<PAGE> 1
This filing is made pursuant
to Rule 424(b)(4) under
the Securities Act of
1933 in connection with
Registration No. 333-90103
7,500,000 Shares
LIGHTSPAN LOGO
Common Stock
------------------
Prior to this offering, there has been no public market for our common
stock. Our common stock has been approved for listing on The Nasdaq Stock
Market's National Market under the symbol "LSPN."
The underwriters have an option to purchase a maximum of 1,125,000
additional shares to cover over-allotments of shares.
In connection with and conditioned upon the sale of the shares in the
initial public offering, we will sell to CINAR Corporation in a concurrent
private placement an additional $10.0 million of shares of common stock at the
initial public offering price. Also conditioned upon the sale of the shares in
the initial public offering and other requirements, we will sell to Cox
Communications Holdings, Inc. and Gateway Companies, Inc. in concurrent private
placements an additional $12.5 million and $3.0 million, respectively, of shares
of common stock at the initial public offering price.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" ON PAGE 7.
<TABLE>
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UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS LIGHTSPAN
-------------- -------------- --------------
<S> <C> <C> <C>
Per Share............................................ $12.00 $0.84 $11.16
Total................................................ $90,000,000 $6,300,000 $83,700,000
</TABLE>
Delivery of the shares of common stock will be made on or about February
15, 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
CREDIT SUISSE FIRST BOSTON
THOMAS WEISEL PARTNERS LLC
U.S. BANCORP PIPER JAFFRAY
The date of this prospectus is February 10, 2000.
<PAGE> 2
DESCRIPTION OF INSIDE-COVER ARTWORK
PANEL ONE
[PHOTO OF THREE SMILING CHILDREN WITH "HOW SMART CAN A KID GET?"]
INSIDE TWO-PAGE GATEFOLD SPREAD
[PHOTOS OF LIGHTSPAN ACHIEVE NOW PRODUCTS]
LIGHTSPAN ACHIEVE NOW
A series of media-rich, interactive software programs for K-8 students that
covers the core curriculum -- language arts, reading and math. Used in
classrooms and at home, Lightspan Achieve Now adds critical learning time to
every day, gets families involved in their children's learning, and is highly
motivating to students. The availability of a very low cost delivery platform
lets schools provide this learning opportunity to all students.
ACADEMIC SYSTEMS
Interactive, comprehensive curriculum in Mathematics and English which
addresses the needs of under-prepared college students. The courses are designed
to adapt to each student's academic needs and learning style. Faculty members
orchestrate the instruction and receive reports on student performance on the
Internet or the college's local area network.
[PHOTO OF ACADEMIC SYSTEMS WEB SITE HOME PAGE]
LIGHTSPAN YOUR SCHOOL ONLINE
A free home page builder for schools. It integrates with Lightspan
PageOne's classroom home pages and includes the ability to organize Web links, a
calendar to keep students and families informed about school events, and Web
usage statistics.
THE LIGHTSPAN NETWORK(R)
The Lightspan Network is Lightspan's premier online classroom resource,
providing a rich array of K-8 curriculum-based content correlated to state
academic standards. A subscription service, TLN provides a commercial-free
environment that offers curriculum that can be customized by state, as well as
in-house customer support.
LIGHTSPAN PAGEONE
Lets teachers easily build a classroom home page with the online
educational resources they need: access to 115,000 reviewed Web sites, learning
activities, lesson plans, tools to post homework, online dictionary, thesaurus
and encyclopedias, and the ability to share these features with students'
families.
[PHOTO OF LIGHTSPAN.COM HOME PAGE]
LIGHTSPAN.COM
The portal for K-12 education. This site is the gateway to all the learning
services Lightspan provides: Lightspan PageOne, Global Schoolhouse, StudyWeb,
The Lightspan Network, The Lightspan Learning Store, and Your School Online.
GLOBAL SCHOOLHOUSE
An online community of educators who share ideas and projects for online
education. Global Schoolhouse facilitates collaborative learning projects among
classrooms, community organizations, businesses and individuals around the
world.
THE LIGHTSPAN LEARNING STORE
An online store developed in partnership with Smarterkids.com. The
Lightspan Learning Store offers educational products to teachers and families.
STUDYWEB
An online "homework helper" categorized by subject matter and including
grade level recommendations and content descriptions. Study Web helps students
easily find research resources on the Web without encountering inappropriate
materials.
<PAGE> 3
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TABLE OF CONTENTS
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PAGE
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<S> <C>
PROSPECTUS SUMMARY.................... 3
RISK FACTORS.......................... 7
FORWARD-LOOKING STATEMENTS............ 16
USE OF PROCEEDS....................... 17
DIVIDEND POLICY....................... 17
CAPITALIZATION........................ 18
DILUTION.............................. 20
SELECTED CONSOLIDATED HISTORICAL AND
PRO FORMA FINANCIAL DATA............ 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND OPERATING
RESULTS............................. 24
BUSINESS.............................. 37
</TABLE>
<TABLE>
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PAGE
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<S> <C>
MANAGEMENT............................ 58
RELATED-PARTY TRANSACTIONS............ 66
PRINCIPAL STOCKHOLDERS................ 68
DESCRIPTION OF CAPITAL STOCK.......... 72
SHARES ELIGIBLE FOR FUTURE SALE....... 74
UNDERWRITING.......................... 76
NOTICE TO CANADIAN RESIDENTS.......... 79
LEGAL MATTERS......................... 80
EXPERTS............................... 80
ADDITIONAL INFORMATION................ 80
INDEX TO FINANCIAL STATEMENTS......... F-1
</TABLE>
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU WHEN YOU ARE CONSIDERING THE INFORMATION IN THIS
PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT
IS DIFFERENT. THIS DOCUMENT MAY BE USED ONLY WHERE IT IS LEGAL TO SELL THESE
SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE ON THE DATE OF
THIS DOCUMENT.
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL MARCH 6, 2000 (25 DAYS AFTER COMMENCEMENT OF THE OFFERING), ALL
DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS AN
UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
<PAGE> 4
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in this offering. You should read the entire prospectus carefully.
THE LIGHTSPAN PARTNERSHIP, INC.
The Lightspan Partnership, Inc. provides curriculum-based educational
software and Internet products and services used both in school and at home. Our
technology, delivery systems and content help increase student interest in
learning, parental involvement in their children's education, and productive
interaction among teachers, parents and students. Over 340 studies by schools
that use our products and services show that our products improve overall
student performance.
Lightspan Achieve Now, our product for students in kindergarten through
eighth grade, or K-8, is a series of media-rich, interactive software programs
that covers the core curriculum -- language arts, reading and math. We sell it
exclusively to schools and school districts for use in both the classroom and at
home. The Lightspan Achieve Now curriculum has already been purchased by over
873 school districts in 46 states and implemented in over 2,250 schools and
11,075 classrooms. Our Academic Systems products provide a series of
curriculum-based software that addresses the math and writing needs of under-
prepared college students. These products are currently used in over 225
colleges and universities across the United States.
We offer the following integrated family of Internet products and services
through our Web site, Lightspan.com:
- The Lightspan Network, a curriculum-based online subscription service
marketed to schools for classroom and home use;
- Lightspan PageOne, a service that enables teachers to easily create
customized home pages for their classrooms;
- Global Schoolhouse, a leading education Web site where teachers can
develop and manage collaborative learning projects online;
- StudyWeb, a leading research Web site that helps parents, teachers and
students find educational information and resources on the Web;
- The Lightspan Learning Store, a Web site that sells educational products
online; and
- selected additional content for teachers, parents and students.
The need to improve student achievement is a top priority in American
education, and educators are increasingly using educational technology to help
accomplish this objective. According to the Department of Education, the United
States spent an estimated $351 billion on kindergarten through twelfth grade, or
K-12, education in the 1997 - 1998 school year, and industry sources project
that spending on educational technology will increase from an estimated $7
billion during 1998 - 1999 to approximately $10 billion by the 2001 - 2002
school year. This growth has created a significant market opportunity for
educational technology providers whose products and services help educators
provide students with the tools they need to improve achievement. By increasing
students' time spent on the core curriculum, their motivation to learn, and
their families' involvement with their learning, our curriculum-based
educational software and Internet products and services provide a unique and
powerful solution for improving student achievement.
Our objective is to become the premier online education destination for
teachers, parents and students, as well as the leading provider of
technology-delivered, curriculum-based supplemental study materials in
kindergarten through college education. To achieve this objective, we expect to
draw on the educational technology and Internet experience of our management,
sales and marketing and Internet teams to pursue the following strategies:
- capitalize on our current market position;
- continue to develop and enhance Lightspan.com;
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- enhance our Lightspan Achieve Now curriculum with content delivery
available through new Internet and broadband technologies;
- create additional Internet-based revenue streams; and
- pursue strategic acquisitions and relationships.
We were founded in 1993 on the philosophy of using technology to increase
student achievement by connecting the school to the home. Through June 1996, our
activities consisted primarily of designing and developing Lightspan Achieve
Now. To supplement our product offerings, we introduced The Lightspan Network in
January 1997 and launched Lightspan PageOne in June 1999. We acquired Academic
Systems and Global Schoolhouse in September 1999 and StudyWeb in October 1999.
Our principal executive offices are located at 10140 Campus Point Drive, San
Diego, CA 92121, where our telephone number is (858) 824-8000. We maintain Web
sites at www.lightspan.com and www.academic.com. Information on our Web sites is
not part of this prospectus.
THE OFFERING
Common stock offered.................... 7,500,000 shares
Common stock to be outstanding after the
offering................................ 43,101,305 shares
Use of proceeds......................... For general corporate purposes,
including expanding our sales and
marketing activities and continued
development of our products and
services, particularly our Internet
offerings. See "Use of Proceeds."
Proposed Nasdaq National Market
symbol.................................. LSPN
SHARES OUTSTANDING AFTER THE OFFERING
The number of shares of common stock to be outstanding after the offering
is based upon the actual number of shares outstanding as of December 31, 1999,
and giving effect to:
- the conversion of all of our outstanding preferred stock into 27,087,826
shares of common stock in connection with the offering;
- 833,333 shares expected to be issued to CINAR Corporation in a private
placement concurrently with the closing of this offering;
- 1,041,667 shares expected to be issued to Cox Communication Holdings,
Inc. in a private placement concurrently with the closing of this
offering;
- 250,000 shares expected to be issued to Gateway Companies, Inc. in a
private placement concurrently with the closing of this offering; and
- warrants to purchase up to 1,663,056 shares of common stock, which will
be exercised for $0.02 per share upon completion of this offering.
However, it does not include, as of December 31, 1999:
- 5,153,941 shares of common stock reserved for issuance under our stock
benefit plans, 3,737,451 of which were covered by outstanding options
with a weighted average exercise price of $3.96 per share and 242,773 of
which were available for future grants;
- 1,250,000 and 500,000 additional shares of common stock that will be
reserved for issuance as of the closing of this offering under our 2000
Equity Incentive Plan and our 2000 Employee Stock Purchase Plan,
respectively;
- warrants to purchase 749,605 shares of preferred stock, which will become
warrants to purchase 403,591 shares of common stock at a weighted average
exercise price of $6.64 per share upon completion of this offering;
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- a warrant to purchase 750,000 shares of common stock scheduled to be
issued to Cox Communications Holdings, Inc. concurrently with the closing
of this offering; and
- a warrant to purchase 500,000 shares of Series E preferred stock issued
to CINAR Corporation.
RECENT DEVELOPMENTS
In October 1999, we agreed to pursue several potential strategic
initiatives with CINAR Corporation. CINAR is an integrated entertainment and
education company that develops, produces, markets and distributes high-quality
programming and supplemental education products for children, families and
educators worldwide. CINAR is an international supplier of animated and
live-action children's and family programming that it markets and distributes to
broadcast, cable and other media outlets. As part of our agreement, CINAR
purchased 2,500,000 shares of our Series E preferred stock, which will convert
into 1,250,000 shares of common stock at the close of this offering, at $5.00
per share. CINAR also agreed to purchase $10 million of our common stock at the
initial public offering price in a private placement scheduled to occur
concurrently with our initial public offering. Thus, we will issue 833,333
shares to CINAR. We also granted CINAR a warrant to purchase 500,000 shares of
our Series E preferred stock that will vest upon the achievement of various
agreed-to strategic goals. This warrant will become a warrant to purchase
250,000 shares of common stock at the close of this offering.
In January 2000, we agreed to pursue strategic initiatives with Cox
Communications Holdings, Inc. Cox Communications is among the nation's largest
broadband communications companies, serving more than 3.8 million customers in
18 locations. Cox Communications also provides a wide variety of services to
schools in their cable communities through its "Cable in the Classroom"
initiative which provides public schools with free basic cable service and
learning guides. As part of our agreement, Cox Communications agreed to purchase
$12.5 million of our common stock, or 1,041,667 shares, in a private placement
scheduled to occur concurrently with our initial public offering upon
satisfaction of several conditions. We also granted Cox Communications a warrant
to purchase 750,000 shares of our common stock. The warrant will vest upon the
achievement of various agreed-to strategic goals related to the proposed use of
Lightspan Achieve Now and Lightspan.com products in trials by Cox Communications
of cable offerings over digital set-top boxes.
Also, in January 2000, Gateway Companies, Inc. agreed to purchase $3.0
million of our common stock, or 250,000 shares, in a private placement that is
scheduled to occur concurrently with our initial public offering. This
investment by Gateway is subject to the satisfaction of several conditions,
including our jointly entering into an Internet sponsorship agreement whereby
Gateway would become a sponsor of Lightspan.com. Gateway, a manufacturer of
personal computers, is Lightspan's preferred provider of personal computers.
SUMMARY CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS)
The following financial information should be read together with the
"Selected Consolidated Historical and Pro Forma Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Operating
Results" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH PERIOD ENDED
JANUARY 31, 1999 OCTOBER 31, 1999
----------------------- -----------------------
ACTUAL PRO FORMA(1) ACTUAL PRO FORMA(1)
-------- ------------ -------- ------------
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues......................................... $ 10,870 $ 17,246 $ 11,282 $ 17,010
Gross profit..................................... 3,210 7,447 4,549 8,692
Loss from operations............................. (33,984) (53,800) (34,999) (45,252)
Net loss......................................... (33,566) (53,271) (34,768) (45,146)
</TABLE>
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<TABLE>
<CAPTION>
AT OCTOBER 31, 1999
----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(3)
-------- ------------ --------------
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................. $ 22,672 $ 35,705 $142,475
Working capital (deficit)................................. (20,570) (7,537) 99,233
Total assets.............................................. 98,767 111,800 218,570
Capital lease obligations, less current portion........... 526 526 526
Total stockholders' equity................................ 33,346 46,379 153,149
</TABLE>
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(1) The Pro Forma consolidated statement of operations data for the year ended
January 31, 1999 and the nine months ended October 31, 1999 assumes that we
purchased Academic Systems as of the beginning of each of these periods and
is based on our historical operating results and those of Academic Systems
for the periods presented, giving effect to the amortization of intangibles
related to the acquisition and decreased interest income representing
foregone interest income at an assumed 3% rate of return.
(2) The Pro Forma column gives effect to the collection of $13,000,000 in stock
subscriptions receivable in November 1999, the exercise of warrants to
purchase 1,663,056 shares of common stock, and the conversion of all of our
outstanding shares of preferred stock into shares of common stock upon the
closing of this offering.
(3) The As Adjusted column reflects our receipt of the net proceeds from our
private sales of common stock to CINAR, Cox Communications and Gateway,
scheduled to occur concurrently with this offering, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses.
-----------------------
Except as otherwise indicated, all information in this prospectus assumes:
- the underwriters' over-allotment option will not be exercised;
- the conversion of all of our outstanding shares of preferred stock into
shares of common stock upon the closing of this offering; and
- the filing, promptly following this offering, of an amended and restated
certificate of incorporation.
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RISK FACTORS
You should carefully consider the risks described below before making a
decision to buy our common stock. If any of the following risks actually occurs,
our business could be harmed. In that case, the trading price of our common
stock could decline, and you may lose all or part of your investment. You should
also refer to the other information in this prospectus, including our financial
statements and the related notes.
WE HAVE A LIMITED OPERATING HISTORY THAT MAKES AN EVALUATION OF OUR BUSINESS
DIFFICULT.
We began selling our Lightspan Achieve Now educational software in January
1996 and entered the Internet market by launching The Lightspan Network in
January 1997. Academic Systems began selling its educational software in April
1994. Since early 1999, we have significantly increased our efforts to expand
our Internet businesses. As a result, both our curriculum-based educational
software and Internet businesses have only a limited operating history on which
you can base your evaluation of our business and prospects. Before investing,
you should evaluate the risks, uncertainties, expenses and difficulties
frequently encountered by early stage companies, particularly companies that are
seeking to significantly increase their presence in new and rapidly evolving
Internet markets.
OUR QUARTERLY RESULTS ARE VOLATILE AND DIFFICULT TO FORECAST, WHICH COULD CAUSE
THE PRICE OF OUR COMMON STOCK TO DECLINE.
Our quarterly results have fluctuated greatly since our inception, for
various reasons. Our quarterly net loss ranged between $8.5 million and $15.6
million over the four quarters ended October 31, 1999. In addition, in fiscal
year 1997 and 1998 we recognized license revenue for our Lightspan Achieve Now
product of $5.6 million and $14.8 million, respectively, in accordance with the
accounting rules in effect at that time. In fiscal years 1999 and 2000, we did
not recognize any Lightspan Achieve Now license revenue, in accordance with new
accounting rules adopted February 1, 1998. We expect to recognize license
revenue during the first two quarters of fiscal year 2001 for cumulative
Lightspan Achieve Now shipments since February 1, 1998. This may result in an
operating profit for one or more quarters, which will not be indicative of our
underlying business in that period, and will not be indicative of results that
may be expected for any subsequent quarters or for the full fiscal year ending
January 31, 2001.
We expect significant fluctuations in our quarterly revenues and operating
results to continue. Demand for our products and services is subject to seasonal
influences based on school calendars, budget cycles and the timing of school
districts' funding sources. Moreover, our sales could be delayed from quarter to
quarter due partly to our need to educate school district decision makers
regarding the uses and benefits of our software, and the lengthy multiple
approval process that typically accompanies significant capital expenditures by
school districts. If a significant sale that we expect to occur in a particular
quarter is delayed and does not occur until a future quarter, or does not occur
at all, our quarterly performance may be worse than expected. Further, our
recently expanded Internet efforts may contribute to fluctuations in our
quarterly operating results because the sales cycles of our Internet businesses
are different than those of our curriculum-based educational software. If our
financial results for one or more quarters fall below the expectations of
analysts and investors, the trading price of our common stock may decline.
WE EXPECT A SUBSTANTIAL INCREASE IN EXPENSES AND NET LOSSES IN THE FUTURE AND
MAY NEVER ACHIEVE OR SUSTAIN PROFITABILITY, WHICH MAY CAUSE OUR STOCK PRICE TO
FALL.
Since our inception, we have incurred significant losses. As of October 31,
1999, we had an accumulated deficit of $156.5 million. We incurred net losses of
$33.6 million for the fiscal year ended January 31, 1999 and $34.8 million for
the nine months ended October 31, 1999. Except as may otherwise occur due to
revenue recognition for past Lightspan Achieve Now shipments, as described
above, we
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expect our operating losses and negative cash flow to continue and increase for
the foreseeable future as we incur additional costs and expenses related to:
- brand maintenance, advertising, marketing and promotional activities;
- continued development and expansion of our Internet offerings and
content;
- hiring personnel, including additional Internet systems, sales and
marketing, and product development personnel;
- acquisition of additional office space and other necessary facilities;
and
- amortization of intangible assets and goodwill recorded in connection
with our acquisitions of Academic Systems, Global Schoolhouse and
StudyWeb.
Our ability to become profitable and maintain profitability depends on our
ability to generate and sustain substantially higher revenues while maintaining
reasonable expense levels. Although we intend to increase our spending on the
activities listed above, these efforts may not result in increased revenues. We
conduct operations using estimates as to future expense levels based on our
expectations of future revenues. We cannot guarantee that we will be able to
predict our future revenues accurately or that we will be able to adjust
spending to compensate for any unexpected revenue shortfall. If we achieve
profitability, we cannot be certain that we will be able to sustain or increase
profitability in the future.
WE MAY NEED ADDITIONAL FINANCING TO MEET OUR STRATEGIC BUSINESS OBJECTIVES,
WHICH MAY NOT BE AVAILABLE AND, IF AVAILABLE, MIGHT HURT OUR EXISTING
STOCKHOLDERS.
As we enter into new areas of business, like Internet businesses, we will
incur substantially increased expenses for which we do not expect returns for
months or years in the future. We currently anticipate that the net proceeds of
this offering, together with our available funds, will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the next 18 months. However, we may need to raise additional funds prior to or
after that period. If we raise additional funds through the issuance of equity
or debt securities that have rights senior to those of our stockholders, our
stockholders may experience additional dilution or may lose other rights. We
cannot be certain that additional financing will be available to us on favorable
terms when required, or at all. If we cannot raise funds on acceptable terms, if
and when needed, we may not be able to take advantage of future opportunities,
grow our business or respond to competitive pressures or unanticipated
developments.
OUR CONTINUED GROWTH WILL STRAIN OUR RESOURCES, AND FAILURE TO MANAGE THIS
GROWTH EFFECTIVELY COULD DISRUPT OUR OPERATIONS AND PREVENT US FROM GENERATING
THE REVENUES WE EXPECT.
We expect that significant expansion of our operations will be required to
successfully implement our business strategy. For example, the development of
our Internet businesses continues to require increased sales, marketing and
promotion expenditures as well as increased development efforts. This expansion
will strain our management, operational, financial and technological resources,
as well as the infrastructure for our Web sites and services. The growth of our
Lightspan Achieve Now educational software business may strain the resources of
our professional development staff during periods of heavy implementation in
purchasing school districts. Our growth depends on our ability to attract and
retain qualified employees (including employees of businesses that we acquire),
particularly Internet systems, sales and marketing, and product development
personnel. Our failure to manage our growth in a manner that minimizes these
strains on our resources could disrupt our operations and ultimately prevent us
from generating the revenues we expect.
OUR CURRICULUM-BASED EDUCATIONAL SOFTWARE MAY BE UNABLE TO ACHIEVE OR MAINTAIN
BROADER MARKET ACCEPTANCE, WHICH WOULD CAUSE OUR FUTURE REVENUE GROWTH AND
PROFITABILITY TO SUFFER.
We expect to generate a substantial portion of our revenues from Lightspan
Achieve Now software licenses, and will need to increase these revenues in order
to more effectively grow in other areas of our
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business. Revenues from licenses of our curriculum-based educational software
will depend principally on broadening market acceptance of that software, which
may not occur due to a number of factors, including:
- teacher, parent and student preferences for interactive educational
technology are subject to changes in popular entertainment and
educational theory;
- some teachers may be reluctant to use interactive educational technology
to supplement their customary teaching practices;
- we may be unable to continue to demonstrate improvements in academic
performance at schools or colleges that use our educational software; and
- our failure to detect bugs in our software could result in product
failures or poor product performance.
If market acceptance of our curriculum-based educational software is not
broadened, our future revenue growth will suffer and we may never become
profitable.
THE SUCCESS OF OUR BUSINESS MODEL REQUIRES US TO INCREASE OUR REVENUES FROM OUR
INTERNET BUSINESSES, AND WE MAY NEVER BECOME PROFITABLE IF WE ARE UNABLE TO DO
SO.
In order to grow as currently contemplated, we will need to derive an
increasing portion of our revenues from our Internet businesses, including
sponsorship of our Web sites, subscriptions to The Lightspan Network and
electronic commerce. Some of these methods of generating revenues are relatively
new to us and largely untested. Our ability to increase revenues from these
sources depends on:
- improvement of the accessibility and ease of use of our Web sites;
- development of Web sites that are sufficiently engaging to increase and
retain our number of teacher, student and parent visitors;
- purchase by parents and teachers of the products being offered at our
electronic commerce Web sites;
- initiation and growth of sponsorships and banner advertisement sales; and
- our ability to increase the subscriber base of The Lightspan Network
while maintaining a subscription fee.
If we are unable to substantially increase our revenues from our Internet
businesses, we will be unable to execute our current business model and we may
never become profitable.
WE ARE HEAVILY DEPENDENT UPON OUR RELATIONSHIP WITH SONY COMPUTER ENTERTAINMENT,
AND TERMINATION OF THAT RELATIONSHIP, SUPPLY SHORTAGES OF SONY PLAYSTATION GAME
CONSOLES FROM SONY COMPUTER ENTERTAINMENT OR UNANTICIPATED CHANGES IN THE GAME
CONSOLES COULD REDUCE OUR LIGHTSPAN ACHIEVE NOW SALES OR INCREASE RELATED
EXPENSES.
We are heavily dependent upon our relationship with Sony Computer
Entertainment, which supplies the Sony PlayStation game console used by the
students who use our Lightspan Achieve Now educational software at home. Without
incurring significant additional expense, there currently is no readily
available operating platform for broad implementation of Lightspan Achieve Now
in the home other than the PlayStation game console. Sony Computer Entertainment
has rights to terminate their agreement with us in various circumstances,
including if it elects to stop producing the PlayStation game console. If our
agreement is terminated, if the PlayStation game console loses popular appeal or
if we are unable to obtain an adequate supply of PlayStation game consoles on a
timely basis, our ability to sell our Lightspan Achieve Now curriculum will be
reduced and we could incur significant additional expenses or lose substantial
revenues.
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The next version of the PlayStation game console, the recently-announced
PlayStation 2 game console, is expected to be available in the United States in
late 2000. If we are unable to enter into agreements to distribute the
PlayStation 2 game console, our Lightspan Achieve Now operations will be
disrupted and we could lose substantial revenues. Certain schools that are
potential purchasers of Lightspan Achieve Now educational software may not want
or be able to afford the PlayStation 2 game console if it is priced
significantly higher than the original PlayStation game console. While we expect
Lightspan Achieve Now to run on the PlayStation 2 game console, we may have to
adapt our software to any changes in or new versions of the PlayStation game
console that occur, which may require us to redirect significant financial and
personnel resources from other development efforts.
WE RELY ON STATISTICAL STUDIES TO DEMONSTRATE THE EFFECTIVENESS OF OUR PRODUCTS,
AND OUR REPUTATION AND SALES AND MARKETING EFFORTS COULD BE HARMED IF THE
RESULTS OF THESE STUDIES ARE NOT REPRESENTATIVE OR IF THEIR INTEGRITY IS
QUESTIONED, WHICH COULD LEAD TO LOWER THAN EXPECTED REVENUES.
We rely heavily on statistical studies, including those cited in this
prospectus, to demonstrate that our curriculum-based educational software
increases student achievement. We believe that these studies accurately reflect
the performance of our products. However, these studies involve the following
risks:
- the limited sample sizes used in our studies may yield results that are
not representative of the general population of students who use our
products;
- the methods used to gather the information upon which these studies are
based depend on cooperation from students and other participants and
inaccurate or incomplete responses could distort results; and
- schools studying the effectiveness of our Lightspan Achieve Now
curriculum administer different tests, and colleges and universities
studying the effectiveness of our Academic Systems curriculum apply
different methodologies and data collection techniques, making results
difficult to aggregate and compare.
We are involved in the Lightspan Achieve Now studies in the following ways:
- we facilitate the collection and analysis of data for these studies; and
- we select and pay researchers to aggregate and present the results of
these studies and, in some cases, to conduct the studies.
Our sales and marketing efforts, as well as our reputation, could be harmed
if the public, including our existing and potential customers, perceives these
studies to be biased due to our involvement, or if the results of these studies
are not representative, which could lead to lower than expected revenues.
CHANGES IN FUNDING FOR PUBLIC SCHOOL SYSTEMS COULD REDUCE OUR REVENUES AND
IMPEDE THE GROWTH OF OUR INTERNET BUSINESSES.
We derive a substantial portion of our revenues from public school funding,
which is heavily dependent on support from federal, state and local governments.
Government budget deficits may adversely affect the availability of this
funding. In addition, the government appropriations process is often slow,
unpredictable and subject to factors outside of our control. Curtailments,
delays or reductions in the funding of schools or colleges, for example a
reduction of funds allocated to schools under Title I of the Elementary and
Secondary Education Act of 1965, could delay or reduce our revenues, in part
because schools may not have sufficient capital to purchase our products or
services. Funding difficulties experienced by schools or colleges could also
cause those institutions to be more resistant to price increases in our
products, compared to other businesses that might better be able to pass on
price increases to their customers. The growth of our Internet businesses
depends on continued investment by public school systems in interactive
educational technology and products. Changes to funding of public school systems
could slow this kind of investment.
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<PAGE> 12
IF WE FAIL TO ENHANCE OUR INTERNET PRODUCTS AND SERVICES WITHOUT SYSTEMS
INTERRUPTIONS AND ADAPT THOSE PRODUCTS AND SERVICES TO CHANGES IN TECHNOLOGY,
OUR FUTURE REVENUE GROWTH AND PROFITABILITY COULD BE LESS THAN WE EXPECT.
We believe that our future revenue growth will depend in large part on
whether we are able to enhance and improve our Web sites and services as
planned. Enhancements and improvements to our Web sites are currently scheduled
for commercial launch, but we cannot assure you that those enhancements and
improvements will gain market acceptance or be launched on schedule and without
systems interruptions. In addition, the Internet is rapidly changing, and we
expect that we will continually need to adapt our Web sites and their related
technology to emerging Internet standards and practices, technological advances
developed by our competition, and changing subscriber, user and sponsor
preferences. Ongoing adaptation of our Web sites and their related technology
will entail significant expense and technical risk, and we may use new
technologies ineffectively or fail to adapt our Web sites and their related
technology on a timely and cost-effective basis. If our enhancements,
improvements and adaptations of our Web sites and their related technology are
delayed or result in systems interruptions or do not gain market acceptance, our
future revenue growth will suffer and we may never become profitable.
WE MAY NOT BE ABLE TO EXECUTE PART OF OUR BUSINESS STRATEGY IF BROADBAND
TECHNOLOGY DOES NOT BECOME MORE PREVALENT OR IF WE CANNOT REACH AGREEMENTS TO
DISTRIBUTE OUR PRODUCTS AND SERVICES USING BROADBAND TECHNOLOGY.
We intend to offer Lightspan Achieve Now and our Internet products and
services as educational channels on a digital set-top box once broadband
technology becomes widely available to cable television subscribers. We cannot
predict that it will ever be economically practical or technologically feasible
for either ourselves or cable television operators to deliver these products
using broadband technology to cable television subscribers. In addition, we may
not be able to reach commercially acceptable agreements with cable operators to
distribute our products and services using broadband technology. If we are
unable to offer Lightspan Achieve Now and our Internet products and services as
educational channels on a digital set-top box, whether because of economic or
technological limitations or a failure to reach commercially acceptable
agreements with cable television operators, we will not be able to execute part
of our business strategy and our growth and revenues will suffer.
OUR SPONSORSHIP REVENUES MAY BE LESS THAN WE EXPECT BECAUSE ADVERTISING OVER THE
INTERNET IN EDUCATIONAL SETTINGS MAY BE UNPOPULAR WITH SPONSORS, THE PUBLIC OR
GOVERNMENT ENTITIES.
We expect to generate revenues from the sale of sponsorships and banner
advertisements on our Web sites. Advertisements in educational settings may not
be accepted by the educational community or by parents and others. Sales of
sponsorships on our Web sites may therefore prove controversial and lead to
negative publicity and action by the government or private interests to
discourage companies from advertising on our Web sites. Third parties that
oppose corporate sponsorships in schools have engaged in publicity campaigns to
encourage boycotts of businesses that advertise in schools, and have sought
legislation to curb advertising in schools. If government or private action
discourages or prevents businesses from advertising in schools or we are not
able to offer potential sponsors access to our Web sites that are primarily
intended for school use, our sponsorship revenues will be significantly less
than we expect and our revenues could suffer.
WE EXPECT COMPETITION TO INCREASE SIGNIFICANTLY IN THE FUTURE, WHICH COULD
PREVENT US FROM SUCCESSFULLY IMPLEMENTING OUR BUSINESS STRATEGY.
The educational technology market is intensely competitive and subject to
increasing commercial attention. Barriers to entering Internet markets are
relatively low, and we expect competition to intensify in the future, as more
businesses use the Internet to enter the student, parent and teacher markets for
education-oriented products and services. Competition among Internet companies
is also intensifying for Web site sponsorships. We also may be adversely
affected by pricing and other operational decisions, like
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<PAGE> 13
the recent decision of several of our competitors that offer educational content
on the Internet to offer a free service rather than charge a fee, which could
hurt our subscription revenues.
Our competitors include:
- software publishers that market educational curriculum products to
schools and homes;
- on-line education-related content and electronic commerce providers
(including Internet content providers that license education-oriented
content from third parties and Internet retailers that may enter the
education electronic commerce market); and
- programs that enable remote learning, assume management of schools, or
provide concentrated tutoring services.
Many of our current and potential competitors have longer operating histories,
larger customer or user bases, greater brand recognition and significantly
greater financial, marketing and other resources than we do. Many of these
current and potential competitors can devote substantially greater resources
than we can to product development, marketing and promotional campaigns and Web
site and systems development.
OUR ACQUISITIONS OF OTHER BUSINESSES AND INVOLVEMENT IN STRATEGIC RELATIONSHIPS
MAY NOT BE SUCCESSFUL, WHICH COULD DISTRACT OUR MANAGEMENT OR CAUSE US TO INCUR
ADDITIONAL EXPENSES.
We have acquired businesses and may continue to do so in the future. We are
currently in the process of integrating the operations, systems and personnel of
Academic Systems, Global Schoolhouse and StudyWeb, all of which we acquired in
the second half of 1999. Our integration of these acquisitions or any future
acquisitions could distract our management or cause us to incur additional
expenses, and could cause our business and operations to suffer. We also may
enter into strategic relationships with complementary businesses. For example,
we have agreed to pursue several potential strategic initiatives with CINAR
Corporation, we hope to participate in a digital set-top box trial with Cox
Communications and we expect Gateway will become a sponsor on our Web site. We
cannot assure you that we will implement these initiatives and other activities
and arrangements, particularly because we still need to negotiate some terms of
the arrangements with each of them. If implemented, they, or any other strategic
relationships we may enter into, may increase our expenses or divert efforts of
our management and may not be successful.
THE OPERATIONS OF ACADEMIC SYSTEMS WILL BE SUBSTANTIALLY IMPACTED IF DATABASE
SOFTWARE WE LICENSE FROM ORACLE CORPORATION CEASES TO BE AVAILABLE TO ACADEMIC
SYSTEMS FOR ANY REASON.
Academic Systems is heavily dependent upon its relationship with Oracle
Corporation, which provides a database that Academic Systems uses to accumulate
data on students' progress in its math and writing courses. If Oracle
Corporation terminates its relationship with Academic Systems or its database
fails to function properly for any reason, a portion of our operations could be
interrupted and we could lose revenues.
IF WE DO NOT SUCCESSFULLY ANTICIPATE AND ADAPT TO CHANGES IN COMPUTER PLATFORMS
AND OTHER EVOLVING TECHNOLOGIES, OUR OPERATING RESULTS RELATING TO SALES OF OUR
SOFTWARE PRODUCTS COULD SUFFER.
We must manage our software development efforts to anticipate and adapt to
changes in popular computer operating environments and other evolving
technologies. For example, we are currently reviewing possibilities for
migrating Academic Systems' CD-ROM-based educational software to an
Internet-based product, and expect to devote significant financial resources to
do so. Our curriculum-based educational software is currently delivered in
CD-ROM format on Sony PlayStation game consoles and on Windows-based personal
computers. We will continue to evaluate other operating environments and
computer platforms for our software products as they become available. We may
decide from time to time to make our software products available in other
operating environments or on other computer platforms and our efforts to do so
may involve substantial costs that may not be offset by additional revenues or
may delay our realization of revenues from these activities. Market acceptance
of our software products and our
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<PAGE> 14
operating results relating to their sale could also be worse than we expect if
we are unable to anticipate and adapt to changes in computer platforms and other
evolving technologies on a timely and cost-effective basis.
WE WILL NOT BE ABLE TO GROW OUR INTERNET BUSINESSES IF THE MARKET FOR THOSE
BUSINESSES DOES NOT DEVELOP.
