IEDU Investools Inc. (MM)

INVESTools Inc. (Nasdaq:IEDU), the market leader in fulfilling the lifelong education needs of self-directed investors, today announced financial results for the quarter and nine months ended September 30, 2006. Year-over-year third quarter highlights include: Sales Transaction Volume increased from $38.5 million to $56.6 million, or 47 percent. GAAP Revenue decreased from $37.0 million to $35.6 million, or 4 percent. Adjusted EBITDA increased from $6.8 million to $12.0 million, or 77 percent. Net loss of $9.9 million, compared to $4.0 million of net income last year. Cash, cash equivalents and marketable securities increased to $69.5 million, net of $1.3 million paid for thinkorswim-related transaction costs. Alumni base increased to 264,000. Active subscribers to the Company�s websites increased to 85,300. �The third quarter resulted in sales transaction volume of $56.6 million, a year-over-year increase of 47%, driven by the enrollment of over 4,400 INVESTools� branded students and 35% upsell rates for advanced education sales in our workshops, both quarterly records. Seasonally lower event schedules and student enrollments with our co-marketing partners were consistent with our third quarter expectations,��said Lee K. Barba, Chairman and CEO of INVESTools. �Continued success with our new coaching model is converting our students to subscription-based education services at improved margins.� �We are pleased with the progress we have made toward a successful closing of the merger with thinkorswim in early 2007. With approximately six weeks since the announcement of the merger on September 19th, we have experienced a higher degree of student acceptance of the thinkorswim brokerage platform than anticipated which is increasing our confidence in the long-term recurring revenue streams and increased lifetime value of our 264,000 graduates.� In October 2006 we signed an agreement with NASDAQ� to distribute customized investor education content developed by INVESTools on the NASDAQ.com Web site,�a leading exchange site serving more than 26 million monthly page views to over�1.8 million unique visitors per month. Conference Call Information A conference call to discuss the financial results is scheduled for 10:00 a.m. Eastern today. The live call is being webcast by CCBN and will be available through INVESTools� corporate website at www.investools.com (About Us / Investor Relations). The webcast is also being distributed over CCBN�s Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through CCBN�s individual investor center at www.earnings.com or by visiting any of the investor sites in CCBN�s Individual Investor Network. Institutional investors can access the call via CCBN�s password-protected event management site, StreetEvents (www.streetevents.com). Please allow extra time prior to the call to visit the site and to download the streaming media software required to listen to the Internet broadcast. The online archive of the broadcast will be available within two hours following completion of the live call. About INVESTools Inc. INVESTools offers a full range of investor education products and services that provide lifelong learning in a variety of interactive delivery formats, including instructor-led online courses, in-person workshops, "at home" study programs, one-on-one and group online coaching sessions and telephone, live-chat and email support. Approximately 264,000 investors around the world have graduated from INVESTools' investor education programs. Log on to http://www.investools.com to learn more about the INVESTools Method� -- one of the most widely recognized, adopted and endorsed approaches to investor education. All statements in this�press release that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as �believe,� �intend,� �expect,� �may,� �could,� �would,� �will,� �should,� �plan,� �project,� �contemplate,� �anticipate,� or similar statements. Because these statements reflect the Company�s current views concerning future events, these forward-looking statements are subject