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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
COMMISSION FILE NUMBER 000-24289
CLICK2LEARN.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1276003
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110-110TH AVENUE NE, BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) (Zip Code)
(425) 462-0501
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 15, 2000 was $161,193,711.
The number of shares outstanding of the registrant's common stock as of March
15, 2000 was 16,666,473.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held are incorporated
by reference into Part III.
CLICK2LEARN.COM, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
INDEX
PART I
Item 1. Business................................................................................................. 3
Item 2. Properties............................................................................................... 13
Item 3. Legal Proceedings........................................................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 14
Item 4a. Executive Officers....................................................................................... 14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters..................................... 17
Item 6. Selected Financial Data.................................................................................. 19
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.................... 20
Item 7a. Quantitative and Qualitative Disclosures about Market Risk............................................... 30
Item 8. Financial Statements and Supplementary Data.............................................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant....................................................... 53
Item 11. Executive Compensation................................................................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 53
Item 13. Certain Relationships and Related Transactions........................................................... 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 53
Signatures......................................................................................................... 56
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PART I
EXCEPT FOR HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, AMONG
OTHER THINGS, STATEMENTS REGARDING CLICK2LEARN.COM'S ANTICIPATED COSTS AND
EXPENSES AND REVENUE MIX. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS,
THOSE STATEMENTS INCLUDING THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS",
"BELIEVES" AND SIMILAR LANGUAGE. CLICK2LEARN.COM'S ACTUAL RESULTS MAY DIFFER
SIGNIFICANTLY FROM THOSE PROJECTED IN THE FORWARD-LOOKING STATEMENTS. FACTORS
THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCES INCLUDE, BUT ARE NOT LIMITED
TO, THOSE DISCUSSED IN THE SECTION "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS--FACTORS THAT MAY AFFECT FUTURE
RESULTS OF OPERATIONS". YOU SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER
DOCUMENTS CLICK2LEARN.COM FILES FROM TIME TO TIME WITH THE SECURITIES AND
EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q THAT
CLICK2LEARN.COM WILL FILE IN 2000. YOU ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE OF THIS
ANNUAL REPORT ON FORM 10-K. CLICK2LEARN.COM UNDERTAKES NO OBLIGATION TO PUBLICLY
RELEASE ANY REVISIONS TO THE FORWARD-LOOKING STATEMENTS OR REFLECT EVENTS OR
CIRCUMSTANCES AFTER THE DATE OF THIS DOCUMENT.
ITEM 1. BUSINESS
OVERVIEW AND HISTORY
Click2learn.com, inc. ("click2learn"), formerly known as Asymetrix
Learning Systems, Inc., provides e-learning solutions designed to help
organizations more effectively capture, organize, manage, disseminate and use
knowledge as a competitive advantage. Click2learn conducts two primary lines of
business related to e-learning:
- the click2learn.com network, an Internet based-application
service solution for the delivery and management of e-learning
over the Internet, including the click2learn.com e-learning
portal, an e-commerce site for the purchase of web-delivered
learning as well as more traditional forms of learning such as
books, video tapes, CD-ROMs and instructor-led training, and a
free system to allow subscribers to author and publish e-learning
content; and
- a comprehensive enterprise e-learning solution designed for
implementation on a customer's own internal information systems.
To support these solutions, click2learn also offers its customers a range of
authoring solutions for the capture of knowledge and the creation of e-learning
courses as well as a comprehensive array of professional services including
strategic consulting, e-learning development, training and support.
The click2learn.com network is a network of learning web sites based on
click2learn's web site at www.click2learn.com that are hosted and operated by
click2learn for its customers. The click2learn.com network includes: (1) private
corporate e-learning sites supported on an application service provider basis
for internal use by the organizations' employees; (2) public co-branded
e-learning sites established in connection with corporate web sites or Internet
portals where users can purchase both e-learning content for delivery over the
Internet, traditional learning materials in tangible formats, and seats in
instructor-led training courses; and (3) the click2learn.com e-learning portal,
a click2learn branded public e-commerce site where users can purchase both
e-learning content for delivery over the Internet, traditional learning
materials in tangible formats, and seats in instructor-led training courses. The
web sites on the click2learn.com network are based on a standard template that
is configured to include the look and feel of click2learn's customers' internal
or external web sites, appearing to the end user as the integrated "learning
channel" for these sites.
One of the most unique features of click2learn's solution is a
"server-side" authoring tool, called CLICK2LEARN.AUTHOR-TM-, and a similar
publishing tool, called CLICK2LEARN.PUBLISHER-TM- , that users can access
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with only a standard web browser to create brand new, interactive web-based
courseware, and to upload existing knowledge objects such as Microsoft Word or
PowerPoint files. Most public and private web sites on the click2learn.com
network also include these authoring and publishing tools with which their users
can create their own e-learning courses and publish them throughout the
click2learn.com network. Both the owner of the click2learn.com network site
where the course was published and the individual author can earn royalties if
such courses are purchased anywhere on the click2learn.com network, as can the
owners of the click2learn.com network sites through which such courses are sold.
Click2learn's enterprise e-learning solution includes Ingenium-TM-, a
learning management and skills assessment system to enable customers to deploy
and manage all aspects of their learning needs and to assess the skills and
learning needs of their employees. The Ingenium system supports the management
and delivery of multiple types of learning activities within an organization
including instructor-led training, training delivered on CD-ROM or e-learning
courses delivered over an organization's intranet. The Ingenium system also
allows an organization to closely match and track all employees' readiness to
perform their job functions based on the analysis of the skills required to
accomplish any tasks, and the analysis of the training an employee has completed
as compared to that required for the job. Ingenium's skill inventory also allows
an enterprise to locate employees with a particular skill--for example, someone
fluent in Japanese--by doing a quick search of the Ingenium database.
Click2learn's professional services related to both the click2learn.com
network and its enterprise e-learning solution include consulting on
e-learning initiatives, custom development of e-learning content, systems and
content integration, and training. The custom development group uses a
collaborative, application service provider (ASP) approach to developing
content that allows click2learn to rapidly create multiple hours of web-based
courseware in a relatively short development cycle. Click2learn also offers
ToolBook II Instructor-TM- and ToolBook II Assistant-TM-, products to enable
customers to easily create and deploy e-learning courses in conjunction with
either the click2learn.com network or its enterprise e-learning solution, or
on a stand-alone basis. Click2learn's combination of technology and services
enable organizations to establish and maintain an e-learning solution that is
tailored to their unique needs.
Click2learn was originally incorporated as Asymetrix Corporation in the
State of Washington in 1984. Prior to focusing on the e-learning market,
click2learn developed and marketed a wide range of software products. As a
result of click2learn's decision to focus on e-learning, between October 1996
and July 1998, click2learn divested several product lines and made a number of
acquisitions to strengthen its position in the market, and changed its name to
Asymetrix Learning Systems, Inc. Click2learn also focused its research and
development efforts on products for e-learning and began developing a
professional services organization through internal growth and acquisition. In
connection with its initial public offering in June 1998, click2learn
reincorporated as a Delaware corporation through a merger with a Delaware
subsidiary. In July 1999, click2learn announced the launch of the
click2learn.com network and in November 1999, formally changed its name to
click2learn.com, inc. to reflect the long-term strategic importance of the
click2learn.com network and its application service provider business.