The success of our Internet businesses will depend in large part on the
continued emergence and growth of a market for Internet-based educational
technology products. The market for educational technology is characterized by
rapid technological change and product innovation, unpredictable product life
cycles and unpredictable preferences among students, teachers and parents.
Internet commercial businesses and services are evolving markets as well, and it
is difficult to estimate how and when growth or other changes in those markets
will occur. We therefore cannot predict that the market for Internet-based
educational technology products will continue to grow.
OUR BUSINESS MAY NOT SUCCEED WITHOUT THE CONTINUED DEVELOPMENT AND MAINTENANCE
OF THE INTERNET.
Without the continued development and maintenance of the Internet
infrastructure, we could fail to generate the Internet traffic and revenues we
need for our business to succeed. In addition, our Lightspan Achieve Now and
Academic Systems curricula are very media-rich and are not currently delivered
over the Internet, given bandwidth limitations. The continued development of the
Internet includes maintenance of a reliable network with the necessary speed,
data capacity and security, as well as timely development of complementary
products for providing reliable Internet access and services. Because the online
exchange of information and global commerce on the Internet is new and evolving,
we cannot predict whether the Internet will prove to be an effective vehicle for
delivering commercial content or will provide a viable marketplace for
electronic commerce in the long term.
As the Internet continues to experience increased numbers of users,
increased frequency of use and increased bandwidth requirements, the Internet
infrastructure may be unable to support the demands placed on it. In addition,
increased users or bandwidth requirements may harm the performance of the
Internet.
UNLESS WE MAINTAIN A STRONG BRAND IDENTITY, OUR BUSINESS MAY NOT GROW AND OUR
FINANCIAL RESULTS MAY SUFFER.
We believe that maintaining and enhancing the value of our Lightspan and
Academic Systems brands is critical to attracting purchasers for our
curriculum-based educational software and sponsors, subscribers and users of our
Internet businesses. Our success in maintaining brand awareness will depend on
our ability to continuously provide educational technology that students enjoy
using and teachers and parents consider beneficial to the learning process. We
cannot assure you that we will be successful in maintaining our brand equity. In
addition, to attract and retain online sponsors, subscribers and users and to
promote and maintain the Lightspan brand, we have spent and intend to continue
spending significant amounts on an aggressive brand-enhancement strategy, which
includes advertising, promotional programs and efforts by our field sales force
and professional development staffs. We may also need to spend significant
amounts in the future to maintain the value of our Lightspan and Academic
Systems brands as they relate to our curriculum-based educational software
business. Revenues from these activities may not be sufficient to offset
associated costs.
CLAIMS RELATING TO DATA COLLECTION FROM OUR USER BASE AND CONTENT AVAILABLE ON
OR ACCESSIBLE FROM OUR WEB SITES MAY SUBJECT US TO LIABILITIES AND ADDITIONAL
EXPENSE AND DECREASE TRAFFIC TO OUR WEB SITES.
We currently collect only the names of teachers who are registering for our
Internet products. However, we may in the future collect names and other
personal information relating to students, teachers and parents, and may sell
our user information on an aggregated, non-individual basis, though we do not
intend to sell information relating to children under 13. We could be subject to
liability claims for misuses of information collected from our users, such as
for unauthorized marketing purposes, and could face
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<PAGE> 15
additional expenses to analyze and comply with increasing regulation in this
area. The Federal Trade Commission, for example, has announced regulations
governing collection of personal information from children under 13 and is
expected to issue and enforce additional regulations in this area. We could also
be subject to liability based on claims relating to content that is published on
our Web sites or that is accessible from our network through links to other Web
sites. In addition to subjecting us to potential liability, claims of this type
could require us to change our Web sites in a manner that could be less
attractive to our customers and divert our financial and development resources.
OUR BUSINESS OPERATIONS COULD BE SIGNIFICANTLY DISRUPTED IF WE LOSE MEMBERS OF,
OR FAIL TO PROPERLY INTEGRATE, OUR MANAGEMENT TEAM.
Our success depends on the continued contributions of the principal members
of our sales and marketing, product development, Internet services, and
management departments. The loss of the services of any of our officers or
senior managers would disrupt operations in their respective departments and
could cause our overall financial results to suffer. We do not maintain any "key
person" life insurance policies other than on John T. Kernan, our Chairman and
Chief Executive Officer, and Carl Zeiger, our President and Chief Operating
Officer.
Many of our existing senior management personnel joined us during 1999,
including critical members of our Internet team. Some of these individuals have
not previously worked together and are currently being integrated as a
management team. If our senior managers are unable to work effectively as a
team, our business operations could be significantly disrupted.
YEAR 2000 PROBLEMS COULD LEAD TO MALFUNCTIONS OF OUR COMPUTER AND COMMUNICATIONS
SYSTEMS, AND PREVENT US FROM RUNNING OUR BUSINESS.
Some computer programs cannot tell the difference between the year 2000 and
the year 1900. If we or any third parties with whom we have a material
relationship suffer adverse effects of the change from 1999 to 2000, now or in
coming months, we may be temporarily prevented from operating any and all
aspects of our business in the ordinary course. In a worst case scenario, we may
be unable to make or receive phone calls at our facilities, process or ship
orders, make payments due to third parties and our employees, or operate our
Internet businesses.
WE MAY NOT BE ABLE TO PREVENT OTHERS FROM USING OUR TRADEMARKS, COPYRIGHTS,
SOFTWARE, CHARACTERS AND OTHER INTELLECTUAL PROPERTY ASSETS. IF OTHERS DO USE
THESE ASSETS, THEIR VALUE TO US, AND OUR ABILITY TO USE THEM TO GENERATE
REVENUES, MAY DECREASE.
Our intellectual property includes our trademarks and copyrights,
proprietary software, characters and other proprietary rights. We believe that
our intellectual property is important to our success and our competitive
position, and we try to protect it. However, our efforts may be inadequate. In
addition, our ability to conduct our business may be harmed if others claim we
violate their intellectual property rights. If successful, claims of this nature
could seriously harm our business by requiring us to cease using important
intellectual property or pay monetary damages. Even if unsuccessful, these
claims could harm our business by damaging our reputation, requiring us to incur
legal costs and diverting management's attention away from our business.
OUR STOCK PRICE MAY BE PARTICULARLY VOLATILE BECAUSE OF THE INDUSTRY WE ARE IN.
The stock market in general has recently experienced extreme price and
volume fluctuations. In addition, the market prices of securities of technology
companies, particularly Internet-related companies, have been extremely
volatile, and have experienced fluctuations that have often been unrelated to or
disproportionate to the operating performance of these companies. These broad
market fluctuations could adversely affect the market price of our stock.
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<PAGE> 16
OUR EXECUTIVE OFFICERS, DIRECTORS AND MAJOR STOCKHOLDERS WILL CONTROL 56.7% OF
OUR COMMON STOCK AFTER THIS OFFERING.
After this offering and the private placements expected to occur at the
same time, executive officers, directors and holders of 5% or more of our
outstanding common stock will, in the aggregate, beneficially own 56.7% of our
outstanding common stock. These stockholders will be able to influence all
matters requiring approval by our stockholders, including the election of
directors and the approval of corporate transactions. This concentration of
ownership may also delay, deter or prevent a change in control of our company
and may make some transactions more difficult or impossible to complete without
the support of these stockholders.
IT MAY BE DIFFICULT FOR A THIRD PARTY TO ACQUIRE OUR COMPANY, AND THIS COULD
DEPRESS OUR STOCK PRICE.
Delaware corporate law and our certificate of incorporation and bylaws
contain provisions that could delay, defer or prevent a change in control of our
company or our management. These provisions could also discourage proxy contests
and make it more difficult for you and other stockholders to elect directors and
take other corporate actions. As a result, these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock. These provisions:
- authorize us to issue preferred stock that can be created and issued by
the board of directors without prior stockholder approval, with rights
senior to those of common stock;
- provide for a staggered board of directors, so that it would take three
successive annual meetings to replace all directors;
- prohibit stockholder action by written consent; and
- establish advance notice requirements for submitting nominations for
election to the board of directors and for proposing matters that can be
acted upon by stockholders at a meeting.
THERE IS NO PRIOR MARKET FOR OUR SECURITIES, AND OUR STOCK PRICE MAY DECLINE
AFTER THE OFFERING.
Before this offering, there has not been a public market for our common
stock. After the offering, the market price of our common stock may decline
below the initial public offering price. The initial public offering price has
been determined by negotiations between us and representatives of the
underwriters. In addition, an active public market for our common stock may not
develop or be sustained after this offering.
THE BOOK VALUE OF THE SHARES YOU PURCHASE WILL BE SUBSTANTIALLY LESS THAN THE
PRICE YOU PAY FOR THE SHARES AND, IF A LIQUIDATION WERE TO OCCUR, YOU MAY
RECEIVE SIGNIFICANTLY LESS THAN THE PURCHASE PRICE FOR YOUR SHARES.
The initial public offering price is substantially higher than the net
tangible book value of each outstanding share of our common stock. As a result,
purchasers of common stock in this offering will suffer immediate and
substantial dilution. This dilution will reduce the net tangible book value of
their shares, since the price per share in this offering will be substantially
higher than it was for our existing stockholders. The dilution will be $9.65 per
share in the net tangible book value of the common stock from the initial public
offering price. If the underwriters exercise their over-allotment option, or if
outstanding options or warrants to purchase shares of common stock are
exercised, there will be further dilution. As a result of this dilution, in the
event of a liquidation, common stockholders who purchase stock in this offering
may receive significantly less than the purchase price for the shares they
purchased in this offering.
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<PAGE> 17
APPROXIMATELY 35.6 MILLION, OR 82.6%, OF OUR TOTAL OUTSTANDING SHARES ARE
RESTRICTED FROM IMMEDIATE RESALE BUT MAY BE SOLD INTO THE MARKET IN THE NEAR
FUTURE. WE WILL ALSO ISSUE ADDITIONAL STOCK FOLLOWING THIS OFFERING. THIS WILL
INCREASE THE SUPPLY OF COMMON STOCK AVAILABLE FOR RESALE, AND COULD INCREASE
TRADING ACTIVITY AND CAUSE THE MARKET PRICE OF OUR COMMON STOCK TO DROP
SIGNIFICANTLY, EVEN IF OUR BUSINESS IS DOING WELL.
Sales of a substantial number of shares of common stock in the public
market following this offering could cause the market price of our common stock
to decline. After completion of this offering and our expected private sales of
common stock to CINAR, Cox Communications, and Gateway, and the exercise of
warrants to purchase up to 1,663,086 shares of common stock concurrently with
this offering, we will have 43,101,305 shares of common stock outstanding, based
on the number of our outstanding shares on December 31, 1999. The shares offered
for sale through the underwriters will be freely tradable unless purchased by
our affiliates or covered by a separate lock-up agreement with the underwriters.
Of the remaining 35,601,305 shares of common stock outstanding after this
offering, 26,957,622 shares will be eligible for sale in the public market
beginning 181 days after the date of this prospectus. The remaining 8,643,683
shares will become available at various times thereafter upon the expiration of
one-year holding periods. We also intend to register up to approximately
5,730,224 additional shares of our common stock after this offering for issuance
under our equity plans and may issue additional stock in connection with
acquisitions or strategic relationships and to some of our existing
stockholders.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology including "could," "may," "will," "should," "expect," "intend,"
"plan," "anticipate," "believe," "estimate," "predict," "potential," "continue"
or "opportunity," the negative of these terms or other comparable terminology.
These statements are only predictions. Actual events or results may differ
materially. In evaluating these statements, you should specifically consider
various factors, including the risks described above and in other parts of this
prospectus. These factors may cause our actual results to differ materially from
any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements. We are under no duty to update any of the
forward-looking statements after the date of this prospectus to conform them to
actual results or to changes in our expectations.
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USE OF PROCEEDS
We estimate that our net proceeds from the offering will be approximately
$82.2 million, after deducting the underwriting discount and commissions and
estimated offering expenses. Our net proceeds from the offering will be
approximately $94.8 million if the over-allotment option is exercised in full.
We also expect to receive net proceeds of approximately $24.6 million after
payment of financial advisory fees relating to our agreements with Cox
Communications and Gateway, as a result of our sales to CINAR, Cox
Communications and Gateway, of common stock in private placements scheduled to
occur concurrently with the closing of the initial public offering.
We expect to use the net proceeds for general corporate purposes, including
expansion of our sales and marketing activities and continued development of our
products and services, particularly our Internet offerings. Our management will
retain broad discretion in the allocation of the net proceeds of this offering.
The amounts we actually spend will depend on a number of factors, including the
amount of our future revenues and other factors described elsewhere in this
prospectus. A portion of the net proceeds may also be used to acquire or invest
in complementary businesses, technologies, product lines or products. Pending
such uses, the net proceeds of this offering will be invested in short term,
interest-bearing, investment grade securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our capital stock. We
currently intend to retain any future earnings to finance the growth and
development of our business and therefore do not anticipate paying any cash
dividends in the foreseeable future. Any future determination to pay cash
dividends will be at the discretion of the board of directors and will be
dependent upon our financial condition, results of operations, capital
requirements, general business conditions and other factors that the board of
directors may deem relevant.
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CAPITALIZATION
The following table sets forth our capitalization as of October 31, 1999:
- On an actual basis after giving effect to 2,600,000 shares of Series E
preferred stock subscribed to in October 1999 and issued in November
1999;
- On a pro forma basis after giving effect to the conversion of all of our
outstanding shares of preferred stock into 27,087,826 shares of common
stock upon the closing of the offering and the collection of $13.0
million in stock subscriptions receivable in November 1999; and the
exercise of warrants to purchase up to 1,663,056 shares of common stock
scheduled to occur concurrently with the closing of this offering; and
- On a pro forma as adjusted basis, giving effect to our issuance of common
stock in the offering and our anticipated receipt of the proceeds from
our private sales of common stock to CINAR, Cox Communications, and
Gateway.
This information should be read in conjunction with our financial
statements and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
OCTOBER 31, 1999
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
Capital lease obligations, less current portion... $ 526,458 $ 526,458 $ 526,458
Stockholders' equity(1):
Series A preferred stock, $.001 par value;
7,615,500 shares authorized and 7,467,500 shares
issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 7,467 -- --
Series B preferred stock, $.001 par value;
11,816,664 shares authorized and 11,666,664
shares issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 11,667 -- --
Series C preferred stock, $.001 par value;
3,360,910 shares authorized and 3,264,285 shares
issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 3,264 -- --
Series D preferred stock, $.001 par value;
17,000,000 shares authorized and 13,129,444
shares issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 13,129 -- --
Series E preferred stock, $.001 par value;
22,000,000 shares authorized and 16,703,022
shares issued and outstanding, actual; 0 shares
authorized, none issued and outstanding, pro
forma and pro forma as adjusted................. 16,703 -- --
</TABLE>
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<PAGE> 20
<TABLE>
<CAPTION>
OCTOBER 31, 1999
---------------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------------- ------------- -------------
<S> <C> <C> <C>
Common Stock, $.001 par value; 75,000,000 shares
authorized and 4,625,389 shares issued and
outstanding, actual; 33,376,271 shares issued
and outstanding, pro forma (unaudited);
250,000,000 shares authorized, 43,001,271 shares
issued and outstanding, pro forma as adjusted... 4,625 33,376 43,001
Additional paid-in capital........................ 209,464,854 227,781,949 334,542,324
Stock subscriptions receivable.................... (13,000,000) -- --
Deferred advertising expense...................... (400,000) (400,000) (400,000)
Deferred compensation............................. (6,236,490) (6,236,490) (6,236,490)
Accumulated deficit............................... (156,539,154) (174,799,509) (174,799,509)
------------- ------------- -------------
Total stockholders' equity.............. 33,346,065 46,379,326 153,149,326
------------- ------------- -------------
Total capitalization.................... $ 33,872,523 $ 46,905,784 $ 153,675,784
============= ============= =============
</TABLE>
- ---------------
(1) Other than as indicated in the introduction to the table, share numbers in
the table do not include issuances subsequent to October 31, 1999, or the
following shares:
- as of October 31, 1999, 5,153,941 shares of common stock reserved for
issuance under our stock benefit plans, of which 3,714,076 shares were
covered by outstanding options with a weighted average exercise price of
$3.64 per share and 366,361 shares remain available for grant;
- 750,000 shares of common stock issuable at an exercise price of $10.00
per share upon exercise of a warrant scheduled to be issued concurrent
with the closing of this offering;
- 150,000 shares of Series A preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $1.00 per share (which will
become warrants to purchase 75,000 shares of common stock at an exercise
price of $2.00 per share upon the closing of this offering);
- 150,000 shares of Series B preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $3.00 per share (which will
become warrants to purchase 75,000 shares of common stock at an exercise
price of $6.00 per share upon the closing of this offering);
- 96,625 shares of Series C preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $6.00 per share (which will
become warrants to purchase 77,096 shares of common stock at an exercise
price of $7.52 per share upon the closing of this offering);
- 183,105 shares of Series D preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $3.76 per share (which will
become warrants to purchase 91,556 shares of common stock at an exercise
price of $7.52 per share upon the closing of this offering);
- 127,659 shares of Series D preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $4.70 per share (which will
become warrants to purchase 63,830 shares of common stock at an exercise
price of $9.40 per share upon the closing of this offering);
- 42,216 shares of Series E preferred stock issuable upon exercise of
outstanding warrants at an exercise price of $5.00 per share (which will
become warrants to purchase 21,109 shares of common stock at an exercise
price of $10.00 per share upon the closing of this offering); and
- 500,000 shares of Series E preferred stock issuable upon exercise of an
outstanding warrant at an exercise price of $5.00 per share (which will
become a warrant to purchase 250,000 shares of common stock at an
exercise price of $10.00 per share upon the closing of this offering).
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DILUTION
As of October 31, 1999, our pro forma net tangible book value, after giving
effect to conversion of all of our preferred stock then outstanding and the
exercise, concurrently with this offering, of warrants to purchase 1,663,056
shares of common stock, was a deficit of approximately $5.7 million, or $(.17)
per share of common stock. Pro forma net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of common stock outstanding. After giving effect to our
sale of common stock offered hereby, our expected private sales of common stock
to CINAR, Cox Communications, and Gateway and our receipt of the estimated net
proceeds from all of those transactions, our pro forma net tangible book value
as of October 31, 1999 would have been approximately $101.1 million, or $2.35
per share. This represents an immediate increase in net tangible book value of
$2.52 per share to existing stockholders and an immediate dilution of $9.65 per
share to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $12.00
Pro forma net tangible book value per share before the
offering............................................... $(.17)
Increase per share attributable to new investors.......... 2.52
-----
Pro forma net tangible book value per share after this
offering.................................................. 2.35
------
Dilution per share to new investors......................... $ 9.65
======
</TABLE>
The following table summarizes, on a pro forma basis as of October 31,
1999, the differences between existing stockholders and the new investors with
respect to the number of shares of common stock purchased from us, the total
consideration paid and the average price per share paid before deducting the
underwriting discounts and commissions for this offering and our estimated
offering expenses.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
---------------------- ---------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ----------- ------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C> <C>
Existing stockholders................. 33,376,271(1) 78% $158,429 58% $ 4.75
New investors......................... 9,625,000(2) 22% 115,500 42% $12.00
---------- --- -------- ----
Total............................... 43,001,271 100% $273,929 100%
========== === ======== ====
</TABLE>
- ---------------
(1) Gives effect to the conversion of all of our outstanding preferred stock
into 27,087,826 shares of common stock in connection with the offering and
our issuance of 1,663,056 shares of common stock upon exercise of
outstanding warrants for $0.02 per share concurrently with the closing of
this offering, and assumes no exercise of stock options or other warrants
outstanding as of October 31, 1999. As of October 31, 1999, there were
options outstanding to purchase a total of 3,714,076 shares of common stock,
with a weighted average exercise price of $3.64 per share. As of October 31,
1999, there were also additional warrants outstanding to purchase a total of
749,605 shares of preferred stock. These warrants will become warrants to
purchase 403,591 shares of common stock at a weighted average exercise price
of $6.63 per share upon completion of this offering. To the extent that any
of these options or warrants are exercised, there will be further dilution
to new investors. See "Management -- Equity Plans," "Description of Capital
Stock" and Note 5 to the Lightspan financial statements.
(2) Includes 833,333 shares, 1,041,667 shares and 250,000 shares of common stock
that CINAR, Cox Communications, and Gateway, respectively, have agreed to
purchase upon the close of this offering.
20
<PAGE> 22
SELECTED CONSOLIDATED HISTORICAL AND PRO FORMA FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with the Lightspan and Academic Systems financial statements and the
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Operating Results" included elsewhere in this prospectus. The pro
forma statement of operations data for the year ended January 31, 1999 and the
nine months ended October 31, 1999 should be read in conjunction with the
unaudited pro forma financial statements included elsewhere in this prospectus.
That data assumes that we purchased Academic Systems as of the beginning of each
of these periods and is based on our historical operating results and those of
Academic Systems for the periods presented, giving effect to the amortization of
intangibles related to the acquisition, decreased interest income representing
foregone interest income at an assumed 3% rate of return, our issuance of shares
of common and preferred stock to complete the acquisition as if such issuance
had occurred at the beginning of each of the periods presented, and the
conversion of all of our outstanding shares of preferred stock as of their
original dates of issuance. Our statement of operations data for the years ended
January 31, 1995, 1996, 1997, 1998 and 1999 and balance sheet data as of January
31, 1995, 1996, 1997, 1998 and 1999 are derived from our audited financial
statements, which are included elsewhere in this prospectus for the years ended
January 31, 1997, 1998 and 1999 and as of January 31, 1998 and 1999. Academic
Systems' statement of operations data for the years ended September 30, 1997 and
1998 are derived from Academic Systems' audited financial statements included
elsewhere in this prospectus. Our statement of operations data for the nine
months ended October 31, 1999 and our balance sheet data as of October 31, 1999
are derived from our audited financial statements included elsewhere in this
prospectus. Our statement of operations data for the nine months ended October
31, 1998 are derived from our unaudited financial statements included elsewhere
in this prospectus. Our pro forma statement of operations data for the year
ended January 31, 1999 and the nine months ended October 31, 1999 are derived
from unaudited pro forma financial statements included elsewhere in this
prospectus. Academic Systems' statement of operations data for the nine months
ended June 30, 1998 and 1999 are derived from its unaudited financial statements
included elsewhere in this prospectus. The unaudited financial statements have
been prepared on substantially the same basis as the audited financial
statements and include all adjustments, consisting only of normal recurring
adjustments, that we consider necessary for a fair presentation of the financial
position and results of operations for the periods presented. Historical results
are not necessarily indicative of the results that may be expected in the
future, and the results of interim periods are not necessarily indicative of
results that may be expected for the entire year. The following financial
information is in thousands, except per share data.
21
<PAGE> 23
THE LIGHTSPAN PARTNERSHIP, INC.
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31,
----------------------------------------------------------------
1995 1996 1997 1998 1999 1999
------- -------- -------- -------- -------- --------
PRO
ACTUAL FORMA
-------- --------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software Licenses......... $ -- $ -- $ 5,592 $ 14,753 $ -- $ 6,376
Internet Licenses......... -- -- -- 289 1,024 1,024
Services.................. -- -- 554 1,973 3,742 3,742
Hardware.................. -- -- 2,419 5,294 6,104 6,104
------- -------- -------- -------- -------- --------
Total revenues...... -- -- 8,565 22,309 10,870 17,246
Cost of revenues:
Software Licenses......... -- -- 2,964 4,836 -- 2,139
Internet Licenses......... -- -- -- 99 302 302
Services.................. -- -- 563 1,753 2,385 2,385
Hardware.................. -- -- 2,315 4,745 4,973 4,973
------- -------- -------- -------- -------- --------
Total cost of
revenues.......... -- -- 5,842 11,433 7,660 9,799
------- -------- -------- -------- -------- --------
Gross profit............... -- -- 2,723 10,876 3,210 7,447
Operating expenses:
Technology and
development............. 4,907 12,152 18,953 14,816 10,594 13,876
Sales and marketing....... 2,177 6,831 13,773 20,296 22,990 29,738
General and
administrative.......... 1,231 1,460 2,473 2,715 3,590 5,780
Stock-based
compensation............ -- -- -- -- 20 20
Amortization of
intangibles............. -- -- -- -- -- 11,833
------- -------- -------- -------- -------- --------
Total operating
expenses.......... 8,315 20,443 35,199 37,827 37,194 61,247
------- -------- -------- -------- -------- --------
Loss from operations....... (8,315) (20,443) (32,476) (26,951) (33,984) (53,800)
Interest income (expense),
net....................... 86 876 (113) (528) 418 529
------- -------- -------- -------- -------- --------
Net loss................... $(8,229) $(19,567) $(32,589) $(27,479) $(33,566) $(53,271)
======= ======== ======== ======== ======== ========
Historical net loss per
share(1) -- basic and
diluted................... $ (2.72) $ (6.47) $ (10.72) $ (8.65) $ (9.91)
======= ======== ======== ======== ========
Historical weighted average
shares -- basic and
diluted................... 3,024 3,024 3,039 3,177 3,388
======= ======== ======== ======== ========
Pro forma net loss per
share -- basic and
diluted................... $ (1.54)(2) $ (2.05)(3)
======== ========
Pro forma weighted average
shares -- basic and
diluted................... 21,801(2) 25,968(3)
======== ========
<CAPTION>
NINE MONTH PERIOD
ENDED OCTOBER 31,
--------------------------------
1998 1999 1999
-------- -------- --------
PRO
ACTUAL FORMA
-------- --------
<S> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA:
Revenues:
Software Licenses......... $ -- $ 489 $ 6,217
Internet Licenses......... 639 1,246 1,246
Services.................. 2,961 4,718 4,718
Hardware.................. 4,867 4,829 4,829
-------- -------- --------
Total revenues...... 8,467 11,282 17,010
Cost of revenues:
Software Licenses......... -- 145 1,730
Internet Licenses......... 189 378 378
Services.................. 1,753 2,226 2,226
Hardware.................. 3,986 3,984 3,984
-------- -------- --------
Total cost of
revenues.......... 5,928 6,733 8,318
-------- -------- --------
Gross profit............... 2,539 4,549 8,692
Operating expenses:
Technology and
development............. 8,466 7,526 8,997
Sales and marketing....... 16,926 23,820 27,899
General and
administrative.......... 1,792 4,083 5,533
Stock-based
compensation............ -- 2,503 2,503
Amortization of
intangibles............. -- 1,616 9,012
-------- -------- --------
Total operating
expenses.......... 27,184 39,548 53,944
-------- -------- --------
Loss from operations....... (24,645) (34,999) (45,252)
Interest income (expense),
net....................... 350 231 106
-------- -------- --------
Net loss................... (24,295) (34,768) (45,146)
======== ======== ========
Historical net loss per
share(1) -- basic and
diluted................... $ (7.29) $ (8.93) $ (11.60)
======== ======== ========
Historical weighted average
shares -- basic and
diluted................... 3,331 3,892 3,892
======== ======== ========
Pro forma net loss per
share -- basic and
diluted................... $ (1.42) $ (1.62)(3)
======== ========
Pro forma weighted average
shares -- basic and
diluted................... 24,445 27,940(3)
======== ========
</TABLE>
<TABLE>
<CAPTION>
JANUARY 31,
------------------------------------------------ OCTOBER 31,
1995 1996 1997 1998 1999 1999
------- ------- ------- ------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $17,300 $14,733 $ 1,884 $ 4,422 $ 7,143 $ 22,672
Working capital (deficit)................................... 15,795 14,037 (287) 454 (12,233) (20,570)
Total assets................................................ 19,824 18,259 12,852 14,080 22,566 98,767
Capital lease obligations, less current portion............. 1,379 1,460 1,702 775 393 526
Total stockholders' equity (deficit)........................ $16,379 $14,537 $ 1,614 $ 1,682 $(11,249) $ 33,346
</TABLE>
- ---------------
(1) See Note 1 to the Lightspan financial statements for a description of the
computation of the historical net loss per share and the number of shares
used in the historical per share calculation.
(2) Assumes the conversion of all of our outstanding preferred stock as of their
original dates of issuance. See Note 1 to the Lightspan financial statements
for a description of the computation of pro forma net loss per share and the
number of shares used in the pro forma per share calculation.
(3) In addition to the assumption described in (2) above, assumes the issuance
of our shares of common and preferred stock used to complete the acquisition
of Academic Systems as if such issuance had occurred at the beginning of
each of the periods presented.
22
<PAGE> 24
ACADEMIC SYSTEMS CORPORATION
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTH PERIOD
SEPTEMBER 30, ENDED JUNE 30,
------------------ -----------------
1997 1998 1998 1999
-------- ------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues................................................. $ 4,399 $ 5,939 $ 2,947 $ 4,870
Cost of revenues......................................... 1,920 2,064 1,183 1,378
-------- ------- ------- -------
Gross profit............................................. 2,479 3,875 1,764 3,492
Operating expenses....................................... 12,738 12,893 10,013 8,003
-------- ------- ------- -------
Loss from operations..................................... (10,259) (9,018) (8,249) (4,511)
Interest income (expense), net........................... 151 347 310 (50)
-------- ------- ------- -------
Net loss................................................. $(10,108) $(8,671) $(7,939) $(4,561)
======== ======= ======= =======
</TABLE>
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND OPERATING RESULTS
OVERVIEW
We develop, market and sell curriculum-based educational software and
Internet products and services used both in school and at home. Our
curriculum-based educational software consists of our Lightspan Achieve Now and
Academic Systems software. Lightspan Achieve Now is our media-rich, interactive
CD-ROM-based software for students in kindergarten through eighth grade that
covers the core curriculum of language arts, reading and math. Its technology,
delivery system and content help increase student interest in learning, parental
involvement in their children's education, and productive interaction among
teachers, parents and students. Our Academic Systems software is also
CD-ROM-based and serves the college market with an English and mathematics
curriculum designed to meet the needs of under-prepared students. We offer the
following integrated family of Internet products and services through our Web
site, Lightspan.com:
- The Lightspan Network, an online subscription service marketed to schools
for classroom and home use;
- Lightspan PageOne, an online service developed with Yahoo! that enables
teachers to easily create customized home pages for their classrooms;
- Global Schoolhouse, a leading education Web site that helps teachers
develop and manage collaborative learning projects online;
- StudyWeb, a leading research Web site that helps parents, teachers and
students find on the Web the educational information and resources they
want;
- The Lightspan Learning Store, a Web site that sells educational products
online to teachers and parents; and
- selected additional content for teachers, parents and students.
We charge an annual subscription fee of approximately $2,500 for The
Lightspan Network to subscribing schools. We also plan to generate revenues for
our free Internet products and services, like Lightspan PageOne and Global
Schoolhouse, through sponsorships, advertising and electronic commerce.
Our products and services are sold to school districts by a direct field
sales force and supported by our professional development team who assists in
implementing our curricula in schools.
We commenced operations in September 1993, and through June 1996 our
activities consisted primarily of designing and developing Lightspan Achieve
Now. In January 1996, we released our Lightspan Achieve Now curriculum for use
on Windows-based personal computers. In the fall of that year, we released the
product for use on the Sony PlayStation game console. In January 1997, we
introduced The Lightspan Network to supplement our product offerings. In June
1999, we launched Lightspan PageOne. We acquired Academic Systems and Global
Schoolhouse in September 1999, and StudyWeb in October 1999. We also introduced
the Lightspan Learning Store in October 1999.
RESULTS OF OPERATIONS
Revenues
Our revenues from sales of Lightspan Achieve Now consist of license,
service and hardware revenues, although since February 1, 1998 we have deferred
recognition of license revenues, as described below in "Change in Revenue
Recognition Policy." Our revenues from sales of The Lightspan Network consist of
subscription fees.
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
24
<PAGE> 26
Lightspan. The objective evidence for each element is based on the respective
list prices of each element when sold or offered for sale separately.
Historically, Lightspan has not experienced customer cancellations,
forfeitures or discontinuations of licenses.
License Revenues. We derive license revenues from the sale of Lightspan
Achieve Now licenses and subscriptions for The Lightspan Network. We recognize
revenue from Lightspan Achieve Now licenses after:
- a license agreement has been executed or a definitive purchase order has
been received;
- the product has been shipped;
- the license fee has become fixed and determinable;
- the collection of the fee is considered probable; and
- the related hardware, if applicable, has been shipped.
We recognize revenue from subscriptions to The Lightspan Network ratably
over the term of the subscription agreement. Subscription licenses are for a
one-year term, and are paid in advance.
Amounts received in excess of revenue that is recognized are recorded as
deferred revenue.
Service Revenues. We derive service revenues from implementation services
and training for our Lightspan Achieve Now curriculum that is provided by our
professional development team and, to a lesser extent, from telephone support
and maintenance. All customers that purchase our Lightspan Achieve Now
curriculum also purchase service and support. This service and support are paid
for in advance and initially recorded as deferred revenues. Service revenues are
recognized when services are performed, in accordance with the standard
implementation, training, service, and evaluation plans that we establish for
the customer. Revenues from telephone support and maintenance arrangements are
recognized ratably over the one-year term of the support and maintenance
agreement.
Hardware Revenues. We derive hardware revenues from the sale of Sony
PlayStation game consoles and accessories. We recognize hardware revenues after
a definitive purchase order has been received, the product has been shipped and
collection of the sales price is considered probable. Substantially all of our
Lightspan Achieve Now customers also purchase Sony PlayStation game consoles.
Our future hardware revenues will vary based on the cost to us of Sony
PlayStation game consoles and accessories.
Future Revenue Sources. We anticipate that the sources of our revenues will
change over time. In the future, we plan to generate revenues from other sources
such as:
- sponsorship of, and advertising on, our Web sites;
- electronic commerce; and
- new titles that may be developed to expand Lightspan Achieve Now.
As broadband technology becomes more prevalent and cable operators provide
more of their customers with digital set-top boxes, we also intend to offer both
Lightspan Achieve Now and all of our Internet products and services as
educational channels on digital cable television systems.
COST OF REVENUES
Our cost of revenues consists of:
- costs for assembly, distribution and materials for CD-ROMs, and packaging
and print material costs;
- labor costs and overhead related to professional development personnel;
- costs for Sony PlayStation game consoles and related accessories;
- costs for third-party royalties and third-party content; and
- costs for server and network fees.
25
<PAGE> 27
CHANGE IN REVENUE RECOGNITION POLICY
We sell our 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 32 to 36 separate Lightspan Achieve Now titles, with each
title consisting of one distinct CD-ROM. There are a total of 77 separate titles
planned, some of which are included in more than one grade cluster. From the
time we commenced sales of the Lightspan Achieve Now product line, a number of
these titles were not available on the date of the sale, but were under
development at various stages in the development cycle. We consider titles that
have completed the development cycle and have been released for shipment to
customers to be "completed," and we consider titles still in the development
cycle to be "as-yet uncompleted." As of October 31, 1999, 72 of the 77 planned
titles had been completed. The remaining five titles are expected to be
completed during the first and second quarters of the fiscal year ending January
31, 2001.
At the time we began selling Lightspan Achieve Now licenses in 1996, the
compilation of titles which were then complete and available was fully
functional, met the academic objectives which we had committed to our customers,
and contained sufficient content to cover a complete school year's curriculum.
At that time it was our intention to subsequently develop additional titles that
would expand the overall curriculum, and we have continued efforts to do so.
Since the first shipment of Lightspan Achieve Now in 1996, we have established a
practice of providing these additional titles, when completed, to all existing
customers for no additional charge on a when and if available basis, although we
are not contractually obligated to do so. We plan to continue this practice
until we have delivered the last of the 77 planned titles, expected to be prior
to July 31, 2000. We plan to offer any new titles developed after that time to
our existing customers for a separate license fee. Prior to December 31, 1997,
our plans regarding the final collection of titles to be provided to customers
was evolving, and therefore customers were not provided with specific
information regarding the content of as-yet undelivered titles on the estimated
delivery schedule for these titles. In January 1998, we began providing a
specific list of titles which we planned to eventually deliver to our customers,
as well as the projected delivery dates for these titles.
