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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
(Amendment No. 1)
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported):November 17, 2003
PLATO LEARNING, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation) | 0-20842 (Commission File Number) | 36-3660532 (IRS Employer Identification Number) |
10801 Nesbitt Avenue South Bloomington, Minnesota (Address of principal executive offices) | 55437 (Zip Code) |
(952) 832-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
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Item 2. Acquisition or Disposition of Assets.
On November 17, 2003 (the “Closing Date”), PLATO Learning, Inc., a Delaware corporation (“PLATO”), acquired Lightspan, Inc., a Delaware corporation (“Lightspan”), pursuant to an Agreement and Plan of Merger dated September 9, 2003 (“Merger Agreement”), that provided for the merger of LSPN Merger Corp., a Delaware corporation and wholly-owned subsidiary of PLATO (“Merger Sub”) with and into Lightspan, with Lightspan surviving as a wholly-owned subsidiary of PLATO. Lightspan is a provider curriculum-based educational software and online products and services used in schools, at home, and in community colleges.
Pursuant to the Merger Agreement, PLATO acquired all the shares of publicly held Lightspan in exchange for shares of PLATO common stock. Approximately 6.6 million shares of PLATO common stock will be issued on the basis of an exchange ratio of 1.330 shares of PLATO common stock for each share of Lightspan common stock. The exchange ratio of 1.330 is calculated as set forth in the Merger Agreement based on the volume-weighted average of the closing price of PLATO common stock for the 15 trading days prior to the Closing Date of $10.59.
Pursuant to the Merger Agreement, each outstanding option for the purchase of Lightspan common stock, whether vested or unvested, with an exercise price equal to or greater than $14.08, was cancelled. Each outstanding option for the purchase of Lightspan common stock, whether vested or unvested, with a per share exercise price less than $14.08, was automatically converted into the right to receive shares of PLATO common stock equal to (i) $14.08 minus the exercise price of the option multiplied by (ii) the number of shares of Lightspan Common Stock for which the option was exercisable divided by (iii) $10.59.
Pursuant to the Merger Agreement, warrants previously issued for the purchase of Lightspan common stock ceased to represent a right to acquire shares of Lightspan common stock and were automatically converted into and now represent warrants to purchase, upon substantially similar terms and conditions as were applicable under the original Lightspan warrants, shares of PLATO common stock.
Item 7. Financial Statements and Exhibits.
(a) | Financial statements of businesses acquired: See Financial Statements attached hereto and filed as part of this report. | |
(b) | Pro forma financial information: See Financial Statements attached hereto and filed as part of this report. | |
Exhibits |
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Exhibit Number | Description of Exhibit | |
2.1 | Agreement and Plan of Merger, dated September 9, 2003, among PLATO Learning, Inc., LSPN Merger Corp., and Lightspan, Inc. (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus included in PLATO Learning, Inc. Form S-4, as amended, Registration No. 333-109209) | |
23.1 | Consent of Ernst & Young LLP | |
99.1 | Press Release dated November 17, 2003* |
* | Previously filed |
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INDEX TO FINANCIAL STATEMENTS
Page | ||||
LIGHTSPAN, INC. CONSOLIDATED FINANCIAL STATEMENTS | ||||
Report of Ernst & Young LLP, Independent Auditors | 5 | |||
Consolidated Balance Sheets as of January 31, 2003 and 2002. | 6 | |||
Consolidated Statements of Operations for the years ended January 31, 2003, 2002 and 2001. | 7 | |||
Consolidated Statements of Stockholders’ Equity for the years ended January 31, 2003, 2002 and 2001 | 8 | |||
Consolidated Statements of Cash Flows for the years ended January 31, 2003, 2002 and 2001. | 9 | |||
Notes to Consolidated Financial Statements | 10 | |||
Consolidated Balance Sheets as of July 31, 2003 (unaudited) and January 31, 2003 | 30 | |||
Consolidated Statements of Operations for the three months and six months ended July 31, 2003 and 2002 (unaudited) | 31 | |||
Consolidated Statements of Cash Flows for the six months ended July 31, 2003 and 2002 (unaudited) | 32 | |||
Notes to Consolidated Financial Statements (unaudited) | 33 | |||
PLATO LEARNING, INC. PRO FORMA CONSOLIDATED COMBINED FINANCIAL STATEMENTS | ||||
Unaudited Pro Forma Consolidated Combined Balance Sheet as of July 31, 2003 | 40 | |||
Unaudited Pro Forma Consolidated Combined Statement of Operations for the nine months ended July 31, 2003 | 41 | |||
Unaudited Pro Forma Consolidated Combined Statement of Operations for the year ended October 31, 2002 | 42 | |||
Notes to the Unaudited Pro Forma Consolidated Combined Financial Statements | 43 |
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REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders Lightspan, Inc.
We have audited the accompanying consolidated balance sheets of Lightspan, Inc. as of January 31, 2003 and 2002, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three years in the period ended January 31, 2003. 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. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Lightspan, Inc. at January 31, 2003 and 2002 and the results of its operations and its cash flows for each of the three years in the period ended January 31, 2003, in conformity with accounting principles generally accepted in the United States.
As discussed in Note 2 to the consolidated financial statements, Lightspan, Inc. changed its method of accounting for purchased goodwill and other intangible assets in accordance with Statement of Financial Accounting Standards No. 142 during fiscal 2003.
ERNST & YOUNG LLP |
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LIGHTSPAN, INC.
CONSOLIDATED BALANCE SHEETS
January 31, | |||||||||||
2003 | 2002 | ||||||||||
ASSETS | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | 18,497 | $ | 35,033 | |||||||
Short-term investments available for sale | 5,055 | 8,333 | |||||||||
Accounts receivable, less allowance for doubtful accounts of $1,652 and $930, respectively | 9,135 | 11,477 | |||||||||
Finished goods inventory | 1,829 | 2,432 | |||||||||
Restricted cash | 827 | 826 | |||||||||
Other current assets | 1,075 | 1,449 | |||||||||
Total current assets | 36,418 | 59,550 | |||||||||
Restricted cash | — | 827 | |||||||||
Property and equipment, net | 4,060 | 6,839 | |||||||||
Goodwill, net of accumulated amortization of $22,280 and $21,580, respectively | 11,741 | 14,241 | |||||||||
Intangible assets, net of accumulated amortization of $25,226 and $17,922, respectively | 6,774 | 15,278 | |||||||||
Deposits and other assets | 553 | 685 | |||||||||
Total assets | $ | 59,546 | $ | 97,420 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current liabilities: | |||||||||||
Accounts payable | $ | 3,836 | $ | 4,421 | |||||||
Accrued liabilities | 10,258 | 12,242 | |||||||||
Deferred revenues | 11,642 | 10,682 | |||||||||
Other current liabilities | 20 | 227 | |||||||||
Total current liabilities | 25,756 | 27,572 | |||||||||
Deferred revenues, less current portion | 682 | 1,282 | |||||||||
Other liabilities | 129 | 271 | |||||||||
Stockholders’ equity: | |||||||||||
Convertible preferred stock, par value $0.001: | |||||||||||
Authorized shares — 20,000 | |||||||||||
Issued and outstanding shares — 0 | |||||||||||
Aggregate liquidation preference — $0 | — | — | |||||||||
Common stock, par value $0.001: | |||||||||||
Authorized shares — 250,000 | |||||||||||
Issued and outstanding shares — 47,676 and 47,029, respectively | 48 | 47 | |||||||||
Additional paid-in capital | 357,460 | 356,887 | |||||||||
Deferred compensation | (27 | ) | (278 | ) | |||||||
Accumulated deficit | (324,502 | ) | (288,361 | ) | |||||||
Total stockholders’ equity | 32,979 | 68,295 | |||||||||
Total liabilities and stockholders’ equity | $ | 59,546 | $ | 97,420 | |||||||
See accompanying notes.
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LIGHTSPAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 31, | ||||||||||||||
2003 | 2002 | 2001 | ||||||||||||
Revenues: | ||||||||||||||
Software licenses | $ | 26,604 | $ | 34,309 | $ | 79,553 | ||||||||
Online subscriptions | 10,506 | 7,935 | 4,556 | |||||||||||
Professional services | 9,863 | 9,343 | 9,175 | |||||||||||
Hardware and other | 3,035 | 5,945 | 5,790 | |||||||||||
Total revenues | 50,008 | 57,532 | 99,074 | |||||||||||
Cost of revenues: | ||||||||||||||
Software licenses | 5,240 | 6,564 | 14,887 | |||||||||||
Online subscriptions | 1,854 | 1,952 | 2,004 | |||||||||||
Professional services | 5,030 | 5,411 | 4,780 | |||||||||||
Hardware and other | 2,370 | 3,802 | 3,615 | |||||||||||
Total cost of revenues | 14,494 | 17,729 | 25,286 | |||||||||||
Gross profit | 35,514 | 39,803 | 73,788 | |||||||||||
Operating expenses: | ||||||||||||||
Sales and marketing | 36,266 | 49,367 | 56,920 | |||||||||||
Technology and development | 13,535 | 24,424 | 25,775 | |||||||||||
General and administrative | 10,997 | 11,670 | 9,425 | |||||||||||
Stock-based compensation | 227 | 747 | 2,398 | |||||||||||
Amortization of intangible assets | 8,004 | 18,298 | 16,005 | |||||||||||
Restructuring | — | — | 1,600 | |||||||||||
Total operating expenses | 69,029 | 104,506 | 112,123 | |||||||||||
Loss from operations | (33,515 | ) | (64,703 | ) | (38,335 | ) | ||||||||
Interest income | 461 | 2,571 | 6,315 | |||||||||||
Interest expense | (87 | ) | (111 | ) | (100 | ) | ||||||||
Loss before cumulative effect of change in accounting principle | (33,141 | ) | (62,243 | ) | (32,120 | ) | ||||||||
Cumulative effect of a change in accounting principle | (3,000 | ) | — | — | ||||||||||
Net loss | (36,141 | ) | (62,243 | ) | (32,120 | ) | ||||||||
Preferred stock dividend | — | — | (16,506 | ) | ||||||||||
Net loss applicable to common stockholders | $ | (36,141 | ) | $ | (62,243 | ) | $ | (48,626 | ) | |||||
Net loss per share: | ||||||||||||||
Basic and diluted loss per share before cumulative effect of a change in accounting principle | $ | (0.70 | ) | $ | (1.34 | ) | $ | (1.10 | ) | |||||
Cumulative effect of a change in accounting principle | $ | (0.06 | ) | — | — | |||||||||
Basic and diluted net loss per share | $ | (0.76 | ) | $ | (1.34 | ) | $ | (1.10 | ) | |||||
Weighted average shares — basic and diluted | 47,271 | 46,373 | 44,019 | |||||||||||
See accompanying notes.
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LIGHTSPAN, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Convertible | Total | ||||||||||||||||||||||||||||||||||||||||
Preferred Stock | Common Stock | Additional | Deferred | Other | Stockholders’ | ||||||||||||||||||||||||||||||||||||
Paid-in | Advertising | Deferred | Comprehensive | Accumulated | Equity | ||||||||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | Capital | Expense | Compensation | Loss | Deficit | (Deficit) | ||||||||||||||||||||||||||||||||
Balance at January 31, 2000 | 52,231 | $ | 52 | 4,764 | $ | 5 | $ | 209,740 | $ | (400 | ) | $ | (5,211 | ) | $ | — | $ | (177,492 | ) | $ | 26,694 | ||||||||||||||||||||
Conversion of convertible preferred stock into common stock upon completion of initial public offering | (52,231 | ) | (52 | ) | 27,088 | 27 | 25 | — | — | — | — | — | |||||||||||||||||||||||||||||
Issuance of common stock in initial public offering, net of offering costs, commissions and discounts of $9,042 | — | — | 8,155 | 8 | 88,811 | — | — | — | — | 88,819 | |||||||||||||||||||||||||||||||
Issuance of common stock in private placements, net of advisory fees of $930 | — | — | 2,125 | 2 | 24,568 | — | — | — | — | 24,570 | |||||||||||||||||||||||||||||||
Issuance of common stock in connection with the purchase of eduTest and LearningPlanet.com, net of registration fees | — | — | 1,019 | 1 | 8,934 | — | — | — | — | 8,935 | |||||||||||||||||||||||||||||||
Issuance of common stock | — | — | 1,515 | 2 | 7,331 | — | — | — | — | 7,333 | |||||||||||||||||||||||||||||||
Reduction to deferred compensation related to stock options | — | — | — | — | (1,499 | ) | — | 1,499 | — | — | — | ||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | — | 2,398 | — | — | 2,398 | |||||||||||||||||||||||||||||||
Use of advertising credits | — | — | — | — | — | 400 | — | — | — | 400 | |||||||||||||||||||||||||||||||
Preferred stock dividend | — | — | 1,378 | 1 | 16,505 | — | — | — | (16,506 | ) | — | ||||||||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||
Unrealized loss | — | — | — | — | — | — | (714 | ) | — | (714 | ) | ||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (32,120 | ) | (32,120 | ) | |||||||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | (32,834 | ) | ||||||||||||||||||||||||||||||
Balance at January 31, 2001 | — | — | 46,044 | 46 | 354,415 | — | (1,314 | ) | (714 | ) | (226,118 | ) | 126,315 | ||||||||||||||||||||||||||||
Issuance of common stock to Learning Planet.com and eduTest | — | — | 263 | — | 2,067 | — | — | — | — | 2,067 | |||||||||||||||||||||||||||||||
Exercise of stock options | — | — | 185 | — | 147 | — | — | — | — | 147 | |||||||||||||||||||||||||||||||
Reduction to deferred compensation related to stock options | — | — | — | — | (289 | ) | — | 289 | — | — | — | ||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | — | 747 | — | — | 747 | |||||||||||||||||||||||||||||||
Common Stock issued under Employee Stock Purchase Plan | — | — | 537 | 1 | 548 | — | — | — | — | 548 | |||||||||||||||||||||||||||||||
Comprehensive loss: | |||||||||||||||||||||||||||||||||||||||||
Net change in unrealized loss | — | — | — | — | — | — | 714 | — | 714 | ||||||||||||||||||||||||||||||||
Net loss | — | — | — | — | — | — | — | — | (62,243 | ) | (62,243 | ) | |||||||||||||||||||||||||||||
Comprehensive loss | — | — | — | — | — | — | — | — | — | (61,529 | ) | ||||||||||||||||||||||||||||||
Balance at January 31, 2002 | — | — | 47,029 | 47 | 356,887 | — | (278 | ) | — | (288,361 | ) | 68,295 | |||||||||||||||||||||||||||||
Exercise of stock options | — | — | 198 | — | 170 | — | — | — | — | 170 | |||||||||||||||||||||||||||||||
Reduction to deferred compensation related to stock options | — | — | — | — | (24 | ) | — | 24 | — | — | — | ||||||||||||||||||||||||||||||
Amortization of deferred compensation | — | — | — | — | — | — | 227 | — | — | 227 | |||||||||||||||||||||||||||||||
Common Stock issued under Employee Stock Purchase Plan | — | — | 449 | 1 | 427 | — | — | — | — | 428 | |||||||||||||||||||||||||||||||
Comprehensive and net loss | — | — | — | — | — | — | — | — | (36,141 | ) | (36,141 | ) | |||||||||||||||||||||||||||||
Balance at January 31, 2003 | — | $ | — | 47,676 | $ | 48 | $ | 357,460 | $ | — | $ | (27 | ) | $ | — | $ | (324,502 | ) | $ | 32,979 | |||||||||||||||||||||
See accompanying notes.