PRODUCTS AND SERVICES
Click2learn offers a solutions-based approach to e-learning for
business and professionals, with implementation strategies to address each
customer's unique needs. Click2learn provides its customers with needs analysis
and consulting, e-learning authoring and management products, custom e-learning
content development, a wide variety of e-learning content published by third
parties, e-learning hosting services and e-learning systems integration
services.
The click2learn e-learning solution includes the following products and
services:
THE CLICK2LEARN.COM NETWORK
THE CLICK2LEARN.COM E-LEARNING PORTAL. The e-learning portal at
www.click2learn.com provides the underlying technology platform for all of the
web sites in the click2learn.com network. At the e-learning portal, click2learn
has aggregated an extensive catalog of learning materials from third party
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publishers in a wide variety of formats including e-learning courses delivered
over the Internet, learning materials in tangible formats such as video tapes,
books, CD-ROMS and spaces in instructor-led training courses. As of March 15,
2000, click2learn had signed contracts with publishers to offer approximately
7,000 Internet-deliverable e-learning and tangible media titles at the
click2learn.com e-learning portal. The learning titles cover a wide variety of
technical, professional and business subject areas such as information
technology systems, including certification courses, end user software
applications, and finance and career development. Click2learn acts as an
aggregator of third party content and does not currently own any of the
content sold through the click2learn.com network. Click2learn has established
relationships with the following publishers to offer their titles through the
click2learn.com e-learning portal:
ActiveEducation KnowHowZone OTSI
Applied Learning Systems Knowledge Quest Productivity Point Intl
Catapult KT Solutions Richard Chang Associates
Competence Software Learn2.com SkillSoft
ComputerPREP LearnKey Skills Online
Crisp Publications Macmillan Publications Triad Healthcare Technologies
CyberStateU.com Maxim Training TRO Learning, Inc.
DiscoverWare NETg University Access
FirstNet Learning netSyndicate Velocity Business Publishing
InfoSource, Inc. NIIT Vital Learning
Infotec Onlinelearningguide.com Vivid Concepts
Intellexis International Onyx Interactive youachieve.com
Jossey-Bass Publishers
The prices charged by click2learn for learning titles varies depending
on the title and the number of licensed users, and whether the learning titles
are purchased individually or in bundled "productivity packs." Purchases through
the e-learning portal are made via credit card using standard e-commerce and
Internet security technology. Click2learn generally pays publishers of
commercially-available learning titles a portion of their list prices for titles
sold through the e-learning portal, as well as through any other sites on the
click2learn.com network. Click2learn does not maintain an inventory of tangible
materials and places an order with the publisher when tangible materials (hard
goods) are purchased through the e-learning portal or other sites on the
click2learn.com network. The publisher or its fulfillment firm then ships the
materials directly to the customer. Click2learn assumes all customer credit
risk.
The click2learn e-learning portal also includes the unique
CLICK2LEARN.PUBLISHER and CLICK2LEARN.AUTHOR publishing and authoring
tools which are available free to registered users of the e-learning portal.
These tools enable subject matter experts to easily develop courses and to
publish those courses as well as existing spreadsheets, documents or
presentations (referred to as knowledge objects) to the e-learning portal's
master catalog, where they are available to be included in the catalogs of any
other site throughout the click2learn.com network. If a course or knowledge
object is purchased anywhere on the click2learn.com network, the author can
receive a royalty on click2learn's revenue from the sale, as can the owners of
the sites from which the course or knowledge object was published and through
which the course or knowledge object was purchased.
CORPORATE E-LEARNING SITES. Click2learn also hosts and operates
corporate e-learning sites that link to the e-learning portal at which an
organization provides learning titles for use within the organization. Corporate
e-learning sites are configured to match the look and feel of customers'
internal intranets to provide the appearance of an integrated learning channel.
Corporate e-learning sites include CLICK2LEARN.MANAGER-TM-, which provides basic
site management and administration functionality. Click2learn branding on these
sites is maintained by the inclusion of the "Powered by click2learn.com" logo.
Corporate e-learning sites generally offer a catalog determined by the customer
that includes a selection of off-the-shelf titles from the master catalog at the
e-learning portal together with custom courses specific to the customers'
internal operations or procedures. Custom courses offered on a corporate
e-learning site may be developed by the customers' internal training development
organization
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using either commercially-available tools (such as click2learn's ToolBook II
Instructor or Assistant) or the free authoring and publishing tools
(CLICK2LEARN.AUTHOR and CLICK2LEARN.PUBLISHER), or by click2learn's professional
services organization, which can also integrate a customer's existing training
content with the e-learning site.
Click2learn generally charges its customers a fee for the initial
set-up and configuration of a corporate e-learning site and also charges monthly
hosting fees based on the amount of storage required for any private e-learning
content hosted on the corporate e-learning site that is not created with the
free authoring and publishing tools. There is no hosting fee for e-learning
courses from the master catalog available on the e-learning portal or for
private e-learning courses created with the free CLICK2LEARN.AUTHOR authoring
tool. Click2learn is paid for all purchases through the corporate e-learning
site of learning titles from the click2learn.com master catalog. Billing
accounts can be established for different segments of the customers' businesses
such as departments or divisions, or other segments as determined by the
customers. Click2learn also offers a variety of advanced learning management
tools on an application service provider basis for additional fees. These
additional tools allow training administrators to assign particular courses or
curricula to employees or groups of employees and to track the progress and
performance of individuals or groups of employees.
CO-BRANDED INTERNET PORTALS AND PUBLIC SITES. Click2learn also hosts
and operates e-learning sites based on the e-learning portal for other Internet
portals or for corporate customers that desire to sell learning content to their
customers. Click2learn believes these sites are attractive to other Internet
portal sites because they offer a means not only to increase the number of users
of such sites but also as a means to generate revenue from those users and to
keep them visiting the site for longer periods of time. Click2learn believes
these sites are also attractive to corporate customers who see the opportunity
to provide training and certification to customers, suppliers, resellers and
other business partners.
Like the corporate e-learning sites, these co-branded e-learning sites
are configured to match the look and feel of customers' Internet portal sites or
public web sites and provide the appearance of an integrated learning channel,
with click2learn branding maintained by the inclusion of the "Powered by
click2learn.com" logo. Co-branded public e-learning sites also generally offer a
catalog determined by the customer that includes a selection of titles from the
master catalog at the click2learn.com e-learning portal and private courses
specific to the interests of their customers or business partners. Most
co-branded e-learning sites also include the free authoring and publishing
tools. If the Internet portal or corporate customer elects to allow its users to
make e-learning courses developed with the free authoring and publishing tools
available throughout the click2learn.com network, both the individual author and
the Internet portal or corporate customer can earn royalties on any purchases of
those courses through the e-learning portal or any other sites on the
click2learn.com network.