When a customer enters into a Lightspan Achieve Now license, we ship them
the compilation of titles which is then available. The customer is able to begin
using our product immediately and is obligated to pay the entire non-refundable
license fee at that time. Neither the license fee collected from the customer,
nor the customer's ability to use our product, is contingent or dependent upon
our delivery of any additional titles.
Through January 31, 1998, our revenue recognition for Lightspan Achieve Now
licenses was in accordance with AICPA Statement of Position 91-1. Under AICPA
Statement of Position 91-1, we recognized the entire Lightspan Achieve Now
license fee upon the initial shipment of titles.
Effective February 1, 1998, we adopted AICPA Statement of Position 97-2,
which caused a substantial change in our revenue recognition for Lightspan
Achieve Now licenses. Under AICPA Statement of Position 97-2, we are unable to
recognize any Lightspan Achieve Now license fees as revenue until we ship the
final title which we plan to provide to all existing customers for no additional
charge. Therefore, we have deferred revenue recognition for all Lightspan
Achieve Now licenses shipped in the year ended January 31, 1999 and the nine
months ended October 31, 1999. We have also deferred revenue recognition for all
Lightspan Achieve Now licenses shipped in the quarter ended January 31, 2000 and
will do the same for any subsequent quarter until we have shipped the final
title to be provided for that grade cluster. By July 31, 2000, we expect to ship
the final title to be provided to all existing customers for no additional
charge. At that time we expect to recognize all of the revenue related to
shipments of Lightspan Achieve Now for that quarter as well as all prior
quarters since the adoption of AICPA Statement of Position 97-2. This will
result in the recognition of the entire deferred revenue balance, and the
related deferred cost of revenue, at that time. This impact could all occur in a
single quarter, if the final title for each grade cluster is completed in the
same quarter, or it could occur over two quarters, if the final title for one or
two grade clusters is completed in one quarter and the final title for the other
one or two grade clusters is completed in a subsequent quarter.
26
<PAGE> 28
Since we defer all of the Lightspan Achieve Now license revenue pursuant to
AICPA Statement of Position 97-2, we also defer all of the costs of duplicating
the product and packaging it for distribution. We will recognize these amounts
as cost of license revenue when we recognize the related revenue.
The following table shows the amount of license revenue and the amount of
cost of license revenue we have deferred since the adoption of AICPA Statement
of Position 97-2:
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
---------------------------------------- YEAR ENDED ------------------------------
APRIL 30, JULY 31, OCT 31, JAN 31, JAN 31, APRIL 30, JULY 31, OCT 31,
1998 1998 1998 1999 1999 1999 1999 1999
--------- -------- ------- ------- ---------- --------- -------- -------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
License Revenue
Deferred During the
Period............. $2,958 $ 7,803 $4,920 $ 5,036 $20,717 $3,578 $ 8,763 $ 7,149
Cost of License
Revenue Deferred
During the Period.. 560 1,066 860 1,069 3,555 651 1,657 1,230
<CAPTION>
NINE MONTHS TOTAL AMOUNTS
ENDED DEFERRED AT
OCT 31, OCTOBER 31,
1999 1999
----------- -------------
($ IN THOUSANDS)
<S> <C> <C>
License Revenue
Deferred During the
Period............. $19,490 $40,207
Cost of License
Revenue Deferred
During the Period.. 3,538 7,093
</TABLE>
We expect to recognize the cumulative deferred license revenue of $40.2
million and deferred cost of license revenue of $7.1 million in the quarters
ending April 30 and July 31, 2000. We will incur additional marginal costs to
reproduce and distribute the as-yet uncompleted titles at October 31, 1999.
OPERATING EXPENSES
During the years ended January 31, 1998 and 1999, our technology and
development and sales and marketing expenses related primarily to the
development, release, marketing, sale and distribution of Lightspan Achieve Now.
During the nine months ended October 31, 1999, our expenses relating to the
development, sale and marketing of our Internet products and services increased.
We expect that we will continue to make investments in product development,
sales and marketing to enhance our Lightspan Achieve Now and Academic Systems
curricula and expand our existing customer base. However, an increasingly
important part of our strategy and spending will focus on building our
technology and development and sales and marketing teams to support our Internet
products and services.
Technology and Development. Our technology and development costs consist
primarily of payroll and related costs for design, art, production, development,
maintenance and testing of our Lightspan Achieve Now curriculum and for
performing Web site design, development and testing. We believe that continued
investment in Web site development is critical to attain our strategic
objectives and therefore anticipate that Web site development expenses will
increase significantly in future periods.
Sales and Marketing. Our sales and marketing expenses consist primarily of
salaries, commissions, bonuses, related payroll and travel costs, advertising,
promotional activities, customer incentive programs and research and evaluation
of our current customers and markets. We expect that sales and marketing
expenses will increase significantly in future periods and we intend to continue
to pursue aggressive branding and marketing campaigns to retain and increase
sales to current customers, attract new customers, and broaden our markets. We
expect that most of these activities will be directed toward the target users
and markets for our Internet products and services.
General and Administrative. Our general and administrative expenses consist
primarily of payroll and related costs for executive and administrative
personnel, professional services expenses and other general corporate expenses.
We expect that general and administrative expenses will increase as our business
grows and we expand our staff, increase our infrastructure, and incur costs
associated with being a public company.
Stock-Based Compensation. We have recorded deferred stock-based
compensation as a result of our granting of stock options to employees with
exercise prices per share deemed to be below the fair values per share for our
common stock on the dates those options were granted. The deferred stock-based
compensation is being amortized to expense on an accelerated basis over the
vesting period of the individual options, generally four years. As of October
31, 1999, there was approximately $6.2 million to be amortized in future
periods.
27
<PAGE> 29
Amortization of Intangible Assets. In connection with the acquisitions of
Academic Systems, Global Schoolhouse and StudyWeb, we recorded intangible assets
totaling an aggregate of approximately $53.7 million, including goodwill of
$27.9 million. We amortize intangible assets over their respective useful lives,
ranging from three to ten years.
Operating Losses
We have incurred significant losses since our inception and, as of October
31, 1999, had an accumulated deficit of approximately $156.5 million. We expect
to continue to incur substantial operating losses for the foreseeable future.
However, in the quarters in which we ship the final Lightspan Achieve Now
titles, which we intend to provide for the different grade clusters to existing
customers for no additional charge, we may have an operating profit. We expect
this will occur in the quarters ending April 30, 2000 and July 31, 2000.
However, because we may complete the final titles for one or two grade clusters
in one quarter and complete the final titles for the remaining one or two grade
clusters in the next quarter, the impact could be spread over multiple quarters.
The operating results in that period or periods will not be indicative of our
underlying business in that period or periods, and will not be indicative of
results that may be expected for any subsequent quarters or for the full year
ending January 31, 2001.
COMPARISON OF NINE MONTHS ENDED OCTOBER 31, 1999 AND OCTOBER 31, 1998
Revenues
Our revenues increased to $11.3 million in the nine months ended October
31, 1999 from $8.5 million for the comparable period of 1998, an increase of
33%. No one customer accounted for more than 10% of total revenues for the nine
month periods ended October 31, 1999 or 1998.
License Revenues. Our license revenues grew to $1.7 million from $0.6
million, an increase of 171%.
Our revenues from subscription fees for The Lightspan Network increased to
$1.2 million from $0.6 million, an increase of 95%. This increase was due
primarily to an increase in the number of subscribers to The Lightspan Network.
Academic Systems license revenues were $0.5 million from the date of
acquisition (September 20, 1999) through October 31, 1999.
Due to our adoption of AICPA Statement of Position 97-2 on February 1,
1998, we did not record any license revenues related to Lightspan Achieve Now in
the nine months ended October 31, 1999 or 1998. We recorded deferred revenue of
$19.5 million in fiscal 1999, an increase of 24% from $15.7 million in fiscal
1998. This increase was due to increased shipments of Lightspan Achieve Now
licenses in fiscal 1999, which resulted from increased sales and marketing
efforts, continued market acceptance of our products and expansion of our
customer base.
Service Revenues. Our service revenues increased to $4.7 million from $3.0
million, an increase of 59%. This increase was due primarily to an increase in
sales of Lightspan Achieve Now licenses. All customers that purchase our
Lightspan Achieve Now curriculum also purchase professional service and support.
Hardware Revenues. Our hardware revenues declined to $4.8 million from $4.9
million, a decrease of 1%. This decrease was due to a decrease in the average
selling price of the Sony PlayStation game console, offset in part by an
increase in the number of units we shipped.
Cost of Revenues
Our cost of revenues increased to $6.7 million for the nine months ended
October 31, 1999 from $5.9 million for the comparable period in 1998, an
increase of 14%. Gross margin as a percentage of total revenues was 40% and 30%
for the nine months ended October 31, 1999 and 1998, respectively. We expect our
gross margins as a percentage of total revenues will increase significantly when
we begin recognizing revenue on shipments of Lightspan Achieve Now.
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Cost of License Revenues. Our cost of license revenues increased to $0.5
million from $0.2 million, an increase of 177%.
Our cost of revenues for subscriptions to The Lightspan Network increased
to $0.4 million from $0.2 million, an increase of 100%. This growth was due
primarily to an increase in third-party content fees driven by an increase in
subscriptions. Gross margin as a percentage of subscription fee revenues from
The Lightspan Network decreased to 70% from 71%. This decrease was primarily due
to additional network and server costs and, to a lesser extent, additional
support personnel costs required to support a larger subscription base.
Our cost of revenues for Academic Systems licenses was $0.1 million from
the date of acquisition (September 20, 1999) through October 31, 1999. Gross
margin as a percentage of license revenues was 70%.
Because we deferred all revenue related to shipments of Lightspan Achieve
Now in the first nine months of both 1999 and 1998, we also deferred the related
cost of revenue. Our deferred cost of license revenues for Lightspan Achieve Now
licenses was $3.5 million in the first nine months of 1999, and $2.5 million in
the first nine months of 1998, a 42% increase. Gross margin related to deferred
Lightspan Achieve Now revenues and deferred cost of revenue was 82% in the first
nine months of 1999 compared to 84% in the first nine months of 1998.
Cost of Service Revenues. Our cost of service revenues increased to $2.2
million from $1.8 million, an increase of 27%. This increase was primarily due
to an increase in professional services and support personnel to accommodate the
growth in sales of Lightspan Achieve Now licenses and related services. Gross
margin as a percentage of service revenues increased to 53% from 41%. This
increase was primarily due to our service revenues increasing at a greater rate
than our fixed professional development costs.
Cost of Hardware Revenues. Our cost of hardware revenues remained steady at
$4.0 million. Gross margin as a percentage of hardware revenues remained
relatively constant. We expect that gross margins as a percentage of hardware
revenue may fluctuate from period-to-period based on variations in the product
mix of hardware accessories.
Technology and Development
Our technology and development expenses decreased to $7.5 million for the
nine months ended October 31, 1999 from $8.5 million for the comparable period
of 1998, a decrease of 11%. This decrease was due to a reduction in development
personnel and related costs that occurred in the second half of the prior fiscal
year. The reduction occurred following completion of initial design and
development of substantially all of our Lightspan Achieve Now titles. This
reduction was partially offset by our hiring of additional personnel for Web
site design and development and a shift of some existing development personnel
and related costs to our Internet business as we expanded our Internet
offerings.
Sales and Marketing
Our sales and marketing expenses increased to $23.8 million for the nine
months ended October 31, 1999 from $16.9 million for the comparable period in
1998, an increase of 41%. This increase was attributable to an increase in
marketing personnel and marketing and promotional activities, particularly in
connection with the launch of Lightspan PageOne.
General and Administrative
Our general and administrative expenses increased to $4.1 million for the
nine months ended October 31, 1999 from $1.8 million for the comparable period
in 1998, an increase of 128%. This increase was due primarily to increased
personnel and related costs, particularly in our finance and management
information systems departments. The increase was also due to additional legal
fees and settlement costs associated with a lawsuit brought by a former
employee, which was settled in August 1999, in addition to an increase in our
allowance for doubtful accounts.
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Stock-Based Compensation
During the year ended January 31, 1999 and the nine months ended October
31, 1999, we granted stock options with exercise prices that were less than the
deemed fair value of the underlying shares of common stock on the date of grant.
As a result, we have recorded and will continue to record deferred stock-based
compensation expense over the period that these options vest. The deferred
stock-based compensation expense was approximately $2.5 million for the nine
months ended October 31, 1999.
Amortization of Intangible Assets
Our amortization of intangible assets totaled $1.6 million for the nine
months ended October 31, 1999 and represents amortization related to Academic
Systems since September 20, 1999, Global Schoolhouse since September 2, 1999,
and StudyWeb since October 28, 1999.
Interest Income (Expense)
Our net interest income decreased to $0.2 million for the nine months ended
October 31, 1999 from $0.4 million for the comparable period in 1998, a decrease
of 34%. This decrease was due to higher average cash balances in the prior
comparable period.
COMPARISON OF YEARS ENDED JANUARY 31, 1999, 1998 AND 1997
Revenues
Our revenues decreased to $10.9 million during the year ended January 31,
1999, or fiscal 1999, from $22.3 million during the year ended January 31, 1998,
or fiscal 1998, and increased from $8.6 million during the year ended January
31, 1997, or fiscal 1997. Revenues declined by 51% in fiscal 1999 and grew by
160% in fiscal 1998.
Our license revenues decreased to $1.0 million from $15.0 million and $5.6
million in fiscal 1998 and fiscal 1997, respectively. The decreases in 1999
compared to prior years were due to the adoption of AICPA Statement of Position
97-2, under which we were required to defer $20.7 million of revenue related to
shipments of Lightspan Achieve Now licenses made in 1999 which would otherwise
have been recognized under AICPA Statement of Position 91-1. The 169% increase
from fiscal 1997 to fiscal 1998 was due to increases in the sales of Lightspan
Achieve Now licenses, primarily as a result of increased sales and marketing
efforts, continued market acceptance of our products, expansion of our customer
base and availability and release of additional Lightspan Achieve Now titles.
The decrease from 1998 to 1999 was offset, to a lesser extent, by increases in
the number of subscriptions to The Lightspan Network.
Our service revenues were $3.7 million, $2.0 million, and $0.6 million in
fiscal 1999, fiscal 1998, and fiscal 1997, respectively, and grew by 90% in
fiscal 1999 and 256% in fiscal 1998. These increases were due primarily to
increases in sales of Lightspan Achieve Now licenses. All customers that
purchase our Lightspan Achieve Now curriculum also purchase professional service
and support.
Our hardware revenues increased to $6.1 million in fiscal 1999 from $5.3
million in fiscal 1998 and $2.4 million in fiscal 1997. These 15% and 119%
increases were due to increased sales of Lightspan Achieve Now licenses and
hardware, partially offset by reductions in the cost of Sony PlayStation game
consoles to us that we passed through to our customers.
Cost of Revenues
Our cost of revenues decreased to $7.7 million in fiscal 1999 from $11.4
million in fiscal 1998, or 33%, and increased in fiscal 1998 from $5.8 million
in fiscal 1997, or 96%. Gross margin as a percentage of revenues decreased to
30% in fiscal 1999 from 49% in fiscal 1998 and 32% in fiscal 1997.
Our cost of license revenues decreased to $0.3 million in fiscal 1999 from
$4.9 million in fiscal 1998, a decrease of 94%, due to the deferral of cost of
revenue related to Lightspan Achieve Now license revenue deferred as a result of
the adoption of AICPA Statement of Position 97-2. Our cost of license
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revenues increased in fiscal 1998 from $3.0 million in fiscal 1997, or by 66%,
due to increases in the sales of Lightspan Achieve Now licenses. Gross margin as
a percentage of license revenues increased to 70% in fiscal 1999 from 67% in
fiscal 1998.
Our cost of service revenues grew to $2.4 million in fiscal 1999 from $1.8
million in fiscal 1998 and $0.6 million in fiscal 1997. These increases were due
to increases in professional development services and support personnel to
accommodate the growth in sales of Lightspan Achieve Now licenses and related
services. Gross margin as a percentage of service revenue increased to 36% in
fiscal 1999 from 11% in fiscal 1998 and from (2%) in fiscal 1997. These
increases were due to increased utilization of our professional development
staff, an increase in the average number of days of service sold per license,
improved billing of customers for services provided beyond the scope of the
original license agreement, and, in general, our service revenues increasing at
a greater rate than our fixed professional development costs.
Our cost of hardware revenues increased to $5.0 million in fiscal 1999 from
$4.7 million in fiscal 1998 and $2.3 million in fiscal 1997. These increases
were due to increased Lightspan Achieve Now license sales, offset in large part
by our transition to the Sony PlayStation game console, a less expensive
hardware platform than the hardware platforms that we had previously provided to
our Lightspan Achieve Now customers, often at low or negative margins. Gross
margin as a percentage of hardware revenues increased to 19% in fiscal 1999 from
10% in fiscal 1998 and 4% in fiscal 1997. These increases were due to the
transition to the higher-margin Sony PlayStation game console platform.
Technology and Development
Our technology and development expenses decreased to $10.6 million in
fiscal 1999 from $14.8 million in fiscal 1998, a 28% decrease, and by 22% in
fiscal 1998 from $19.0 million in fiscal 1997. These decreases were due to
reductions in development personnel and related costs associated with completion
of most of our Lightspan Achieve Now titles. By the end of fiscal 1999,
substantially all design, development and testing had been completed on our
Lightspan Achieve Now product line.
Sales and Marketing
Our sales and marketing expenses increased to $23.0 million in fiscal 1999
from $20.3 million in fiscal 1998 and $13.8 million in fiscal 1997. These 13%
and 47% increases are the result of increased personnel in marketing, increased
commissions and bonuses as the result of growing sales, and additional marketing
and promotional activities. The increase from fiscal 1998 to fiscal 1999 was
partially offset by a decrease in personnel and related costs in the sales and
professional development organizations due to a reduction in headcount during
the last half of fiscal 1999.
General and Administrative
Our general and administrative expenses increased to $3.6 million in fiscal
1999 from $2.7 million in fiscal 1998 and $2.5 million in fiscal 1997. The 32%
increase in general and administrative expenses in fiscal 1999 compared to
fiscal 1998 was caused primarily by $1.1 million in legal and settlement costs
associated with a lawsuit brought by a former employee, which was settled in
August 1999, and an increase in personnel and other costs related to our growth,
partially offset by decreases in bad debt expense in fiscal 1999 as compared to
fiscal 1998. The 10% increase in general and administrative expenses in fiscal
1998 compared to fiscal 1997 was caused primarily by an increase in bad debt and
rent expenses.
Interest Income (Expense)
We earned net interest income of $0.4 million in fiscal 1999, as compared
to net interest expense of $0.5 million and $0.1 million in fiscal 1998 and
fiscal 1997, respectively. Our net interest income in fiscal 1999 compared to
our net interest expense in fiscal 1998 was due to higher average cash balances
in the six months ended July 31, 1998, when we received proceeds of a Series D
preferred stock financing. Our
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interest expense for fiscal 1999, fiscal 1998 and fiscal 1997 is attributable to
the utilization of our equipment lease lines and borrowings against our
revolving line of credit.
QUARTERLY RESULTS
The following table sets forth certain statement of operations data for us
for each of the seven quarters ended October 31, 1999. This information has been
derived from our audited financial statements. You should read this information
in conjunction with our audited and unaudited financial statements and related
notes appearing elsewhere in this prospectus. Our quarterly operating results
are expected to vary significantly because of seasonal influences on demand for
our Lightspan Achieve Now and Academic Systems curricula and our services based
on school calendars, budget cycles and timing of school districts' funding
sources. Our revenues have historically been highest in our second fiscal
quarter, and lowest in our first fiscal quarter. In light of these factors, our
limited operating history and the rapidly evolving nature of our business, we
believe that period-to-period comparisons of our results are not meaningful and
should not be relied upon as indicators of future performance.
<TABLE>
<CAPTION>
APRIL 30, JULY 31, OCTOBER 31, JANUARY 31, APRIL 30, JULY 31, OCTOBER 31,
1998 1998 1998 1999 1999 1999 1999
--------- -------- ----------- ----------- --------- -------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $ 2,003 $ 3,661 $ 2,803 $ 2,403 $ 2,636 $ 4,166 $ 4,480
Cost of revenues........... 1,345 2,787 1,795 1,733 1,574 2,775 2,384
------- ------- ------- ------- ------- -------- --------
Gross profit............... 658 874 1,008 670 1,062 1,391 2,096
Operating expenses......... 9,268 9,102 8,814 10,010 9,528 12,083 17,937
------- ------- ------- ------- ------- -------- --------
Loss from operations....... (8,610) (8,228) (7,806) (9,340) (8,466) (10,692) (15,841)
Interest income (Expense),
net...................... 93 150 108 67 4 3 224
------- ------- ------- ------- ------- -------- --------
Net loss................... $(8,517) $(8,078) $(7,698) $(9,273) $(8,462) $(10,689) $(15,617)
======= ======= ======= ======= ======= ======== ========
License revenue deferred
during the period........ $ 2,958 $ 7,803 $ 4,920 $ 5,036 $ 3,578 $ 8,763 $ 7,149
Cost of license revenue
deferred during the
period................... 560 1,066 860 1,069 651 1,657 1,230
</TABLE>
ACADEMIC SYSTEMS ACQUISITION
We acquired Academic Systems in September 1999. Academic Systems develops,
markets and sells curriculum-based educational software to colleges and
universities for use by under-prepared college students. Academic Systems offers
five course programs -- four in mathematics covering elementary algebra to
college algebra, and one in English covering remedial writing and freshman
composition. Academic Systems' products also include a student management system
that can be run on the Internet or the college's own network.
Revenues consist primarily of fees for licenses and implementation of
Academic Systems' software, customer training, books and materials, upgrades and
support. Academic Systems enters into license agreements under which software,
support and other services are provided to a customer for a fixed fee for a
specified period of time. License revenues are recognized upon contract signing
and delivery of the software, provided the related fee is fixed and determinable
and collection of the fee is probable. The revenues associated with books and
materials are recognized upon shipment and revenues for services are recognized
when the services are performed.
The cost of license revenues consists of costs related to materials for
CD-ROMs, assembly and distribution of CD-ROMs, print materials and third-party
royalties.
Comparison of Nine Months Ended June 30, 1999 and 1998
Academic Systems' revenues increased to $4.9 million for the nine months
ended June 30, 1999 from $2.9 million for the comparable period in 1998, an
increase of 65%. This increase was due to increases in
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sales of licenses, primarily as a result of expansion of Academic Systems'
customer base. Cost of license revenues increased to $1.4 million from $1.2
million, an increase of 16%. Gross margin as a percentage of revenues increased
to 72% from 60% due to decreases in the cost of materials and third-party
royalties and increased utilization of Academic Systems' support and operations
personnel. Operating expenses declined to $8.0 million from $10.0 million, a
decrease of 20%. This decrease was due to reductions in technology and
development expense, as Academic Systems completed the development of its
product line, and sales and marketing, as staffing and marketing programs were
reduced.
Comparison of Years Ended September 30, 1998 and 1997
Academic Systems' revenues increased to $5.9 million in the year ended
September 30, 1998 from $4.4 million in the year ended September 30, 1997. The
35% increase was due to increases in sales of licenses, as a result of increased
sales and marketing efforts, continued market acceptance of the Academic Systems
curriculum, expansion of the customer base, and the availability of additional
titles. The cost of licenses increased to $2.1 million from $1.9 million. Gross
margin improved to 65% from 56% due to the decreasing cost of materials and
improved utilization of support and operations staffs. Operating expenses
increased to $12.9 million from $12.7 million. Technology and development
expense decreased each year as Academic Systems completed the development of its
product line. Sales and marketing expense increases accounted for the majority
of the growth in operating expenses as Academic Systems increased its sales and
marketing staffs, increased commissions and bonuses as a result of growing
sales, and added marketing and promotional activities.
BUSINESS COMBINATIONS AND PURCHASE ACCOUNTING
The acquisition of Academic Systems, Global Schoolhouse and StudyWeb were
accounted for as purchases. During the nine months ended October 31, 1999, we
paid net cash of $4.3 million for these acquisitions.
The purchase price of Academic Systems was allocated to the assets
acquired, consisting principally of goodwill and intangible assets which are
being amortized over useful lives ranging from 4 to 10 years. The purchase
prices of Global Schoolhouse and StudyWeb were allocated to the assets acquired,
primarily intangibles related to the Web sites acquired, which are being
amortized over useful lives of three years.
The assets and operations of Global Schoolhouse and Study Web are included
in the Internet K-12 segment. The assets, liabilities and operations of Academic
comprise the Higher Education segment. The results of operations for all three
acquired businesses, including the related amortization of intangible assets,
have been included in our consolidated results of operations from the dates of
acquisition.
Amortization of intangibles and goodwill for the nine months ended October
31, 1999 was $1.6 million. We expect to record annual amortization expense
related to these acquisitions of approximately $5.0 million for the year ending
January 31, 2000, $13.4 million for each of fiscal years 2001 and 2002, $12.8
million for fiscal 2003, $7.5 million for fiscal 2004, and approximately $0.3
million for each fiscal year from 2005 through 2009.
SPRINGING WARRANTS
Upon the sale of Lightspan's common stock as described in this prospectus,
outstanding, unexercisable warrants to purchase up to 3,326,112 shares of Series
D preferred stock at $.01 per share could become exercisable. The exact number
of shares that will be issued depends upon the per share public offering price
of our common stock, the closing date of this offering, and whether warrant
holders choose to net exercise their warrants, and is calculated in a manner
designed to ensure an agreed-upon rate of return on investment.
Lightspan will account for the springing warrants as a preferred stock
dividend. As such, on the exercise date we will account for the value of these
warrants by charging retained earnings and increasing
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the carrying amount of preferred stock by a corresponding amount. The amount of
this charge will increase the loss applicable to common stockholders.
If the offering contemplated by this prospectus is completed under the
terms set forth on the cover, warrants to purchase up to 1,663,056 additional
shares of common stock would be exercised concurrently with the close of this
offering at $0.02 per share and the loss applicable to common stockholders would
increase by approximately $19.9 million as a result.
OTHER RELATIONSHIPS
CINAR Corporation
In October 1999, we agreed to pursue several potential strategic
initiatives with CINAR Corporation. CINAR is an integrated entertainment and
education company that develops, produces, markets and distributes high-quality
programming and supplemental education products for children, families and
educators. CINAR markets and distributes its animated and live-action children's
and family programming to broadcast, cable and other media outlets worldwide.
CINAR's productions include the two-time Emmy award-winning Arthur, the
top-rated children's television program in the United States, as well as Are You
Afraid of the Dark?, Wimzie's House, Lassie, The Busy World of Richard Scarry
and The Adventures of Paddington Bear. CINAR also publishes and distributes
approximately 2,000 supplemental education products for pre-kindergarten through
eighth grade that enhance classroom curricula and foster continued learning in
the home. CINAR's products are sold each year to more than 1.6 million teachers
and 370,000 daycare providers in North America.
As part of our agreement, CINAR purchased 2,500,000 shares of our Series E
preferred stock at $5.00 per share. CINAR also agreed to purchase $10 million of
our common stock in a private placement scheduled to occur concurrently with our
initial public offering at the initial public offering price. We also granted
CINAR warrants to purchase 500,000 shares of our Series E preferred stock that
will vest upon the achievement of various agreed-to strategic goals. The planned
strategic initiatives include such projects as
- a convergence educational television series, combining broadband
interactive offerings and standard television;
- the co-development of a pre-kindergarten educational portal featuring
CINAR's subsidiary HighReach Learning; and
- a series of other co-marketing and distribution arrangements such as the
international distribution of Lightspan products.
As part of our agreement with CINAR, Ronald A. Weinberg, CINAR's President
and co-CEO, joined our board.
Cox Communications
In January 2000, we agreed to pursue strategic initiatives with Cox
Communications Holdings, Inc. Cox Communications is among the nation's largest
broadband communications companies, serving more than 3.8 million customers in
18 locations. Cox Communications also provides a wide variety of services to
schools in their cable communities through its "Cable in the Classroom"
initiative, which provides public schools with free basic cable service and
learning guides. As part of our agreement, Cox Communications agreed to purchase
$12.5 million of our common stock, or 1,041,667 shares, in a private placement
scheduled to occur concurrently with our initial public offering upon
satisfaction of several conditions. We also agreed to grant to Cox
Communications a warrant to purchase 750,000 shares of our common stock upon the
closing of this offering. The warrant will vest upon the achievement of various
agreed-to strategic goals related to the proposed use of Lightspan Achieve Now
and Lightspan.com products in trials by Cox Communications of cable offerings
over digital set-top boxes.
As part of our agreement with Cox Communications Holdings, Inc., Thomas F.
Nagel, Cox Communications Inc.'s Vice President of Business Development, will
join our board as of the close of this offering.
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Gateway
In January 2000, Gateway Companies, Inc. agreed to purchase $3.0 million of
our common stock, or 250,000 shares, in a private placement that is scheduled to
occur concurrently with our initial public offering. This investment by Gateway
is subject to the satisfaction of several conditions, including our jointly
entering into an Internet sponsorship agreement whereby Gateway will become a
sponsor of Lightspan.com. Gateway, a manufacturer of personal computers, is
Lightspan's preferred provider of personal computers.
LEGAL MATTERS
In July 1996, a former Lightspan employee commenced legal action against
us, alleging causes of action for fraud, breach of contract, negligent
misrepresentation and conversion. On August 26, 1999, we entered into a
settlement agreement and release with the former employee, the terms of which
are subject to confidentiality provisions set forth in the agreement.
During the year ended January 31, 1999, we recorded a charge of
approximately $1.1 million for anticipated settlement and legal costs related to
this case. During the quarter and nine months ended October 31, 1999, we
recorded an additional charge of approximately $467,000 to cover additional
costs related to the settlement.
As of October 31, 1999, we had paid approximately $950,000 in legal and
settlement costs related to this case. We anticipate that we will pay an
additional $617,000 shortly following the effective date of this offering.
LIQUIDITY AND CAPITAL RESOURCES
From inception through October 31, 1999, we financed our operations and met
our capital expenditure requirements primarily with the net proceeds from
private sales of equity securities totaling approximately $143.6 million. At
October 31, 1999, we had $22.7 million of cash and cash equivalents. The
expansion of our business will require significant additional capital to fund
operating losses, capital expenditures and working capital needs. We expect our
operating losses to continue and increase for the foreseeable future.
Our working capital has fluctuated significantly since our inception. This
is due, in large part, to the timing of cash payments to vendors, cash
collections from customers, varying resources required for development efforts
on Lightspan Achieve Now, as well as receipt of cash from our preferred stock
and other financings. We expect that our working capital requirements and cash
position will fluctuate significantly from period to period for the foreseeable
future. These fluctuations may be caused by increased spending to support our
growth in operations, strategic investments, or acquisitions.
Net cash used in operating activities was $11.8 million for the nine months
ended October 31, 1999, $16.5 million for fiscal 1999, $22.5 million for fiscal
1998 and $31.5 million for fiscal 1997. Net cash used during these periods was
primarily to fund technology and development, sales and marketing and general
and administrative costs associated with the development and deployment of our
Lightspan Achieve Now curriculum and Internet products and services. We expect
our negative operating cash flow to continue and increase for the foreseeable
future.
Net cash used in investing activities was $5.6 million for the nine months
ended October 31, 1999, $0.7 million for fiscal 1999 and insignificant in fiscal
1998. The increase in cash used during this period relates primarily to net cash
paid for the acquisitions of Academic Systems, Global Schoolhouse and StudyWeb.
Net cash used during these periods was primarily for the acquisition of property
and equipment. Net cash provided by investing activities was $2.6 million for
fiscal 1997, due to maturities on our short-term investments.
Net cash provided by financing activities was $33.0 million for the nine
months ended October 31, 1999, $19.9 million for fiscal 1999, $25.4 million for
fiscal 1998 and $21.5 million for fiscal 1997. Our cash
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provided by financing activities during these periods was raised by issuing our
Series C, D and E preferred stock to various strategic and financial investors.
In February 1999, we extended our line of credit with a financial
institution. The line of credit bears interest at the bank's prime rate plus
1.5% and expires in April 2000. The amount available under the line of credit
was increased to the lesser of $10.0 million or 75% of eligible accounts
receivable, and is collateralized by substantially all of our assets.
We entered into a $1.0 million capital leasing line with a financial
institution in April 1999. Under the agreement, which expires in March 2000, we
finance the purchase of capital equipment at an 8.8% interest rate over a 42
month period with a purchase option.
We have also entered into various purchase order commitments with a number
of vendors, primarily for the purchase of hardware, marketing services,
promotional activities and development activities. As of October 31, 1999, our
outstanding purchase order commitments were approximately $0.4 million.
Our future capital requirements will depend on a variety of factors,
including market acceptance of our products and services and the resources we
devote to developing, marketing, selling and supporting our products. We expect
to devote substantial capital resources in connection with:
- brand maintenance, advertising, marketing and promotional activities;
- continued development and expansion of our Internet offerings and
content;
- hiring personnel, including additional Internet systems, sales and
marketing, and product development personnel; and
- acquiring additional office space and other necessary facilities.
In addition, we may devote substantial capital resources to strategic
acquisitions and relationships.
In September 1999 we completed our acquisition of Academic Systems,
pursuant to which we issued 7,191,839 shares of our Series E preferred stock
pursuant to various exchange ratios applied to the various classes and series of
capital stock of Academic Systems. However, we believe a small number of former
Academic Systems stockholders may have rights to additional shares of our stock,
or other compensation in lieu of issuing such shares. As a result, we intend to
issue 1,068,015 shares of Series E preferred stock, subject to regulatory
approval, to those stockholders. Alternatively, we may pay them cash or some
other form of consideration.
We believe that our cash and cash equivalents and the net proceeds from
this offering will be sufficient to fund our operations for at least the next 18
months. Despite our expectations, we may need to raise additional capital before
the end of the next 18 months.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates relates primarily
to the increase or decrease in the amount of interest income we can earn on our
investment portfolio and on the increase or decrease in the amount of interest
expense we must pay with respect to our various outstanding debt instruments.
Our risk associated with fluctuating interest expense is limited, however, to
our line of credit, the interest rates under which are tied to market rates, and
our investments in interest sensitive financial instruments. Under our current
policies, we do not use interest rate derivative instruments to manage exposure
to interest rate changes. We ensure the safety and preservation of our invested
principal funds by limiting default risks, market risk and reinvestment risk. We
mitigate default risk by investing in investment grade securities. A
hypothetical 100 basis point adverse move in interest rates along the entire
interest rate yield curve would not materially affect the fair value of our
interest sensitive financial instruments at January 31 or October 31, 1999.
Declines in interest rates over time will, however, reduce our interest income
while increases in interest rates over time will increase our interest expense.
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BUSINESS
OVERVIEW
The Lightspan Partnership, Inc. provides curriculum-based educational
software and Internet products and services used both in school and at home. Our
technology, delivery systems and content help increase student interest in
learning, parental involvement in their children's education, and productive
interaction among teachers, parents and students. Over 340 studies by schools
that use our products and services show that our products improve overall
student performance.
Lightspan Achieve Now, our product for students in kindergarten through
eighth grade, or K-8, is a series of media-rich, interactive software programs
that covers the core curriculum -- language arts, reading and math. We sell it
exclusively to schools and school districts, and it is used by teachers,
students and parents. We typically sell the Lightspan Achieve Now software with
a Sony PlayStation game console that the student uses to run the program at home
throughout the school year.
We also provide a series of curriculum-based software that addresses the
math and writing needs of under-prepared college students through our
subsidiary, Academic Systems Corporation.
We offer the following integrated family of Internet products and services
through our Web site, Lightspan.com:
- The Lightspan Network, an online subscription service marketed to schools
for classroom and home use, introduced in January 1997 and redesigned in
September 1999;
- Lightspan PageOne, an online service developed with Yahoo! and launched
in June 1999 that enables teachers to easily create customized home pages
for their classrooms;
- Global Schoolhouse, a leading education Web site that helps teachers
develop and manage collaborative learning projects online;
- StudyWeb, a leading research Web site started in 1995 that helps parents,
teachers and students find educational information and resources on the
Web;
- The Lightspan Learning Store, a Web site that sells educational products
online to teachers and parents, introduced in October 1999; and
- selected additional content for teachers, parents and students.
