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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM 8-K/A
AMENDMENT NO. 1 TO CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): June 17, 2002
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)
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Pro Forma Financial Information (unaudited)
EDT LEARNING, INC. AND QUISIC CORPORATION PRO FORMA
UNAUDITED COMBINED FINANCIAL STATEMENTS
Introduction.................................................... 4
Pro Forma Combined Statement of Operations for the
year ended March 31, 2002..................................... 5
Pro Forma Combined Statement of Operations for the
six months ended September 30, 2002........................... 6
Notes to Pro Forma Combined Financial Statements................ 7
(b) Financial Statements of Business Acquired
QUISIC CORPORATION FINANCIAL STATEMENTS
Report of Independent Auditors.................................. 9
Balance Sheets as of December 31, 2001 and 2000................. 10
Statements of Operations for the years ended
December 31, 2001 and 2000.................................... 11
Statements of Redeemable Preferred Stock and
Stockholders' Deficit for the years ended
December 31, 2001 and 2000.................................... 12
Statements of Cash Flows for the years ended
December 31, 2001and 2000..................................... 13
Notes to Audited Financial Statements........................... 15
Consent of KPMG LLP................................................ 35
2
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EDT Learning, Inc.
By: /s/ James M. Powers, Jr.
------------------------------------
James M. Powers, Jr.,
Chairman of the Board, President and
Chief Executive Officer
Date: February 7, 2003
3
EDT LEARNING, INC. AND QUISIC CORPORATION
PRO FORMA UNAUDITED COMBINED FINANCIAL STATEMENTS
INTRODUCTION
The following pro forma combined financial statements reflect the
acquisition of certain assets of Quisic Corporation (Quisic) on June 17, 2002.
The pro forma combined financial statements also reflect the acquisition of all
of the outstanding capital stock of Learning-Edge, Inc. (Learning-Edge) on
October 1, 2001 and the acquisition of all the outstanding capital stock of
ThoughtWare Technologies, Inc. (ThoughtWare) on January 15, 2002.
The acquisition of certain assets of Quisic was consummated on June 17,
2002. As part of the Asset Purchase Agreement, Quisic was obligated to provide
its audited financial statements to the Company for the years ended December 31,
2001 and 2000 within two weeks of the transaction closing, well in advance of
the September 3, 2002 deadline to file this related Form 8-K/A . Quisic
delivered its audited financial statements to the Company on December 16, 2002.
Due to the late receipt of the Quisic financial statements, a pro forma
consolidated balance sheet is not presented in this Form 8-K/A since the
acquired assets and liabilities have already been incorporated in EDT Learning's
Form 10-Q for the three month period ended June 30, 2002 and for the six month
period ended September 30, 2002 as filed with the Securities and Exchange
Commission.
The pro forma combined statement of operations for the year ended March 31,
2002 is derived from the historical consolidated statement of operations of EDT
Learning for the year ended March 31, 2002, the historical statement of
operations of Quisic for the year ended December 31, 2001, the interim statement
of operations of Learning-Edge for the six months ended September 30, 2001 and
the interim statement of operations of ThoughtWare for the nine months ended
December 31, 2001. The pro forma combined statement of operations for the six
months ended September 30, 2002 is derived from the interim consolidated
statement of operations of EDT Learning for the six months ended September 30,
2002 and the results of operations of Quisic for the period from April 1, 2002
to June 16, 2002. The pro forma adjustments have been prepared as if the
acquisitions of Quisic, Learning-Edge and ThoughtWare had been consummated on
April 1, 2001.
The pro forma combined financial statements are not necessarily indicative
of the results of the future operations of EDT Learning. The pro forma combined
statements of operations do not reflect the anticipated cost savings resulting
from integration of the operations of EDT Learning and Quisic or costs to be
incurred to integrate the two companies. The pro forma adjustments described in
the accompanying notes are based on estimates derived from information currently
available.
The pro forma combined financial statements should be read in conjunction
with the notes thereto and the historical financial statements of Quisic
included in Item 7(b) of this Form 8-K/A. In addition, reference should be made
to the historical financial statements of EDT Learning included in Form 10-K for
the year ended March 31, 2002 and included in Form 10-Q for the six months ended
September 30, 2002 filed with the Securities and Exchange Commission. Reference
should be made to the historical financial statements of Learning-Edge included
in Form 8-K/A, which contained the audited financial statements of
Learning-Edge, Inc. for the year ended December 31, 2000 and the unaudited
financial statements of Learning-Edge, Inc. for the nine months ended September
30, 2001 filed with the Securities and Exchange Commission. Reference should
also be made to the historical financial statements of ThoughtWare included in
Form 8-K/A, which contained the audited financial statements of ThoughtWare for
the year ended December 31, 2001 and the unaudited financial statements of
ThoughtWare for the year ended December 31, 2000 filed with the Securities and
Exchange Commission.
4
EDT LEARNING, INC., LEARNING-EDGE, INC., THOUGHTWARE TECHNOLOGIES, INC. AND
QUISIC CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE DATA)
EDT LEARNING- THOUGHTWARE QUISIC
LEARNING EDGE TECHNOLOGIES CORPORATION
FOR THE FISCAL FOR THE SIX FOR THE NINE FOR THE PRO
YEAR ENDED MONTHS ENDED MONTHS ENDED YEAR ENDED PRO FORMA
MARCH 31, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, FORMA AS
2002 2001 2001 2001 ADJUSTMENTS ADJUSTED
-------- -------- -------- -------- -------- --------
Revenues
Learning ............................. $ 2,682 $ 530 $ 1,493 $ 6,184 $ (50)(A) $ 10,839
Dental contracts ..................... 6,582 -- -- -- -- 6,582
-------- -------- -------- -------- -------- --------
Total revenues ..................... 9,264 530 1,493 6,184 (50) 17,421
Operating expenses:
Costs of revenue ..................... -- 608 887 3,747 (50)(A) 5,192
Research and development ............. 2,323 -- 908 5,030 -- 8,261
Sales and marketing .................. 1,123 402 1,611 4,201 -- 7,337
General and administrative ........... 2,692 638 3,234 9,642 -- 16,206
Depreciation and amortization ........ 2,089 88 131 5,049 99(B),(E) 7,456
Impairment of long-lived assets ...... -- -- -- 6,217 -- 6,217
-------- -------- -------- -------- -------- --------
Total operating expenses ........... 8,227 1,736 6,771 33,886 49 50,669
Earnings (loss) from operations ......... 1,037 (1,206) (5,278) (27,702) (99) (33,248)
Interest expense ..................... (1,040) (54) (65) (45,540) (30)(C) (46,729)
Interest income ...................... 238 -- 37 -- -- 275
Other income (expense) ............... 1,305 -- -- (763) -- 542
-------- -------- -------- -------- -------- --------
503 (54) (28) (46,303) (30) (45,912)
Income (loss) before taxes .............. 1,540 (1,260) (5,306) (74,005) (129) (79,160)
Income tax expense ................. -- -- -- 1 -- 1
-------- -------- -------- -------- -------- --------
Income (loss) before extraordinary
item ................................ $ 1,540 $ (1,260) $ (5,306) $(74,006) $ (129)(D) $(79,161)
======== ======== ======== ======== ======== ========
Earnings (loss) per common share:
Basic ................................. $ 0.13 $ (4.78)
======== ========
Diluted ............................... $ 0.12
========
Number of shares used in calculation
of earnings (loss) per share:
Basic ................................. 11,930 (F) 16,568
======== ========
Diluted ............................... 12,466
========
SEE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
5
EDT LEARNING, INC. AND QUISIC CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS, EXCEPT SHARE DATA)
QUISIC
EDT CORPORATION
LEARNING FOR THE
FOR THE SIX PERIOD
MONTHS ENDED FROM APRIL 1 PRO PRO FORMA
SEPTEMBER 30, TO JUNE 16, FORMA AS
2002 2002 ADJUSTMENTS ADJUSTED
-------- -------- -------- --------
Revenues
Learning ............................................... $ 2,272 $ 335 $ -- $ 2,607
Dental contracts ....................................... 1,993 -- -- 1,993
-------- -------- -------- --------
Total revenues ..................................... 4,265 335 -- 4,600
Operating expenses
Cost of revenue ........................................ -- 472 -- 472
Research and development ............................... 1,810 408 -- 2,218
Sales and marketing .................................... 851 383 -- 1,234
General and administrative ............................. 1,463 708 -- 2,171
Depreciation and amortization .......................... 991 466 14(E) 1,471
-------- -------- -------- --------
Total operating expenses ........................... 5,115 2,437 14 7,566
Earnings (loss) from operations ........................... (850) (2,102) (14) (2,966)
Interest expense ....................................... (766) (348) -- (1,114)
Interest income ........................................ 92 -- -- 92
Other income ........................................... 815 -- -- 815
-------- -------- -------- --------
141 (348) -- (207)
Income (loss) before income taxes ...................... (709) (2,450) (14) (3,173)
Income taxes ....................................... -- -- -- --
-------- -------- -------- --------
Net income (loss) ......................................... $ (709) $ (2,450) $ (14) $ (3,173)
======== ======== ======== ========
Earnings (loss) per common share, basic and diluted ....... $ (0.05) $ (0.19)
======== ========
Number of shares used in calculation of earnings
(loss) per share, basic and diluted ...................... 15,572 (F) 16,622
======== ========
SEE ACCOMPANYING NOTES TO THE UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
6
NOTES TO PRO FORMA UNAUDITED COMBINED FINANCIAL STATEMENTS
On June 17, 2002, the Company acquired certain assets of Quisic Corporation
(Quisic), a California based private Company in exchange for 2,500,000 shares of
the Company's common stock and the assumption of $223,000 of liabilities. The
purchase price has been calculated as follows:
QUISIC
-------
Issuance of EDT Learning common stock
valued at $0.92 per share........................... $ 2,300
Acquisition costs..................................... 100
-------
Net purchase price, including acquisition costs..... $ 2,400
Assumed liabilities................................... 223
-------
Total purchase price................................ $ 2,623
=======
The total purchase price has been allocated to assets acquired and
liabilities assumed based upon their estimated fair values in
accordance with Statement of Financial Accounting Standards (SFAS) No.
