore purchasable hereunder, the kind and amount of shares of stock and other securities and property (including cash) which the Holder would have owned or have been entitled to receive after such Capital Reorganization if this Warrant had been exercised immediately prior to such Capital Reorganization, assuming such holder (i) is not a person with which the Company consolidated or into which the Company merged or which merged into the Company or to which such sale or conveyance was made, as the case may be ("constituent person") and (ii) failed to exercise his rights of election, if any, as to the kind or amount of securities, cash or other property receivable upon such Capital Reorganization (provided that if the kind or amount of securities, cash or other property receivable upon such Capital Reorganization is not the same for each share of Common Stock held immediately prior to such consolidation, merger, sale or 4 conveyance by other than a constituent person or an affiliate thereof and in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purposes of this paragraph the kind and amount of shares of stock and other securities or other property (including cash) receivable upon such Capital Reorganization shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). As a condition to effecting any Capital Reorganization, the Company or the successor or surviving corporation, as the case may be, shall execute and deliver to the Holder an agreement as to the Holder's rights in accordance with this Section 5(c), providing for subsequent adjustments as nearly equivalent as may be practicable to the adjustments provided for in this Section 5. The provisions of this Section 5(c) shall similarly apply to successive Capital Reorganizations. (d) If after the date of the issuance of this Warrant the Company shall issue by reclassification of its shares of Common Stock other securities of the Company, then the number of shares of Common Stock purchasable upon exercise of the Warrant immediately prior to such issuance shall be adjusted so that the Holder upon exercise hereof shall be entitled to receive the kind and number of shares of Common Stock or other securities of the Company which it would have owned or have been entitled to receive after such issuance, had this Warrant been exercised immediately prior to such issuance or any record date with respect thereto. An adjustment made pursuant to this Section 5(d) shall become effective upon the date of the issuance retroactive to the record date with respect thereto, if any. Such adjustment shall be made successively whenever such an issuance is made. (e) (i) Any adjustments pursuant to this Section 5 shall be made successively whenever an event referred to herein shall occur. (ii) If the Company shall set a record date to determine the holders of shares of Common Stock for purposes of a Common Stock Reorganization, Non-Cash Dividend or Capital Reorganization, and shall legally abandon such action prior to effecting such action, then no adjustment shall be made pursuant to this Section 5 in respect of such action. (iii) No adjustment in the Exercise Price shall be made hereunder unless such adjustment decreases such price by one percent or more, but any such lesser adjustment shall be carried forward and shall be made at the time and together with the next subsequent adjustment which together with any adjustments so carried forward shall serve to adjust such price by one percent or more. (iv) No adjustment in the Exercise Price shall be made hereunder if such adjustment would reduce the exercise price to an amount below par value of the Common Stock, which par value shall initially be $0.001 per share of Common Stock. (f) As a condition precedent to the taking of any action which would require an adjustment pursuant to this Section 5, the Company shall take any action which may be necessary, including obtaining regulatory approvals or exemptions, in order that the Company may thereafter validly and legally issue 5 as fully paid and nonassessable all shares of Common Stock which the Holder is entitled to receive upon exercise thereof. (g) Promptly after an adjustment or readjustment pursuant to this Section 5 becomes determinable, the Company shall give notice to the Holder of any action which requires an adjustment or readjustment pursuant to this Section 5, describing such event in reasonable detail and specifying the record date or effective date, if determinable, the required adjustment and the computation thereof, if applicable. If the Holder fails to object to any such notice within 30 days of receipt of the Company's notice, the adjustment will be deemed accepted by the Holder. 6. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon receipt of indemnity or security reasonably satisfactory to the Company (the original Holder's indemnity being satisfactory indemnity in the event of loss, theft or destruction of any Warrant owned by such Holder), or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company will make and deliver, in lieu of such lost, stolen, destroyed or mutilated Warrant, a new Warrant of like tenor and representing the right to purchase the same aggregate number of shares of Common Stock as provided for in such lost, stolen, destroyed or mutilated Warrant. 