Click2learn,generally, does not charge a fee for hosting content
from the e-learning portal on co-branded e-learning sites but may charge fees
for hosting. In addition, click2learn will receive the revenue for any sales
of learning content made though the click2learn.com network. Click2learn will
then pay a portion of that revenue to the publisher (and in some cases the
author) of the learning content and to the owner of the co-branded e-learning
site where a purchase is made. Click2learn will also pay the owner of a
co-branded e-learning site if content published to the click2learn.com
network from that site is purchased through another site on the
click2learn.com network.
CLICK2LEARN PRODUCTS
INGENIUM. Ingenium is a skills and competency-based learning management
system designed to manage all facets of learning, and is the centerpiece of
click2learn's enterprise learning management solution for both e-learning and
instructor-led training. Through its AICC compliant interface and content
adapter technology, Ingenium manages the assignment, scoring and tracking of
e-learning content from SmartForce and NETg, as well as e-learning created
using click2learn's ToolBook II Instructor or Assistant, or authoring tools
from Macromedia and QuestionMark. Ingenium also manages the resources and
logistics involved in delivering instructor-led training, such as scheduling
classrooms and instructors and managing attendance. Ingenium offers tools to
help organizations maximize their return on investment such as the Qualified
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Employee Finder tool, which searches for employees who have a particular set of
skills, such as fluency in a foreign language; the Organizational Health tool,
which measures skills and skill deficiencies at an organizational level;
Learning Maps, which prescribe available learning based on a job or
organizational requirements; and robust and user-friendly reporting
capabilities. The administrative module is priced by the number of concurrent
users. The list price for this component varies from $16,995 for up to five
concurrent users to $94,995 for up to 100 concurrent users. Pricing for the
browser-based student and manager components is based on the total number of
users. List prices for this component range from $9,495 for 1,000 users to
$39,495 for 15,000 users. Pricing for larger implementations is negotiated on a
case by case basis.
A number of complementary products are available to extend the
functionality of Ingenium. Ingenium Messenger Express automatically delivers
email messages such as confirmations and notices to Ingenium users. DUIT is a
data update and import tool that permits the synchronization of employee and
training records with corporate information systems. Pricing for Ingenium
Messenger Express is a flat fee of $14,995 per Ingenium implementation. DUIT is
licensed on a per copy basis, with a list price of $4,995 per copy.
TOOLBOOK II INSTRUCTOR. ToolBook II Instructor is a multimedia
development system for creating sophisticated e-learning applications. With
ToolBook II Instructor, authors can create e-learning applications in a
Microsoft Windows environment and deliver them over the Internet or an intranet
natively, without plug-ins, in HTML, DHTML and Java format. ToolBook II courses
can also be delivered in a Windows environment via a LAN or CD-ROM. Interactive
question objects and other objects designed explicitly for e-learning provides
the interactivity that is required for effective learning. ToolBook II
Instructor is easy to use and includes the powerful OpenScript scripting
language that allows courseware developers instructional design flexibility.
ToolBook II Instructor includes a "publish to click2learn.com" feature which
allows users to submit courses created with the product for publication to their
corporate e-learning site where they are available for internal training or to
the click2learn.com network where the author could potentially earn royalties on
sales of the course. The list price for ToolBook II Instructor is $2,495.
TOOLBOOK II ASSISTANT. ToolBook II Assistant is an easy-to-use
e-learning authoring product, designed for content experts rather than
professional application developers. Without knowing HTML, DHTML, Java or
OpenScript, subject matter experts can use ToolBook II Assistant to publish
web-based interactive courseware in an intuitive, drag and drop environment.
ToolBook II Assistant automates much of the process of developing e-learning
applications, through the use of a large catalog of ready-made objects and
templates to help authors become immediately productive. The ToolBook II
Assistant catalog and interface can be modified using ToolBook II Instructor
to create a product that is customized for a particular organization, look
and feel, or instructional design. ToolBook II Assistant also allows for
delivery natively over the Internet or an intranet or in a Windows
environment, and includes the "publish to click2learn.com" feature that
allows users to submit courses for publication to a corporate e-learning site
or the click2learn.com network. The list price for ToolBook II Assistant is
$1,495.
CLICK2LEARN SERVICES
CONSULTING. Click2learn offers a broad range of consulting services
related to its customers' learning needs. Consulting activities include advising
clients on performance assessments, training needs, technical capabilities,
organizational development, training program development, including corporate
and virtual universities, and consulting with respect to specific projects. The
consulting organization also provides seminars in learning theory and
integrative learning, trends in knowledge management, needs and performance
analysis, project management and technology-based learning for public and
private groups.
CUSTOM APPLICATIONS DEVELOPMENT. Click2learn's award-winning
development services group offers a full range of customized services for the
design and production of e-learning content and performance support
applications. The custom development staff includes experienced professionals
with
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a wide spectrum of development skills, including needs assessment, content and
audience analysis, instructional design, graphic and animation development,
OpenScript, Java and C++ programming, application localization, testing, and
deployment support. The custom development group uses a Rapid E-learning
Development System, called REDS, to deliver large amounts of e-learning content
in short time cycles. Using an ASP model for collaborative development, the REDS
process allows instructional designers to develop on one centralized database
using pre-programmed templates and navigational functions. This allows
programmers and graphic artists to focus on specialized tasks as opposed to
every screen in a finished application.
SYSTEMS INTEGRATION. Click2learn provides the services necessary to set
up and integrate content with web sites on the click2learn.com network and to
set up and integrate Ingenium and its other e-learning products with its
customers' network environments site. Systems integration services
include e-learning site design and set-up or product installation; design of
user profiles, lesson structures, organizational structures, user interface
customizations; integration with databases, email and web servers; and
installation of courses, implementation of self-registration mechanisms,
template building, client administration, and student orientation.
TRAINING SERVICES. Click2learn offers training that helps organizations
become more self-reliant in the area of e-learning. Training includes courses in
the use of click2learn's learning management systems, e-learning development
products, web application development and instructional design. Click2learn has
training centers at its offices in Bellevue, Washington; Needham, Massachusetts;
Fort Worth, Texas; and Des Plaines, Illinois. Training is also available through
authorized training partners throughout the United States and other countries.
PLACEMENT SERVICES. Click2learn offers placements of qualified
professionals with expertise in e-learning content development and related
fields. These professionals are placed on a temporary or permanent basis.
TECHNICAL SUPPORT AND MAINTENANCE. Click2learn offers a variety of
optional technical support and maintenance packages for its software products
and for members of the click2learn.com network. Generally, such packages include
access to support engineers and technical information, software maintenance
releases and upgrades of existing products if made available.