141, "Business Combinations". The excess purchase price over the
estimated fair value of the tangible and identifiable intangible
assets acquired and liabilities assumed has been assigned to goodwill.
The purchase price of Quisic has been allocated as follows:
PURCHASE
PRICE
ALLOCATION
--------------
(IN THOUSANDS)
Current assets ....................................... $ 186
Property and equipment ............................... 75
Goodwill ............................................. 2,155
Identifiable intangible assets ....................... 207
Current liabilities, including deferred revenue ...... (323)
Common stock ......................................... (3)
Capital in excess of par value ....................... (2,297)
-------
$ --
=======
The following is a summary of the significant assumptions and adjustments
used in preparing the pro forma unaudited combined statements of operations for
the year ended March 31, 2002 and for the six months ended September 30, 2002.
(A) Reflects the elimination of sales between EDT Learning and
Learning-Edge prior to the acquisition.
(B) Reflects the increase in amortization related to the Learning-Edge
acquisition.
(C) Reflects interest expense related to the $1.1 million debt issued by
EDT Learning in connection with the Learning-Edge acquisition.
(D) The historical results of EDT Learning for the year ended March 31,
2002 included a $4,265,000 extraordinary gain related to forgiveness
of debt. This item has not been included in the related unaudited pro
forma consolidated statements of operations.
7
(E) Reflects amortization of the identifiable intangible assets recorded
as part of the Quisic asset acquisition.
(F) Weighted average shares of common stock outstanding is summarized
below:
SIX MONTHS YEAR
ENDED ENDED
SEPTEMBER 30, MARCH 31,
2002 2002
------ ------
EDT Learning historical weighted
average common stock equivalents:
Basic .................................... 15,572 11,930
Diluted .................................. 15,572 12,466
EDT Learning shares issued for the
acquisition of Learning-Edge ............... -- 975
EDT Learning shares issued for the
acquisition of ThoughtWare ................. -- 1,163
EDT Learning issued for the acquisition
of certain assets of Quisic ................ 1,050 2,500
------ ------
Total number of shares used in net
income per share calculation:
Basic .................................... 16,622 16,568
====== ======
Diluted .................................. 16,622 17,104
====== ======
8
QUISIC CORPORATION
Financial Statements
December 31, 2001 and 2000
(With Independent Auditors' Report Thereon)
Report of Independent Auditors
The Board of Directors
Quisic Corporation
We have audited the accompanying balance sheets of Quisic Corporation as of
December 31, 2001 and 2000 and the related statements of operations, redeemable
preferred stock and shareholders' deficit, and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quisic Corporation as of
December 31, 2001 and 2000 and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in note 17 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are described in note 17. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in note 18(c) to the financial statements, the Company sold
substantially all of its assets subsequent to the balance sheet date.
/s/ KMPG LLP
October 11, 2002
Los Angeles, California
9
QUISIC CORPORATION
Balance Sheets
December 31, 2001 and 2000
ASSETS 2001 2000
------------- --------------
Current assets:
Cash and cash equivalents, $ 1,342,845 3,989,833
Restricted cash (note 2) 750,000 1,310,408
Accounts receivable, net of allowance for uncollectible
accounts of $42,514 and $82,513, respectively 416,295 1,763,561
Costs and gross profit in excess of billings on uncompleted projects 80,025 727,301
Prepaid expenses and other current assets 103,340 198,463
------------- -------------
Total current assets 2,692,505 7,989,566
Educational video production costs (notes 4 and 7) 40,296 1,190,121
Property and equipment, net (notes 5 and 7) 1,379,019 2,667,465
Goodwill and intangible assets, net (notes 6 and 7) 875,287 10,173,530
Other long-term assets 189,598 636,753
------------- -------------
Total assets $ 5,176,705 22,657,435
============= =============
LIABILITIES, REDEEMABLE PREFERRED STOCK, AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses $ 1,825,488 2,897,166
Lease termination accrual 301,585 1,305,845
Current portion of capital lease obligation 454,978 532,266
Deferred revenue 40,500 450,644
Billings in excess of costs and gross profit on uncompleted contracts 366,639 1,161,484
10% convertible subordinated notes (notes 9 and 13) -- 10,978,066
------------- -------------
Total current liabilities 2,989,190 17,325,471
Accrued dividends (note 16) 6,552,245 --
Deferred rent 197,830 153,137
Capital lease obligation 100,360 584,186
------------- -------------
Total liabilities 9,839,625 18,062,794
------------- -------------
SeriesF redeemable preferred stock, no par value. Authorized 2,000,000,000
shares; issued and outstanding 611,641,353 shares at December 31, 2001;
no shares authorized, issued, or outstanding at December 31, 2000
Redemption value at September 7, 2006 of $67,656,408 (notes 9 and 16) 51,182,343 --
Series E redeemable preferred stock, no par value. No shares authorized, issued,
or outstanding at December 31, 2001. Authorized 20,953,361 shares; issued
and outstanding 16,937,297 shares at December 31, 2000 (note 16) -- 42,249,870
Series D redeemable preferred stock, no par value. No shares authorized, issued,
or outstanding at December 31, 2001. Authorized, issued, and outstanding
4,214,654 shares at December 31, 2000 (note 16) -- 7,000,314
Series C redeemable preferred stock, no par value. No shares authorized, issued,
or outstanding at December 31, 2001. Authorized, issued, and outstanding
4,452,000 shares at December 31, 2000 (note 16) -- 5,227,106
Commitments and contingencies (notes 11 and 12) Shareholders' deficit (note 16):
Series A preferred stock, no par value. No shares authorized, issued, or
outstanding at December 31, 2001. Authorized, issued, and outstanding
1,590,000 shares at December 31, 2000 -- 397,500
Series B preferred stock, no par value. No shares authorized, issued, or
outstanding at December 31, 2001. Authorized, issued, and outstanding
3,682,000 shares at December 31, 2000 -- 1,841,000
Common stock, no par value. Authorized 2,000,000,000 shares; issued, and
outstanding 41,195,495 shares at December 31, 2001. Authorized
75,000,000 shares; issued and outstanding 4,869,371 shares at
December 31, 2000 70,146,890 --
Notes receivable for common stock -- (135,000)
Accumulated deficit (125,992,153) (51,986,149)
------------- -------------
Total shareholders' deficit (55,845,263) (49,882,649)
------------- -------------
Total liabilities, redeemable preferred stock, and shareholders' deficit $ 5,176,705 22,657,435
============= =============
See accompanying notes to financial statements
10
QUISIC CORPORATION
Statements of Operations
Years ended December 31, 2001 and 2000
2001 2000
------------ ------------
Revenues:
Custom courseware development $ 4,301,341 5,182,145
Academic and corporate training course fees 1,317,668 555,550
Distribution and license fees, net 565,009 403,725
------------ ------------
Total revenues 6,184,018 6,141,420
------------ ------------
Cost of revenues:
Custom courseware production expense 2,581,373 2,748,257
Amortization of educational video production costs 492,276 1,462,375
Impairment of educational video production costs (note 7) 673,778 5,333,296
------------ ------------
3,747,427 9,543,928
------------ ------------
Gross profit (loss) 2,436,591 (3,402,508)
------------ ------------
Operating expenses:
General and administrative 9,339,928 14,862,254
Sales and marketing 4,200,967 10,401,585
Research and development 5,030,014 5,556,565
Depreciation and amortization 5,048,703 2,428,325
Lease termination expense (note 12) 301,585 1,311,494
Loss on disposal of property and equipment (note 5) -- 3,115,805
Impairment of long-lived assets (note 7) 6,217,604 --
------------ ------------
Total operating expenses 30,138,801 37,676,028
------------ ------------
Operating loss (27,702,210) (41,078,536)
Interest expense (45,540,167) (1,498,469)
Loss on induced debt conversion (896,336) --
Other income 133,509 853,802
------------ ------------
Loss before income taxes (74,005,204) (41,723,203)
Income taxes (note 8) (800) (800)
------------ ------------
Net loss (74,006,004) (41,724,003)
Preferred stock dividends and accretion to redemption value (3,910,680) (3,542,760)
------------ ------------
Net loss available to common shareholders $(77,916,684) (45,266,763)
============ ============
See accompanying notes to financial statements
11
QUISIC CORPORATION
Statements of Redeemable Preferred Stock and Shareholders' Deficit
Years ended December 31, 2001 and 2000
SERIES C REDEEMABLE SERIES D REDEEMABLE SERIES E REDEEMABLE SERIES F REDEEMABLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK
---------------------- ----------------------- ------------------------- ------------------------