to risks and uncertainties. The Company has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this press release, including, without limitation, the success of brand development efforts and strategic alliances; demand for the Company�s products and services; the ability to compete effectively and adjust to changing market conditions; inability to protect the Company�s proprietary technology; difficulties or delays in developing improved products when expected or desired and with the additional features contemplated or desired; the potential for intellectual property infringement, warranty, product liability, and other claims; the uncertainties associated with governmental regulation; and other factors detailed from time to time in INVESTools� SEC filings. The forward-looking statements are made only as of the date hereof and the Company assumes no obligation to publicly update or revise the forward-looking statements whether as a result of new information, future events, or otherwise. Explanation and Reconciliation of Non-GAAP Information The Company believes that sales transaction volume is an important measure of business volume. Sales transaction volume is a non-GAAP financial measure and represents sales in a particular period before the effect of recognition of deferred revenue from prior periods and the deferral of current period sales. It is consistent with the amount of cash receipts from selling activities in the period and with the majority of the components of cost of revenue. The table below provides a reconciliation of sales transaction volume to revenue for the periods indicated: Three Months Ended Sept 30, Jun 30, Mar 31, Dec 31, Sep 30, ($ in millions) � 2006� � 2006� � 2006� � 2005� � 2005� � Sales transaction volume $ 56.6� 73.4� $ 58.7� $ 50.0� $ 38.5� Change to deferred revenue � (21.0) � (35.0) � (19.9) � (13.2) � (1.5) Revenue $ 35.6� $ 38.4� $ 38.8� $ 36.8� $ 37.0� The Company believes that Adjusted EBITDA as shown in the table below is a valuable representation of operating performance given the impact of accounting for deferred revenue and for costs associated with deferred revenue. The table below provides a reconciliation of net income (loss) to Adjusted EBITDA for the periods indicated: Three Months Ended Sept 30, Jun 30, Mar 31, Dec 31, Sep 30, ($ in millions) � 2006� � 2006� � 2006� � 2005� � 2005� � Net income (loss) $ (9.9) $ (20.3) $ (9.9) $ (4.2) $ 4.0� Depreciation and amortization 1.2� 1.2� 1.1� 0.9� 0.6� Income tax (benefit) expense (0.9) �� �� 0.1� �� Other non-cash items 0.4� 2.0� 0.6� 1.8� 0.6� Net change in deferred revenue � 21.2� � 35.0� � 19.9� � 12.8� � 1.6� Adjusted EBITDA $ 12.0� $ 17.9� $ 11.7� $ 11.4� $ 6.8� These non-GAAP financial measures may not be comparable to similarly titled measurements used by other companies and should not be used generally as a substitute for revenue, net income (loss) or other GAAP operating measurements. The table below provides information on the number of graduates during the period indicated. The Company defines a graduate as someone who has purchased or attended as a spouse, the foundational Stocks or Currency course. Three Months Ended Sept 30, June 30, Mar, 31 Dec 31, Sept 30, 2006� 2006� 2006� 2005� 2005� Paid graduates 10,200� 14,800� 9,800� 10,300� 7,700� Spouses 5,500� 9,900� 5,400� 5,600� 2,700� Total graduates 15,700� 24,700� 15,100� 15,900� 10,400� The following table outlines the workshop upsell rates during the period indicated. During the third quarter of 2006, the Company introduced a subscription based Trading Rooms product as an alternative upsell at the workshop. Three Months Ended Sept 30, June 30, Mar, 31 Dec 31, Sept 30, 2006� 2006� 2006� 2005� 2005� P.H.D. 19% 27% 25% 25% 20% Master 37% 32% 36% 35% 37% Associate 36% 41% 39% 40% 43% Trading Rooms 7% -� -� -� -� � Blended Upsell Rate 35% 27% 33% 31% 30% Workshop upsell rates are the sales that take place at the workshops for advanced product sales. Upsell rates do not include sales from the Company�s other sales operations. INVESTOOLS INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands) � � � September 30,2006 December 31,2005 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 32,660� $ 11,466� Marketable securities 36,473� 16,871� Accounts receivable, net of allowance ($73 and $55) 5,184� 3,353� Current portion of restricted cash �� 4,722� Other current assets 7,562� 3,133� Total current assets 81,879� 39,545� � Long-term restricted cash 373� 366� Goodwill 18,085� 18,085� Intangible assets, net of accumulated amortization ($3,715 and $1,891) 3,375� 5,199� Furniture and equipment, net of accumulated depreciation ($4,089 and $2,403) 15,188� 8,890� Other long-term assets 1,357� 614� � Total assets $ 120,257� $ 72,699� � LIABILITIES AND STOCKHOLDERS� DEFICIT Current liabilities: Current portion of deferred revenue $ 131,037� $ 68,215� Accounts payable 6,621� 3,210� Accrued payroll 5,141� 3,522� Accrued tax liabilities 7,700� 7,359� Other current liabilities 10,038� 4,193� Current portion of capitalized lease obligations 176� 125� Total current liabilities 160,713� 86,624� � Other long-term accrued liabilities 264� �� Long-term portion of capitalized lease obligations 543� 513� Long-term portion of deferred revenue 22,249� 9,301� Total liabilities 183,769� 96,438� � Stockholders� deficit: Common stock $0.01 par value (45,133 and 44,754 shares issued and outstanding, respectively) 451� 447� Additional paid-in capital 127,600� 131,162� Accumulated other comprehensive loss (19) (116) Deferred stock compensation �� (3,742) Accumulated deficit (191,544) (151,490) Total stockholders� deficit (63,512) (23,739) � Total liabilities and stockholders� deficit $ 120,257� $ 72,699� INVESTOOLS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (in thousands, except per share amounts) (unaudited) � � � � Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2006� 2005� 2006� 2005� � Revenue $ 35,552� $ 37,019� $ 112,729� $ 101,804� Costs and expenses Cost of revenue 26,291� 18,254� 90,841� 68,844� Selling expense 12,154� 9,383� 36,208� 27,329� General and administrative expense 8,353� 5,439� 25,039� 17,402� Special charges 195� 18� 3,185� 58� Total costs and expenses 46,993� 33,094� 155,273� 113,633� � Income (loss) from operations (11,441) 3,925� (42,544) (11,829) � Other income Gain (loss) on sale of assets �� �� 10� (93) Interest income and other, net 646� 108� 1,581� 397� Other income 646� 108� 1,591� 304� � Net income (loss) before income taxes and cumulative effect of accounting change (10,795) 4,033� (40,953) (11,525) Income tax benefit (907) (5) (851) �� � Net income (loss) before cumulative effect of accounting change (9,888) 4,038� (40,102) (11,525) Cumulative effect of accounting change �� �� 48� �� � Net income (loss) $ (9,888) $ 4,038� � (40,054) $ (11,525) � � � � � Net income (loss) per common share � basic $ (0.22) $ 0.09� $ (0.89) $ (0.26) � Weighted average common shares outstanding � basic 45,111� 45,009� 44,999� 44,996� � Net income (loss) per common share � diluted $ (0.22) $ 0.09� $ (0.89) $ (0.26) � Weighted average common shares outstanding � diluted 45,111� 46,790� 44,999� 44,996� INVESTOOLS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) � � � � Three Months EndedSeptember 30, Nine Months EndedSeptember 30, 2006� 2005� 2006� 2005� Cash flows from operating activities: Net income (loss) $ (9,888) $ 4,038� $ (40,054) $ (11,525) Reconciling adjustments: Depreciation and amortization 1,194� 645� 3,510� 1,814� Deferred taxes 28� �� 84� �� Stock compensation expense 342� 150� 833� 402� Provision for sales return reserve 11� 410� 326� 1,493� Provision for lease termination �� �� 213� �� (Recovery of) provision for bad debt 3� (7) (32) 51� (Gain) loss on sale of assets �� �� (10) 93� Impairment of internally developed software �� �� 1,464� �� Loss on marketable securities 73� �� 73� �� Changes in operating assets and liabilities, net of the effect of acquired businesses: Accounts receivable (2,260) (194) (1,799) (1,175) Restricted cash �� (1) �� 2� Other assets (719) (269) (2,378) (763) Accounts payable 189� 1,096� 1,437� (845) Deferred revenue 21,168� 1,580� 76,137� 