-----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, OAn5aOmPidMjAS3oigjlpwGxJk2cKwPeLnJ09RsVxjlw9uaEeu9X7Oxj2haOYwSs ng9W20bSrFyJ3M+ysj/JfA== 0001019687-03-001680.txt : 20030814 0001019687-03-001680.hdr.sgml : 20030814 20030814152641 ACCESSION NUMBER: 0001019687-03-001680 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20030630 FILED AS OF DATE: 20030814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EDT LEARNING INC CENTRAL INDEX KEY: 0001042291 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING, DATA PROCESSING, ETC. [7370] IRS NUMBER: 760545043 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13725 FILM NUMBER: 03847127 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: E-DENTIST COM INC DATE OF NAME CHANGE: 20001114 FORMER COMPANY: FORMER CONFORMED NAME: PENTEGRA DENTAL GROUP INC DATE OF NAME CHANGE: 19970822 10-Q 1 edt_10q-063003.txt ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ______________ FORM 10-Q (MARK ONE) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE PERIOD ENDED JUNE 30, 2003 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE TRANSITION PERIOD FROM _________ TO _________ COMMISSION FILE NUMBER 1-13725 ______________ EDT LEARNING, INC. (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 76-0545043 (STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 2999 NORTH 44TH STREET, SUITE 650, PHOENIX, ARIZONA 85018 (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE) (602) 952-1200 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) ______________ 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 ( ) Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2 of the Exchange Act). Yes ( ) No (X) The number of shares of Common Stock of the Registrant, par value $.001 per share, outstanding at August 8, 2003 was 15,797,791, net of shares held in treasury. ================================================================================ FORM 10-Q REPORT INDEX
PART I--FINANCIAL INFORMATION PAGE ---- Item 1--Unaudited Condensed Consolidated Financial Statements Unaudited Condensed Consolidated Balance Sheets as of June 30, 2003 and March 31, 2003........................................................................ 3 Unaudited Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2003 and June 30, 2002.......................................... 4 Unaudited Condensed Consolidated Statement of Changes in Shareholders' Equity for the Three Months Ended June 30, 2003....................................... 5 Unaudited Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2003 and June 30, 2002.......................................... 6 Notes to Unaudited Condensed Consolidated Financial Statements........................ 7 Item 2--Management's Discussion and Analysis of Financial Condition and Results of Operations................................................... 16 Item 3--Quantitative and Qualitative Disclosures about Market Risk................................... 28 Item 4--Controls and Procedures...................................................................... 28 PART II--OTHER INFORMATION Item 1--Legal Proceedings............................................................................ 28 Item 2--Change in Securities and Use of Proceeds..................................................... 29 Item 3--Defaults of Senior Securities................................................................ 29 Item 4--Submission of Matters to a Vote of Security Holders.......................................... 29 Item 5--Other Information............................................................................ 29 Item 6--Exhibits and Reports on Form 8-K............................................................. 29 Signatures........................................................................................... 32 Certifications....................................................................................... 33 A copy of the annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports are available for free on the Company's website, www.edtlearning.com, as soon as reasonably practical after such material is electronically filed with the Securities and Exchange Commission. 2
PART I--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS EDT LEARNING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNE 30, 2003 MARCH 31, (UNAUDITED) 2003 (A) ------------ ------------ ASSETS Current assets: Cash and cash equivalents ................................................... $ 124 $ 409 Accounts receivable, net of allowance for doubtful accounts of $424 and $425, respectively ................................................................ 861 675 Notes receivable, net of allowance for doubtful accounts of $489 and $553, respectively .............................................................. 223 270 Prepaid and other current assets ............................................ 101 33 ------------ ------------ Total current assets ...................................................... 1,309 1,387 Property and equipment, net .................................................... 429 485 Goodwill ....................................................................... 8,844 8,823 Intangible assets, net ......................................................... 1,265 1,346 Notes receivable, net of allowance for doubtful accounts of $663 and $607, Respectively ............................................................. 289 326 Other assets .................................................................. 54 56 ------------ ------------ Total assets .............................................................. $ 12,190 $ 12,423 ============ ============ LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long term debt ........................................... $ 596 $ 728 Accounts payable and accrued liabilities .................................... 2,005 2,040 Current portion of capital lease liabilities ................................ 502 462 Current portion of deferred revenue ......................................... 752 817 ------------ ------------ Total current liabilities ................................................. 3,855 4,047 Long term debt, less current maturities, net of discount of $1,981 and $2,038, Respectively ............................................................. 5,979 5,863 Capital lease liabilities, less current maturities ............................. 126 193 ------------ ------------ Total liabilities ......................................................... 9,960 10,103 ------------ ------------ Commitments and contingencies SHAREHOLDERS' EQUITY: Common stock, $.001 par value 40,000,000 shares authorized, 17,042,504 and 17,018,184 issued, respectively ............................................. 17 17 Additional paid-in capital .................................................. 32,890 32,854 Accumulated deficit ......................................................... (29,426) (29,300) Less: 1,244,713 treasury share at cost ..................................... (1,251) (1,251) ------------ ------------ Total shareholders' equity ................................................ 2,230 2,320 ------------ ------------ Total liabilities and shareholders' equity ................................ $ 12,190 $ 12,423 ============ ============ (A) Derived from the audited consolidated financial statements as of March 31, 2003. THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 3
EDT LEARNING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED JUNE 30, ----------------------- 2003 2002 --------- --------- Revenues Licenses ........................................... $ 600 $ 12 Service and maintenance ............................ 742 1,119 --------- --------- Total e-Learning revenue ....................... 1,342 1,131 Dental contract revenue ............................ 83 1,171 --------- --------- Total revenues ................................. 1,425 2,302 --------- --------- Operating expenses Research and development ........................... 565 907 Sales and marketing ................................ 312 360 General and administrative ......................... 588 713 Depreciation and amortization ...................... 107 479 --------- --------- Total operating expenses ....................... 1,572 2,459 --------- --------- Loss from operations .................................. (147) (157) Interest expense ................................... (351) (415) Interest income and other .......................... 6 36 Gain on termination of service agreements with Affiliated Practices ..................... 14 181 Gain on settlement of debt and other obligations ................................... 352 -- --------- --------- Loss before income taxes ........................... (126) (355) Income taxes ....................................... -- -- --------- --------- Net loss .............................................. $ (126) $ (355) ========= ========= Net loss per share - basic and diluted ................ $ (0.01) $ (0.02) ========= ========= Number of shares used in calculation of loss per share, basic and diluted ................................. 15,798 14,429 ========= ========= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 4
EDT LEARNING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (IN THOUSANDS)
COMMON STOCK ADDITIONAL TOTAL ---------------------- PAID -IN ACCUMULATED TREASURY SHAREHOLDERS' SHARES AMOUNT CAPITAL DEFICIT STOCK EQUITY --------- --------- --------- --------- --------- --------- Balances, April 1, 2003 ........... 17,018 $ 17 $ 32,854 $(29,300) $ (1,251) $ 2,320 Issuances of common stock ......... 24 -- 14 -- -- 14 Repricing of warrants ............. -- -- 12 -- -- 12 Vesting of restricted stock grant . -- -- 10 -- -- 10 Net loss .......................... -- -- -- (126) -- (126) --------- --------- --------- --------- --------- --------- Balances, June 30, 2003 ........... 17,042 $ 17 $ 32,890 $(29,426) $ (1,251) $ 2,230 ========= ========= ========= ========= ========= ========= THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 5
EDT LEARNING, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS CASH FLOWS (UNAUDITED) (IN THOUSANDS) THREE MONTHS ENDED JUNE 30, ------------------------- 2003 2002 ---------- ---------- Net cash used in operating activities ............ $ (332) $ (832) ---------- ---------- Cash flows from investing activities: Repayment of notes receivable ................. 78 337 Proceeds from practice terminations ........... 61 382 Acquisition, royalty earnout .................. (21) -- Capital expenditures .......................... -- (72) ---------- ---------- Net cash provided by investing activities ... 118 647 ---------- ---------- Cash flows from financing activities: Repayment of long-term debt ................... (44) (97) Repayment of capital lease liabilities ........ (27) (155) Proceeds from stock option exercise ........... -- 17 ---------- ---------- Net cash used in financing activities ....... (71) (235) ---------- ---------- Net change in cash and cash equivalents .......... (285) (420) Cash and cash equivalents, beginning of period ... 409 1,498 ---------- ---------- Cash and cash equivalents, end of period ......... $ 124 $ 1,078 ========== ========== Non cash investing and financing activities: Issuance of common stock for acquisitions ..... $ -- $ 2,307 ========== ========== THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 6 EDT LEARNING, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. ORGANIZATION AND NATURE OF OPERATIONS Headquartered in Phoenix, Arizona, EDT Learning, Inc. ("EDT Learning" or the "Company") is a leading provider of e-Learning and Web collaboration software and services. The Company's software has become well recognized for providing industry-leading software with the most robust set of features and functionality. With over 15 years of combined e-Learning expertise, EDT Learning provides proven solutions to corporate, government, and education clients alike. As a comprehensive provider of e-Learning software and services, EDT Learning's products and services are offered either as an integrated suite or sold separately. The Company began in March of 1998 as a dental practice management company under the name Pentegra Dental Group, Inc. Its formation included the simultaneous rollup of dental practices ("Affiliated Practices") and an initial public offering raising $25 million in initial capital. The Company's initial goals were to provide training and practice enhancement services to its affiliated dental practices spread over 31 states. The Company subsequently shifted its focus away from the dental practice management industry and toward the e-Learning sector in the summer of 2001, and changed its name to EDT Learning, Inc. The Company has elected not to enter into new dental practice management contacts, and intends to not renew existing dental practice management contracts as they expire. The unaudited condensed consolidated financial statements included herein have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC"). Pursuant to such regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. The Company believes the presentation and disclosures herein are adequate to make the information not misleading, but do not purport to be a complete presentation inasmuch as all note disclosures required by generally accepted accounting principles are not included. In the opinion of management, the unaudited condensed consolidated financial statements reflect all elimination entries and normal recurring adjustments that are necessary for a fair statement of the results for the interim periods ended June 30, 2003 and 2002. Fiscal operating results for interim periods are not necessarily indicative of the results for full years. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the financial statements of the Company and related notes thereto, and management's discussion and analysis related thereto, all of which are included in the Company's annual report on Form 10-K as of and for the year ended March 31, 2003, as filed with the SEC. The accompanying consolidated financial statements have been prepared on a basis which assumes that the Company will continue as a going concern and which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. The Company changed its business model from a dental practice management company to an e-Learning company in the summer of 2001. The Company is currently implementing its e-Learning strategy and has a limited operating history in the e-Learning business. The Company had a working capital deficiency, and incurred an operating loss and had negative cash flows from operations during the three months ended June 30, 2003 and during fiscal 2003. As part of the Company's legacy business, services were provided to affiliated dental practices in accordance with modified service agreements. Those services generally were access to online enhancement, online payroll processing and online consulting and seminars. As anticipated and previously announced, nearly all of those legacy service agreements terminated during fiscal 2003 which will reduce revenues and cash flow from this source and accordingly will negatively affect the Company's liquidity and operating results. These matters, among others, including those discussed above and the limited operating history as an e-Learning company, raise substantial doubt about the Company's ability to continue as a going concern. Management's plan with regard to these matters include continued development, marketing and licensing of its e-Learning products and services through both internal growth and acquisition. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient revenues from its products and services to provide adequate cash flows to sustain operations. Continuation of the Company is dependent on 7 the Company's ability to raise additional equity or debt capital, to increase its e-Learning revenues, to generate positive cash flows from operations and to achieve profitability. The consolidated financial statements do not include any adjustments related to the recoverability of assets and classification of liabilities that might result from the outcome of this uncertainty. 2. SIGNIFICANT ACCOUNTING POLICIES USE OF ESTIMATES The Company has not materially added to or changed its significant accounting policies since March 31, 2003. For a description of these policies, refer to Note 3 of the consolidated financial statements in the Company's annual report on Form 10-K as of and for the year ended March 31, 2003. 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, accounts receivable and notes receivable valuation reserves, realizability of intangible assets, realizability of income tax assets and the evaluation of contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of such estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumption or conditions. STOCK-BASED COMPENSATION The Company has adopted SFAS No. 123, "Accounting for Stock-Based Compensation," for disclosure purposes. Under SFAS No. 123, the Company measures compensation expense for its stock-based employee compensation plan using the intrinsic value method prescribed in Accounting Principles Board ("APB") No. 25, "Accounting for Stock Issued to Employees" and its related interpretations. The Company provides pro forma disclosure of the effect on net income or loss as if the fair value based method prescribed in SFAS No. 123 has been applied in measuring compensation expense. The fair value for options granted was estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions for the three months ended June 30, 2003. There were no options granted during the three months ended June 30, 2002. THREE MONTHS ENDED JUNE 30, -------------------------------------- 2003 2002 ------------------ ------------------- Risk free interest rate 3.88% -- Dividend yield 0% -- Volatility factors of the expected market price of the Company's common stock 70% -- Weighted-average expected life of options 5-9 years -- 8 For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS):
THREE MONTHS ENDED JUNE 30, --------------------------- 2003 2002 ---------- ---------- Net Loss, as reported ..................................... $ (126) $ (355) Plus: Stock based employee compensation expense included in reported net income (loss) ............................. -- -- Less: Total stock based employee compensation expense determined using fair value based method ............... (57) (164) ---------- ---------- Pro forma net income (loss) ............................... $ (183) $ (519) ========== ========== Loss per share: Basic and diluted - as reported ........................... $ (0.01) $ (0.02) ========== ========== Basic and diluted - pro forma ............................. $ (0.01) $ (0.04) ========== ==========
RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" was issued. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after June 30, 2003. Adoption of this statement is not expected to have a significant effect on the Company's consolidated financial position or results of operations. In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 is not expected to have a significant effect on the Company's consolidated financial position, results of operations, or cash flows. In July 2003, the EITF reached a consensus on EITF 03-5, "Applicability of AICPA SOP 97-2 to Non-Software Deliverables." EITF 03-5 provides accounting guidance on whether non-software deliverables (e.g., non-software related equipment or services) included in an arrangement that contains software are within the scope of SOP 97-2. In general, any non-software deliverables are within the scope of SOP 97-2 if the software deliverable is essential to its functionality. Companies are required to adopt this consensus in the first reporting period (annual or interim) beginning after ratification by the FASB, which is expected to be August 13, 2003. The Company believes the adoption of EITF 03-5 will not have a material impact on the Company's financial position or results of operations. 3. EARNINGS PER SHARE Basic earnings per share are computed by dividing net income available to common stockholders by the weighted-average number of common shares outstanding for the reporting period. Diluted earnings per share are computed similar to basic earnings per share while giving effect to all potential dilutive common stock equivalents that were outstanding during the period. For the three months ended June 30, 2003 and 2003, options and warrants to purchase 8,435,977 and 8,347,315 shares of common stock were excluded from the computation of diluted earnings per share because of their anti-dilutive effect. Furthermore, a restricted stock grant of 450,000 shares and 500,000 shares contingently issuable in the Quisic acquisition has been excluded from the earnings per share calculations. 9 4. SEGMENT INFORMATION During the three months ended June 30, 2003 and 2002, the Company had two reportable segments, learning and dental practice management. The e-Learning segment included revenues and operating expenses related to the development and sale of the Company's e-Learning products. The dental practice segment included revenues from service contracts, operating expenses related to the delivery of the dental services and other non-operating expenses. There are no intersegment revenues. Summary financial information of the segments is as follows: THREE MONTHS ENDED JUNE 30, ------------------------- 2003 2002 ---------- ---------- Revenues: Licenses ........................ $ 600 $ 12 Service and maintenance ......... 742 1,119 ---------- ---------- Total e-Learning revenues .... 1,342 1,131 Dental practice management ...... 83 1,171 ---------- ---------- Total revenues .............. $ 1,425 $ 2,302 ========== ========== Operating expenses: e-Learning ...................... $ 1,522 $ 1,222 Dental practice management ...... 50 1,237 ---------- ---------- Total operating expenses .... $ 1,572 $ 2,459 ========== ========== Loss from operations: e-Learning ...................... $ (180) $ (91) Dental practice management ...... 33 (66) ---------- ---------- Total loss from operations .. $ (147) $ (157) ========== ========== Capital expenditures: e-Learning ...................... $ -- $ 72 Dental practice management ...... -- -- ---------- ---------- Total capital expenditures .. $ -- $ 72 ========== ========== JUNE 30, MARCH 31, 2003 2003 ---------- ---------- Total assets: e-Learning ...................... $ 10,965 $ 11,081 Dental practice management ...... 1,225 1,342 ---------- ---------- Total assets .................. $ 12,190 $ 12,423 ========== ========== 5. GOODWILL AND INTANGIBLE ASSETS, NET Goodwill consisted of the following: JUNE 30, MARCH 31, 2003 2003 ---------- ---------- (IN THOUSANDS) Goodwill........................... $ 8,844 $ 8,823 ========== ========== 10 The changes in the carrying amount of the goodwill for the three months ended June 30, 2003: LEARNING SEGMENT ---------- Balance, March 31, 2003....................................... $ 8,823 LearnLinc royalty earnout.................................. 21 ---------- Balance, June 30, 2003........................................ $ 8,844 ========== Intangible assets consisted of the following (in thousands):