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LIGHTSPAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 31, | ||||||||||||||
2003 | 2002 | 2001 | ||||||||||||
Operating activities: | ||||||||||||||
Net loss | $ | (36,141 | ) | $ | (62,243 | ) | $ | (32,120 | ) | |||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||||
Depreciation and amortization | 2,439 | 3,265 | 1,821 | |||||||||||
Provision for doubtful accounts | 724 | 357 | (78 | ) | ||||||||||
Amortization of intangible assets | 8,004 | 18,298 | 16,005 | |||||||||||
Amortization of deferred stock-based compensation | 227 | 747 | 2,398 | |||||||||||
Loss on disposal of assets | 607 | — | — | |||||||||||
Change in deferred advertising expense | — | — | 400 | |||||||||||
Restructuring charge, non-cash portion | — | — | 533 | |||||||||||
Cumulative effect of a change in accounting principle | 3,000 | — | — | |||||||||||
Changes in operating assets and liabilities, net of effects of assets acquired: | ||||||||||||||
Accounts receivable | 1,618 | (581 | ) | 5,266 | ||||||||||
Finished goods inventory | 603 | 135 | (1,451 | ) | ||||||||||
Deferred cost of revenue | — | — | 8,709 | |||||||||||
Restricted cash | 826 | 3,115 | (4,768 | ) | ||||||||||
Deposits and other assets | 506 | 1,306 | (527 | ) | ||||||||||
Accounts payable, accrued and other liabilities | (2,672 | ) | 1,300 | 329 | ||||||||||
Deferred revenue | 360 | 2,602 | (46,188 | ) | ||||||||||
Net cash flows used in operating activities | (19,899 | ) | (31,699 | ) | (49,671 | ) | ||||||||
Investing activities: | ||||||||||||||
Purchases of short-term investments | (5,078 | ) | (121,845 | ) | (35,753 | ) | ||||||||
Maturities of short-term investments | 8,356 | 146,909 | 18,488 | |||||||||||
Purchase of property and equipment | (267 | ) | (4,218 | ) | (4,204 | ) | ||||||||
Net cash paid for acquisitions | — | — | (2,845 | ) | ||||||||||
Net cash flows provided by (used in) investing activities | 3,011 | 20,846 | (24,314 | ) | ||||||||||
Financing activities: | ||||||||||||||
Proceeds from issuance of common stock | 428 | 548 | 114,011 | |||||||||||
Principal repayments on capital leases | (246 | ) | (375 | ) | (391 | ) | ||||||||
Principal repayments on notes payable | — | — | (257 | ) | ||||||||||
Net proceeds from exercise of stock options | 170 | 147 | 1,155 | |||||||||||
Net cash flows provided by financing activities | 352 | 320 | 114,518 | |||||||||||
Increase (decrease) in cash and cash equivalents | (16,536 | ) | (10,533 | ) | 40,533 | |||||||||
Cash and cash equivalents at beginning of year | 35,033 | 45,566 | 5,033 | |||||||||||
Cash and cash equivalents at end of year | $ | 18,497 | $ | 35,033 | $ | 45,566 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||||
Interest paid | $ | 87 | $ | 111 | $ | 100 | ||||||||
Supplemental schedule of noncash investing and financing activities: | ||||||||||||||
Reduction in deferred stock-based compensation | $ | 24 | $ | 289 | $ | (1,499 | ) | |||||||
Conversion of convertible preferred stock into common stock | $ | — | $ | — | $ | 52 | ||||||||
Issuance of common stock related to the acquisitions of Academic, eduTest and LearningPlanet.com | $ | — | $ | 67 | $ | 14,490 | ||||||||
Issuance of common stock as preferred stock dividend | $ | — | $ | — | $ | 16,506 | ||||||||
Additional consideration payable related to the acquisitions of Academic and eduTest | $ | — | $ | (2,000 | ) | $ | 2,000 | |||||||
See accompanying notes.
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LIGHTSPAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Organization and Business Activity |
Lightspan, Inc. (“Lightspan”) was founded in 1993. Lightspan was incorporated as The Lightspan Partnership, Inc. and changed its name to Lightspan, Inc. on April 10, 2000. Lightspan provides curriculum-based educational software and online products and services to schools and school districts that are used both in school and at home. Lightspan Achieve Now is an interactive CD-ROM-based software product for kindergarten through eighth grade schools, or K-8, that covers the core curriculum of language arts, reading and math. The Lightspan Achieve Now program typically includes the Lightspan Achieve Now software and a PlayStation® game console that the student uses to operate the program at home throughout the school year. The Lightspan Network is an online subscription service that provides curriculum-based content for classroom and home use. The Lightspan Reading Center is a complete online reading program that supports student achievement and helps educators make more informed instructional decisions. Lightspan eduTest Assessment is a comprehensive accountability and assessment online subscription program that allows educators to quickly identify district, school, class and student strengths and needs relating to state and national standards. Academic software is a CD-ROM-based product that serves the college market with an English and mathematics curriculum designed to meet the needs of under-prepared students. Web-enhanced versions of Academic’s Interactive Mathematics and Interactive English which allow colleges to implement the programs using client workstations that are located solely within an intranet, on the Internet in a distance learning configuration, or with a combination of intranet and Internet-based workstations.
Basis of Presentation |
As of January 31, 2003, Lightspan had working capital of $10.7 million and an accumulated deficit of $324.5 million. The accompanying financial statements have been prepared assuming that Lightspan will continue as a going concern. This basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of conducting business. Based on a revenue and expense forecast, management believes that Lightspan’s existing capital resources will enable them to fund operations through January 31, 2004. If revenue targets are not achieved as contemplated by the forecast, Lightspan may determine that it is necessary to delay, reduce the scope of or eliminate one or more of its sales and marketing programs and reduce the cost of its infrastructure and personnel. If necessary, management believes it has the ability to defer or eliminate certain sales, general and administrative expenses to enable Lightspan to sustain its operations through January 2004.
Principles of Consolidation |
The consolidated financial statements include the accounts of Lightspan and its wholly-owned subsidiaries, Academic Systems Corporation (“Academic”) and Edutest, Inc. (“eduTest” or “eduTest.com”). All intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents |
Cash and cash equivalents consist of cash and highly liquid investments which include debt securities with original maturities of three months or less when acquired. Restricted cash consists of certificates of deposit that are used as collateral against lines of credit.
Short-term investments |
Short-term investments consist of fixed income investments with an original maturity of greater than three months such as United States treasury securities, obligations of the United States government agencies and other investment grade securities such as commercial paper and corporate bonds rated AA or better. The
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Company applies Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities” to its investments in short-term investments. Short-term investments classified as available-for-sale are recorded at estimated fair value with unrealized gains or losses reported in stockholders’ equity.
Accounts Receivable |
Substantially all of Lightspan’s accounts receivable are from school districts and colleges located throughout the United States and Puerto Rico. The company maintains an adequate level of accounts receivable reserves in order to minimize the risk of loss due to uncollectible accounts. Management periodically assesses the adequacy of these reserves based on various business risk factors that include availability of customer funding and customer delinquency trends. The Company has not recorded a material write-off of receivables since inception.
Inventory |
Inventory consists primarily of hardware and software and is stated at the lower of cost (first in, first out basis) or market.
Property and Equipment |
Property and equipment is stated at cost and depreciated or amortized over the shorter of the estimated useful life of the related asset (two to five years) or the term of the lease, using the straight-line method.
Depreciation expense for the years ended January 31, 2003, 2002 and 2001 was $2.4 million, $3.1 million and $1.8 million, respectively.
Goodwill and Other Intangible Assets |
On February 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, or SFAS No. 142, “Goodwill and Other Intangible Assets” which eliminated amortization of goodwill and certain other intangible assets and requires annual testing for impairment. SFAS No. 142 prescribes a two-phase process for impairment testing of goodwill. The first phase identifies impairment, if any, of goodwill by comparing the reporting unit’s carrying amount, including goodwill, to the fair value of the reporting unit. The fair values of the reporting units are estimated using a discounted cash flow model and other corporate and market information. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.
Intangible assets consist of customer base, core technology, trademark and trade name and are amortized over useful lives ranging from three to ten years.
Deferred Revenues |
Payments received in advance of amounts earned are recorded as deferred revenue in the accompanying financial statements.
Impairment of Long-Lived Assets |
The Company reviews the recoverability of the carrying value of long-lived assets, primarily property, plant and equipment, intangible assets, and software development costs, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be fully recoverable. Should indicators of impairment exist, the carrying values of the assets are evaluated in relation to the operating performance and future undiscounted cash flows of the underlying business. The net book value of an asset is
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
adjusted to fair value if its expected future undiscounted cash flow is less than its book value. The Company has identified no such impairment losses as of January 31, 2003 and 2002.
Revenue |
Lightspan derives its revenues from the licensing of software, product implementation, materials, training services, customer support services, Internet subscriptions, and the sale of PlayStation game consoles and accessories.
Software Licenses |
Lightspan recognizes revenue from license agreements when a non-cancelable, non-contingent license agreement has been signed, the software product has been delivered, no uncertainties exist surrounding product acceptance, fees from the agreement are fixed and determinable, and collection is probable. In software arrangements that include multiple elements, such as those that include rights to software products, customer support and product implementation and training services, Lightspan allocates the total fee to each component of the arrangement based on objective evidence of its fair value, which is specific to Lightspan. The objective evidence for each element is based on the sale price of each element when sold or offered for sale separately. Lightspan uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date if evidence of the fair value of all undelivered elements exists. If evidence of the fair value of the undelivered elements does not exist, all revenue is deferred until sufficient evidence exists or all elements have been delivered.
Lightspan sells its Lightspan Achieve Now licenses in three distinct grade clusters — grades K through 2; grades 3 through 4; and grades 5 through 8. Each grade cluster includes up to 40 separate Lightspan Achieve Now titles, with each title consisting of one distinct CD-ROM. As of January 31, 2000, there were a total of 77 separate titles, some of which were included in more than one grade cluster. From fiscal 1997 through fiscal 2000, certain titles were under development at various stages in the development cycle. Lightspan considers titles that have completed the development cycle and have been released for shipment to customers to be “completed,” and considers titles still in the development cycle to be “as-yet uncompleted.” As of January 31, 2000, 72 of the 77 titles had been completed and five of the 77 titles were still as-yet uncompleted.
In July 2000, the Company completed and shipped all Lightspan Achieve Now titles in all grade clusters used on the PlayStation game console and on a PC platform, resulting in the recognition of $48.1 million of revenue previously deferred, and the recognition of $8.7 million of previously deferred expenses as cost of revenue, pursuant to SOP 97-2 as discussed below.
On February 1, 1998, Lightspan adopted the provisions of SOP 97-2,Software Revenue Recognition,as amended by SOP 98-4,Deferral of the Effective Date of Certain Provisions of SOP 97-2.Under SOP 97-2, Lightspan recognizes software license revenue when (i) an agreement has been executed or a definitive purchase order has been received; (ii) the product has been shipped or services have been performed; (iii) the fee has become fixed and determinable; (iv) the collection of the fee is considered probable; (v) the related hardware, if applicable, has been shipped, and (vi) when all titles for a given grade cluster have been delivered to its customers. In early 1998, Lightspan began providing customers with a specific list of titles which were planned to be eventually provided to the customers, as well as the projected delivery dates for these titles. Prior to April 30, 2000, Lightspan deferred the recognition of all revenue for Achieve Now licenses, since objective fair values of individual as-yet uncompleted titles could not be determined and used to allocate the license fee to the individual titles as they were shipped.
In December 1999, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin No. (“SAB”) 101,Revenue Recognition in Financial Statements. The Company adopted SAB 101 in the fourth quarter of fiscal 2001. SAB 101 requires, among other things, that license and other up-front fees be
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recognized over the term of the agreement, unless the fees are nonrefundable and in exchange for products delivered or services performed that represent the culmination of a separate earnings process. The Company currently recognizes revenue in accordance with SAB 101, and the adoption in fiscal 2001 did not have a material effect on the Company’s financial position and results of operations.
Academic curriculum products are licensed to colleges and then sold by the licensing colleges to students on a student-by-student basis for use with each class, instead of a textbook. As Lightspan is not contractually obligated to provide further service after delivery of the license, Lightspan recognizes the full sales value of Academic license revenue generally upon delivery.
Historically, Lightspan has experienced minimal customer cancellations, forfeitures or discontinuations of licenses.
Online Subscriptions |
Revenue derived from fee-based online subscriptions recognized on a straight-line basis over the term of the agreement, generally one year.