24,201� Accrued payroll 1,291� 740� 1,619� 1,144� Other liabilities 3,623� (101) 4,223� (2,911) Accrued tax liabilities (1,712) 409� (394) 1,097� Net cash provided by operating activities 13,343� 8,496� 45,252� 13,078� � Cash flows from investing activities: Purchases of marketable securities �� (2,636) (23,403) (2,636) Proceeds from the maturity of marketable securities 1,365� 1,965� 3,865� 6,135� Proceeds from the sale of equipment �� �� 10� 40� Purchases of furniture and equipment (1,689) (1,595) (7,161) (5,766) Deferred acquisition costs (1,323) �� (1,323) �� Working capital adjustment (cash paid) related to business acquisitions, net of cash received �� 102� �� (7,777) Net cash used in investing activities (1,647) (2,164) (28,012) (10,004) � Cash flows from financing activities: Payments on capital leases (42) (31) (112) (40) Changes in long-term restricted cash (2) (193) 4,715� (3,219) Repurchase of stock �� (990) (1,360) (990) Proceeds from exercise of stock options 39� 37� 711� 127� Net cash provided by (used in) financing activities (5) (1,177) 3,954� (4,122) � Increase (decrease) in cash and cash equivalents 11,691� 5,155� 21,194� (1,048) � Cash and cash equivalents: Beginning of period 20,969� 4,533� 11,466� 10,736� � End of period $ 32,660� $ 9,688� $ 32,660� $ 9,688� INVESTools Inc. (Nasdaq:IEDU), the market leader in fulfilling the lifelong education needs of self-directed investors, today announced financial results for the quarter and nine months ended September 30, 2006. Year-over-year third quarter highlights include: -- Sales Transaction Volume increased from $38.5 million to $56.6 million, or 47 percent. -- GAAP Revenue decreased from $37.0 million to $35.6 million, or 4 percent. -- Adjusted EBITDA increased from $6.8 million to $12.0 million, or 77 percent. -- Net loss of $9.9 million, compared to $4.0 million of net income last year. -- Cash, cash equivalents and marketable securities increased to $69.5 million, net of $1.3 million paid for thinkorswim-related transaction costs. -- Alumni base increased to 264,000. -- Active subscribers to the Company's websites increased to 85,300. "The third quarter resulted in sales transaction volume of $56.6 million, a year-over-year increase of 47%, driven by the enrollment of over 4,400 INVESTools' branded students and 35% upsell rates for advanced education sales in our workshops, both quarterly records. Seasonally lower event schedules and student enrollments with our co-marketing partners were consistent with our third quarter expectations," said Lee K. Barba, Chairman and CEO of INVESTools. "Continued success with our new coaching model is converting our students to subscription-based education services at improved margins." "We are pleased with the progress we have made toward a successful closing of the merger with thinkorswim in early 2007. With approximately six weeks since the announcement of the merger on September 19th, we have experienced a higher degree of student acceptance of the thinkorswim brokerage platform than anticipated which is increasing our confidence in the long-term recurring revenue streams and increased lifetime value of our 264,000 graduates." In October 2006 we signed an agreement with NASDAQ(R) to distribute customized investor education content developed by INVESTools on the NASDAQ.com Web site, a leading exchange site serving more than 26 million monthly page views to over 1.8 million unique visitors per month. Conference Call Information A conference call to discuss the financial results is scheduled for 10:00 a.m. Eastern today. The live call is being webcast by CCBN and will be available through INVESTools' corporate website at www.investools.com (About Us / Investor Relations). The webcast is also being distributed over CCBN's Investor Distribution Network to both institutional and individual investors. Individual investors can listen to the call through CCBN's individual investor center at www.earnings.com or by visiting any of the investor sites in CCBN's Individual Investor Network. Institutional investors can access the