JUNE 30, 2003 ---------------------------------------------- GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION NET ------------ ------------ ------------ AMORTIZED INTANGIBLE ASSETS: Deferred offering costs . $ 1,020 $ (270) $ 750 Purchase software ....... 675 (174) 501 Customer relationship ... 32 (18) 14 ------------ ------------ ------------ $ 1,727 $ (462) $ 1,265 ============ ============ ============ MARCH 31, 2003 ---------------------------------------------- GROSS CARRYING ACCUMULATED AMOUNT AMORTIZATION NET ------------ ------------ ------------ AMORTIZED INTANGIBLE ASSETS: Deferred offering costs . $ 1,020 $ (249) $ 771 Purchase software ....... 675 (118) 557 Customer relationship ... 32 (14) 18 ------------ ------------ ------------ $ 1,727 $ (381) $ 1,346 ============ ============ ============
6. ACCOUNT PAYABLE AND ACCRUED LIABILITIES Accounts payable and accrued liabilities consisted of the following: JUNE 30, MARCH 31, -------------------- 2003 2003 --------- --------- (IN THOUSANDS) Accounts payable trade .......................... $ 832 $ 681 Accrued state sales tax ......................... 32 384 Accrued interest ................................ 320 310 Amount payable to Quisic shareholders ........... 200 150 Amounts related to acquisitions ................. 71 73 Accrued salaries and related benefits ........... 137 160 Amount payable to third party providers ......... 120 37 Deferred rent liability ......................... 116 89 Lease termination liability ..................... 103 101 Other ........................................... 74 55 --------- --------- Total accounts payable and accrued liabilities $ 2,005 $ 2,040 ========= ========= 11 7. LONG-TERM DEBT Long-term debt consisted of the following: JUNE 30, MARCH 31, --------------------- 2003 2003 -------- -------- (IN THOUSANDS) Convertible redeemable subordinated notes $ 5,775 $ 5,775 Convertible subordinated notes, Series A 849 849 Subordinated promissory notes ........... 1,072 1,072 Shareholders' notes payable ............. 391 430 Notes payable ........................... 469 503 -------- -------- 8,556 8,629 Less: current portion of long-term debt . (596) (728) discount .......................... (991) (1,019) beneficial conversion feature ..... (990) (1,019) -------- -------- Long-term debt .......................... $ 5,979 $ 5,863 ======== ======== In March 2002, the Company completed a Private Placement Offering (the "Offering") raising capital of $5,775,000. Under the terms of the Offering, the Company issued convertible redeemable subordinated notes ("the notes") and warrants to purchase 5,775,000 shares of the Company's common stock. The notes bear interest at 12% per annum and require quarterly interest payments with the principal due at maturity on March 29, 2012. The note holders may convert the notes into shares of the Company's common stock at a price equal to $1.00 per share. The Company may force redemption of the notes into shares of the Company's common stock at the conversion price, if at any time the closing price of the Company's common stock equals or exceeds $3.00 per share for 20 consecutive trading days. The notes are subordinated to any present or future senior indebtedness, with no waiver required. The exercise price for the warrants is $3.00 per share. The Company may force redemption of the warrants into shares of the Company's common stock at the exercise price, if at any time the closing price of the Company's common stock equals or exceeds $5.50 per share for 20 consecutive trading days. The warrants expire on March 29, 2005. The fair value of the warrants was estimated using a Black-Scholes pricing model with the following assumptions: contractual and expected life of three years, volatility of 75%, dividend yield of 0%, and a risk-free rate of 3.87%. The fair value was then used to calculate a discount of $1,132,000, which is being amortized to interest expense over ten years, the term of the notes. As the carrying value of the notes is less than the conversion value, a beneficial conversion feature of $1,132,000 was calculated and recorded as an additional discount to the notes and is being amortized to interest expense over the term of the notes. Upon conversion, any remaining discount associated with the beneficial conversion feature will be expensed in full at the time of conversion. 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"). The Learning-Edge Notes bear interest at rates ranging from at 7.5% to 9.0% and are due in two equal installments on April 5, 2005 and on October 1, 2005, respectively. If the Company raises additional capital equal to or in excess of $3 million, 25% of the principal of the Learning-Edge Notes is to be repaid. For each $500,000 raised above $3 million, the repayment percentage increases by 15%. If more than $5 million is raised, 100% of the principal of the Learning-Edge Notes is to be repaid. The holders of the Learning-Edge Notes waived the accelerated payment schedule in relation to the Offering. The Convertible Subordinated Notes Series A Securities ("Series A Securities") were issued in connection with the acquisition of certain Affiliated Practices. The Series A Securities bear interest at 12% and can be converted to Common Stock of the Company at conversion prices ranging from $6.75 to $7.00 per share. The conversion period began on November 1, 1999 and ends on July 1, 2004. The principal amount of the Series A Securities, if not converted, is payable on July 1, 2004. In connection with the IPO, the Company issued $468,000 of notes payable to certain shareholders formerly owning preferred stock. The notes bear 6% interest and were originally payable on the earlier of March 30, 2003 or the date upon which the Company offers and sells an amount of equity securities equal or greater to the gross proceeds of the IPO. During the three months ended June 30, 2003 and the year ended March 31, 2003, $4,000 and $58,000 of accrued 12 interest on certain of these notes was added to the principal balance and the maturity date was extended to April 1, 2005. The new principal balance on the extended notes is $267,000 and the interest rate was increased to 10%. The remaining $124,000 is currently past due. In connection with the acquisition of certain assets of LearnLinc Corporation, the Company issued a $250,000 note payable. The note bears interest at 6% with quarterly interest payments and is due on December 13, 2003. The aggregate maturities of long-term debt excluding capital leases for each of the next five years subsequent to June 30, 2003 were as follows (in thousands): Amounts past due........................................... $ 124 2004....................................................... 472 2005....................................................... 1,653 2006....................................................... 532 2007....................................................... -- 2008....................................................... -- Thereafter................................................. 5,775 ---------- $ 8,556 ========== 8. STOCK OPTION PLANS AND WARRANTS The Company grants stock options under its 1997 Stock Compensation Plan (the "Plan"). The Company recognizes stock-based compensation issued to employees at the intrinsic value between the exercise price of options granted and the fair value of stock for which the options may be exercised. However, pro forma disclosures as if the Company recognized stock-based compensation at the fair value of the options themselves are presented below. Under the Plan, the Company is authorized to issue 3,500,000 shares of Common Stock pursuant to "Awards" granted to officers and key employees in the form of stock options. There were 1,788,313 options granted under the Plan at June 30, 2003. 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 June 30, 2003:
NUMBER OF WEIGHTED WEIGHTED SHARES AVERAGE AVERAGE UNDERLYING EXERCISE FAIR-VALUE OF OPTIONS PRICES OPTIONS GRANTED ------------- ----------- --------------- Outstanding at March 31, 2003................... 1,835,865 $ 1.82 Granted......................................... 70,000 0.50 $ 0.21 ====== Exercised....................................... -- Forfeited....................................... (117,552) 0.59 Expired......................................... -- -------------- ----------- Outstanding at June 30, 2003.................... 1,788,313 $ 1.87 ============== ===========
13 The following table summarizes information about stock options outstanding at June 30, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ---------------------------------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE AVERAGE NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE SHARES PRICE LIFE (YEARS) SHARES PRICE --------- -------- --------------------- --------- -------- (SHARE DATA IN THOUSANDS) $ 0.01 - $ 0.99 1,029,581 $ 0.54 7.81 629,169 $ 0.53 $ 1.00 - $ 1.99 107,125 1.59 7.20 96,175 1.66 $ 2.00 - $ 2.99 430,000 2.22 6.03 378,000 2.25 $ 3.00 - $ 8.50 221,607 7.31 4.85 201,929 7.40 -------------- ------------- 1,788,313 1,305,273 ============== ===============
The following table summarizes information about stock purchase warrants outstanding at June 30, 2003:
WARRANTS OUTSTANDING WARRANTS EXERCISABLE ---------------------------------------------- ------------------------ WEIGHTED WEIGHTED AVERAGE WEIGHTED AVERAGE AVERAGE NUMBER OF EXERCISE REMAINING CONTRACTUAL NUMBER OF EXERCISE SHARES PRICE LIFE (YEARS) SHARES PRICE --------- -------- --------------------- --------- -------- (SHARE DATA IN THOUSANDS) $ 0.42 - $ 0.42 543,182 $ 0.42 8.15 543,182 $ 0.42 $ 0.44 - $ 0.44 132,972 0.44 8.21 132,972 0.44 $ 0.50 - $ 0.50 25,000 0.50 2.51 25,000 0.50 $ 1.50 - $ 1.50 171,510 1.50 8.56 171,510 1.50 $ 3.00 - $ 3.00 5,775,000 3.00 1.75 5,775,000 3.00 -------------- ------------- 6,647,664 6,647,664 ============== ===============
In December 2001, the Company, under the initiative of the Compensation Committee with the approval of the Board of Directors, issued its chief executive officer an incentive stock grant under the 1997 Stock Compensation Plan of 450,000 restricted shares of the Company's common stock as a means to retain and incentivize the chief executive officer. The shares 100% vest after 10 years from the date of grant. The shares were valued at $405,000 based on the closing price of the stock on the date of grant, which is recorded as compensation expense ratably over the ten-year vesting period. The vesting of the incentive shares accelerates based on the Company's share price as follows:
PERFORMANCE CRITERIA SHARES VESTED --------------------------------------------------------------------- ---------------- Share price trades for $4.50 per share for 20 consecutive days 150,000 shares Share price trades for $8.50 share for 20 consecutive days 150,000 shares Share price trades for $12.50 per share for 20 consecutive days 150,000 shares
14 9. COMMITMENTS AND CONTINGENCIES The Company is subject to various commitments and contingencies as described in Note 16 to the consolidated financial statements in the Companies annual report on Form 10-K as of and for the year ended March 31, 2003. The significant items included were Lease Commitments, Employment Agreements, Litigation and Royalty Agreements. During the three month period ended June 30, 2003, the following commitments and contingencies arose or were settled: The Company's wholly owned subsidiary, TW Acquisition Subsidiary, Inc. was a respondent in a claim asserted by the Tennessee Department of Revenue alleging a sales and use tax liability of approximately $384,000 from sales made by its predecessor, ThoughtWare Technologies, Inc. The Company was notified on July 29, 2003, that the sales tax assessment was abated. Accordingly, the Company has reversed $352,000 of the accrued liability as of June 30, 2003. As the purchase allocation period to the acquisition was closed, the $352,000 was recorded as other income rather than a reduction to goodwill. Effective May 1, 2003, certain employees of the Company terminated their employment with the Company and created a new company, Interactive Alchemy, Inc. ("IA"). The Company entered into a non-cancelable three-year subcontractor agreement with IA whereby the Company is required to source its custom content development services through IA. The Company provides IA with certain facilities and administrative support for which in exchange it receives a specified amount of support services. Furthermore, the agreement provides for a specified fee sharing arrangement between the Company and IA for all custom content development services provided. During the three month period ended June 30, 2003, the Company incurred approximately $151,000 of fees to IA in connection with this agreement. 10. SUBSEQUENT EVENTS The Company is in the process of raising $1 million to $1.5 million of additional capital through a private placement offering. Under the terms of the offering, the Company intends to sell 20 units at $50,000 each, or a total of $1 million in gross proceeds, with an additional 10 units available for sale at the discretion of the Company, which would increase the gross proceeds to $1.5 million in the event the additional units are issued. Each unit will consist of 50,000 shares of preferred stock and a warrant to purchase 25,000 shares of common stock. The preferred stock in each unit, which will have a par value of $0.01, will be convertible into 100,000 shares of common stock at a price of $0.50 per share (subject to adjustment in certain events). The warrants are exercisable at a price of $1.50 per share and will expire three years after the date of issuance of the warrant. The Company will pay an 8% dividend to holders of the preferred stock, and the dividend will be cumulative. The preferred stock will be non-voting and non-participating. The placement agent is to be paid a commission totaling 10% of gross proceeds, plus a 3% non-accountable expense allowance. Through August 12, 2003, the Company has received subscriptions for approximately $1,000,000 and has extended the offering through August 31, 2003. The Company intends to file a Form 8-K in early September 2003 with the full results of the offering. 15 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations STATEMENTS CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K THAT INVOLVE WORDS LIKE "ANTICIPATES," "EXPECTS," "INTENDS," "PLANS," "BELIEVES," "SEEKS," "ESTIMATES" AND SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SUCH FORWARD-LOOKING STATEMENTS INVOLVE CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANTICIPATED RESULTS. THESE RISKS AND UNCERTAINTIES INCLUDE, BUT ARE NOT LIMITED TO, OUR DEPENDENCE ON OUR PRODUCTS OR SERVICES, MARKET DEMAND FOR OUR PRODUCTS AND SERVICES, OUR ABILITY TO ATTRACT AND RETAIN CUSTOMERS AND CHANNEL PARTNERS, OUR ABILITY TO EXPAND OUR TECHNOLOGICAL INFRASTRUCTURE TO MEET THE DEMAND FROM OUR CUSTOMERS, OUR ABILITY TO RECRUIT AND RETAIN QUALIFIED EMPLOYEES, THE ABILITY OF CHANNEL PARTNERS TO SUCCESSFULLY RESELL OUR SERVICES, THE STATUS OF THE OVERALL ECONOMY, THE STRENGTH OF COMPETITIVE OFFERINGS, THE PRICING PRESSURES CREATED BY MARKET FORCES, AND THE OTHER RISKS DISCUSSED HEREIN. ALL FORWARD-LOOKING STATEMENTS INCLUDED IN THIS REPORT ARE BASED ON INFORMATION AVAILABLE TO US AS OF THE DATE HEREOF. WE EXPRESSLY DISCLAIM ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, TO REFLECT ANY CHANGE IN OUR EXPECTATIONS OR IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS BASED. OUR REPORTS ARE AVAILABLE FREE OF CHARGE AS SOON AS REASONABLY PRACTICABLE AFTER WE FILE THEM WITH THE SEC AND MAY BE OBTAINED THROUGH OUR WEBSITE. OVERVIEW As of June 30, 2003 we offered to our customers a wide array of e-Learning and training products and services. Our four-product suite (LearnLinc, MeetingLinc, ConferenceLinc, and SupportLinc) also lets customers collaborate and present over the Internet in one-to-one, one-to-many, and many-to-many communication formats. Our Web collaboration suite of products is sold in both an application service provider ("ASP") or hosted basis (a periodic license) and on a purchase client hosted basis (client server software sold as a non-periodic, perpetual license). While we are a comprehensive provider of e-Learning products, over the past 15 months we shifted our focus away from our lower margin custom content service business and toward our higher margin software products with particular emphasis since December of 2002 on our Web collaboration and virtual classroom suite led by LearnLinc. In addition to our web collaboration and virtual classroom software, we also offer software that facilitates the management of users and e-Learning content through EDT's Learning Management System (LMS). Our LMS has been combined with a suite of workforce management solutions (the ThoughtWare Suite), which includes Career Planner, Job Seeker, and Performance Coach. Our LMS software is offered in an ASP format using a periodic per user per period annual license agreement. For the development of custom online content we offer an award winning content development software, (i-Canvas) which is sold on an individual user perpetual license basis. We continue to provide to our customers award winning custom content services including the development of online course material specific to our customers. Custom content services are bid on a project-by-project basis and revenue is recognized on the percentage-of-completed contract method. Finally, we offer a library of online courses focused upon the training of executives on essential business topics, including an online "mini-MBA" program. Customers subscribe for a period of time per course, with the license providing for access over typically one year from date the students first access of the course. The Company began operations in March of 1998 under the name Pentegra Dental Group, Inc. Its formation included the simultaneous roll-up of 50 businesses and an initial public offering. The Company's initial goals were to provide training and practice enhancement services nationwide to our affiliated dental practices including the use of our proprietary Web-based management and financial reporting system. Beginning in April of 2000, the Company modified its affiliated service agreements and commensurate with that change the Company recorded certain charges against earnings during the fiscal year ending March 31, 2001. The Company evolved from its legacy business into its current e-Learning focus during its fiscal year 2002, and accordingly, changed its name to EDT Learning, Inc. (now trading as AMEX:EDT). 16 During the three months ended June 30, 2003, the Company had two reportable segments, e-Learning and dental practice management. The e-Learning segment included revenues and operating expenses related to the development and sale of the Company's e-Learning products. The dental practice segment included revenues from service contracts, operating expenses related to the delivery of the dental services and other non-operating expenses. There are no intersegment revenues. Summary financial information of these segments is as follows: THREE MONTHS ENDED JUNE 30, ------------------------- 2003 2002 ---------- ---------- Revenues: Licenses ........................ $ 600 $ 12 Service and maintenance ......... 742 1,119 ---------- ---------- Total e-Learning revenues .... 1,342 1,131 Dental practice management ...... 83 1,171 ---------- ---------- Total revenues .............. $ 1,425 $ 2,302 ========== ========== Operating expenses: e-Learning ...................... $ 1,522 $ 1,222 Dental practice management ...... 50 1,237 ---------- ---------- Total operating expenses .... $ 1,572 $ 2,459 ========== ========== Loss from operations: e-Learning ...................... $ (180) $ (91) Dental practice management ...... 33 (66) ---------- ---------- Total loss from operations .. $ (147) $ (157) ========== ========== Capital expenditures: e-Learning ...................... $ -- $ 72 Dental practice management ...... -- -- ---------- ---------- Total capital expenditures .. $ -- $ 72 ========== ========== JUNE 30, MARCH 31, 2003 2003 ---------- ---------- Total assets: e-Learning ...................... $ 10,965 $ 11,081 Dental practice management ...... 1,225 1,342 ---------- ---------- Total assets .................. $ 12,190 $ 12,423 ========== ========== RESULTS OF OPERATIONS As of June 30, 2003, we offered to our customers a wide array of e-Learning and training products and services. Since December of 2002 we have placed special emphasis on sales and marketing efforts that have been directed at our virtual classroom Web casting and online collaboration four-product suite led by LearnLinc. We continue to offer for those seeking to manage users and e-Learning content EDT's Learning Management System, which has been combined with a suite of workforce management solutions - which includes Career Planner, Job Seeker, and Performance Coach. For the development of custom online content we offer an award winning content development software, i-Canvas and award winning custom content services, which have been providing proven results for over 15 years. Finally, we offer a library of online courses focused upon the training of executives on essential business topics. The Company has implemented its e-Learning strategy. The Company acquired the assets of two e-Learning entities during fiscal 2003 and acquired two e-Learning entities during fiscal 2002. 