Professional Services |
Revenue derived from professional services, including product implementation and customer training provided by the professional development organization, is recognized as the services are performed in accordance with the standard implementation, training, service, and evaluation plans that Lightspan establishes for its customers. Revenue derived from telephone support and maintenance arrangements provided by the professional development organization is recognized ratably over the term of the support and maintenance period, generally one year.
Hardware |
Revenue derived from hardware revenue, including the sale of PlayStation game consoles and related accessories, is recognized upon delivery of the console and the related software product.
Advertising Costs |
Advertising costs are expensed as incurred and were $0.1 million, $0.2 million and $5.7 million for the years ended January 31, 2003, 2002 and 2001, respectively.
Technology and Development Expenses |
Technology and development expenses include software development costs which are expensed as incurred until technological feasibility has been established and a definitive decision has been made to proceed with the commercial launch of the title. To date, these factors have not been met until substantial completion of the title, and therefore costs associated with software development have been expensed as incurred.
Web Site and Software Development Costs |
Technology and development expenses also include Web site development costs which are evaluated under Emerging Issues Task Force (“EITF”) 00-2Accounting for Web Site Development Costs. Web site development costs for which a plan exists to market the Web-site externally are accounted for pursuant to SFAS 86, Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketedand are expensed as incurred until technological feasibility has been established and a definitive decision has been made to proceed with the commercial launch of the Web site. To date, technological feasibility has not been
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met until substantial completion of the Web site, and therefore costs associated with Web site development costs have been expensed as incurred.
Web site development costs relating to software (which includes Web site application, infrastructure and graphics) used to operate a web site internally and for which a plan to market the Web site externally does not exist are accounted for in accordance with Statement of Position (“SOP”) 98-1Accounting for the Cost of Computer Software Developed or Obtained for Internal Use. According to SOP 98-1, once capitalization criteria of SOP 98-1 have been met, the Company capitalizes costs such as external direct costs of materials and services, payroll and payroll related costs for employees who are directly associated with developing the internal-use software or upgrades and enhancements that result in additional functionality. Training costs, data conversion costs and operating expenses are expensed as incurred. As of January 31, 2003, the Company had not incurred any Web site development costs meeting the criteria for capitalization.
Stock-Based Compensation |
As permitted by SFAS No. 123,Accounting for Stock-Based Compensation, Lightspan has elected to follow Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees,and related Interpretations in accounting for stock-based employee compensation. Under APB No. 25, if the exercise price of Lightspan’s employee and director stock options equals or exceeds the fair value of the underlying stock on the date of grant, no compensation expense is recognized. When the exercise price of the employee or director stock options is less than the fair value of the underlying stock on the grant date, Lightspan records deferred stock compensation for the difference and amortizes this amount to expense in accordance with FASB Interpretation No. 28, (“FIN 28”), over the vesting period of the options. Options or stock awards issued to non-employees are recorded at their fair value as determined in accordance with SFAS No. 123 and EITF 96-18, and recognized over the related service period.
Pro forma information regarding net loss is required by SFAS No. 123, as amended by SFAS No. 148,Accounting for Stock-Based Compensation — Transition and Disclosure, and has been determined as if Lightspan had accounted for its employee stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model for options subsequent to Lightspan’s initial public offering and using the minimum value method for nonpublic entities for options prior to Lightspan’s initial public offering, with the following weighted average assumptions for each of the years ended January 31, 2003, 2002 and 2001, respectively: ten year risk-free interest rates of 4.02%, 4.90% and 6.51%, respectively; dividend yields of 0%; weighted-average expected life of the options of four to five years; and expected volatility of 77% for the year ended January 31, 2003. In determining pro forma amounts, the estimated fair value of the options is amortized to expense over the vesting period of such options. The following table compares net loss as reported in Lightspan’s financial statements to pro forma amounts that would be reported had compensation expense been recognized for Lightspan’s stock-based
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compensation plans using the fair value method of SFAS No. 123, as amended by SFAS No. 148 (in thousands, except per share data):
Years Ended January 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Net loss, as reported | $ | (36,141 | ) | $ | (62,243 | ) | $ | (48,626 | ) | |||
Add: Stock-based compensation expense included in reported net income, net of related tax effects | 227 | 747 | 2,398 | |||||||||
Deduct: Total Stock-based compensation expense determined under fair value based method for all awards, net of related tax effects | (1,013 | ) | (1,755 | ) | (5,980 | ) | ||||||
Pro forma net loss | $ | (36,927 | ) | $ | (63,251 | ) | $ | (52,208 | ) | |||
Basic and diluted net loss per share: | ||||||||||||
As reported | $ | (0.76 | ) | $ | (1.34 | ) | $ | (1.10 | ) | |||
Pro forma | $ | (0.78 | ) | $ | (1.36 | ) | $ | (1.19 | ) | |||
Comprehensive Loss |
The Company has adopted the provisions of SFAS No. 130, “Reporting Comprehensive Income”. SFAS No. 130 establishes standards for reporting comprehensive income and its components in financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during a period from non-owner sources. Net loss and other comprehensive loss, including foreign currency translation adjustments and unrealized gains and losses on investments shall be reported, net of their related tax effect, to arrive at comprehensive loss. The Company’s net loss and its total comprehensive loss are included in a supplementary schedule in the statement of stockholders’ equity for the years ended January 31, 2002 and 2001. Total comprehensive loss was equivalent to reported net loss for the year ended January 31, 2003.
Segment Reporting |
SFAS No. 131,Disclosures about Segments of an Enterprise and Related Information,establishes standards for disclosure about operating segments in annual financial statements and selected information in interim financial reports. This establishes standards for related disclosures about products and services, geographic areas and major customers. See Note 10.
Net Loss Per Share |
Lightspan computes net loss per share in accordance with SFAS No. 128,Earnings Per Share.Under the provisions of SFAS No. 128, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Potentially dilutive securities composed of incremental common shares issuable upon the exercise of stock options and warrants, and common shares issuable on conversion of preferred stock, were excluded from historical diluted loss per share because of their anti-dilutive effect. Dilutive common stock equivalents would include the dilutive effects of common stock options, convertible preferred stock (as if converted), warrants for common stock, and restricted stock that has not yet fully vested. Potentially dilutive securities totaled 0.2 million, 1.2 million and 1.4 million for the years ended January 31, 2003, 2002 and 2001, respectively, and were excluded from the diluted earnings per share because of their antidilutive effect.
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Use of Estimates |
The preparation of financial statements in conformity with generally accepted accounting principles requires Lightspan management to make estimates and assumptions that affect the amounts reported in the financial statements and disclosures made in the accompanying notes to the financial statements. Actual results could differ from those estimates.
Fair Value of Financial Instruments |
Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities, and capital lease obligations, are carried at cost, which management believes approximates fair value because of the short-term maturity of these instruments. Short-term investments, consisting primarily of U.S. Agency securities that mature within one year, are carried at fair value, which is based on quoted market prices for such securities.
Reclassifications |
Certain amounts in prior year financial statements have been reclassified to conform with the current period presentation.
Recently Issued Accounting Standards |
In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”, which is effective for the Company beginning February 1, 2003. The Company believes the adoption of SFAS No. 145 will not have a material effect on the Company’s consolidated financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” SFAS No. 146 requires that costs associated with exit or disposal activities be recorded at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management’s commitment to an exit plan, which is generally before an actual liability has been incurred. This Statement is effective for exit or disposal activities that are initiated after December 31, 2002 and will impact the timing of exit or disposal costs reported after adoption.
In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” SFAS No. 148 amends SFAS No. 123 by providing alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 expands the pro forma disclosures of the effect of a company’s accounting for stock-based employee compensation required by SFAS No. 123 and adds comparable disclosures to those required by APB Opinion No. 28, “Interim Financial Reporting”. SFAS No. 148 is effective for financial statements of the Company beginning December 15, 2002.
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2. Detailed Balance Sheet Information (In thousands)
Cash and cash equivalents consist of the following:
January 31, | |||||||||
2003 | 2002 | ||||||||
Cash | $ | 2,028 | $ | 1,344 | |||||
Money market accounts | 16,469 | 33,689 | |||||||
$ | 18,497 | $ | 35,033 | ||||||
Restricted cash | |||||||||
Certificates of deposit, current portion | 826 | 826 | |||||||
Certificates of deposit, long term portion | — | 827 | |||||||
Total restricted cash | $ | 826 | $ | 1,653 | |||||
At January 31, 2003, short-term investments consisted of the following.
Unrealized | Fair | ||||||||||||
Amortized Cost | Gain (Loss) | Market Value | |||||||||||
U.S. agency | $ | 5,055 | $ | — | $ | 5,055 | |||||||
Cash and cash equivalents | $ | 18,497 | $ | — | $ | 18,497 | |||||||
Total cash and cash equivalents and short-term investments | $ | 23,552 | $ | — | $ | 23,552 | |||||||
At January 31, 2002, short-term investments consisted of the following.
Unrealized | Fair | ||||||||||||
Amortized Cost | Gain (Loss) | Market Value | |||||||||||
U.S. government securities | $ | 8,333 | $ | — | $ | 8,333 | |||||||
Cash and cash equivalents | $ | 35,033 | $ | — | $ | 35,033 | |||||||
Total cash and cash equivalents and short-term investments | $ | 43,366 | $ | — | $ | 43,366 | |||||||
Property and equipment consist of the following:
January 31, | ||||||||
2003 | 2002 | |||||||
Computer equipment | $ | 11,003 | $ | 12,506 | ||||
Software | 3,145 | 2,718 | ||||||
Office furniture and equipment | 1,807 | 2,045 | ||||||
15,955 | 17,269 | |||||||
Less accumulated depreciation and amortization | (11,895 | ) | (10,430 | ) | ||||
$ | 4,060 | $ | 6,839 | |||||
Goodwill and Other Intangible Assets
On February 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, or SFAS No. 142, “Goodwill and Other Intangible Assets” which required us to cease amortizing goodwill, and instead
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perform a transitional review for impairment as of February 1, 2002 and an annual review for impairment during the fourth quarter of fiscal 2003. Goodwill is considered to be potentially impaired if we determine the carrying value of the reporting unit exceeds its fair value. During the second quarter of fiscal 2003, we performed the transitional test by completing the first step of this review and determined that there was a potential impairment of goodwill relating to our higher education division, Academic Systems. As a result, as required by SFAS 142, we performed a second step utilizing an independent appraisal firm combined with internal analyses and other market and company information to measure the amount of the potential impairment. As a part of this second step, SFAS 142 requires the fair value of the reporting unit be allocated to its assets and liabilities in the same manner used in accounting for business combinations. These analyses were judgmental in nature and included a significant amount of estimates and assumptions in forecasting revenues, expenses, growth rates and other relevant information in a discounted cash flow model with discount rates reflecting the appropriate inherent risk.
This transitional impairment review from the second step of SFAS 142 resulted in a noncash charge of $3.0 million to reduce the carrying value of the goodwill associated with our higher education division, Academic Systems. This charge is reflected as the cumulative effect of a change in accounting principle in the first quarter of fiscal 2003 as required by SFAS 142. Also in connection with the adoption of SFAS 142 we reclassified $1.2 million and $0.5 million of assembled workforce intangibles and related accumulated amortization respectively as required by the pronouncement.
During the fourth quarter of fiscal 2003, we also performed our annual review for impairment as of January 31, 2003 and determined no impairment existed.
We cannot assure you that when we complete our annual or other periodic reviews for impairment of goodwill that a material impairment charge will not be recorded. Goodwill totaled $11.7 million at January 31, 2003.
The following table presents a reconciliation of net income (loss) and per share data to what would have been reported had the new rules been in effect during the years ended January 31, 2003, 2002 and 2001.
January 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Reported net loss | $ | (36,141 | ) | $ | (62,243 | ) | $ | (48,626 | ) | |||
Cumulative effect of change in accounting principle | 3,000 | — | — | |||||||||
Add back goodwill and assembled workforce amortization | — | 10,295 | 9,188 | |||||||||
Adjusted net loss | $ | (33,141 | ) | $ | (51,948 | ) | $ | (39,438 | ) | |||
Basic and diluted net loss per share: | ||||||||||||
Reported net loss per share | $ | (0.76 | ) | $ | (1.34 | ) | $ | (1.10 | ) | |||
Cumulative effect of change in accounting principle | 0.06 | — | — | |||||||||
Goodwill amortization | — | 0.22 | 0.21 | |||||||||
Adjusted net loss per share | $ | (0.70 | ) | $ | (1.12 | ) | $ | (0.90 | ) | |||
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Detail of intangible assets subject to amortization at January 31, 2003 was as follows:
Remaining | ||||||||||||||||
Useful | Gross | Net | ||||||||||||||
Life (in | Carrying | Accumulated | Carrying | |||||||||||||
years) | Value | Amortization | Value | |||||||||||||
Customer base | 4 | $ | 17,500 | $ | 14,787 | $ | 2,713 | |||||||||
Core technology | 4 | 10,400 | 8,858 | 1,542 | ||||||||||||
Trademark and trade name | 9 | 4,100 | 1,581 | 2,519 | ||||||||||||
$ | 32,000 | $ | 25,226 | $ | 6,774 | |||||||||||
Comparison of intangible assets between years:
January 31, | ||||||||
2003 | 2002 | |||||||
Customer base | $ | 17,500 | $ | 17,500 | ||||
Core technology | 10,400 | 10,400 | ||||||
Trademark and trade name | 4,100 | 4,100 | ||||||
Assembled workforce | — | 1,200 | ||||||
32,000 | 33,200 | |||||||
Less accumulated amortization | (25,226 | ) | (17,922 | ) | ||||
$ | 6,774 | $ | 15,278 | |||||
Amortization expense for intangible assets for the years ended January 31, 2003, 2002 and 2001 was $8.0 million, $8.0 million and $7.1 million, respectively.