CUSTOMERS
Click2learn provides its products and services to customers across a
broad range of industries including financial services, accounting, health care,
insurance, computer hardware and software, manufacturing, networking,
telecommunications, government and education. The following is a partial list of
customers which purchased products or services from click2learn in 1999:
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FINANCIAL SERVICES/INSURANCE TECHNOLOGY/TELECOMMUNICATIONS
- ---------------------------- -----------------------------
Bank of America ADP
Chase Manhattan Bank Compaq
Ernst & Young Dell
First USA EDS
Fidelity Investments GTE Internetworking
GE Capital Hewlett-Packard
Liberty Mutual ICO Global Communications
New York Life Lucent Technologies
New York Stock Exchange (NYSE) MCI WorldCom
PaineWebber Microsoft
PriceWaterhouseCoopers Nortel Networks
Prudential Novartis Pharmaceuticals
Wells Fargo Bank Raytheon
Southwestern Bell
MANUFACTURING/OTHER Symantec
- --------------------
Boeing GOVERNMENT/EDUCATION
Duracell --------------------
HBO NYU Online
Sherwin-Williams Tufts University
Starwood Hotels and Resorts U.S. Air Force
Subaru U.S. Navy
Talbots
No single customer accounted for 10% or more of click2learn's total
consolidated revenues in any of the last three fiscal years.
COMPETITION
The e-learning market is a very new market that is highly fragmented
and very competitive. No single competitor holds a dominant market share.
Because there are no significant barriers to entry in its market, click2learn
expects a number of new competitors to enter this market in the future. The
click2learn.com network faces competition from other similar e-learning portal
sites that either aggregate off-the-shelf content or aggregate their own
content, such as those operated by SmartForce and others. Click2learn's
e-learning authoring products face competition from developers of general
purpose multimedia authoring tools, its learning management systems face
competition from vendors of other management systems, such as Saba and Docent,
and its professional services business faces competition from many small,
regional online learning and technology-based training service businesses as
well as large professional consulting firms and in-house training departments.
Click2learn believes there currently is no single competitor that
offers a comprehensive e-learning solution including corporate e-learning sites,
co-branded e-learning sites, an e-learning portal, e-learning authoring
products, enterprise learning management systems and professional services.
Click2learn believes that its solution including aggregated content, authoring
and publishing, and management systems delivered both over the Internet as an
application service provider and as an enterprise learning solution for
installation and operation on a customer's internal information systems provides
it with a competitive advantage.
Click2learn believes that the principal competitive factors affecting
the market for e-learning include:
- the scope and variety of e-learning content available at the
e-learning portal or through the click2learn.com network;
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- the features of the e-learning portal, the click2learn.com
network and its enterprise products such as management
functionality, scalability, and ability to integrate with other
e-learning products;
- the scope and quality of professional services offered, and the
expertise and technical knowledge of its employees;
- the functionality, ease of use, quality and performance of its
e-learning solutions;
- pricing;
- customer service and support;
- the effectiveness of sales and marketing efforts; and
- company reputation.
Although click2learn believes that its solutions currently compete
favorably with respect to all these factors, click2learn may not be able to
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, technical and
other resources. Several of click2learn's competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than click2learn, and several large companies have announced an
intention to enter the e-learning market. These companies may be able to respond
more quickly than click2learn to new or changing opportunities, technologies,
standards or customer requirements. In addition, if such competitors were to
offer a complete e-learning solution, click2learn's competitive position could
be adversely affected.
SALES AND MARKETING
Click2learn markets its e-learning solutions primarily through its
direct sales force. As of December 31, 1999, click2learn's sales, marketing and
support organizations consisted of 65 employees based at its corporate
headquarters in Bellevue, Washington and at other locations in Arizona,
California, Georgia, Illinois, Kansas, Maryland, Massachusetts, New Hampshire,
New Jersey, New York, Ohio, South Carolina, Texas, Virginia and the United
Kingdom. Click2learn intends to add additional field sales representatives
during 2000. The direct sales organization is currently divided into two groups,
one of which is focused on selling enterprise e-learning solutions consisting
primarily of the Ingenium system and related services and integration but also
including the click2learn.com network, and the other of which is focused
entirely on selling corporate e-learning sites. The direct sales organization
includes a telesales force that focuses on sales of the ToolBook II authoring
products, and handles smaller orders and assists with lead generation. The
direct sales organization also includes sales engineers who answer technical
questions and assist customers with product installation and implementation.
Click2learn also has a business development team focused on obtaining content
for the click2learn.com network and establishing public co-branded e-learning
sites. The click2learn direct sales force accounted for 51%, 83% and 91% of
total revenue in 1997, 1998 and 1999 respectively, reflecting the shift in
click2learn's sales and distribution strategy to primarily a direct sales
approach.
International revenue based on the origin of the customer accounted for
27%, 12% and 16% of click2learn's total revenue for 1997, 1998 and 1999,
respectively. Click2learn believes that the e-learning market is in the early
stages of development outside the United States, but that business in other
countries, particularly in Japan and Europe, are beginning to undertake
e-learning initiatives. With respect to the e-learning portal and
click2learn.com network, click2learn intends to pursue international markets
primarily through joint ventures with companies based in the various countries.
Click2learn.com is currently pursuing joint venture opportunities in several
European countries as well as Japan.
Click2learn conducts a variety of marketing programs to promote the
click2learn.com network and its other products and services, including direct
mail, advertising, seminars, trade shows, public relations and distribution of
literature. Click2learn and Bill Communications, the publisher of TRAINING
magazine, jointly sponsor an annual e-learning conference. The first such
conference, named "Online Learning `98" was held in Anaheim in September 1998.
"Online Learning `99" was held in Los Angeles in October 1999, and it was at
this event that click2learn announced the e-learning portal and the
click2learn.com network. "Online Learning 2000" will be held in Denver in
September 2000. Click2learn also participates as an exhibitor and speaker at
technology-based training trade shows and
10
maintains an area on www.click2learn.com where potential customers can obtain
information about click2learn and its products and services.
TECHNOLOGY, RESEARCH AND DEVELOPMENT
Click2learn believes that its long-standing focus on research has
attracted qualified engineering and other technical personnel and has
contributed to its core technology capabilities. Click2learn research and
development groups are located in Bellevue, Washington, where the focus is on
development of the e-learning portal and the ToolBook family of e-learning
authoring products; Rochester, New York where the focus is on development of the
Ingenium system; and Nashua, New Hampshire, where the focus is on the
development of underlying technology for the publishing and authoring solutions.
Research and development expenses were $8.4 million, $6.1 million and $7.4
million in 1997, 1998 and 1999, respectively and represented 33%, 18% and 21% of
total revenue for those respective periods. Click2learn expects to continue to
commit significant resources to research and development in the future, in
particular with respect to the click2learn.com network.
Key features of click2learn's technology platform include:
- SUPPORT OF OPEN INTERNET STANDARDS. Click2learn's development
efforts for the click2learn.com network support open and de facto
standards including HTML, DHTML, Java, ActiveX, AICC, Netscape
and Microsoft browsers and streaming technologies. This focus,
together with click2learn's experience with rapidly changing
technologies such as multimedia management, facilitates the
incorporation of internally or externally developed advanced
technologies.
- ENTERPRISE-CLASS ARCHITECTURE. The technologies incorporated in
Ingenium support integrated management solutions that are
designed to scale from one server to multiple servers while
maintaining centralized administration to support a large number
of concurrent users.