call via CCBN's password-protected event management site, StreetEvents (www.streetevents.com). Please allow extra time prior to the call to visit the site and to download the streaming media software required to listen to the Internet broadcast. The online archive of the broadcast will be available within two hours following completion of the live call. About INVESTools Inc. INVESTools offers a full range of investor education products and services that provide lifelong learning in a variety of interactive delivery formats, including instructor-led online courses, in-person workshops, "at home" study programs, one-on-one and group online coaching sessions and telephone, live-chat and email support. Approximately 264,000 investors around the world have graduated from INVESTools' investor education programs. Log on to http://www.investools.com to learn more about the INVESTools Method(TM) -- one of the most widely recognized, adopted and endorsed approaches to investor education. All statements in this press release that are not historical are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements may be identified by words such as "believe," "intend," "expect," "may," "could," "would," "will," "should," "plan," "project," "contemplate," "anticipate," or similar statements. Because these statements reflect the Company's current views concerning future events, these forward-looking statements are subject to risks and uncertainties. The Company has made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this press release, including, without limitation, the success of brand development efforts and strategic alliances; demand for the Company's products and services; the ability to compete effectively and adjust to changing market conditions; inability to protect the Company's proprietary technology; difficulties or delays in developing improved products when expected or desired and with the additional features contemplated or desired; the potential for intellectual property infringement, warranty, product liability, and other claims; the uncertainties associated with governmental regulation; and other factors detailed from time to time in INVESTools' SEC filings. The forward-looking statements are made only as of the date hereof and the Company assumes no obligation to publicly update or revise the forward-looking statements whether as a result of new information, future events, or otherwise. Explanation and Reconciliation of Non-GAAP Information The Company believes that sales transaction volume is an important measure of business volume. Sales transaction volume is a non-GAAP financial measure and represents sales in a particular period before the effect of recognition of deferred revenue from prior periods and the deferral of current period sales. It is consistent with the amount of cash receipts from selling activities in the period and with the majority of the components of cost of revenue. The table below provides a reconciliation of sales transaction volume to revenue for the periods indicated: -0- *T Three Months Ended ---------------------------------------- Sept 30, Jun 30, Mar 31, Dec 31, Sep 30, ($ in millions) 2006 2006 2006 2005 2005 -------- ------- ------- ------- ------- Sales transaction volume $ 56.6 73.4 $ 58.7 $ 50.0 $38.5 Change to deferred revenue (21.0) (35.0) (19.9) (13.2) (1.5) -------- ------- ------- ------- ------- Revenue $ 35.6 $ 38.4 $ 38.8 $ 36.8 $37.0 ======== ======= ======= ======= ======= *T The Company believes that Adjusted EBITDA as shown in the table below is a valuable representation of operating performance given the impact of accounting for deferred revenue and for costs associated with deferred revenue. The table below provides a reconciliation of net income (loss) to Adjusted EBITDA for the periods indicated: -0- *T Three Months Ended ---------------------------------------- Sept 30, Jun 30, Mar 31, Dec 31, Sep 30, ($ in millions) 2006 2006 2006 2005 2005 -------- ------- ------- ------- ------- Net income (loss) $(9.9) $(20.3) $(9.9) $(4.2) $ 4.0 Depreciation and amortization 