The estimated annual amortization expense for amortized intangible assets owned as of January 31, 2003 for each of the five succeeding fiscal years is as follows:
Years Ending January 31, 2004 | $ | 4,774 | ||
2005 | 520 | |||
2006 | 392 | |||
2007 | 300 | |||
2008 | 300 | |||
Thereafter | 488 | |||
$ | 6,774 | |||
Accrued liabilities consist of the following:
January 31, | ||||||||
2003 | 2002 | |||||||
Accrued compensation and related expenses | $ | 8,728 | $ | 10,876 | ||||
Other accrued liabilities | 1,530 | 1,366 | ||||||
$ | 10,258 | $ | 12,242 | |||||
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3. Business Combinations and Strategic Relationships
Acquisition of eduTest, Inc. |
On May 24, 2000, Lightspan entered into a merger agreement with eduTest, which offered a combination of online assessment products and proprietary test questions covering language arts, mathematics, history and science, allowing educators to assess their students’ progress in the classroom. In connection with the merger agreement, which was consummated on June 23, 2000, Lightspan paid $2.6 million in cash, $1.3 million of which was paid to eduTest common shareholders, $1.1 million of which was paid in satisfaction of various obligations of eduTest and $.2 million of transaction costs. Lightspan also issued 1,028,543 shares of common stock with a value at the measurement date of $8.75 per share valued at $9.0 million, with a potential for up to an additional 228,561 hold-back shares valued at $2.0 million over the next 18 months and up to an additional $2.0 million in stock over the subsequent 12 months based upon certain revenue based performance criteria, in exchange for all of the outstanding common and preferred shares of eduTest. The acquisition was accounted for as a purchase.
In December 2001 we issued 228,561 shares of our common stock which had been initially held back from the purchase price as security for indemnification and other obligations of eduTest. The aggregate purchase price, including the 228,561 hold-back shares valued at $2.0 million, but excluding the $2.0 million in potential earnout payments, totaled $13.6 million as follows (in thousands):
Valuation of common stock issued | $ | 9,000 | ||
Valuation of hold-back shares | 2,000 | |||
Acquisition costs | 287 | |||
Cash paid to eduTest shareholders | 1,309 | |||
Cash paid in satisfaction of certain eduTest liabilities | 1,054 | |||
Aggregate purchase price | $ | 13,650 | ||
The purchase price was allocated to the assets acquired, consisting principally of intangible assets and goodwill. The intangible assets are being amortized over useful lives of three to five years. The accompanying consolidated financial statements include the results of operations of eduTest since June 23, 2000, the date the acquisition was consummated.
Acquisition of LearningPlanet.com |
On May 26, 2000, Lightspan acquired LearningPlanet.com, a popular education Web destination for children and their parents. LearningPlanet.com features creative and instructional learning activities in mathematics and language arts. Launched in June 1999, LearningPlanet.com has focused on creating activities for kids that are both entertaining and educational. The transaction was structured as an asset purchase, with Lightspan acquiring the LearningPlanet.com Web site and related technology and assets in exchange for a combination of approximately $0.15 million in our common stock and $0.2 million in cash. The purchase price was allocated to goodwill and amortized over a useful life of three years. The accompanying consolidated financial statements include the results of operations of LearningPlanet.com since May 26, 2000, the date the acquisition was consummated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pro forma financial information |
The following unaudited pro forma financial information assumes the acquisitions of eduTest and LearningPlanet.com were consummated on February 1, 2000 (in thousands, except per share data):
Years Ended January 31, | ||||||||
2002 | 2001 | |||||||
Revenues | $ | 57,532 | $ | 99,607 | ||||
Net loss | $ | (62,243 | ) | $ | (51,607 | ) | ||
Net loss per share, basic and diluted | $ | (1.34 | ) | $ | (1.19 | ) | ||
4. Restructuring
Restructuring.In July 2000, the Company recorded a $1.6 million restructuring charge related to a refocus of our sales and marketing efforts from our free Internet products towards our fee-based subscription Internet products, which was fully implemented during the quarter ended October 31, 2000. The restructuring charge included $1.2 million of involuntary termination benefits relating to the termination of 14 employees in August 2000. The Company also accrued exit costs of $0.4 million in expenses relating to contractual obligations for services associated with our free Internet site that would no longer be used to generate revenue. As of January 31, 2001, the Company had paid $1.0 million in involuntary termination benefits and exit costs and the remaining involuntary termination benefits were substantially paid during the year ended January 31, 2002.
5. Letter of Credit and Financing Facility
In October 2000, Lightspan entered into a $2.5 million letter of credit with a financial institution related to a three-year contract with a customer whereby in the event of cancellation of the contract, the customer can draw an amount equivalent to the value of any non-delivered services, not to exceed the value of the letter of credit. The amount of this letter of credit decreased to $0.8 million on September 30, 2002 and will expire on September 30, 2003. The letter of credit is collateralized by a $0.8 million certificate of deposit and the face value of the certificate of deposit is recorded as restricted cash. As of January 31, 2003, the contract has not been cancelled and no amount has been drawn against the letter of credit.
6. Commitments and Contingencies
Lightspan leases its facilities under operating lease agreements subject to annual escalation provisions based upon the Consumer Price Index. Facilities rent and operating lease expenses were $2.2 million, $2.4 million and $1.9 million, for the years ended January 31, 2003, 2002 and 2001, respectively.
At January 31, 2003, future minimum lease payments for all leases with initial terms of one year or more are as follows for each fiscal year ending January 31 (in thousands):
Operating | ||||
Leases | ||||
2004 | $ | 1,601 | ||
2005 | 339 | |||
2006 | 74 | |||
Total minimum lease payments | $ | 2,014 | ||
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In addition, Lightspan subleases a portion of their facilities for a period of one year subject to one-year renewal options. Sublease income was $0.2 million, $0.2 million and $0.5 million for the years ended January 31, 2003, 2002 and 2001, respectively.
7. Stockholders’ Equity
Initial Public Offering |
On February 15, 2000, Lightspan completed its initial public offering (the “Offering”) of 7,500,000 shares of common stock at $12 per share. Lightspan also issued 2,125,000 shares at the same price in private placements that occurred concurrently with the Offering. In March 2000 the underwriters exercised a portion of their overallotment option and purchased 655,150 additional shares at the Offering price. Total net proceeds as a result of the Offering, private placements and overallotment exercise after deducting the underwriting discount and commissions, offering expenses and financial advisory fees was approximately $113.4 million.
Convertible Preferred Stock |
All series of preferred stock automatically converted into 27,087,810 shares of common stock at the then effective conversion price upon the closing of the Offering on February 15, 2000.
Upon the completion of the Offering, warrants to purchase up to 2,760,160 shares of Series D preferred stock at $.02 per share converted into warrants to purchase up to 1,380,080 shares of common stock and were automatically exercised, resulting in the issuance of 1,377,762 shares of common stock (after application of certain “net exercise” provisions that permitted exercise without additional cash payment combined with the issuance of a reduced number of shares). As a result, on February 15, 2000, Lightspan accounted for the intrinsic value by charging retained earnings an additional $16.5 million and increasing the carrying amount of common stock by a corresponding amount. Such amount increased the net loss per share applicable to common stockholders for the year ended January 31, 2001.
Stock Option Plan |
In 1993, Lightspan adopted its 1993 Stock Option Plan, which was renamed the 2000 Equity Incentive Plan (the “Plan”) upon the close of the Offering. Upon the closing of its acquisition of Academic, Lightspan assumed Academic’s 1992 Stock Option Plan. All options outstanding under the 1992 Stock Option Plan were converted into options to purchase shares of Lightspan common stock, and are included in the summary below. Options for common stock may be incentive stock options or non-statutory stock options and are granted at the discretion of the Board of Directors. The Plan permits immediate exercise of options with the unvested portion subject to repurchase by Lightspan at the original exercise price, in the event of termination of employment. Non-statutory stock options may be granted to employees, directors and consultants whereas incentive stock options may be granted to employees and directors only. The option price for incentive stock options shall not be less than 100% of the fair value on the date of grant, and the option price of non-statutory options shall not be less than 85% of the fair value on the date of grant. The maximum term of options granted under the Plan is ten years. Incentive stock options granted under the Plan generally vest at the rate of 25% after one year from the vesting commencement date and 1/36 of the remaining shares every month thereafter. Non-statutory stock options generally vest at the rate of 50% after one year from the vesting commencement date and the remaining 50% after two years from such date.
At January 31, 2003, Lightspan was authorized to issue 9,711,991 shares of common stock to eligible employees, officers, directors and consultants under the Plan, of which options to purchase 1,208,510 shares were available for future grant at January 31, 2003.
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A summary of Lightspan’s stock option activity and related information is as follows (in thousands, except per share data):
Years Ended January 31, | |||||||||||||||||||||||||
2003 | 2002 | 2001 | |||||||||||||||||||||||
Weighted | Weighted | Weighted | |||||||||||||||||||||||
Average | Average | Average | |||||||||||||||||||||||
Exercise | Exercise | Exercise | |||||||||||||||||||||||
Options | Price | Options | Price | Options | Price | ||||||||||||||||||||
Outstanding — beginning of year | 4,974 | $ | 3.06 | 4,420 | $ | 4.28 | 3,782 | $ | 4.16 | ||||||||||||||||
Granted | 2,347 | $ | 0.96 | 2,024 | $ | 1.19 | 2,494 | $ | 4.89 | ||||||||||||||||
Exercised | (207 | ) | $ | 0.82 | (185 | ) | $ | 0.79 | (597 | ) | $ | 1.94 | |||||||||||||
Forfeited | (1,114 | ) | $ | 3.27 | (1,285 | ) | $ | 4.68 | (1,259 | ) | $ | 6.23 | |||||||||||||
Outstanding — end of year | 6,000 | $ | 2.27 | 4,974 | $ | 3.05 | 4,420 | $ | 4.28 | ||||||||||||||||
Exercisable at end of year | 2,023 | 1,624 | 1,115 | ||||||||||||||||||||||
Weighted average fair value of Options granted during the year | $ | 0.96 | $ | 1.19 | $ | 4.84 | |||||||||||||||||||
The following table summarizes information about stock options outstanding as of January 31, 2003 (in thousands, except per share data):
Options Outstanding | Options Exercisable | |||||||||||||||||||
Weighted | Weighted | |||||||||||||||||||
Average Remaining | Weighted Average | Average | ||||||||||||||||||
Range of Exercise Price | Number | Contractual Life | Exercise Price | Number | Exercise Price | |||||||||||||||
$ 0.01 – $ 1.90 | 3,831 | 8.8 | $ | 1.02 | 498 | $ | 1.13 | |||||||||||||
$ 1.91 – $ 3.80 | 1,032 | 6.0 | $ | 2.45 | 676 | $ | 2.43 | |||||||||||||
$ 3.81 – $ 5.70 | 458 | 1.9 | $ | 4.06 | 363 | $ | 4.05 | |||||||||||||
$ 5.71 – $ 7.60 | 312 | 7.4 | $ | 5.80 | 197 | $ | 5.80 | |||||||||||||
$ 7.61 – $ 9.50 | 200 | 3.7 | $ | 8.34 | 157 | $ | 8.33 | |||||||||||||
$ 9.51 – $11.40 | 150 | 2.2 | $ | 10.09 | 120 | $ | 10.09 | |||||||||||||
$13.30 – $15.20 | 1 | 7.2 | $ | 14.25 | 1 | $ | 14.25 | |||||||||||||
$17.10 – $19.00 | 16 | 7.2 | $ | 19.00 | 11 | $ | 19.00 | |||||||||||||
6,000 | 7.3 | $ | 2.27 | 2,023 | $ | 3.74 | ||||||||||||||
Pro forma information regarding net loss is required by SFAS No. 123, “Accounting for Stock-Based Compensation,” and has been determined as if Lightspan had accounted for its employee stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model for options subsequent to Lightspan’s initial public offering and using the minimum value method for nonpublic entities for options prior to Lightspan’s initial public offering, with the following weighted average assumptions for each of the years ended January 31, 2003, 2002 and 2001, respectively: ten year risk-free interest rates of 4.02%, 4.90% and 6.51%, respectively; dividend yields of 0%; weighted-average expected life of the options of four to five years; and expected volatility of 77% for the year ended January 31, 2003.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of such options. Lightspan’s pro forma information is as follows (in thousands, except per share data):
Years Ended January 31, | ||||||||||||
2003 | 2002 | 2001 | ||||||||||
Pro forma net loss | $ | (36,927 | ) | $ | (63,251 | ) | $ | (52,208 | ) | |||
Pro forma net loss per share, basic and diluted | $ | (0.78 | ) | $ | (1.36 | ) | $ | (1.19 | ) | |||
2000 Employee Stock Purchase Plan |
In October 1999, Lightspan adopted the 2000 Employee Stock Purchase Plan (the “Purchase Plan”) whereby a total of 500,000 shares of common stock were reserved for issuance under the Purchase Plan. This share reserve shall automatically increase each year, based upon a formula, by an amount not to exceed 1% of our total outstanding common stock and common stock equivalents at the time of the automatic increases. The Purchase Plan is intended to qualify as an employee stock purchase plan within the meaning of Section 423 of the Internal Revenue Code. Under the Purchase Plan, the board may authorize participation by eligible employees, including officers, in periodic offerings following the commencement of the Purchase Plan. For the years ended January 31, 2003 and 2002, employees purchased 448,570 and 536,999 shares, respectively, under the Purchase Plan. As of January 31, 2003, 238,676 shares remained available for issuance prior to the automatic increase.
Unless otherwise determined by the board, employees are eligible to participate in the Purchase Plan only if they are employed by Lightspan for at least 20 hours per week and are customarily employed by Lightspan for at least 5 months per calendar year. Employees who participate in an offering may have up to 15% of their earnings withheld pursuant to the Purchase Plan. The amount withheld is then used to purchase shares of common stock equal to 85% of the lower of the fair market value of the common stock at the commencement date or the end of each offering period. Employees may end their participation in the offering at any time during the offering period, and participation ends automatically on termination of employment.
In the event of a merger, reorganization, consolidation or liquidation, the board has discretion to provide that each right to purchase common stock will be assumed or an equivalent right substituted by the successor corporation or the board may provide for all sums collected by payroll deductions to be applied to purchase stock immediately prior to such merger or other transaction. The board has the authority to amend or terminate the Purchase Plan, provided, however, that no such action may adversely affect any outstanding rights to purchase common stock.