Shares Amount Shares Amount Shares Amount Shares Amount
---------- ---------- ---------- ----------- ----------- ------------ ----------- -----------
Balance, December 31, 1999 4,452,000 $4,901,866 4,214,654 $ 6,535,370 -- $ -- -- $ --
Issuance of Series E
redeemable preferred stock -- -- -- -- 16,937,297 39,497,294 -- --
Preferred stock dividends
and accretion to
redemption value -- 325,240 -- 464,944 -- 2,752,576 -- --
---------- ---------- ---------- ----------- ----------- ------------ ----------- -----------
Balance, December 31, 2000 4,452,000 5,227,106 4,214,654 7,000,314 16,937,297 42,249,870 -- --
Preferred stock dividends
and accretion to
redemption value -- 254,097 -- 360,827 -- 2,814,090 -- 481,666
Conversion of convertible
notes -- -- -- -- -- -- 522,752,464 46,785,443
Conversion of preferred
shares into common stock (4,452,000) (4,452,000) (4,214,654) (6,312,981) (16,937,297) (40,589,078) -- --
Transfer of accrued
dividends to accrued
liability -- (1,029,203) -- (1,048,160) -- (4,474,882) -- --
Issuance of Series F
preferred stock -- -- -- -- -- -- 88,888,889 3,915,234
---------- ---------- ---------- ----------- ----------- ------------ ----------- -----------
Balance, December 31, 2001 -- $ -- -- $ -- -- $ -- 611,641,353 $51,182,343
========== ========== ========== =========== =========== ============ =========== ===========
SERIES A PREFERRED STOCK SERIES B PREFERRED STOCK COMMON STOCK
---------------------------- ---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 1999 1,590,000 $ 397,500 3,682,000 $ 1,841,000 3,523,337 $ 156,776
Issuance of Series E
redeemable preferred stock
warrants to investment bank -- -- -- -- -- 240,889
Exercise of stock options -- -- -- -- 485,034 55,972
Issuance of stock warrants -- -- -- -- -- 960,552
Issuance of common stock as
compensation -- -- -- -- 111,000 277,500
Acquisition of IEC -- -- -- -- 750,000 1,747,500
Preferred stock dividends and
accretion to redemption value -- -- -- -- -- (3,439,189)
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 1,590,000 397,500 3,682,000 1,841,000 4,869,371 --
Issuance of common stock
warrants in VLN acquisition -- -- -- -- -- 219,483
Preferred stock dividends and
accretion to redemption value -- -- -- -- -- (3,910,680)
Exercise of stock options -- -- -- -- 4,500 686
Repurchase of shares from
former officer -- -- -- -- (3,200,000) (135,000)
Issuance of warrants in
consideration of April 2001
bridge note financing -- -- -- -- -- 4,845,000
Embedded beneficial conversion
features associated with the
November 2000 and April 2001
bridge financings -- -- -- -- -- 14,514,000
Conversion of convertible notes -- -- -- -- 8,645,755 896,336
Conversion of preferred shares
into common stock (1,590,000) (397,500) (3,682,000) (1,841,000) 30,875,869 53,592,559
Issuance of stock warrants as
compensation -- -- -- -- -- 124,506
Net loss -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balance, December 31, 2001 -- $ -- -- $ -- 41,195,495 $ 70,146,890
============ ============ ============ ============ ============ ============
NOTES FROM ACCUMULATED SHAREHOLDERS'
SHAREHOLDERS DEFICIT DEFICIT
------------- ------------- -------------
Balance, December 31, 1999 (135,000) (10,158,575) (7,898,299)
Issuance of Series E
redeemable preferred stock
warrants to investment bank -- -- 240,889
Exercise of stock options -- -- 55,972
Issuance of stock warrants -- -- 960,552
Issuance of common stock as
compensation -- -- 277,500
Acquisition of IEC -- -- 1,747,500
Preferred stock dividends and
accretion to redemption value -- (103,571) (3,542,760)
Net loss -- (41,724,003) (41,724,003)
------------- ------------- -------------
Balance, December 31, 2000 (135,000) (51,986,149) (49,882,649)
Issuance of common stock
warrants in VLN acquisition -- -- 219,483
Preferred stock dividends and
accretion to redemption value -- -- (3,910,680)
Exercise of stock options -- -- 686
Repurchase of shares from
former officer 135,000 -- --
Issuance of warrants in
consideration of April 2001
bridge note financing -- -- 4,845,000
Embedded beneficial conversion
features associated with the
November 2000 and April 2001
bridge financings -- -- 14,514,000
Conversion of convertible notes -- -- 896,336
Conversion of preferred shares
into common stock -- -- 51,354,059
Issuance of stock warrants as
compensation -- -- 124,506
Net loss -- (74,006,004) (74,006,004)
------------- ------------- -------------
Balance, December 31, 2001 -- (125,992,153) (55,845,263)
============= ============= =============
See accompanying notes to financial statements
12
QUISIC CORPORATION
Statements of Cash Flows
Years ended December 31, 2001 and 2000
2001 2000
------------ ------------
Cash flows from operating activities:
Net loss $(74,006,004) (41,724,003)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 5,120,412 2,428,325
Amortization of educational video production costs 492,276 1,462,375
Impairment of educational video production costs 673,778 5,333,296
Loss on impairment of property and equipment 743,329 --
Loss on impairment of goodwill and intangible assets 5,771,351 --
Loss on disposal of property and equipment -- 3,115,805
Noncash interest expense 45,494,018 1,119,066
Loss on induced debt conversion 896,336 --
Noncash stock compensation 124,506 277,500
Changes in assets and liabilities:
Accounts receivable 1,260,500 801,570
Costs and gross profit in excess of billings 647,276 108,834
Prepaid expenses and other current assets 95,123 29,099
Other long-term assets 447,155 (636,753)
Accounts payable and accrued expenses (1,151,562) 1,325,034
Lease termination accrual (1,004,260) 1,305,845
Deferred revenue (641,035) 447,455
Billings in excess of costs and gross profit (794,845) 963,952
Deferred rent 44,692 (123,872)
------------ ------------
Net cash used in operating activities (15,786,954) (23,766,472)
------------ ------------
Cash flows from investing activities:
Educational video production costs capitalized -- (2,654,027)
Acquisition of IEC -- (12,364,478)
Lease deposits 560,408 (775,248)
Purchases of property and equipment (275,250) (3,881,013)
------------ ------------
Net cash provided by (used in) investing activities 285,158 (19,674,766)
------------ ------------
Cash flows from financing activities:
Proceeds from exercise of stock options 686 55,972
Issuance of Series F redeemable preferred stock 3,915,234 --
Issuance of Series E redeemable preferred stock -- 33,806,183
Principal payments under capital lease obligation (561,112) (169,638)
Proceeds from convertible promissory notes 9,500,000 9,859,000
------------ ------------
Net cash provided by financing activities 12,854,808 43,551,517
------------ ------------
Net increase (decrease) in cash and cash equivalents (2,646,988) 110,279
Cash and cash equivalents:
Beginning of year 3,989,833 3,879,554
------------ ------------
End of year $ 1,342,845 3,989,833
============ ============
13
QUISIC CORPORATION
Statements of Cash Flows
Years ended December 31, 2001 and 2000
2001 2000
------------ ------------
Supplemental disclosure of cash flow information:
Cash paid for interest $ 45,429 49,049
Cash paid for taxes 800 800
Noncash financing activities:
Convertible promissory notes and related interest converted into
Series F redeemable preferred stock $ 46,785,443 --
Convertible promissory notes and related interest converted into
Series E redeemable preferred stock -- 5,932,000
Property and equipment acquired under capital lease -- 1,050,605
Series A preferred stock converted into common stock 397,500 --
Series B preferred stock converted into common stock 1,841,000 --
Series C redeemable preferred stock converted into common stock 4,452,000 --
Series D redeemable preferred stock converted into common stock 6,312,981 --
Series E redeemable preferred stock converted into common stock 40,552,215 --
Net assets acquired in VLN acquisition:
Accounts receivable $ 66,092 --
Fixed assets 267,740 --
Intangible assets 368,784 --
Prepaid expenses -- --
Deferred revenue (230,891) --
------------ ------------
Net assets acquired $ 471,725 --
============ ============
Net assets acquired in IEC acquisition:
Accounts receivable $ -- 1,454,602
Costs and gross profit in excess of billings -- 836,135
Fixed assets -- 811,668
Intangible assets -- 11,660,568
Prepaid expenses -- 24,720
Accounts payable -- (478,183)
Billings in excess of costs and gross profit -- (197,532)
------------ ------------
Net assets acquired $ -- 14,111,978
============ ============
See accompanying notes to financial statements
14
(1) NATURE OF BUSINESS
Quisic Corporation (the Company) created business management education and
training software environments for the corporate market. Originally founded
as University Access, the Company changed its name in August 2000 upon the
change in its strategic focus from undergraduate distance education to the
business-to-business training industry. The Company operated in Los
Angeles, Chicago, and Atlanta.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Because of the use of
estimates inherent in the financial reporting process, actual results
could differ from those estimates.