1.2 1.2 1.1 0.9 0.6 Income tax (benefit) expense (0.9) -- -- 0.1 -- Other non-cash items 0.4 2.0 0.6 1.8 0.6 Net change in deferred revenue 21.2 35.0 19.9 12.8 1.6 -------- ------- ------- ------- ------- Adjusted EBITDA $12.0 $ 17.9 $11.7 $11.4 $ 6.8 ======== ======= ======= ======= ======= *T These non-GAAP financial measures may not be comparable to similarly titled measurements used by other companies and should not be used generally as a substitute for revenue, net income (loss) or other GAAP operating measurements. The table below provides information on the number of graduates during the period indicated. The Company defines a graduate as someone who has purchased or attended as a spouse, the foundational Stocks or Currency course. -0- *T Three Months Ended ------------------------------------------ Sept 30, June 30, Mar, 31 Dec 31, Sept 30, 2006 2006 2006 2005 2005 -------- -------- ------- ------- -------- Paid graduates 10,200 14,800 9,800 10,300 7,700 Spouses 5,500 9,900 5,400 5,600 2,700 -------- -------- ------- ------- -------- Total graduates 15,700 24,700 15,100 15,900 10,400 ======== ======== ======= ======= ======== *T The following table outlines the workshop upsell rates during the period indicated. During the third quarter of 2006, the Company introduced a subscription based Trading Rooms product as an alternative upsell at the workshop. -0- *T Three Months Ended ------------------------------------------ Sept 30, June 30, Mar, 31 Dec 31, Sept 30, 2006 2006 2006 2005 2005 -------- -------- ------- ------- -------- P.H.D. 19% 27% 25% 25% 20% Master 37% 32% 36% 35% 37% Associate 36% 41% 39% 40% 43% Trading Rooms 7% - - - - Blended Upsell Rate 35% 27% 33% 31% 30% *T Workshop upsell rates are the sales that take place at the workshops for advanced product sales. Upsell rates do not include sales from the Company's other sales operations. -0- *T INVESTOOLS INC. AND SUBSIDIARIES Condensed Consolidated Balance Sheets (in thousands) September December 30, 31, 2006 2005 ----------- ---------- (unaudited) ASSETS Current assets: Cash and cash equivalents $ 32,660 $ 11,466 Marketable securities 36,473 16,871 Accounts receivable, net of allowance ($73 and $55) 5,184 3,353 Current portion of restricted cash -- 4,722 Other current assets 7,562 3,133 ----------- ---------- Total current assets 81,879 39,545 Long-term restricted cash 373 366 Goodwill 18,085 18,085 Intangible assets, net of accumulated amortization ($3,715 and $1,891) 3,375 5,199 Furniture and equipment, net of accumulated depreciation ($4,089 and $2,403) 15,188 8,890 Other long-term assets 1,357 614 ----------- ---------- Total assets $120,257 $ 72,699 =========== ========== LIABILITIES AND STOCKHOLDERS' DEFICIT Current liabilities: Current portion of deferred revenue $131,037 $ 68,215 Accounts payable 6,621 3,210 Accrued payroll 5,141 3,522 Accrued tax liabilities 7,700 7,359 Other current liabilities 10,038 4,193 Current portion of capitalized lease obligations 176 125 ----------- ---------- Total current liabilities 160,713 86,624 Other long-term accrued liabilities 264 -- Long-term portion of capitalized lease obligations 543 513 Long-term portion of deferred revenue 22,249 9,301 ----------- ---------- Total liabilities 183,769 96,438 Stockholders' deficit: Common stock $0.01 par value (45,133 and 44,754 shares issued and outstanding, respectively) 451 447 Additional paid-in capital 127,600 131,162 Accumulated other comprehensive loss (19) (116) Deferred stock compensation -- (3,742) Accumulated deficit (191,544) (151,490) ----------- ---------- Total stockholders' deficit (63,512) (23,739) ----------- ---------- Total liabilities and stockholders' deficit $120,257 $ 72,699 =========== ========== *T -0- *T INVESTOOLS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Operations (in thousands, except per share amounts) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2006 2005 2006 2005 ----------- -------- --------- --------- Revenue $35,552 $37,019 $112,729 $101,804 Costs and expenses Cost of revenue 26,291 18,254 90,841 68,844 Selling