Common Shares Reserved for Future Issuance |
The following table summarizes common shares reserved for future issuance at January 31, 2003:
Common stock options | 1,208,510 | ||||
Employee stock purchase plan | 238,676 | ||||
Total common shares reserved for issuance | 1,447,186 | ||||
Warrants |
In connection with debt and equipment lease financing agreements entered into at various dates, Lightspan issued a total of 749,605 warrants to purchase: up to 150,000 shares of Series A preferred stock at $1.00 per share, up to 150,000 shares of Series B preferred stock at $3.00 per share, up to 96,625 shares and 57,564 shares of Series C preferred stock at $6.00 per share and $0.01 per share, respectively, up to 183,105
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
shares and 127,659 shares of Series D preferred stock at $3.76 and $4.70 per share, respectively, and up to 42,216 shares of Series E preferred stock at $5.00 per share.
The warrants to purchase Series A through D preferred stock were valued at an aggregate of $0.2 million and were recorded as debt discounts and accreted into interest expense over the life of the applicable financing agreements. The fair value of the warrants were estimated at the dates of grant using the minimum value method with the following assumptions: risk free interest rate at the date of grant of 6.00%; an expected warrant life of two years; and no annual dividends. There were no such amounts included in interest expense for the years ended January 31, 2003, 2002 and 2001.
In connection with the acquisition of Academic Systems Corporation (“Academic”), Lightspan converted 50,000 warrants to purchase Academic Series C preferred stock originally issued in connection with lease financing into 8,000 warrants to purchase Lightspan Series E preferred stock; and 34,216 warrants to purchase Academic Series F preferred stock originally issued in connection with debt financing into 34,216 warrants to purchase Lightspan Series E preferred stock. These warrants were valued at $1.25 per share and $.33 per share, respectively, in accordance with APB 16, using the minimum value method, and were accounted for as a part of the purchase price of Academic.
Upon completion of the Offering, and after the effect of the reverse split in January 2000, all of the above 749,605 warrants to purchase Series A through E preferred stock were converted, at their respective conversion rates, into warrants to purchase 403,591 shares of common stock. As of January 31, 2003, warrants to purchase 21,108 shares of common stock remained outstanding and expire on various dates through 2004.
Agreement with CINAR Corporation |
In October 1999, Lightspan agreed to pursue several potential strategic initiatives with CINAR Corporation. As part of the agreement, CINAR purchased 2,500,000 shares of Series E preferred stock at $5.00 per share, which converted into 1,250,000 shares of common stock upon completion of Lightspan’s initial public offering. CINAR also purchased $10 million of common stock, or 833,333 shares, in a private placement that occurred concurrently with Lightspan’s initial public offering at the initial public offering price of $12 per share. Lightspan also granted CINAR a warrant to purchase 500,000 shares of Series E preferred stock at an exercise price of $5.00 per share (which became a warrant to purchase 250,000 shares of common stock at an exercise price of $10.00 per share upon completion of our initial public offering) that will vest upon the achievement of various agreed-to strategic goals.
Lightspan has accounted for the warrants in accordance with EITF 96-18,Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling Goods or Services.Specifically, the shares that could be issued pursuant to the warrant will be valued the earlier of a) the date at which a commitment for performance is reached or b) the date at which CINAR’s performance is complete (the “measurement date”).
Lightspan believes that it is unlikely that a performance commitment, as described in EITF 96-18, will be reached until performance is complete. Therefore, the measurement date will be the date of completion of performance and accordingly, no expense had been recorded through January 31, 2003.
Deferred Advertising Expense |
On October 29, 1999, Lightspan issued 160,000 shares of Series E convertible preferred stock to Liberty Digital Corporation in exchange for $0.4 million in cash and $0.8 million in future Internet advertising credits. Lightspan determined that the fair value of the shares issued ($5.00 per share) was more readily determinable than the fair value of the advertising credits.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
As a result, Lightspan recorded the 160,000 shares issued at $0.8 million and recorded deferred advertising expense of $0.4 million. During the year ended January 31, 2001, Lightspan remeasured the value of the shares in accordance with EITF 96-18 and expensed $0.4 million.
Deferred Compensation |
Lightspan recorded deferred stock-based compensation of $0.1 million and $8.7 million for the years ended January 31, 2001 and 2000, respectively, in connection with the grants of certain stock options to employees and consultants with exercise prices per share below the fair values per share for our common stock on the dates those options were granted prior to the initial public offering. Lightspan also reduced deferred stock-based compensation by $0.3 million due to the cancellation of unvested options associated with the termination of employees during the year ended January 31, 2003. Amortization of deferred stock compensation was $0.2 million, $0.8 million and $2.4 million during the years ended January 31, 2003, 2002 and 2001, respectively.
8. Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for tax purposes. Significant components of Lightspan’s deferred tax assets are shown below (in thousands):
January 31, | |||||||||
2003 | 2002 | ||||||||
Deferred tax assets: | |||||||||
Net operating loss carryforwards | $ | 98,843 | $ | 91,206 | |||||
State capitalized research expenses | 1,955 | 1,955 | |||||||
Federal research and development credits | 8,910 | 8,358 | |||||||
Deferred revenue | 5,021 | 2,672 | |||||||
Other | 5,207 | 3,226 | |||||||
Total deferred tax assets | 119,936 | 107,417 | |||||||
Valuation allowance for deferred tax assets | (116,842 | ) | (100,849 | ) | |||||
Net deferred tax assets | 3,094 | 6,568 | |||||||
Deferred tax liabilities: | |||||||||
Acquired intangibles | (3,094 | ) | (6,568 | ) | |||||
Net deferred tax assets | $ | — | $ | — | |||||
A valuation allowance has been recognized to offset the deferred tax assets because management cannot conclude that it is more likely than not that the deferred tax assets will be realized.
At January 31, 2003, Lightspan had federal and California net operating loss carryforwards of approximately $274.0 million and $43.3 million respectively. The difference between the federal and California tax loss carryforwards is primarily attributable to capitalization of research expenses and limitations on net operating losses for California tax purposes. The federal tax loss carryforwards will begin expiring in 2007 unless previously utilized. Through January 31, 2003, California tax loss carryforwards of $26.5 million have expired, and additional loss carryforwards will continue to expire in fiscal 2004. Lightspan also has federal and California research and development tax credit carryforwards of $6.0 million and $4.4 million respectively, which will begin expiring in fiscal 2008 unless previously utilized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Pursuant to Internal Revenue Code Section 382 and 383, the use of Lightspan’s net operating loss and credit carryforwards may be limited as a result of a cumulative change in ownership of more than 50% during any given three-year period.
Lightspan’s net operating loss carryforwards as of January 31, 2003, will expire as follows (in millions):
Federal | State | ||||||||
2004 | — | $ | 3.3 | ||||||
2005 | — | 6.0 | |||||||
2006 | — | — | |||||||
2007 | $ | 0.1 | — | ||||||
2008 | 0.9 | — | |||||||
Remaining | $ | 273.0 | $ | 34.0 | |||||
Totals | $ | 274.0 | $ | 43.3 | |||||
9. Retirement Plan
Lightspan has a 401(k) defined contribution savings and retirement plan (the “Retirement Plan”). The Retirement Plan is for the benefit of all qualifying employees and permits employees voluntary contributions up to 20% of base salary limited by the IRS imposed maximum. On January 1, 1999, Lightspan began matching in cash 10% of employee contributions up to 4% of eligible compensation. Employer contributions were $0.08 million, $0.09 million and $0.1 million for the years ended January 31, 2003, 2002 and 2001, respectively.
10. Reportable Segments
Description of the Types of Products from Which Each Reportable Segment Derives its Revenues |
Lightspan has two reportable segments: K-12 and Higher Education. Revenues derived from the K-12 segment include the sale of Lightspan Achieve Now software licenses, subscription fees for The Lightspan Network and Lightspan eduTest Assessment products, implementation, training and support services and hardware and related accessories. Revenues derived from the Higher Education segment, comprised solely of Academic which was acquired in September 1999, include the sale of curriculum products licensed to colleges and then sold by the licensing colleges to students on a student-by-student basis for use with each class.
Measurement of Segment Profit or Loss and Segment Assets |
Lightspan evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Factors Management Used to Identify Lightspan’s Reportable Segments |
Lightspan’s reportable segments are business units that offer different products and services. Prior to the end of fiscal year 2001, and due to the Company’s restructuring in July 2000 and as the Company has focused on selling its software and fee-based online subscription products and services together, Lightspan re-evaluated its reportable segments and combined the Achieve Now and K-12 online segments, previously reported as separate segments, into the K-12 segment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Financial Information for Lightspan’s Segments |
The Company’s Higher Education segment remains solely comprised of Academic. The following information is for the K-12 and Higher Education segments (in thousands):
Year Ended January 31, 2003 | |||||||||||||
Higher | |||||||||||||
K-12 | Education | Consolidated | |||||||||||
Revenues from external customers | $ | 40,932 | $ | 9,076 | $ | 50,008 | |||||||
Interest income (expense), net | 374 | — | 374 | ||||||||||
Depreciation and amortization | 2,069 | 370 | 2,439 | ||||||||||
Loss from operations | (24,406 | ) | (9,109 | ) | (33,515 | ) | |||||||
Assets | 42,949 | 16,597 | 59,546 | ||||||||||
Other significant non cash items: | |||||||||||||
Deferred stock compensation | (24 | ) | — | (24 | ) | ||||||||
Amortization of deferred stock compensation | 227 | — | 227 | ||||||||||
Amortization of intangible assets | 2,254 | 5,750 | 8,004 |
Year Ended January 31, 2002 | |||||||||||||
Higher | |||||||||||||
K-12 | Education | Consolidated | |||||||||||
Revenues from external customers | $ | 47,154 | $ | 10,378 | $ | 57,532 | |||||||
Interest income (expense), net | 2,460 | — | 2,460 | ||||||||||
Depreciation and amortization | 2,857 | 408 | 3,265 | ||||||||||
Loss from operations | (46,130 | ) | (18,573 | ) | (64,703 | ) | |||||||
Assets | 71,679 | 25,741 | 97,420 | ||||||||||
Other significant non cash items: | |||||||||||||
Deferred stock compensation | (264 | ) | (25 | ) | (289 | ) | |||||||
Amortization of deferred stock compensation | 747 | — | 747 | ||||||||||
Amortization of intangible assets | 6,316 | 11,982 | 18,298 |
Year Ended January 31, 2001 | |||||||||||||
Higher | |||||||||||||
K-12 | Education | Consolidated | |||||||||||
Revenues from external customers | $ | 91,052 | $ | 8,022 | $ | 99,074 | |||||||
Interest income (expense), net | 6,219 | (4 | ) | 6,215 | |||||||||
Depreciation and amortization | 1,486 | 335 | 1,821 | ||||||||||
Restructuring charge | 1,600 | — | 1,600 | ||||||||||
Loss from operations | (16,944 | ) | (21,391 | ) | (38,335 | ) | |||||||
Assets | 116,362 | 37,536 | 153,898 | ||||||||||
Other significant non cash items: | |||||||||||||
Deferred stock compensation | (1,437 | ) | (62 | ) | (1,499 | ) | |||||||
Amortization of deferred stock compensation | 2,344 | 54 | 2,398 | ||||||||||
Amortization of intangible assets | 4,314 | 11,691 | 16,005 |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
11. Legal Matters
We are not currently involved in any material legal proceedings.
12. Unaudited Selected Quarterly Financial Data
The following is a summary of the quarterly results of operations for the years ended January 31, 2003 and 2002.
Quarter Ended | |||||||||||||||||
April 30 | July 31 | October 31 | January 31 | ||||||||||||||
2003 | |||||||||||||||||
Total revenues | $ | 10,270 | $ | 14,115 | $ | 12,577 | $ | 13,046 | |||||||||
Total cost of revenues | 3,216 | 3,774 | 3,912 | 3,592 | |||||||||||||
Gross margin | 7,054 | 10,341 | 8,665 | 9,454 | |||||||||||||
Total operating expenses | 19,594 | 18,458 | 16,729 | 14,248 | |||||||||||||
Loss before cumulative effect of a change in accounting principle | (12,406 | ) | (7,984 | ) | (7,940 | ) | (4,811 | ) | |||||||||
Cumulative effect of a change in accounting principle | (3,000 | ) | — | — | — | ||||||||||||
Net loss attributable to common stockholders | (15,406 | ) | (7,984 | ) | (7,940 | ) | (4,811 | ) | |||||||||
Net loss per share: | |||||||||||||||||
Basic and diluted net loss per share before cumulative effect of a change in accounting principle | $ | (0.26 | ) | $ | (0.17 | ) | $ | (0.17 | ) | $ | (0.10 | ) | |||||
Cumulative effect of a change in accounting principle | $ | (0.06 | ) | — | — | — | |||||||||||
Basic and diluted | $ | (0.32 | ) | $ | (0.17 | ) | $ | (0.17 | ) | $ | (0.10 | ) | |||||
2002 | |||||||||||||||||
Total revenues | $ | 10,657 | $ | 19,467 | $ | 13,354 | $ | 14,054 | |||||||||
Total cost of revenues | 3,938 | 5,571 | 4,297 | 3,923 | |||||||||||||
Gross margin | 6,719 | 13,896 | 9,057 | 10,131 | |||||||||||||
Total operating expenses | 25,583 | 28,442 | 26,568 | 23,913 | |||||||||||||
Net loss attributable to common stockholders | (17,793 | ) | (13,844 | ) | (17,070 | ) | (13,536 | ) | |||||||||
Net loss per share: | |||||||||||||||||
Basic and diluted | $ | (0.39 | ) | $ | (0.30 | ) | $ | (0.37 | ) | $ | (0.29 | ) |
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LIGHTSPAN, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share data)
July 31, | January 31, | |||||||||||
2003 | 2003 | |||||||||||
(Unaudited) | ||||||||||||
Assets | ||||||||||||
Current assets: Cash and cash equivalents | $ | 12,601 | $ | 18,497 | ||||||||
Short-term investments available for sale | — | 5,055 | ||||||||||
Accounts receivable, less allowance for doubtful accounts of $1,645 (July 31, 2003) and $1,652 (January 31, 2003) | 14,065 | 9,135 | ||||||||||
Finished goods inventory | 2,113 | 1,829 | ||||||||||
Other current assets | 1,090 | 1,075 | ||||||||||
Restricted cash | 827 | 827 | ||||||||||
Total current assets | 30,696 | 36,418 | ||||||||||
Property and equipment, net | 3,001 | 4,060 | ||||||||||
Goodwill, net of accumulated amortization of $22,280 (July 31, 2003) and $22,280 (January 31, 2003) | 11,741 | 11,741 | ||||||||||
Other intangible assets, net of accumulated amortization of $29,058 (July 31, 2003) and $25,226 (January 31, 2003) | 2,942 | 6,774 | ||||||||||
Deposits and other assets | 587 | 553 | ||||||||||
Total assets | $ | 48,967 | $ | 59,546 | ||||||||
Liabilities and Stockholders’ Equity | ||||||||||||
Current liabilities: | ||||||||||||
Accounts payable | $ | 2,193 | $ | 3,836 | ||||||||
Accrued liabilities | 8,876 | 10,278 | ||||||||||
Deferred revenue | 13,711 | 11,642 | ||||||||||
Total current liabilities | 24,780 | 25,756 | ||||||||||
Deferred revenue, less current portion | 934 | 682 | ||||||||||
Other liabilities | 72 | 129 | ||||||||||
Stockholders’ equity: | ||||||||||||
Convertible preferred stock, par value $0.001: | ||||||||||||
Authorized shares - 20,000 No shares issued and outstanding | — | — | ||||||||||
Common stock, par value $0.001: | ||||||||||||
Authorized shares – 250,000 Issued and outstanding – 47,684 (July 31, 2003) and 47,676 (January 31, 2003) | 48 | 48 | ||||||||||
Additional paid-in capital | 357,608 | 357,460 | ||||||||||
Deferred compensation | — | (27 | ) | |||||||||
Accumulated deficit | (334,475 | ) | (324,502 | ) | ||||||||
Total stockholders’ equity | 23,181 | 32,979 | ||||||||||
Total liabilities and stockholders’ equity | $ | 48,967 | $ | 59,546 | ||||||||
See accompanying notes.