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 17 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 April 1, 2005 and on October 1, 2005, respectively. The Company also assumed approximately $2.9 million of Learning-Edge debt as part of this acquisition. The operating results of Learning-Edge are included with the Company as of October 1, 2001. On January 15, 2002, the Company acquired all of the outstanding capital stock of ThoughtWare Technologies, Inc.; a Tennessee based private company. The Company issued 1,550,000 common shares under the terms of the acquisition agreement. The Company also assumed approximately $1.5 million of ThoughtWare debt as part of this acquisition. Since January 2002, operating results of ThoughtWare are included with the Company's results from operations. On June 14, 2002, the Company acquired certain assets of Quisic Corporation ("Quisic"); a California based private e-Learning company for in an asset purchase and common stock purchase transaction that involved the issuance of 2,000,000 common shares to certain shareholders of Quisic. An additional 500,000 shares of common stock of the Company were contingently issuable upon the achievement of certain cash basis sales targets, as defined, for the 12-month period following the close of the acquisition. As of June 30,2003, the cash basis sales targets were not achieved. The operating results of Quisic have been included in the consolidated operations of the Company commencing June 17, 2002. The purchase agreement also provides for the Company to remit to the seller, during the 5 year period following the close of the acquisition, 100% of the first $1,250,000 of proceeds and 50% of the remaining proceeds from the sales of software licenses for certain specified products, as defined, and collection of notes. Since the closing date of the acquisition and through June 30, 2003, the Company has collected funds subject to this provision of the agreement totaling $200,000, all of which has been withheld and not remitted to the seller as of June 30, 2003 in accordance with the Company's understanding of the escrow and indemnity provisions of the Asset Purchase Agreement. Effective November 4, 2002, the Company acquired certain assets of Mentergy, Inc. ("Mentergy"), a wholly owned subsidiary of Mentergy, Ltd, in exchange for $500,000 and the assumption of $462,000 of liabilities. In addition, the Company has agreed to pay a royalty of 20% for all revenues collected from the sale or license of LearnLinc software over a three-year period. The first $600,000 of sales is not subject to the royalty. The maximum amount due under the Royalty Agreement is $5,000,000. The Company intends to account for any such amounts collected as additional purchase consideration in accordance with EITF No. 95-8 at the time such amounts are remitted to the seller. As of June 30, 2003, the Company has collected $708,000 related to this royalty agreement and has recorded additional purchase consideration of $21,000. The operating results are included with the Company's as of November 4, 2002. As a part of our legacy business we provided services to certain affiliated practices in accordance with modified service agreements. Those services generally included access to online enhancement, access to online payroll processing, access to online consulting and seminars. For the fiscal years ending March 31, 2003 and 2002, we earned dental revenues of $3.1 million and $6.6 million, respectively. As anticipated and previously announced, nearly all of those legacy service agreements terminated during fiscal 2003. In fiscal 2004, $200,000 is anticipated in dental revenues and $235,000 from the collection of notes receivable from those dental practices that had executed a legacy management services agreement ("Affiliated Practices"). The operations of the Company involve many risks, which, even through a combination of experience, knowledge and careful evaluation, may not be overcome. These risks include the fact that the market for e-learning products and services is in the early stages of development and may not grow to a sufficient size or at a sufficient rate to sustain the Company's business. The Company also faces intense competition from other e-learning providers and may be unable to compete successfully. Many of the Company's existing and potential competitors have longer operating histories and significantly greater financial, technical and other resources and therefore may be able to more quickly respond to changing opportunities or customer requirements. New competitors are also likely to enter this market in the future due to the lack of significant barrier to entry in the market share. REVENUES Total revenues generated for the three months ended June 30, 2003 and June 30, 2002 were $1.4 million and $2.3 million respectively, a decrease of $900,000. e-Learning revenues for the three months ended June 30, 2003 and June 30, 2002 were $1.3 million and $1.1 million, respectively, an increase of $588,000 in licenses and a decrease of $377,000 in e-Learning service and 18 maintenance revenues. The increase is a result of the Company's continuing expansion into the e-Learning marketplace and has been fueled by the acquisitions in fiscal 2003 of certain assets of LearnLinc and Quisic. Revenue from dental contracts decreased by $1.1 million from $1.2 million for the three months ended June 30, 2002 to $83,000 for the three months ended June 30, 2003 due to the previously announced and planned modification and termination of certain dental management service contracts. As anticipated and previously announced, nearly all of those legacy management service agreements terminated during fiscal 2003 and only $200,000 is anticipated to be earned as dental revenue for fiscal 2004. OPERATING EXPENSES Operating expenses consist of research and development, sales and marketing, general and administrative, and depreciation and amortization expenses. The Company incurred operating expenses of $1.6 million for the three months ended June 30, 2003, a decrease of $900,000 from $2.5 million for the three months ended June 30, 2002. This is due to decreases in salaries and wages of $480,000, advertising and printing of $55,000, office expenses of $35,000, telephone of $16,000, $121,000 of legal fees and $372,000 in depreciation and amortization expense. These were offset by increases of $103,000 in product development costs and $103,000 of bad debt expense. The Company has reduced head count from a high of 83 in June of 2002 to 38 at June 30, 2003. In addition, the Company has streamlined its operations by closing non-essential facilities and consolidating those functions in its Phoenix and Troy locations. Research and development expenses represent expenses incurred in connection with the provision of e-learning services, development of new products and new product versions and consist primarily of salaries and benefits, communication equipment and supplies. Research and development expenses for the three months ended June 30, 2003 and June 30, 2002 were $565,000 and $907,000, respectively, a decrease of $342,000. The decrease is a result of the Company's closure of the Memphis and Los Angeles offices, reducing headcount by 25 since June 30, 2002 and salaries and wages by $278,000. Sales and marketing expenses consist primarily of sales and marketing salaries and benefits, travel, advertising, and other marketing literature. Sales and marketing expenses were $312,000 and $360,000 for the three months ended June 30, 2003 and June 30, 2002, respectively, a decrease of $48,000. The decrease is a result of a decrease in advertising and printing of $45,000 and travel expenses of $5,000. General and administrative expenses consist of the corporate expenses of the Company. These corporate expenses include salaries and benefits of executive, finance and administrative personnel, rent, bad debt expense, professional services, travel, office costs and other general corporate expenses. During the three months ended June 30, 2003 and June 30,2002, general and administrative expenses were $588,000 and $713,000, respectively, a decrease of $125,000. The change in General and administrative expenses was primarily due to increases in bad debt expense of $103,000, $25,000 in other taxes and $18,000 in occupancy costs; and decreases in legal fees of $121,000, compensation and related benefit expense of $112,000, office expenses of $14,000, investor relations of $26,000, and travel expenses of $10,000. The Company continues efforts to reduce overhead, with those efforts including the elimination of facilities, equipment, and personnel. For the three months ended June 30, 2003 and June 30, 2002 depreciation and amortization expense was $107,000 and $479,000, respectively. Beginning in fiscal 2003 the Company ceased amortizing goodwill in accordance with SFAS No. 142. The decrease is also attributed to the modification and termination of the service agreements that returned ownership of the dental practice equipment to the related dental practices. INTEREST EXPENSE Interest expense of $351,000 in for the three months ended June 30, 2003 decreased by $64,000 from $415,000 for the three months ended June 30, 2002. The decrease was primarily a result of a reduction in interest expense associated with the Company's interest bearing liabilities. GAIN ON TERMINATION AND RESTRUCTURING OF SERVICE CONTRACTS WITH AFFILIATED PRACTICES The gains of $14,000 and $181,000 for the three months ended June 30, 2003 and 2002 relate to a variety of transactions with Affiliated Practices, including the results of negotiated settlements, the results of litigation to enforce contracts and modified service agreements. 19 GAIN ON SETTLEMENT OF DEBT AND OTHER OBLIGATIONS During the three months ended June 30, 2003, the Company recognized a gain of $352,000 relating to a state sales tax settlement. As part of the acquisition of ThoughtWare in January of 2002, the Company assumed a sales and use tax liability of $384,000. On July 29, 2003, the Company was notified by the state taxing authorities that the amount due relating to the sales tax would be removed from the assessment resulting in a net amount due of $32,000. As the purchase allocation period to the acquisition was closed, the $352,000 was recorded as other income rather than a reduction to goodwill. INCOME TAX EXPENSE The Company recorded no tax benefit during the three months ended June 30, 2003 or 2002 because it concluded it is not likely it would be able to recognize the tax asset created due to the lack of operating history of its e-Learning business strategy. At March 31, 2003, the Company has a net deferred tax asset of $9.9 million with a corresponding valuation allowance. The Company's tax benefits are scheduled to expire over a period of six to fourteen years. LIQUIDITY AND CAPITAL RESOURCES The Company has a working capital deficiency, incurred an operating loss and had negative cash flows from operations during the three months ended June 30, 2003. As part of the Company's legacy business, services were provided to affiliated dental practices in accordance with modified service agreements. Those services generally were access to online enhancement, online payroll processing and online consulting and seminars. As anticipated and previously announced, nearly all of those legacy service agreements terminated during fiscal 2003 which will reduce revenues and cash flow from this source and accordingly will negatively affect the Company's liquidity and operating results. These matters, among others, including those discussed above and the limited operating history as an e-Learning company, raise substantial doubt about the Company's ability to continue as a going concern. Management's plan with regard to these matters includes continued development, marketing and licensing of its e-Learning products and services. Although management continues to pursue these plans, there is no assurance that the Company will be successful in obtaining sufficient revenues from its products and services to provide adequate cash flows to sustain operations. In order to increase its liquidity, the Company has developed a plan consisting of the following strategies; (i) implement its e-Learning based strategic business plan and (ii) restructure or extend outstanding obligations to reduce cash outflows for debt service and (iii) seek if necessary funding from the placement of debt or equity securities providing additional capital. However, there can be no assurance that the Company's e-Learning strategies will be achieved or that creditors of the Company will accept delayed or reduced sums or that the Company will be able to acquire additional sums. The Company's service agreements with affiliated dental practices nearly all terminated during fiscal 2003 which will reduce revenues and cash flow from this source and accordingly could negatively affect the Company's liquidity and operating results. During the three months ended June 30, 2003 and 2002, the Company received $61,000 and $382,000 respectively, in cash from terminating the service agreements with affiliated practices. These cash collections accelerate the date at which the Company will be required to sustain its operations solely on cash collections derived from e-Learning revenues. However, there can be no assurance that the Company's e-Learning strategies will be achieved. The Company currently does not have existing working capital and does not generate positive cash flows from operations. As a result, we may not have sufficient financial resources to satisfy our obligations as they come due in the near term. As of June 30, 2003, the Company had a working capital deficit of $2.5 million. Current assets included $124,000 in cash, $861,000 in accounts receivable and $223,000 in notes receivable. Current liabilities consisted of $752,000 of deferred revenue, $1.1 million of current maturities of long-term debt and capital leases and $2.0 million in accounts payable and accrued liabilities. Cash used in operating activities was $332,000 during the three months ended June 30, 2003 and $832,000 during the three months ended June 30, 2002. Cash used in operating activities during the three months ended June 30, 2003 20 was primarily attributable to a net loss of $126,000, increases in accounts receivable and prepaid expenses of $186,000 and $68,000, respectively and a decrease in deferred revenue of $65,000. These items were partially offset by $107,000 of depreciation and amortization expense and discount accretion on debt of $57,000. Cash used in operating activities during the three months ended June 30, 2002 was primarily attributable to a net loss of $355,000, decreases in deferred revenue and accounts payable and accrued liabilities of $549,000 and $406,000, respectively. These items were offset by $479,000 of depreciation and amortization expense. Cash provided by investing activities was $118,000 and $647,000 for the three months ended June 30, 2003 and June 30, 2002, respectively. Cash provided by investing activities for the three months ended June 30, 2003 was primarily due to $78,000 from the repayment of notes receivable and proceeds received from practice terminations of $61,000. Cash provided by investing activities during the three months ended June 30, 2002 was primarily due to proceeds received from practice terminations of $382,000 and the repayment of notes receivable of $337,000. Cash used in financing activities was $71,000 during the three months ended June 30, 2003, and $235,000 during the three months ended June 30, 2002. Cash used in financing activities during the three months ended June 30, 2003 was due to the repayment of debt and capital leases of $71,000. Cash used in financing activities during the three months ended June 30, 2002 was primarily attributable to the repayment of debt and capital leases totaling $252,000. The Company is in the process of raising $1 million to $1.5 million of additional capital through a private placement offering. Under the terms of the offering, the Company intends to sell 20 units at $50,000 each, or a total of $1 million in gross proceeds, with an additional 10 units available for sale at the discretion of the Company, which would increase the gross proceeds to $1.5 million in the event the additional units are issued. Each unit will consist of 50,000 shares of preferred stock and a warrant to purchase 25,000 shares of common stock. The preferred stock in each unit, which will have a par value of $0.01, will be convertible into 100,000 shares of common stock at a price of $0.50 per share (subject to adjustment in certain events). The warrants are exercisable at a price of $1.50 per share and will expire three years after the date of issuance of the warrant. The Company will pay an 8% dividend to holders of the preferred stock, and the dividend will be cumulative. The preferred stock will be non-voting and non-participating. The placement agent is to be paid a commission totaling 10% of gross proceeds, plus a 3% non-accountable expense allowance. Through August 12, 2003, the Company has received subscriptions for approximately $1,000,000 and has extended the offering through August 31, 2003. The Company intends to file a Form 8-K in early September 2003 with the full results of the offering. In March 2002, the Company completed a Private Placement Offering (the "Offering") raising capital of $5,775,000. Under the terms of the Offering, the Company issued convertible redeemable subordinated notes ("the notes") and warrants to purchase 5,775,000 shares of the Company's common stock. The notes bear interest at 12% per annum and require quarterly interest payments with the principal due at maturity on March 29, 2012. The note holders may convert the notes into shares of the Company's common stock at a price equal to $1.00 per share. The Company may force redemption of the notes into shares of the Company's common stock at the conversion price, if at any time the closing price of the Company's common stock equals or exceeds $3.00 per share for 20 consecutive trading days. The notes are subordinated to any present or future senior indebtedness, with no waiver required. The exercise price for the warrants is $3.00 per share. The Company may force redemption of the warrants into shares of the Company's common stock at the exercise price, if at any time the closing price of the Company's common stock equals or exceeds $5.50 per share for 20 consecutive trading days. The warrants expire on March 29, 2005. The fair value of the warrants was estimated using a Black-Scholes pricing model with the following assumptions: contractual and expected life of three years, volatility of 75%, dividend yield of 0%, and a risk-free rate of 3.87%. The fair value was then used to calculate a discount of $1,132,000, which is being amortized to interest expense over ten years, the term of the notes. As the carrying value of the notes is less than the conversion value, a beneficial conversion feature of $1,132,000 was calculated and recorded as an additional discount to the notes and is being amortized to interest expense over the term of the notes. Upon conversion, any remaining discount associated with the beneficial conversion feature will be expensed in full at the time of conversion. 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"). The Learning-Edge Notes bear interest at rates ranging from at 7.5% to 9.0% and are due in two equal installments on April 5, 2005 and on October 1, 2005, respectively. If the Company raises additional capital equal to or in excess of $3 million, 25% of the principal of the Learning-Edge Notes is to be repaid. For each $500,000 raised above $3 million, the repayment percentage increases by 15%. If more than $5 million is raised, 100% of the principal of the Learning-Edge Notes is to be 21 repaid. The holders of the Learning-Edge Notes waived the accelerated payment schedule in relation to the Offering. The Convertible Subordinated Notes Series A Securities ("Series A Securities") were issued in connection with the acquisition of certain Affiliated Practices. The Series A Securities bear interest at 12% and can be converted to Common Stock of the Company at conversion prices ranging from $6.75 to $7.00 per share. The conversion period began on November 1, 1999 and ends on July 1, 2004. The principal amount of the Series A Securities, if not converted, is payable on July 1, 2004. In connection with the IPO, the Company issued $468,000 of notes payable to certain shareholders formerly owning preferred stock. The notes bear 6% interest and were originally payable on the earlier of March 30, 2003 or the date upon which the Company offers and sells an amount of equity securities equal or greater to the gross proceeds of the IPO. During the three months ended June 30, 2003 and the year ended March 31, 2003, $4,000 and $58,000 of accrued interest on certain of these notes was added to the principal balance and the maturity date was extended to April 1, 2005. The new principal balance on the extended notes is $267,000 and the interest rate was increased to 10%. The remaining $124,000 is currently past due. In connection with the acquisition of certain assets of LearnLinc Corporation, the Company issued a $250,000 note payable. The note bears interest at 6% with quarterly interest payments and is due on December 13, 2003. Effective May 1, 2003, certain employees of the Company terminated their employment with the Company and created a new company, Interactive Alchemy, Inc. ("IA"). The Company entered into a non-cancelable three-year subcontractor agreement with IA whereby the Company is required to source its custom content development services through IA. The Company provides IA with certain facilities and administrative support for which in exchange it receives a specified amount of support services. Furthermore, the Company's fee sharing arrangement generally provides for the Company and IA to receive 20% and 80% of all custom content development services provided, respectively. CONTRACTUAL OBLIGATIONS The following schedule details all of the Company's indebtedness and the required payments related to such obligations at June 30, 2003 (in thousands):
DUE IN DUE IN DUE IN LESS THAN DUE IN YEAR YEARS FOUR DUE AFTER TOTAL ONE YEAR YEAR TWO THREE AND FIVE FIVE YEARS --------- --------- --------- --------- --------- --------- Long term debt ............... $ 8,556 $ 596 $ 1,653 $ 532 $ -- $ 5,775 Capital lease obligations .... 628 502 115 11 -- -- Operating lease obligations .. 2,338 619 556 506 391 266 Base salary commitments under employment agreements ................ 840 465 375 -- -- -- --------- --------- --------- --------- --------- --------- Total contractual obligations $ 12,362 $ 2,182 $ 2,698 $ 1,049 $ 391 $ 6,041 ========= ========= ========= ========= ========= =========
CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The more significant areas requiring use of estimates relate to revenue recognition, accounts receivable and notes receivable valuation reserves, realizability of intangible assets, realizability of deferred income tax assets, and the evaluation of contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. The results of such estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may materially differ from these estimates under different assumptions or conditions. 22 Our critical accounting policies and estimates are included in the Company's annual report on Form 10-K for the year ended March 31, 2003 as filed with the SEC. RECENT ACCOUNTING PRONOUNCEMENTS In April 2003, SFAS No. 149, "AMENDMENT OF STATEMENT 133 ON DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" was issued. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement is effective for contracts entered into or modified after June 30, 2003. Adoption of this statement is not expected to have a significant effect on the Company's consolidated financial position or results of operations. In May 2003, SFAS No. 150, "ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY" was issued. This statement establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003. The adoption of SFAS No. 150 is not expected to have a significant effect on the Company's consolidated financial position, results of operations, or cash flows. In July 2003, the EITF reached a consensus on EITF 03-5, "Applicability of AICPA SOP 97-2 to Non-Software Deliverables." EITF 03-5 provides accounting guidance on whether non-software deliverables (e.g., non-software related equipment or services) included in an arrangement that contains software are within the scope of SOP 97-2. In general, any non-software deliverables are within the scope of SOP 97-2 if the software deliverable is essential to its functionality. Companies are required to adopt this consensus in the first reporting period (annual or interim) beginning after ratification by the FASB, which is expected to be August 13, 2003. The Company believes the adoption of EITF 03-5 will not have a material impact on the Company's financial position or results of operations. ADDITIONAL RISK FACTORS THAT MAY AFFECT OUR OPERATING RESULTS AND THE MARKET PRICE OF OUR COMMON STOCK You should carefully consider the risks described below. The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occur, our business, financial condition or results of operations could be materially and adversely affected. In that case, the trading price of our common stock could be adversely affected. WE HAVE A LIMITED OPERATING HISTORY, WHICH MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS. We have a limited operating history in the e-Learning business and particularly as a provider of web conferencing and web collaboration software. While the organizations that we have acquired have been engaged in the e-Learning business for over ten years, we only recently acquired those assets and you should not rely on our historical results as an indication of our future performance. Over the past 12 months we have made significant changes to our product mix and service mix, our growth strategies, our sales and marketing plans, and other operational matters, including a significant reduction in our employee base. As a result, it may be difficult to evaluate an investment in our company, and we cannot be certain that our business model and future operating performance will yield the results that we intend. In addition, the competitive and rapidly changing nature of the e-Learning and Web conferencing markets makes it difficult for us to predict future results. Our business strategy may be unsuccessful and we may be unable to address the risks we face. THE COMPANY FACES RISKS ENCOUNTERED BY EARLY-STAGE COMPANIES IN INTERNET-RELATED BUSINESSES AND MAY BE UNSUCCESSFUL IN ADDRESSING THESE RISKS. The Company faces risks frequently encountered by early-stage companies in new and rapidly evolving markets. Specific risks the Company faces relate to the demand for e-Learning products and services, and broad and timely acceptance of the Company's e-Learning products and services. The Company may fail to adequately address these risks and, as a consequence, its business may suffer. To address these risks, the Company must: 23 o successfully introduce and attract new customers to its e-Learning products; o successfully implement its sales and marketing strategy to generate sufficient revenues to sustain operations; o foster existing relationships its customers to provide for continued or recurring business; and o successfully address and establish new products and technologies. THE COMPANY'S QUARTERLY OPERATING RESULTS ARE UNCERTAIN AND MAY FLUCTUATE SIGNIFICANTLY. The Company's operating results have varied significantly from quarter to quarter and are likely to continue to fluctuate as a result of a variety of factors, many of which the Company cannot control. Factors that may adversely affect the Company's quarterly operating results include: o the size and timing of product orders; o the mix of revenue from custom services and software products; o the market acceptance of the Company's products and services; o the Company's ability to develop and market new products in a timely manner and the market acceptance of these new products; o the timing of revenues and expenses relating to the Company's product sales; and, o the timing of revenue recognition. Expense levels are based, in part, on expectations as to future revenue and to a large extent are fixed in the short term. To the extent the Company is unable to predict future revenue accurately, the Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. WE HAVE SIGNIFICANT OPERATING LOSSES AND HAVE LIMITED FINANCIAL RESOURCES We have incurred substantial operating losses and have limited financial resources at our disposal. We have substantial current and long-term obligations that we will not be able to satisfy without additional debt and/or equity capital and ultimately generating profits and cash flows from our e-Learning operations. As we transition from the management of dental practices, from which we received substantial cash flows during the past two years, to being a provider of e-Learning services, we will need to show growth and financial improvement in our e-Learning operating segment. We may not be successful in raising additional debt or equity capital and may not become profitable in our e-Learning business. As a result, we may not have sufficient financial resources to satisfy our obligations as they come due in the near term. OUR AUDITORS HAVE EXPRESSED SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN Our consolidated financial statements have been prepared on a basis which assumes that we will continue as a going concern and which contemplates the realization of our assets and the satisfaction of our liabilities and commitments in the normal course of business. The Company has a significant working capital deficiency, and has suffered substantial recurring losses and negative cash flows from operations. Also, the Company's management service agreements with the affiliated dental practices nearly all expired during fiscal 2003 and will continue to expire through December 31, 2003, which will reduce revenues and cash flows from this source and accordingly will negatively affect the Company's liquidity and operating results. These matters, among others, and the limited operating history as an e-Learning company, caused our independent accountants to express their substantial doubt about as to our ability to continue as a going concern. 24 YOUR OWNERSHIP INTEREST IN THE COMPANY WILL BE DILUTED UPON ISSUANCE OF SHARES WE HAVE RESERVED FOR FUTURE ISSUANCE On June 30, 2003, 17,042,504 shares of our common stock were outstanding, of which 1,244,713 were held in treasury, and 14,782,000 additional shares of our common stock were reserved for issuance. The issuance of these additional shares will reduce your percentage ownership in the Company. The following shares were reserved for issuance as of June 30, 2003: o Issued and outstanding stock options to purchase shares totaling approximately 1,788,000; o Issued and outstanding warrants to purchase shares totaling approximately 6,648,000; o A restricted stock grant to receive shares totaling approximately 450,000; o Shares issuable upon the conversion of convertible redeemable subordinated notes totaling approximately 5,775,000; and o Shares issuable upon the conversion of convertible Series A subordinated notes totaling approximately 121,000. The existence of these reserved shares coupled with other factors, such as the relatively small public float, could adversely affect prevailing market prices for our common stock and our ability to raise capital through an offering of equity securities. THE LOSS OF THE SERVICES OF THE COMPANY'S SENIOR EXECUTIVES AND KEY PERSONNEL WOULD LIKELY CAUSE THE COMPANY'S BUSINESS TO SUFFER. The Company's success depends to a significant degree on the performance of the senior management team listed elsewhere in this Memorandum. The loss of any of these individuals could harm the Company's business. The Company does not maintain key person life insurance for any officers or key employees other than James Powers. The Company's success also depends on its ability to attract, integrate, motivate and retain additional highly skilled technical, sales and marketing, and professional services personnel. To the extent the Company is unable to attract and retain a sufficient number of additional skilled personnel, the Company's business will suffer. THE COMPANY'S INTELLECTUAL PROPERTY MAY BECOME SUBJECT TO LEGAL CHALLENGES, UNAUTHORIZED USE OR INFRINGEMENT, ANY OF WHICH COULD DIMINISH THE VALUE OF ITS PRODUCTS AND SERVICES. The Company's success depends in large part on its proprietary technology. If the Company fails to successfully enforce its intellectual property rights, the value of these rights, and consequently the value of its products and services to its customers, could diminish substantially. It may be possible for third parties to copy or otherwise obtain and use its intellectual property or trade secrets without the Company's authorization, and it may also be possible for third parties to independently develop substantially equivalent intellectual property. Currently, the Company does not have patent protection in place related to its products and services. Litigation may be necessary in the future to enforce the Company's intellectual property rights, to protect trade secrets or to determine the validity and scope of the proprietary rights of others. From time to time the Company has received, and may in the future receive, notice of claims of infringement of other parties' proprietary rights. Such claims could result in costly litigation and could divert management and technical resources. These types of claims could also delay product shipment or require the Company to develop non-infringing technology or enter into royalty or licensing agreements, which agreements, if required, may not be available on reasonable terms, or at all. A DETERIORATION OF GENERAL ECONOMIC CONDITIONS MAY MATERIALLY AND ADVERSELY AFFECT THE COMPANY'S BUSINESS. The Company's revenues are subject to fluctuation as a result of general economic conditions. The Company's customers may reduce their expenditures for education and training during economic downturns. Therefore, a continued economic downturn could adversely affect the Company's business. 25 WE OFFER OUR WEB COLLABORATION PRODUCTS ON AN ASP BASIS SO IF WE DO NOT INCREASE THE CAPACITY OF OUR INFRASTRUCTURE IN EXCESS OF CUSTOMER DEMAND, CUSTOMERS MAY EXPERIENCE SERVICE PROBLEMS. We expect the demand on our ASP business to increase significantly. Accordingly, we must increase our capacity to keep pace with that growth in demand. To accommodate increased customer usage requires a significant increase in the capacity of our infrastructure and may cause us to invest significant resources or capital. If we fail to increase our capacity in a timely and efficient manner, customers may experience service problems that could cause us to lose customers and decrease our revenue. COMPETITION IN THE WEB CONFERENCING SERVICES MARKET IS INTENSE AND WE MAY BE UNABLE TO COMPETE SUCCESSFULLY, PARTICULARLY AS A RESULT OF RECENT ANNOUNCEMENTS FROM LARGE SOFTWARE COMPANIES. The market for web conferencing services is relatively new, rapidly evolving and intensely competitive. Competition in our market will continue to intensify and may force us to reduce our prices, or cause us to experience reduced sales and margins, loss of market share and reduced acceptance of our services. Many of our competitors have larger and more established customer bases, longer operating histories, greater name recognition, broader service offerings, more employees and significantly greater financial, technical, marketing, public relations and distribution resources than we do. We expect that we will face new competition as others enter our market to develop web conferencing services. These current and future competitors may also offer or develop products or services that perform better than ours. In addition, acquisitions or strategic partnerships involving our current and potential competitors could harm us in a number of ways. FUTURE REGULATIONS COULD BE ENACTED THAT EITHER DIRECTLY RESTRICT OUR BUSINESS OR INDIRECTLY IMPACT OUR BUSINESS BY LIMITING THE GROWTH OF INTERNET-BASED BUSINESS AND SERVICES. As commercial use of the Internet increases, federal, state and foreign agencies could enact laws or adopt regulations covering issues such as user privacy, content and taxation of products and services. If enacted, such laws or regulations could limit the market for our products and services. Although they might not apply to our business directly, we expect that laws or rules regulating personal and consumer information could indirectly affect our business. It is possible that such legislation or regulation could expose companies involved in providing Internet-based services to liability, which could limit the growth of Web use generally and thereby reduce demand for our products and services. Such legislation or regulation could dampen the growth in Web usage and decrease its acceptance as a medium of communications and commerce. WE DEPEND LARGELY ON ONE-TIME SALES TO GROW REVENUES. A high percentage of our revenue is attributable to one-time purchases by our customers rather than long term recurring contracts. As a result, our inability to continue to obtain new agreements and sales may result in lower than expected revenue, and therefore, harm our ability to sustain operations or profitability on a consistent basis, which could also cause our stock price to decline. Further, because we face competition from larger better-capitalized companies, we could face increased downward pricing pressure that could cause a decrease in our gross margins. OUR OPERATING RESULTS MAY SUFFER IF WE FAIL TO DEVELOP AND FOSTER OR VALUE ADDED RESELLER OR DISTRIBUTION RELATIONSHIPS. We have an existing channel and distribution network that provides growing revenues and contributes to our high margin software sales. These distribution partners are not obligated to distribute our services at any particular minimum level. As a result, we cannot accurately predict the amount of revenue we will derive from our distribution partners in the future. Our inability of our distribution partners to sell our products to their customers and increase their distribution of our products could result in significant reductions in our revenue, and therefore, harm our ability to sustain profitability on a consistent basis. 26 THE GROWTH OF OUR BUSINESS SUBSTANTIALLY DEPENDS ON OUR ABILITY TO SUCCESSFULLY DEVELOP AND INTRODUCE NEW SERVICES AND FEATURES IN A TIMELY MANNER. We acquired our Web collaboration, Web conferencing and virtual classroom software in November of 2002. With our focus upon that product suite our growth depends on our ability to continue to develop new features, products and services around that suite and line of products. We may not successfully identify, develop and market new products and features in a timely and cost-effective manner. If we fail to develop and maintain market acceptance of our existing and new products to offset our continuing development costs, then our net losses will increase and we may not be able to sustain profitability on a consistent basis. IF WE FAIL TO OFFER COMPETITIVE PRICING, WE MAY NOT BE ABLE TO ATTRACT AND RETAIN CUSTOMERS. Because the Web conferencing market is relatively new and still evolving, the prices for these services are subject to rapid and frequent changes. In many cases, businesses provide their services at significantly reduced rates, for free or on a trial basis in order to win customers. Due to competitive factors and the rapidly changing marketplace, we may be required to significantly reduce our pricing structure, which would negatively affect our revenue, margins and our ability to sustain profitability on a consistent basis. We have an existing channel and distribution network that provides growing revenues and contributes to our high margin software sales. These distribution partners are not obligated to distribute our services at any particular minimum level. As a result, we cannot accurately predict the amount of revenue we will derive from our distribution partners in the future. Our inability of our distribution partners to sell our products to their customers and increase their distribution of our products could result in significant reductions in our revenue, and therefore, harm our ability to sustain profitability on a consistent basis. OUR INTERNATIONAL DISTRIBUTOR NETWORK MAY CAUSE COSTS THAT ARE NOT ANTICIPATED. We continue to expand internationally through our value added reseller network and OEM partners. We have limited experience in international operations and may not be able to compete effectively in international markets. We face certain risks inherent in conducting business internationally, such as: our inability to establishing and maintain effective distribution channels and partners; the varying technology standards from country to country; our inability to effectively protect our intellectual property rights or the code to our software; our inexperience with inconsistent regulations and unexpected changes in regulatory requirements in foreign jurisdictions; language and cultural differences; fluctuations in currency exchange rates; our inability to effectively collecting accounts receivable; or our inability to manage sales and other taxes imposed by foreign jurisdictions. 27 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK The following discusses our exposure to market risk related to changes in interest rates, equity prices and foreign currency exchange rates. Market risk generally represents the risk of loss that may result from the potential change in the value of a financial instrument as a result of fluctuations in interest rates and market prices. We have not traded or otherwise bought and sold derivatives nor do we expect to in the future. We also do not invest in market risk sensitive instruments for trading purposes. The primary objective of the Company's investment activity is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, the Company maintains its portfolio of cash equivalents in a variety of money market funds. As of June 30, 2003, the carrying value of our outstanding convertible redeemable subordinated notes was approximately $3.8 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. ITEM 4. CONTROLS AND PROCEDURES We evaluated the design and operation of our disclosure controls and procedures to determine whether they are effective in ensuring that we disclose the required information in a timely manner and in accordance with the Securities Exchange Act of 1934, as amended, or the Exchange Act, and the rules and forms of the Securities and Exchange Commission. Management, including our principal executive officer and principal financial officer, supervised and participated in the evaluation. The evaluation was completed within the 90-day period prior to the filing of this Form 10-Q. The principal executive officer and principal financial officer concluded, based on their review, that our disclosure controls and procedures, as defined by Exchange Act Rules 13a-14(c) and 15d-14(c), are effective and ensure that we disclose the required information in reports that we file under the Exchange Act and that the filings are recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. No significant changes were made to our internal controls or other factors that could significantly affect these controls subsequent to the date of their evaluation. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems no evaluation of controls can provide absolute assurance that all control issues if any, within a company have been detected. PART II--OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Company has pending lawsuits against three affiliated practices for defaulting in the payment of the required service fees. 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. The Company is also party to two other legal disputes arising from the ordinary course of its e-Learning business. On August 27, 2002 Computer Associates International Inc., filed in the Superior Court of the State of Arizona in and for the County of Maricopa claiming breach of software license/agreement and other fees for services in the amount of $389,000. The Company thereafter filed an answer and counterclaim on October 4, 2002 alleging damages in the amount of $389,000. On November 4, 2002 two former employees of Quisic Corporation, filed in the Superior Court of the State of California for the County of Los Angeles Central District claiming damages in the amount of $6.4 million against the Board of Directors of Quisic Corporation resulting from their employment termination by Quisic alleging among other things breach of contract. The Company is a third party defendant with a mere allegation of successor liability 28 to the extent the Quisic defendants are found liable and to the extent the plaintiff proves successor liability by the Company. The Company only acquired certain assets of Quisic Corporation in an asset purchase transaction and does not believe it has any successor liability. The Company believes that it will prevail in these matters. While in the opinion of management, resolution of these matters is not expected to have a material adverse effect on the Company's financial position, results of operations or cash flows, the ultimate outcome of any litigation is uncertain. Were an unfavorable outcome to occur, the impact could be material to the Company. ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS None ITEM 3. DEFAULTS OF SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5. OTHER INFORMATION Additional Disclosures Concerning Mr. Brian L. Berry: Brian Berry has served as EDT Learning's Vice President of Finance and principal financial officer since August of 2002 and prior to that served as the Corporate Controller for the Company since October of 1998. In 1999, the Securities and Exchange Commission initiated a Rule 102(e) proceeding against Mr. Berry, among others, in his role as manager for Coopers & Lybrand and their audit of the fiscal 1994 financial statements of California Micro Devices, Inc. An administrative hearing was held in 2000 and the Administrative Law Judge dismissed the claim in 2001. Subsequently, the Division of Enforcement of the SEC appealed that decision and on July 29, 2003, the SEC reversed the decision of the Administrative Law Judge, finding that Mr. Berry, among others, violated Generally Accepted Auditing Standards in connection with certain limited aspects of the audit. It was undisputed that senior management of California Micro Devices, in connection with the audit, intentionally misled Mr. Berry and the Coopers & Lybrand audit team. The SEC has concluded that Mr. Berry should be barred from practicing before it. Mr. Berry intends to appeal the decision of the Commission and seek a stay of the order. Based on a motion filed by Mr. Berry, the Commission has granted a 60 day stay of their own decision, in order to allow him to seek similar relief from the Court of Appeals. Mr. Berry will be seeking to overturn the Commission's ruling and to reinstate the dismissal of the claim against him. The Company cannot predict at this time what, if any, impact the Commission's decision will have on Mr. Berry's role with the Company. 29 ITEM 6. 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(8) Restated Certificate of Incorporation of e-dentist.com, Inc. ++3.6 Certificate of Designations of Series A Preferred Stock 4.1(1) Form of certificate evidencing ownership of Common Stock of Pentegra Dental Group, Inc. 4.2(1) Form of Registration Rights Agreement for Owners of Founding Affiliated Practices 4.3(1) Registration Rights Agreement dated September 30, 1997 between Pentegra Dental Group, Inc. and the stockholders named therein 4.4(2) Form of Stockholders' Agreement for Owners of Affiliated Practices 4.5(3) Form of Indenture from Pentegra Dental Group, Inc. to U.S. Trust Company of Texas, N.A., as Trustee relating to the Convertible Debt Securities 4.6(7) Form of certificate evidencing ownership of Common Stock of e-dentist.com, Inc. 4.7(8) Form of Convertible Redeemable Subordinated Note 4.8(8) Form of Redeemable Warrant (2002 Private Placement Offering) ++4.9 Form of Redeemable Warrant (2003 Private Placement Offering) +10.1(1) Pentegra Dental Group, Inc. 1997 Stock Compensation Plan +10.2(1) Form of Service Agreement 10.3(4) Credit Agreement dated June 1, 1998 between Bank One, Texas, N.A. and Pentegra Dental Group, Inc. 10.4(5) Modification to Credit Agreement between Pentegra Dental Group, Inc. and Bank One, Texas, N.A. dated September 9, 1998 10.5(5) Agreement and Plan of Merger among Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc., Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated as of November 13, 1998 10.6(2) First Amendment to Credit Agreement by and among Pentegra Dental Group, Inc. and Bank One, Texas, N.A. dated as of February 9, 1999 10.7(2) First Amendment to the Agreement and Plan of Merger by and among Pentegra Dental Group, Inc., Liberty Dental Alliance, Inc., Liberty Acquisition Corporation, James M. Powers, Jr., Sylvia H. McAlister and William Kelly dated as of January 29, 1999 10.8(6) Third Amendment to Credit Agreement +10.9(7) Employment Agreement dated November 12, 2000 between e-dentist.com and James M. Powers, Jr. +10.10(7) Employment Agreement dated February 15, 2001 between e-dentist.com and Charles Sanders +10.11(7) Employment Agreement dated February 15, 2001 between e-dentist.com and James Dunn, Jr. 10.12(7) Asset Purchase Agreement by and among e-dentist.com, Inc. and Dexpo.com, Inc. 10.13(7) Fourth Amendment of Credit Agreement 10.14(9) Plan of Reorganization and Agreement of Merger by and among EDT Learning, Inc., Edge Acquisition Subsidiary, Inc. and the Stockholders of Learning-Edge, Inc. 10.15(10) Plan of Reorganization and Agreement of Merger by and among EDT Learning, Inc., TW Acquisition Subsidiary, Inc., ThoughtWare Technologies, Inc. and the Series B Preferred Stockholder of ThoughtWare Technologies, Inc. 10.16(11) Asset Purchase Agreement by and among EDT Learning, Inc., and Quisic Corporation. Common Stock Purchase Agreement by and between EDT Learning, Inc., Investor Growth Capital Limited, A Guernsey Corporation and Investor Group, L.P., A Guernsey Limited Partnership and Leeds Equity Partners III, L.P. 10.16(12) Asset Purchase Agreement by and among EDT Learning, Inc., and Mentergy, Inc. and its wholly-owned subsidiaries, LearnLinc Corp and Gilat-Allen Communications, Inc. ++10.17 Subcontractor Agreement between EDT Learning, Inc. and Interactive Alchemy, Inc. 6(13) Letter re Change in Certifying Accountant ++31.1 Chief Executive Officer Section 302 Certification ++31.2 Principal Financial Officer Section 302 Certification ++32.1 Chief Executive Officer Section 906 Certification ++32.2 Principal Financial Officer Section 906 Certification 30 - ---------- (1) Previously filed as an exhibit to EDT Learning's Registration Statement on Form S-1 (No. 333-37633), and incorporated herein by reference. (2) Previously filed as an exhibit to EDT Learning's Registration Statement on Form S-4 (No. 333-78535), and incorporated herein by reference. (3) Previously filed as an exhibit to EDT Learning's Registration Statement on Form S-4 (No. 333-64665), and incorporated herein by reference. (4) Previously filed as an exhibit to EDT Learning's Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998. (5) Previously filed as an exhibit to EDT Learning's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1998. (6) Previously filed as an exhibit to EDT Learning's Annual Report on Form 10-K for the year ended March 31, 2000. (7) Previously filed as an exhibit to EDT Learning's Annual Report on Form 10-K for the year ended March 31, 2001. (8) Previously filed as an exhibit to EDT Learning's Annual Report on Form 10-K for the year ended March 31, 2002. (9) Previously filed as an exhibit to EDT Learning's Form 8-K filed October 16, 2001. (10) Previously filed as an exhibit to EDT Learning's Form 8-K filed January 30, 2002 (11) Previously filed as an exhibit to EDT Learning's Form 8-K filed July 2, 2002. (12) Previously filed as an exhibit to EDT Learning's Form 8-K filed December 20, 2002. (13) Previously filed as an exhibit to EDT Learning's Form 8-K filed April 3, 2003. + Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to the requirements of Item 14(c) of Form 10-K. ++ Furnished herewith as an Exhibit (B) REPORTS ON FORM 8-K. A Report on Form 8-K was filed April 3, 2003 reporting the dismissal by EDT Learning, Inc. of PricewaterhouseCoopers LLP as its independent accountants and engagement of BDO Seidman, LLP. No financial statements were filed with this report. A Report on Form 8-K was filed July 1, 2003 furnishing under Item 12 our press release announcing our operating results for the year ended March 31, 2003. A Report on Form 8-K was filed August 13, 2003 furnishing under Item 12 our press release announcing our operating results for the quarter ended June 30, 2003. 31 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant, EDT Learning, Inc., has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. EDT LEARNING, INC. Dated: August 14, 2003 By: /s/ James M. Powers, Jr. ----------------------------- Chairman of the Board, President and Chief Executive Officer By: /s/ Brian L. Berry ----------------------------- Vice President of Finance (Principal Financial Officer) 32 EX-3.6 3 edt_ex3-6.txt EXHIBIT 3.6 CERTIFICATE OF DESIGNATIONS OF SERIES A PREFERRED STOCK OF EDT LEARNING, INC. (Pursuant to Section 151(g) of the Delaware General Corporation Law) EDT Learning, Inc., a corporation organized and existing under the General Corporation Law of the State of Delaware (the "Corporation") does hereby certify that the following resolutions respecting Series A Preferred Stock were duly adopted by the Corporation's Board of Directors: WHEREAS, the Certificate of Incorporation of EDT Learning, Inc., a Delaware corporation (the "Company"), authorized the Company to issue a total of 10,000,000 shares of preferred stock, par value $0.001 per share ("Preferred Stock"), which may be divided into one or more series as the Board of Directors may determine; WHEREAS, the Certificate of Incorporation of the Company expressly vests in the Board of Directors the authority to fix and determine the designations, powers, preferences and rights, and the qualifications, limitations and restrictions, of the Preferred Stock; and WHEREAS, the Board of Directors deems it advisable to designate a series of the Preferred Stock consisting of shares designated as convertible "Series A Preferred Stock." NOW, THEREFORE, IT IS HEREBY: RESOLVED, that pursuant to the authority granted by the Company's Revised Certificate of Incorporation, the Board of Directors hereby authorize and create a series of preferred stock hereby of 400,000 shares of the 10,000,000 of authorized preferred stock, having a par value of $0.001 per share (the "Series A Preferred Stock"). The Series A Preferred Stock shall have the rights, designations, powers, preferences, and qualifications, limitations and restrictions set forth as follows: 1. Dividend Rights. The holders of Series A Preferred Stock shall be entitled to receive dividends, but only out of funds that are legally available therefor, at the rate of 8% of the Series A Original Issue Price (as defined below) per annum (the "Series A Dividend Rate") on each outstanding share of Series A Preferred Stock (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares). For any share of Series A Preferred Stock, such dividends shall begin to accrue commencing upon the first date such share is issued and becomes outstanding (the "Original Issue Date") and shall be payable quarterly in cash on the first day of each calendar quarter beginning in the calendar quarter following the Original Issue Date until conversion (each, a "Dividend Payment Date"), provided, that, if any such Dividend Payment Date is not a Business Day, then any such dividend shall be payable on the next Business Day. Subject to the foregoing, any such dividend shall be paid to the holders of record at the close of business on the date specified by the Board of Directors at the time such dividend is declared, provided, however, that such date may not be more than 60 days nor less than 10 days prior to the applicable dividend payment date. Such dividends CERTIFICATE OF DESIGNATIONS PAGE 1 OF 6 shall accrue day-by-day and shall be cumulative, whether or not declared by the Board of Directors and whether or not there shall be funds legally available for the payment of dividends. The original issue price of the Series A Preferred Stock shall be $10.00 per share (the "Series A Original Issue Price"). Dividends payable for any period shorter or longer than a quarterly dividend period shall be computed on the basis of a 360-day year of twelve 30-day months. Dividends in arrears may be declared by the Board of Directors and paid on any date fixed by the Board of Directors, without reference to any regular Dividend Payment Date. Any dividend paid upon the Series A Preferred Stock at a time when any accrued dividends for any prior periods are delinquent shall be expressly declared as a dividend in whole or partial payment of the accrued dividend for the earliest period or periods for which dividends are then delinquent, and shall be so designated to each holder to whom payment is made thereof. The term "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in the New York, New York are authorized or required by law to be closed. Until it has paid all dividends on the Series A Preferred Stock as contemplated in this Certificate, the Company may not pay dividends on any common stock, par value $0.001 per share, of the Company (the "Common Stock"), or any other stock of the Company hereafter created that is junior to the Series A Preferred Stock (together with the Common Stock, "Junior Stock"). 2. Voting Rights. Except as otherwise provided herein or as required by law, the holders of Series A Preferred Stock will not have the right to vote on matters brought before the stockholders of the Company. 3. Liquidation Rights. Upon any liquidation, dissolution, or winding up of the Company, whether voluntary or involuntary, before any distribution or payment shall be made to the holders of any Junior Stock, subject to the rights of any series of Preferred Stock that may from time-to-time come into existence and which is expressly senior to the rights of the Series A Preferred Stock, the holders of Series A Preferred Stock shall be entitled to be paid in cash out of the assets of the Company an amount per share of Series A Preferred Stock equal to 100% of the Series A Original Issue Price (as adjusted for any stock dividends, combinations, splits, recapitalizations and the like with respect to such shares), plus accrued but unpaid dividends (the "Liquidation Preference"), for each share of Series A Preferred Stock held by each such holder. If, upon any such liquidation, dissolution, or winding up, the assets of the Company shall be insufficient to make payment in full of the Liquidation Preference to all holders of Series A Preferred Stock, then such assets shall be distributed among the holders of Series A Preferred Stock at the time outstanding, ratably in proportion to the full amounts to which they would otherwise be respectively entitled. 4. Conversion Rights. The holders of the Series A Preferred Stock shall have the following rights with respect to the conversion of the Series A Preferred Stock into shares of Common Stock: (a) Optional Conversion. Subject to and in compliance with the provisions of this Section 4, any shares of Series A Preferred Stock may, at the option of the holder, be converted at any time on and after the date that is ninety (90) days after the Series A Original Issue Date into fully-paid and nonassessable shares of Common Stock. The number of shares of Common Stock to which a holder of Series A Preferred Stock shall be entitled upon conversion shall be the product obtained by multiplying the "Series A Preferred Conversion Rate" then in effect (determined as provided in Section 4(b)) by the number of shares of Series A Preferred Stock being converted. CERTIFICATE OF DESIGNATIONS PAGE 2 OF 6 (b) Forced Conversion. The Company may require conversion of the Series A Preferred Stock at the Conversion Price (if such holder has not already converted the Series A Preferred Stock held by it to Common Stock) if at any time the ten (10) trading day average of the Common Stock exceeds $1.50 per share. (c) Series A Preferred Conversion Rate and Price. The Series A Conversion Rate shall mean the fraction, the numerator of which is equal to the Series A Original Issue Price and the denominator of which is equal to the Conversion Price in effect at the time of Conversion. By way of example but not limitation, the initial Series A Conversion Rate shall be 20 times (e.g. $10.00/$0.50). The initial conversion price for the Series A Preferred Stock shall initially be $0.50 per share (the "Initial Conversion Price"). The Initial Conversion Price at which the Preferred Stock may be converted into shares of Common Stock has been arbitrarily determined by the Company in its sole discretion and is not necessarily reflective of the Company's asset value, net worth, earnings, cash flow or any other established criteria of value. The Initial Conversion Price shall be adjusted from time-to-time in accordance with this Section 4. The Conversion Price of the Preferred Stock in effect at any time shall be subject to adjustment generally for a decrease in the price per share of the Common Stock below the Initial Conversion Price. If on the initial annual anniversary of the closing date of the Offering (the "Adjustment Date"), the 20 trading day average closing price of the Common Stock is less than the Initial Conversion Price, then the Initial Conversion Price will be adjust downward and shall be thereafter be fixed at the greater of; the 20 trading day average for the period ending with the Adjustment Date or $0.30 per share. All references to the Conversion Price herein shall mean the Initial Conversion Price as so adjusted. (d) Mechanics of Conversion. Each holder of Series A Preferred Stock who desires to convert the same into shares of Common Stock pursuant to this Section 4 shall surrender the certificate or certificates therefor, duly endorsed, at the office of the Company or any transfer agent, and shall give written notice to the Company at such office that such holder elects to convert the same. Such notice shall state the number of shares of Series A Preferred Stock being converted. Thereupon, the Company shall promptly issue and deliver at such office to such holder (or to the nominee or nominees of such holder) a certificate or certificates for the number of shares of Common Stock to which such holder is entitled and shall promptly pay in cash (at the Common Stock's value (which shall be (1) the average of the closing prices of the securities on the American Stock Exchange (or a similar national quotation system, if so listed) over the 30 day period ending three days prior to the valuation date, or (2) if not then listed on any quotation system, the fair market value as determined in good faith by the Board of Directors as of the date of conversion) the value of any fractional share of Common Stock otherwise issuable to any holder of Series A Preferred Stock. Such conversion shall be deemed to have been made at the close of business on the date of such surrender of the certificates representing the shares of Series A Preferred Stock to be converted, and the person entitled to receive the shares of Common Stock issuable upon such conversion shall be treated for all purposes as the record holder of such shares of Common Stock on such date. (e) Adjustment Upon Common Stock Event. Upon the happening of a Common Stock Event (as hereinafter defined) at any time or from time-to-time after the Issue Date, the Series A Preferred Conversion Price shall, simultaneously with the happening of such Common Stock Event, be adjusted by multiplying the Conversion Price in effect immediately prior to such Common Stock Event by a fraction, the numerator of which shall be the number of shares of Common Stock issued and outstanding immediately prior to such Common Stock Event, and the CERTIFICATE OF DESIGNATIONS PAGE 3 OF 6 denominator of which shall be the number of shares of Common Stock issued and outstanding immediately after such Common Stock Event. The Conversion Price shall be readjusted in the same manner upon the happening of each subsequent Common Stock Event. As used in this Section 4, the term "Common Stock Event" shall mean the issue by the Company of additional shares of Common Stock as a dividend or other distribution on outstanding Common Stock; a subdivision of the outstanding shares of Common Stock into a greater number of shares of Common Stock (by stock split, reclassification or otherwise); or a combination or consolidation, by reclassification or otherwise, of the outstanding shares of Common Stock into a smaller number of shares of Common Stock (unless the Series A Preferred Stock is combined, consolidated or reclassified on an equal basis). (f) Adjustment for Stock Dividends and Distributions. If at any time or from time-to-time after the Series A Original Issue Date the Company pays a dividend or makes another distribution to the holders of the Common Stock (or fixes a record date for the determination of holders of Common Stock entitled to receive such dividend or other distribution) that is payable in Common Stock of the Company (a "Stock Dividend"), then in each such event provision shall be made so that the holders of Series A Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable upon conversion thereof, the amount of securities of the Company or such subsidiary which they would have received had their Series A Preferred Stock been converted into Common Stock. (g) Adjustment for Reclassification, Exchange and Substitution. If at any time or from time-to-time after the Series A Original Issue Date, the Common Stock issuable upon the conversion of the Series A Preferred Stock is changed into a different number of shares of any class or classes of stock, whether by recapitalization or reclassification or otherwise (a "Reclassification") (other than a Stock Dividend or a Reorganization provided for elsewhere in this Section 4), in any such event each holder of Series A Preferred Stock shall have the right thereafter (to the extent such Series A Preferred Stock is convertible as otherwise provided herein) to convert such Series A Preferred Stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Series A Preferred Stock could have been converted immediately prior to such Reclassification. (h) Adjustment for Reorganizations, Mergers or Consolidations. If at any time or from time-to-time after the Series A Original Issue Date, there is a reorganization of the Common Stock or the merger or consolidation of the Company with or into another corporation or another entity or person (a "Reorganization") (other than a Reclassification provided for elsewhere in this Section 4), as a part of such Reorganization, provision shall be made so that the holders of the Series A Preferred Stock shall thereafter be entitled to receive upon conversion of the Series A Preferred Stock the number of shares of stock or other securities or property which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, merger or consolidation, subject to