We were founded in 1993 on the philosophy of using technology to increase
student achievement by connecting the school to the home. Over 873 school
districts in 46 states have purchased our Lightspan Achieve Now curriculum and
implemented it in over 2,250 schools and 11,075 classrooms, representing a total
of 120,750 student and teacher licenses. Students in over 225 colleges and
universities across the United States are currently using Academic Systems'
products. Our Internet K-12 products and services are used in over 6,400
schools, of which over 1,100 schools are using the Lightspan Network.
Lightspan.com is currently being used by over 228,000 unique visitors monthly.
MARKET OPPORTUNITY
Education is the second largest sector of the United States economy, behind
health care. According to the Department of Education, the United States spent
an estimated $351 billion on kindergarten through twelfth grade, or K-12,
education in the 1997 - 1998 school year, which represented over 4% of the
United States gross domestic product. During the 1997 - 1998 school year, an
estimated 52.2 million students were enrolled in K-12 in 110,473 public and
private schools in over 16,400 school districts.
Comparative studies among industrialized countries show that American
students rank near the bottom in educational performance. Thirty-eight percent
of American fourth graders read below the basic reading level and American
eighth graders recently ranked 28th in a study comparing their mathematical
performance to that of students from 40 other countries. In addition, a recent
federal study found that
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approximately 30% of incoming college freshmen in the United States enrolled in
at least one remedial education course.
The need to improve student achievement is a top priority in American
education. Growing concerns about this issue have resulted in educators and
school districts being held increasingly accountable for their students'
educational progress. Educators have responded by seeking alternatives for more
effective K-12 education and have identified key elements that are important for
educational reform. These key elements include:
- students spending more time on core curriculum;
- students being motivated to learn;
- families becoming more actively involved in their children's schooling;
and
- educational resources being accessible to all students, families and
schools, regardless of socioeconomic status.
Educators today are challenged to effectively access and implement educational
technology that addresses key educational reform elements and improves student
performance. Industry sources estimate that spending on educational technology
was approximately $7 billion during the 1998-1999 school year, and this figure
is expected to increase to approximately $10 billion by the 2001 - 2002 school
year.
The Internet is becoming an increasingly important part of American
education, with teachers viewing the Internet as a powerful learning,
communication and information resource for use in both schools and in homes. In
a recent survey, 90% of teachers said they considered Internet access in their
classroom valuable or essential, and over 51% of classrooms had Internet access
in 1998. The number of five through twelve year-old children with Internet
access is expected to grow 155% to 21.9 million between 1998 and 2002. Teachers
are seeking ways to effectively harness the resources available on the Internet
and offer their students safe and appropriate materials.
Increased spending on educational technology, a growing commitment to
improving student achievement, and rising demand for educational reform programs
that are built around or include educational technology has created a
significant market opportunity for providers of software- and Internet-based
educational products and services.
THE LIGHTSPAN SOLUTION
Lightspan offers curriculum-based educational software featuring digital
video technology and entertainment industry production quality. Our software is
used by students in an interactive setting in schools, colleges and homes. We
combine our software offerings with Internet products and services to provide
teachers, students and families with educational tools and resources to help
students learn and succeed. We believe that our competitive advantages include
the following:
We Improve Student Achievement. We have developed curriculum-based
educational software that improves student achievement. Over 340 studies by
schools that use our products and services show that our products improve
student performance in reading or mathematics or in both subjects. A composite
analysis of studies conducted by schools at 36 sites and covering 4,650 students
shows that, on average, 24% more Lightspan Achieve Now students were successful
in reading and 46% more Lightspan Achieve Now students were successful in
mathematics than their peers who did not use the Lightspan Achieve Now
curriculum, as measured by performance on standardized tests. In part because of
its demonstrated impact on student achievement, our Lightspan Achieve Now
curriculum has been included as a skill-and-content-based reform model eligible
for funding by the U.S. Department of Education's Comprehensive School Reform
Demonstration program. Several independent studies conducted by colleges that
use our Academic Systems products have shown that these products, compared to
traditional lecture taught courses, increase pass rates, keep more students
enrolled in the courses covered and increase students' performance in follow-on
course work.
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We Increase Student Motivation. We believe that the engaging Lightspan
Achieve Now interactive learning experience, and the increased involvement of
parents when students use the curriculum at home, motivate K-8 students to focus
more effectively on core curriculum study. Approximately 60% of teachers using
our Lightspan Achieve Now program reported to us in a survey that the program
had a positive impact on student attitude and motivation in their classrooms. We
also believe that the Academic Systems interactive learning experience, which
links writing or math lessons with immediate practice and feedback and allows
students to choose the learning style that works best for them, is a unique
motivational tool for students in remediation courses.
We Extend Learning Beyond Traditional Classroom Time. In addition to their
use in the classroom, our products and services are used both in the home and in
structured after-school and summer-school programs designed to increase the
amount of time students spend learning. Schools that have implemented the
Lightspan Achieve Now curriculum report that 84% of students spend approximately
one half hour or more, and that 41% spend approximately an hour or more, at home
on core curriculum study daily. Moreover, when our products are used in the
home, parents can take a more active role in their child's learning.
Additionally, the learning resources offered through our Internet products and
services can be accessed at any time by teachers, parents and students to
further a broad range of out-of-classroom educational objectives.
We Facilitate Widespread Use of Our Products and Services. We seek to
provide schools with cost-effective ways to give access to enhanced learning
through educational technology to all students, regardless of socioeconomic
status. A school that implements Lightspan Achieve Now generally provides to
students, at no cost to the family, a Sony PlayStation game console to run the
program on a home television. Our Academic Systems software products cost
approximately as much as a textbook, which makes these learning tools accessible
to most students, either in a computer lab or in their residence. For K-12
students that have access to the Internet, we provide free or
paid-for-by-the-school Internet tools that are either customized by their
teacher or correlated to their curriculum. We believe our ability to reach
students will be enhanced as more students get Internet access at home. Also, as
broadband technology becomes more widespread among cable television subscribers,
our products may become available on a digital set-up box provided by cable
operators, and be accessible to all students with cable service whose school
districts use our products and services.
We Have Experienced Staff to Reach the Nation's Educators. We currently
employ 91 direct salespeople and 74 professional development staff members for
our Lightspan and Academic Systems products and services. They are experienced
in selling to and training educators and have established strong relationships
with key decision makers in the education community. We generally hire current
or former education professionals to serve the territories that encompass their
local education communities. As a team, our sales and professional development
staff guides educators through the decision making process for purchasing
educational technology and ease their transition to its use, thereby making
educational technology more accessible to educators and available to more
students. We believe that our ability to successfully transition educators to
the use of our curricula manifests itself in our large number of repeat
customers. For example, during our fiscal year ended January 31, 1999, 74% of
school districts that were using our Lightspan Achieve Now curriculum at the
beginning of the year bought additional products.
We Offer High-Quality, Curriculum-Based Content. We have developed and own
the rights to nearly all of the content on the 77 titles in our Lightspan
Achieve Now curriculum, which aggregate over 1,200 hours of learning-intensive
programs correlated to state academic standards. We have also developed The
Lightspan Network, an online subscription service for classroom and home use
that provides subscribers with a rich array of curriculum-based content that is
correlated to state academic standards. In addition, we have developed and own
the rights to all 5 titles in our Academic Systems curriculum, which aggregate
over 420 hours. We intend to enhance our current content-based products and
services, particularly in connection with our planned expansion of
Lightspan.com.
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STRATEGY
Our objective is to become the premier online education destination for
teachers, parents and students, as well as the leading provider of
technology-delivered, curriculum-based supplemental study materials in
kindergarten through college education. In order to achieve this objective, we
intend to pursue the following strategies:
Capitalize on Our Current Market Position. We intend to capitalize on the
relationships that we have established with educators and the strength of our
products and services and Lightspan and Academic Systems brands to increase our
market penetration. We have established our market position to date by directing
our marketing efforts toward becoming the educational technology provider of
choice among teachers. We believe that our established market position will
enable us to do the following:
- migrate our existing installed user base to our Internet offerings;
- sell The Lightspan Network and Lightspan Achieve Now to schools that use
our free Internet services;
- increase the number of schools, colleges, classrooms and college sections
that use our curriculum-based software; and
- extend the use of our Academic Systems curriculum to more high schools
that participate in outreach programs with community colleges that
currently use that curriculum.
Continue to Develop and Enhance Lightspan.com. We intend to continue to
develop and enhance our Lightspan.com Web site to make it the premier online
education destination for teachers, parents and students. To increase
connectivity between schools and homes, we plan to introduce Your School Online,
a free home page builder for schools, at our Lightspan.com Web site in early
2000. Also in early 2000, we plan to increase the offerings for teachers,
parents and students at Lightspan.com, and to further enhance Lightspan.com by
entering into strategic relationships to sell teaching supplies and other
products online. Accordingly, we will seek to ensure that our Lightspan.com Web
site will offer teachers, parents and students:
- tools to enhance communication between classroom, school and home;
- access to curriculum-based interactive K-8 educational content;
- proprietary search capabilities tailored to classroom use; and
- the opportunity to purchase a broad range of educational products and
teaching supplies.
While Lightspan.com's content is currently focused on K-8 students and their
parents and teachers, we intend to later expand its selected educational content
to address the needs of high school students.
Enhance our Lightspan Achieve Now Curriculum With Content Delivery
Available Through New Internet and Broadband Technologies. As technology
evolves, we intend to migrate our customers to new delivery platforms that will
extend our reach. Our Lightspan Achieve Now and Academic Systems curricula are
very media-rich and are not currently delivered over the Internet, given
bandwidth limitations. However, we recently began to manage some of the Academic
Systems curriculum through our Academic Systems Web site, which enables teachers
to efficiently compile information about time-on-task and performance for
students who use that curriculum. We plan to implement use of an Internet
compatible game console or other delivery platform that will provide direct
access from the home to our Internet products and services. We anticipate this
will enable us to enhance future releases of our Lightspan Achieve Now
curriculum with content available through our Internet products and services. As
broadband technology becomes more prevalent and cable operators provide more of
their customers with digital set-top boxes, we intend to offer both Lightspan
Achieve Now and all of our Internet products and services on digital cable
television systems. We expect that, while we will continue to enable these
products and services to be used on Sony PlayStation game consoles and personal
computers, they will also be able to be used on digital set-top boxes and other
new broadband devices.
Create Additional Internet-Based Revenue Streams. We believe that the
complementary nature of our product lines will allow us to cross-promote and
cross-sell our products and services, and to generate and
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sustain multiple revenue streams in the future. With the introduction of our
first Internet service, The Lightspan Network, we gained a renewable stream of
subscription revenue to augment our revenues from software licenses. We expect
to continue to generate a subscription revenue stream with sales of The
Lightspan Network, and ultimately to sell subscriptions for Lightspan Achieve
Now to be delivered using broadband technology. In addition, we plan to focus on
the sale of "Olympic-style" sponsorships, supplemented by sales of banner
advertisements where appropriate, to fund the further development of
Lightspan.com and our other free Internet offerings. We also intend to sell an
increasing array of educational products online. The Lightspan Learning Store, a
Web site where SmarterKids.com sells educational products under the Lightspan
brand to families, was introduced in early October 1999, and we intend to
increase our offerings on that site. We also intend to develop other Web sites
that will sell teaching supplies and other products beginning in early 2000.
Capitalize on the Experience of the Lightspan Team. We have a management
team with extensive educational technology and Internet experience. Both John
Kernan, our Chairman and Chief Executive Officer, and Carl Zeiger, our President
and Chief Operating Officer, started educational technology companies before
they founded Lightspan. Our sales and marketing organizations are headed by
people with extensive experience in educational technology sales at Apple
Computer, Inc. Our sales and marketing personnel also have extensive contacts in
school districts or colleges within their territories and frequently can
leverage their existing relationships with school district and school decision
makers. Our Lightspan Achieve Now product development team is comprised of
former classroom teachers and experienced instructional designers, animators,
and multimedia computer programmers. Our Internet team includes several key
individuals who previously contributed to the development and management of
Disney Online and Disney.com while working at The Walt Disney Company.
Pursue Strategic Acquisitions and Relationships. We have pursued and
entered into strategic acquisitions and relationships to facilitate the growth
of our business, such as our acquisitions of Academic Systems, Global
Schoolhouse and StudyWeb and our relationships with Sony Computer Entertainment
and SmarterKids.com. We intend to continue to pursue strategic acquisitions and
relationships as we attempt to diversify our revenue sources and the delivery
platforms for our curriculum-based content. For example, in October 1999, we
agreed to pursue several potential strategic initiatives with CINAR Corporation.
PRODUCTS
Our products and services are technology-based educational tools and
resources that can be used by teachers, students and families to increase
student performance.
K-8
Lightspan Achieve Now is a series of media-rich, interactive software
programs that covers the core curriculum of language arts, reading and math, and
is designed to enhance learning in both the classroom and at home. Lightspan
Achieve Now is a supplement to textbooks and other materials used in K-8 schools
and covers more than 80% of the typical K-8 reading, language arts and
mathematics curricula. Lightspan Achieve Now incorporates a variety of
interactive formats and varying levels of difficulty to cover a specific set of
educational objectives and to address a diverse range of learning styles, making
it possible to reach each student in a class more effectively. The Lightspan
Achieve Now curriculum features stories and original characters designed around
an active learning approach, which is intended to provide the learner with the
following essential components of an effective learning environment:
- motivation to master a skill or concept;
- learning by doing;
- practice; and
- application of the skill or concept to another situation.
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The Lightspan Achieve Now curriculum was developed using entertainment industry
production techniques and features full motion digital video and 3-D animation.
We deliver our reading and language arts and mathematics curricula in
imaginary "worlds" -- episodic, interactive series with a consistent set of
characters that are designed to cover a broad range of curriculum objectives.
Generally, each world is contained on a series of CD-ROMs, or titles, which are
divided into multiple "Adventures." Our Adventures are developed with the
assistance of an advisory board of reading, language arts and mathematics
educators, an advisory board of video game developers, television writers and
commercial animators. Various characters from our Lightspan worlds are depicted
below.
[A collection of Lightspan characters from various Lightspan Worlds and
Adventures]
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Our Lightspan Achieve Now language arts and reading curriculum provides a
variety of learning paths, all with a single objective -- improving literacy and
communication -- and is designed to ensure that all students succeed in
listening, speaking, reading, writing, viewing and producing. The Adventures
that comprise our Lightspan Achieve Now reading and language arts curriculum
address vocabulary comprehension, critical thinking skills, study skills, the
writing process, print and text recognition, phonics, decoding, and many other
areas covered by the typical K-8 reading and language arts curriculum. These
Adventures currently include the following:
LIGHTSPAN ACHIEVE NOW LANGUAGE ARTS AND READING CURRICULUM
<TABLE>
<CAPTION>
ADVENTURE SERIES GRADES FOCUS
---------------- ------ -----
<S> <C> <C>
Calamity 3-4 Reading informational text
Cosmic Cookoff K-2 Reducing test-taking anxiety
Cosmic Quest K-2 Motivation in learning
Faire Games K-2 Practicing test-taking skills
K9.5 3-4 Strategies for written and oral communication
KazMania 3-4 Literary appreciation and comprehension
Liquid Books K-6 Reading with fluency
Mona & Moki 3-4 Developing vocabulary
Road Writer K-6 Steps in writing process
Stay & Play K-2 Applying skills in everyday experiences
str.at.e.s 5-8 Confidence in reading informational text
WalkAbout K-2 Theme-based activities for literacy
</TABLE>
Our Lightspan Achieve Now math curriculum is designed to provide a set of
experiences that increase student confidence and encourage students to solve
problems, think mathematically and apply and communicate their thinking. The
Adventures that comprise our Lightspan Achieve Now mathematics curriculum
address number sense, critical thinking, number theory, estimation, geometry and
many other areas covered by the typical K-8 mathematics curriculum. These
Adventures currently include the following:
LIGHTSPAN ACHIEVE NOW MATH CURRICULUM
<TABLE>
<CAPTION>
ADVENTURE SERIES GRADES FOCUS
---------------- ------ -----
<S> <C> <C>
Cali's Geo Tools K-2 Mastery of basic math concepts
Cosmic Cookoff 3-4 Reducing test-taking anxiety
Creative Tools 3-4 Interactive scenarios
Faire Games K-2 Practicing test-taking skills
Math Gallery K-6 Understanding math problems
Math on the Move! 3-6 Mental math strategies
P.K.'s Math Studio 3-4 Mastery of basic math by solving word problems
P.K.'s Place 3-4 Practicing math skills
The Quaddle Family Mysteries 3-4 Practicing active math problem solving
The Secret of Googol K-2 Developing strong math foundations
Timeless Math 5-8 Broadening students' awareness of other cultures
through math challenges
</TABLE>
The Lightspan Achieve Now curriculum is divided into grade clusters for
K-2, 3-4, and 5-6. The 5-6 materials are also used in middle schools for poorer
performing grade 7-8 students. Each grade cluster includes 32 to 36 separate
Lightspan Achieve Now titles, with each title consisting of one distinct
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CD-ROM. There are a total of 77 separate titles, some of which are included in
more than one grade cluster. From the time we commenced sales of the Lightspan
Achieve Now product line, a number of these titles were not available on the
date of the sale, but were under development at various stages in the
development cycle. We consider titles that have completed the development cycle
and have been released for shipment to customers to be "completed," and we
consider titles still in the development cycle to be "as-yet uncompleted." While
we are under no contractual obligation to deliver any as-yet uncompleted titles
to our customers, we do intend to deliver the remaining titles on a when-and-if
available basis, and have in the past shipped additional titles to our customers
as titles have been completed. As of October 31, 1999, 72 of the 77 titles had
been completed. The remaining five titles are expected to be completed during
the first and second quarters of the fiscal year ending January 31, 2001. After
the completion and delivery of the last of these 77 titles, we will offer any
newly developed titles for sale to all existing customers at a separate price.
Lightspan Achieve Now licenses are sold on a perpetual license basis for
approximately $600 per student license including the teacher license and
materials. A complete Lightspan Achieve Now program consists of teacher licenses
containing approximately 35 CD-ROM titles appropriate to each grade level,
instructional materials, student licenses for each student containing the same
CD-ROM titles as those included with the teacher licenses, student pre-tests,
post-tests and progress checks, parenting and other materials, professional
development visits, and evaluation criteria to meet accountability standards.
Lightspan Achieve Now's curriculum runs on both Sony PlayStation game
consoles and MPEG-capable, Windows-based personal computers, though use at home
is currently almost always on Sony PlayStation game consoles. We plan to
continue development of new titles to meet changing education trends and to
refresh the product over time.
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K-12 INTERNET
Our family of Internet products and services provides teachers, students
and parents with a wide array of online learning resources.
Lightspan.com
All of our Internet products and services can be found at
www.lightspan.com, including Lightspan PageOne, Global Schoolhouse, The
Lightspan Network, The Lightspan Learning Store and StudyWeb. The information
found on our Web site is not a part of this prospectus, except for the
information we have included in the prospectus. We intend to significantly
expand and enhance the products and services offered through Lightspan.com in
early 2000, including the addition of specific content for teachers, students
and parents.
[Lightspan.com Home Page Screen Shot]
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Lightspan PageOne
Developed with Yahoo!, Lightspan PageOne helps teachers quickly and easily
build customized classroom home pages and assemble the best educational
resources available on the Internet to support their classroom instruction. With
over 35,800 registered users, Lightspan PageOne allows teachers to:
- access a database of over 115,000 educational Web sites, activities and
lesson plans which have been reviewed by educators;
- bookmark favorite sites;
- post homework assignments;
- create class albums, like collections of student artwork or projects;
- access on-line reference resources such as a dictionary, thesaurus, and
encyclopedia;
- use a variety of curriculum-based interactive learning activities in
their classrooms; and
- share these features in a password-protected environment with students'
families.
[Lightspan PageOne Home Page Screen Shot]
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Global Schoolhouse
We recently acquired Global Schoolhouse, a Web site which has over 28,900
registered users. It enables classroom to classroom collaboration by allowing
educators to share ideas and create projects together online. Global Schoolhouse
began as a pilot project of the National Science Foundation. Global Schoolhouse
has teamed with individuals, schools, businesses, and community organizations to
design, develop and manage hundreds of collaborative online learning projects
each year. Global Schoolhouse offers:
- Cyberfair, an annual global Internet competition for children in grades
K-12, who showcase their local communities by designing their own Web
sites;
- CU-Schools Videoconferencing, a real-time, community-building
conferencing system that lets students and their teachers learn and
collaborate online; and
- Internet Projects Registry, a registry of classroom projects from
teachers all over the world.
[Global Schoolhouse Home Page Screen Shot]
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StudyWeb
We recently acquired StudyWeb, a "homework helper" Web site. StudyWeb was
started approximately four years ago to specifically address one of the needs
most frequently cited by parents, teachers and students seeking to use the Web
for educational purposes -- finding research resources as easily as possible on
the Web without encountering inappropriate materials. StudyWeb has developed a
sophisticated system for identifying and reviewing Web sites, and has built a
database with more than 115,000 Web site reviews. Reviews are categorized by
subject matter and include grade level recommendations, content descriptions and
other useful information.
[StudyWeb Home Page Screen Shot]
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The Lightspan Network
The Lightspan Network is our premium online subscription service for
classroom and home use. It provides a rich array of curriculum-based K-8 content
correlated to state academic standards in an advertising-free environment. We
charge a subscription fee of approximately $2,500 annually to each subscribing
school for The Lightspan Network. The Lightspan Network:
- provides Internet activities and lesson plans;
- offers approximately 100 interactive, adventure-filled learning
activities developed by educators that cover reading, mathematics,
writing, vocabulary development, and Web literacy;
- provides access to a database of over 115,000 educational Web sites,
activities and lesson plans that have been reviewed by educators and
correlated to state standards;
- offers teachers and students Ed-mail, a personal e-mail account featuring
special security measures created specifically for use in schools;
- provides tools to enhance Internet research and student learning with a
subscription to Compton's Encyclopedia Online, a leading online reference
tool for K-12 schools; and
- offers customer support through our professional development staff and
access to our telephone help line.
[The Lightspan Network Home Page Screen Shot]
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The Lightspan Learning Store
We developed The Lightspan Learning Store in partnership with
SmarterKids.com to offer educational products online to teachers and families.
As we expand and enhance Lightspan.com, we plan to include links from products
that SmarterKids.com recommends to specific Lightspan learning activities found
on Lightspan.com. We also expect that our Lightspan learning activities will be
linked to the Lightspan Learning Store, allowing users to make an immediate
purchase of educational products related to the learning activity.
[The Lightspan Learning Store Home Page Screen Shot]
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Your School Online
We plan to launch Your School Online, currently in beta test, in early 2000
as a free home page builder for schools. We expect Your School Online to allow
teachers to automatically integrate their classrooms' Lightspan PageOne home
pages with their school's home page. We also expect that Your School Online will
work with many other Web publishing tools that a school might have in place. Its
features include:
- the ability to organize and compile Web links;
- a calendar of events that makes it easy for parents and students to find
out what events or activities are happening at school;
- a simple way for users to connect to Lightspan PageOne home pages for
particular classrooms within a given school;
- a site for teachers to post notes and announcements and receive feedback;
- a school contact page which allows parents to easily send e-mail to a
school representative; and
- easy access to Web site usage statistics to help administrators
understand what is popular on their site.
[Your School Online Home Page Screen Shot]
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Financial information about our Lightspan Achieve Now educational software
and our Internet products and services is included in Note 8 to the Lightspan
financial statements that are included elsewhere in this prospectus.
HIGHER EDUCATION
Academic Systems' products address the needs of under-prepared college
students, and consist of:
- Interactive Mathematics -- Elementary Algebra, which covers whole
numbers, proportional reasoning, signed numbers and introductory geometry
and algebra;
- Interactive Mathematics -- Algebra, which covers polynomials, rational
expressions, linear equations and graphing;
- Interactive Mathematics -- Intermediate Algebra, which covers rational
exponents, quadratic equations, functions, exponential and logarithmic
functions, and non-linear equations and inequalities;
- Interactive Mathematics -- College Algebra, which includes non-linear
functions, equations, conic sections, matrices, determinants, induction,
sequences and counting; and
- Interactive English, which prepares students for academic writing,
including narrative writing, data analysis, text interpretation, and
persuasive writing, and contains concise grammar instructions on common
college writing errors and related reading and comprehension activities.
Academic Systems' products are media-rich with extensive graphics and video
components and are grounded in teaching techniques that focus on students as
individuals. Students take the courses in a computer lab or on a Windows-based
personal computer in their residence, at their own pace. Students review lessons
and then practice the concepts learned. Depending upon the student's performance
in the practice session, the program prompts further review or moves the student
onto the next lesson. Wrong answers will prompt an explanation of how to solve
the question. In the Elementary Algebra course, there is a special help function
featuring video characters. Each character represents a different learning style
and offers multiple approaches to solving the problem, ranging from showing the
method that can be used to solve the problem, to explaining the solution with a
picture or graph, to providing the solution from a theoretical perspective. This
often provides the help that under-prepared college students need to pass the
course and succeed in school. Academic Systems also offers printed practice
materials.
Academic Systems provides management services to educators who use its
curriculum, typically by compiling and communicating information about student
time-on-task and performance while using the curriculum. These management
services can be accessed on the Internet at academic.com or a college's Web
site, and also on a college's local area network.
Academic Systems 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. The licensing fee to colleges of $60 to $80
per student is approximately equal to an equivalent textbook.
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[ACADEMIC SYSTEMS HOME PAGE SCREEN SHOT]
PRODUCT DESIGN AND DEVELOPMENT
We consider successful product development to be essential to maintaining
and growing our market position. We expect to continue enhancing our Lightspan
Achieve Now and Academic Systems curricula while significantly increasing our
efforts to further develop our Internet products and services.
Lightspan Achieve Now products include a diverse mix of media, formats, and
visual presentations. Every Lightspan Adventure is built according to the
following fundamental design principles, which we believe differentiate our
products from competitive products:
- we correlate each title to state and national academic standards;
- we create interesting characters in engaging stories that unfold with the
help of full-screen, full-motion video and music, and with sophisticated
interactivity representing many of the techniques of the latest video
games; and
- we develop assessment components for the teacher to monitor students'
progress for each of the titles.
All Lightspan Achieve Now programs are designed so they can be used on a
television as well as on a computer screen. Text elements are rendered on the
screen for clear visibility from across the room. Live action video and
animation segments are converted from original footage to the MPEG software
format, and then digitally optimized for a sharp television picture. We believe
these design features offer a unique opportunity to move our Lightspan Achieve
Now curriculum to a digital set-top box once broadband technology becomes widely
available to cable television subscribers. We also believe that our competitors
who have designed their educational technology for use only on a computer screen
will experience difficulties in converting their computer interfaces to
television interfaces, and that we are better positioned to move our products to
a digital set-top box platform.
We are pursuing a broad range of product development efforts to expand and
enhance our Lightspan.com Web site. These product development efforts include
developing new collaborative learning applications for Global Schoolhouse and
enhancing its existing content, developing new content for teachers, parents and
students on Lightspan.com, and expanding our electronic commerce offerings.
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Academic Systems' math and writing products combine media-rich video and
graphics with teaching techniques that focus on students as individuals and
offer extensive help and reinforcement examples. The Academic Systems curriculum
is reviewed each school year based on input from user groups made up of faculty
from across the country, and updated when appropriate.
SALES AND MARKETING
We sell our Lightspan Achieve Now curriculum and The Lightspan Network
directly to school districts. We have identified and are targeting school
districts that routinely implement new and innovative programs. Our programs are
generally sold "top down," with the first presentations made to a school
district's key decision maker, who is often the superintendent or assistant
superintendent in charge of curriculum or technology. Schools are becoming more
involved in the decision process as site-based management is implemented within
school districts. The sales cycle for the initial purchase of our Lightspan
Achieve Now curriculum is typically six to twelve months, with shorter periods
for The Lightspan Network.
A school district will typically purchase the Lightspan Achieve Now
curriculum for a few classrooms in one school. Upon the successful
implementation of the Lightspan Achieve Now curriculum, the school district will
typically add the curriculum in other schools within the district. For example,
during our fiscal year ended January 31, 1999, 74% of school districts that were
using our Lightspan Achieve Now curriculum at the beginning of the year bought
additional products. The product is also often sold deeper into individual
schools, either in additional classrooms in a given grade or in additional grade
levels.
As of October 31, 1999, we employed 73 direct salespeople for grades K-12.
As of that date, this sales force was supported by a 69 person professional
development team that provides pre- and post-sales support and works with
current Lightspan schools to identify additional sales opportunities. While our
sales force and professional development team are focused on selling into new
accounts and increasing our presence in current accounts, they also act as
partners with implementing schools in identifying funding sources. Each member
of our sales force has substantial experience in educational technology sales,
is generally working in his or her home territory and has extensive contacts in
school districts within their territory.
Our marketing efforts include:
- hosting policy forums for education policy makers at industry events;
- giving keynote speeches and presentations at major education conventions;
- participating on the advisory boards of key organizations in education;
- presenting at education trade shows and customer conferences; and
- pursuing focused media relations activities in the education trade press
and in local media in communities that are implementing our Lightspan
Achieve Now curriculum.
Sales of our Internet products and services are supported by our Lightspan
field sales force, including a dedicated team of eight Internet sales people
that focus on driving state-wide sales of our Internet products and services. We
offer customized versions of The Lightspan Network to states having large
contracts, and currently have contracts with the states of Illinois, North
Carolina, Pennsylvania, Oklahoma, Texas, Delaware, and Hawaii. To date, most of
the marketing focus for our Internet products and services has been on the
educational community. For example, a very active campaign of direct mail,
telemarketing and advertising focused on the educational community, along with
participation by our field sales and professional development staffs at the
school district and school site levels and appearances at trade shows, as of
October 31, 1999 had resulted in the registration of over 35,800 teachers for
Lightspan PageOne since its launch in June 1999.
In the future, our focus will expand to include marketing directly to
families. Print advertising will be supplemented with a variety of online
strategies. A series of promotions will be directed at encouraging
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usage and may include sweepstakes, user points affinity programs, and referral
programs. Public relations efforts will focus on educational, consumer and
business press. We have formed an advisory board of educators to assist us with
the design and development of our Internet products and services. Direct
marketing will concentrate on teachers and parents. We expect the results of
these marketing efforts will be an increase in the number of teachers, students
and parents accessing the content and tools provided by Lightspan.com. We
believe that the marketing of Lightspan.com and our Internet products and
services will contribute to sales of The Lightspan Network and sales of our
Lightspan Achieve Now curriculum.
As of October 31, 1999 Academic Systems employed 18 direct sales people in
a separate sales organization. Academic Systems' sales and marketing efforts
focus on statewide, system-wide and district sales, and specifically target
potential purchasers that offer opportunities for sales of the Academic Systems
curriculum to multiple college class sections. A typical initial sale of the
Academic Systems curriculum will be for several sections in a college course. As
the faculty becomes familiar with the Academic Systems curriculum and witnesses
improved results from sections that are using the curriculum, Academic Systems'
contracts tend to be renewed and increased. Over 90% of the institutions that
have installed any portion of the Academic Systems curriculum since it was first
offered remain as installed users. In addition, over 70% of institutions that
have renewed their contracts with Academic Systems over its last four fiscal
years have signed larger contracts. Academic Systems' marketing efforts include
print advertising in periodicals directed at the higher education market, direct
marketing, participation at trade shows, and user conferences.
PROFESSIONAL DEVELOPMENT AND SUPPORT SERVICES
We believe that successfully implementing our products and services in
schools and extending them to the home is necessary to realize potential
improvements in student achievement. We also believe that improvements in
student achievement differentiate the Lightspan Achieve Now curriculum from
products offered by our competitors and generate further support at the school
level for expanded sales. Our goal is to become the partner of schools that
implement our products and services. Given the comprehensive nature of the
Lightspan Achieve Now curriculum, its connection of schools to homes, the rapid
technological changes brought about by the Internet, and educators' needs for
ongoing technical training and mentoring, we commit substantial resources to
train educators in the use of our products and services.
As of October 31, 1999, we maintained a staff of 69 trained professionals,
most of whom are former educators, to provide pre-sale planning and post-sale
implementation, customer support, training services and motivation for teachers,
administrators and parents in Lightspan schools. We also operate a toll-free,
five-day per week technical and curriculum support telephone help line called
Partner Line that is accessible to both teachers and parents. We include
professional development and Partner Line services with the initial purchase of
Lightspan Achieve Now. Schools may purchase additional professional development
or support services. We believe that the on-site training provided by our
professional development staff is a key factor in encouraging school districts
to implement Lightspan products in more schools within the district and in
additional classrooms within an individual school.
We provide pre-sale and post-sale support for college campuses that use our
Academic Systems curriculum in a manner similar to that provided for our
Lightspan Achieve Now curriculum, with a greater emphasis on technical support
and installation related to the Web-based or local area networked student
management system. Installation and support are included with the software
license and additional services may be purchased.
COMPETITION
The market for educational technology content and services is highly
fragmented and competitive, with no company having significant market
penetration. We generally compete for school instructional dollars with textbook
publishers, software publishers, supplemental print publishers, Internet content
and service providers, and training services, among others. We believe our
solution is unique and competes favorably with existing products in these
categories on a price and performance basis.
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In the instructional technology segment of this market, we believe our
existing and prospective competitors may be divided into the following groups:
- comprehensive curriculum software publishers which offer various
school-based computer-based learning systems, including Jostens Learning
Corporation and Computer Curriculum Corporation;
- "edutainment" software vendors, which principally target the consumer
market but also sell to schools;
- education-oriented Internet services and the educational segments of
general on-line service providers;
- distance learning providers; and
- programs that take over management of the school or provide substantial
tutoring help, such as those provided by Edison Schools, Inc. and Sylvan
Learning Systems, Inc.
As Internet and broadband services become more widely deployed in K-12 and
colleges, we believe new and as yet unidentified competition will enter the
market. Traditional media companies and rapidly expanding Internet companies are
likely to present new competition. Many of our current and potential competitors
have longer operating histories, larger customer or user bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do. In addition, many of these current and potential competitors can
devote substantially greater resources to product development, marketing and
promotional campaigns and Web site and systems development than we can.
RIGHTS TO CONTENT
We rely principally upon a combination of copyright, trademark and trade
secret laws and contractual restrictions to protect our proprietary rights.
We developed and own the rights to nearly all of the content within the
Lightspan Achieve Now curriculum, including the worlds, characters, stories,
educational content, and games. We hold trademarks to all of our Lightspan
Achieve Now worlds, our individual CD-ROM titles, and many of our characters.
SEASONALITY
Our operating results are expected to vary significantly from quarter to
quarter because of seasonal influences on demand for our Lightspan Achieve Now
and Academic Systems curricula and our services based on school calendars,
budget cycles and timing of school districts' funding sources. Our Lightspan
Achieve Now license transactions have historically been highest in our second
fiscal quarter, and lowest in our first fiscal quarter.
EMPLOYEES
As of October 31, 1999, we employed 412 persons, including 131 in
technology and development, 49 in general and administrative, 145 in sales and
marketing and 87 in professional development. We expect that our headcount will
increase, particularly in sales and professional development and Internet
marketing and product development. None of our employees is represented by a
labor union and we consider our employee relations to be excellent.
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FACILITIES
Our headquarters are located in San Diego, California, where we currently
lease approximately 47,000 square feet under a lease expiring in 2003. Warehouse
facilities are located in Carlsbad, California, where we currently lease
approximately 9,000 square feet under a lease expiring in 2002. Additional
facilities for the Internet group are located in Santa Monica, California, where
approximately 6,900 square feet are under a lease expiring in 2002, and, for
Academic Systems, in Mountain View, California, where approximately 15,500
square feet are under a lease expiring in 2001. While we consider our current
facilities adequate for our current operations, we expect that we will need to
lease additional facilities as our operations expand.