7. The Holder shall not, as holder of this Warrant, be entitled to vote or to receive dividends or be deemed the holder of Common Stock that may at any time be issuable upon exercise of this Warrant for any purpose whatsoever, nor shall anything contained herein be construed to confer upon the Holder, as holder of this Warrant, any of the rights of a stockholder of the Company or any right to vote for the election of directors or upon any matter submitted to stockholders at any meeting thereof, or to give or withhold consent to any corporate action (including without limitation, a Capital Reorganization), or to receive notice of meetings, or to receive dividends or subscription rights, until the Holder shall have exercised this Warrant and been issued shares of Common Stock in accordance with the provisions hereof. 8. The Holder of this Warrant, by acceptance hereof, agrees to give written notice to the Company before transferring this Warrant or transferring any Common Stock issuable or issued upon the exercise hereof of such Holder's intention to do so, describing briefly the manner of any proposed transfer of this Warrant or such Holder's intention as to the disposition to be made of shares of Common Stock issuable or issued upon the exercise hereof. Such Holder shall also provide the Company with an opinion of counsel reasonably satisfactory to the Company to the effect that the proposed transfer of this Warrant or disposition of shares received upon exercise hereof may be effected without registration or qualification (under any Federal or State law) and without causing the loss of the applicable securities law registration exemption(s) relied upon by the Company when it issued this Warrant. Upon receipt of such written notice and opinion by the Company, such Holder shall be entitled to transfer this Warrant, or to exercise this Warrant in accordance with its terms and dispose of the shares received upon such exercise or to dispose of shares of Common Stock received upon the previous exercise of this Warrant, all in accordance with the terms of the notice delivered by such Holder to the Company, provided that an appropriate legend respecting the aforesaid 6 restrictions on transfer and disposition shall be endorsed on this Warrant or the certificates for such shares. 9. Subject to the provisions of Section 8 hereof, this Warrant and all rights hereunder are transferable, in whole or in part, without charge to the Holder hereof, at the principal office of the Company by the Holder hereof in person or by its duly authorized attorney, upon surrender of this Warrant properly endorsed and this Warrant is exchangeable, upon the surrender hereof by the Holder hereof at the office of the Company, for new Warrants of like tenor representing in the aggregate the right to subscribe for and purchase the number of shares which may be subscribed for and purchased hereunder, each of such new Warrants to represent the rights to subscribe for and purchase such number of shares as shall be designated by said Holder hereof at the time of such surrender. Each taker and Holder of this Warrant, by taking or holding the same, consents and agrees that the bearer of this Warrant, when endorsed, may be treated by the Company and all other persons dealing with this Warrant as the absolute owner hereof for any purpose and as the person entitled to exercise the rights represented by this Warrant, or to transfer hereof on the books of the Company, any notice to the contrary notwithstanding; but until such transfer on such books, the Company may treat the registered Holder hereof as the owner for all purposes. 10. (a) Upon receipt of notice (the "Registration Request Notice") requesting registration under the Securities Act of Underlying Shares (defined below) from the holders of Notes and Warrants representing more than fifty percent (50%) of the aggregate Underlying Shares, on only one occasion, at any time commencing on the date hereof and terminating two years thereafter, the Company will offer to Holder the opportunity to include its Underlying Shares in such registration. The Company will use its reasonable best efforts to file with the Commission as promptly as practicable, a registration statement (the "Demand Registration Statement"), and will use its reasonable best efforts to have the Demand Registration Statement declared effective and remain effective until the earliest of (i) two years after the date it is declared effective, (ii) the date all the Underlying Shares registered thereby have been sold, or, (iii) in the reasonable opinion of the Company's counsel, the Underlying Shares may be sold publicly without registration. The Company will also use its reasonable best efforts to qualify the Underlying Shares under the securities laws of the state where Holder resides provided the Company is not required to execute a general consent to service or to qualify to do business in such state. This offer to Holder shall be made within twenty (20) days after the Company receives the Registration Request Notice. If Holder elects to include its Underlying Shares in the Demand Registration Statement, it will, in a timely fashion, provide the Company and its counsel with such information and execute such documents as the Company's counsel may reasonably require to prepare and process the Demand Registration Statement, it shall have no further rights to registration of its Underlying Shares under this Section 9(a). In the event that the Company has filed a registration statement with the Commission relating to its securities within ninety (90) days prior to its receipt of the Registration Request Notice, which registration statement has not been declared effective, Holder agrees that the Company can thereafter delay the filing of the Demand Registration Statement for a period not to exceed ninety (90) days. Anything to the contrary notwithstanding, in no event shall the Company be required to file a Demand Registration Statement with the Commission prior to one hundred and eighty (180) 7 days after the date hereof. As used in this Section 10, "Underlying Shares" means (i) shares of Common Stock issuable upon conversion of the Notes and (ii) the Warrant Shares. (b) If at any time after the date hereof, the Company proposes to file a registration statement under the Act with respect to any of its securities (except one relating to employee benefit plans or a merger, acquisition or similar transaction), it shall give written notice of its intention to effect such filing to the Holder at least 30 days prior to filing such registration statement (the "Piggyback Registration Statement"). If the Underlying Shares have not been previously registered and the Holder desires to include its Underlying Shares in the Piggyback Registration Statement, it shall notify the Company in writing within 15 days after receipt of such notice from the Company, in which event the Company shall include the Holder's Underlying Shares in the Piggyback Registration Statement. If the Holder elects to include its Underlying Shares in the Piggyback Registration Statement as set forth herein, it shall, in a timely fashion, provide the Company and its counsel with such information and execute such documents as its counsel may reasonably require to prepare and process the Piggyback Registration Statement. (c) The Company will provide the Holder with a copy of the Demand Registration Statement or Piggyback Registration Statement, as the case may be, and any amendments thereto, and copies of the final prospectus included therein in such quantities as may reasonably be required to permit the Holder to sell its Underlying Shares after the Demand Registration Statement or Piggyback Registration Statement is declared effective by the Commission. (d) The Company will bear all expenses (except underwriting discounts and commission, if any, and the legal fees and expenses, if any, of counsel to the Holder) necessary and incidental to the performance of its obligations under this Section 10. (e) The Company and the Holder, if the Holder's Underlying Shares are included in a Demand Registration Statement or Piggyback Registration Statement pursuant to this Section 10, shall provide customary and appropriate cross indemnities to each other covering the information supplied by the indemnifying party for inclusion in such Demand Registration Statement or Piggyback Registration Statement. (f) Anything to the contrary notwithstanding, the Holder agrees that as a condition for the Company registering the Underlying Shares, in the event that the Piggyback Registration Statement in which the Underlying Shares are included relates to an offering to be effected through or with the assistance of an underwriter, the Holder will consent to restrict the sale of the Underlying Shares or reduce (on a pro rata basis with shares of Common Stock issued to any other stockholders of the Company prior to or after the date hereof, and that, as of the time of determination, have presently exercisable registration rights and are requested by such stockholders to be included in such Piggyback Registration Statement) the number of Underlying Shares that may be included in such registration in accordance with the requirements of such underwriter. (g) Anything to the contrary notwithstanding, the Company shall not be required to register any Underlying Shares or provide notices under this Section 10 to a Holder whose Underlying Shares are either (i) are covered by a 8 then currently effective registration statement or (ii) in the reasonable opinion of the Company's counsel, may be sold pursuant to the exemption from registration provided by Section (k) of Rule 144 promulgated under the Act. 11. Any notices required or permitted to be given under the terms of this Warrant shall be sent by certified or registered mail (with return receipt requested) or delivered personally or by courier (including a nationally recognized overnight delivery service) or by facsimile transmission. Any notice so given shall be deemed effective three days after being deposited in the U.S. Mail, or upon receipt if delivered personally or by courier or facsimile transmission, in each case addressed to a party at the following address or such other address as each such party furnishes to the other in accordance with this Section 11: If to the Company: EDT Learning, Inc. 2999 North 44th Street Suite 650 Phoenix, AZ 85018 Telephone: (602) 952-1200 Facsimile: (602) 952-0544 Attention: President If to the Holder: <> <> <> Telephone:<> Facsimile:<> 12. (a) No failure or delay of the Holder in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Holder are cumulative and not exclusive of any rights or remedies which it would otherwise have. The provisions of this Warrant may be amended, modified or waived with (and only with) the written consent of the Company and the Holder. (b) Any such amendment, modification or waiver effected pursuant to this Section 12 shall be binding upon the Holder of the Warrant and Common Stock issuable upon exercise, upon each future holder thereof and upon the Company. In the event of any such amendment, modification or waiver the Company shall give prompt notice thereof to the Holder and, if appropriate, notation thereof shall be made on any Warrant thereafter surrendered for registration of transfer or exchange. No notice or demand on the Company in any case shall entitle the Company to any other or further notice or demand in similar or other circumstances. 