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LIGHTSPAN, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(Unaudited)
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||||
Revenues: | ||||||||||||||||||
Software licenses | $ | 8,875 | $ | 8,901 | $ | 13,739 | $ | 13,457 | ||||||||||
On-line subscriptions | 2,957 | 2,245 | 5,822 | 4,816 | ||||||||||||||
Professional services | 2,411 | 2,308 | 4,600 | 4,764 | ||||||||||||||
Hardware and other | 1,135 | 661 | 1,848 | 1,348 | ||||||||||||||
Total revenues | 15,378 | 14,115 | 26,009 | 24,385 | ||||||||||||||
Cost of revenues: | ||||||||||||||||||
Software licenses | 1,333 | 1,588 | 2,334 | 2,445 | ||||||||||||||
On-line subscriptions | 483 | 380 | 937 | 954 | ||||||||||||||
Professional services | 1,185 | 1,271 | 2,269 | 2,541 | ||||||||||||||
Hardware and other | 966 | 535 | 1,583 | 1,050 | ||||||||||||||
Total cost of revenues | 3,967 | 3,774 | 7,123 | 6,990 | ||||||||||||||
Gross profit | 11,411 | 10,341 | 18,886 | 17,395 | ||||||||||||||
Operating expenses: | ||||||||||||||||||
Sales and marketing | 8,614 | 10,131 | 17,073 | 20,352 | ||||||||||||||
Technology and development | 2,153 | 3,448 | 4,535 | 7,236 | ||||||||||||||
General and administrative | 1,335 | 2,814 | 3,455 | 6,314 | ||||||||||||||
Stock-based compensation | 8 | 64 | 26 | 148 | ||||||||||||||
Amortization of intangible assets | 1,831 | 2,001 | 3,832 | 4,002 | ||||||||||||||
Total operating expenses | 13,941 | 18,458 | 28,921 | 38,052 | ||||||||||||||
Loss from operations | (2,530 | ) | (8,117 | ) | (10,035 | ) | (20,657 | ) | ||||||||||
Interest income, net | 31 | 133 | 62 | 267 | ||||||||||||||
Loss before cumulative effect of change in accounting principle | (2,499 | ) | (7,984 | ) | (9,973 | ) | (20,390 | ) | ||||||||||
Cumulative effect of a change in accounting principle | — | — | — | (3,000 | ) | |||||||||||||
Net loss | $ | (2,499 | ) | $ | (7,984 | ) | $ | (9,973 | ) | $ | (23,390 | ) | ||||||
Net loss per share: | ||||||||||||||||||
Basic and diluted loss per share before cumulative effect of change in accounting principle | $ | (0.53 | ) | $ | (1.69 | ) | $ | (2.10 | ) | $ | (4.33 | ) | ||||||
Cumulative effect of a change in accounting principle | — | — | — | (.64 | ) | |||||||||||||
Basic and diluted (see Note 3) | $ | (0.53 | ) | $ | (1.69 | ) | $ | (2.10 | ) | $ | (4.97 | ) | ||||||
Weighted average shares — basic and diluted | 4,751 | 4,716 | 4,759 | 4,710 | ||||||||||||||
See accompanying notes.
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LIGHTSPAN, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
Six Months Ended | ||||||||||||
July 31, | ||||||||||||
2003 | 2002 | |||||||||||
Operating activities: | ||||||||||||
Net loss | $ | (9,973 | ) | $ | (23,390 | ) | ||||||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
Depreciation and amortization of property and equipment | 1,073 | 1,270 | ||||||||||
Amortization of intangible assets | 3,832 | 4,002 | ||||||||||
Amortization of deferred stock-based compensation | 26 | 148 | ||||||||||
Loss on disposal of assets | 4 | 598 | ||||||||||
Cumulative effect of a change in accounting principle | — | 3,000 | ||||||||||
Changes in operating assets and liabilities: | ||||||||||||
Accounts receivable | (4,930 | ) | (6,404 | ) | ||||||||
Finished goods inventory | (284 | ) | (279 | ) | ||||||||
Deposits and other assets | (49 | ) | (186 | ) | ||||||||
Accounts payable | (1,643 | ) | (1,173 | ) | ||||||||
Deferred revenue | 2,321 | 2,728 | ||||||||||
Accrued and other liabilities | (1,439 | ) | (694 | ) | ||||||||
Net cash flows used in operating activities | (11,062 | ) | (20,380 | ) | ||||||||
Investing activities: | ||||||||||||
Purchase of short-term investments | — | (5,078 | ) | |||||||||
Maturities of short-term investments | 5,055 | 1,276 | ||||||||||
Purchase of property and equipment | (17 | ) | (144 | ) | ||||||||
Net cash flows provided by (used in) investing activities | 5,038 | (3,946 | ) | |||||||||
Financing activities: | ||||||||||||
Net proceeds from issuance of common stock and exercise of stock options | 148 | 283 | ||||||||||
Principal repayments on capital leases | (20 | ) | (121 | ) | ||||||||
Net cash flows provided by financing activities | 128 | 162 | ||||||||||
Decrease in cash and cash equivalents | (5,896 | ) | (24,164 | ) | ||||||||
Cash and cash equivalents at beginning of period | 18,497 | 35,033 | ||||||||||
Cash and cash equivalents at end of period | $ | 12,601 | $ | 10,869 | ||||||||
Supplemental disclosure of cash flow information: | ||||||||||||
Interest paid | $ | 34 | $ | 45 | ||||||||
Supplemental schedule of noncash investing and financing activities: | ||||||||||||
Deferred stock-based compensation | $ | (2 | ) | $ | (23 | ) | ||||||
See accompanying notes.
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LIGHTSPAN, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Lightspan, Inc., which include the accounts of its wholly owned subsidiary, Academic Systems Corporation (“Academic”), have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring items considered necessary for a fair presentation, have been included in the accompanying unaudited consolidated financial statements. All significant intercompany transactions and balances have been eliminated in consolidation. Historically, the operating results for Lightspan, Inc., Academic and eduTest (collectively “Lightspan” or the “Company”) have varied significantly from quarter to quarter because of seasonal influences on demand for its Lightspan Achieve Now, fee-based subscription online and Academic curriculum products and services based on school calendars, budget cycles, the sources and the timing of school districts’ funding. The Company’s operating results are expected to continue to vary significantly from quarter to quarter as a result of the same influences. Operating results for the three and six months ended July 31, 2003, or for any other interim period are not necessarily indicative of the results that may be expected for the full year ending January 31, 2004. For further information, refer to the consolidated financial statements and notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2003.
Organization and Business Activity
Lightspan, Inc. (“Lightspan”) was founded in 1993. Lightspan was incorporated as The Lightspan Partnership, Inc. and changed its name to Lightspan, Inc. on April 10, 2000. Lightspan provides curriculum-based educational software and online products and services to schools and school districts that are used both in school and at home. Lightspan Achieve Now is an interactive CD-ROM-based software product for kindergarten through eighth grade schools, or K-8, that covers the core curriculum of language arts, reading and math. The Lightspan Achieve Now program typically includes the Lightspan Achieve Now software and a PlayStation® game console that the student uses to operate the program at home throughout the school year. The Lightspan Network is an online subscription service that provides curriculum-based content for classroom and home use. The Lightspan Reading Center is a complete online reading program that supports student achievement and helps educators make more informed instructional decisions. Lightspan eduTest Assessment is a comprehensive accountability and assessment online subscription program that allows educators to quickly identify district, school, class and student strengths and needs relating to state and national standards. Academic software is a CD-ROM-based product that serves the college market with an English and mathematics curriculum designed to meet the needs of under-prepared students. Web-enhanced versions of Academic’s Interactive Mathematics and Interactive English allow colleges to implement the programs using client workstations that are located solely within an intranet, on the Internet in a distance learning configuration, or with a combination of intranet and Internet-based workstations.
Revenue
Lightspan derives its revenues from the licensing of software, online subscriptions, product implementation, materials, training services, customer support services, and the sale of PlayStation game consoles and accessories.
Software Licenses
Lightspan recognizes revenue from license agreements when a non-cancelable, non-contingent license agreement has been signed, the software product has been delivered, no uncertainties exist surrounding product acceptance, fees from the agreement are fixed and determinable, and collection is probable. In software arrangements that include multiple elements, such as those that include rights to software products, customer support and product implementation and training services, Lightspan allocates the total fee to each component of the arrangement based on objective evidence of its fair value, which is specific to Lightspan. The objective evidence for each element is based on the sale price of each element when sold or offered for sale separately. Lightspan uses the residual method to recognize revenue when a license agreement includes one or more elements to be delivered at a future date if evidence of the fair value of all undelivered elements exists. If evidence of
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the fair value of the undelivered elements does not exist, all revenue is deferred until sufficient evidence exists or all elements have been delivered.
The Company recognizes revenue in accordance with Statement of Position (“SOP”) 97-2, “Software Revenue Recognition,” and SOP 98-9, “Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions,” the Securities and Exchange Commissions (“SEC”) Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements” (“SAB 101”) and The American Institute of Certified Public Accountants (“AICPA”). We believe that our revenue recognition policy is consistent with this guidance and in accordance with generally accepted accounting principles. However, the accounting profession continues to discuss various provisions of these guidelines with the objective of providing additional guidance on their future application. These discussions and the issuance of new interpretations, once finalized, could lead to unanticipated changes in recognized revenue. They could also drive significant adjustments to our business practices that could result in increased administrative costs, lengthened sales cycles and other changes that could affect our results of operations.
Academic curriculum products are licensed to colleges and then sold by the licensing colleges to students on a student-by-student basis for use with each class, instead of a textbook. As Lightspan is not contractually obligated to provide further service after delivery of the license, Lightspan recognizes the full sales value of Academic license revenue generally upon delivery.
Historically, Lightspan has experienced minimal customer cancellations, forfeitures or discontinuations of licenses.
Online Subscriptions
Revenue derived from fee-based online subscriptions is recognized on a straight-line basis over the term of the agreement, generally one year.
Professional Services
Revenue derived from professional services, including product implementation and customer training provided by our professional development organization, is recognized as the services are performed in accordance with the standard implementation, training, service, and evaluation plans that Lightspan establishes for its customers. Revenue derived from telephone support and maintenance arrangements provided by the professional development organization is recognized ratably over the term of the support and maintenance period, generally one year.
Hardware
Revenue derived from hardware sales, including the sale of PlayStation game consoles and related accessories, is recognized upon delivery of the console and the related software product.
2. Goodwill and Other Intangible Assets
On February 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, or SFAS No. 142, “Goodwill and Other Intangible Assets” which required us to cease amortizing goodwill, and instead perform a transitional review for impairment as of February 1, 2002 and an annual review for impairment during the fourth quarter of fiscal 2003. Goodwill is considered to be potentially impaired if we determine the carrying value of the reporting unit exceeds its fair value. During the second quarter of fiscal 2003, we performed the transitional test by completing the first step of this review and determined that there was a potential impairment of goodwill relating to our higher education division, Academic Systems. As a result, as required by SFAS 142, we performed a second step utilizing an independent appraisal firm combined with internal analyses and other market and company information to measure the amount of the potential impairment. As a part of this second step, SFAS 142 required the fair value of the reporting unit be allocated to its assets and liabilities in the same manner used in accounting for business combinations. These analyses were judgmental in nature and included significant estimates and assumptions in forecasting revenues, expenses, growth rates and other relevant information in a discounted cash flow model with discount rates reflecting the appropriate inherent risk.
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This transitional impairment review from the second step of SFAS 142 resulted in a noncash charge of $3.0 million in the first quarter of fiscal 2003 to reduce the carrying value of the goodwill associated with our higher education division, Academic Systems. This charge is reflected as the cumulative effect of a change in accounting principle in the first quarter of fiscal 2003 as required by SFAS 142. Also in connection with the adoption of SFAS 142 we reclassified $1.2 million and $0.5 million of assembled workforce intangibles and related accumulated amortization respectively as required by the pronouncement.