LEGAL PROCEEDINGS
We are not currently involved in any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, KEY EMPLOYEES AND DIRECTORS
The following table sets forth certain information about our executive
officers, key employees and directors as of January 13, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- ----------------------------------------------
<S> <C> <C>
John T. Kernan.................... 53 Chief Executive Officer and Chairman
Carl Zeiger....................... 57 President, Chief Operating Officer and
Director
Kathleen R. McElwee............... 45 Vice President of Finance and Chief Financial
Officer
John H. Brandon................... 43 Executive Vice President, President of
Academic Systems and Director
Winifred B. Wechsler.............. 43 Executive Vice President and General Manager
of Internet and Broadband Services
Merritt D. Farren................. 39 Senior Vice President of Corporate Development
Sandra K. Fivecoat................ 50 Senior Vice President of Sales
Bernice Stafford.................. 58 Vice President of School Marketing and
Evaluation
Dr. Larry R. Vaughn............... 61 Senior Vice President of School Reform
James W. Breyer................... 38 Director(1)
L. John Doerr..................... 48 Director(1)
Bradley P. Dusto.................. 46 Director
David D. Hiller................... 46 Director(2)
Thomas F. Nagel................... 36 Director(3)
Bruce W. Ravenel.................. 49 Director
Jeffrey P. Sanderson.............. 40 Director(2)
Barry J. Schiffman................ 54 Director(2)
Ronald A. Weinberg................ 48 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
(3) On January 11, 2000 the board of directors appointed Mr. Nagel as a member
of the board, effective as of the closing of this offering and the purchase
by Cox Communications Holdings, Inc. of $12.5 million of common stock at the
time of closing of this offering.
John T. Kernan co-founded Lightspan and has served as our Chairman and
Chief Executive Officer since September 1993. Prior to founding Lightspan, Mr.
Kernan served as Chairman and Chief Executive Officer of Jostens Learning
Corporation, an educational software company. Mr. Kernan developed Jostens
Learning from a start-up company in 1985 (then named Education Systems
Technology Corporation) to one of the largest educational software businesses in
the United States. Under Mr. Kernan's leadership, Jostens Learning was a leading
supplier of pre-kindergarten through adult educational software. Prior to
founding Jostens Learning, Mr. Kernan was an executive with Gill Cable
Corporation, a Northern California cable TV operator. He also was Vice President
of Product Development for DELTAK, Inc. (now NETg), then the nation's largest
provider of video-based training for technical professionals. Mr. Kernan was the
President of the Software Publishers Association, has been named "Educator of
the Decade" by Electronic Learning Magazine and regional "Entrepreneur of the
Year" by Inc. Magazine, among other distinctions. Mr. Kernan helped found
Academic Systems, which has since been acquired by Lightspan, and Elemental
Software, which has since been acquired by Macromedia. Mr. Kernan sits on the
boards of Teach.com and TechNet. Mr. Kernan holds a Bachelor of Science from
Loyola College.
Carl Zeiger co-founded Lightspan and has served as our President and Chief
Operating Officer and as one of our directors since September 1993. Prior to
founding Lightspan, Mr. Zeiger served as the
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President and Chief Operating Officer of Jostens Learning Corporation. Along
with Mr. Kernan, Mr. Zeiger developed Jostens Learning into a leading supplier
of pre-kindergarten through adult educational software. Prior to joining Jostens
Learning, Mr. Zeiger served as Senior Vice President of Finance for Integrated
Software Systems Corporation, a leading provider of presentation graphics
software, and managed its initial and secondary public offerings and its
eventual sale to Computer Associates. Mr. Zeiger is a certified public
accountant in the State of California and holds a Bachelor of Science from the
University of Denver.
Kathleen R. McElwee has served as our Vice President of Finance and Chief
Financial Officer since January 1999. From November 1997 to January 1999, she
served as Vice President of Finance and Chief Financial Officer of Galoob Toys,
Inc., a developer and marketer of toys. From December 1995 to November 1997, she
served as Vice President of Planning for Galoob. From September 1993 to December
1995, she served as Assistant Controller of Nissan Motor Corporation in USA, an
automobile company. Ms. McElwee holds a Bachelor in Business Administration from
Pennsylvania State University and a Masters in Business Administration from the
Wharton School of the University of Pennsylvania.
John H. Brandon has served as our Executive Vice President and President of
Academic Systems since we acquired Academic Systems in September 1999. From June
1997 to September 1999, he served as President and Chief Executive Officer of
Academic Systems. From 1987 to May 1997, Mr. Brandon held various management
positions at Adobe Systems, a provider of Web and print publishing software, and
most recently was Vice President and General Manager of Adobe North America. Mr.
Brandon holds a Bachelor of Arts from the University of California at Davis.
Winifred B. Wechsler joined Lightspan in February 1999 and is our Executive
Vice President and General Manager of Internet and Broadband Services. From 1985
to January 1999, Ms. Wechsler served in various management positions at The Walt
Disney Company, a media and entertainment company, and most recently as Senior
Vice President of Buena Vista Internet Group, or BVIG. One of the founders of
Disney Online, Ms. Wechsler launched and managed Disney.com, directing all
operations, including design, production, electronic commerce, advertising and
marketing. In addition, Ms. Wechsler oversaw Disney's investment in Infoseek and
the launch of Go Network and set policy and direction for BVIG. Prior to joining
BVIG, Ms. Wechsler held a variety of positions at the Disney Channel, including
Senior Vice President of New Business Development. Ms. Wechsler holds a Bachelor
of Arts from Wellesley College and a Masters in Business Administration from the
Wharton School of the University of Pennsylvania.
Merritt D. Farren has served as our Senior Vice President of Corporate
Development since April 1999. From May 1988 to April 1999, Mr. Farren held
various management positions at The Walt Disney Company, a media and
entertainment company, and most recently was Senior Vice President and General
Counsel of The Disneyland Resort, Anaheim, California. Mr. Farren holds a
Bachelor of Arts from Stanford University and a Juris Doctor from the University
of California at Berkeley.
Sandra K. Fivecoat has served as our Senior Vice President of Sales since
February 1999. From April 1998 to January 1999, she served as Regional Vice
President for our South Central Region. From 1987 to April 1998, Ms. Fivecoat
held various sales management positions at Apple Computer, a manufacturer of
computers and software. Ms. Fivecoat holds a Bachelor of Science and a Masters
in Education from the University of Texas at Austin.
Bernice Stafford co-founded Lightspan and has served as our Vice President
of School Marketing and Evaluation since October 1993. From 1989 to 1993, she
served as Director of Sales Programs at Jostens Learning Corporation. Ms.
Stafford holds a Bachelor of Arts and a Master of Arts from the University of
California at Berkeley.
Dr. Larry R. Vaughn, Ed.D. has served as our Senior Vice President of
School Reform since January 1999. From January 1993 to July 1998, he served as
superintendent of Wichita Public Schools in Wichita, Kansas. Dr. Vaughn holds a
Bachelor of Arts from Mississippi State University and a Doctorate in Education
from the University of Houston.
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James W. Breyer has served as one of our directors since December 1993.
Since 1990, Mr. Breyer has been a partner at Accel Partners, a venture capital
firm. He is responsible for Accel's involvement in more than twenty companies
that have completed public offerings or successful mergers. Mr. Breyer currently
serves on the boards of directors of Actuate, a provider of electronic business
services, HearMe, a provider of real-time Internet communication tools,
RealNetworks, a provider of streaming media technology on the Internet, and
several private companies. Mr. Breyer holds a Bachelor of Science degree from
Stanford University and a Masters in Business Administration from the Harvard
Business School.
L. John Doerr has served as one of our directors since December 1993. Since
1980, Mr. Doerr has been a partner at Kleiner Perkins Caufield & Byers, a
venture capital firm. Mr. Doerr was the founding Chief Executive Officer of
Silicon Compilers. Mr. Doerr currently serves on the boards of directors of
Intuit, a producer of electronic finance software, Amazon.com, an online
retailer, Excite@home, a broadband interactive media company, Epicor Software
Corporation, an enterprise software company, Healtheon, an online healthcare
company, Homestore.com, an online real-estate company, Drugstore.com, an online
drugstore, MSCO, a marketing company and Sun Microsystems, a provider of network
computing products and services, as well as several privately held companies.
Mr. Doerr co-manages the Technology Network, the high-technology community's
political action organization. He holds a Bachelor of Science and Master of
Science from Rice University and a Masters in Business Administration from the
Harvard Business School.
Bradley P. Dusto has served as one of our directors since May 1999. Mr.
Dusto is Chief Technology Officer and Executive Vice President for Comcast Cable
Communications, a media company, and is responsible for engineering, product
development and new product operations. Prior to joining Comcast in 1992, Mr.
Dusto held management positions with several companies in the cable television
and satellite industries. He received a Bachelor of Science from Cornell
University and a Masters in Business Administration from New York University.
David D. Hiller has served as one of our directors since September 1996.
Since October 1993, Mr. Hiller has served as Senior Vice President of
Development at Tribune Company, a media company. He is responsible for strategic
planning and acquisitions for all Tribune businesses. Mr. Hiller currently
serves on the boards of directors of several private companies. He holds a
Bachelor of Arts from Harvard College and a Juris Doctor from Harvard Law
School.
Thomas F. Nagel is scheduled to become one of our directors upon the
closing of this offering and the purchase by Cox Communications Holdings, Inc.
of $12.5 million of common stock at the time of the closing of this offering.
Since July 1999 Mr. Nagel has served as Vice President of Business Development
for Cox Communications, Inc. Mr. Nagel joined Cox Communications in 1995 as
Director of Multimedia Applications. Previously, he served two years as Business
Development Manager in the New Media group of Cox Enterprises, Cox
Communications' majority shareholder. Mr. Nagel serves on the board of Liberate
Technologies, Inc., a company developing software and services for advanced
cable set-top boxes. Mr. Nagel holds a Bachelor of Science from Auburn
University and a Masters in Business Administration from the University of North
Carolina.
Bruce W. Ravenel has served as one of our directors since 1994. Since June
1999 he has served as a director and Executive Vice President of Liberty
Digital, Inc., a new media investment company. From September 1998 to June 1999
he was employed by Liberty Media Corporation in connection with the formation of
Liberty Digital. From April 1998 to September 1998, Mr. Ravenel was Executive
Vice President -- Interactive Ventures of TCI Communications, Inc., a former
subsidiary of Tele-Communications, Inc. Mr. Ravenel also served as President and
Chief Executive Officer of TCI.Net, Inc. and Senior Vice President -- Internet
Services of TCI Communications, Inc. from January 1996 to April 1998. Mr.
Ravenel also served as Senior Vice President and Chief Operating Officer of TCI
Technology Ventures, Inc. from March 1994 to January 1996. Mr. Ravenel was a
founder and served on the board of directors of At Home Corporation, a media
company, from March 1995 until March 1999. He serves on the boards of directors
of several private companies. Mr. Ravenel holds a Bachelor of Arts from the
University of Colorado, where he also studied in the doctoral program in
computer science.
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Jeffrey P. Sanderson has served as one of our directors since December
1998. Since June 1984, Mr. Sanderson has served as General Manager of Business
Development for the Consumer and Commerce Group of Microsoft Corporation, a
software company. Mr. Sanderson holds a Bachelor of Arts from Princeton
University and attended the Harvard Business School.
Barry J. Schiffman has served as one of our directors since August 1997.
Since 1996, Mr. Schiffman has served as President, Chief Investment Officer and
a director of JAFCO America Ventures, Inc., a venture capital firm. Prior to
JAFCO, he was a general partner at Weiss, Peck & Greer Venture Partners, a
venture capital firm. Mr. Schiffman is currently chairman of AirGate PCS, Inc.
(PCSA), an affiliate of Sprint, and member of the board of several private
companies. Mr. Schiffman holds a Bachelor of Science from Georgia Institute of
Technology and a Masters in Business Administration from the Stanford Graduate
School of Business.
Ronald A. Weinberg joined our board of directors in October 1999. Mr.
Weinberg serves as President and co-CEO of CINAR Corporation, an integrated
entertainment and education company, which he founded in 1976. Mr. Weinberg is
the producer on all CINAR productions including some of its most successful
current series, such as Arthur, Are You Afraid of the Dark?, The Busy World of
Richard Scarry, Wimzie's House, and Lassie. Mr. Weinberg currently serves on the
boards of directors of Cossette Communications Group Inc., a communications and
marketing concern, and several private companies and institutions. Mr. Weinberg
holds a Bachelor of Science from Tulane University.
BOARD COMPOSITION
Upon the closing of this offering, in accordance with the terms of our
restated certificate of incorporation, the terms of office of the board of
directors will be divided into three classes:
- Class I directors, whose term will expire at the annual meeting of
stockholders to be held in 2000;
- Class II directors, whose term will expire at the annual meeting of
stockholders to be held in 2001; and
- Class III directors, whose term will expire at the annual meeting of
stockholders to be held in 2002.
Our Class I directors will be Messrs. Brandon, Doerr, Schiffman and
Sanderson, our Class II directors will be Messrs. Hiller, Dusto, Ravenel and
Zeiger, and our Class III directors will be Messrs. Breyer, Kernan and Weinberg,
and Nagel provided he becomes a member of the board. At each annual meeting of
stockholders after the initial classification, the successors to directors whose
terms will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election. Any additional
directorships resulting from an increase in the number of directors will be
distributed among the three classes so that, as nearly as possible, each class
will consist of one-third of the directors. This classification of the board of
directors may have the effect of delaying or preventing changes in control or
management of our company.
BOARD COMMITTEES
The board of directors has established an audit committee and a
compensation committee. The audit committee consists of David D. Hiller, Jeffrey
P. Sanderson and Barry J. Schiffman. The audit committee makes recommendations
to the board of directors regarding the selection of independent auditors,
reviews the results and scope of the audit and other services provided by our
independent auditors and reviews and evaluates our audit and control functions.
The compensation committee consists of James W. Breyer and L. John Doerr.
The compensation committee makes recommendations regarding our 1992 Stock Option
Plan and our 2000 Equity Incentive Plan and makes general decisions concerning
salaries and incentive compensation for our employees and consultants.
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COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During the fiscal year ended January 31, 1999, James W. Breyer and L. John
Doerr served as members of our compensation committee. During that fiscal year,
none of our executive officers or employees served as a director or as a member
of the compensation committee of any entity that has one or more executive
officers serving as a member of our board of directors or compensation
committee.
DIRECTOR COMPENSATION
Our directors do not currently receive any cash compensation for services
on the board of directors or any committee thereof, but directors may be
reimbursed for certain expenses in connection with attendance at board and
committee meetings. In addition, all directors are eligible to participate in
our 2000 Equity Incentive Plan.
EXECUTIVE COMPENSATION
The following table sets forth summary information concerning compensation
awarded to, earned by, or accrued for services rendered to us in all capacities
during the fiscal year ended January 31, 1999 by our Chief Executive Officer and
two other executive officers. The compensation described in this table does not
include medical, group life insurance or other benefits which are available
generally to all of our salaried employees and certain perquisites and other
personal benefits received which do not exceed the lesser of $50,000 or 10% of
his or her salary and bonus as disclosed in this table.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------
NAME AND PRINCIPAL POSITION SALARY($) BONUS($)
--------------------------- --------- --------
<S> <C> <C>
John T. Kernan.............................................. $200,000 --
Chairman and Chief Executive Officer
Carl Zeiger................................................. $200,000 --
President and Chief Operating Officer
Michelle M. Hays(1)......................................... $126,000 $6,000
Former Vice President of Finance and Administration
</TABLE>
- ---------------
(1) Ms. Hays resigned from Lightspan in September 1998.
No options were granted to our executive officers during the fiscal year
ended January 31, 1999.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information as of January 31, 1999 regarding
options held by the executive officers listed. No stock appreciation rights were
outstanding at January 31, 1999.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS AT
JANUARY 31, 1999 JANUARY 31, 1999
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
John T. Kernan................................... 0 0 0 0
Carl Zeiger...................................... 0 0 0 0
Michelle M. Hays................................. 82,498 27,502 $66,749 $17,251
</TABLE>
Dollar values in the table above are calculated by taking the fair market
value of our common stock on January 31, 1999, as determined by our board of
directors, subtracting the per share exercise price of the options, and
multiplying the result by the number of shares. Options were granted at an
exercise price equal to the fair market value of our common stock, as determined
by the board of directors on the date of grant.
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Ms. Hays resigned from Lightspan in September 1998. On March 15, 1999, her
options stopped vesting, and in April 1999 all of her unexercised options were
cancelled.
EQUITY PLANS
2000 Equity Incentive Plan
A total of 4,890,272 shares of common stock are currently reserved for
issuance pursuant to our 2000 Equity Incentive Plan. This share reserve shall
automatically increase each year, based upon a formula, by an amount not to
exceed 3% of our total outstanding common stock at the time of the automatic
increases. The 2000 Plan provides for the grant of options to our directors,
officers, employees, consultants and certain of our advisors. As of December 31,
1999, options to purchase 3,485,568 shares under the 2000 Plan were outstanding,
and 242,773 shares remained available for issuance pursuant to the 2000 Plan. We
have also reserved an additional 1,250,000 shares of common stock to become
available for grants beginning at the close of this offering.
The 2000 Plan permits the granting of options intended to qualify as
incentive stock options within the meaning of Section 422 of the Internal
Revenue Code to employees (including officers and employee directors) and
nonstatutory stock options to employees (including officers and employee
directors), directors and consultants (including non-employee directors). In
addition, the 2000 Plan permits the granting of stock bonuses and rights to
purchase restricted stock. No person is eligible to be granted options covering
more than one million shares of common stock in any calendar year.
The 2000 Plan is administered by the board or a committee appointed by the
board. Subject to the limitations set forth in the 2000 Plan, the board has the
authority to select the persons to whom grants are to be made, to designate the
number of shares to be covered by each stock award, to determine whether an
option is to be an incentive stock option or a nonstatutory stock option, to
establish vesting schedules, to specify the option exercise price and the type
of consideration to be paid upon exercise and, subject to certain restrictions,
to specify other terms of stock awards.
The maximum term of options granted under the 2000 Plan is ten years. The
aggregate fair market value, determined at the time of grant, of the shares of
common stock with respect to which incentive stock options are exercisable for
the first time by an optionee during any calendar year (under all of our
incentive plans) may not exceed $100,000 or the options or portion thereof which
exceed such limit (according to the order in which they are granted) shall be
treated as nonstatutory stock options. Stock options granted under the 2000 Plan
generally are non-transferable. Options expire three months after the
termination of an optionee's service.
The exercise price of options granted under the 2000 Plan is determined by
the board of directors in accordance with the guidelines set forth in the 2000
Plan. The exercise price of an incentive stock option cannot be less than 100%
of the fair market value of the common stock on the date of the grant. The
exercise price of a nonstatutory stock option cannot be less than 85% of the
fair market value of the common stock on the date of grant. Options granted
under the 2000 Plan vest at the rate specified in the option agreement. The
exercise price of incentive stock options granted to any person who at the time
of grant owns stock representing more than 10% of the total combined voting
power of all classes of our capital stock must be at least 110% of the fair
market value of such stock on the date of grant and the term of such incentive
stock options cannot exceed five years.
Any stock bonuses or restricted stock purchase awards granted under the
2000 Plan shall be in such form and will contain such terms and conditions as
the board deems appropriate. The purchase price under any restricted stock
purchase agreement will not be less than 85% of the fair market value of our
common stock on the date of grant. Stock bonuses and restricted stock purchase
agreements awarded under the 2000 Plan are generally transferable.
Pursuant to the 2000 Plan, shares subject to stock awards that have expired
or otherwise terminated without having been exercised in full again become
available for grant, but exercised shares repurchased by us pursuant to a right
of repurchase will not again become available for grant.
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Upon certain changes in control, all outstanding stock awards under the
2000 Plan must either be assumed or substituted for by the surviving entity. In
the event the surviving entity does not assume or substitute for such stock
awards, such stock awards will be accelerated and then terminated to the extent
not exercised prior to such change in control.
The board has the authority to amend or terminate the 2000 Plan. The
existence of the 2000 Plan does not affect the board's ability to grant other
incentives or compensation under other authority that it has.
2000 Employee Stock Purchase Plan
In October 1999, we adopted the 2000 Employee Stock Purchase Plan. A total
of 500,000 shares of common stock has been 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 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.
Unless otherwise determined by the board, employees are eligible to
participate in the Purchase Plan only if they are employed by us or our
subsidiary designated by the board for at least 20 hours per week and are
customarily employed by us or our subsidiary designated by the board 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 the common stock on specified
dates determined by the board. The price of common stock purchased under the
Purchase Plan will be equal to 85% of the lower of the fair market value of the
common stock at the commencement date of each offering period or the relevant
purchase date. 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.
401(k) Plan
We have established a tax-qualified employee savings and retirement plan.
Our 401(k) Plan provides that each participant may contribute up to 20% of his
or her pre-tax gross compensation (up to a statutorily prescribed annual limit
of $10,000 in 1999). Employees must be twenty-one years old to participate and
are eligible on the first day of the quarter following six months as our
employee. All amounts contributed by employee participants and earnings on these
contributions are fully vested at all times. Employee participants may elect to
invest their contributions in various established funds.
1992 Stock Option Plan
Upon the closing of our acquisition of Academic Systems, we assumed
Academic Systems' 1992 Stock Option Plan, under which outstanding options to
purchase shares of common stock of Academic Systems became exercisable for
263,669 shares of Lightspan common stock. As of December 31, 1999, options to
purchase 251,883 shares of common stock were outstanding under the 1992 Stock
Option Plan. We no longer grant options under the 1992 Stock Option Plan.
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EMPLOYMENT AGREEMENTS
We have no employment agreements with any of our officers or employees.
INDEMNIFICATION OF DIRECTORS AND OFFICERS AND LIMITATION ON LIABILITY
Our bylaws provide that we must indemnify our directors and officers and
may indemnify our employees and other agents to the fullest extent permitted by
Delaware law, except with respect to certain proceedings initiated by these
persons. Our bylaws also allow us to enter into indemnification contracts with
our directors and officers and to purchase insurance on behalf of any person we
are required or permitted to indemnify. Pursuant to this provision, we have
entered into indemnification agreements with each of our directors and executive
officers.
In addition, our restated certificate provides that our directors will not
be personally liable to us or our stockholders for monetary damages for any
breach of their fiduciary duties as a director, except for liability for any
breach of the director's duty of loyalty to us or our stockholders; for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; under Section 174 of the Delaware General Corporation Law; or
for any transaction from which the director derives an improper personal
benefit. The restated certificate also provides that if the Delaware General
Corporation Law is amended after our stockholders' approval of the restated
certificate to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of our directors shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended. The provision does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
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RELATED-PARTY TRANSACTIONS
The following is a description of transactions occurring after February 1,
1996 to which we have been a party, in which the amount involved exceeds $60,000
and in which any director, executive officer or holder of more than 5% of our
capital stock had or will have a direct or indirect material interest, other
than compensation arrangements which are described under "Management."
The following affiliates of our directors purchased securities in the
amounts set forth in the chart below. Certain additional issuances are discussed
in more detail in the paragraphs below.
<TABLE>
<CAPTION>
SERIES C SERIES D SERIES E
PREFERRED PREFERRED PREFERRED
PURCHASER(1) STOCK STOCK STOCK WARRANTS
------------ ---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
Entities Affiliated with Directors
Entities affiliated with Accel
Partners(2)........................... 327,381 475,410 1,224,902 38,021
Comcast Cable Corporation(3)............ 297,619 -- 1,000,000 --
Entities affiliated with JAFCO America
Ventures, Inc.(4)..................... -- 2,127,658 -- --
Entities affiliated with Kleiner,
Perkins, Caufield & Byers(5).......... 166,666 475,414 1,235,593 38,023
Entities affiliated with Liberty
Digital, Inc.(6)...................... 297,619 207,174 3,661,951 23,546
Microsoft Corporation(7)................ 297,619 475,415 1,203,243 33,313
Tribune Company(8)...................... 1,666,667 741,373 200,000 30,718
Price Per Share:........................ $6.00 $3.76 $5.00 $3.76 - $5.00
</TABLE>
- -------------------------
(1) See "Principal Stockholders" for more detail on shares held by these
purchasers.
(2) Mr. James W. Breyer, one of our directors, is a partner of Accel Partners.
(3) Mr. Bradley P. Dusto, one of our directors, is the Chief Technology Officer
and Executive Vice President of Comcast Cable Communications, Inc.
(4) Mr. Barry J. Schiffman, one of our directors, is President and Chief
Investment Officer of JAFCO America Ventures, Inc.
(5) Mr. L. John Doerr, one of our directors, is a partner of Kleiner, Perkins,
Caufield & Byers.
(6) Mr. Bruce W. Ravenel, one of our directors, is an Executive Vice President
of Liberty Digital, Inc.
(7) Mr. Jeffrey P. Sanderson, one of our directors, is General Manager of
Business Development of Microsoft Corporation.
(8) Mr. David D. Hiller, one of our directors, is Senior Vice President of
Development of Tribune Company.
In September 1999, we acquired Academic Systems. John Brandon and funds
associated with four of our other directors, Messrs. Breyer, Doerr, Ravenel and
Sanderson, were shareholders of Academic Systems and received shares of our
common stock and Series E preferred stock in the acquisition.
In October 1999, CINAR Corporation purchased 2.5 million shares of our
Series E preferred stock (which will convert into 1.25 million shares of common
stock at the close of this offering) at $5.00 per share. CINAR also agreed to
purchase $10 million of our common stock (833,333 shares) in a private placement
that is scheduled to occur concurrently with our initial public offering at the
initial public offering price. We also granted CINAR warrants to purchase
500,000 shares of our Series E preferred stock (which will become a warrant to
purchase 250,000 shares of common stock at the close of this offering) that will
vest upon the achievement of various agreed-to strategic goals. As part of our
agreement with CINAR, Ronald A. Weinberg, CINAR's President and co-CEO, joined
our board.
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In January 2000, we agreed to pursue strategic initiatives with Cox
Communications Holdings, Inc. As part of our agreement, Cox Communications
agreed to purchase $12.5 million of our common stock, or 1,041,667 shares, in a
private placement that is scheduled to occur concurrently with our initial
public offering. We also agreed to grant to Cox Communications a warrant to
purchase 750,000 shares of our Series E preferred stock at the close of this
offering, which will become a warrant to purchase 375,000 of common stock at the
close of this offering. As part of our agreement with Cox Communications, Thomas
F. Nagel, Cox Communications Inc.'s Vice President of Business Development, will
join our board upon the close of this offering and the close of the purchase by
Cox Communications of our common stock.
We believe that the foregoing transactions were in our best interest and
were made on terms no less favorable to us than could have been obtained from
unaffiliated third parties. All future transactions between us and any of our
officers, directors or principal shareholders will be approved by a majority of
the independent and disinterested members of the board of directors, will be on
terms no less favorable to us than could be obtained from unaffiliated third
parties and will be in connection with our bona fide business purposes.
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<PAGE> 69
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership of
our common stock before and after our initial public offering for:
- each person who beneficially owns more than five percent of the common
stock;
- each of our directors;
- each of our executive officers listed in the Summary Compensation Table
under "Management"; and
- all directors and executive officers as a group.
Unless otherwise indicated, the address for each person or entity named
below is c/o The Lightspan Partnership, Inc., 10140 Campus Point Drive, San
Diego, California 92121.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or investment
power with respect to securities. Except as indicated by footnote, and subject
to community property laws where applicable, the persons named in the table
below have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them. The percentage of beneficial
ownership before the offering is based on 31,813,249 shares of common stock
outstanding as of December 31, 1999, as adjusted to reflect the conversion of
all outstanding shares of preferred stock upon the closing of this offering.
The table assumes no exercise of the underwriters' over-allotment option.
If the underwriters' over-allotment option is exercised in full, we will sell up
to an aggregate of 1,125,000 additional shares of our common stock, and up to
44,226,305 shares of common stock will be outstanding after the completion of
this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES
OUTSTANDING
--------------------
NUMBER OF SHARES BEFORE AFTER
NAME OF BENEFICIAL OWNER BENEFICIALLY OWNED OFFERING OFFERING
------------------------ ------------------ -------- --------
<S> <C> <C> <C>
John T. Kernan(1)......................................... 1,302,715 4.1% 3.0%
Carl Zeiger............................................... 1,288,500 4.1% 3.0%
John H. Brandon(2)........................................ 323,630 1.0% *
Michelle M. Hays(3)....................................... 25,000 * *
James W. Breyer(4)........................................ 3,011,465 9.5% 7.1%
Accel Partners
L. John Doerr(5).......................................... 2,957,114 9.3% 7.0%
Kleiner, Perkins, Caufield & Byers
Jeffrey P. Sanderson(6)................................... 2,761,417 8.7% 6.5%
Microsoft Corporation
David D. Hiller(7)........................................ 1,800,475 5.7% 4.4%
Tribune Company
Bradley P. Dusto(8)....................................... 2,404,130 7.6% 5.6%
Comcast Cable Corporation
Bruce W. Ravenel(9)....................................... 3,928,932 12.3% 9.2%
Liberty Digital, Inc.
Barry J. Schiffman(10).................................... 1,088,831 3.4% 3.2%
JAFCO America Ventures, Inc.
Ronald A. Weinberg(11).................................... 1,250,000 3.9% 4.8%
CINAR Corporation
Thomas F. Nagel(12)....................................... 0 * 2.4%
Cox Communications Holdings, Inc.
All directors and officers as a group (14 persons)(13).... 22,219,293 69.0% 56.7%
</TABLE>
- ---------------
(1) Includes 1,135 shares issuable under options exercisable by February 29,
2000.
(2) Includes 202,420 shares issuable under options exercisable by February 29,
2000.
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(3) Michelle M. Hays resigned from Lightspan in September 1998.
(4) Mr. Breyer's business address is 428 University Avenue, Palo Alto, CA
94301.
Percentage of shares outstanding includes:
- before the offering, 2,227,941 shares and 14,069 shares issuable under a
warrant exercisable by February 29, 2000 and, after the offering, an
additional 55,161 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Accel IV
L.P., which represents 7.0% and 5.3%, respectively, of the total number
of shares outstanding before and after this offering;
- before the offering, 89,993 shares and 568 shares issuable under a
warrant exercisable by February 29, 2000 and, after the offering, an
additional 2,228 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Accel
Investors '93 L.P., which represents less than 1% of the total number of
shares outstanding before and after this offering;
- before the offering, 46,213 shares and 292 shares issuable under a
warrant exercisable by February 29, 2000 and, after the offering, an
additional 1,144 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Accel
Keiretsu L.P., which represents less than 1% of the total number of
shares outstanding before and after this offering;
- 540,713 shares and 3,142 shares issuable under a warrant exercisable by
February 29, 2000 held by Accel III L.P., which represents 1.7% and
1.3%, respectively, of the total number of shares outstanding before and
after this offering;
- 37,724 shares and 219 shares issuable under a warrant exercisable by
February 29, 2000 held by Accel Investors '92 L.P., which represents
less than 1% of the total number of shares outstanding before and after
this offering; and
- 50,299 shares and 292 shares issuable under a warrant exercisable by
February 29, 2000 held by Accel Japan L.P., which represents less than
1% of the total number of shares outstanding before and after this
offering.
Mr. Breyer shares voting and investment power over the shares held by
each of these entities. Mr. Breyer disclaims beneficial ownership of
these shares except to the extent of his pecuniary interest therein.
(5) Mr. Doerr's business address is 2750 Sand Hill Road, Menlo Park, CA 94025.
Percentage of shares outstanding includes:
- before the offering, 2,662,653 shares and 19,012 shares issuable under a
warrant exercisable by February 29, 2000 and, after the offering, an
additional 52,210 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Kleiner,
Perkins, Caufield & Byers VI, which represents 8.4% and 6.3%,
respectively, of the total number of shares outstanding before and after
this offering; and
- before the offering, 275,449 shares and, after the offering, an
additional 8,009 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by KPCB VI
Founders Fund, which represents less than 1% of the total number of
shares outstanding before and after this offering.
Mr. Doerr shares voting and investment power over the shares held by
each of these entities.
(6) Mr. Sanderson's business address is One Microsoft Way, Redmond, WA 98052.
Percentage of shares outstanding includes, before the offering, 15,359
shares issuable upon exercise of a warrant exercisable by February 29, 2000
and, after the offering, an additional 60,219 shares to be issued upon the
exercise of a warrant concurrently with the closing of this offering, all
held by Microsoft Corporation. Mr. Sanderson shares voting and investment
power over these shares.
(7) Mr. Hiller's business address is 435 North Michigan Avenue, Chicago, IL
60611. Percentage of shares outstanding after the offering includes 93,907
shares to be issued upon the exercise of a
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warrant concurrently with the closing of this offering held by Tribune Company.
Mr. Hiller shares voting and investment power over these shares.
(8) Mr. Dusto's business address is 1500 Market Street, Philadelphia, PA 19102.
Includes 500,000 shares held by Comcast Interactive Capital, L.P. and
1,904,130 shares held by Comcast Programming Holdings, Inc., which
represents 1.6% and 1.2%, respectively, of the total number of shares
outstanding before the offering, and 6.0% and 4.4%, respectively, of the
total number of shares outstanding after the offering. Mr. Dusto shares
voting and investment power over these shares.
(9) Mr. Ravenel's business address is 9197 South Peoria Street, Englewood, CO
80112. Percentage of shares outstanding includes, before the offering,
10,239 shares issuable upon exercise of a warrant exercisable by February
29, 2000 and, after the offering, an additional 26,242 shares to be issued
upon the exercise of a warrant concurrently with the closing of this
offering, all held by Liberty Lightspan Holdings, Inc., an indirect
wholly-owned subsidiary of Liberty Digital, Inc. Mr. Ravenel shares voting
and investment power over these shares.
(10) Mr. Schiffman's business address is 505 Hamilton Avenue, Palo Alto, CA
94301.
Percentage of shares outstanding includes:
- before the offering, 425,531 shares and, after the offering, an
additional 107,801 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by U.S.
Information Technology Investment Enterprise Partnership, which
represents 1.3% and 1.2%, respectively, of the total number of shares
outstanding before and after this offering;
- before the offering, 445,531 shares and, after the offering, an
additional 107,801 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by U.S.
Information Technology #2 Investment Enterprise Partnership, which
represents 1.4% and 1.3%, respectively, of the total number of shares
outstanding before and after this offering;
- before the offering, 44,524 shares and, after the offering, an
additional 11,279 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by JAFCO G-7
(B) Investment Enterprise Partnership, which represents less than 1% of
the total number of shares outstanding before and after this offering;
- before the offering, 44,524 shares and, after the offering, an
additional 11,279 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by JAFCO G-7
(A) Investment Enterprise Partnership, which represents less than 1% of
the total number of shares outstanding before and after this offering;
- before the offering, 38,101 shares and, after the offering, an
additional 9,652 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by JAFCO R-2
Investment Enterprise Partnership, which represents less than 1% of the
total number of shares outstanding before and after this offering;
- before the offering, 43,064 shares and, after the offering, an
additional 10,910 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by JAFCO JS-2
Investment Enterprise Partnership, which represents less than 1% of the
total number of shares outstanding before and after this offering; and
- before the offering, 47,556 shares and, after the offering, an
additional 10,781 shares to be issued upon the exercise of a warrant
concurrently with the closing of this offering, all held by Japan
Associated Finance Co., Ltd., which represents less than 1% of the total
number of shares outstanding before and after this offering.
Mr. Schiffman shares voting and investment power over these shares.
(11) Mr. Weinberg's business address is: 1055, boul. Rene-Levesque Est,
Montreal, Quebec H2L 4S5, Canada. Percentage of shares outstanding after
the offering includes 833,333 shares of common stock that will be issued to
CINAR Corporation in a private placement concurrent with the closing of
this offering. Mr. Weinberg shares voting and investment power over these
shares.
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(12) Mr. Nagel is scheduled to become a director upon the closing of this
offering, contingent upon Cox Communications' purchase of our common stock
concurrently with the closing of this offering. Mr. Nagel's business
address is: 1400 Lake Hearn Drive, Atlanta, GA 30319. Percentage of shares
outstanding after the offering includes 1,041,667 shares of common stock
that is scheduled to be issued to Cox Communications Holdings, Inc. in a
private placement concurrent with the closing of this offering. Mr. Nagel
shares voting and investment power over these shares.
(13) Percentage of shares outstanding includes 305,639 shares issuable under
options exercisable by February 29, 2000 and 63,192 shares issuable under
warrants exercisable by February 29, 2000. Percentage of shares outstanding
after the offering additionally includes 833,333 and 1,041,667 shares of
common stock that are scheduled to be issued to CINAR Corporation and Cox
Communications Holdings, Inc., respectively in private placements
concurrent with the closing of this offering and 568,623 shares to be
issued concurrently with the closing of this offering upon exercise of
warrants.