(b) CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of short-term investments with an
original maturity of less than 90 days. The carrying amounts of cash
and cash equivalents approximate their fair values due to their short
maturities.
(c) CONCENTRATION OF RISK
Financial instruments that subject the Company to credit risk consist
primarily of cash, cash equivalents, and accounts receivable. The
Company invests its cash and cash equivalents in a money market
account with a high-quality financial institution.
At December 31, 2001, approximately 48% of the Company's accounts
receivable were from Arthur Andersen LLP (Andersen). At December 31,
2000, approximately 62% of the Company's accounts receivable were from
United Airlines, Achieve Global, The Gap, and Agilent Technologies.
The Company performs ongoing credit evaluations of its customers and
maintains an allowance for potential losses. The Company does not
require collateral from its customers.
In 2001, the Company's two largest customers accounted for 30% of net
sales, with their contribution to total sales being 17% and 13%,
respectively. In 2000, the Company's four largest customers accounted
for 70% of net sales, with their contribution to total sales being
25%, 18%, 15%, and 12%, respectively.
(d) EDUCATIONAL VIDEO AND SOFTWARE DEVELOPMENT COSTS
SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE SOLD,
LEASED, OR OTHERWISE MARKETED, requires film production and software
costs associated with the development of entertainment and educational
software products to be charged to operations as incurred prior to the
establishment of technological feasibility. As all costs incurred
subsequent to establishing technological feasibility have been
immaterial, all costs incurred during the production of entertainment
and educational software have been expensed as research and
development as incurred. These costs include course development
personnel related costs and payments to subject matter experts and
course authors.
Educational video production costs consist of the production costs
related to developing and producing video-based academic courses.
Capitalized costs are amortized based on the ratio
15
that current period actual revenue bears to estimated remaining
unrecognized ultimate revenue as of the beginning of the current
fiscal year on a course-by-course basis. Amortization of capitalized
costs commences when a course is complete and available for general
release.
Upon an event or change in circumstance that indicates the fair value
of a course's capitalized educational video production cost is less
than its carrying value, the Company determines fair value of the
capitalized costs as the discounted future cash flows arising from the
course and compares the resulting fair value of the course to its
carrying value. The carrying values of courses with unamortized
educational video production costs in excess of fair value are
adjusted to fair value.
(e) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated
depreciation and amortization. Depreciation is computed on a
straight-line basis, based upon the estimated useful lives of the
various classes of assets. The estimated useful lives of the assets
are as follows:
Computers and equipment 3 years
Office furniture 5 years
Purchased software 3 years
Leasehold improvements Lesser of life or lease term
Costs incurred related to repairs and maintenance that do not improve
or extend the life of the assets are expensed as incurred. The cost
and accumulated depreciation on property and equipment sold, retired,
or otherwise disposed of is removed from the respective accounts and
the resulting gains and losses are reflected in income.
(f) RESEARCH AND DEVELOPMENT COSTS
The Company expenses all research and development costs when incurred.
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED
OF
Statement of Financial Accounting Standards No. 121, ACCOUNTING FOR
THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
DISPOSED OF (SFAS No. 121), requires that long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by a comparison of the carrying amount of an
asset to its fair value. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets. In
situations in which fair value is determined using future net cash
flows, impairment to be recognized is measured as the amount by which
the carrying value of the assets exceeds the discounted future net
cash flows associated with the assets. Assets to be disposed of are
reported at the lower of the carrying amount or fair value, less cost
to sell.
(h) INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, ACCOUNTING FOR INCOME TAXES (SFAS No.
109). Under the asset and liability method of SFAS No. 109, deferred
tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial
statement carrying amounts of
16
existing assets and liabilities and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under
SFAS No. 109, the effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that
includes the enactment date. A valuation allowance is recorded against
deferred tax assets to the extent the Company does not expect to
realize those assets through future taxable income.
(i) STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees using the
intrinsic-value method. The Company accounts for awards to
nonemployees using the fair-value method.
(j) COMPREHENSIVE INCOME
Comprehensive income includes all changes in shareholders' equity
(except those arising from transactions with shareholders) and
includes net income and net unrealized gains (losses) on securities.
The Company has had no other comprehensive income apart from its net
losses.
(k) REVENUE RECOGNITION
Custom Courseware Development: Revenues related to the sale of custom
corporate training products and software are recorded on a
percentage-of-completion basis, in accordance with SOP 81-1,
ACCOUNTING FOR PERFORMANCE OF CONSTRUCTION TYPE AND CERTAIN PRODUCTION
TYPE CONTRACTS, using cost incurred as a percentage of total estimated
costs to determine the percent complete. Estimated profits are taken
into earnings in proportion to revenues recorded.
Catalog Courseware Licensing and Distribution and License Fees:
Revenues related to the licensing of catalog courses and the sale of
the rights to distribute the Company's products are recognized in
accordance with the American Institute of Certified Public Accountants
Statement of Position (SOP) 97-2, SOFTWARE REVENUE RECOGNITION. In
accordance with SOP 97-2, revenue is recorded when each of the
following criteria has been met: persuasive evidence of an arrangement
exists, delivery has occurred, the fee is fixed or determinable, and
collectibility is probable. When arrangements include multiple
elements, value is allocated to each element based on vendor-specific
objective evidence of fair value. Revenue equal to the value assigned
to each element in multiple-element arrangements is then recognized
individually for each element according to the basic criteria
described above.
(l) INTANGIBLE ASSETS
Intangibles include the minimum purchase commitment from Andersen (the
Andersen Sales Contract), customer list, favorable lease, acquired
workforce, and goodwill. Cumulative accumulated amortization for the
Andersen Sales Contract is the greater of the amount computed using
(a) the ratio that current gross revenues from Andersen bear to the
total of current and estimated future gross revenues from Andersen
during the commitment period or (b) the straight-line method over the
remaining estimated economic life of the asset. Amortization for the
customer list, acquired workforce, and goodwill is calculated on a
straight-line basis over a three-year useful life. Amortization
expense for the favorable lease is calculated on a straight-line basis
over the remainder of the lease term.
17
(m) COSTS AND GROSS PROFIT IN EXCESS OF BILLINGS AND BILLINGS IN EXCESS OF
COSTS AND GROSS PROFIT
The Company classifies as current all assets and liabilities related
to the performance of long-term contracts. Costs and gross profit in
excess of billings and billings in excess of costs and gross profit
arise as revenues are recognized under the percentage-of-completion
method. These amounts are billable at specified dates, when deliveries
are made or at contract completion, which is expected to occur within
one year. The differences between amounts billed and revenue
recognized are reflected as costs and gross profit in excess of
billings and billings in excess of costs and gross profit. All amounts
included within costs and gross profit in excess of billings are
expected to billed and collected.
(n) RESTRICTED CASH
The Company maintained certificates of deposit at financial
institutions totaling $750,000 and $1,310,408 at December 31, 2001 and
2000, respectively, that secure the operating leases of its primary
operating facility in Marina del Rey (the Marina Facility). The
Company is unable to withdraw these funds without consent of its
landlord.
(3) ACQUISITIONS
(a) VIRTUAL LEARNING NETWORK
In May 2001, the Company purchased certain assets comprising the
Virtual Learning Network (VLN) division of Andersen. VLN operates
within the management education and corporate training market.
As consideration, the Company issued: (a) 10% convertible promissory
notes with a face value of $4,099,200 (the VLN Notes), (b) equity
participation rights equivalent to 2,529,636 shares of common stock,
277,114 shares of Series A preferred stock, 641,720 shares of Series B
preferred stock, 775,920 shares of Series C redeemable preferred
stock, 734,554 shares of Series D redeemable preferred stock, and
2,951,929 shares of Series E redeemable preferred stock (collectively
the Junior Shares), and (c) options to purchase 6,267,753 shares of
common stock valued at $219,483 using a Black-Scholes pricing model.
The Company incurred direct and incremental legal fees of $252,242 in
association with the business combination.
Management recorded a discount on the face value of the VLN Notes of
$4,099,200, resulting in a net carrying value for the VLN Notes of
zero upon issuance. The fair value of the VLN notes was based upon
similar notes issued by the Company in monetary transactions that were
executed immediately before and after the issuance of the VLN Notes
that resulted in no cash proceeds allocable to the notes pursuant to
the application of EITF 98-5, ACCOUNTING FOR CONVERTIBLE SECURITIES
WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE
CONVERSION RATIOS, and EITF 00-27, APPLICATION OF ISSUE NO. 98-5 TO
CERTAIN CONVERTIBLE INSTRUMENTS. These similar notes had identical
terms as the VLN Notes. See note 15 for further discussion of the VLN
Notes.
The equity participation rights entitle Andersen to receive additional
consideration upon: (a) the sale of the majority of the Company's
assets, (b) an acquisition which results in the Company's shareholders
retaining less than 50% of the voting power of the remaining entity,
or (c) a capital stock dividend. The amount of additional
consideration due to Andersen upon one of the aforementioned
transactions is equal to: (i) the amount Andersen would have been
entitled to had they owned the Junior Shares, and (ii) the additional
amount Andersen would
18
have been entitled to receive in the transaction had they been able to
convert the VLN Notes prior to the completion of the transaction. The
equity participation rights issued by the Company were considered to
be contingent consideration. The Company's obligations to provide
additional consideration pursuant to Andersen's equity participation
rights were subsequently extinguished concurrent with the conversion
of the VLN Notes (see note 15). As the issuance of additional
consideration at resolution of the contingencies surrounding the
equity participation rights were based on security prices, the equity
participation rights did not increase the cost of acquisition.