adjustment in respect of such stock or securities by the terms thereof. (i) Certificate of Adjustment. In each case of an adjustment or readjustment of the Conversion Price or the number of shares of Common Stock or other securities issuable upon conversion of the Series A Preferred Stock, the Company, at its expense, shall compute such adjustment or readjustment in accordance with the provisions hereof and CERTIFICATE OF DESIGNATIONS PAGE 4 OF 6 prepare a certificate showing such adjustment or readjustment, and shall mail such certificate, by first class mail, postage prepaid, to each registered holder of Series A Preferred Stock at the holder's address as shown in the Company's books. The certificate shall set forth such adjustment or readjustment, showing in detail the facts upon which such adjustment or readjustment is based. (j) Notices of Record Date. Upon any taking by the Company of a record of the holders of any class of securities for the purpose of determining the holders thereof who are entitled to receive any Stock Dividend, Reclassification or Reorganization of the Company, or any voluntary or involuntary liquidation, the Company shall mail to each holder of Series A Preferred Stock at least 20 days prior to the record date specified therein a notice specifying the date on which any such record is to be taken for the purpose of such dividend or distribution and a description of such Stock Dividend, the date on which any such Reorganization, Reclassification or liquidation is expected to become effective, and the date, if any, that is to be fixed as to when the holders of record of Common Stock (or other securities) shall be entitled to exchange their shares of Common Stock (or other securities) for securities or other property deliverable upon such Reorganization, Reclassification, or liquidation. (k) Fractional Shares. No fractional shares of Common Stock shall be issued upon conversion of Series A Preferred Stock. All shares of Common Stock (including fractions thereof) issuable upon conversion of more than one share of Series A Preferred Stock by a holder thereof shall be aggregated for purposes of determining whether the conversion would result in the issuance of any fractional share. If, after the aforementioned aggregation, the conversion would result in the issuance of any fractional share, the Company shall, in lieu of issuing any fractional share, pay cash equal to the product of such fraction multiplied by the Common Stock's value (which shall be (1) the average of the closing prices of the securities on the American Stock Exchange (or a similar national quotation system, if so listed) over the 30 day period ending three days prior to the valuation date, or (2) if not then listed on any quotation system, the fair market value as determined in good faith by the Board of Directors) on the date of conversion. (l) Reservation of Stock Issuable Upon Conversion. The Company shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock, solely for the purpose of effecting the conversion of the shares of the Series A Preferred Stock such number of its shares of Common Stock as shall from time-to-time be sufficient to effect the conversion of all outstanding shares of the Series A Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall not be sufficient to effect the conversion of all then outstanding shares of the Series A Preferred Stock, the Company will take such corporate action as may (in the opinion of its counsel) be necessary to increase its authorized but unissued shares of Common Stock to such number of shares as shall be sufficient for such purposes, including without limitation engaging in best efforts to obtain the requisite stockholder approval of any necessary amendment to this Certificate. (m) Notices. Any notice required by the provisions of this Section 4 shall be in writing and shall be deemed effectively given: upon personal delivery to the party to be notified; when sent by confirmed facsimile if sent during normal business hours of the recipient; if not, then on the next business day; five days after having been sent by registered or certified mail, return receipt requested, postage prepaid; or one day after deposit with a nationally recognized overnight courier, specifying next day delivery, with CERTIFICATE OF DESIGNATIONS PAGE 5 OF 6 written verification of receipt. All notices shall be addressed to each holder of record at the address of such holder appearing on the books of the Company. (n) Satisfaction of Accrued Dividends. Except as otherwise expressly provided, upon the conversion of any shares of Series A Preferred Stock into Common Stock as provided herein, the holders thereof shall be entitled to receive a payment in satisfaction of all accrued but unpaid dividends. (o) Payment of Taxes. The Company will pay all taxes (other than taxes based upon income) and other governmental charges that may be imposed with respect to the issue or delivery of shares of Common Stock upon conversion of shares of Series A Preferred Stock, excluding any tax or other charge imposed in connection with any transfer involved in the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series A Preferred Stock so converted were registered. 5. NO REISSUANCE OF SHARES. No shares of Series A Preferred Stock acquired by the Company by reason of redemption, purchase, conversion or otherwise shall be reissued, and all such shares shall be cancelled, retired and eliminated from the shares of Series A Preferred Stock that the Company is authorized to issue. 6. NO IMPAIRMENT. The Company shall not amend its Certificate of Incorporation or participate in any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, for the purpose of avoiding or seeking to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but shall at all times in good faith assist in carrying out all such actions as may be reasonably necessary or appropriate in order to protect the conversion rights of the holders of the Series A Preferred Stock against impairment. IN WITNESS WHEREOF, the undersigned duly authorized officer of the Company has executed this Certificate of Designations on July 11, 2003. EDT LEARNING, INC. By: /S/ JAMES M. POWERS, JR. ------------------------ James M. Powers, Jr. President CERTIFICATE OF DESIGNATIONS PAGE 6 OF 6 EX-4.9 4 edt_ex4-9.txt EXHIBIT 4.9 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) Warrant Number: _______ 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 One Dollar and Fifty Cents ($1.50) 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 20 (subject to increase to a total of 30) 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 5,000 shares of Series A Convertible Preferred Stock and one (1) Warrant exercisable for 25,000 shares of Common Stock 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 WARRANT FOR COMMON STOCK PAGE 1 OF 10 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 exceeded $4.00 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 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: WARRANT FOR COMMON STOCK PAGE 2 OF 10 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. 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 non-excluded 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 WARRANT FOR COMMON STOCK PAGE 3 OF 10 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 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 increases or decreases such price by one percent (1%) 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. WARRANT FOR COMMON STOCK PAGE 4 OF 10 (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 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 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 WARRANT FOR COMMON STOCK PAGE 5 OF 10 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. The Warrants (including this Warrant) are entitled to certain registration rights, as set forth in a Registration Rights Agreement, dated as of the closing date of the Offering. 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: With a copy to: 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. WARRANT FOR COMMON STOCK PAGE 6 OF 10 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, 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.] WARRANT FOR COMMON STOCK PAGE 7 OF 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 ___________. EDT LEARNING, INC. By _____________________________________ James M. Powers, Jr. President and Chief Executive Officer WARRANT FOR COMMON STOCK PAGE 8 OF 10 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.) WARRANT FOR COMMON STOCK PAGE 9 OF 10 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. WARRANT FOR COMMON STOCK PAGE 10 OF 10 EX-10.17 5 edt_ex10-17.txt [EDT LEARNING LOGO] EXHIBIT 10.17 SUBCONTRACTOR AGREEMENT This subcontractor agreement (the "Agreement"), is made to be effective on May 1, 2003 (the "Effective Date") by and between EDT Learning, Inc. ("EDT Learning"), a Delaware corporation and Interactive Alchemy, Inc. ("Contractor"). WHEREAS, EDT Learning is in the business of providing custom content development services to its customers (in the corporate, government and education customers sectors) and is the owner of certain proprietary techniques, methods and/or processes for developing and converting content into online and cd-rom based courses to individual end users and distributors; WHEREAS, EDT Learning and Contractor desire to enter into an agreement whereby Contractor will provide e-Learning custom content development and professional services to EDT Learning and indirectly to EDT Learning's Customers using among other things EDT Learning's Development Software; WHEREAS, EDT Learning and Contractor wish to execute this Agreement and certain subsequent statements of work, which will provide a description of each specific engagement or project, the associated fees, and the resulting work products or courses; NOW, THEREFORE, EDT Learning and Contractor, in exchange for the mutual promises and conditions contained herein and other good and valuable consideration the sufficiency of which is hereby acknowledged, do agree as follows: 1. DEFINITIONS: a. "Custom Services" shall mean any of the services provided by Contractor pursuant to a Statement of Work to EDT Learning and indirectly to EDT Learning's Customers, which may include but are not limited to: (i) development of Courses incorporating and combining Customer Source Material with EDT's Learning Products or EDT Learning's Development Software; (ii) customizing and creating a Customer's Course using EDT Learning's Development Software; (iii) the creation or customization of an existing Customer's Course using Customer Source Material and a third party's development software for EDT Learning; or, (iv) any other type of work or effort on behalf of EDT Learning or its Customer pursuant to a Statement of Work executed by the parties hereto. b. "Source Material" shall be the source materials that belong to EDT Learning or its Customers that will be used or incorporated into a Course as a part of a Statement of Work, including text, pictures, graphics, sound files and video files. c. "Customer" shall mean any person or entity that: (i) had prior to the Effective Date ever purchased, obtained or received any good, service or product from either EDT Learning or from entities that have engaged in a merger or asset purchase transaction with EDT Learning, (specifically LearningEdge, Inc., ThoughtWare Technologies, Inc., Quisic Corporation and Mentergy, Inc.) and (ii) any person or entity who does during the period beginning with the Effective Date and ending the with termination date of this Agreement purchase, obtain or receive any good, service or product from EDT Learning. d. A "Contractor Client" shall mean any person or entity with which Contractor does business who is not an EDT Learning Customer. If a person or entity does business with the SUBCONTRACTOR AGREEMENT PAGE 1 OF 19 Contractor prior to becoming an EDT Learning Customer and then subsequently does business with EDT Learning then that person or entity will not become a "Customer." e. "Course" shall mean any computer based or web based training, instructional or demonstration course that Contractor develops for EDT Learning or an EDT Learning Customer and shall also mean the Derivative Work and Work Product Contractor creates on behalf of EDT Learning for its Customer using the EDT Learning Development Software and/or the Contractor Development Software to modify the Source Material from one or more Courses. f. "Derivative Work" shall mean any work that is based upon one or more preexisting works, EDT Learning Products, EDT Learning Development Software, such as a revision, enhancement, modification, translation, abridgement, condensation, expansion, or any other form in which such preexisting works may be recast, transformed or adapted, and that, if prepared without authorization of the owner of the copyright in such preexisting work, would constitute copyright infringement. For purposes hereof, a Derivative Work shall also include any compilation or combination that incorporates such preexisting work. g. "EDT Learning Products" means the software and other proprietary products developed, owned, leased and /or licensed by EDT Learning, and/or the software and other proprietary products developed and owned by EDT Learning including LearnLinc(R), or learning management systems, and any other software in which EDT Learning maintains a proprietary ownership interest. h. "Proprietary Rights" shall mean any and all ownership rights and other proprietary rights and interests, including but not limited to, patents, patent rights and published or unpublished U.S. and foreign patent applications, copyrights, copyrighted materials, unpublished research and development information, engineering, technical or product specification, designs, processes, un-patented inventions, mask ware, mask works, know-how, trade secrets, trademarks and their associated good will, trade names, service marks and their associated good will, logos, designs, technical data, licenses to practice any of the foregoing, and physical embodiments of any of the foregoing. i. "Development Software" shall mean the proprietary course development tool set and course player developed and owned by EDT Learning called i-Canvas(TM) and any software used or owned by EDT Learning and used in conjunction with i-Canvas for the development, creation or maintenance of a Course including EDT Learning's scripting tool and i-Review(TM) products, together with any documentation or materials provided therewith. j. "Statement of Work" shall mean the document between EDT Learning and Contractor in which Custom Services will be assigned by EDT Learning to Contractor. Each Statement of Work to this Agreement will define Custom Services to be provided and shall be mutually agreed to between EDT Learning and Contractor and will be executed by both parties and shall not be effective or binding upon EDT Learning or its Customer until signed by an authorized officer of EDT Learning and an authorized officer of Contractor. Each Statement of Work to this Agreement may include the description of Custom Services to be performed, the rate of compensation in hours and in total, expected start and completion date, any acceptance criteria, testing criteria, and delivery milestones. Where a Statement of Work contains provisions that are inconsistent with this Agreement, the inconsistent provisions of the Statement of Work shall govern, and all other provisions of this Agreement shall remain in full force and effect. SUBCONTRACTOR AGREEMENT PAGE 2 OF 19 k. "Trademarks" shall mean the marks claimed in good faith by EDT Learning to be its proprietary marks (service and trade) which include, but are not limited to: "EDT Learning e-Learning Simplified" "EDT Learning", "EDT Learning Custom Services Group", i-Canvas(TM), LearnLinc(R), TestLinc(TM), OfficeLinc(TM), SupportLinc(TM), MeetingLinc(TM), ThoughtWare(TM), i-Review(TM) and any corresponding design or logo, associated with those Trademarks together with their respective stylistic markings and distinctive logotypes for such trademarks, trade names and service marks, along with all associated goodwill. l. "Work Product" shall mean (i) all of the tangible product or result of Contractor's work, including work of Contractor's subcontractors, if any, pursuant to any Statement of Work issued hereunder or pursuant to any other agreement of EDT Learning and Contractor and (ii) all intellectual property and intellectual property rights that relate to the business and interests of EDT Learning that Contractor conceives, develops or delivers at any time during the course of Contractor's performance of any Statement of Work issued hereunder or pursuant to any other agreement of EDT Learning and Contractor. Notwithstanding the foregoing, "Work Product" shall not include Consultant Tools, and EDT Learning hereby disclaims any ownership or proprietary interest of any kind in any Consultant Tools. m. "Advance Deposits" shall mean monies EDT collects from EDT customers for work for which no Statement of Work" has been executed. n. "Consultant Tools" shall mean any method, process or technique designed and developed by Contractor and used by Contractor in connection with providing consulting services under a Statement of Work, whether any such method, process or technique was conceived, developed or delivered prior to this Agreement or in connection with providing services under a Statement of Work that are not directly related to, based upon or derived from EDT Learning Products, Derivative Work or Development Software. Contractor retains ownership of and all rights to any Consultant Tools. Except as otherwise expressly provided in a separate, written license agreement signed by Contractor, if any, no license or other right to the Tools is granted or transferred to any Customer or to EDT Learning by this Agreement, any Statement of Work, or any Customer Contract. o. "Customer Contract" shall mean any contract or agreement between EDT Learning and a Customer (including without limitation any master agreement, any amendments and all relevant statements of work, including amendments) to which Custom Services relate. 2. APPOINTMENT AS CONTRACTOR. EDT Learning hereby appoints Contractor, and Contractor hereby accepts appointment from EDT Learning, as its sole authorized Custom Services contractor, subject to the terms and conditions hereof. Contractor agrees to provide to EDT Learning and its Customers Custom Services that are described and jointly agreed upon in a Statement of Work, as provided in this Agreement, using approved development tools including the Development Software. EDT Learning agrees that from time to time Contractor may hire subcontractors to assist Contractor in providing Custom Services, provided however that the use of subcontractors shall not relieve Contractor of any obligation or liability under this Agreement or any Statement of Work. 3. CUSTOM SERVICES. This Agreement is a foundation document to establish the working relationship between EDT Learning and Contractor in an independent agent principal relationship. EDT Learning and Contractor will endeavor to use a Statement of Work in the form attached as EXHIBIT "A." Statements of Work will be agreed upon concerning each project obtained by EDT Learning from the Customer pursuant to a SUBCONTRACTOR AGREEMENT PAGE 3 OF 19 Customer Contract and will be executed from time to time by the parties after the Effective Date. EDT Learning shall provide to Contractor, in connection with the negotiation of each Statement of Work, a copy of all relevant portions of the Customer Contract (including any amendments thereto). Any Statement of Work may be supplemented or modified by the parties from time to time, but any changes to a Statement of Work shall only be binding if made in writing and signed by both parties. The parties will further refine the scope of work and the timetables associated with any particular project through the development of a project plan and scope document which may supplement and/or amend the Statement of Work. Contractor will not attempt to negotiate any Statement of Work directly with a Customer and accordingly will not attempt to negotiate the price to be paid by the Customer or the payment terms available to the Customer. However, Contractor may assist EDT Learning in preparation of the Statement of Work by discussing the project with the Customer including the nature of the work, the type of deliverable, and the timelines associated with the project. Contractor will not be authorized to begin the delivery of Custom Services to EDT Learning unless and until a Statement of Work is executed by EDT Learning and by Contractor authorizing the work. 4. CONTRACTOR OBLIGATIONS. Upon execution of a relevant Statement of Work, issued by EDT Learning to Contractor and agreed to by Contractor in writing, Contractor warrants and represents that it will identify and allocate the resources required to design, develop and deliver the Custom Services to EDT Learning for timely delivery to Customer in accordance with the Statement of Work. Contractor shall be fully responsible for, and shall exercise all due diligence with respect to, the care and protection of any Source Materials which may be in Contractor's possession, custody, or control, including but not limited to maintaining the confidentiality thereof and preventing any unauthorized access or use thereof. Contractor shall ensure that all Courses developed and delivered to EDT Learning or its Customers are fully tested and comply with the Statement of Work pursuant to which they were developed and delivered. Within 30 days after termination of this Agreement Contractor and any third parties to whom Contractor has disseminated such Source Materials shall provide written verification that all such Source Materials have been returned to EDT Learning or its Customers, and neither Contractor nor its subcontractors will retain any copies of such Source Materials. Contractor agrees that the quality control of the Course and the Custom Services provided shall be the sole responsibility of Contractor. Subject to Contractor's rights to pursue its remedies under this Agreement, Contractor shall perform all Custom Services in a professional and expeditious manner and warrants that its services will be of a professional quality conforming to generally accepted industry standards and procedures. Contractor will conduct its business with EDT Learning Customers in a manner that reflects favorably at all times on EDT Learning and the good name, goodwill and reputation of EDT Learning. Contractor will avoid materially deceptive, misleading or unethical practices that are or might be detrimental to EDT Learning or its Products. Contractor will make no materially false or misleading representations with regard to EDT Learning or the Custom Services and will not: (i) employ or cooperate in the publication or employment of any materially misleading or deceptive advertising with regard to the Custom Services or Products; (ii) make representations, warranties or guarantees to the Customers with respect to the specifications, features or capabilities of the Custom Services or Courses other than those which are consistent with the Statement of Work (or any amendment thereof); or, (iii) enter into any contract or engage in any practice in conflict with its obligations under this Agreement. 