13. All representations, warranties and covenants made by the Company herein or in any certificate or other instrument delivered by or on behalf of it in connection with the Warrant shall be considered to have been relied upon by the Holder and shall survive the issuance and delivery of the Warrant, 9 regardless of any investigation made by the Holder, and shall continue in full force and effect so long as any Warrant is outstanding. All statements in any such certificate or other instrument shall constitute representations and warranties hereunder. 14. All covenants, stipulations, promises and agreements contained in this Warrant by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not. 15. In case any one or more of the provisions contained in this Warrant shall be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein and therein shall not in any way be affected or impaired thereby. The parties shall endeavor in good faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. 16. This Warrant shall be governed by and construed in accordance with the substantive laws (but not the rules governing conflicts of laws) of the State of Delaware. [Intentionally left blank.] 10 IN WITNESS WHEREOF, the Company has caused this Warrant to be signed by its duly authorized officer and this Warrant to be dated as of March 29, 2002. EDT LEARNING, INC. By ------------------------------------- James M. Powers, Jr. President and Chief Executive Officer 11 FORM OF ASSIGNMENT (To Be Signed Only Upon Assignment) FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers unto ___________________________ all of the rights of the undersigned under this Warrant, with respect to the number of shares set forth below, and appoints ___________________________ to transfer this Warrant on the books of EDT LEARNING, INC. with the full power of substitution in the premises. NAME OF ASSIGNEE ADDRESS NUMBER OF SHARES - ---------------- ------- ---------------- Dated: ______________________ In the presence of: ___________________________________ ____________________________________ (Signature must conform in all respects to the name of the holder as specified on the face of this Warrant without alteration, enlargement or any change whatsoever, and the signature must be guaranteed in the usual manner.) SUBSCRIPTION FORM To be Executed by the Holder of this Warrant if such Holder Desires to Exercise this Warrant in Whole or in Part: To: EDT LEARNING, INC. (the "Company") The undersigned ___________________________________________________________ Please insert Social Security or other identifying number of Subscriber: _________________________________________ hereby irrevocably elects to exercise the right of purchase represented by this Warrant for, and to purchase thereunder, _________ shares of the Common Stock provided for therein and tenders payment herewith to the order of the Company in the amount of $___________, such payment being made as provided on the face of this Warrant. Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below. The undersigned requests that certificates for such shares of Common Stock be issued as follows: Name: __________________________________________________________________________ Address: _______________________________________________________________________ Deliver to: ____________________________________________________________________ Address: _______________________________________________________________________ Dated: ___________________________ Signature ______________________________ Note: The signature on this Subscription Form must correspond with the name as written upon the face of this Warrant in every particular, without alteration or enlargement or any change whatever. EX-12 6 ex-12.txt RATIO OF EARNINGS TO FIXED CHANGES EXHIBIT 12 EDT LEARNING, INC. RATIO OF EARNINGS TO FIXED CHANGES The following table sets forth the Company's earnings to fixed charges for the periods indicated: YEAR ENDED MARCH 31, -------------------------- 2002 2001 2000 ---- ---- ---- Ratio of Earnings to Fixed Charges (a) 2.4 (b) (c) (a) For the purposes of computing the consolidated ratio of earnings to fixed charges, earnings consist of income before income taxes and extraordinary items. Fixed charges consist of interest on all indebtedness, amortization of debt discount and expense, and that portion of rental expense that we believe to be representation of interest. (b) Due to the loss recorded in 2001, the ratio coverage was less than 1:1. The Company would have needed to generate additional earnings of $25 million to achieve a coverage of 1:1 in 2001. (c) Due to the loss recorded in 2000, the ratio coverage was less than 1:1. The Company would have needed to generate additional earnings of $3.5 million to achieve a coverage of 1:1 in 2000. EX-21.1 7 ex21-1.txt SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21.1 SUBSIDIARIES OF THE REGISTRANT 1. Liberty Acquisition Corporation, a Tennessee corporation and wholly owned subsidiary of EDT Learning, Inc. 2. Special Omega Acquisition Corporation, a Delaware corporation and wholly owned subsidiary of EDT Learning, Inc. 3. Pentegra Investments, Inc., a Delaware corporation and wholly owned subsidiary of EDT Learning, Inc. 4. Edge Acquisition Subsidiary, Inc., a Delaware Corporation and wholly owned subsidiary of EDT Learning. Inc. 5. TW Acquisition Subsidiary, Inc., a Delaware Corporation and wholly owned subsidiary of EDT Learning, Inc. EX-23.1 8 ex23-1.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (No. 333-71332) of EDT Learning, Inc., of our report dated July 11, 2002, which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated July 11, 2002 relating to the financial statement schedules, which appears in this Form 10-K. PricewaterhouseCoopers LLP Phoenix, Arizona July 15, 2002 -----END PRIVACY-ENHANCED MESSAGE-----