In conjunction with the purchase of VLN, the parties executed a
customer agreement in which Andersen is required to make minimum
purchases equal to the lesser of $12 million or 15% of the Company's
gross revenues during the three-year period subsequent to the
acquisition date.
The acquisition has been accounted for under the purchase method and
the cost of acquisition of $471,725 has been allocated to the assets
acquired and liabilities assumed based on estimates of their fair
values. Assets acquired were $333,832 and liabilities assumed were
$230,891. The excess of the purchase price over the fair value of the
net assets acquired of $368,784 has been recorded as an Andersen Sales
Contract intangible asset, which represents the minimum purchase
commitment from Andersen. The value of the Andersen Sales Contract was
subsequently written down to estimated fair value pursuant to an
impairment analysis. See discussion of the impairment loss at note 7.
The operating results of VLN have been included within the statements
of operations from the date of acquisition. Pro forma operating
results as if the Company had acquired VLN on January 1, 2001 would
not be materially different than historical results.
(b) INTERNAL EXTERNAL COMMUNICATIONS
In August 2000, the Company acquired all of the outstanding shares of
Internal External Communications, Inc. (IEC). IEC operates within the
management education and corporate training market. Subsequent to the
purchase, all of IEC's assets and liabilities were merged into the
Company.
As consideration, the Company paid $12,364,478 in cash and $1,747,500
in common stock valued at $2.33 per share. As the acquisition has been
accounted for under the purchase method, the total purchase price of
$14,111,978 was allocated to acquired tangible assets and liabilities
based on estimates of their fair values. Additionally, identifiable
intangible assets related to acquired workforce, favorable lease, and
customer list were assigned values of $3,612,141, $2,081,259, and
$1,255,830, respectively. The excess of the purchase price over the
fair value of net assets acquired of $4,711,338 was recorded as
goodwill. The goodwill created in the IEC acquisition was subsequently
written down to estimated fair value pursuant to an impairment
analysis. See discussion of the impairment loss at note 7.
The operating results of IEC have been included within the statements
of operations from the date of acquisition.
19
(4) EDUCATIONAL VIDEO PRODUCTION COSTS
Educational video production costs are comprised of the following:
2001 2000
---------- ----------
Business communication $ 1,545 45,758
Pre-MBA 11,218 332,151
Legal environment of business 4,213 124,738
Marketing 3,875 114,752
Macroeconomics 3,154 93,401
LBS 2,978 90,587
Accounting I 2,945 87,200
Others 10,368 301,534
---------- ----------
$ 40,296 1,190,121
========== ==========
The Company recorded $492,276 and $1,462,375 of amortization expense
related to educational video production costs during the years ended
December 31, 2001 and 2000, respectively.
In connection with its ongoing review of the carrying value of its
long-lived assets, the Company wrote down educational video production
costs an additional $673,778 and $5,333,296 during 2001 and 2000,
respectively, in order to state the assets at estimated fair value.
Consequently, there is no accumulated amortization as of December 31, 2001
and 2000. See note 7 for discussion of the impairment losses. Amortization
and impairment expense for educational video production costs have been
classified within cost of revenues.
(5) PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following:
2001 2000
---------- ----------
Computers and equipment $ 901,451 2,784,114
Office furniture 116,612 250,816
Purchased software 180,737 189,386
Leasehold improvements 180,219 314,571
---------- ----------
1,379,019 3,538,887
Less accumulated depreciation and amortization -- (871,422)
---------- ----------
Net property and equipment $1,379,019 2,667,465
========== ==========
The Company recorded $1,088,107 and $941,285 of depreciation expense
related to its property and equipment during the years ended December 31,
2001 and 2000, respectively.
In connection with its ongoing review of the carrying value of its
long-lived assets, the Company conducted an impairment analysis and wrote
down its property and equipment an additional $743,329 to state the assets
at estimated fair value. Consequently, there is no accumulated amortization
as of December 31, 2001. See note 7 for discussion of the impairment loss.
20
In 2000, the Company recorded a loss on disposal of property and equipment
totaling $3,115,805 resulting from the disposal of leasehold improvements,
purchased software assets, and information technology assets at a former
facility.
(6) GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets are comprised of the following:
2001 2000
----------- -----------
Goodwill $ -- 4,711,338
Acquired workforce 334,532 3,612,141
Favorable lease 91,821 2,081,259
Customer list 448,934 1,255,830
----------- -----------
875,287 11,660,568
Accumulated amortization -- (1,487,038)
----------- -----------
Net intangible assets $ 875,287 10,173,530
=========== ===========
The Company recorded $4,401,089 and $1,487,038 of amortization expense
related to intangible assets during the years ended December 31, 2001 and
2000, respectively. In 2001, $368,784 of amortization expense and
impairment loss related to the Andersen Sales Contract and was net against
distribution and license fees similar to a sales incentive.
In connection with its ongoing review of the carrying value of its
long-lived assets, the Company conducted an impairment analysis and wrote
down its intangible assets an additional $5,771,351 in 2001 in order to
state the assets at estimated fair value. Consequently, there is no
accumulated amortization as of December 31, 2001. See note 7 for discussion
of the impairment loss.
(7) IMPAIRMENT OF LONG-LIVED ASSETS
In connection with its ongoing review of the carrying value of its
long-lived assets, the Company conducts impairment analyses of its
long-lived assets. In instances where the long-lived asset under review was
acquired in a business combination accounted for under the purchase method,
the goodwill that arose in that transaction is allocated to the long-lived
asset being tested for recoverability on a pro rata basis, using the fair
value of long-lived assets and identifiable intangible assets acquired at
the acquisition date, for purposes of determining recoverability. In
instances where goodwill is allocated to assets that are subject to an
impairment loss, the carrying amount of the allocated goodwill is
eliminated prior to the reduction of the carrying amounts of the impaired
long-lived assets.
21
As discussed in note 18(c), the Company sold substantially all of its
tangible and intangible assets to a third party subsequent to December 31,
2001. The Company considered the consideration paid by the third party as
the basis for determining the value of its long-lived assets, including
intangibles. At December 31, 2001, the Company recorded the following
impairment losses in order to write down its long-lived assets to fair
value:
Goodwill $2,555,098
Acquired workforce 1,637,151
Favorable lease 1,043,008
Customer list 239,018
Andersen Sales Contract 297,076
Educational video production costs 673,778
Property and equipment 743,329
----------
Total impairment loss $7,188,458
==========
Impairment losses associated with the Andersen Sales Contract have been
reflected as a reduction of distribution and license fees.
In 2000, the Company recorded an impairment loss totaling $5,333,296 on the
academic courses within its educational video production cost library. The
impairment loss was equal to the amount by which the carrying value of the
academic courses exceeded their net realizable value. Net realizable value
of each course title was determined to be the future expected net cash
inflows arising from the assets. The decrease in net realizable value of
the academic courses stemmed from the Company's change in strategic
direction subsequent to the acquisition of IEC in August 2000. Prior to the
acquisition, the Company focused on the sale of undergraduate and graduate
academic courses through traditional media outlets, as well as the
Internet. Subsequent to the acquisition, the Company changed its focus to
the sale of corporate training software and materials. As a result, the
Company expected to sell significantly less of its academic courses.
(8) INCOME TAXES
Under SFAS No. 109, ACCOUNTING FOR INCOME TAXES, deferred tax assets may be
recognized for temporary differences that will result in deductible amounts
in future periods and for loss carryforwards. A valuation allowance is
recognized if, based on the weight of available evidence, it is more likely
than not that some portion or all of the net deferred tax assets will not
be realized.
The Company has recorded a valuation allowance amounting to the entire
deferred tax asset balance because of the lack of earnings history and
possible limitations on the use of carryforwards which gave rise to the
uncertainty as to whether the deferred tax assets are realizable.
22
The tax effects of the temporary differences, which give rise to deferred
tax assets (liabilities), for the years ended December 31, 2001 and 2000
are as follows:
2001 2000
------------ ------------
Net operating losses $ 30,261,622 12,506,132
Depreciation and amortization 5,640,381 2,119,008
Accrued expenses and other 3,297,878 3,635,911
------------ ------------
Deferred tax assets 39,199,881 18,261,051
Valuation allowance (39,199,881) (18,261,051)
------------ ------------
Net deferred tax assets $ -- --
============ ============
The provision for income taxes is as follows:
2001 2000
------------ ------------
Current:
Federal $ -- --
State 800 800
Deferred -- --
------------ ------------
Provision for income taxes $ 800 800
============ ============
The summary reconciliation of the effective tax rate to the assumed federal
tax rate is as follows:
2001 2000
------------ ------------
U.S. statutory tax rate 34% 34%
State taxes, net of federal benefit 6 6
Valuation allowance (40) (40)
------------ ------------
Effective tax rate 0% 0%
============ ============
At December 31, 2001, the Company had, for U.S. federal income tax purposes
and for California income tax purposes, net operating loss carryforwards of
approximately $82 million and $41 million, respectively. These amounts are
available to reduce future income taxes. The federal and California net
operating loss carryforwards will expire in 2021 and 2006, respectively.