- SCALABLE AUTHORING. Click2learn's ToolBook II authoring products
incorporate an object-oriented core code base and user interface
technology that provide the power and flexibility required by
professional developers, as well as the ease of use needed to
support training professionals who have little or no computer
programming or authoring experience. Using click2learn's
objected-oriented scripting language known as OpenScript, custom
templates and objects can be created in ToolBook II Instructor
and exported to ToolBook II Assistant. Learning applications
created in ToolBook II Assistant can be modified or enhanced in
ToolBook II Instructor. Both products contain a "publish to
click2learn.com" feature to allow content created with the
products to easily be published to the click2learn.com network.
Click2learn's success will depend on its ability to continue to enhance
features and functionality available to the click2learn.com network and in its
current product line and to develop and introduce new products or offer new
services that keep pace with competitive product and service offerings, new
technologies and industry standards, and diverse and changing customer
requirements. Although click2learn believes it is well positioned to do so, it
may not be able to develop and market new enhancements to the click2learn.com
network or future products or services on a timely and cost effective basis. In
the past, click2learn has experienced delays in the development, introduction
and marketing of new products and services, and may experience similar delays in
the future. In addition, click2learn's business could be adversely affected if
it is unable to respond to technological changes in a timely and cost-effective
manner.
PROPRIETARY RIGHTS
Click2learn relies on a combination of copyrights, trademarks, trade
secret laws, restrictions on disclosure and other methods to protect its
intellectual property and trade secrets. Click2learn also enters into
confidentiality agreements with its employees and consultants, and controls
access to its proprietary
11
information. Click2learn is also pursuing patent protection on certain aspects
of the click2learn.com network, however, there can be no assurance that any
patents will be issued or that they will provide click2learn with a competitive
advantage. Furthermore, despite click2learn's precautions, it may be possible
for unauthorized parties to copy or otherwise obtain or use click2learn's
intellectual property or trade secrets without authorization. In addition, other
companies may independently develop equivalent technology or intellectual
property. The misappropriation or infringement of its technology could have a
significant negative impact on click2learn's business. In the future,
click2learn may become involved in litigation related to its own intellectual
property or the intellectual property of others, which could result in
substantial costs and diversion of management and technical resources, either of
which could have a significant negative impact on click2learn's business.
Click2learn also licenses technology from others for use in the
click2learn.com network and in some of its products, and will continue to do so
in the future. In these license agreements, the licensors have generally agreed
to assume all liability for any claim that their technology infringes any patent
or other proprietary right. Nevertheless, any litigation or dispute related to
licensed technology could result in an injunction on click2learn's continued use
of the technology or in royalty obligations for which the licensor has not
agreed to assume liability or for which the licensor does not have adequate
resources to cover the liability it agreed to assume. In such a situation,
click2learn might not be able to obtain a license to the technology at issue or
to other similar technology on commercially reasonable terms or at all. The
inability to obtain or continue to use licensed technology could result in
product delays or reduced functionality of existing products, and could have a
significant negative effect on click2learn's business.
Click2learn uses the following trademarks or registered trademarks in
the conduct of its business: OPENSCRIPT and TOOLBOOK are registered trademarks,
and CLICK2LEARN, CLICK2LEARN.COM, TOOLBOOK II ASSISTANT, TOOLBOOK II INSTRUCTOR,
INGENIUM, NEURON and WEB 3D are trademarks. Applications for registration of
CLICK2LEARN and CLICK2LEARN.COM are currently pending with the U.S. Patent and
Trademark Office as well as in certain foreign countries.
EMPLOYEES
As of December 31, 1999, click2learn had 319 full-time employees,
including 78 in research and development, 65 in sales, marketing and support,
128 in professional services and technical support and 48 in operations and
administration. Click2learn has never had a work stoppage and none of its
employees are represented under collective bargaining agreements. Click2learn
considers its relations with its employees to be good. Click2learn believes that
its future success will depend in part on its continued ability to attract,
integrate, retain and motivate highly qualified sales, technical, professional
services and managerial personnel. Competition for qualified personnel is
intense, and click2learn may not be successful in attracting, integrating,
retaining and motivating a sufficient number of qualified personnel.
ITEM 2. PROPERTIES
Click2learn does not own any of the physical properties where it
conducts its business. Click2learn's primary business is conducted in the
following leased office space:
- Bellevue, Washington: approximately 35,293 square feet of leased
office space, expiring in October 2003, which is click2learn's
principal administrative, sales, marketing and research and
development facility.
- Rochester, New York: approximately 6,392 square feet of leased
office space, expiring in April, 2000, which is the primary
facility for Ingenium research and development and related sales
and administration.
12
- Nashua, New Hampshire: approximately 6,749 square feet of leased
office space, expiring in December, 2000, which is primarily a
research and development facility.
- Needham, Massachusetts: approximately 19,960 square feet of
leased office space, expiring in September 2001, which is
primarily a professional services facility.
- Fort Worth, Texas: approximately 11,500 square feet of leased
office space, expiring in May 2003, which is primarily a
professional services facility.
- Des Plaines, Illinois: approximately 5,005 square feet of leased
office space, expiring in February 2002, which is primarily a
professional services facility.
- Atlanta, Georgia: approximately 3,490 square feet of leased
office space, expiring in June 2002, which is primarily a
professional services facility.
- Richmond, British Columbia: approximately 2,057 square feet of
leased office space, expiring in November 2002, which is
primarily a web development facility.
- Halifax, Nova Scotia: approximately 3,133 square feet of leased
office space, expiring in February 2005, which is primarily a
professional services facility.
- London, England: approximately 2,046 square feet of leased office
space, expiring in June 2004, which is click2learn's European
headquarters and sales office.
Click2learn believes that its current facilities will be adequate to
meet its needs, or that alternate leased space will be available to meet its
needs, for the foreseeable future. Click2learn also has employees in Arizona,
California, Kansas, Louisiana, Maryland, Minnesota, New Jersey, New York, Ohio,
and Virginia.
ITEM 3. LEGAL PROCEEDINGS
From time to time, click2learn is involved in legal proceedings and
litigation arising in the ordinary course of its business. As of March 15, 2000,
click2learn is not a party to any litigation or other legal proceeding that, in
the opinion of management, could have a material adverse effect on its business,
operating results and financial condition, except as described below.
RICHARD B. GRANT V. ASYMETRIX CORPORATION, No. CV-96-3635 HLH, Central
District of California. On May 21, 1996, Richard B. Grant filed a complaint
alleging that click2learn's ToolBook and Multimedia ToolBook products
infringe a patent owned by him and is seeking unspecified damages.
Click2learn has received an opinion from its patent counsel that the products
do not infringe this patent and that the patent is invalid. This action is
still in the discovery stage, and it is not yet possible to assess the
likelihood of its outcome. An adverse outcome in this litigation could have a
material adverse effect on click2learn's business, operating results and
financial condition.
Although management believes that click2learn does not infringe this
patent and that the patent is invalid, and although click2learn intends to
defend this action vigorously, the results of litigation can never be predicted
with certainty. Moreover, the costs of defending the action, regardless of
outcome, could have significant negative effect on click2learn's business.