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DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 250,000,000 shares of common stock, $0.001 par value per
share, and 20,000,000 shares of preferred stock, $0.001 par value per share. As
of December 31, 1999, and assuming the conversion of all outstanding preferred
stock into common stock upon the closing of this offering, there were
outstanding 31,813,249 shares of common stock held of record by 357
stockholders, options to purchase 3,737,451 shares of common stock and warrants
to purchase 2,066,647 shares of common stock.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common stock
are entitled to receive ratably such dividends as may be declared by the board
of directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding up, holders of common stock are entitled to
share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders of
common stock have no preemptive, conversion, subscription or other rights. There
are no redemption or sinking fund provisions applicable to the common stock. All
outstanding shares of common stock are, and all shares of common stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
As of December 31, 1999, assuming the closing of this offering, all
outstanding shares of preferred stock would have been converted into 27,087,826
shares of common stock. See Note 5 to the Lightspan financial statements for a
description of the currently outstanding preferred stock. Following the
conversion, our certificate of incorporation will be amended and restated to
delete all references to such shares of preferred stock. The certificate, as
restated, gives to the board the authority, without further action by
stockholders, to issue up to 20,000,000 shares of preferred stock in one or more
series and to fix the rights, preferences, privileges, qualifications and
restrictions granted to or imposed upon such preferred stock, including dividend
rights, conversion rights, voting rights, rights and terms of redemption,
liquidation preference and sinking fund terms, any or all of which may be
greater than the rights of the common stock. The issuance of preferred stock
could:
- adversely affect the voting power of holders of common stock and reduce
the likelihood that such holders will receive dividend payments and
payments upon liquidation;
- decrease the market price of the common stock; or
- delay, deter or prevent a change in our control.
We have no present plans to issue any shares of preferred stock.
REGISTRATION RIGHTS
Pursuant to the Amended and Restated Investor Rights Agreement, as amended,
between us and some of our investors, the investors, holding an aggregate of
29,404,473 shares of our common stock issuable upon conversion of our
outstanding preferred stock and upon exercise of outstanding warrants to
purchase common stock, have registration rights pertaining to the securities
they hold, exercisable any time following 180 days after the effective date of
this offering. In addition, Cox Communications and Gateway have registration
rights on the securities they are expected to hold as of the close of this
offering, beginning one year after the effective date of this offering. If we
propose to register any of our securities under the Securities Act for our own
account or the account of any of our stockholders other than these holders of
registrable shares, holders of such registrable shares are entitled to notice of
the registration and are entitled to include registrable shares therein,
provided, among other conditions, that the underwriters of any such offering
have the right to limit the number of shares included in such registration. In
addition, commencing 180 days after the effective date of the registration
statement of which this prospectus is a
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part, we may be required to prepare and file a registration statement under the
Securities Act at our expense if requested to do so by the holders of at least
30% of the registrable shares, or by holders who propose to register securities,
the aggregate offering price of which, net of underwriting discounts and
commissions, equals or exceeds $10,000,000. We are required to use our best
efforts to effect such registration, subject to certain conditions and
limitations. We are not obligated to effect more than three of such
stockholder-initiated registrations. Further, holders of registrable securities
may require us to file additional registration statements on Form S-3, subject
to certain conditions and limitations.
We are required to bear substantially all costs incurred in connection with
any such registrations, other than underwriting discounts and commissions. The
foregoing registration rights could result in substantial future expenses for us
and adversely affect any future equity offerings.
ANTI-TAKEOVER PROVISIONS
Delaware Law
We are governed by the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a public Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved in
a prescribed manner. A "business combination" includes mergers, asset sale or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. The statute could have the effect of delaying,
deferring or preventing a change in our control.
Certificate of Incorporation and Bylaw Provisions
Our restated certificate, which will become effective upon the closing of
the offering, provides that the board of directors will be divided into three
classes of directors, with each class serving a staggered three-year term. The
classification system of electing directors may tend to discourage a third party
from making a tender offer or otherwise attempting to obtain control of us and
may maintain the composition of the board of directors, as the classification of
the board of directors generally increases the difficulty of replacing a
majority of directors. Our restated certificate provides that any action
required or permitted to be taken by our stockholders must be effected at a duly
called annual or special meeting of stockholders and may not be effected by any
consent in writing. In addition, our bylaws provide that special meetings of our
stockholders may be called only by the Chairman of the board of directors, our
President, our Chief Executive Officer, or by the board of directors pursuant to
a resolution adopted by a majority of the total number of authorized directors.
Our restated certificate also specifies that the authorized number of directors
may be changed only by resolution of the board of directors and does not include
a provision for cumulative voting for directors. Under cumulative voting, a
minority stockholder holding a sufficient percentage of a class of shares may be
able to ensure the election of one or more directors. These and other provisions
contained in our restated certificate and bylaws could delay or discourage
certain types of transactions involving an actual or potential change in control
of us or our management (including transactions in which stockholders might
otherwise receive a premium for their shares over then current prices) and may
limit the ability of stockholders to remove current management or approve
transactions that stockholders may deem to be in their best interests and,
therefore, could adversely affect the price of our common stock.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Harris Trust
Company of California.
THE NASDAQ STOCK MARKET'S NATIONAL MARKET
Our common stock has been approved for listing upon notice of issuance on
the Nasdaq Stock Market's National Market under the trading symbol "LSPN."
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. As described below, no shares
currently outstanding will be available for sale immediately after this offering
due to certain contractual and securities law restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding 43,101,305
shares of common stock, assuming no exercise of the underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, the shares
offered for sale through the underwriters will be freely tradable without
restriction under the Securities Act unless purchased by our affiliates or
covered by a separate lock-up agreement with the underwriters.
The remaining 35,601,305 shares of common stock held by existing
stockholders are restricted securities. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration described below under Rules 144, 144(k) or 701 promulgated under
the Securities Act.
As a result of the lock-up agreements and the provisions of Rules 144,
144(k) and 701 described below, these restricted shares will be available for
sale in the public market as follows:
- no shares may be sold prior to 180 days from the date of this prospectus;
- 26,957,622 shares will have been held long enough to be sold under Rule
144 or Rule 701 beginning 181 days after the date of this prospectus; and
- the remaining shares may be sold under Rule 144 or 144(k) once they have
been held for the required time.
Lock-Up Agreements. We and our officers, directors and stockholders have
agreed not to transfer or dispose of, directly or indirectly, any shares of our
common stock or any securities convertible into or exercisable or exchangeable
for shares of our common stock, for a period of 180 days after the date of this
prospectus. Transfers or dispositions can be made sooner with the prior written
consent of Credit Suisse First Boston Corporation.
Rule 144. In general, under Rule 144, a person who has beneficially owned
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
- 1% of the number of shares of our common stock then outstanding which
will equal approximately 431,013 shares immediately after this offering;
or
- the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also limited by manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the 3 months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years is
entitled to sell these shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144 discussed above.
Rule 701. In general, under Rule 701, any of our employees, consultants or
advisors who purchases or receives shares from us under a compensatory stock
purchase plan or option plan or other written agreement will be eligible to
resell their shares beginning 90 days after the date of this prospectus. Non-
affiliates will be able to sell their shares subject only to the manner-of-sale
provisions of Rule 144.
74
<PAGE> 76
Affiliates will be able to sell their shares without compliance with the holding
period requirements of Rule 144.
Registration Rights. Upon completion of this offering, the holders of
29,404,473 shares of our common stock have rights to have their shares
registered under the Securities Act. Moreover, Cox Communications Holdings, Inc.
and Gateway Companies, Inc., upon purchase of shares as expected at the time of
the initial public offering, will have rights to have those shares registered
under the Securities Act, beginning one year after issuance. Except for shares
purchased by affiliates or covered by lock-up agreements, registration of their
shares under the Securities Act would result in these shares becoming freely
tradable without restriction under the Securities Act immediately upon the
effectiveness of the registration.
Stock Options and other Potential Share Issuances. Immediately after this
offering, we intend to file a registration statement under the Securities Act
covering the shares of common stock reserved for issuance upon exercise of
outstanding options. The registration statement is expected to be filed and
become effective as soon as practicable after the closing of this offering.
Accordingly, shares registered under the registration statement will be
available for resale in the open market beginning 180 days after the effective
date of the registration statement of which this prospectus is a part, except
with respect to Rule 144 volume limitations that apply to our affiliates. In
addition, we may issue additional securities in connection with acquisitions or
strategic relationships and to some of our existing stockholders.
75
<PAGE> 77
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated February 9, 2000, we have agreed to sell to the underwriters
named below, for whom Credit Suisse First Boston Corporation, Thomas Weisel
Partners LLC and U.S. Bancorp Piper Jaffray Inc. are acting as representatives,
the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
----------- ----------
<S> <C>
Credit Suisse First Boston Corporation...................... 3,270,000
Thomas Weisel Partners LLC.................................. 1,962,000
U.S. Bancorp Piper Jaffray Inc.............................. 1,308,000
ABN AMRO Incorporated....................................... 120,000
Deutsche Bank Securities Inc. .............................. 120,000
E*Offering Corp. ........................................... 120,000
First Union Securities, Inc. ............................... 120,000
FleetBoston Robertson Stephens Inc. ........................ 120,000
Invemed Associates LLC...................................... 120,000
Legg Mason Wood Walker, Incorporated........................ 120,000
TD Securities (USA) Inc. ................................... 120,000
----------
Total............................................. 7,500,000
==========
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in the offering, if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We have granted to the underwriters a 30-day option to purchase on a pro
rata basis up to 1,125,000 additional shares from us at the initial public
offering price less the underwriting discounts and commissions. The option may
be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $0.50 per share. The
underwriters and selling group members may allow a discount of $0.10 per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to dealers may be changed by the
representatives.
The following table summarizes the compensation and expenses we will pay.
<TABLE>
<CAPTION>
Per Share Total
--------------------------------- ---------------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Underwriting discounts and commissions
paid by us............................ $0.84 $0.84 $6,300,000 $7,245,000
Expenses payable by us.................. $0.20 $0.17 $1,500,000 $1,500,000
</TABLE>
We will pay Credit Suisse First Boston Corporation financial advisory fees of
approximately $750,000 and $180,000 relating to our agreements with Cox
Communications and Gateway, respectively.
The underwriters have informed us that they do not expect discretionary
sales to exceed 5% of the shares of common stock being offered.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has acted as lead or co-manager on numerous public
offerings of equity securities. Thomas Weisel Partners does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except
76
<PAGE> 78
with respect to its contractual relationship with us pursuant to the
underwriting agreement entered into in connection with this offering.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Securities and
Exchange Commission a registration statement under the Securities Act of 1933
relating to, any shares of our common stock or securities convertible into or
exchangeable or exercisable for any of our common stock, or publicly disclose
the intention to make any such offer, sale, pledge, disposition or filing,
without the prior written consent of Credit Suisse First Boston Corporation, for
a period of 180 days after the date of this prospectus, except issuances
pursuant to the conversion or exchange of convertible or exchangeable securities
or the exercise of warrants or options outstanding on the date of this
prospectus, grants of options or issuances of shares pursuant to our 2000 Equity
Incentive Plan or 1992 Stock Option Plan, and issuances pursuant to our 2000
Employee Stock Purchase Plan. In addition, we may issue up to 534,008 shares of
our common stock to a small number of former Academic Systems stockholders that
we believe may have a right to these shares relating to our acquisition of
Academic Systems, and up to 1,000,000 shares of our common stock in connection
with acquisitions, strategic alliances or joint ventures, subject to the
condition that the recipients of these shares agree to the same restrictions
during the remainder of the 180-day period after the date of this prospectus
that our officers, directors and other stockholders have agreed to. Our
officers, directors and stockholders have agreed that, for a period of 180 days
after the date of this prospectus, they will not offer, sell, contract to sell,
pledge or otherwise dispose of, directly or indirectly, any shares of our common
stock or securities convertible into or exchangeable or exercisable for any
shares of our common stock, or publicly disclose the intention to make any such
offer, sale, pledge or disposal, without the prior written consent of Credit
Suisse First Boston Corporation.
The underwriters have reserved for sale, at the initial public offering
price, less than 5% of the 7,500,000 shares of the common stock offered by the
underwriters in this offering for employees, directors and certain other persons
associated with us who have expressed an interest in purchasing common stock in
the offering. The number of shares available for sale to the general public in
the offering will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered by the underwriters
to the general public on the same terms as the other shares.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act, or to contribute to payments which the underwriters may be
required to make in that respect.
Our common stock has been approved for listing upon notice of issuance on
The Nasdaq Stock Market's National Market under the trading symbol "LSPN."
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiation
between us and the representatives. The principal factors to be considered in
determining the public offering price include the following:
- the information included in this prospectus and otherwise available to
the representatives;
- market conditions for initial public offerings;
- the history of, and the prospects for, the industry in which we will
compete;
- the ability of our management;
- the prospects for our future earnings;
- the present state of our development and our current financial condition;
- the general condition of the securities markets at the time of this
offering; and
- the recent market prices of, and the demand for, publicly-traded common
stock of companies that are generally comparable to us.
77
<PAGE> 79
The representatives may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids in accordance with Regulation M
under the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the securities in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the securities originally sold by the
syndicate member are purchased in a syndicate covering transaction to
cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty bids
may cause the price of the common stock to be higher than it would otherwise be
in the absence of these transactions. These transactions may be effected on The
Nasdaq Stock Market's National Market or otherwise and, if commenced, may be
discontinued at any time.
78
<PAGE> 80
NOTICE TO CANADIAN RESIDENTS
RESALE RESTRICTIONS
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common stock
in Canada must be made in accordance with applicable securities laws which will
vary depending on the relevant jurisdiction, and which may require resales to be
made in accordance with available statutory exemptions or pursuant to a
discretionary exemption granted by the applicable Canadian securities regulatory
authority. Purchasers are advised to seek legal advice prior to any resale of
the common stock.
REPRESENTATIONS OF PURCHASERS
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that: (i) such purchaser is entitled under
applicable provincial securities laws to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, such purchaser is purchasing as principal and not as agent, and
(iii) such purchaser has reviewed the text above under "Resale Restrictions."
RIGHTS OF ACTION (ONTARIO PURCHASERS)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
ENFORCEMENT OF LEGAL RIGHTS
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be possible
for Canadian purchasers to effect service of process within Canada upon the
issuer or such persons. All or a substantial portion of the assets of the issuer
and such persons may be located outside of Canada and, as a result, it may not
be possible to satisfy a judgment against the issuer or such persons in Canada
or to enforce a judgment obtained in Canadian courts against such issuer or
persons outside of Canada.
NOTICE TO BRITISH COLUMBIA RESIDENTS
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under the
same prospectus exemption.
TAXATION AND ELIGIBILITY FOR INVESTMENT
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
79
<PAGE> 81
LEGAL MATTERS
Cooley Godward LLP, San Diego, California will pass upon the validity of
the shares of common stock offered by this prospectus for us. As of the date of
this prospectus, an investment fund created by Cooley Godward LLP owns an
aggregate of 70,000 shares of Series E preferred stock (convertible into 35,000
shares of common stock). O'Melveny & Myers LLP, Newport Beach, California will
pass upon certain legal matters in connection with this offering for the
underwriters.
EXPERTS
Ernst & Young LLP have audited our consolidated financial statements as of
January 31, 1998 and 1999 and October 31, 1999 and for the years ended January
31, 1997, 1998 and 1999 and the nine months ended October 31, 1999 and the
financial statements of Academic Systems as of September 30, 1997 and 1998 and
for the years then ended, as set forth in their reports. We have included our
financial statements (including those of Academic Systems) in this prospectus
and elsewhere in the registration statement in reliance on their reports, given
on their authority as experts in accounting and auditing.
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act, with respect to the common stock
offered by this prospectus. As permitted by the rules and regulations of the
Commission, this prospectus, which is a part of the registration statement,
omits certain information, exhibits, schedules and undertakings set forth in the
registration statement. For further information pertaining to us and the common
stock offered hereby, reference is made to such registration statement and the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents or provisions of any contract or other document referred to herein
are not necessarily complete, and in each instance reference is made to the copy
of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement may be inspected without charge
at the office of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, and at the Commission's regional offices located at the Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and
Seven World Trade Center, 13th Floor, New York, New York 10048. Copies of all or
any part of the registration statement may be obtained from such offices upon
the payment of the fees prescribed by the Commission. In addition, registration
statements and certain other filings made with the Commission through its
Electronic Data Gathering, Analysis and Retrieval ("EDGAR") system, including
our registration statement and all exhibits and amendments to our registration
statements, are publicly available through the Commission's Web site at
http://www.sec.gov.
The following are trademarks or service marks of The Lightspan Partnership,
Inc.:
- - The Lightspan Network(R)
- - Global Schoolhouse(R)
- - StudyWeb(R)
- - Cosmic Cookoff(R)
- - Faire Games(R)
- - Liquid Books(R)
- - Mona & Moki(R)
- - Math on the Move!(R)
- - P.K.'s Math Studio(R)
- - The Quaddle Family Mysteries(R)
- - The Secret of Googol(R)
- - Timeless Math(R)
- - Lightspan Partnership
- - Lightspan
- - Lightspan Achieve Now
- - Lightspan PageOne
- - Lightspan Adventures
- - Learning Search
- - Calamity
- - K9.5
- - Math Gallery
- - P.K's Place
All other trade names, trademarks and service marks appearing in this prospectus
are the property of their holders.
80
<PAGE> 82
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE LIGHTSPAN PARTNERSHIP, INC.
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of January 31, 1998 and 1999
and October 31, 1999...................................... F-3
Consolidated Statements of Operations for the years ended
January 31, 1997, 1998 and 1999 and the nine months ended
October 31, 1998 (unaudited) and 1999..................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended January 31, 1997, 1998 and 1999 and the nine
months ended October 31, 1999............................. F-5
Consolidated Statements of Cash Flows for the years ended
January 31, 1997, 1998 and 1999 and the nine months ended
October 31, 1998 (unaudited) and 1999..................... F-7
Notes to Consolidated Financial Statements.................. F-8
ACADEMIC SYSTEMS CORPORATION
Report of Ernst & Young LLP, Independent Auditors........... F-27
Balance Sheets as of September 30, 1997 and 1998 and June
30, 1999 (unaudited)...................................... F-28
Statements of Operations for the years ended September 30,
1997 and 1998 and the nine months ended June 30, 1998 and
1999 (unaudited).......................................... F-29
Statements of Shareholders' Equity for the years ended
September 30, 1997 and 1998 and the nine months ended June
30, 1998 and 1999 (unaudited)............................. F-30
Statements of Cash Flows for the years ended September 30,
1997 and 1998 and the nine months ended June 30, 1998 and
1999 (unaudited).......................................... F-31
Notes to Financial Statements............................... F-32
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
Unaudited Pro Forma Combined Condensed Statement of
Operations for the year ended January 31, 1999............ F-40
Unaudited Pro Forma Combined Condensed Statement of
Operations for the nine months ended October 31, 1999..... F-41
Notes to Unaudited Pro Forma Combined Condensed Financial
Statements................................................ F-42
</TABLE>
F-1
<PAGE> 83
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
The Lightspan Partnership, Inc.
We have audited the accompanying consolidated balance sheets of The
Lightspan Partnership, Inc. as of January 31, 1998 and 1999 and October 31,
1999, and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended January
31, 1999 and the nine months ended October 31, 1999. These financial statements
are the responsibility of Lightspan'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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The
Lightspan Partnership, Inc. at January 31, 1998 and 1999 and October 31, 1999
and the results of its operations and its cash flows for each of the three years
in the period ended January 31, 1999 and the nine months ended October 31, 1999,
in conformity with accounting principles generally accepted in the United
States.
ERNST & YOUNG LLP
San Diego, California
January 28, 2000
F-2
<PAGE> 84
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 31, PRO FORMA
----------------------------- OCTOBER 31, STOCKHOLDERS'
1998 1999 1999 EQUITY
------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 4,421,617 $ 7,142,938 $ 22,671,611
Accounts receivable, less allowance for doubtful
accounts of $533,168, $400,000 and $827,472 at January
31, 1998 and 1999 and October 31, 1999,
respectively.......................................... 5,243,838 7,794,981 10,798,303
Finished goods inventory................................ 919,142 1,267,237 1,710,104
Deferred cost of revenue................................ -- 3,555,336 7,092,700
Other current assets.................................... 1,086,017 1,045,997 1,719,265
------------- ------------- -------------
Total current assets............................. 11,670,614 20,806,489 43,991,983
Property and equipment, net............................... 2,241,784 1,637,886 2,565,740
Deposits and other assets................................. 167,494 121,178 146,777
Intangible assets, less accumulated amortization of
$1,615,839.............................................. -- -- 52,062,682
------------- ------------- -------------
Total assets..................................... $ 14,079,892 $ 22,565,553 $ 98,767,182
============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 3,285,340 $ 3,069,280 $ 5,015,616
Accrued liabilities..................................... 4,203,311 4,878,620 7,142,644
Acquisition consideration payable....................... -- -- 5,341,609
Deferred revenue -- Achieve Now......................... -- 20,717,005 40,207,314
Deferred revenue -- services & other.................... 2,494,072 3,444,098 6,023,828
Current portion of note payable......................... -- -- 224,086
Current portion of capital lease obligations............ 1,234,358 930,040 606,575
------------- ------------- -------------
Total current liabilities........................ 11,217,081 33,039,043 64,561,672
Deferred rent............................................. 406,281 382,486 332,987
Capital lease obligations, less current portion........... 774,889 393,480 526,458
Commitments
Stockholders' equity:
Convertible preferred stock, par value $0.001:
Authorized shares -- 61,793,074
Issued and outstanding shares -- 30,049,176 and
35,527,893 at January 31, 1998 and 1999,
respectively, and 52,230,915 at October 31, 1999; no
shares pro forma....................................
Aggregate liquidation preference -- $90,819,936 and
$111,419,912 at January 31, 1998 and 1999,
respectively, and $194,935,047 at October 31,
1999................................................ 30,049 35,527 52,230 $ --
Common stock, par value $0.001:
Authorized shares -- 75,000,000
Issued and outstanding shares -- 3,275,618 and
3,540,578 at January 31, 1998 and 1999,
respectively, and 4,625,389 at October 31, 1999;
33,376,271 shares pro forma......................... 3,276 3,541 4,625 33,376
Additional paid-in capital.............................. 89,852,909 110,674,833 209,464,854 227,781,949
Stock subscriptions receivable.......................... -- -- (13,000,000) --
Deferred advertising expense............................ -- -- (400,000) (400,000)
Deferred compensation................................... -- (192,196) (6,236,490) (6,236,490)
Accumulated deficit..................................... (88,204,593) (121,771,161) (156,539,154) (174,799,509)
------------- ------------- ------------- -------------
Total stockholders' equity....................... 1,681,641 (11,249,456) 33,346,065 $ 46,379,326
------------- ------------- ------------- =============
Total liabilities and stockholders' equity....... $ 14,079,892 $ 22,565,553 $ 98,767,182
============= ============= =============
</TABLE>
See accompanying notes.
F-3
<PAGE> 85
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, NINE MONTHS ENDED OCTOBER 31,
------------------------------------------ -----------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Software Licenses................. $ 5,591,769 $ 14,753,097 $ -- $ -- $ 488,798
Internet Licenses................. -- 288,645 1,023,714 639,490 1,246,100
Services.......................... 553,912 1,973,595 3,742,237 2,960,750 4,718,495
Hardware.......................... 2,419,360 5,293,671 6,103,957 4,866,768 4,828,535
------------ ------------ ------------ ------------ ------------
Total revenues............ 8,565,041 22,309,008 10,869,908 8,467,008 11,281,928
Cost of revenues:
Software Licenses................. 2,963,848 4,835,830 -- -- 145,057
Internet Licenses................. -- 98,903 302,132 188,462 377,484
Services.......................... 563,403 1,753,808 2,385,056 1,753,404 2,226,190
Hardware.......................... 2,314,844 4,744,887 4,973,166 3,985,868 3,983,925
------------ ------------ ------------ ------------ ------------
Total cost of revenues.... 5,842,095 11,433,428 7,660,354 5,927,734 6,732,656
------------ ------------ ------------ ------------ ------------
Gross profit........................ 2,722,946 10,875,580 3,209,554 2,539,274 4,549,272
Operating expenses:
Technology and development........ 18,953,329 14,816,050 10,593,735 8,465,760 7,525,997
Sales and marketing............... 13,773,048 20,295,916 22,990,261 16,925,824 23,820,445
General and administrative........ 2,472,717 2,714,544 3,590,159 1,792,138 4,082,508
Stock-based compensation.......... -- -- 19,680 -- 2,503,458
Amortization of intangible
assets......................... -- -- -- -- 1,615,839
------------ ------------ ------------ ------------ ------------
Total operating
expenses................ 35,199,094 37,826,510 37,193,835 27,183,722 39,548,247
------------ ------------ ------------ ------------ ------------
Loss from operations................ (32,476,148) (26,950,930) (33,984,281) (24,644,448) (34,998,975)
Interest income..................... 444,916 261,875 638,619 531,151 371,819
Interest expense.................... (557,475) (789,534) (220,906) (181,085) (140,837)
------------ ------------ ------------ ------------ ------------
Net loss............................ $(32,588,707) $(27,478,589) $(33,566,568) $(24,294,382) $(34,767,993)
============ ============ ============ ============ ============
Historical net loss per share:
Basic and diluted................. $ (10.72) $ (8.65) $ (9.91) $ (7.29) $ (8.93)
============ ============ ============ ============ ============
Weighted average shares -- basic
and diluted.................... 3,038,824 3,177,315 3,387,772 3,330,546 3,891,940
============ ============ ============ ============ ============
Pro forma net loss per share:
Basic and diluted................. $ (1.54) $ (1.42)
============ ============
Weighted average shares -- basic
and diluted.................... 21,801,339 24,445,397
============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 86
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
-------------------- ------------------ PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ------- --------- ------ ------------ ------------ --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 31, 1997.......... 22,398,449 $22,398 3,068,864 $3,069 $ 62,315,020 $ -- $ --
Issuance of Series D convertible
preferred stock at $3.76 per
share for cash, net of offering
costs of $1,405,286.............. 5,984,038 5,984 -- -- 21,088,712 -- --
Issuance of Series D convertible
preferred stock at $3.76 per
share in exchange for bridge
loans from shareholders.......... 1,666,689 1,667 -- -- 6,265,085 -- --
Issuance of warrants to purchase
convertible
preferred stock.................. -- -- -- -- 102,536 -- --
Exercise of stock options.......... -- -- 244,775 245 83,024 -- --
Repurchase of common stock for
cash............................. -- -- (38,021) (38) (1,468) -- --
Net loss........................... -- -- -- -- -- -- --
---------- ------- --------- ------ ------------ -------- -----------
Balance at January 31, 1998.......... 30,049,176 30,049 3,275,618 3,276 89,852,909 -- --
Issuance of Series D convertible
preferred stock at $3.76 per
share for cash, net of offering
costs of $127,132................ 5,478,717 5,478 -- -- 20,467,364 -- --
Exercise of stock options.......... -- -- 264,960 265 142,684 -- --
Deferred compensation related to
stock options.................... -- -- -- -- 211,876 -- (211,876)
Amortization of deferred
compensation..................... -- -- -- -- -- -- 19,680
Net loss........................... -- -- -- -- -- -- --
---------- ------- --------- ------ ------------ -------- -----------
Balance at January 31, 1999.......... 35,527,893 35,527 3,540,578 3,541 110,674,833 -- (192,196)
<CAPTION>
DEFERRED TOTAL
ADVERTISING ACCUMULATED STOCKHOLDERS'
EXPENSE DEFICIT EQUITY (DEFICIT)
----------- ------------- ----------------
<S> <C> <C> <C>
Balance at January 31, 1997.......... $ -- $ (60,726,004) $ 1,614,483
Issuance of Series D convertible
preferred stock at $3.76 per
share for cash, net of offering
costs of $1,405,286.............. -- -- 21,094,696
Issuance of Series D convertible
preferred stock at $3.76 per
share in exchange for bridge
loans from shareholders.......... -- -- 6,266,752
Issuance of warrants to purchase
convertible
preferred stock.................. -- -- 102,536
Exercise of stock options.......... -- -- 83,269
Repurchase of common stock for
cash............................. -- -- (1,506)
Net loss........................... -- (27,478,589) (27,478,589)
-------- ------------- ------------
Balance at January 31, 1998.......... -- (88,204,593) 1,681,641
Issuance of Series D convertible
preferred stock at $3.76 per
share for cash, net of offering
costs of $127,132................ -- -- 20,472,842
Exercise of stock options.......... -- -- 142,949
Deferred compensation related to
stock options.................... -- -- --
Amortization of deferred
compensation..................... -- -- 19,680
Net loss........................... -- (33,566,568) (33,566,568)
-------- ------------- ------------
Balance at January 31, 1999.......... -- (121,771,161) (11,249,456)
</TABLE>
F-5
<PAGE> 87
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK ADDITIONAL STOCK
-------------------- ------------------ PAID-IN SUBSCRIPTION DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE COMPENSATION
---------- ------- --------- ------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of Series E convertible
preferred stock at $5.00 per
share, net of offering costs
of $45,559.................... 6,614,183 $ 6,614 -- $ -- $ 33,018,742 $ -- $ --
Issuance of Series E convertible
preferred stock in exchange
for future advertising........ 80,000 80 -- -- 399,920 -- --
Series E convertible preferred
stock issued or issuable in
connection with the
acquisition of Academic
Systems....................... 7,191,839 7,192 -- -- 35,952,003 -- --
Series E convertible preferred
stock issued in connection
with the acquisition of
StudyWeb...................... 217,000 217 -- -- 1,084,783 -- --
Common stock issued in
connection with the
acquisition of Academic
Systems....................... -- -- 570,356 570 4,710,571 -- --
Options and warrants issued in
connection with the
acquisition of Academic
Systems....................... -- -- -- -- 1,817,707 -- --
Preferred stock at $5.00 per
share......................... 2,600,000 2,600 -- -- 12,997,400 (13,000,000) --
Exercise of stock options....... -- -- 514,455 514 261,143 -- --
Deferred compensation related to
stock options................. -- -- -- -- 8,547,752 -- (8,547,752)
Amortization of deferred
compensation.................. -- -- -- -- -- -- 2,503,458
Net loss........................ -- -- -- -- -- -- --
---------- ------- --------- ------ ------------ ------------ -----------
Balance at October 31, 1999....... 52,230,915 $52,230 4,625,389 $4,625 $209,464,854 $(13,000,000) $(6,236,490)
========== ======= ========= ====== ============ ============ ===========
<CAPTION>
DEFERRED TOTAL
ADVERTISING ACCUMULATED STOCKHOLDERS'
EXPENSE DEFICIT EQUITY
----------- ------------- -------------
<S> <C> <C> <C>
Issuance of Series E convertible
preferred stock at $5.00 per
share, net of offering costs
of $45,559.................... $ -- $ -- $ 33,025,356
Issuance of Series E convertible
preferred stock in exchange
for future advertising........ (400,000) -- --
Series E convertible preferred
stock issued or issuable in
connection with the
acquisition of Academic
Systems....................... -- -- 35,959,195
Series E convertible preferred
stock issued in connection
with the acquisition of
StudyWeb...................... -- -- 1,085,000
Common stock issued in
connection with the
acquisition of Academic
Systems....................... -- -- 4,711,141
Options and warrants issued in
connection with the
acquisition of Academic
Systems....................... -- -- 1,817,707
Preferred stock at $5.00 per
share......................... -- -- --
Exercise of stock options....... -- -- 261,657
Deferred compensation related to
stock options................. -- -- --
Amortization of deferred
compensation.................. -- -- 2,503,458
Net loss........................ -- (34,767,993) (34,767,993)
--------- ------------- ------------
Balance at October 31, 1999....... $(400,000) $(156,539,154) $ 33,346,065
========= ============= ============
</TABLE>
See accompanying notes.
F-6
<PAGE> 88
THE LIGHTSPAN PARTNERSHIP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER
YEARS ENDED JANUARY 31, 31,
------------------------------------------ ---------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss............................................... $(32,588,707) $(27,478,589) $(33,566,568) $(24,294,382) $(34,767,993)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization...................... 982,665 1,637,485 1,310,498 1,005,836 865,116
(Gain) loss on disposal of assets.................. (64,827) 37,774 (5,060) 6,175 (1,219)
Provision for doubtful accounts.................... 235,991 297,177 (133,168) 15,776 363,748
Amortization of intangible assets.................. -- -- -- -- 1,615,839
Amortization of deferred stock-based
compensation..................................... -- -- 19,680 -- 2,503,458
Amortization of interest expense issued in
connection with debt............................. 61,509 140,151 -- -- --
Changes in operating assets and liabilities:
Accounts receivable............................ (5,620,093) (156,913) (2,417,975) (909,623) (1,391,488)
Inventory...................................... (284,871) 174,579 (348,095) (758,537) (160,032)
Deferred cost of Revenue....................... -- -- (3,555,336) (2,485,965) (3,537,364)
Deposits and other assets...................... 160,654 (288,659) 86,336 (76,110) (638,713)
Accounts payable............................... 2,136,259 (149,262) (216,060) (531,903) 1,556,782
Deferred revenue............................... 1,769,315 724,757 21,667,031 17,122,839 20,583,190
Accrued liabilities............................ 1,732,330 2,581,077 651,514 (1,990,834) 1,182,197
------------ ------------ ------------ ------------ ------------
Net cash flows used in operating activities............ (31,479,775) (22,480,423) (16,507,203) (12,896,728) (11,826,479)
INVESTING ACTIVITIES:
Decrease in short-term investments..................... 5,423,307 414,000 -- -- --
Purchase of property and equipment..................... (2,850,709) (422,808) (725,707) (620,234) (1,335,968)
Proceeds from sale of fixed assets..................... -- 30,816 24,167 -- 4,978
Net cash paid for purchase of Academic Systems......... -- -- -- -- (801,698)
Net cash paid for purchase of GlobalSchoolhouse........ -- -- -- -- (2,500,000)
Net cash paid for purchase of StudyWeb................. -- -- -- -- (1,000,000)
------------ ------------ ------------ ------------ ------------
Net cash flows provided by (used in) investing
activities........................................... 2,572,598 22,008 (701,540) (620,234) (5,632,688)
FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock.............. 19,554,716 21,094,696 20,472,842 20,480,369 33,025,356
Proceeds from convertible bridge notes................. -- 6,266,752 -- -- --
Proceeds from lessor from capital leases............... 2,287,118 339,112 699,538 739,405 587,782
Principal repayments on capital leases................. (1,216,743) (1,527,864) (1,385,265) (1,071,032) (886,955)
Proceeds from notes payable............................ 1,600,000 -- -- -- --
Principal repayments on notes payable.................. (755,152) (844,848) -- -- --
Proceeds from exercise of stock options................ 12,009 83,269 142,949 88,863 261,657
Repurchase of common stock............................. -- (1,506) -- -- --
------------ ------------ ------------ ------------ ------------
Net cash flows provided by financing activities........ 21,481,948 25,409,611 19,930,064 20,237,605 32,987,840
Increase (decrease) in cash and cash equivalents....... (7,425,229) 2,951,196 2,721,321 6,720,643 15,528,673
Cash and cash equivalents at beginning of period....... 8,895,650 1,470,421 4,421,617 4,421,617 7,142,938
------------ ------------ ------------ ------------ ------------
Cash and cash equivalents at end of period............. $ 1,470,421 $ 4,421,617 $ 7,142,938 $ 11,142,260 $ 22,671,611
============ ============ ============ ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid.......................................... $ 495,966 $ 584,035 $ 193,058 $ 149,744 $ 140,428
============ ============ ============ ============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Conversion of bridge notes into Series D convertible
preferred stock...................................... $ -- $ 6,266,752 $ -- $ -- $ --
============ ============ ============ ============ ============
Deferred stock-based compensation...................... $ -- $ -- $ 211,876 $ -- $ 8,547,752
============ ============ ============ ============ ============
Series E preferred stock issued in connection with the
purchase of Academic Systems......................... $ -- $ -- $ -- $ -- $ 35,959,195
============ ============ ============ ============ ============
Common stock issued in connection with the purchase of
Academic Systems..................................... $ -- $ -- $ -- $ -- $ 4,711,141
============ ============ ============ ============ ============
Valuation of options and warrants issued in connection
with the purchase of Academic Systems................ $ -- $ -- $ -- $ -- $ 1,817,707
============ ============ ============ ============ ============
Additional consideration related to the acquisition of
Academic Systems..................................... $ -- $ -- $ -- $ -- $ 5,341,609
============ ============ ============ ============ ============
Series E preferred stock issued for future
advertising.......................................... $ -- $ -- $ -- $ -- $ 400,000
============ ============ ============ ============ ============
Series E preferred stock issued for subscriptions
receivable........................................... $ -- $ -- $ -- $ -- $ 13,000,000
============ ============ ============ ============ ============
Series E preferred stock issued in connection with
purchase of StudyWeb................................. $ -- $ -- $ -- $ -- $ 1,085,000
============ ============ ============ ============ ============
</TABLE>
See accompanying notes.