We cannot assure you that when we complete our future annual or other periodic reviews for impairment of goodwill that a material impairment charge will not be recorded. Goodwill totaled $11.7 million at July 31, 2003.
Detail of intangible assets subject to amortization at July 31, 2003 was as follows:
Gross | Net | |||||||||||
Carrying | Accumulated | Carrying | ||||||||||
Value | Amortization | Value | ||||||||||
Customer base | $ | 17,500 | $ | 16,992 | $ | 508 | ||||||
Core technology | 10,400 | 10,225 | 175 | |||||||||
Trademark and trade name | 4,100 | 1,841 | 2,259 | |||||||||
$ | 32,000 | $ | 29,058 | $ | 2,942 | |||||||
Comparison of intangible assets between years:
July 31, | ||||||||
2003 | 2002 | |||||||
Customer base | $ | 17,500 | $ | 17,500 | ||||
Core technology | 10,400 | 10,400 | ||||||
Trademark and trade name | 4,100 | 4,100 | ||||||
32,000 | 32,000 | |||||||
Less accumulated amortization | (29,058 | ) | (21,224 | ) | ||||
$ | 2,942 | $ | 10,776 | |||||
Amortization expense for intangible assets was $1.8 million and $2.0 million for the three months ended July 31, 2003 and July 31, 2002, respectively; and $3.8 million and $4.0 million for the six months ended July 31, 2003 and July 31, 2002, respectively.
The estimated annual amortization expense for amortized intangible assets owned as of January 31, 2003 for each of the five succeeding fiscal years is as follows:
Years Ending January 31, 2004 | $ | 4,774 | ||
2005 | 520 | |||
2006 | 392 | |||
2007 | 300 | |||
2008 | 300 | |||
Thereafter | 488 | |||
$ | 6,774 | |||
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3. Computation of Net Loss per Share
Lightspan computes net loss per share in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128,Earnings Per Share.Under the provisions of SFAS No. 128, basic net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per share is computed by dividing the net income (loss) for the period by the weighted average number of common and common equivalent shares outstanding during the period. Potentially dilutive securities composed of incremental common shares issuable upon the exercise of stock options and warrants were excluded from diluted loss per share for the three and six month periods ended July 31, 2003 and the three and six month periods ended July 31, 2002 because the Company had a net loss for the period and the inclusion of outstanding stock options and warrants would be anti-dilutive. Basic and diluted loss per share, including the weighted average shares, have been adjusted to reflect the 1:10 reverse stock split which became effective at 5:00 P.M. on August 25, 2003.
4. Stock-based Compensation
As permitted by SFAS No. 123,Accounting for Stock-Based Compensation, Lightspan has elected to follow Accounting Principles Board Opinion (“APB”) No. 25,Accounting for Stock Issued to Employees,and related Interpretations in accounting for stock-based employee compensation. Under APB No. 25, if the exercise price of Lightspan’s employee and director stock options equals or exceeds the fair value of the underlying stock on the date of grant, no compensation expense is recognized. When the exercise price of the employee or director stock options is less than the fair value of the underlying stock on the grant date, Lightspan records deferred stock compensation for the difference and amortizes this amount to expense in accordance with FASB Interpretation No. 28, (“FIN 28”), over the vesting period of the options. Options or stock awards issued to non-employees are recorded at their fair value as determined in accordance with SFAS No. 123 and EITF 96-18, and recognized over the related service period.
Pro forma information regarding net loss is required by SFAS No. 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure,” and has been determined as if Lightspan had accounted for its employee stock options under the fair value method of that statement. The fair value of these options was estimated at the date of grant using the Black-Scholes option pricing model for options subsequent to Lightspan’s initial public offering and using the minimum value method for nonpublic entities for options prior to Lightspan’s initial public offering.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the vesting period of such options. Lightspan’s pro forma information is as follows (in thousands, except per share data):
Three Months Ended July 31, | Six Months Ended July 31, | |||||||||||||||
2003 | 2002 | 2003 | 2002 | |||||||||||||
Net loss, as reported | $ | (2,499 | ) | $ | (7,984 | ) | $ | (9,973 | ) | $ | (23,390 | ) | ||||
Add: Stock-based compensation expense included in reported net loss | 8 | 64 | 26 | 148 | ||||||||||||
Deduct: Total stock-based compensation expense determined under fair value based methods | $ | (223 | ) | $ | (699 | ) | $ | (502 | ) | $ | (1,332 | ) | ||||
Pro forma net loss | $ | (2,714 | ) | $ | (8,619 | ) | $ | (10,449 | ) | $ | (24,574 | ) | ||||
Basic and diluted net loss per share, as reported | $ | (0.53 | ) | $ | (1.69 | ) | $ | (2.10 | ) | $ | (4.97 | ) | ||||
Pro forma net loss per share, basic and diluted | $ | (0.57 | ) | $ | (1.83 | ) | $ | (2.20 | ) | $ | (5.22 | ) | ||||
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5. Comprehensive Income (Loss)
For the three and six months ended July 31, 2003 and July 31, 2002, comprehensive loss was equal to reported net loss.
6. Reportable Segments
Description of the Types of Products from Which Each Reportable Segment Derives its Revenues
Lightspan has two reportable segments: K-12 and Higher Education. Revenues derived from the K-12 segment include the sale of Lightspan Achieve Now software licenses, subscription fees for The Lightspan Network and Lightspan eduTest Assessment products, implementation, training and support services and hardware and related accessories. Revenues derived from the Higher Education segment, comprised solely of Academic which was acquired in September 1999, include the sale of curriculum products licensed to colleges, which are then sold by the licensing colleges to students on a student-by-student basis for use with each class.
Measurement of Segment Profit or Loss and Segment Assets
Lightspan evaluates performance and allocates resources based on profit or loss from operations before income taxes. The accounting policies of the reportable segments are the same as those described in the summary of significant accounting policies.
Factors Management Used to Identify Lightspan’s Reportable Segments
Lightspan’s reportable segments are business units that offer different products and services.
Financial Information for Lightspan’s Segments
The Company’s Higher Education segment remains solely comprised of Academic. The following information is for the K-12 and Higher Education segments (in thousands):
Three Months Ended July 31, 2003 | |||||||||||||
Higher | |||||||||||||
K-12 | Education | Consolidated | |||||||||||
Revenues from external customers | $ | 11,391 | $ | 3,987 | $ | 15,378 | |||||||
Interest income, net | 31 | — | 31 | ||||||||||
Depreciation and amortization of property and equipment | 431 | 73 | 504 | ||||||||||
Loss from operations | (2,679 | ) | 149 | (2,530 | ) | ||||||||
Assets | 33,427 | 15,540 | 48,967 | ||||||||||
Other significant non cash items: | |||||||||||||
Amortization of stock based compensation | 8 | — | 8 | ||||||||||
Amortization of intangible assets | 393 | 1,438 | 1,831 |
Three Months Ended July 31, 2003 | |||||||||||||
Higher | |||||||||||||
K-12 | Education | Consolidated | |||||||||||
Revenues from external customers | $ | 11,027 | $ | 3,088 | $ | 14,115 | |||||||
Interest income, net | 133 | — | 133 | ||||||||||
Depreciation and amortization of property and equipment | 502 | 108 | 610 | ||||||||||
Loss from operations | (6,778 | ) | (1,339 | ) | (8,117 | ) | |||||||
Assets | 53,984 | 24,218 | 78,202 | ||||||||||
Other significant non cash items: | |||||||||||||
Amortization of stock based compensation | 64 | — | 64 | ||||||||||
Amortization of intangible assets | 563 | 1,438 | 2,001 |
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Six Months Ended July 31, 2003 | |||||||||||||
Higher | |||||||||||||
K-12 | Education | Consolidated | |||||||||||
Revenues from external customers | $ | 20,237 | $ | 5,772 | $ | 26,009 | |||||||
Interest income, net | 62 | — | 62 | ||||||||||
Depreciation and amortization of property and equipment | 917 | 156 | 1,073 | ||||||||||
Loss from operations | (7,703 | ) | (2,332 | ) | (10,035 | ) | |||||||
Assets | 33,427 | 15,540 | 48,967 | ||||||||||
Other significant non cash items: | |||||||||||||
Amortization of stock based compensation | 26 | — | 26 | ||||||||||
Amortization of intangible assets | 956 | 2,876 | 3,832 |
Six Months Ended July 31, 2003 | ||||||||||||||||
Higher | ||||||||||||||||
K-12 | Education | Consolidated | ||||||||||||||
Revenues from external customers | $ | 20,051 | $ | 4,334 | $ | 24,385 | ||||||||||
Interest income, net | 267 | — | 267 | |||||||||||||
Depreciation and amortization of property and equipment | 1,105 | 165 | 1,270 | |||||||||||||
Loss from operations | (15,918 | ) | (4,739 | ) | (20,657 | ) | ||||||||||
Assets | 53,984 | 24,218 | 78,202 | |||||||||||||
Other significant non cash items: | ||||||||||||||||
Amortization of stock based compensation | 148 | — | 148 | |||||||||||||
Amortization of intangible assets | 1,127 | 2,875 | 4,002 |
7. Subsequent Events
Reverse Stock Split
At the Company’s Annual Meeting of Stockholders, on August 21, 2003, the stockholders of the Company approved a series of alternative amendments to the Company’s Amended and Restated Certificate of Incorporation, as amended, to effect at the discretion of the Board of Directors a reverse stock split of the Common Stock, with the effectiveness of one of such amendments to be determined by the Board of Directors. On August 22, 2003 the Board of Directors authorized the Company to effect a reverse split whereby each outstanding 10 shares was combined, converted and changed into one share of Common Stock. The reverse split became effective at 5:00 P.M. EDT on August 25, 2003. The Company’s trading symbol on NASDAQ will temporarily be “LSPND” for 20 trading days then revert back to “LSPN.” Computershare Trust Company of New York is the Company’s exchange agent for the reverse split.
Merger Agreement Signed
On September 9, 2003, the Company announced the signing of an Agreement and Plan of Merger with Plato Learning, Inc. Plato Learning will acquire all of the shares of the Company for approximately 6.6 million shares of Plato Learning common stock, based on an exchange ratio of 1.330 shares of Plato common stock for each share of the Company’s common stock. The value could change based on the price movement of Plato’s common stock, which is publicly traded on NASDAQ, as outlined in an 8-K filed on September 9, 2003 with the U.S. Securities and Exchange Commission.
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The following unaudited pro forma consolidated combined financial statements of PLATO give effect to the merger using the purchase method of accounting and the assumptions and adjustments described in the accompanying Notes to Unaudited Pro Forma Consolidated Combined Financial Statements.
These unaudited pro forma consolidated combined financial statements were prepared as if the merger had been completed as of November 1, 2001 for statement of operations purposes and as of July 31, 2003 for balance sheet purposes.
We present the unaudited pro forma consolidated combined financial statements for illustrative purposes only and they are not necessarily indicative of our financial position or results of operations that would have actually been reported had the merger occurred as of the dates indicated, nor are they necessarily indicative of our financial position or results of operations on a consolidated basis in the future.
The unaudited pro forma consolidated combined financial statements are based upon a preliminary purchase price and include adjustments, which are based upon preliminary estimates, to reflect the allocation of the purchase price to the acquired assets and liabilities of Lightspan before any integration adjustments. The final allocation of the purchase price will be determined after the completion of the merger and will be based upon actual tangible and intangible assets acquired and liabilities assumed. Actual adjustments may differ materially based upon the final allocation.
These unaudited pro forma consolidated combined financial statements are based upon the historical financial statements of PLATO and Lightspan and should be read in conjunction with the historical financial information contained in the reports PLATO and Lightspan have on file with the Securities and Exchange Commission.