Litigating this claim could be time-consuming and distract management personnel,
and if click2learn is unsuccessful in its defense, it may be required to develop
non-infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, might not be available on
commercially reasonable terms, or at all. If click2learn was unsuccessful in
its defense of this action, then the inability to develop non-infringing
technology or obtain a license on commercially reasonable terms could have a
material adverse effect on click2learn's business, operating results and
financial condition.
13
PROEDUCATION INTERNATIONAL, INC. V. ASYMETRIX CORP. ET AL, cause No.
1999-32584 District Court, 125th Judicial District, Harris County, Texas. This
lawsuit was filed in July 1999 and alleged that click2learn conspired with
several other named defendants to misappropriate certain intellectual property
of the plaintiff and engaged in other tortuous activities to the detriment of
the plaintiff. Click2learn and the plaintiff settled this lawsuit in December
1999. As a part of such settlement the plaintiff released click2learn and
its subsidiaries from any and all claims arising out of the allegations in the
suit. The terms of the settlement agreement are confidential, but the settlement
did not have a material impact on click2learn's business, operating results or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
A Special Meeting of the Stockholders of click2learn was held on
November 23, 1999 at 110 - 110th Avenue NE, Bellevue, Washington. The meeting
was held pursuant to a Notice of Special Meeting of Stockholders mailed to the
stockholders on November 10, 1999. The only proposal submitted to the
stockholders and approved at the special meeting was a proposal to change the
corporate name from "Asymetrix Learning Systems, Inc." to "click2learn.com,
inc." The number of votes cast for, cast against or abstaining from this
proposal, both in person and by proxy, and broker non-votes was as follows:
Votes For 9,583,190
Votes Against 6,509
Abstaining 4,491
Broker Non-votes 0
14
Item 4a. Executive Officers
The following table sets forth certain information regarding the
executive officers of click21earn as of March 15, 2000:
Name Age Position
- ---- --- --------
Kevin M. Oakes 36 President and Chief Executive Officer
Joseph DiNucci 57 Executive Vice President
Steven Martino 41 Senior Vice President and Chief Operating Officer
John M. Kellum 49 Vice President and Chief Technology Officer
John D. Atherly 41 Vice President, Finance and Administration and Chief Financial Officer
Steven Esau 37 Vice President, General Counsel and Corporate Secretary
Bert Kolde 44 Chairman of the Board and Director
James A. Billmaier 44 Vice Chairman and Director
Mr. Oakes was named President and Chief Executive Officer in
January 2000. Mr. Oakes has served as President since he joined click21earn
in September 1997. Prior to that time, Mr. Oakes was the President of each of
Oakes Interactive, Acorn Associates and TopShelf Multimedia (the Oakes
Companies) which he founded in March 1993, January 1996 and March 1997,
respectively, and each of which click21earn acquired in September 1997. Prior
to forming the Oakes Companies, Mr. Oakes was a Senior Account Representative
for The Minnesota Mutual Life Insurance Company.
Mr. DiNucci has served as Executive Vice President
since July 1999 and as a Director since May 1999. Mr. DiNucci joined
click21earn in October 1998 as Senior Vice President, Worldwide Sales. Prior
to joining click21earn, Mr. DiNucci was the Vice President of Business
Development for E.piphany, Inc., which markets enterprise relationship
management systems, where he recruited the initial sales force and first
customers. Previously, Mr. DiNucci spent five years at Silicon Graphics, a
graphics workstation company, as Vice President of Marketing. Prior to that
Mr. DiNucci was the Senior Vice President and General Manager of MIPS
Computer Systems, where he ran the systems business. Prior to MIPS, Mr.
DiNucci spent seventeen years at Digital Equipment Company, where he held a
variety of positions, including general manager of DEC's workstation
business. Mr. DiNucci is a director of Rand Technologies in Toronto, and
Realax in Frankfurt.
Mr. Martino was named Senior Vice President and Chief
Operating Officer in January 2000. Mr. Martino has held a number of executive
positions with click21earn since he joined click21earn in September 1995. He
has served at various times as Vice President, Marketing; Vice President,
Strategic Relationships; Vice President, Sales, and Vice President and
General Manager, Professional Services. From 1990 to September 1995, Mr.
Martino was with Sun Microsystems, most recently as the Senior Director of
Marketing for SunSoft. Prior to that time, he was a Senior Manager at Price
Waterhouse, and held various sales and marketing positions at Xerox
Corporation.
Mr. Kellum was named Vice President and Chief Technology Officer in
January 2000. Prior to that, he served as Vice President and General Manager,
Online Learning Products since November 1995, and prior to that was Senior
Director of Business Development since he joined click21earn in September
1995. From May 1993 to September 1995, he served as Director of
15
Technology and Business Development at SunSoft. From 1987 to May 1993, he
served as Director of Engineering at Intergraph Corporation, a graphics
workstation company. Prior to that time, he served as Director of Operating
Systems at Fairchild Research Center and as a Senior Research Scientist at
Honeywell Research Center.
Mr. Atherly has served as Vice President, Finance and Administration and
Chief Financial Officer of click21earn since February 1995, and prior to that
was Director of Finance and Operations, Treasurer and Secretary from February
1993 until February 1995. Mr. Atherly held various other positions since he
joined click21earn in June 1990, including controller from February 1991
until February 1993. Prior to joining click21earn, Mr. Atherly was a Finance
and Operations Manager at MicroDisk Services, a software manufacturing
services company.
Mr. Esau has served as General Counsel of click21earn since
October 1995 and also as a Vice President and Secretary of click21earn since
January 1997. Prior to that time, Mr. Esau was the Director of Legal Affairs
from February 1995 until October 1995, and before that he was counsel to
click21earn since joining click21earn in February 1994. From 1988 until
February 1994, he was in private law practice, first with Stoel Rives LLP in
Seattle and then with his own law firm, where he focused on advising software
and technology startup companies.
Mr. Kolde was appointed Chairman of the Board of click21earn in
July 1997, and has been a director since click21earn was founded in December
1984. Mr. Kolde served as Executive Vice President of click21earn from
December 1984 until April 1993, and thereafter as President until November
1994. Mr. Kolde is Vice Chairman of Trail Blazers Inc., Football Northwest
LLC, First & Goal Inc. and Oregon Arena Corporation and a Vice President of
Vulcan Ventures, Inc. Mr. Kolde serves as a director of MetaCreations Corp.
and Beyond.com Corp. Prior to joining click21earn, Mr. Kolde was the Vice
President of Management Reporting of Seafirst Corporation.
Mr. Billmaier was appointed Vice Chairman in January 2000.
Mr. Billmaier is currently President and CEO of Broadband Partners. Mr.
Billmaier served as Chief Executive Officer and a director of click21earn
since July 1995 and served as President from July 1995 until September 1997.
From January 1994 until July 1995 he was the Vice President and General
Manager of the Network Software Products Business of Sun Microsystems, Inc.