The utilization of net operating loss carryforwards may be limited due to
restrictions imposed under federal and state laws due to a change in
ownership.
(9) RELATED PARTY TRANSACTIONS
The Company sold 88,888,889 shares of Series F redeemable preferred stock
to two major investors in exchange for gross proceeds of $4,000,000. Each
of the investors has representatives who currently sit on the Company's
board of directors.
The Company's November 2000 Bridge financing and April 2001 Bridge
financing were led by a venture capital fund, two representatives of which
currently sit on the Company's board of
23
directors. Other funds who participated in such financings also have
representatives on the Company's board of directors.
The Company sold 3,200,000 shares of common stock to its founders for 5%
promissory notes totaling $110,000 and $25,000 in 1997 and 1996,
respectively. The notes compound annually and are payable four years from
the date of issuance. Upon the termination of the founders in 2001, the
Company canceled the promissory notes in exchange for the 3,200,000 common
shares.
No amounts under the loans remained outstanding at December 31, 2001.
(10) STOCK OPTIONS AND WARRANTS
(a) COMMON STOCK
The Company issued the following warrants to purchase common stock of
the Company during the two years ended December 31, 2001.
Andersen received warrants to purchase 6,267,753 shares of common
stock as consideration in the VLN acquisition. The warrants have an
exercise price of $0.045 and are exercisable over a five-year period.
The warrants vested immediately. The fair value of the warrants, as
calculated using a Black-Scholes pricing model using assumptions of a
fair value of $0.045, a risk-free interest rate of 3.92%, a volatility
of 104%, and an expected life of five years, was $219,483. The fair
value of the warrants was recorded as an increase to common stock.
At times throughout 2000, the Company issued warrants to purchase
common stock to nonemployees as consideration for course content and
services received. In total, the Company issued 565,000 warrants to
purchase the Company's common stock at a price of $2.50 per share. The
fair value of the warrants, as calculated using a Black-Scholes
pricing model, using assumptions of a risk-free rate of 5.8%, a
volatility of 75%, and an expected life of seven years, totaled
$960,552 and was recorded as research and development expense in
fiscal 2000.
If the Company had elected to recognize compensation expense for
options awarded to employees based on the fair value provisions of
SFAS No. 123 rather than the intrinsic value provisions of APB 25, the
Company's net loss would have changed to the pro forma amount
indicated below:
Net loss:
As reported $(74,006,004)
Pro forma (74,135,845)
24
Common stock option activity during the two years ended December 31,
2001 is as follows:
WEIGHTED AVERAGE
NUMBER OF OPTIONS EXERCISE PRICE
----------------- --------------
Balance at December 31, 1999 5,048,656 $0.08
Granted 3,030,433 1.60
Exercised (485,034) 0.12
Canceled (1,307,270) 0.41
----------
Balance at December 31, 2000 6,286,785 0.74
Granted 6,267,753 0.05
Exercised (4,500) 0.15
----------
Balance at December 31, 2001 12,550,038 0.40
==========
There were 546,600 options vested as of December 31, 2001.
The following table summarizes information regarding common stock
options outstanding and options exercisable at December 31, 2001:
WEIGHTED
AVERAGE
RANGE OF OUTSTANDING AT REMAINING WEIGHTED EXERCISABLE AT WEIGHTED
EXERCISE DECEMBER 31, CONTRACTUAL AVERAGE DECEMBER 31, AVERAGE
PRICES 2001 LIFE (YEARS) EXERCISE PRICE 2001 EXERCISE PRICE
------ ---- ------------ -------------- ---- --------------
$0.02 - 0.03 2,000,000 6.5 $ 0.03 2,000,000 $ 0.03
0.05 6,653,429 4.6 0.05 6,653,429 0.05
0.10 1,039,168 6.6 0.10 1,039,168 0.10
0.15 738,508 7.9 0.15 738,508 0.15
0.25 203,500 8.3 0.25 203,500 0.25
1.50 498,583 8.5 1.50 498,583 1.50
2.50 1,416,850 8.7 2.50 1,416,850 2.50
---------- ----------
0.02 - 2.50 12,550,038 5.9 0.39 12,550,038 0.39
========== ==========
All options are exercisable immediately, even if not vested; however,
shares exercised early are subject to repurchase by the Company at the
original exercise price if service terminates prior to vesting.
(b) SERIES F REDEEMABLE PREFERRED STOCK WARRANTS
The Company issued the following warrants to purchase Series F
preferred stock of the Company during the year ended December 31,
2001.
April 2001 Bridge holders received warrants to purchase 394,074,074
shares of Series F preferred stock pursuant to the terms of the April
2001 Bridge agreement. The warrants were valued at $13,799,536. The
proceeds from the issuance of the April 2001 Bridge agreement were
allocated to the debt and the warrants on a relative fair-value basis.
A total of $4,845,000 was recorded as a discount against the note,
with a corresponding increase to
25
common stock for the relative fair value of the warrants. See note 14
for discussion of the April 2001 Bridge agreement.
In conjunction with the conversion of preferred stock into common
stock (see note 16), Series A, Series B, Series C, Series D, and
Series E shareholders who returned executed preferred share conversion
forms received warrants to purchase 74,563,313 shares of Series F
preferred stock. The warrants had an estimated fair value of
$2,611,030 and were recorded as an increase to common stock. However,
the warrants represent a dividend to preferred shareholders and the
dividend reduced common stock by an equivalent amount.
Andersen received warrants to purchase 14,486,323 shares of Series F
preferred stock in association with the conversion of the VLN Notes.
The warrants were valued at $507,277. The fair value of the warrants
was recorded as a debt conversion inducement expense pursuant to SFAS
No. 84, INDUCED CONVERSIONS OF CONVERTIBLE DEBT, with a corresponding
increase to common stock.
Upon their termination, two former officers of the Company received
warrants to purchase 3,555,556 shares of Series F preferred stock
pursuant to their severance agreements. The warrants were valued at
$124,506. The fair value of the warrants was recorded to general and
administrative expense with a corresponding increase to common stock.
All Series F preferred stock warrants issued during the year have an
exercise price of $0.045, are exercisable over a five-year period, and
vested immediately.
The fair value of each Series F warrant grant discussed above was
calculated using a Black-Scholes pricing model using assumptions of a
risk-free interest rate of 3.92%, a volatility of 104%, and an
expected life of five years.
No options to purchase Series F preferred stock were exercised or
canceled during the year ended December 31, 2001. Outstanding options
to purchase Series F preferred stock had a weighted average remaining
contractual life of 4.3 years and a weighted average exercise price of
$0.045. All options to purchase Series F preferred stock were fully
vested as of December 31, 2001.
(c) SERIES E REDEEMABLE PREFERRED STOCK WARRANTS
In March 2000, the Company completed a private placement of Series E
preferred stock. In association with the private placement, the
Company issued 150,000 warrants to purchase common stock at $1.50 per
share, exercisable no later than June 2005, to the Company's
investment bank. The fair value of the warrants, as calculated using a
Black-Scholes pricing model, totaled $240,889 using assumptions of a
risk-free rate of 5.8% and a volatility of 75%. None of these warrants
have been exercised.
26
(11) COMMITMENTS AND CONTINGENCIES
(a) CAPITAL LEASES
The Company leases certain office equipment and its Marina Facility.
The capital leases for office equipment expire at various dates
through 2003. The approximate aggregate minimum future commitments
under these leases are as follows:
CAPITAL
LEASES
------
Year ending December 31:
2002 $ 481,283
2003 124,763
---------
606,046
Less amounts representing interest (50,708)
---------
Present value of minimum capital lease payments 555,338
Less current portion (454,978)
---------
$ 100,360
=========
The carrying value of property and equipment held under capital lease
totaled $75,436 at December 31, 2001. Amortization expense applicable
to assets held under capital leases has been included within
depreciation expense.
See note 12 for discussion of the Company's operating lease
commitments.
(b) LEGAL PROCEEDINGS
The Company is involved in various other claims and legal actions
arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a
material adverse effect on the Company's financial position, results
of operations, or liquidity.
(12) OPERATING LEASE COMMITMENTS AND OPERATING LEASE TERMINATIONS
In November 2001, the Company sublet the second floor of the Marina
Facility, which comprises approximately 50% of the square footage of the
facility.
Subsequent to December 31, 2001, the Company defaulted on the operating
lease for the Marina Facility. At such time, the Company negotiated a lease
termination settlement with its landlord requiring the Company to surrender
certificates of deposit and lease deposits totaling $751,000 to the
landlord. The surrender of those assets, net of a $148,000 deferred rent
balance associated with the Marina Facility, resulted in a loss on lease
termination of $603,000. The Company has recorded the lease termination fee
and corresponding accrued liability relating to the sublet portion of the
facility, totaling $301,585, during the year ended December 31, 2001. The
remainder of the lease termination fee will be recorded during 2002 upon
the Company's exit from the facility.
Total lease expense for the Company's operating leases was $979,656 and
$1,410,352 for the years ended December 31, 2001 and 2000, respectively.