5. EDT LEARNING OBLIGATIONS. EDT Learning will conduct its business activities in a professional and expeditious manner. EDT Learning will avoid materially deceptive, misleading or unethical practices that are or might be detrimental to Contractor. EDT Learning will make no materially false or misleading representations with regard to Contractor or the Custom Services and will not: (i) employ or cooperate in the publication or employment of any materially misleading or deceptive advertising with regard to the Custom Services or Products or (ii) make representations, warranties or guarantees to the Customers SUBCONTRACTOR AGREEMENT PAGE 4 OF 19 with respect to the specifications, features or capabilities of the Custom Services or Courses other than those which are consistent with the Statement of Work. 6. GRANT OF SOFTWARE LICENSE. Subject to the terms and conditions contained herein, EDT Learning hereby grants to Contractor while this Agreement remains in effect a non-exclusive, non-transferable, limited license to use the Development Software and the EDT Learning Trademarks to provide Custom Services to EDT Learning's Customers and to Contractor Clients. It is agreed and accepted by the parties that any licenses granted by EDT Learning to Contractor herein are limited personal licenses with no right to sublicense or sell that license. All proprietary rights in and to the Development Software, EDT Learning Products and Trademarks not granted herein shall remain fully and exclusively vested in EDT Learning. The limited license rights granted pursuant to this Agreement are the only rights that Contractor has to the EDT Learning Development Software, EDT Learning Products and Trademarks. During the term of this Agreement and in consideration for its execution, Contractor will be provided a fifty (50) user license to the i-Canvas software, including maintenance, support and upgrades without charge to Contractor. Upon termination of this Agreement, Contractor will have the right during the ninety (90) day period following the termination date to purchase licenses of the i-Canvas software at the lesser of the then current price or 80% of the price of i-Canvas at the Effective Date of this Agreement with the i-Canvas license purchased by Contractor being granted on EDT Learning's standard end user license terms. Unless and until this Agreement is terminated, Contractor may modify the source code of the i-Canvas software from time to time for use on a Customer's or Contractor Client's project. Prior to modification, Contractor will notify EDT Learning of the proposed change. Any changes to the i-Canvas software or any other EDT Learning Products or Development Software made by Contractor, regardless of the nature of the change or the timing of the change, will at all times exclusively vest in EDT Learning with all right title and interest in and to the i-Canvas software or any other EDT Learning Products or Development Software, and such changes shall be considered work-for-hire by Contractor on EDT Learning's behalf, without compensation of any nature to Contractor for the work performed or the value of the resulting modified software or product. Except and expressly authorized in writing by EDT Learning, Contractor shall not modify, translate, reverse engineer, de-compile or disassemble the Development Software or the EDT Learning Products or any portion thereof. Contractor agrees that is will use the Development Software only for the purposes of performing Custom Services or developing Courses for Contractor Clients and EDT Learning's Customers. Unless a license is purchased, Contractor agrees that within 30 days after termination of this Agreement, then Contractor will immediately return to EDT Learning all copies of Development Software or the EDT Learning Products, whether in the possession of Contractor or any subcontractor, and the license granted will immediately cease. Contractor will also receive such concurrent user licenses as EDT Learning reasonably determines necessary to use the LearnLinc(R)virtual classroom software for the exclusive purpose of internal use (the "Internal Use License") by Contractor while this Agreement remains in effect. The Internal Use Licenses will include free maintenance, support and upgrades while this Agreement remains in effect. Contractor will be able to use the Internal Use Licenses for the exclusive purpose of: (a) training its own employees; (b) providing training and support to those person who will be using the Courses created by Contractor; or (c) providing to Customers and Contractor Clients ongoing review and modification of the Courses while in development or during maintenance periods. Contractor shall not use the Internal Use Licenses to compete with EDT Learning and shall not directly or indirectly sell, re-sell, deliver, distribute, transfer, lease, sub-lease, sub-license or otherwise make available for use by an End User the Internal Use Licenses other than those in the direct employment of Contractor. 7. OFFICE SHARING ARRANGEMENT. Unless and until this Agreement is terminated and in consideration for the Contractor Payments (hereinafter defined), EDT Learning will provide to Contractor use of an appropriate amount of square feet of EDT Learning's premises (located at 2999 N. 44th Street, Suite 620, Phoenix, Arizona) (the SUBCONTRACTOR AGREEMENT PAGE 5 OF 19 "Premises") and facilities for the support of up to 45 fulltime employees who work for Contractor (the "Contractor Space"). Should Contractor need more square footage than the Contractor Space provided then Contractor and EDT Learning may engage in a separate sublease agreement concerning some other portion of EDT Learning's Premises or Contractor may seek other additional premises outside of the EDT Learning's Premises. Unless and until this Agreement is terminated and in consideration for the Contractor Payments, EDT Learning will provide to Contractor use of its office equipment, office furniture and general office suite services (the "Executive Suite Services") which is necessary to provide the Custom Services to EDT Learning that will include at no additional cost to Contractor office cubicles, desks, computers, software, telephones, internet access, long distance, fax, copier, office supplies and postage without itemization. Should EDT Learning vacate the Premises for any reason and not provide equivalent space reasonably acceptable to Contractor, then, on and after the date of vacancy of the Premises, the obligation to provide Contractor Space and the obligations related to the Executive Suite Services shall terminate and the Percentage (as defined below) shall be reduced by one-half and the fees due to Contractor under Section 9b shall be increased to 90% from 80% of the Net Fees as defined therein. In the event of vacancy of the Premises, other than the foregoing changes in the Percentage and the amount due to Contractor the obligations of Contractor to EDT Learning concerning the Contractor Payments shall continue during the Term hereof. In consideration for the Executive Suite Services and use of the Contractor Space provided and other good and valuable consideration, then Contractor will (the "Contractor Payments"): (a) provide to EDT Learning each month that this Agreement remains in effect, at no additional charge, 80 hours of Custom Services for the creation of product demonstration, sales and marketing literature, web site enhancements and other creative services for use by EDT Learning, but not as part of the Custom Services provided to Customers; (b) reimburse one half of the base compensation of the sales executive which is focused on the sale of Custom Services (currently Ms. Sue Leff) in an amount up to $2,500 per month; (c) pay a percentage (the "Percentage") of the collected revenues associated with the sale of Custom Services to Contractor's Clients (i.e., revenues to persons other than EDT Learning Customers, the "Collected Revenues") based upon the following table:
--------------------------------------------------------------------------------------------------------------- COLLECTED REVENUES BY CONTRACTOR DURING THE FIRST 12 DURING THE SECOND 12 AFTER THE SECOND MONTHS FROM THE MONTHS FROM THE ANNIVERSARY OF THE EFFECTIVE DATE EFFECTIVE DATE EFFECTIVE DATE --------------------------------------------------------------------------------------------------------------- LESS THAN $2 MILLION 20% 20% 20% --------------------------------------------------------------------------------------------------------------- BETWEEN $2 AND $4 MILLION 15% 15% 15% --------------------------------------------------------------------------------------------------------------- BETWEEN $4 AND $5 MILLION 10% 10% 10% --------------------------------------------------------------------------------------------------------------- OVER $5 MILLION 10% 5% 0% ---------------------------------------------------------------------------------------------------------------
EDT Learning will maintain a fulltime sales representative who is dedicated to the sale of Custom Services (the "Contractor Payments"). However, should EDT Learning terminate that sales associate and no longer employ a person who is dedicated to the sale of Custom Services, then Contractor on the termination date of that dedicated sales person will no longer provide to EDT Learning reimbursement of any sales person's compensation. If EDT Learning desires to hire and/or assign a new salesperson dedicated to the sale of Custom Services then Contractor will have the right to approve or disapprove the assignment/hire and upon their hiring the obligation to reimburse for one half of their compensation shall again resume. SUBCONTRACTOR AGREEMENT PAGE 6 OF 19 8. LOYALTY AND EXCLUSIVITY. a. Each party warrants and represents to the other party that: i. During the term of this Agreement and for the one (1) year period after termination of this Agreement, neither party will solicit for hire or hire any employee of the other party. ii. During the term of this Agreement and for the three (3) year period after termination of this Agreement, Contractor will not solicit any Customer of EDT Learning (or facilitate the solicitation of any Customer by any third party) for the purpose of the sale of the Custom Services or other product or service which is competitive with that of the products and services sold by EDT Learning as of the termination date of this Agreement other than pursuant to the terms and conditions of this Agreement, and EDT Learning will not solicit any Contractor Client for the purpose of the sale of the Custom Services.. iii. During the term of this Agreement and for the one (1) year period after termination of this Agreement, Contractor will not solicit any Value Added Reseller or referral partner of EDT Learning (or facilitate the solicitation by any third party), including but not limited to SkillSoft, for the purpose of the sale of the Custom Services or other product or service which is competitive with that of the products and services sold by EDT Learning as of the termination date of this Agreement, other than pursuant to the terms and conditions of this Agreement. During the term of this Agreement and for the one (1) year period after termination of this Agreement, EDT Learning will not solicit any distribution or referral partner of Contractor (or facilitate the solicitation by any third party), for the purpose of the sale of the Custom Services, other than pursuant to the terms and conditions of this Agreement iv. During the term of this Agreement and for the three (3) year period after termination of this Agreement, each party represents and covenants that it will not (either personally, or through any individual association, partnership, corporation or other entity) intentionally disclose any Trade Secret or Confidential Information of the other party to any person, (or any association, partnership, corporation or other entity) for any reason or purpose whatsoever, except as may be required by this Agreement, a Statement of Work or operation and compulsion of law. b. Each party represents and warrants that its training and experience are such that the restrictions contained in this section, in general and in this paragraph specifically, shall not result in an inability on its part to pursue a livelihood, and that other alternatives or employment or business endeavors are reasonably available with these covenants fully enforced. Each party expressly agrees that the duration, geographical limitations and description of the prohibited conduct described in these representations and covenants are reasonable and that such party has given valuable consideration for the representations and covenants contained in this section. Each party agrees that the representations and covenants contained in this section are a material inducement for the other party to enter into this Agreement. Because each party has negotiated and agreed to the limitations and restrictions contained in this section, such Party expressly waives the right to later protest the reasonableness of the limitations, warranties, geographical limitations and prohibited conduct specified in these restrictive representations and covenants. Each party agrees that any compensation or fee due to such party may be offset by any damages sustained by the other party should Contractor SUBCONTRACTOR AGREEMENT PAGE 7 OF 19 materially breach the foregoing restrictive covenants after notice and failure to cure such breach. Each party agrees that the other party would be immediately and irreparably harmed in the event of breach by it and therefore enforcement by immediately obtaining an injunction would be proper; and each party agrees that the amount of surety bond if any required shall not exceed $500.00. 9. FEES, PAYMENT TERMS AND CANCELLATION. a. EDT Learning and Contractor agree that the fees charged to Customers for the Custom Services shall be mutually agreed upon by both parties prior to the execution of a Statement of Work between EDT Learning and the Customer. Attached hereto in EXHIBIT "B" is Contractor's current standard fee schedule for the provision of Custom Services. EXHIBIT "B" is subject to modification by Contractor on at least 90 days prior written notice by Contractor. Any deviation from the standard rates for any Statement of Work shall be mutually agreed upon by both parties prior to quotation of the prices for the Custom Services to the Customer. b. Only EDT Learning will bill and collect from the EDT Learning Customer and accordingly Contractor will only look to EDT Learning for collection of any fees and charges due to Contractor from such Customer, including for work performed pursuant to this Agreement or any applicable Statement of Work. EDT Learning shall make reasonable commercial efforts to collect such fees and charges, and in connection therewith and will provide to Contractor a weekly written report of EDT Learning's aged accounts receivable, cash collections and such other related information that Consultant reasonably requests concerning Custom Services. EDT Learning represents that it shall not write off its accounts receivable arising from Custom Services performed by Contractor except for appropriate reserves and write offs due to uncollectability. Notwithstanding the foregoing, Contractor may bill and collect from any Contractor Client who is not an EDT Learning Customer. The fees due to Contractor will be equal to eighty percent (80%) of the Net Fee received by EDT Learning from the Customer for the Custom Services provided by EDT Learning to Customer. The term "Net Fee" shall mean the amount of the fee paid by Customer to EDT Learning after deduction of the sales commission (the amount of which is subject to mutual agreement by EDT Learning and Contractor) due to the EDT Learning sales executive who was responsible for the sale of the Statement of Work and shall not include any sales or other taxes collected by EDT Learning and remitted to any taxing authority. By way of example but not limitation, should EDT Learning's sales person receive 10% of the total revenue earned and a project derive revenue of $100,000, then Contractor shall be due a cash fee equal to $72,000 with EDT Learning retaining the remaining cash associated with the revenue of $18,000. c. Payments to Contractor of the Net Fee will be due upon the collection of cash from the Customer and which is earned revenue on an accrual basis in accordance with GAAP (matching the payments from the customer) and will be tendered to Contractor within three (3) business days of its receipt by EDT Learning. However, EDT Learning will have no obligation to tender to Contractor any portion of any Advance Deposits received by EDT Learning. If EDT Learning receives a deposit of money from a Customer in advance of the Net Fee being due and payable, then EDT Learning will advance to Contractor an amount equal to eighty percent (80%) of that deposit after deduction of the sales commission (the "Deposit"), provided, however, that such Deposit shall remain a liability of Contractor to EDT Learning unless and until earned by Contractor under the applicable accrual rules. By way of example but not limitation, should EDT Learning's sales person receive 10% of the total revenue earned and the Customer SUBCONTRACTOR AGREEMENT PAGE 8 OF 19 tenders a deposit of $10,000, then Contractor will receive a cash Deposit equal to $7,200 with EDT Learning retaining the remaining cash associated with the deposit of $1,800. Only Custom Services which are resulting from executed Statements of Work on and after the Effective Date of this Agreement will result in a Net Fee due to Contractor. Contractor will not be entitled to any portion of any accounts receivable on EDT Learning's books prior to the Effective Date. Contractor and EDT Learning will apportion any work in process which is ongoing (i.e., partially completed projects prior to the Effective Date) and only the agreed upon un-completed portion of any work in progress will be subject to any Net Fee or sharing between EDT Learning and Contractor. EDT Learning and Contractor will execute separate Statements of Work for projects that are in partial completion and for which a Net Fee is due. All payments to Contractor shall be made in United States dollars. EDT Learning will provide to Contractor a weekly written report in reasonable detail itemizing cash receipts for payments received for Custom Services. Contractor will have right to audit upon reasonable notice and during normal business hours EDT's books and records concerning custom content development services that are provided to Customers. EDT Learning will be responsible for the collection of and payment of all taxes that are imposed on the Custom Services delivered to Customer, including any sales taxes. Notwithstanding any other provision of this Agreement, if EDT Learning fails to make any payment of the Net Fee within the three (3) days specified above, then in addition to any other remedies available under this Agreement Contractor shall have the right, but not the obligation, to immediately suspend all work under the Statement of Work and/or terminate the Statement of Work in its entirety. 10. CHANGE MANAGEMENT PROCEDURES. a. CANCELLATION OF STATEMENTS OF WORK. Once a Statement of Work has been executed by the parties, then EDT Learning may cancel such outstanding Statement of Work by providing to Contractor written notice of such cancellation in the event that: (i) the Customer cancels the Customer Contract to for which the Statement of Work provides Custom Services; (ii) the Contractor and EDT Learning mutually cancel the Statement of Work; or, (iii) Contractor breaches the Statement of Work and fails to cure such breach pursuant to Section 18b. hereof. Cancellation of a Statement of Work will be effective on the later of the date provided in the notice or the date Contractor receives written notice of cancellation. In the event of a cancellation of a Statement of Work, EDT Learning shall reimburse Contractor for all expenses incurred and for all Custom Services performed through and including the effective date of the cancellation. The fee due at cancellation for the services performed shall be based upon the hours expended and rates provided in the applicable Statement of Work (or if the specific hourly rates are not provided in the Statement of Work then the fee due to Contractor shall be based upon Contractor's standard hourly rate schedule). b. REQUIREMENT OF CHANGE ORDERS. Any changes, modifications, or additions to the obligations of either party or to any other material aspect of a Statement of Work will require a written Change Order prepared by either party and mutually agreed to by the parties. Either party may initiate a Change Order by sending the Change Order to the other party for review and approval. All Change Orders will conform to the template set forth in EXHIBIT "C" and may contain, but will not be limited to, the following information, as applicable: i. A description of any additional work to be performed and/or changes to the performance required of either party, including the estimated number and skill level of personnel necessary to make such changes and/or additions and the availability of such personnel over the ensuing period; ii. A statement of the impact of the work or changes on the services or other requirements of this Agreement; SUBCONTRACTOR AGREEMENT PAGE 9 OF 19 iii. The estimated timetable to complete the work specified in the Change Order; iv. The impact, if any, on the schedule or fees; v. Acceptance criteria for such work; and, vi. Signatures of both parties. c. ACCEPTANCE OF CHANGE ORDER. Within five (5) days of the submission of a Change Order to either party, the other party will notify the party submitting the Change Order of its acceptance or rejection of the proposed change or addition in writing. Failure to respond to such a request will not be deemed to constitute acceptance of such Change Order request. 