From February 1992 until January 1994 he was Vice President of Marketing and
Business Development for SunSoft, Sun Microsystems' software business
division. Prior to joining Sun Microsystems, Mr. Billmaier served as the Vice
President of Software Marketing and Business Development at MIPS
Technologies, Inc., a developer of computer microprocessors, and before that
he was responsible for UNIX workstation products and strategies at Digital
Equipment Corporation.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Prior to the initial public offering of its common stock on June 12,
1998, there was no public market for click2learn's common stock. Since the
initial public offering, click2learn's common stock has been listed on the
Nasdaq National Market, originally under the symbol ASYM and currently under the
symbol CLKS. The following table sets forth the high and low sales prices per
share for each fiscal quarter since the initial public offering.
FISCAL QUARTER HIGH LOW
- --------------------------------------------------------------------------------------
1998
Second Quarter (beginning June 12, 1998) $11.06 $8.88
Third Quarter 11.00 6.00
Fourth Quarter 6.88 2.94
1999
First Quarter $ 6.47 $3.66
Second Quarter 5.47 3.75
Third Quarter 11.63 3.94
Fourth Quarter 13.88 6.38
As of March 15, 2000, there were 229 holders of record of click2learn's
common stock. Because many of the shares of click2learn's stock are held by
brokers and other institutions on behalf of stockholders, click2learn is unable
to estimate the actual number of stockholders represented by these record
holders. Click2learn has never declared or paid any cash dividends on its common
stock. Click2learn currently intends to retain any future earnings to finance
future growth and, thus, does not anticipate paying any cash dividends in the
foreseeable future.
The stock market from time to time has experienced significant price
and volume fluctuations. In addition, the market price of click2learn common
stock has been highly volatile since the initial public offering. Factors such
as fluctuations in click2learn's operating results, announcements of
technological innovations or new products by click2learn or its competitors,
analysts' reports and projections and general market conditions may have a
significant effect on the market price of click2learn's common stock. In the
past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted against
such a company. The institution of such litigation against click2learn could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on click2learn's business,
operating results and financial condition.
RECENT SALES OF UNREGISTERED SECURITIES
On October 6, 1999, click2learn sold 6,000 shares of Series A
Convertible Preferred Stock (the "Series A Stock") to Marshall Capital
Management, Inc., an affiliate of Credit Suisse First Boston, and sold 4,000
shares of Series A Stock to Vulcan Ventures, Inc. for an aggregate purchase
price of $10,000,000 in cash. In connection with the purchase of the Series A
Stock, click2learn also issued Marshall Capital Management, Inc. and Vulcan
Ventures, Inc. warrants for the purchase of 580,646 and 387,096 shares,
respectively, of common stock at an exercise price of $9.30 per share.
Click2learn also issued warrants for the purchase of 30,000 shares of common
stock on the same terms and conditions to Alpine Capital Partners, Inc. as a
finders fee for the transaction. The sale of shares and warrants was made
pursuant to Rule 506 of Regulation D and/or Section 4(2) under the Securities
Act of 1933 as amended ("the Act") and was therefore exempt under the Act. The
shares and warrants were sold only to accredited investors, there was no general
solicitation or advertising in connection with the sale of the shares and
warrants, and click2learn exercised reasonable care to assure that the
purchasers were not
17
underwriters with the meaning of Section 2(11) of the Act. The proceeds will
be used for working capital requirements.
The terms of the Series A Stock provided that it would automatically
convert into shares of common stock (conversion shares) at such time as a
registration statement on Form S-3 covering the resale of the conversion shares
and the shares issuable on exercise of the warrants was declared effective by
the SEC. On November 1, 1999, the Series A Stock held by Marshall Capital
Management, Inc. converted into 774,193 shares of common stock, and the Series A
Stock held by Vulcan Ventures, Inc. converted into 516,120 shares of common
stock. The conversion price at which the Series A Stock was converted into
common stock was $7.75, and was determined accordance with the Series A Stock
terms.
The warrants are exercisable at any time prior to 5:00 p.m. Eastern
time on October 6, 2004 in whole or in part upon the payment of the exercise
price for the number of shares with respect to which the warrants are being
exercised. In addition, the warrants may be exercised on a net exercise base,
pursuant to which the exercise price for an exercise of warrants is paid by the
cancellation of a portion of the shares being exercised having a fair market
value equal to the exercise price for all the shares being exercised. However, a
net exercise may only be made if there is not an effective registration
statement in place on the date of such exercise covering the resale of the
warrant shares.
USE OF PROCEEDS
In connection with click2learn's initial public offering, it registered
for public sale 3,000,000 shares of common stock, all of which were sold by
click2learn. The Registration Statement on Form S-1 (Registration No.
333-49037), as amended, was declared effective by the Securities and Exchange
Commission on June 11, 1998. NationsBanc Montgomery Securities LLC was the
managing underwriter of the IPO. The IPO commenced on June 12, 1998, and
terminated following the sale of all of the securities registered under the
Registration Statement, plus an additional 25,000 shares pursuant to the
exercise of the underwriters' over-allotment option. The common stock was
offered and sold to the public at $11.00 per share, for aggregate consideration
of $33,275,000, of which click2learn received net proceeds of $29,331,000.
From the effective date of the Registration Statement through December
31, 1999, click2learn has incurred an estimated $3,944,000 in expenses for
click2learn's account in connection with the issuance and distribution of the
common stock, including underwriting discounts and commissions of $2,329,250 and
other expenses of $1,614,750. No finders' fees or expenses were paid to or for
the underwriters. None of these payments were made, directly or indirectly, to:
(1) directors or officers of click2learn, or their associates; (2) persons
owning ten percent or more of any class of equity securities of click2learn; or
(3) affiliates of click2learn.