expense 12,154 9,383 36,208 27,329 General and administrative expense 8,353 5,439 25,039 17,402 Special charges 195 18 3,185 58 ----------- -------- --------- --------- Total costs and expenses 46,993 33,094 155,273 113,633 ----------- -------- --------- --------- Income (loss) from operations (11,441) 3,925 (42,544) (11,829) Other income Gain (loss) on sale of assets -- -- 10 (93) Interest income and other, net 646 108 1,581 397 ----------- -------- --------- --------- Other income 646 108 1,591 304 ----------- -------- --------- --------- Net income (loss) before income taxes and cumulative effect of accounting change (10,795) 4,033 (40,953) (11,525) Income tax benefit (907) (5) (851) -- ----------- -------- --------- --------- Net income (loss) before cumulative effect of accounting change (9,888) 4,038 (40,102) (11,525) Cumulative effect of accounting change -- -- 48 -- ----------- -------- --------- --------- Net income (loss) $(9,888) $ 4,038 (40,054) $(11,525) =========== ======== ========= ========= Net income (loss) per common share - basic $ (0.22) $ 0.09 $ (0.89) $ (0.26) =========== ======== ========= ========= Weighted average common shares outstanding - basic 45,111 45,009 44,999 44,996 =========== ======== ========= ========= Net income (loss) per common share - diluted $ (0.22) $ 0.09 $ (0.89) $ (0.26) =========== ======== ========= ========= Weighted average common shares outstanding - diluted 45,111 46,790 44,999 44,996 =========== ======== ========= ========= *T -0- *T INVESTOOLS INC. AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (in thousands) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 2006 2005 2006 2005 ----------- ------- --------- --------- Cash flows from operating activities: Net income (loss) $(9,888) $4,038 $(40,054) $(11,525) Reconciling adjustments: Depreciation and amortization 1,194 645 3,510 1,814 Deferred taxes 28 -- 84 -- Stock compensation expense 342 150 833 402 Provision for sales return reserve 11 410 326 1,493 Provision for lease termination -- -- 213 -- (Recovery of) provision for bad debt 3 (7) (32) 51 (Gain) loss on sale of assets -- -- (10) 93 Impairment of internally developed software -- -- 1,464 -- Loss on marketable securities 73 -- 73 -- Changes in operating assets and liabilities, net of the effect of acquired businesses: Accounts receivable (2,260) (194) (1,799) (1,175) Restricted cash -- (1) -- 2 Other assets (719) (269) (2,378) (763) Accounts payable 189 1,096 1,437 (845) Deferred revenue 21,168 1,580 76,137 24,201 Accrued payroll 1,291 740 1,619 1,144 Other liabilities 3,623 (101) 4,223 (2,911) Accrued tax liabilities (1,712) 409 (394) 1,097 ----------- ------- --------- --------- Net cash provided by operating activities 13,343 8,496 45,252 13,078 ----------- ------- --------- --------- Cash flows from investing activities: Purchases of marketable securities -- (2,636) (23,403) (2,636) Proceeds from the maturity of marketable securities 1,365 1,965 3,865 6,135 Proceeds from the sale of equipment -- -- 10 40 Purchases of furniture and equipment (1,689) (1,595) (7,161) (5,766) Deferred acquisition costs (1,323) -- (1,323) -- Working capital adjustment (cash paid) related to business acquisitions, net of cash received -- 102 -- (7,777) ----------- ------- --------- --------- Net cash used in investing activities (1,647) (2,164) (28,012) (10,004) ----------- ------- --------- --------- Cash flows from financing activities: Payments on capital leases (42) (31) (112) (40) Changes in long-term restricted cash (2) (193) 4,715 (3,219) Repurchase of stock -- (990) (1,360) (990) Proceeds from exercise of stock options 39 37 711 127 ----------- ------- --------- --------- Net cash provided by (used in) financing activities (5) (1,177) 3,954 (4,122) ----------- ------- --------- --------- Increase (decrease) in cash and cash equivalents 11,691 5,155 21,194 (1,048) Cash and cash equivalents: Beginning of period 20,969 4,533 11,466 10,736 ----------- ------- --------- --------- End of period $32,660 $9,688 $ 32,660 $ 9,688 =========== ======= ========= ========= *T