11. WARRANTY. a. Contractor represents and warrants that: i. All work undertaken by it to provide Custom Services, all Courses, and all Work Product shall be accomplished in a professional and workmanlike manner, and in accordance with industry standards, and in accordance with this Agreement and the applicable Statement of Work; and, ii. All software, content and other material provided to EDT Learning or EDT Learning Customer, including Contractor Work Product and covered Derivative Works do not and will not, to its knowledge, violate any copyright, trademark, service mark, trade secrets, U.S. patents, proprietary right or personal right of any third party, including any right of privacy or publicity and will not contain any defamatory or obscene statement or material. b. EDT Learning represents and warrants that the Development Software and EDT Learning Products and other material provided to Contractor for a Customer do not and will not, to its knowledge, violate any copyright, trademark, service mark, trade secrets, U.S. patents, proprietary right or personal right of any third party, including any right of privacy or publicity, and that they are original works for which EDT Learning has the right, power and authority to convey the licenses to Contractor or Contractor's subcontractors contemplated by this Agreement. 12. LIMITATION OF LIABILITY. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED IN THIS AGREEMENT, EDT LEARNING AND CONTRACTOR MAKE AND RECEIVE EACH TO THE OTHER NO WARRANTIES, EXPRESS, IMPLIED, STATUTORY, ARISING FROM THE COURSE OF DEALING OR USEAGE OF TRADE, OR OTHERWISE, AND EACH PARTY SPECIFICALLY DISCLAIMS ANY WARRANTIES OF TITLE, QUIET ENJOYMENT, ABSENCE OF SECURITY INTEREST, LIEN OR ENCUMBRANCE, NONINFRINGEMENT, MERCHANTABILITY AND/OR FITNESS FOR A PARTICULAR PURPOSE. EXCEPT AS OTHERWISE EXPRESSLY PROVIDED HEREIN (INDEMNIFICATION), NEITHER EDT LEARNING NOR CONTRACTOR SHALL BE LIABLE FOR ANY INDIRECT, SPECIAL, CONSEQUENTIAL, INCIDENTAL EXEMPLARY, OR PUNITIVE DAMAGES RELATING TO OR ARISING FROM ANY BREACH OR ALLEGED BREACH OF THIS AGREEMENT, OR FROM SUBCONTRACTOR AGREEMENT PAGE 10 OF 19 ANY PRODUCTS, SERVICES OR OTHER ACTIONS OR OMISSIONS CONNECTED WITH OR UNDERTAKEN PURSUANT TO THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY, (WHETHER BASED UPON BREACH OF CONTRACT OR WARRANTY, STRICT LIABILITY, NEGLIGENCE, TORT OR OTHERWISE), INCLUDING, WITHOUT LIMITATION, LOST PROFITS OR INJURY TO BUSINESS, REGARDLESS OF WHETHER THE OTHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EDT LEARNING'S LIABILITY FOR DAMAGES RELATING TO OR ARISING FROM ANY ALLEGED BREACH OF THIS AGREEMENT, OR PRODUCT, SERVICE ACT OR OMISSION IN CONNECTION WITH THIS AGREEMENT SHALL NOT EXCEED THE BALANCE OF PROJECT PRICE PAYABLE TO CONTRACTOR WITH RESPECT TO COMPLETED COURSES PREVIOUSLY DEVELOPED PURSUANT TO THE STATEMENT OF WORK DELIVERED BY EDT LEARNING TO CONTRACTOR PURSUANT TO THIS AGREEMENT AND PRIOR TO EXPIRATION OR TERMINATION OF THIS AGREEMENT. CONTRACTOR'S LIABILITY FOR DAMAGES RELATING TO OR ARISING FROM ANY ALLEGED BREACH OF THIS AGREEMENT SHALL NOT EXCEED THE AMOUNT OF PROJECT PRICE ALREADY PAID BY EDT LEARNING WITH RESPECT TO STATEMENT OF WORK ISSUED PURSUANT TO THIS AGREEMENT. IN NO EVENT SHALL EDT LEARNING'S OR CONTRACTOR'S RESPECTIVE AFFILIATES, OR THE RESPECTIVE SHAREHOLDERS, DIRECTORS, OFFICERS, EMPLOYEES, AGENTS OR REPRESENTATIVES OF EDT LEARNING OR CONTRACTOR, BE LIABLE FOR ANY CLAIMS OR DAMAGES RELATING TO OR ARISING FROM ANY BREACH OR ALLEGED BREACH OF THIS AGREEMENT, OR FROM ANY PRODUCTS, SERVICES OR OTHER ACTIONS OR OMISSIONS CONNECTED WITH OR UNDERTAKEN PURSUANT TO THIS AGREEMENT, UNDER ANY CAUSE OF ACTION OR THEORY OF LIABILITY, (WHETHER BASED UPON BREACH OF CONTRACT OR WARRANTY, STRICT LIABILITY, NEGLIGENCE, TORT OR OTHERWISE), INCLUDING, BUT NOT LIMITED TO, INDIRECT, SPECIAL, CONSEQUENTIAL, INCIDENTAL, EXEMPLARY, OR PUNITIVE DAMAGES, OR THIRD PARTY CLAIMS, INCLUDING WITHOUT LIMITATION LOST PROFITS OR INJURY TO BUSINESS, REGARDLESS OF WHETHER SUCH INDIVIDUALS OR ENTITIES HAVE BEEN OR ARE ADVISED OR KNOW OR SHOULD KNOW OF THE POSSIBILITY OF SUCH DAMAGES. 13. INDEMNIFICATION. a. BY CONTRACTOR. Contractor hereby agrees to indemnify, defend and hold harmless EDT Learning, its affiliates, and their respective shareholders, officers, directors, employees, agents and representatives from and against any and all third party claims or proceedings ("Claims") for causes of action, demands, liabilities, obligations, losses, damages, judgments, costs and expenses (including reasonable attorney's fees and expert witness fees) of any kind whatsoever: (a) which arise directly or indirectly out any breach of a Statement of Work by Contractor or its subcontractors; (b) which arise directly or indirectly under any agreement between Contractor and any Contractor Client; (c) which are based on an allegation that any materials, Custom Services, covered Derivative Works, Customer's Courses, or Work Product provided by Contractor hereunder infringe any Proprietary Rights of third parties provided that such infringement in not caused in whole or in part by EDT Learning Products; or, (d) which are claims by Contractor's employees for any wage, compensation, taxes, benefits, vacation pay, insurance, workman's compensation or other employment claims based upon the employment of such person by Contractor. b. BY EDT LEARNING. EDT Learning hereby agrees to indemnify, defend and hold harmless Contractor, its affiliates, and their respective shareholders, officers, directors, employees, SUBCONTRACTOR AGREEMENT PAGE 11 OF 19 agents and representatives from and against any and all Claims of any kind whatsoever: (a) which arise directly or indirectly out any breach of a Statement of Work by EDT Learning; (b) which arise directly or indirectly under any Customer Contract (other than a breach of the related Statement of Work by Contractor or its subcontractors); (c) which are based on an allegation that any EDT Learning Products infringe any Proprietary Rights of third parties; or, (d) which are claims by EDT Learning's employees for any wage, compensation, taxes, benefits, vacation pay, insurance, workman's compensation or other employment claims based upon the employment of such person by EDT Learning. c. PROCEDURES. A party's obligation to indemnify the other party hereunder is conditioned upon such other party providing prompt written notice to the indemnifying party of an Claim and cooperating (at no out-of-pocket cost) with the indemnifying party in all reasonable respects. 14. INDEPENDENT CONTRACTOR RELATIONSHIP BETWEEN PARTIES. Contractor represents and warrants that it, and not EDT Learning, is the employer of Contractor's employees and that it is solely responsible for complying with all laws, rules and regulations of any governmental authority having appropriate jurisdiction relating to such employment, including, but not limited to, immigration, taxation, worker compensation and unemployment compensation. EDT Learning and Contractor are independent contractors, and neither party will have the power to bind the other or incur obligations on the other's behalf without the other's prior written consent. The parties agree that Contractor shall retain sole discretion and judgment in the manner the services are to be performed. Neither party is, nor shall be considered to be, an agent, distributor, partner, joint venture or representative of the other party for any purpose. 15. CONFIDENTIAL INFORMATION. The term "Confidential Information" means, with respect to each party information which relates to a party's business, research, development, programs, costs, customers or general activities that is held in confidence by such party, including information that is designated as confidential or that, by its nature, should be considered confidential, including the terms of this Agreement, information relating to the Development Software, Source Material, EDT Learning Products, Work Products, Custom Services and Customers.. Each party (and its agents and licensors) will not disclose to any third party (except as required by law or government requests/orders or to its attorneys, accountants and other advisors as reasonably necessary), any of the Confidential Information. If law requires disclosure of Confidential Information, the party receiving the request will give prior written notice to the other to permit the other to contest such disclosure. Each party agrees to protect the confidentiality of the Confidential Information with at least the same degree of care it takes to protect its own Confidential Information. Neither party has any confidentiality obligations regarding information that enters into the public domain without breach of this Agreement; that it receives from a third party without restrictions on disclosure and without breach of a nondisclosure obligation; or that it has developed internally. 16. RIGHTS IN WORK PRODUCT. a. WORK PRODUCT. All Work Product created or prepared by Contractor for EDT Learning pursuant to this Agreement whether or not prepared on or off the premises of EDT Learning or during regular work hours shall be the sole and exclusive property of EDT Learning. SUBCONTRACTOR AGREEMENT PAGE 12 OF 19 b. EXCLUDED ITEMS. EDT Learning hereby disclaims any ownership in, and Contractor shall not be required to assign to EDT Learning, any invention, discovery, innovation or improvement of Contractor which does not involve any of EDT Learning Products or Development Software or Contractor Tools (the "Excluded Inventions"). In any Dispute with respect to these exclusions, the burden of proof will be on Contractor to show that the exclusion applies. 17. INSURANCE. Contractor agrees to obtain and maintain insurance which is required by any Statement of Work or that is required by the Customer of EDT Learning, including the following: a. Workers' Compensation insurance in an amount sufficient by virtue of the laws of the State of Arizona; b. General Liability insurance in which the limit of liability for injuries, including accidental death, and property damage is no less than U.S. $1,000,000 for any one occurrence; c. Professional Liability (errors & omissions): with limits of not less than $1,000,000 each occurrence; and, d. Automobile insurance in which the limit of liability for injuries, including accidental death, and property damage is no less than U.S. $1,000,000 for any one occurrence. 18. TERM AND TERMINATION. a. TERM. The initial term of this Agreement will be thirty-six (36) months from the Effective Date of this Agreement (the "Initial Term"), unless terminated as provided herein with the date upon which termination is to occur provided in the Notice of Termination (the "Termination Date"). b. BREACH. In the event that either party hereto breaches in the substantial performance of any material obligation specified herein or in any Statement of Work, the non-breaching party shall notify the other party hereof in writing and, if such breach is not remedied within thirty (30) days from the date of such notice, then the non-breaching party shall have the right to terminate this Agreement and all outstanding Statements of Work immediately. c. FINANCIAL DIFFICULTY. This Agreement shall automatically terminate if any of the following take place with regard to the other party: such party makes a general assignment or general arrangement for the benefit of its creditors; the filing by or against such party of a petition to have it adjudged bankrupt or of a petition for reorganization or arrangement of such party under any law relating to bankruptcy or insolvency unless, in the case of a filing against such party, the same is dismissed within thirty (30) days; the appointment of a trustee or a receiver to take possession of substantially all of such party's assets or its interests in this Agreement, where such possession is not restored within thirty (30) days; or the attachment, execution or other judicial seizure of substantially all of such party's assets or its interests in this Agreement, where such seizure is not discharged within thirty (30) days. d. VOLUNTARY TERMINATION. After the Initial Term, this Agreement shall continue from month to month unless and until terminated upon delivery by either party of thirty (30) days prior written notice of a party's intent to terminate (the "Termination Date"). e. EFFECT UPON TERMINATION. No new Statements of Work may be entered into after the Termination Date, but termination of this Agreement by either party will not cause the automatic SUBCONTRACTOR AGREEMENT PAGE 13 OF 19 cancellation of any pending Statement of Work signed by both parties prior to the Termination Date (the "Remaining Statements of Work"). Services to be performed under Remaining Statements of Work will continue until completion, unless Customer cancels any or all of the Remaining Statements of Work as provided herein. This Agreement will remain in effect with respect to the Remaining Statements of Work until their completion, at which time this Agreement will automatically terminate. 19. MISCELLANEOUS PROVISIONS. a. FORCE MAJEURE. Either party's non-performance shall be excused to the extent that performance is impossible due to reasons beyond such party's control. b. GOVERNMENT REGULATIONS. Contractor will not export, re-export, transfer, or make available, whether directly or indirectly, any regulated item or information to anyone outside the U.S. in connection with this Agreement without first complying with all export control laws and regulations which may be imposed by the U.S. government and any country or organization of nations within whose jurisdiction Customer operates or does business. c. GOVERNING LAW. This Agreement is made under and will be governed by and construed in accordance with the laws of the State of Arizona (except that body of law controlling conflicts of law) and specifically excluding from application to this Agreement that law known as the United Nations Convention on the International Sale of Goods. Notwithstanding the foregoing, claims seeking injunctive relief for Services in accordance with this Agreement may be brought in any state or federal court of competent jurisdiction. The prevailing party in any litigation between the parties shall recover its reasonable attorneys' fees and costs from the non-prevailing party. d. SEVERABILITY; WAIVER. In the event any provision of this Agreement is held to be unenforceable, the remaining provisions of this Agreement will remain in full force and effect, and the unenforceable provisions will be construed in accordance with applicable law as nearly as possible to reflect the original intention of the parties. The waiver of SUBCONTRACTOR AGREEMENT PAGE 14 OF 19 any breach or default of this Agreement will not constitute a waiver of any subsequent breach or default, and will not act to amend or negate the rights of the waiving party. e. ASSIGNMENT. Contractor may not assign this Agreement, whether by operation of law or otherwise, without the prior written consent of EDT Learning, and any purported assignment without such consent will be void. The rights and obligations of EDT Learning hereunder may be assigned to an EDT Learning affiliate, or to an individual or entity that acquires all or substantially all of the assets or shares of EDT Learning, or with whom EDT Learning merges. This Agreement will bind and inure to the benefit of each party's permitted successors and assigns. f. NOTICES. Any written notices, demands or other communications required or permitted by this Agreement must be given in English language and delivered via registered or certified air mail, return receipt requested, postage prepaid or by overnight courier or transmitted via telegraph, telex or telefax as follows: If to EDT Learning at 2999 N. 44th Street, Suite 650, Phoenix, AZ 85018, (602-952-0544 - FAX) or if to Contractor at the address identified as Contractor's principal place of business. Delivery shall be deemed to have occurred upon receipt and/or transmission validation for telex and telefax. All notices are to be forwarded to the parties at their respective addresses stated hereinabove, unless either party furnishes written notice as to a change of its address in the manner provided hereinabove. g. CONTRARY, INCONSISTENT, OR ADDITIONAL TERMS. Any contrary, inconsistent, or additional terms contained in a mutually executed Statement of Work between EDT Learning and Contractor securing such services, as compared to the terms and conditions contained in this Agreement, will be governed, interpreted, and construed in the following order of precedence: (i) the applicable Statement of Work and (ii) this Agreement. Any pre-printed terms and conditions on any materials, which EDT Learning regularly uses with its other customers, will be null and void and of no consequence whatsoever in interpreting the parties' legal rights and responsibilities as they pertain to any of the contemplated services provided hereunder. Should the terms of this Agreement or the existence of this Agreement itself cause a change in the ability of EDT Learning to recognize revenue from the sale of Custom Services or cause any change in the value of any of EDT Learning's assets, then the parties agree that they will either modify this Agreement to avoid that occurrence or will mutually terminate this Agreement. h. ENTIRE AGREEMENT; COUNTERPARTS; ORIGINALS. This Agreement, including all documents incorporated herein by reference, constitutes the entire agreement between the parties with respect to the Custom Services, and supersedes all prior or contemporaneous agreements, written and oral, regarding the Custom Services. This Agreement may be executed in SUBCONTRACTOR AGREEMENT PAGE 15 OF 19 counterparts, each of which will be deemed an original, but both of which together shall constitute one and the same instrument. This Agreement may be changed only by a written document signed by authorized representatives of both parties. i. AUTHORITY. Authorized representatives of EDT Learning and Contractor have read the foregoing and all documents incorporated therein and agree and accept such terms effective as of the date set forth beneath such party's signature. Executed as indicated below to be effective as indicated on the first date written above. INTERACTIVE ALCHEMY, INC. EDT LEARNING, INC. By: /S/ DONALD C. PIERSON, III By: /S/ JAMES M. POWERS, JR. -------------------------------- ------------------------------ Printed Name: Donald C. Pierson, III Printed Name: James M. Powers, Jr. Title: President Title: President Date: May 13, 2003 Date: May 13, 2003 SUBCONTRACTOR AGREEMENT PAGE 16 OF 19 EXHIBIT "A" FORM OF STATEMENT OF WORK ------------------------- The following document is the form of Statement of Work that will be the basis for any work performed by Contractor for EDT Learning, with the actual terms and conditions varying from project to project as needed. [The remainder of this page intentionally left blank.] SUBCONTRACTOR AGREEMENT PAGE 17 OF 19 EXHIBIT "B" CONTRACTOR'S STANDARD HOURLY RATES ---------------------------------- The following attachment will be the basis for any work performed by Contractor for EDT Learning, with the actual hours and rates varying from project to project as needed and reflected in the appropriate Statement of Work. [THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.] SUBCONTRACTOR AGREEMENT PAGE 18 OF 19 EXHIBIT "C" CHANGE ORDER ------------ Change Order No.___________ entered into pursuant to the Subcontractor Agreement dated May 1, 2003 by and between EDT Learning, Inc. and Contractor ("Contractor ") and the Statement of Work or Statement of Work executed on ____________ pertaining to ____________________. 1. Describe changes, modifications, or additions to the services. 2. Necessity, availability and assignment of requisite EDT personnel and/or resources to make requested modifications or additions. 3. Impact on Costs, Performance Period, and other requirements. a. Changes in Costs: b. Changes in Performance Period: c. Changes to any other requirements: 4. Describe any revisions in acceptance test procedures. _______________________________ __________________________________ Signature of Contractor Date _______________________________ __________________________________ Signature of EDT Learning, Inc. Date SUBCONTRACTOR AGREEMENT PAGE 19 OF 19 EX-31.1 6 edt_10qex31-1.txt EXHIBIT 31.1 CERTIFICATION I, James M. Powers, Jr. certify that: 1. I have reviewed this quarterly report on Form 10-Q of EDT Learning, Inc., 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting By: /s/ James M. Powers, Jr. - -------------------------------- James M. Powers, Jr. Chairman of the Board, President and Chief Executive Officer August 14, 2003 EX-31.2 7 edt_10qex31-2.txt EXHIBIT 31.2 CERTIFICATION I, Brian L. Berry certify that: 1. I have reviewed this quarterly report on Form 10-Q of EDT Learning, Inc., 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting By: /s/ Brian L. Berry - ------------------------- Brian L. Berry Vice President of Finance August 14, 2003 EX-32.1 8 edt_10qex32-1.txt EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of EDT Learning, Inc. (the Company) on Form 10-Q for the period ending June 30, 2003 as filed with the Securities Exchange Commission on the date here of (the Report). I, James M. Powers, Jr., Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.ss.1350, as adopted pursuant toss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By: /s/ James M. Powers, Jr. - -------------------------------- James M. Powers, Jr., Chairman of the Board, President and Chief Executive Officer August 14, 2003 EX-32.2 9 edt_10qex32-2.txt EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of EDT Learning, Inc. (the Company) on Form 10-Q for the period ending June 30, 2003 as filed with the Securities Exchange Commission on the date here of (the Report). I, Brian L. Berry, Vice President of Finance of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. By: /s/ Brian L. Berry - ------------------------- Brian L. Berry Vice President of Finance August 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----