F-7
<PAGE> 89
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
The Lightspan Partnership ("Lightspan") was founded in 1993. Lightspan
provides curriculum-based educational software and Internet 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, 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 Sony PlayStation(R) game
console that the student uses to run 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 consolidated financial statements include the accounts of Lightspan and
its wholly owned subsidiary, Academic Systems. 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 remaining maturities when acquired of three
months or less.
CONCENTRATION OF CREDIT RISK
Substantially all of Lightspan's accounts receivable are from school
districts located throughout the United States. Lightspan provides for estimated
losses from uncollectible accounts and such losses have historically not
exceeded management's expectations.
INVENTORY
Inventory consists primarily of software for resale and is stated at the
lower of cost (first in, first out method) or market.
DEFERRED COST OF REVENUES
Deferred cost of sales consists of costs incurred to duplicate and package
titles shipped for which revenue has been deferred. The deferral of these costs
commenced February 1, 1998, when we adopted AICPA Statement of Position 97-2,
"Software Revenue Recognition."
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.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, Lightspan regularly evaluates its long-lived assets for
indicators of possible impairment by comparison of the carrying amounts to
undiscounted estimated cash flows to be generated by such assets. Should an
impairment exist, the impairment loss would be measured based on the excess of
the carrying value of the asset over the asset's
F-8
<PAGE> 90
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
fair value or discounted estimates of future cash flows. Lightspan has not
identified any such impairment losses to date.
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.
DEFERRED RENT
Rent expense is recorded on a straight-line basis over the term of the
lease. The difference between rent expense accrued and amounts paid under the
lease agreements is recorded as deferred rent in the accompanying balance sheet.
REVENUE RECOGNITION
Lightspan derives its revenues from the licensing of software, product
implementation and training services, customer support services, Internet
subscriptions and the sale of PlayStation game consoles and accessories.
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.
Software Licenses
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 32 to 36 separate Lightspan Achieve Now titles, with each
title consisting of one distinct CD-ROM. There are a total of 77 separate titles
planned, some of which are included in more than one grade cluster. Throughout
fiscal 1997 and through the first nine months of fiscal 2000, a number of these
titles were still 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 October 31,
1999, 72 of the 77 planned titles had been completed and five of the 77 planned
titles were still under development.
While Lightspan is under no contractual obligation to deliver any as-yet
uncompleted titles to its customers, it does intend to deliver the remaining
titles on a when-and-if available basis. As of October 31, 1999, these titles
are expected to be delivered by July 31, 2001.
Prior to fiscal year 1999, Lightspan recognized revenue under AICPA
Statement of Position, or SOP, 91-1, Software Revenue Recognition. Under SOP
91-1, Lightspan recognized the full sales value of Lightspan Achieve Now
software licenses, including both completed and as-yet uncompleted titles, upon
shipment of the then-completed titles provided that there were no contractual
performance obligations to deliver the uncompleted titles and the collection of
the related receivable was deemed probable. While Lightspan had an intention to
eventually deliver a number of as-yet uncompleted titles to its customers, the
final composition of such titles was evolving and therefore customers were not
provided with specific
F-9
<PAGE> 91
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
information as to the final collection or delivery schedule of titles to be
provided. Lightspan accrued the production costs associated with the as-yet
uncompleted titles in the period in which the revenue was recognized, and
included these costs in the cost of software license revenues and on the balance
sheet as accrued cost of revenues.
Prior to fiscal year 1999, when the number of titles to be eventually
completed and delivered had not yet been finalized, Lightspan considered its
plan to deliver as-yet uncompleted titles as a post-contract customer support,
or PCS, obligation. In accordance with the provisions of SOP 91-1, Lightspan
recognized the revenue from the PCS obligation along with the initial license
fee, based on the following five criteria: (i) the PCS fee was bundled with the
initial licensing fee; (ii) the substantial portion of additional titles was
expected to be completed and delivered within one year; (iii) the estimated cost
of providing the PCS, primarily assembly, packaging and delivery costs, were
insignificant; (iv) enhancements offered during the initial period of the PCS
arrangements were historically minimal; and, (v) collectibility of the fee was
probable.
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. Under
SOP 97-2, Lightspan defers all revenue recognition for Achieve Now licenses,
since objective fair values of individual as-yet uncompleted titles cannot be
determined and used to allocate the license fee to the individual titles as they
are shipped.
Historically, Lightspan has not experienced customer cancellations,
forfeitures or discontinuations of licenses.
Customer Support
Revenue derived from telephone support and maintenance arrangements
provided by the professional development organization is recognized ratably over
the one-year term of the support and maintenance period.
Product Implementation and Training Services
Revenue derived from product implementation and customer training provided
by the professional development organization is recognized when services are
performed, in accordance with the standard implementation, training, service,
and evaluation plans that Lightspan establishes for its customers.
Internet Subscriptions
Revenue derived from Internet subscriptions is recognized on a
straight-line basis over the term of the agreement (generally one year).
F-10
<PAGE> 92
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PlayStation Game Consoles and Related Accessories
Revenue derived from the sale of PlayStation game consoles and related
accessories is recognized upon delivery of the console and the related software
product.
Deferred Revenue
Payments received in advance of amounts earned are recorded as deferred
revenue in the accompanying financial statements.
SOFTWARE DEVELOPMENT COSTS
Software development costs 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
been met upon substantial completion of the title, and therefore software
development costs subsequent to technological feasibility have been
insignificant.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
Lightspan has elected to follow Accounting Principles Board Opinion, or 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, or 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 recognized over the related service period.
COMPREHENSIVE INCOME
In accordance with SFAS No. 130, Reporting Comprehensive Income, all
components of comprehensive income, including net income, are reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income (loss) and
other comprehensive income (loss), including unrealized gains and losses on
investments, are reported net of their related tax effect, to arrive at
comprehensive income (loss). For the years ended January 31, 1997, 1998 and 1999
and the nine month periods ended October 31, 1998 and 1999, comprehensive loss
equals the net loss as reported.
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.
F-11
<PAGE> 93
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS
Certain amounts in prior year financial statements have been reclassified
to conform with the current period presentation.
NET LOSS PER SHARE AND UNAUDITED PRO FORMA STOCKHOLDERS' EQUITY
Lightspan computes net loss per share in accordance with SFAS No. 128,
Earnings Per Share, and SEC Staff Accounting Bulletin (or SAB) No. 98. 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.
Under the provisions of SAB No. 98, common shares issued for nominal
consideration, if any, would be included in the per share calculations as if
they were outstanding for all periods presented. No common shares have been
issued for nominal consideration.
The following table sets forth the computation of historical net loss per
share, basic and diluted:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED JANUARY 31, OCTOBER 31,
------------------------------------------ ---------------------------
1997 1998 1999 1998 1999
------------ ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss.............. $(32,588,707) $(27,478,589) $(33,566,568) $(24,294,382) $(34,767,993)
============ ============ ============ ============ ============
Denominator for
historical basic and
diluted calculations:
Weighted average
common shares
outstanding........ 3,038,824 3,177,315 3,387,772 3,330,546 3,891,940
============ ============ ============ ============ ============
Historical net loss per
share:
Basic and diluted..... $ (10.72) $ (8.65) $ (9.91) $ (7.29) $ (8.93)
============ ============ ============ ============ ============
</TABLE>
Pro forma net loss per share has been computed as described above and also
gives effect to common equivalent shares arising from preferred stock that will
automatically convert upon the closing of the initial public offering
contemplated by this prospectus (using the as-if converted method from the
original date of issuance).
Unaudited pro forma stockholders' equity at October 31, 1999, as adjusted
for the conversion of the convertible preferred stock into common stock, is
disclosed on the balance sheet.
F-12
<PAGE> 94
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
2. BALANCE SHEET DETAILS
Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Cash............................................ $ 1,608,794 $ 723,190 $ 2,915,486
U.S. Corporate master notes..................... 1,825,000 3,425,000 --
U.S. Corporate repurchase agreements............ 262,000 1,741,000 --
Money market accounts........................... 25,823 27,748 19,716,125
U.S. Government repurchase agreements........... 700,000 1,226,000 --
Certificates of deposit......................... -- -- 40,000
----------- ----------- -----------
$ 4,421,617 $ 7,142,938 $22,671,611
=========== =========== ===========
</TABLE>
Other current assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Prepaid royalties............................... $ 594,883 $ 450,983 $ 427,919
Other receivables............................... 147,587 284,832 140,201
Short-term deposits............................. 221,946 235,578 372,113
Other current assets............................ 121,601 74,604 779,032
----------- ----------- -----------
$ 1,086,017 $ 1,045,997 $ 1,719,265
=========== =========== ===========
</TABLE>
Intangible assets consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Customer base................................... $ -- $ -- $16,200,000
Core technology................................. -- -- 5,600,000
Trademark and trade name........................ -- -- 3,000,000
Assembled workforce............................. -- -- 1,000,000
Goodwill........................................ -- -- 27,878,521
----------- ----------- -----------
-- -- 53,678,521
Less accumulated amortization................... -- -- (1,615,839)
----------- ----------- -----------
$ -- $ -- $52,062,682
=========== =========== ===========
</TABLE>
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
------------------------- OCTOBER 31,
1998 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Machinery and equipment......................... $ 3,978,385 $ 4,339,758 $ 5,370,702
Software........................................ 140,719 244,455 690,192
Office furniture and equipment.................. 1,163,078 1,186,394 1,453,391
----------- ----------- -----------
5,282,182 5,770,607 7,514,285
Less accumulated depreciation and
amortization.................................. (3,040,398) (4,132,721) (4,948,545)
----------- ----------- -----------
$ 2,241,784 $ 1,637,886 $ 2,565,740
=========== =========== ===========
</TABLE>
F-13
<PAGE> 95
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
2. BALANCE SHEET DETAILS (CONTINUED)
Accrued liabilities consist of the following:
<TABLE>
<CAPTION>
JANUARY 31,
----------------------- OCTOBER 31,
1998 1999 1999
---------- ---------- -----------
<S> <C> <C> <C>
Other accrued liabilities.......................... $1,337,516 $2,341,935 $2,896,106
Accrued bonuses and commissions.................... 1,130,438 1,669,737 3,351,611
Accrued vacation................................... 572,857 533,157 826,661
Accrued cost of revenues........................... 1,162,500 333,791 68,266
---------- ---------- ----------
$4,203,311 $4,878,620 $7,142,644
========== ========== ==========
</TABLE>
3. LINE OF CREDIT AND LEASE FINANCING
Lightspan has a revolving line of credit with a bank which allows Lightspan
to borrow up to a maximum of the lesser of (a) 75% of eligible accounts
receivable (as defined) or (b) $10,000,000. The line of credit was renewed in
February 1999 and expires in April 2000 and bears interest at the bank's prime
rate plus 1.5% (10.0% at October 31, 1999), payable monthly. The line of credit
is collateralized by substantially all of Lightspan's assets. The loan agreement
with the bank contains various covenants. As of January 31, 1999 and October 31,
1999, there were no amounts outstanding under the line of credit.
In April 1999, Lightspan entered into a $1.0 million capital lease with a
financial institution. Under the agreement, which expires March 2000, Lightspan
finances the purchase of substantially all capital equipment at an 8.8% interest
rate, with payments due over a 42-month period and a purchase option at the end
of the lease term. At October 31, 1999, $499,039 was available for future
borrowing under this agreement.
In connection with the acquisition of Academic Systems, Lightspan assumed a
note payable under a loan agreement with a bank. The note bears interest at the
bank's prime rate plus 0.5%. The principal balance due under the agreement at
October 31, 1999 was $224,086, which Lightspan intends to pay in full within the
next twelve months.
4. COMMITMENTS
Lightspan leases its facilities under an operating lease agreement. The
facilities lease is subject to annual escalation provisions based upon the
Consumer Price Index.
Cost of equipment acquired under capital leases totaled $3,697,293 and
$1,634,993 (and accumulated amortization totaled $2,647,881 and $1,076,727) at
January 31, 1999 and October 31, 1999, respectively. Facilities rent and
operating lease expenses were $1,302,815 and $729,570 for the year ended January
31, 1999 and the nine months ended October 31, 1999, respectively.
In addition, Lightspan subleases a portion of their facility for a period
of one year subject to one-year renewal options. Sublease income was $0,
$125,323, $213,123 and $272,979 for the years ended January 31, 1997, 1998 and
1999, and the nine months ended October 31, 1999, respectively.
F-14
<PAGE> 96
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
4. COMMITMENTS (CONTINUED)
At October 31, 1999, future minimum lease payments for all leases with
initial terms of one year or more are as follows at for each fiscal year ending
January 31:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
---------- ----------
<S> <C> <C>
2000........................................................ $ 417,387 $ 233,135
2001........................................................ 1,781,144 540,258
2002........................................................ 1,720,968 306,965
2003........................................................ 1,459,963 164,929
2004........................................................ 1,013,153 9,294
---------- ----------
Total minimum lease payments................................ $6,392,615 1,254,581
==========
Less amounts representing interest.......................... 121,548
----------
Present value of future minimum lease payments.............. 1,133,033
Less current portion of capital lease obligations........... 606,575
----------
Long-term capital lease obligations......................... $ 526,458
==========
</TABLE>
5. STOCKHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At October 31, 1999, convertible preferred stock outstanding is as follows:
<TABLE>
<CAPTION>
DATE ISSUED SERIES PRICE PER SHARE NUMBER OF SHARES LIQUIDATION VALUE
----------- ------ --------------- ---------------- -----------------
<S> <C> <C> <C> <C>
December 1993......................... A $1.00 7,135,000 $ 7,135,000
March 1994............................ A $1.00 332,500 332,500
February 1995......................... B $3.00 5,833,336 17,500,008
June 1995............................. B $3.00 5,833,328 17,499,984
September 1996........................ C $6.00 3,264,285 19,585,710
June 1997............................. D $3.76 5,984,038 22,499,983
March 1997............................ D $3.76 1,666,689 6,266,751
March 1998............................ D $3.76 5,478,717 20,599,976
July 1999............................. E $5.00 5,294,183 26,470,915
September 1999........................ E $5.00 7,191,839 35,959,220
October 1999.......................... E $5.00 4,217,000 21,085,000
---------- ------------
52,230,915 $194,935,047
========== ============
</TABLE>
In March 1997, in connection with and prior to the Series D convertible
stock financing, Lightspan obtained $6,180,000 in convertible bridge notes from
certain investors. The notes bore interest at a rate of 9.25% per annum. In June
1997, the bridge notes and accrued interest of $86,752 converted into 1,666,689
shares of Series D convertible preferred stock.
The preferred stock will automatically be converted into shares of common
stock at the then effective conversion price upon the closing of the initial
public offering contemplated by this prospectus as long as the initial public
offering price and aggregate proceeds meet minimum requirements, as defined by
the agreements. As of October 31, 1999, the Series A, B, C, D and E preferred
stock are convertible, at the option of the holder, into 3,733,750, 5,833,332,
2,604,510, 6,564,722 and 8,351,511 shares of common
F-15
<PAGE> 97
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
stock, respectively, which has been reserved for issuance upon conversion of the
preferred stock, subject to certain antidilution adjustments.
Holders of the Series A, B, C, D and E preferred stock are entitled to
receive dividends at a rate of $0.10, $0.30, $0.60, $0.376 and $0.50 per share
per annum, whenever funds are legally available and as declared by Lightspan's
board of directors. The holder of each share of preferred stock is entitled to
the number of votes equal to the number of shares of common stock into which the
preferred stock could be converted. Lightspan is subject to certain covenants
under the agreements that require the vote or written consent by a majority of
the then outstanding preferred shares regarding certain changes in the rights
and interests of the preferred shares.
In the event of any liquidation, dissolution or winding up of Lightspan,
the holders of preferred stock are entitled to receive their liquidation value
prior to and in preference to any distribution of the assets or surplus funds of
Lightspan to the holders of common stock. If, upon the occurrence of such event,
the assets and funds distributed among the holders of preferred stock are
insufficient to permit full payment, the entire assets and funds of Lightspan
would be distributed among the preferred shareholders in proportion to the
product of the liquidation preference of each such share and the number of
shares owned by each such holder.
All series of preferred stock have redemption features, at the option of
Lightspan, which are subject to approval and written consent of a majority of
the shareholders for Series A, C, D and E, voting separately as a single class,
and 57% of the shareholders for Series B, voting separately as single class. The
right of redemption cannot be exercised with respect to any series of preferred
stock prior to the fifth anniversary of the original issue date of the Series D
preferred stock, but may be exercised at any time and from time to time
thereafter.
Upon the sale of Lightspan's common stock as described in this prospectus
within 24 months of the second date on which Series D preferred stock was
issued, and subject to certain criteria being met, outstanding, unexercisable
warrants to purchase up to 3,326,112 shares of Series D preferred stock at $.01
per share could become exercisable. These "springing warrants" will be issued
only if on the measurement date, which is defined as: (i) the closing date of a
qualified public offering; or (ii) the six month anniversary of such offering
(whichever is elected by Lightspan), the fair market value of Lightspan's common
stock (the "measurement price") is less than the defined return benchmark. The
return benchmark is calculated as the number of Series D preferred shares
multiplied by the liquidation preference of such shares, and adjusted for the
number of years elapsed from the original warrant date in a manner designed to
ensure an agreed-upon rate of return on investment. In the event that the return
benchmark exceeds the fair market value at the measurement date (the "wealth
shortfall"), warrants to purchase shares will become exercisable. The number of
shares issuable upon exercise of the warrants will be equal to the wealth
shortfall divided by the measurement price.
If these springing warrants are exercised Lightspan will account for the
intrinsic value of the "springing warrants" as a preferred stock dividend on the
measurement date as a dividend by charging retained earnings and increasing the
carrying amount of preferred stock by a corresponding amount. The amount of such
charge will increase the loss applicable to common stockholders.
If the offering contemplated by this prospectus is completed under the
terms set forth on the cover, warrants to purchase approximately 3,326,112
shares of Series D preferred stock (which will convert to 1,663,056 shares of
common stock), would become exercisable and the loss applicable to common
shareholders would increase by $18,260,355 as a result.
F-16
<PAGE> 98
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
In 1993, Lightspan adopted its 1993 Stock Option Plan, which will be
renamed the 2000 Equity Incentive Plan upon the close of this offering (the
"Plan"). 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 or engagement. 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 are immediately exercisable in full and 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 are immediately
exercisable in full and 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 October 31, 1999, Lightspan was authorized to issue 5,153,941 shares of
common stock to eligible employees, officers, directors and consultants under
the Plan, of which options to purchase 366,361 shares were available for future
grant at October 31, 1999.
1992 STOCK OPTION PLAN
Upon the closing of its acquisition of Academic Systems, Lightspan assumed
Academic Systems' 1992 Stock Option Plan. All options outstanding under the 1992
Stock Option Plan at the date of acquisition were converted into options to
purchase shares of Lightspan common stock, and are included in the summary
below. Lightspan no longer grants options under this plan.
A summary of Lightspan's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31,
---------------------------------------------------------------------- NINE MONTHS ENDED
1997 1998 1999 OCTOBER 31, 1999
---------------------- --------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- --------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Outstanding -- beginning of
year........................... 1,144,500 $ .36 1,858,750 $ .54 1,951,083 $ .60 1,782,687 $ .78
Granted........................ 893,000 $ .76 858,500 $ .86 517,438 $1.36 2,722,404 $5.00
Exercised...................... (44,427) $ .28 (244,775) $ .34 (264,960) $ .54 (514,455) $ .50
Forfeited...................... (134,323) $ .54 (521,392) $ .94 (420,874) $ .80 (276,560) $1.20
---------- ---------- ---------- ----------
Outstanding -- end of year....... 1,858,750 $ .54 1,951,083 $ .60 1,782,687 $ .78 3,714,076 $3.80
========== ========== ========== ==========
Exercisable at end of year....... 622,617 968,387 1,031,005 784,678
========== ========== ========== ==========
Weighted average fair value of
options granted during the
year........................... $ .14 $ .20 $ .30 $ 3.92
========== ========== ========== ==========
</TABLE>
F-17
<PAGE> 99
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about stock options outstanding
as of October 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------- OPTIONS EXERCISABLE
WEIGHTED --------------------------
RANGE OF AVERAGE REMAINING WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE PRICE NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
-------------- ----------- ----------------- ---------------- ------- ----------------
<S> <C> <C> <C> <C> <C>
$ .0000 - $ 1.0000 817,983 2.2 $ .7056 593,052 $ .6782
$1.0001 - $ 2.0000 976,130 3.8 $ 1.8902 133,715 $ 1.7312
$2.0001 - $ 3.0000 243,500 4.5 $ 3.0000 770 $ 3.0000
$3.0001 - $ 4.0000 893,580 6.8 $ 4.0000 5,391 $ 4.0000
$8.0001 - $ 9.0000 592,010 5.2 $ 8.2600 50,000 $ 8.2600
$9.0001 - $10.0000 190,873 5.6 $10.0000 1,750 $10.0000
--------- -------
3,714,076 4.6 $ 3.6416 784,678 $ 1.3866
========= =======
</TABLE>
Pro forma information regarding net loss is required by SFAS No. 123, 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 minimum value option pricing model
with the following weighted average assumptions for each of the years ended
January 31, 1997, 1998 and 1999 and the nine months ended October 31, 1999,
respectively: risk-free interest rates of 6.00%, 5.13%, 5.00% and 5.19%,
respectively; dividend yields of 0%; and a weighted-average expected life of the
options of four to five years.
The minimum value option pricing model is similar to the Black-Scholes
option valuation model which was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor of volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because Lightspan's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
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:
<TABLE>
<CAPTION>
YEARS ENDED JANUARY 31, NINE MONTHS ENDED
------------------------------------------ OCTOBER 31,
1997 1998 1999 1999
------------ ------------ ------------ -----------------
<S> <C> <C> <C> <C>
Pro forma net loss................. $(32,615,453) $(27,546,519) $(33,625,632) $(37,508,408)
============ ============ ============ ============
Pro forma historical net loss per
share, basic and diluted......... $ (10.73) $ (8.67) $ (9.93) $ (9.64)
------------ ------------ ------------ ------------
</TABLE>
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 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 expire on
various dates commencing in 2002 through 2006.
F-18
<PAGE> 100
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
The warrants to purchase Series A through D preferred stock were valued at
an aggregate of $201,660, which was 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 of 6.00%;
an expected warrant life of two years; and no annual dividends. Interest expense
related to the accretion of the debt discounts totaled $61,509 and $140,151 for
the years ended January 31, 1997 and 1998, respectively. There were no such
amounts included in interest expense for the year ended January 31, 1999 or the
six month periods ended October 31, 1998 and 1999.
In connection with the acquisition of Academic Systems Corporation
("Academic") (see Note 9), 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.
AGREEMENT WITH CINAR CORPORATION
On October 29, 1999, Lightspan entered into an agreement with CINAR
Corporation (CINAR) pursuant to which CINAR purchased 2.5 million shares of
Lightspan's Series E Preferred Stock (convertible into 1.25 million shares of
common stock) at $5.00 per share and agreed to purchase $10 million of Lightspan
common stock in a private placement that will occur concurrently with the
initial public offering contemplated by this prospectus and at the same price
per share. Lightspan also granted CINAR a warrant to purchase 500,000 shares of
Lightspan's Series E Preferred Stock at an exercise price of $5.00 per share
(which will become a warrant to purchase 250,000 shares of common stock at an
exercise price of $10.00 per share) 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 October 31, 1999.
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
$400,000 in cash and $800,000 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.
As a result, Lightspan recorded the 160,000 shares issued at $800,000 and
recorded deferred advertising expense of $400,000. Lightspan will remeasure, and
expense, such amount as the advertising credits are utilized, in accordance with
EITF 96-18.
F-19
<PAGE> 101
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
5. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK-BASED COMPENSATION
Lightspan has recorded deferred compensation of $211,876 and $8,547,752 for
the year ended January 31, 1999 and the nine months ended October 31, 1999,
respectively, in connection with the grants of certain stock options to
employees and consultants. Amortization of deferred stock compensation was
$19,680 and $2,503,458 during the year ended January 31, 1999 and the nine
months ended October 31, 1999, respectively.
COMMON SHARES RESERVED FOR FUTURE ISSUANCE
The following table summarizes common shares reserved for future issuance:
<TABLE>
<CAPTION>
OCTOBER 31,
1999
-----------
<S> <C>
Convertible preferred stock................................. 27,087,825
Convertible preferred stock warrants........................ 403,591
Common stock options........................................ 3,714,076
----------
Total common shares reserved for issuance................... 31,205,492
==========
</TABLE>
REVERSE STOCK SPLIT
In January 2000, the Company completed a reincorporation in Delaware and a
one for two reverse stock split of its common stock. In addition, immediately
following the closing of the initial public offering, the certificate of
incorporation will be amended to authorize the issuance of up to 250,000,000
shares of common stock and 20,000,000 shares of preferred stock. Consequently,
the common stock and stock option data throughout the financial statements and
notes to the financial statements have been restated to reflect the stock split.
6. 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:
<TABLE>
<CAPTION>
JANUARY 31,
---------------------------- OCTOBER 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....... $ 29,109,000 $ 44,925,000 $ 60,656,000
Capitalized research expenses.......... 2,111,000 2,119,000 2,514,000
Research and development credits....... 2,608,000 3,257,000 4,062,000
Other.................................. 1,989,000 1,467,000 1,119,000
------------ ------------ ------------
Total deferred tax assets................ 35,817,000 51,768,000 68,351,000
Valuation allowance for deferred tax
assets.............................. (35,817,000) (51,768,000) (58,144,000)
------------ ------------ ------------
Net deferred tax assets.................. -- -- 10,207,000
------------ ------------ ------------
Deferred tax liabilities:
Acquired intangibles................... -- -- 10,207,000
------------ ------------ ------------
Net deferred tax assets.................. $ -- $ -- $ --
============ ============ ============
</TABLE>
F-20
<PAGE> 102
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
A reconciliation of income taxes at the statutory federal income tax rate
to the provision for income taxes is as follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED JANUARY 31, ENDED
----------------------------------------- OCTOBER 31,
1997 1998 1999 1999
------------ ----------- ------------ ------------
<S> <C> <C> <C> <C>
U.S. federal taxes at statutory
rate................................ $(11,080,000) $(9,343,000) $(11,413,000) $(11,821,000)
State taxes, net of federal benefit... (1,955,000) (1,649,000) (2,014,000) (2,086,000)
Change in valuation allowance......... 12,783,000 12,164,000 12,543,000 13,482,000
Other nondeductible expenses and
expiration of net operating loss
carryforwards, net.................. 252,000 (1,172,000) 884,000 425,000
------------ ----------- ------------ ------------
$ -- $ -- $ -- $ --
============ =========== ============ ============
</TABLE>
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 October 31, 1999, Lightspan had federal and California net operating
loss carryforwards of approximately $146,357,000 and $42,569,000, 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 2008 unless previously utilized. Through
October 31, 1999, California tax loss carryforwards of $2,150,000 have expired,
and additional loss carryforwards will continue to expire in fiscal 2000.
Lightspan also has federal and California research and development tax credit
carryforwards of $3,077,000 and $1,515,000, respectively, which will begin
expiring in 2008 unless previously utilized.
Pursuant to Internal Revenue Code Section 382 and 383, the use of
Lightspan's net operating loss and credit carryforwards could be limited in the
event of a cumulative change in ownership of more than 50%.
7. 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 10% of employee contributions up to 4% of eligible compensation.
Employer contributions were $3,459 for the year ended January 31, 1999 and $0
for the nine months ended October 31, 1999.
NOTE 8. BUSINESS COMBINATIONS
ACQUISITION OF ACADEMIC SYSTEMS CORPORATION
On May 10, 1999, Lightspan entered into a merger agreement with Academic,
which sells and supports interactive multimedia learning systems, principally to
colleges and universities. In connection with the merger agreement which was
consummated on September 20, 1999, Lightspan issued 7,191,839 shares of Series E
convertible preferred stock, 570,356 shares of common stock, options to purchase
263,404 shares of common stock, and warrants to purchase 42,216 shares of Series
E convertible preferred stock, and agreed to pay $1,735,840 cash, in exchange
for all of the outstanding common and preferred shares of Academic and all
outstanding Academic options and warrants. The acquisition was accounted for as
a purchase.
F-21
<PAGE> 103
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
NOTE 8. BUSINESS COMBINATIONS (CONTINUED)
The Series E convertible preferred stock was valued at $5.00 per share (the
same price that such shares were sold for cash in July, September and October
1999). The merger agreement included a "put right" whereby Academic common
shareholders could elect to receive cash of $1.00 per Academic common share
($8.26 per Lightspan common share on an as-converted basis) in lieu of shares of
Lightspan common stock. Shareholders approximating 21% of Academic's common
shares and outstanding options exercised the "put right," resulting in an
aggregate cash payment of $1,734,306, with an additional $1,534 to be paid in
the future. The remaining Academic common shares and options to purchase common
shares were converted to Lightspan common stock and options to purchase common
stock at a ratio of .12121-to-1. The 570,356 common shares to be issued were
valued at $8.26 share (the same price on an as-converted basis that Academic
common shareholders and optionholders were paid upon election of the "put
right."). The 263,404 options to purchase Lightspan common stock that were
issued to Academic optionholders were recorded at their fair value of $6.82 per
share in accordance with APB 16 with the fair value determined by the minimum
value method.
Subsequent to September 20, 1999, the date the acquisition was consummated,
Lightspan determined that it will issue additional consideration in the amount
of $5,340,075 in early 2000 to certain Academic stockholders. Lightspan intends
to issue 1,068,015 shares of Series E preferred stock, subject to regulatory
approval, to such stockholders. If regulatory approval is not obtained,
Lightspan intends to issue cash or some other form of additional consideration.
The aggregate purchase price totalled $49,933,078, as follows:
<TABLE>
<S> <C>
Valuation of Series E convertible preferred stock issued.... $35,959,195
Valuation of common stock issued............................ 4,711,141
Issuance of cash pursuant to exercise of "put right"........ 1,734,306
Valuation of options and warrants exchanged for Academic
options and warrants...................................... 1,817,707
Acquisition costs........................................... 369,120
Additional consideration issuable in Series E convertible
preferred stock or cash................................... 5,341,609
-----------
Aggregate purchase price.................................... $49,933,078
===========
</TABLE>
The purchase price was allocated to the assets acquired, consisting
principally of intangible assets and goodwill, which are being amortized over
useful lives ranging from four to ten years.
The accompanying consolidated financial statements include the results of
operations of Academic since September 20, 1999, the date the acquisition was
consummated.
ACQUISITION OF GLOBAL SCHOOLHOUSE
On September 2, 1999, Lightspan acquired certain assets of The Global
SchoolNet Foundation, principally consisting of the Web site
GlobalSchoolhouse.com, an education Web site designed to help teachers develop
and manage collaborative learning projects online, and related intellectual
property, for $2.5 million in cash. The acquisition was accounted for as a
purchase. The purchase price was allocated to the assets acquired, principally
intangible assets related to the Web site, which are being amortized over a
three-year useful life.
The accompanying consolidated financial statements include the results of
operations of Global Schoolhouse since September 2, 1999.
F-22
<PAGE> 104
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
NOTE 8. BUSINESS COMBINATIONS (CONTINUED)
ACQUISITION OF STUDYWEB
On October 28, 1999 Lightspan acquired certain assets of American Computer
Resource, principally consisting of the Web site StudyWeb.com, a research
website designed to help parents, teachers and students find online educational
resources, and related intellectual property, for consideration of $1,000,000 in
cash and 217,000 shares of Series E convertible preferred stock, valued at $5.00
per share. The aggregate purchase price was $2,085,000. The acquisition was
accounted for as a purchase. The purchase price was allocated to the assets
acquired, principally intangible assets related to the Web site, which are being
amortized over a three-year useful life.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information assumes the
acquisitions of Academic, Global Schoolhouse and StudyWeb were consummated on
February 1, 1998 and 1999:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
JANUARY 31, 1999 OCTOBER 31, 1999
---------------- -----------------
<S> <C> <C>
Revenues.................................................... $ 17,246,149 $ 17,009,546
Net loss.................................................... $(55,458,967) $(46,651,433)
Historical net loss per share, basic and diluted............ $ (16.37) $ (11.99)
============ ============
Pro forma net loss per share, basic and diluted............. $ (1.98) $ (1.79)
============ ============
</TABLE>
9. REPORTABLE SEGMENTS
DESCRIPTION OF THE TYPES OF PRODUCTS FROM WHICH EACH REPORTABLE SEGMENT DERIVES
ITS REVENUES
Lightspan has three reportable segments: Lightspan Achieve Now, K-12
Internet and Higher Education. Revenues derived from the Lightspan Achieve Now
segment typically include the sale of Lightspan Achieve Now software licenses,
Sony PlayStation game consoles and related accessories, and implementation,
training and support services. Revenues derived from the K-12 Internet segment
primarily include subscription fees for The Lightspan Network.
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
Upon the purchase of Academic, Lightspan created a new Higher Education
segment, which is comprised solely of Academic. The assets and results of
operations of Global Schoolhouse and Study Web, including the related
amortization of intangible assets, are included in the K-12 Internet segment.
F-23
<PAGE> 105
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
9. REPORTABLE SEGMENTS (CONTINUED)
The following information is for the Lightspan Achieve Now, K-12 Internet,
and Higher Education segments:
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1997
----------------------------------------------------------
LIGHTSPAN
ACHIEVE
NOW K-12 INTERNET ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $ 8,487,916 $ 77,125 $ -- $ 8,565,041
Inter segment revenues..................... -- -- -- --
Interest income (expense), net............. (107,184) (5,375) -- (112,559)
Depreciation and amortization.............. 977,752 4,913 -- 982,665
Segment loss from operations............... (30,925,268) (1,550,880) -- (32,476,148)
Segment assets............................. 12,773,740 78,407 -- 12,852,147
Other significant non cash items:
Deferred stock compensation.............. -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1998
----------------------------------------------------------
LIGHTSPAN
ACHIEVE
NOW K-12 INTERNET ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $ 22,020,363 $ 288,645 $ -- $ 22,309,008
Inter segment revenues..................... -- -- -- --
Interest income (expense), net............. (504,087) (23,572) -- (527,659)
Depreciation and amortization.............. 1,629,299 8,186 -- 1,637,485
Segment loss from operations............... (25,681,113) (1,269,817) -- (26,950,930)
Segment assets............................. 13,925,617 154,275 -- 14,079,892
Other significant non cash items:
Deferred stock compensation.............. -- -- -- --
Amortization of deferred stock
compensation.......................... -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED JANUARY 31, 1999
----------------------------------------------------------
LIGHTSPAN
ACHIEVE
NOW K-12 INTERNET ELIMINATIONS CONSOLIDATED
------------ ------------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues from external customers........... $ 9,846,194 $ 1,023,714 $ -- $ 10,869,908
Inter segment revenues..................... -- -- -- --
Interest income (expense), net............. 359,654 58,059 -- 417,713
Depreciation and amortization.............. 1,297,390 13,108 -- 1,310,498
Segment loss from operations............... (31,628,981) (2,355,300) -- (33,984,281)
Segment assets............................. 22,097,121 468,432 -- 22,565,553
Other significant non cash items:
Deferred stock compensation.............. 211,876 -- -- 211,876
Amortization of deferred stock
compensation.......................... 19,680 -- -- 19,680
</TABLE>
F-24
<PAGE> 106
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
9. REPORTABLE SEGMENTS (CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED OCTOBER 31, 1999
-----------------------------------------------------------------------
LIGHTSPAN
ACHIEVE K-12 HIGHER
NOW INTERNET EDUCATION ELIMINATIONS CONSOLIDATED
------------ ----------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues from external
customers................... $ 9,547,030 $ 1,246,100 $ 488,798 $ -- $ 11,281,928
Inter segment revenues........ -- -- -- -- --
Interest income (expense),
net......................... 217,905 16,769 (3,692) -- 230,982
Depreciation and
amortization................ 816,188 23,670 25,258 -- 865,116
Segment loss from
operations.................. (23,557,362) (9,288,756) (2,152,857) -- (34,998,975)
Segment assets................ 46,997,158 766,096 51,003,928 -- 98,767,182
Other significant non cash
items:
Deferred stock
compensation............. 5,236,905 3,107,200 203,647 -- 8,547,752
Amortization of deferred
stock compensation....... 1,569,255 922,258 11,945 -- 2,503,458
Amortization of intangible
assets................... -- 136,642 1,479,197 -- 1,615,839
</TABLE>
10. LEGAL MATTERS
In July 1996, a former employee (the "Plaintiff") commenced legal action
against Lightspan, alleging causes of action for fraud, breach of contract,
negligent misrepresentation and conversion. On August 26, 1999, the Plaintiff
and Lightspan entered into a settlement agreement and release, the terms of
which are subject to confidentiality provisions, as defined by the agreement.