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As of July 31, 2003 | ||||||||||||||||||
Pro Forma | ||||||||||||||||||
PLATO | Lightspan | Adjustments | Combined | |||||||||||||||
(In thousands) | ||||||||||||||||||
Assets | ||||||||||||||||||
Current assets: | ||||||||||||||||||
Cash and cash equivalents | $ | 26,916 | $ | 12,601 | — | $ | 39,517 | |||||||||||
Accounts receivable, net | 33,613 | 14,065 | — | 47,678 | ||||||||||||||
Prepaid expenses and other current assets | 4,392 | 4,030 | — | 8,422 | ||||||||||||||
Deferred income taxes | 5,523 | — | (5,523 | )(a) | — | |||||||||||||
Total current assets | 70,444 | 30,696 | (5,523 | ) | 95,617 | |||||||||||||
Property and equipment, net | 5,068 | 3,001 | — | 8,069 | ||||||||||||||
Product development costs, net | 14,252 | — | — | 14,252 | ||||||||||||||
Deferred income taxes | 11 | — | (11 | )(a) | — | |||||||||||||
Goodwill | 39,201 | 11,741 | (11,741 | )(b) | 65,068 | |||||||||||||
25,867 | (b) | |||||||||||||||||
Identified intangible assets, net | 13,879 | 2,942 | (2,942 | )(b) | 44,279 | |||||||||||||
30,400 | (b) | |||||||||||||||||
Other assets | 1,669 | 587 | — | 2,256 | ||||||||||||||
Total assets | $ | 144,524 | $ | 48,967 | $ | 36,050 | $ | 229,541 | ||||||||||
Liabilities and Stockholders’ Equity | ||||||||||||||||||
Current liabilities: | ||||||||||||||||||
Accounts payable | $ | 2,227 | $ | 2,193 | $ | — | $ | 4,420 | ||||||||||
Accrued employee salaries and benefits | 6,905 | — | — | 6,905 | ||||||||||||||
Accrued liabilities | 3,378 | 8,876 | 1,700 | (c) | 19,354 | |||||||||||||
5,400 | (c) | |||||||||||||||||
Deferred revenue | 20,263 | 13,711 | (700 | )(d) | 33,274 | |||||||||||||
Total current liabilities | 32,773 | 24,780 | 6,400 | 63,953 | ||||||||||||||
Deferred revenue | 4,801 | 934 | — | 5,735 | ||||||||||||||
Deferred income taxes | — | — | 749 | 749 | ||||||||||||||
Other liabilities | 377 | 72 | — | 449 | ||||||||||||||
Total liabilities | 37,951 | 25,786 | 7,149 | 70,886 | ||||||||||||||
Stockholders’ equity: | ||||||||||||||||||
Common stock | 164 | 48 | (48 | )(e) | 164 | |||||||||||||
Additional paid-in capital | 129,853 | 357,608 | (357,608 | )(e) | 181,935 | |||||||||||||
52,082 | (e) | |||||||||||||||||
Treasury stock | (18,401 | ) | — | — | (18,401 | ) | ||||||||||||
Retained earnings (accumulated deficit) | (4,298 | ) | (334,475 | ) | 334,475 | (e) | (4,298 | ) | ||||||||||
Accumulated other comprehensive loss | (745 | ) | — | — | (745 | ) | ||||||||||||
Total stockholders’ equity | 106,573 | 23,181 | 28,901 | 158,655 | ||||||||||||||
Total liabilities and stockholders’ equity | $ | 144,524 | $ | 48,967 | $ | 36,050 | $ | 229,541 | ||||||||||
See Notes to Unaudited Pro Forma Consolidated Combined Financial Statements
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Nine Months Ended July 31, 2003 | |||||||||||||||||||
Pro Forma | |||||||||||||||||||
PLATO | Lightspan | Adjustments | Combined | ||||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||||
Revenues: | |||||||||||||||||||
License fees | $ | 38,694 | $ | 29,363 | $ | — | $ | 68,057 | |||||||||||
Services | 11,597 | 7,025 | — | 18,622 | |||||||||||||||
Other | 4,426 | 2,667 | — | 7,093 | |||||||||||||||
Total revenues | 54,717 | 39,055 | — | 93,772 | |||||||||||||||
Cost of revenues: | |||||||||||||||||||
License fees | 2,603 | 5,091 | — | 7,694 | |||||||||||||||
Services | 1,908 | 3,489 | — | 5,397 | |||||||||||||||
Other | 3,951 | 2,135 | — | 6,086 | |||||||||||||||
Total cost of revenues | 8,462 | 10,715 | — | 19,177 | |||||||||||||||
Gross profit | 46,255 | 28,340 | — | 74,595 | |||||||||||||||
Operating expenses: | |||||||||||||||||||
Sales and marketing | 33,008 | 23,935 | — | 56,943 | |||||||||||||||
General and administrative | 8,754 | 5,848 | — | 14,602 | |||||||||||||||
Product development and customer support | 9,713 | 7,553 | — | 17,266 | |||||||||||||||
Amortization of intangibles | 1,270 | 5,833 | (5,833 | )(f) | 4,758 | ||||||||||||||
3,488 | (f) | ||||||||||||||||||
Restructuring charge | 802 | — | — | 802 | |||||||||||||||
Total operating expenses | 53,547 | 43,169 | (2,345 | ) | 94,371 | ||||||||||||||
Loss from operations | (7,292 | ) | (14,829 | ) | 2,345 | (19,776 | ) | ||||||||||||
Interest income | 295 | 132 | — | 427 | |||||||||||||||
Interest expense | (88 | ) | (87 | ) | — | (175 | ) | ||||||||||||
Other expense, net | (43 | ) | — | — | (43 | ) | |||||||||||||
Loss before income taxes | (7,128 | ) | (14,784 | ) | 2,345 | (19,567 | ) | ||||||||||||
Income taxes | (2,185 | ) | — | 2,185 | (a) | — | |||||||||||||
Net loss | $ | (4,943 | ) | $ | (14,784 | ) | $ | 160 | $ | (19,567 | ) | ||||||||
Basic and diluted loss per share: | |||||||||||||||||||
Historical | $ | (0.30 | ) | $ | (3.11 | ) | |||||||||||||
Pro forma | $ | (0.85 | ) | ||||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||
Historical | 16,558 | 4,757 | |||||||||||||||||
Pro forma | (4,757 | )(g) | 23,134 | ||||||||||||||||
6,576 | (g) | ||||||||||||||||||
See Notes to Unaudited Pro Forma Consolidated Combined Financial Statements
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Year Ended October 31, 2002 | |||||||||||||||||||
Pro Forma | |||||||||||||||||||
PLATO | Lightspan | Adjustments | Combined | ||||||||||||||||
(In thousands, except per share amounts) | |||||||||||||||||||
Revenues: | |||||||||||||||||||
License fees | $ | 57,691 | $ | 37,079 | $ | — | $ | 94,770 | |||||||||||
Services | 11,780 | 9,941 | — | 21,721 | |||||||||||||||
Other | 4,920 | 3,996 | — | 8,916 | |||||||||||||||
Total revenues | 74,391 | 51,016 | — | 125,407 | |||||||||||||||
Cost of revenues: | |||||||||||||||||||
License fees | 4,150 | 7,153 | — | 11,303 | |||||||||||||||
Services | 1,608 | 5,127 | — | 6,735 | |||||||||||||||
Other | 3,728 | 2,545 | — | 6,273 | |||||||||||||||
Total cost of revenues | 9,486 | 14,825 | — | 24,311 | |||||||||||||||
Gross profit | 64,905 | 36,191 | — | 101,096 | |||||||||||||||
Operating expenses: | |||||||||||||||||||
Sales and marketing | 40,355 | 40,990 | — | 81,345 | |||||||||||||||
General and administrative | 11,635 | 11,476 | — | 23,111 | |||||||||||||||
Product development and customer support | 12,599 | 15,647 | — | 28,246 | |||||||||||||||
Amortization of intangibles | 1,053 | 10,581 | (10,581 | )(f) | 5,704 | ||||||||||||||
4,651 | (f) | ||||||||||||||||||
Purchased in-process research and development | 360 | — | — | 360 | |||||||||||||||
Total operating expenses | 66,002 | 78,694 | (5,930 | ) | 138,766 | ||||||||||||||
Loss from operations | (1,097 | ) | (42,503 | ) | 5,930 | (37,670 | ) | ||||||||||||
Interest income | 851 | 748 | — | 1,599 | |||||||||||||||
Interest expense | (131 | ) | (111 | ) | — | (242 | ) | ||||||||||||
Other expense, net | (164 | ) | — | — | (164 | ) | |||||||||||||
Loss before income taxes and cumulative effect of change in accounting principle | (541 | ) | (41,866 | ) | 5,930 | (36,477 | ) | ||||||||||||
Income taxes | 600 | — | (600 | )(a) | — | ||||||||||||||
Loss before cumulative effect of change in accounting principle | $ | (1,141 | ) | $ | (41,866 | ) | $ | 6,530 | $ | (36,477 | ) | ||||||||
Basic and diluted loss per share: | |||||||||||||||||||
Historical | $ | (0.07 | ) | $ | (8.89 | ) | |||||||||||||
Pro forma | $ | (1.57 | ) | ||||||||||||||||
Weighted average common shares outstanding: | |||||||||||||||||||
Historical | 16,600 | 4,707 | |||||||||||||||||
Pro forma | (4,707 | )(g) | 23,176 | ||||||||||||||||
6,576 | (g) | ||||||||||||||||||
See Notes to Unaudited Pro Forma Consolidated Combined Financial Statements
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NOTES TO UNAUDITED PRO FORMA CONSOLIDATED COMBINED
1. Agreement and Plan of Merger
On September 9, 2003, we signed an Agreement and Plan of Merger with Lightspan, Inc. (“Lightspan”). On November 17, 2003, the stockholders of both PLATO Learning and Lightspan approved the Agreement and Plan of Merger. Pursuant to the merger, we acquired all the outstanding shares of publicly-held Lightspan in exchange for shares of our common stock. Each share of Lightspan common stock was exchanged for 1.33 shares of our common stock. The definitive exchange ratio was based on the volume-weighted average of the closing price of our common stock for the 15 trading days prior to the closing date, which was $10.59, and we issued approximately 6.6 million shares of our common stock in this transaction.
2. Basis of Pro Forma Presentation
These unaudited pro forma consolidated combined financial statements were prepared as if the merger had been completed as of November 1, 2001 for statement of operations purposes and as of July 31, 2003 for balance sheet purposes.
We present the unaudited pro forma consolidated combined financial statements for illustrative purposes only and they are not necessarily indicative of our financial position or results of operations that would have actually been reported had the merger occurred as of the dates indicated, nor are they necessarily indicative of our financial position or results of operations on a consolidated basis in the future.
The unaudited pro forma consolidated combined financial statements include adjustments, which are based upon preliminary estimates, to reflect the allocation of the purchase price to the acquired assets and liabilities of Lightspan before any integration adjustments. The final allocation of the purchase price will be determined after the completion of the merger and will be based upon actual tangible and intangible assets acquired and liabilities assumed. Actual adjustments may differ materially based upon the final allocation.
These unaudited pro forma consolidated combined financial statements are based upon the historical financial statements of PLATO and Lightspan and should be read in conjunction with the historical financial information contained in the reports PLATO and Lightspan have on file with the Securities and Exchange Commission.
3. Estimated Purchase Price
The unaudited pro forma consolidated combined financial statements reflect the issuance of approximately 6.6 million shares of PLATO common stock for the merger. The fair value of the common stock issued, using a PLATO share price of $7.92 calculated in accordance with EITF 99-12, was approximately $52,082,000. The number of shares issued to Lightspan stockholders included shares issued for Lightspan’s in-the-money stock options. The fair value of the Lightspan options and warrants assumed in connection with the merger and converted to PLATO options and warrants is not significant.
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The merger will be accounted for under SFAS 141 using the purchase method of accounting. Acquired assets and liabilities are recorded at their estimated fair values on the merger date. An appraisal firm performed the valuation of identified intangible assets, which consist of a non-compete agreement, customer list, tradename and acquired technology and curriculum content. Goodwill and identified intangible assets are subject to the provisions of SFAS 142. Goodwill and identified intangible assets with indefinite lives will not be amortized and will be reviewed for impairment on at least an annual basis. Identified intangible assets with definite lives will be amortized over an estimated two to nine years. The final fair value of tangible assets and liabilities and goodwill and identified intangible assets to be recorded from this transaction is dependent upon the final management assumptions and conclusions with the assistance of a third party valuation of the acquired assets and may differ materially from our estimates used in this analysis.
The estimated total purchase price is as follows (in thousands):
July 31, | ||||
2003 | ||||
Estimated value of common stock issued | $ | 52,082 | ||
Estimated direct acquisition costs | 1,700 | |||
Estimated liabilities assumed | 25,086 | |||
Estimated accrual of additional liabilities | 5,400 | |||
$ | 84,268 | |||
The estimated allocation of the total purchase price is as follows (in thousands):
July 31, | ||||
2003 | ||||
Estimated fair value of tangible assets acquired | $ | 34,284 | ||
Estimated fair value of identified intangible assets | 30,400 | |||
Estimated goodwill | 25,867 | |||
Estimated deferred taxes | (6,283 | ) | ||
$ | 84,268 | |||
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4. Pro Forma Adjustments
The following pro forma adjustments have been reflected in the accompanying financial statements:
(a) To adjust deferred tax assets as a result of the merger. Except for the merger, PLATO management fully expected to realize the deferred tax assets of $5,534 at July 31, 2003 given PLATO’s expected and historically strong fourth quarter as well as the cumulative profits expected for the three year period ending October 31, 2003. However, with the merger and the significance of operating losses associated with Lightspan’s operations, the outlook for recovering any deferred tax assets has changed and may be uncertain. As a result, net deferred tax assets, excluding the deferred tax liability relating to tax deductible goodwill which cannot be used to support realization of the other net deferred tax assets, have been fully reserved for in the pro forma balance sheet and no tax benefit was recorded in either pro forma statement of operations. The realization of the deferred tax assets is dependent on future taxable income, which will be assessed based on the weight of available evidence at the time the merger transaction is recorded in PLATO’s quarter ending January 31, 2004 and in accordance with SFAS 141 and SFAS 109.
(b) To eliminate the historical goodwill and intangible assets of Lightspan and to record estimated goodwill and identified intangible assets resulting from the merger. Estimated intangible assets include customer relationships of $19,800, developed content and technology of $7,300, trademarks and tradenames of $2,300, and a non-compete agreement of $1,000.
(c) To record the accrual of estimated direct acquisition costs of $1,700 and additional liabilities of $5,400 resulting from the merger. Estimated additional liabilities include severance payments of $2,300, change in control payments of $2,100 and lease termination costs of $1,000.
(d) To reduce Lightspan deferred revenue to estimated fair value in accordance with Emerging Issues Task Force No. 01-3, “Accounting in a Business Combination for Deferred Revenue of an Acquiree”.
(e) To eliminate the historical stockholders’ equity accounts of Lightspan and to record the estimated value of PLATO common stock to be issued in the merger. Estimated amortization of identified intangible assets is based on estimated lives of 7 years for customer relationships, 9 years for developed content and technology. 4.5 years for trademarks and tradenames, and 2 years for the non-compete agreement.
(f) To eliminate the historical amortization of Lightspan intangible assets and to record the estimated amortization of identified intangible assets resulting from the merger. Estimated amortization of identified intangible assets is based on estimated lives of 7 years for customer relationships, 9 years for developed content and technology, 4.5 years for trademarks and tradenames, and 2 years for the non-compete agreement.
(g) To adjust weighted-average shares outstanding for the PLATO common shares issued for the merger in exchange for the outstanding Lightspan common shares.
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SIGNATURE
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.
PLATO LEARNING, INC. | ||||
By: | /s/ Gregory J. Melsen | |||
Name: | Gregory J. Melsen | |||
Title: | Vice President, Finance and Chief Financial Officer |
January 9, 2004
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EXHIBIT INDEX
Exhibit No. | Document | |
2.1 | Agreement and Plan of Merger, dated September 9, 2003, among PLATO Learning, Inc., LSPN Merger Corp., and Lightspan, Inc. (incorporated by reference to Annex A to the Joint Proxy Statement/Prospectus included in PLATO Learning, Inc. Form S-4, as amended, Registration No. 333-109209) | |
23.1 | Consent of Ernst & Young LLP | |
99.1 | Press Release dated November 17, 2003* | |
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