27
In August 2000, the Company transferred essentially all of its operations
from the Sunset facility to the Marina Facility. As of December 31, 2000,
the Sunset facility no longer provided any future economic benefit to the
Company. In March 2001, the Company executed a lease termination agreement
for the Sunset facility that required the Company to make payments to the
landlord in fiscal year 2001 totaling $1,264,455 in addition to monthly
rental payments made during January and February 2001 totaling $41,390. The
Company recorded the transaction and accrued for the payments in fiscal
year 2000 in accordance with EITF 88-10, COSTS ASSOCIATED WITH LEASE
MODIFICATION OR TERMINATION.
Net leasehold improvements at the Sunset facility written off due to the
premature termination of the lease totaled approximately $860,000.
(13) NOVEMBER 2000 BRIDGE FINANCING
In November 2000, the Company issued 10% convertible promissory notes (the
November 2000 Notes) with a stated aggregate principal balance of
$13,802,600 in return for cash of $9,859,000 (the November 2000 Bridge).
Pursuant to the terms of the November 2000 Bridge, the notes automatically
converted into the next qualifying round of equity (Series F preferred
stock) upon the successful completion of an additional round of financing
by March 31, 2001 with proceeds of at least $30,000,000. Upon the failure
of the Company to complete an additional round of equity financing by March
31, 2001 with proceeds of at least $30,000,000, the Company was required to
issue additional notes with a stated aggregate principal amount of
$5,915,400 for no additional cash proceeds. After March 31, 2001, each
November 2000 Note was convertible into either Series E preferred stock or
Series F preferred stock, when issued, at the holders' option.
Pursuant to EITF 98-5 and 00-27, the Company valued the contingent embedded
beneficial conversion feature (BCF) present in the November 2000 Notes
separately upon issuance. The contingent embedded beneficial conversion
feature was measured as of the commitment date as the difference between
the effective conversion price and the fair value of the equity securities
into which the November 2000 Notes were convertible, multiplied by the
number of shares into which the November 2000 Notes were convertible,
limited to the total proceeds allocated to the debt. The BCF embedded
within the November 2000 Notes totaled $9,859,000. The BCF was deemed to be
contingent upon the completion of a qualifying additional round of
financing prior to March 31, 2001 or the note holders' ability to convert
the November 2000 Notes into equity securities of the Company. The embedded
beneficial conversion feature was recognized as interest expense upon the
resolution of the contingency on March 31, 2001, the date upon which the
November 2000 Notes became convertible at the option of the note holder.
The initial discount of $3,943,600 was accreted to the carrying value of
the notes over the minimum debt conversion period as interest expense using
the effective-interest method. The contingent discount of $5,915,400 was
immediately accreted to the carrying value of the notes as interest expense
upon the resolution of the contingency at March 31, 2001.
At December 31, 2000, the aggregate carrying value of the November 2000
Notes totaled $10,978,066. At September 30, 2001, the aggregate carrying
value of the November 2000 Notes totaled $21,279,008. On this date, the
note holders agreed to convert the outstanding notes into 238,259,167
shares of Series F preferred stock. The aggregate carrying value of the
notes was transferred to Series F preferred stock upon conversion.
The Company recorded $19,987,581 and $1,485,560 in interest expense
associated with the November 2000 Notes during the years ended December 31,
2001 and 2000, respectively.
28
(14) APRIL 2001 BRIDGE FINANCING
In April 2001, the Company issued 10% convertible promissory notes (the
April 2001 Notes) with a stated aggregate principal balance of $13,300,000
in return for cash of $9,500,000 (the April 2001 Bridge).
In association with the April 2001 Bridge, the Company issued 394,074,074
detachable warrants to purchase shares of Series F redeemable preferred
stock valued at $13,799,536 using a Black-Scholes pricing model.
Pursuant to the terms of the April 2001 Bridge, the Company issued
additional notes with a stated aggregate principal amount of $5,700,000,
for no additional cash proceeds, upon the failure of the Company to repay
the April 2001 Notes by August 1, 2001.
All April 2001 Notes were immediately convertible into Series E preferred
stock or Series F preferred stock, when issued, at the holders' option.
In accordance with APB 14, ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT ISSUED
WITH STOCK PURCHASE WARRANTS, the proceeds from the issuance of the April
2001 Bridge were allocated between the warrants and the April 2001 Notes
based on their relative fair values at the date of issuance. The $4,845,000
value allocable to the warrants was recorded as an increase to common
stock.
In addition to the allocation of value to the warrants, the Company valued
the embedded beneficial conversion feature (BCF) present in the April 2001
Notes separately upon issuance pursuant to EITF 98-5 and 00-27. The
embedded beneficial conversion feature was measured as of the commitment
date as the difference between the proceeds allocated to the April 2001
Notes and the fair value of the equity securities into which the April 2001
Notes were convertible, multiplied by the number of shares into which the
April 2001 Notes were convertible. The BCF embedded within the April 2001
Notes was limited to the amount of cash proceeds allocated to the notes,
which totaled $4,655,000. The embedded beneficial conversion feature was
recognized as interest expense upon the issuance of the April 2001 Notes,
as the notes were immediately convertible at the option of the note holder.
The initial and contingent discounts of $3,800,000 and $5,700,000 were
immediately accreted to the carrying value of the notes as interest expense
upon the issuance of the notes.
At September 30, 2001, the aggregate carrying value of the April 2001
Bridge notes totaled $19,467,435. On this date, the note holders agreed to
convert the outstanding notes into 217,022,778 shares of Series F preferred
stock. The aggregate carrying value of the notes was transferred to Series
F preferred stock upon conversion.
The Company recorded $19,467,435 in interest expense associated with the
April 2001 Notes during the year ended December 31, 2001.
(15) VLN NOTES
In May 2001, the Company issued 10% convertible promissory notes (the VLN
Notes) with a stated aggregate principal balance of $4,099,200. The terms
of the VLN Notes required the Company to issue additional notes with a
stated aggregate principal amount of $1,756,800 for no additional cash
proceeds if additional notes were issued to the April 2001 Bridge note
holders. As a result, the Company issued additional notes of $1,756,800
upon issuing additional notes to the April 2001 Bridge note holders.
29
The VLN Notes were immediately convertible into Series E preferred stock or
Series F preferred stock, when issued, at the holders' option.
Management recorded a discount on the face value of the VLN Notes of
$4,099,200, resulting in a net carrying value for the VLN Notes of zero
upon issuance. Subsequent to the issuance of the VLN Notes, the Company
immediately accreted the recorded discount of $4,099,200 to interest
expense as the notes were due on demand and immediately convertible. See
note 3 for discussion of the initial valuation of the VLN Notes.
The contingent discount of $1,756,800 was immediately accreted to the
carrying value of the notes as interest expense upon the issuance of the
additional notes.
At September 30, 2001, the aggregate carrying value of the VLN Notes
totaled $6,039,000. On this date, the note holders agreed to convert the
outstanding notes into 67,470,519 shares of Series F preferred stock. In
addition, the Company issued the VLN note holders 14,486,323 warrants to
purchase Series F preferred stock and 8,645,755 shares of common stock. The
fair value of the warrants and stock totaled $507,277 and $389,059,
respectively. The aggregate value of the warrants and common stock issued
of $896,336 was recognized in the accompanying 2001 statement of operations
as a loss on induced debt conversion.
The Company recorded $6,039,000 in interest expense associated with the VLN
Notes during the year ended December 31, 2001.
(16) SHAREHOLDERS' DEFICIT
(a) CAPITAL STOCK
The Company's Amended and Restated Articles of Incorporation
(Articles) authorize the issuance of two billion shares of common
stock and two billion shares of Series F preferred stock as of
December 31, 2001.
Holders of shares of common stock are entitled, subject to the senior
rights of holders of preferred stock, to receive dividends when and as
declared by the board of directors, to share ratably in the proceeds
from any dissolution or winding up of the Company, and to vote on
certain matters as provided in the Articles. Shares of common stock
are subject to transfer restrictions and certain rights of first
refusal relating to the securities laws, the bylaws of the Company,
and, in certain cases, specific agreements with the Company and
holders of preferred stock.
(b) SERIES F REDEEMABLE PREFERRED STOCK
In September 2001, concurrent with the conversion of Series A, Series
B, Series C, Series D, and Series E preferred stock into common stock,
the Company sold 88,888,889 shares of Series F redeemable preferred
stock (Series F) to two major investors, who held previously issued
convertible debt and preferred stock, at $0.045 per share for gross
proceeds of $4,000,000. The Company incurred legal fees totaling
$84,766 associated with the issuance of preferred stock, resulting in
net proceeds to the Company of $3,915,234. Concurrent with the sale,
the November 2000 Bridge, the April 2001 Bridge, and the VLN Notes
were converted into 522,752,464 shares of Series F preferred stock.
Each share of Series F preferred stock is convertible into common
stock of the Company based upon a conversion rate defined in the
Company's Amended Articles of Incorporation. At December 31, 2001,
each share of Series F preferred stock was convertible into one share
of common stock. Each share of Series F preferred stock will
automatically convert into
30
shares of common stock upon (i) the vote in favor of such conversion
by at least 2/3 of outstanding Series F preferred shares then
outstanding, or (ii) at the time in which 2/3 of the number of
originally issued shares of Series F preferred shares have been
converted voluntarily.
Each holder of Series F preferred stock is entitled to the number of
votes equal to the whole number of shares of common stock into which
the holder's shares of Series F preferred stock could be converted.