During the year ended January 31, 1999, Lightspan recorded a charge of
approximately $1.1 million for anticipated settlement and legal costs related to
this case. During the nine months ended October 31, 1999, Lightspan recorded an
additional charge of approximately $467,000 to cover the remaining additional
costs pursuant to the settlement terms.
As of October 31, 1999, Lightspan had paid approximately $950,000 in cash
for legal and settlement costs related to this case. Lightspan anticipates that
it will pay the remaining $617,000 shortly following the effective date of the
offering contemplated by this Prospectus.
11. SUBSEQUENT EVENTS
In January 2000, Lightspan agreed to pursue strategic initiatives with Cox
Communications Holdings, Inc. Cox Communications is among the nation's largest
broadband communications companies, serving more than 3.8 million customers in
18 locations. Cox Communications also provides a wide variety of services to
schools in their cable communities through its "Cable in the Classroom"
initiative which provides public schools with free basic cable service and
learning guides. As part of the agreement, Cox Communications agreed to purchase
$12.5 million of Lightspan common stock, or 1,041,667 shares, in a private
placement scheduled to occur concurrently with our initial public offering upon
satisfaction of several conditions. Lightspan also granted Cox Communications a
warrant to purchase 750,000 shares of common stock. The warrant will vest upon
the achievement of various agreed-to strategic goals related to the proposed use
of Lightspan Achieve Now and Lightspan.com products in trials by Cox
Communications of cable offerings over digital set-top boxes.
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
F-25
<PAGE> 107
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED OCTOBER 31, 1998 IS UNAUDITED)
11. SUBSEQUENT EVENTS (CONTINUED)
earlier of a) the date at which a commitment for performance is reached or b)
the date at which Cox Communication'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.
Also, in January 2000, Gateway Companies, Inc. agreed to purchase $3.0
million of Lightspan common stock, or 250,000 shares, in a private placement
that is scheduled to occur concurrently with the initial public offering. This
investment by Gateway is subject to the satisfaction of several conditions,
including Lightspan jointly entering into an Internet sponsorship agreement
whereby Gateway will become a sponsor of Lightspan.com. Gateway, a manufacturer
of personal computers, is Lightspan's preferred provider of personal computers.
F-26
<PAGE> 108
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Academic Systems Corporation
We have audited the accompanying balance sheets of Academic Systems
Corporation as of September 30, 1997 and 1998, and the related statements of
operations, shareholders' equity and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 Academic Systems Corporation
as of September 30, 1997 and 1998, and the results of its operations and its
cash flows for the years then ended, in conformity with generally accepted
accounting principles.
ERNST & YOUNG LLP
San Diego, California
October 28, 1999
F-27
<PAGE> 109
ACADEMIC SYSTEMS CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------- JUNE 30,
1997 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 13,157,705 $ 4,521,895 $ 2,341,984
Accounts receivable, less allowance for
doubtful accounts of $0, $63,724 and $63,724
at September 30, 1997 and 1998 and June 30,
1999, respectively.......................... 1,142,576 828,931 2,603,255
Other current assets........................... 514,629 582,822 170,622
------------ ------------ ------------
Total current assets............................. 14,814,910 5,933,648 5,115,861
Property and equipment, net...................... 1,131,684 932,918 670,975
------------ ------------ ------------
Total assets........................... $ 15,946,594 $ 6,866,566 $ 5,786,836
============ ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 231,733 $ 849,162 $ 304,864
Accrued liabilities............................ 635,439 790,115 1,340,758
Deferred revenue............................... 2,392,049 2,155,423 2,349,934
Current portion of long-term debt.............. 93,731 206,849 3,503,020
Current portion of capital lease obligations... 189,443 140,794 98,769
------------ ------------ ------------
Total current liabilities........................ 3,542,395 4,142,343 7,597,345
Long-term debt, less current portion............. 388,316 241,323 86,187
Capital lease obligations, less current
portion........................................ 242,703 120,768 --
Commitments
Shareholders' equity (deficit):
Convertible preferred stock, no par value:
Authorized shares -- 54,000,000
Issued and outstanding shares -- 29,535,529
and 27,504,693 at September 30, 1997 and
1998, and at June 30, 1999,
respectively..............................
Aggregate liquidation
preference -- $43,197,149 and $41,715,227
at September 30, 1997 and 1998, and June
30, 1999, respectively.................... 42,895,034 42,115,864 42,115,864
Common stock, no par value:
Authorized shares -- 34,761,460
Issued and outstanding shares -- 4,353,339
and 4,715,454 at September 30, 1997 and
1998, respectively, and 8,111,713 at June
30, 1999.................................. 62,681 102,032 404,520
Accumulated deficit............................ (31,184,535) (39,855,764) (44,417,080)
------------ ------------ ------------
Total shareholders' equity (deficit)... 11,773,180 2,362,132 (1,896,696)
------------ ------------ ------------
Total liabilities and shareholders'
equity (deficit)..................... $ 15,946,594 $ 6,866,566 $ 5,786,836
============ ============ ============
</TABLE>
See accompanying notes.
F-28
<PAGE> 110
ACADEMIC SYSTEMS CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
--------------------------- --------------------------
1997 1998 1998 1999
------------ ------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................................. $ 4,398,994 $ 5,938,618 $ 2,946,885 $ 4,869,613
Cost of revenue.......................... 1,920,439 2,063,800 1,183,409 1,377,878
------------ ------------ ------------ -----------
Gross profit............................. 2,478,555 3,874,818 1,763,476 3,491,735
------------ ------------ ------------ -----------
Operating expenses:
Technology and development............. 4,321,114 3,863,785 3,072,660 1,965,752
Sales and marketing.................... 6,088,928 7,175,302 5,696,939 4,675,330
General and administrative............. 2,327,203 1,853,968 1,243,126 1,362,097
------------ ------------ ------------ -----------
12,737,245 12,893,055 10,012,725 8,003,179
------------ ------------ ------------ -----------
Loss from operations..................... (10,258,690) (9,018,237) (8,249,249) (4,511,444)
Interest income (expense), net........... 150,490 347,008 310,187 (49,872)
------------ ------------ ------------ -----------
Net loss................................. $(10,108,200) $ (8,671,229) $ (7,939,062) $(4,561,316)
============ ============ ============ ===========
</TABLE>
See accompanying notes.
F-29
<PAGE> 111
ACADEMIC SYSTEMS CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK COMMON STOCK TOTAL
------------------------ -------------------- ACCUMULATED SHAREHOLDERS'
SHARES AMOUNT SHARES AMOUNT DEFICIT EQUITY
---------- ----------- --------- -------- ------------ -------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at September 30,
1996........................ 14,720,720 $26,943,956 4,024,052 $ 45,865 $(21,076,335) $ 5,913,486
Sale of Series F convertible
preferred stock, net of
issuance costs of
$48,932.................. 12,962,998 13,951,078 -- -- -- 13,951,078
Conversion of bridge loans
into Series F convertible
preferred stock.......... 1,851,811 2,000,000 -- -- -- 2,000,000
Exercise of stock options... -- -- 329,287 16,816 -- 16,816
Net loss.................... -- -- -- -- (10,108,200) (10,108,200)
---------- ----------- --------- -------- ------------ ------------
Balance at September 30,
1997........................ 29,535,529 42,895,034 4,353,339 62,681 (31,184,535) 11,773,180
Repurchase of convertible
preferred stock.......... (2,116,484) (871,670) -- -- -- (871,670)
Issuance of Series F
convertible preferred
stock for services....... 85,648 92,500 -- -- -- 92,500
Exercise of stock options... -- -- 362,115 39,351 -- 39,351
Net loss.................... -- -- -- -- (8,671,229) (8,671,229)
---------- ----------- --------- -------- ------------ ------------
Balance at September 30,
1998........................ 27,504,693 42,115,864 4,715,454 102,032 (39,855,764) 2,362,132
Exercise of stock options
(unaudited)................. -- -- 3,396,259 302,488 -- 302,488
Net loss (unaudited).......... -- -- -- -- (4,561,316) (4,561,316)
---------- ----------- --------- -------- ------------ ------------
Balance at June 30, 1999
(unaudited)................. 27,504,693 $42,115,864 8,111,713 $404,520 $(44,417,080) $ (1,896,696)
========== =========== ========= ======== ============ ============
</TABLE>
See accompanying notes.
F-30
<PAGE> 112
ACADEMIC SYSTEMS CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED SEPTEMBER 30, JUNE 30,
-------------------------- -------------------------
1997 1998 1998 1999
------------ ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss.............................................. $(10,108,200) $(8,671,229) $(7,939,062) $(4,561,316)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization....................... 533,494 597,810 407,728 436,544
Loss on sale of property and equipment.............. 17,209 70,451 -- --
Preferred stock issued for services................. -- 92,500 92,500 --
Changes in operating assets and liabilities:
Accounts receivable............................... (686,029) (558,025) (1,979,909) (1,774,324)
Other assets...................................... (192,839) (68,193) 265,701 412,200
Accounts payable.................................. (122,449) 617,429 281,087 (544,298)
Accrued liabilities............................... 280,733 (236,626) 528,927 550,643
Deferred revenue.................................. 1,409,355 154,676 1,251,260 194,511
------------ ----------- ----------- -----------
Net cash flows used in operating activities........... (8,868,726) (8,001,207) (7,091,768) (5,286,040)
INVESTING ACTIVITIES:
Purchase of property and equipment.................... (474,927) (474,332) (363,352) (174,601)
Proceeds from sale of property and equipment.......... 7,572 4,837 -- --
------------ ----------- ----------- -----------
Net cash flows used in investing activities........... (467,355) (469,495) (363,352) (174,601)
------------ ----------- ----------- -----------
FINANCING ACTIVITIES:
Net proceeds from issuance of convertible preferred
stock............................................... 13,951,078 -- -- --
Exercise of stock options............................. 16,816 39,351 25,877 302,488
Proceeds from debt.................................... 482,048 138,000 138,000 --
Repayment of debt..................................... -- (171,875) (120,163) (158,965)
Proceeds from convertible bridge notes................ 2,000,000 -- -- 3,300,000
Principal payments under capital lease obligations.... (215,034) (170,584) (133,699) (162,793)
------------ ----------- ----------- -----------
Net cash flows provided by (used in) financing
activities.......................................... 16,234,908 (165,108) (89,985) 3,280,730
------------ ----------- ----------- -----------
Increase (decrease) in cash and cash equivalents...... 6,898,827 (8,635,810) (7,545,105) (2,179,911)
Cash and cash equivalents at beginning of period...... 6,258,878 13,157,705 13,157,705 4,521,895
------------ ----------- ----------- -----------
Cash and cash equivalents at end of period............ $ 13,157,705 $ 4,521,895 $ 5,612,600 $ 2,341,984
============ =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid....................................... $ 130,804 $ 108,774 $ 85,197 $ 49,168
============ =========== =========== ===========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Return of convertible preferred stock in
satisfaction of accounts receivable............... $ -- $ 871,670 $ 871,670 $ --
============ =========== =========== ===========
Conversion of bridge notes into Series F
convertible preferred stock....................... $ 2,000,000 $ -- $ -- $ --
============ =========== =========== ===========
</TABLE>
See accompanying notes.
F-31
<PAGE> 113
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND BUSINESS ACTIVITY
Academic Systems Corporation ("Academic") was founded in 1992. Academic
sells and supports interactive multimedia learning systems, principally to
colleges and universities that install Academic's software systems on campus
servers to deliver instruction, assessment and support to students and faculty.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
which include debt securities with remaining maturities when acquired of three
months or less.
CONCENTRATION OF CREDIT RISK
Substantially all of Academic's accounts receivable are from colleges and
universities located throughout the United States. Academic provides for
estimated losses from uncollectible accounts and such losses have historically
not exceeded management's expectations.
For the years ended September 30, 1997 and 1998, one customer represented
26% and 13% of Academic's revenues, respectively. Accounts receivable from this
customer was $270,000 and $0 at September 30, 1997 and 1998, respectively.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost and depreciated and amortized over
the shorter of the estimated useful life of the assets (three to five years) or
the term of the lease using the straight line method.
IMPAIRMENT OF LONG-LIVED ASSETS
In accordance with Statement of Financial Accounting Standards ("SFAS") No.
121, Accounting for Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of, Academic regularly evaluates its long-lived assets for
indicators of possible impairment by comparison of the carrying amounts to
undiscounted estimated cash flows to be generated by such assets. Should an
impairment exist, the impairment loss would be measured based on the excess of
the carrying value of the asset over the asset's fair value or discounted
estimates of future cash flows. Academic has not identified any such impairment
losses to date.
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.
REVENUE RECOGNITION
Revenue consists primarily of fees for licenses and implementation of
Academic's software products and for customer training, books and materials,
upgrades and support.
Through September 30, 1997, Academic recognized revenue in accordance with
American Institute of Certified Public Accountants Statement of Position (SOP)
91-1, Software Revenue Recognition. Effective
F-32
<PAGE> 114
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
October 1, 1997, Academic adopted the provisions of SOP 97-2, Software Revenue
Recognition, as amended by SOP 98-4.
Academic enters into software license agreements under which software,
support and other services are provided to a customer for a fixed fee for a
specified period of time. The arrangement fee is allocated to the various
elements of the arrangements based upon vendor-specific objective evidence of
the fair value of each of the elements. Software license revenues are recognized
upon contract signing and delivery of the software provided the related fee is
fixed and determinable, and collectability of the fee is probable. The fee for
implementation services is recognized upon completion of the services. The
Company defers revenue related to specified upgrades based upon the established
fair value of the upgrade, until the upgrade has been delivered. The revenue
relating to books and materials is recognized upon shipment. Revenue for
training is recognized when the services are performed.
SOFTWARE DEVELOPMENT COSTS
Software development costs are expensed as incurred until technological
feasibility has been established. To date, the Company's software has been
available for general release concurrent with the establishment of technological
feasibility and, accordingly, no costs have been capitalized.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, Accounting for Stock-Based Compensation,
Academic has elected to follow Accounting Principles Board Opinion, or APB, No.
25, Accounting for Stock Issued to Employees, and related Interpretations in
accounting for stock-based employee compensation. Under APB 25, if the exercise
price of Academic's employee 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 stock options is less than
the fair value of the underlying stock on the grant date, Academic records
deferred stock compensation for the difference and amortizes the difference to
expense in accordance with FASB Interpretation No. 28 over the vesting period of
the individual options. Options or stock awards issued to non-employees are
recorded at their fair value and recognized over the related service period.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
COMPREHENSIVE INCOME
In accordance with SFAS No. 130, Reporting Comprehensive Income, all
components of comprehensive income, including net income, are reported in the
financial statements in the period in which they are recognized. Comprehensive
income is defined as the change in equity during a period from transactions and
other events and circumstances from non-owner sources. Net income (loss) and
other comprehensive income (loss), including unrealized gains and losses on
investments, are reported net of their related tax effect, to arrive at
comprehensive income (loss). For the years ended September 30, 1997
F-33
<PAGE> 115
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
and 1998 and the nine month periods ended June 30, 1998 and 1999, comprehensive
loss equals the net loss as reported.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------- JUNE 30,
1997 1998 1999
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Computer equipment....................................... $1,708,512 $1,738,579 $1,415,837
Software................................................. 428,566 500,873 511,577
Furniture and fixtures................................... 281,517 306,483 793,124
---------- ---------- ----------
2,418,595 2,545,935 2,720,538
Less accumulated depreciation and amortization........... 1,286,911 1,613,017 2,049,563
---------- ---------- ----------
$1,131,684 $ 932,918 $ 670,975
========== ========== ==========
</TABLE>
Equipment and furniture and fixtures under capital leases aggregated
$1,077,491 and $508,939 as of September 30, 1997 and 1998, respectively, and the
related accumulated amortization was $744,623 and $371,800, respectively.
3. DEBT
Academic has entered into a loan agreement with a bank whereby Academic can
borrow up to $1,000,000 with interest payable monthly at prime plus 0.50 percent
per annum. As of September 30, 1997 and 1998, principal of $482,047 and
$448,172, respectively, was outstanding. Amounts drawn against the loan
agreement are payable in 36 equal monthly installments.
4. LEASE COMMITMENTS
The Company leases its facility under an operating lease and certain
equipment and furniture and fixtures under capital leases. These leases expire
at various dates through fiscal 2001.
Future minimum lease payments for all leases with initial terms of one year
or more are as follows at September 30, 1998:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEARS ENDING SEPTEMBER 30 LEASES LEASES
------------------------- ---------- --------
<S> <C> <C>
1999........................................................ $ 413,162 $172,172
2000........................................................ 417,843 39,745
2001........................................................ 312,672 81,039
---------- --------
Future minimum lease payments............................... $1,143,677 292,956
==========
Less amount representing interest........................... 31,394
--------
Present value of future minimum lease....................... 261,562
Less current portion........................................ 140,794
--------
Long-term portion........................................... $120,768
========
</TABLE>
F-34
<PAGE> 116
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
4. LEASE COMMITMENTS (CONTINUED)
Rent expense was $429,592 and $440,640 for the years ended September 30,
1997 and 1998, respectively.
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
At September 30, 1998, convertible preferred stock outstanding is as
follows:
<TABLE>
<CAPTION>
NUMBER OF NUMBER OF
PRICE PER SHARES SHARES LIQUIDATION
DATE ISSUED SERIES SHARE AUTHORIZED OUTSTANDING VALUE
----------- ------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
February 1993.............................. A $ 0.40 1,173,107 653,382 $ 261,353
February 1993.............................. B $ 0.75 435,000 217,500 163,125
February 1993.............................. C $ 0.80 5,995,741 3,995,741 3,196,593
August 1994................................ D $2.725 4,404,280 4,404,280 12,001,663
August 1996................................ E $ 3.00 5,478,717 3,333,333 9,999,999
July 1997.................................. F $ 1.08 15,740,740 14,900,457 16,092,494
---------- -----------
27,504,693 $41,715,227
========== ===========
</TABLE>
The preferred stock will automatically be converted into shares of common
stock at the then effective conversion price upon the closing of a sale of
Academic common stock in a public offering registered under the Securities Act
of 1933 which meets certain minimum requirements, as defined by the agreements.
The shares of preferred stock are convertible, at the option of the holder, into
an aggregate of 27,504,693 shares of common stock, which have been reserved for
issuance upon conversion of the preferred stock, subject to certain antidilution
adjustments.
Holders of the Series A, B, C, D, E and F preferred stock are entitled to
receive dividends at a rate of $0.04, $0.075, $0.08, $0.2725, $0.30 and $0.108
per share per annum, whenever funds are legally available and as declared by
Academic's Board of Directors. The holder of each share of preferred stock is
entitled to the number of votes equal to the number of shares of common stock
into which the preferred stock could be converted. Academic is subject to
certain covenants under the agreements that require the vote or written consent
by a majority of the then outstanding preferred shares regarding certain changes
in the rights and interests of the preferred shares.
In the event of any liquidation, dissolution or winding up of the Company,
the holders of preferred stock are entitled to receive their liquidation value
prior to and in preference to any distribution of the assets or surplus funds of
the Company to the holders of common stock. If, upon the occurrence of such
event, the assets and funds distributed among the holders of preferred stock are
insufficient to permit full payment, the entire assets and funds of the Company
would be distributed among the preferred shareholders in proportion to the
product of the liquidation preference of each such share and the number of
shares owned by each such holder.
All series of preferred stock have redemption features, at the option of
the Company, which are subject to approval and written consent of a majority of
the shareholders for Series A, B and C, voting separately as a single class, and
75% of the shareholders for Series D and E, voting separately as single class.
F-35
<PAGE> 117
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
STOCK OPTION PLAN
In 1992, Academic adopted the 1992 Incentive Stock Option Plan (the
"Plan"). 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 the Company at the original exercise price, in
the event of termination of employment or engagement. Non-statutory stock
options may be granted to employees and consultants whereas incentive stock
options may be granted to employees 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. Options granted under the Plan are immediately exercisable in full
and generally vest at the rate of 25% after one year from the date of employment
and 1/36 of the remaining shares every month thereafter.
Academic is authorized to issue 10,798,792 shares of common stock to
eligible employees, officers, directors and consultants under the Plan, of which
options to purchase 1,408,277 shares are available for future grant at September
30, 1998.
A summary of the Company's stock option activity and related information is
as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------------------------
1997 1998
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding -- beginning of year..................... 2,328,500 $.154 8,121,333 $.095
Granted............................................ 7,874,000 $.107 2,615,000 $.100
Exercised.......................................... (329,287) $.087 (362,115) $.087
Forfeited.......................................... (1,751,880) $ .23 (1,618,251) $.100
---------- ----------
Outstanding -- end of year........................... 8,121,333 $.095 8,755,967 $.096
========== ==========
Exercisable -- end of year........................... 1,315,059 3,167,551
========== ==========
Weighted-average fair value of options granted during
the year........................................... $ .021 $ .018
========== ==========
</TABLE>
The following table summarizes information about stock options outstanding
at September 30, 1998:
<TABLE>
<CAPTION>
RANGE OF EXERCISE
PRICE OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------- ------------------------------------------------- ----------------------------
WEIGHTED-AVERAGE WEIGHTED-
REMAINING WEIGHTED-AVERAGE AVERAGE
NUMBER CONTRACTUAL LIFE EXERCISE PRICE NUMBER EXERCISE PRICE
----------- ---------------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C>
$.05 775,000 0.27 $ .05 775,000 $ .05
$.10 7,977,217 3.87 $ .10 2,390,051 $ .10
$.25 3,750 1.51 $ .25 2,500 $ .25
--------- ---------
8,755,967 $.096 3,167,551 $.088
========= =========
</TABLE>
Pro forma information regarding net loss is required by SFAS No. 123, and
has been determined as if Academic 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 minimum value option pricing
F-36
<PAGE> 118
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
model with the following weighted average assumption for 1997 and 1998,
respectively: risk-free interest rates of 6.09% and 6.29%, respectively;
dividend yields of 0%; and a weighted-average expected life of the options of
3.66 and 3.75 years, respectively.
The minimum value option pricing model is similar to the Black-Scholes
option valuation model which was developed for use in estimating the fair value
of traded options which have no vesting restrictions and are fully transferable,
except that it excludes the factor of volatility. In addition, option valuation
models require the input of highly subjective assumptions. Because the Company's
employee stock options have characteristics significantly different from those
of traded options, and because changes in the subjective assumptions can
materially affect the fair value estimate, in management's opinion the existing
models do not necessarily provide a reliable single measure of the fair value of
its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the vesting period of such options. The
Company's pro forma information is as follows:
<TABLE>
<CAPTION>
YEARS ENDED SEPTEMBER 30,
---------------------------
1997 1998
------------ -----------
<S> <C> <C>
Pro forma net loss....................................... $(10,138,200) $(8,682,944)
============ ===========
</TABLE>
6. 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
Academic's deferred tax assets are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1997 1998
------------ ------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards...................... $ 10,915,000 $ 13,917,000
Deferred revenue...................................... 600,000 608,000
Research and development credits...................... 852,000 1,020,000
Other................................................. 251,000 181,000
------------ ------------
Total deferred tax assets............................... 12,618,000 15,726,000
Valuation allowance for deferred tax assets........... (12,618,000) (15,726,000)
------------ ------------
Net deferred tax assets................................. $ -- $ --
============ ============
</TABLE>
A valuation allowance has been recognized to offset the deferred tax assets
as realization of such assets is uncertain.
At September 30, 1998, Academic has federal and California net operating
loss carryforwards of approximately $37,000,000 and $22,000,000 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 2008 unless previously utilized. The
Company also has federal and California research and development tax credit
carryforwards of $689,000 and $486,000, respectively, which will begin expiring
in 2007 unless previously utilized. The above carryforwards were determined as
if the Company were filing tax returns at September 30, 1998. However, for tax
return purposes, the Company uses a June 30 year end.
F-37
<PAGE> 119
ACADEMIC SYSTEMS CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION SUBSEQUENT TO SEPTEMBER 30, 1998 AND PERTAINING TO JUNE 30, 1999
AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND 1999 IS UNAUDITED)
6. INCOME TAXES (CONTINUED)
Pursuant to Internal Revenue Code Section 382 and 383, the use of the
Company's net operating loss and credit carryforwards may be limited in the
event of a cumulative change in ownership of more than 50%. Management believes
such limitations will not have a material impact on Academic's ability to use
its carryforwards.
7. SUBSEQUENT EVENTS
CONVERTIBLE PROMISSORY NOTES
In March 1999, Academic issued Convertible Promissory Notes (Notes) in the
amount of approximately $3,300,000 from certain of its existing investors. The
Notes bear interest at the prime rate, and all principal and interest is due and
payable on June 30, 1999. The Notes are convertible into the number and type of
equity security issued in the next equity financing completed by the Company
which results in gross proceeds of at least $5,000,000. The Notes allow for the
issuance of warrants to the noteholders if the Notes are not repaid or converted
by May 1, 1999. Upon the consummation of the merger discussed below, the Notes
were converted into 3,168,165 shares of Academic's Series F convertible
preferred stock.
ACQUISITION BY THE LIGHTSPAN PARTNERSHIP, INC.
On May 10, 1999, Academic entered into a merger agreement with The
Lightspan Partnership, Inc. ("Lightspan".) Under the merger agreement, which was
consummated on September 20, 1999, Lightspan acquired all of Academic's
outstanding shares of common and preferred stock in exchange for Lightspan
Series E convertible preferred stock, Lightspan common stock and cash.
F-38
<PAGE> 120
THE LIGHTSPAN PARTNERSHIP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
INTRODUCTION
On May 10, 1999, The Lightspan Partnership, Inc. ("Lightspan") entered into
a merger agreement with Academic Systems Corporation ("Academic"), which was
consummated on September 20, 1999.
The unaudited pro forma combined condensed statements of operations which
follow have been prepared by Lightspan based upon the historical financial
statements of Lightspan and Academic, and may not be indicative of the results
that may have actually occurred if the combination had been in effect on the
date indicated or for the periods presented or which may be obtained in the
future. The unaudited pro forma combined condensed statements of operations
includes the statements of operations of both Lightspan and Academic for the
year ended January 31, 1999 and the nine months ended October 31, 1999. The pro
forma combined condensed financial statements should be read in conjunction with
the audited financial statements and notes of Lightspan and Academic included
elsewhere in the Prospectus.
The unaudited pro forma combined condensed statements of operations for the
year ended January 31, 1999 and the nine months ended October 31, 1999 assume
the purchase of Academic had been consummated on February 1, 1998. The pro forma
information is based on the historical financial statements of Lightspan and
Academic giving effect to the transaction under the purchase method of
accounting and the assumptions and adjustments in the accompanying footnotes.
F-39
<PAGE> 121
THE LIGHTSPAN PARTNERSHIP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JANUARY 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
THE LIGHTSPAN ACADEMIC ADJUSTMENTS COMBINED
PARTNERSHIP, INC. SYSTEMS (NOTE 5) PRO FORMA
----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues.......................... $ 10,869,908 $ 6,376,241 $ -- $ 17,246,149
Cost of revenues.................. 7,660,354 2,138,785 -- 9,799,139
------------ ----------- ------------- ------------
Gross profit...................... 3,209,554 4,237,456 -- 7,447,010
Operating expenses:
Technology and development...... 10,593,735 3,281,876 -- 13,875,611
Sales and marketing............. 22,990,261 6,747,590 -- 29,737,851
General and administrative...... 3,590,159 2,189,785 5,779,944
Stock-based compensation........ 19,680 -- -- 19,680
Amortization of intangible
assets....................... -- -- 11,833,500(1) 11,833,500
------------ ----------- ------------- ------------
Total operating expenses.......... 37,193,835 12,219,251 11,833,500 61,246,586
------------ ----------- ------------- ------------
Loss from operations.............. (33,984,281) (7,981,795) (11,833,500) (53,799,576)
Other income (expense), net....... 417,713 163,747 (52,075)(2) 529,385
------------ ----------- ------------- ------------
Net loss.......................... $(33,566,568) $(7,818,048) $ (11,885,575) $(53,270,191)
============ =========== ============= ============
Historical net loss per share
basic and diluted............... $ (15.72)
============
Shares used in the computation of
historical net loss per share,
basic and diluted............... 3,387,772
============
Pro forma net loss per share,
basic and diluted............... $ (2.05)
============
Shares used in the computation of
pro forma net loss per share,
basic and diluted............... 25,967,615(3)
============
</TABLE>
- ---------------
(1) Represents the amortization of intangible assets and goodwill over estimated
useful lives ranging from four to ten years, and the amortization of
goodwill over four years.
(2) Represents the forgone interest income on the cash paid to effect the
acquisition, based on an assumed 3% rate of return.
(3) Pro forma net loss per share is based on Lightspan's weighted average common
shares outstanding, after giving effect to the issuance of shares of
Lightspan common and preferred stock used to complete the acquisition as if
such issuance had occurred at the beginning of the period, and the assumed
conversion of all of Lightspan's outstanding shares of preferred stock as of
their original dates of issuance.
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
F-40
<PAGE> 122
THE LIGHTSPAN PARTNERSHIP, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED OCTOBER 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
THE LIGHTSPAN ACADEMIC ADJUSTMENTS COMBINED
PARTNERSHIP, INC. SYSTEMS (NOTE 5) PRO FORMA
----------------- ----------- ------------- ------------
<S> <C> <C> <C> <C>
Revenues............................ $ 11,281,928 $ 6,216,416 $ (488,798)(4) $ 17,009,546
Cost of revenues.................... 6,732,656 1,730,292 (145,057)(4) 8,317,891
------------ ----------- ------------- ------------
Gross profit........................ 4,549,272 4,486,124 (343,741) 8,691,655
Operating expenses:
Technology and development........ 7,525,997 1,705,034 (233,800)(4) 8,997,231
Sales and marketing............... 23,820,445 4,674,575 (596,602)(4) 27,898,418
General and administrative........ 4,082,508 1,625,850 (175,054)(4) 5,533,304
Stock-based compensation.......... 2,503,458 11,945 (11,945)(4) 2,503,458
Amortization of intangible
assets.......................... 1,615,839 1,479,197 7,395,921(1) 9,011,760
(1,479,197)(4)
------------ ----------- ------------- ------------
Total operating expenses............ 39,548,247 9,496,601 4,899,323 53,944,171
------------ ----------- ------------- ------------
Loss from operations................ (34,998,975) (5,010,477) (5,243,064) (45,252,516)
Other income (expense), net......... 230,982 (89,595) 3,692(4) 106,023
(39,056)(2)
------------ ----------- ------------- ------------
Net loss............................ $(34,767,993) $(5,100,072) $ (5,278,428) $(45,146,493)
============ =========== ============= ============
Historical net loss per share basic
and diluted $ (11.60)
============
Shares used in the computation of
historical net loss per share,
basic and diluted................. 3,891,940
============
Pro forma net loss per share, basic
and diluted....................... $ (1.62)
============
Shares used in the computation of
pro forma net loss per share,
basic and diluted................. 27,940,184(3)
============
</TABLE>
- ---------------
(1) Represents the amortization of intangible assets over estimated useful lives
ranging from four to ten years, and the amortization of goodwill over four
years, for the period February 1, 1999 through September 19, 1999.
(2) Represents the forgone interest income on the cash paid to effect the
acquisition, based on an assumed 3% rate of return.
(3) Pro forma net loss per share is based on Lightspan's weighted average common
shares outstanding, after giving effect to the issuance of shares of
Lightspan common and preferred stock used to complete the acquisition as if
such issuance had occurred at the beginning of the period, and the assumed
conversion of all of Lightspan's outstanding shares of preferred stock as of
their original dates of issuance.
(4) Represents results of operations for Academic Systems from the acquisition
date through October 31, 1999, which are already included in the results of
operations of Lightspan.
See accompanying notes to unaudited pro forma combined condensed statements of
operations.
F-41
<PAGE> 123
THE LIGHTSPAN PARTNERSHIP, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1.
Pursuant to the merger agreement between Lightspan and Academic, the
following consideration was issued: (i) cash of $1,735,840; (ii) 570,356 shares
of Lightspan's common stock valued at $8.26 per share; (iii) 7,191,839 shares of
its Series E convertible preferred stock valued at $5.00 per share; (iv) options
to acquire 263,404 shares of the Lightspan's common stock, valued at $6.82 per
share; and (v) warrants to purchase 42,216 shares of Lightspan's Series E
convertible preferred stock, valued at $1.25 per share for 8,000 shares and
$0.33 per share for the remaining 34,216 shares. Subsequent to September 20,
1999, the date the acquisition was consummated, Lightspan determined that it
will issue additional consideration in the amount of $5,340,075 in early 2000 to
certain Academic stockholders. Lightspan intends to issue 1,068,015 shares of
Series E preferred stock, subject to regulatory approval, to such stockholders.
If regulatory approval is not obtained, Lightspan intends to issue cash or some
other form of consideration. As a result, the aggregate purchase price is
calculated to be $49,933,078, which includes acquisition costs of $369,121. The
purchase price was allocated as follows:
<TABLE>
<S> <C>
Current assets acquired..................................... $ 3,287,669
Property, equipment and other assets........................ 480,864
Goodwill.................................................... 23,333,966
Customer base............................................... 16,200,000
Core technology............................................. 5,600,000
Trademark and trade name.................................... 3,000,000
Assembled workforce......................................... 1,000,000
Deferred revenue............................................ (1,486,849)
Liabilities assumed......................................... (1,482,572)
-----------
$49,933,078
===========
</TABLE>
The Series E convertible preferred stock was valued at $5.00 per share (the
same price that such shares were sold for cash in July, September and October
1999). The merger agreement included a "put right" whereby Academic common
shareholders could elect to receive cash of $1.00 per Academic common share
($8.26 per Lightspan common share on an as-converted basis) in lieu of shares of
Lightspan common stock. Shareholders approximating 21% of Academic's common
shares and outstanding options exercised the "put right," resulting in an
aggregate cash payment of $1,734,306, with an additional $1,534 to be paid in
the future. The remaining Academic common shares and options to purchase common
shares were converted to Lightspan common stock and options to purchase common
stock at a ratio of .12121-to-1. The 570,356 common shares to be issued were
valued at $8.26 share (the same price on an as-converted basis that Academic
common shareholders and optionholders were paid upon election of the "put
right."). The 262,494 options to purchase Lightspan common stock that were
issued to Academic optionholders were recorded at their fair value of $6.82 per
share in accordance with APB 16, with the fair value determined by the minimum
value method.
Lightspan also 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 $0.33 per share,
respectively, in accordance with APB 16, with the fair value determined by the
minimum value method.
F-42
<PAGE> 124
LIGHTSPANLOGO