In the event of a liquidation, dissolution, or winding up of the
Company, the holders of Series F are entitled upon such event, sharing
pro rata, prior to and in preference to any payments with respect to
common stock or the other series of preferred stock, to receive a
liquidation preference of $0.09 per share plus any accrued but unpaid
dividends and then share the remaining proceeds with the holders of
common stock on an as-converted basis until such time as the holders
thereof have received an aggregate of $0.1125 per share. The
liquidation preferences terminate upon conversion of the preferred
stock to common stock.
The Company is required to redeem shares of Series F holders desiring
such redemption on or after September 7, 2006 upon written demand by
holders of a majority of then outstanding Series F shares for an
amount equal to the liquidation preference plus any accrued but unpaid
dividends. As a result of this redemption requirement, Series F has
been classified outside of shareholders' deficit.
Holders of Series F preferred stock are entitled to vote together with
holders of common stock on matters presented for shareholder action as
if such shares were converted to common stock.
(c) RECAPITALIZATION AND CONVERSION OF SERIES A, SERIES B, SERIES C,
SERIES D, AND SERIES E PREFERRED STOCK INTO COMMON STOCK
On September 30, 2001, the Company completed a recapitalization effort
in an attempt to simplify its capital structure. This effort resulted
in the conversion of all outstanding preferred stock into common stock
and the extinguishment of the equity participation rights issued to
Andersen in the VLN acquisition.
Each share of Series A, Series B, Series C, Series D, and Series E
preferred stock automatically converted into shares of common stock
upon the vote in favor of such conversion by shareholders who
comprised at least 75% of the outstanding shares of each class. Each
share of Series A, Series B, Series C, Series D, and Series E
preferred stock was converted into one share of common stock.
Upon conversion, $6,552,245 of accrued but unpaid dividends owed to
Series C, D, and E preferred shareholders were reclassified to an
accrued liability. All accrued but unpaid dividends owed to Series A
and B preferred shareholders were waived upon conversion.
As incentive for voluntarily conversion, the Company issued 74,563,313
warrants to purchase Series F redeemable preferred stock to preferred
shareholders who executed preferred share conversion forms. The fair
value of the warrants of $2,611,030 was recorded as a dividend to
preferred shareholders. Accordingly, the fair value of the warrants
was recorded as an increase to common stock. Due to the Company's
accumulated deficit, the dividends paid decreased common stock,
resulting in no net effect to common stock.
31
(d) SERIES A, SERIES B, SERIES C, SERIES D, AND SERIES E PREFERRED STOCK
Prior to the conversion into common stock and issuance of Series F
preferred stock in September 2001, the Company's preferred stock was
divided into five series: Series A preferred stock (Series A), Series
B preferred stock (Series B), Series C redeemable preferred stock
(Series C), Series D redeemable preferred stock (Series D), and Series
E redeemable preferred stock (Series E).
In January 1997, the Company issued and sold 1,590,000 shares of
Series A preferred stock for total cash consideration of $397,500.
From July 1997 to September 1997, the Company issued and sold
3,682,000 shares of Series B preferred stock for total cash
consideration of $1,841,000.
From March 1998 to August 1998, the Company issued and sold 4,452,000
shares of Series C preferred stock for total cash consideration of
$4,452,000.
In June 1999, the Company issued and sold 4,214,654 shares of Series D
preferred stock for total cash consideration of $5,232,737 and total
convertible promissory note conversions of $1,089,244.
In March 2000, the Company issued and sold 16,937,297 shares of Series
E preferred stock for total cash consideration of $33,806,183 and
total convertible promissory note conversions of $5,932,000.
In September 2001, all of the outstanding shares of Series A, Series
B, Series C, Series D, and Series E preferred stock were converted
into common stock. Each preferred share was converted into one share
of common stock.
(e) DIVIDEND RIGHTS
Holders of Series A and Series B were entitled to receive dividends,
when and as declared by the Company's board of directors, in the
amount of $0.0125 and $0.025 per share, respectively, on an annual
basis. Such dividends were payable in preference and priority to any
dividends on common stock, with the same preference and priority among
Series A and Series B, including pro rata payments of such dividends
if not all of such dividends accrued were paid and subject to the
senior dividend priority and preference of Series C and Series D. Such
dividends accrue cumulatively, whether or not declared, on an annual
basis from the date of issuance of the shares, but were automatically
waived upon conversion of Series A and Series B to common stock.
Holders of Series C and Series D were entitled to receive dividends,
when and as declared by the Company's board of directors, in the
amount of $0.07 and $0.105 per share, respectively, on an annual
basis. Such dividends were payable in preference and priority to any
dividends on common stock or Series A and Series B, with the same
preference and priority among Series C and Series D, including pro
rata payments of such dividends if not all of such dividends accrued
were paid and subject to the senior dividend prior and preference of
Series E. Such dividends accrue cumulatively, whether or not declared,
on an annual basis from the date of issuance of the shares.
Holders of Series E were entitled to receive dividends, when and as
declared by the Company's board of directors, in the amount of $0.1743
per share. Such dividends were
32
payable in preference and priority to any dividends on common stock or
other outstanding series of preferred stock. Such dividends accrue
cumulatively, whether or not declared, on an annual basis from the
date of issuance of the shares.
Holders of shares of Series F preferred stock are entitled to receive
dividends, payable in preference and priority to any payment of any
dividend on shares of common stock, when and as declared by the board
of directors at a rate of $0.00315 per annum. Dividends accrue whether
or not earned or declared and accrue interest at a rate of 7% per
annum. At December 31, 2001, cumulative undeclared dividends on Series
F preferred stock totaled $481,666. As the cumulative dividends are
not waived upon conversion to common stock, the amount has been
recorded as an increase to Series F, with a corresponding increase in
the accumulated deficit.
Prior to the conversion of Series C, Series D, and Series E redeemable
preferred shares into common stock, the Company was accreting the
carrying value of each series to its redemption amount over the
minimum redemption period against common stock. The accretion prior to
conversion related to Series C, Series D, and Series E totaled
$1,029,203, $1,048,160, and $5,288,914, respectively, and has been
recorded as an increase to Series C, Series D, and Series E. Dividends
are first recorded against common stock to the extent common stock
exists, then against accumulated deficit.
Cumulative accrued but unpaid dividends related to Series C, Series D,
and Series E were not forgiven by their respective shareholders upon
the conversion of the preferred shares into common stock. The Company
has reclassified the aggregate total of cumulative unpaid dividends of
$6,552,245 owed to former preferred shareholders to an accrued
liability account. These dividends have not been paid to the former
preferred shareholders due to the Company's liquidity situation.
(17) LIQUIDITY
Through December 31, 2001, the Company has experienced significant
operating losses and negative cash flows from operations. Operating results
from inception to date have not generated sufficient cash to cover the
Company's current obligations. To date, the Company has funded operations
primarily through sales of preferred stock and bridge financings. No
assurances can be given that the Company will be successful in obtaining
such additional financing on terms reasonably acceptable to the Company.
Nor can any assurances be given that the Company will be able to meet its
financial obligations currently payable or that become payable in the
future.
As discussed in note 18(c), the Company sold substantially all of its
tangible and intangible assets in June 2002. Subsequent to the sale of the
Company's assets, operations ceased.
(18) SUBSEQUENT EVENTS (UNAUDITED)
(a) TERMINATION OF EXECUTIVES
In February 2002, the Company terminated each member of its executive
team, excluding the Chief Executive Officer. Upon termination, each
individual was paid his or her accrued salary and vacation as provided
by his or her respective employment agreement. Each executive was then
immediately rehired via a new 20-day employee contract.
In March 2002, the board of directors terminated the Chief Executive
Officer of the Company for cause in direct association with the
termination and rehiring of the Company's executive team.
33
(b) ISSUANCE OF NOTES PAYABLE
In 2002, the Company issued promissory notes with a face value of
$920,000 in exchange for cash of the same amount. The promissory notes
have an interest rate of prime plus 3.5% and are secured by
essentially all of the Company's assets. Cash received in exchange for
the promissory notes was utilized to fund operations. The secured
creditors are the Company's two most significant shareholders.
(c) SALE OF ASSETS TO EDT LEARNING, INC.
In June 2002, the Company sold substantially all of its tangible and
intangible assets to EDT Learning, Inc. (EDT). As consideration, the
Company received $320,000 in cash and EDT assumed secured notes
payable totaling $920,000. The assets included in the sale secured the
notes payable assumed by EDT.
In addition, EDT issued 2,500,000 shares of its common shares, valued
at $2,375,000, to the secured creditors of the $920,000 notes payable.
In exchange, the secured shareholders agreed to significant changes in
the securitization terms of the notes payable and paid EDT $320,000 in
cash.
34
Independent Auditors' Consent
The Board of Directors
Quisic Corporation:
We consent to the incorporation by reference in the registration statement (No.
333-71332) on Form S-8 of EDT Learning, Inc. of our report dated October 11,
2002, with respect to the balance sheets of Quisic Corporation as of December
31, 2001 and 2000, and the related statements of operations, redeemable
preferred stock and shareholders' deficit, and cash flows for each of the years
in the two-year period ended December 31, 2001, which report appears herein.
/s/ KMPG LLP
February 7, 2003
Los Angeles, California