From the effective date of the Registration Statement through December
31, 1999, click2learn has applied the offering proceeds to working capital
requirements. None of these payments were made outside of normal operating
expenses, directly or indirectly, to: (1) directors or officers of click2learn,
or their associates; (2) persons owning ten percent or more of any class of
equity securities of click2learn; or (3) affiliates of click2learn. To date,
click2learn believes that it has used the offering proceeds in a manner
consistent with the use of proceeds described in the Registration Statement.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
1995 1996 1997 1998 1999
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA :
Revenue:
Product revenue:
Online learning products $889 $3,716 $8,036 $ 10,828 $12,897
Other products 16,238 11,165 10,426 4,365 1,309
-------------------------------------------------------------
Total product revenue 17,127 14,881 18,462 15,193 14,206
Services revenue 2,579 3,600 7,243 18,159 20,527
-------------------------------------------------------------
Total revenue 19,706 18,481 25,705 33,352 34,733
-------------------------------------------------------------
Cost of revenue:
Product revenue:
Online learning products 98 198 608 947 882
Other products 3,343 2,946 2,127 1,038 751
-------------------------------------------------------------
Total cost of product revenue 3,441 3,144 2,735 1,985 1,633
Services revenue 1,757 2,549 4,635 12,432 14,444
-------------------------------------------------------------
Total cost of revenue 5,198 5,693 7,370 14,417 16,077
-------------------------------------------------------------
Gross margin 14,508 12,788 18,335 18,935 18,656
-------------------------------------------------------------
Operating expenses:
Research and development 13,610 12,375 8,423 6,113 7,425
Sales and marketing 12,399 15,636 14,704 14,149 15,977
General and administrative 4,182 4,535 4,491 5,767 5,227
Amortization of goodwill - - 119 825 888
Loss on impairment of assets - 2,787 - - -
Restructuring charges 3,318 1,104 - - -
Acquired in-process research and development - - 4,064 - -
-------------------------------------------------------------
Total operating expenses 33,509 36,437 31,801 26,854 29,517
-------------------------------------------------------------
Loss from operations (19,001) (23,649) (13,466) (7,919) (10,861)
Other income(expense) (667) (348) (228) 2,760 856
-------------------------------------------------------------
Net loss $(19,668) $(23,997) $(13,694) $ (5,159) $(10,005)
Accretion of redemption value of redeemable common stock - - - (1,370) -
Non cash dividend associated with preferred stock - - - - (2,754)
-------------------------------------------------------------
Net loss attributable to common stockholders $(19,668) $ (23,997) $(13,694) $ (6,529) $(12,759)
=============================================================
Net loss per share, basic and diluted $(6.36) $ (3.90) $ (2.17) $(.62) $(.87)
=============================================================
Weighted average common shares outstanding, basic and diluted 3,093 6,158 6,306 10,599 14,626
=============================================================
BALANCE SHEET DATA:
Cash and cash equivalents $3,583 $3,788 $2,541 $21,713 $19,481
Working capital (deficit) 25,373 9,569 (66) 24,913 27,818
Total assets 35,673 19,122 22,169 43,622 49,406
Long-term obligations 70 24 425 268 92
Stockholders' equity 29,862 12,097 8,958 37,010 41,355
(a) Historical information was restated to reflect the combination of
click2learn and Meliora in 1998, accounted for as a pooling-of-interests.
(b) Historical results of operations are not necessarily indicative of future
results. Refer to the "Factors that May Affect Future Results of
Operations" under Item 7: "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for the discussion of
factors which may impact future results.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CLICK2LEARN SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL DATA" AND CLICK2LEARN'S CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. THIS REPORT
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
CLICK2LEARN'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATIONS."
OVERVIEW
Click2learn was originally incorporated as Asymetrix Corporation in
1984 by Paul Allen, the co-founder of Microsoft Corporation. Prior to
focusing on the e-learning market, click2learn developed and marketed a wide
range of software products. As a result of click2learn's decision to focus on
e-learning, between October 1996 and July 1998, click2learn divested several
product lines and made a number of acquisitions to strengthen its position in
the e-learning market. Click2learn focused its research and development
efforts on products for e-learning and began developing a professional
services organization through internal growth and acquisition. Today
click2learn provides full service e-learning solutions to businesses,
government and educational institutions throughout the world.
In July 1999, click2learn announced the development of the
click2learn.com network, a powerful and full-featured outsourced platform for
e-learning. The click2learn.com network gives organizations instant access to
thousands of leading third party courses and an ability to distribute their own
custom courses through the use of click2learn's browser-based authoring and
publishing tools. The click2learn.com network supports custom-configured
e-learning sites, delivered through the application service provider (ASP)
model, providing organizations secure sites for proprietary internal training.
The click2learn.com network supports e-commerce transactions, allowing customers
to extend their value proposition by enabling electronic storefronts or partner
sites to sell their training. In addition, browser-based learning management
tools are provided to manage the training at all custom-configured sites.
Learner access to the network can be attained through corporate e-learning
sites, co-branded Internet portals or directly through the click2learn.com
e-learning portal.
In addition to an outsourced solution, click2learn
provides internal e-learning implementations. The click2learn enterprise
e-learning initiatives include the Ingenium learning management solution, and
e-learning authoring products, featuring the ToolBook II Instructor and
ToolBook II Assistant authoring tools. Each solution is augmented by one of
the industry's largest professional services groups, including custom content
development, strategic consulting and integration services.
Revenues are derived from four categories: software licenses, course
sales, professional services and click2learn.com network site fees and
royalties. Revenue from software licenses generally are recognized upon
shipment of products from click2learn's warehouse. Products that fall under
this category are the Ingenium learning management system and the ToolBook II
line of authoring products. Revenues from course sales generally are spread
over the life of the contract for course usage. For example, if a 12-month
contract for a bundle of courses is bought for $100,000, this revenue will be
recognized evenly over the 12 months. Professional service revenues are
generally associated with fixed price contracts or time and material
contracts. For fixed price contracts, revenues are recognized based on the
percentage-of-completion method. Revenues from time and material contracts
are earned as the work is performed based on the agreed upon rates.
Click2learn.com network site fees or royalties are determined by contracts
with lengths of 1 to 3 years and vary depending on the functionality provided
or the commerce conducted through the site. Functionality fees are generally
recognized evenly over the life of the contract, and royalties are
recognized as earned.
20
Cost of software license or product revenue includes costs of media,
manuals and distribution costs. Gross margin from click2learn's online learning
products is generally higher than that of its other products because these
products are typically sold by click2learn's direct sales force, as compared
with other products sold through indirect channels, such as OEMs and resellers.
Costs of content revenue consist of royalties paid to the developers of the
courses. Costs of services revenue consists primarily of personnel-related costs
in providing consulting, maintenance and training to customers. Gross margin on
product revenue is higher than gross margin on services revenue, reflecting the
lower materials, packaging and other costs of software compared with the
relatively high personnel costs associated with providing professional services.
Click2learn incurred net losses of $13.7 million, $5.2 million and
$10.0 million in 1997, 1998 and 1999 respectively, and has yet to achieve
operating income or net income under its new online learning business model.
Click2learn's limited operating history under this new business model and the
emerging nature of the market for e-learning, among other factors, make
prediction of click2learn's future operating results difficult. Despite the
establishment of the click2learn.com network, which is based on an unproven
business model, we expect to continue to derive the majority of our revenues
from our enterprise e-learning products and services for at least the next 12
months.
Although click2learn has experienced revenue growth in certain recent
periods and although the financial statements herein also reflect revenue growth
in certain periods there can be no assurance that such growth rates are
sustainable or indicative of actual growth rates that click2learn may experience
and, therefore, they should not be considered indicative of future operating
results. In addition, click2learn intends to continue to invest in the
click2learn.com network, its professional services business, and research and
development, among other things. As a result, click2learn expects to continue to
incur annual operating losses at least through 2000. There can be no assurance
that click2learn will achieve profitability or, if profitability is achieved,
that it will be sustained.
RESULTS OF OPERATIONS
The following table presents click2learn's results of operations as a
percentage of total revenue for the periods indicated.
STATEMENT OF OPERATIONS DATA: 1997 1998 1999
--------- --------- ---------
Revenue:
Product revenue:
Online learning products 31.3% 32.5% 37.1%
Other products 40.5 13.1 3.8
--------- --------- ---------
Total product revenue 71.8 45.6 40.9
Services revenue 28.2 54.4 59.1
--------- --------- ---------
Total revenue 100.0 100.0 100.0
--------- --------- ---------
Cost of revenue:
Product revenue:
Online learning products 2.4 2.8 2.5
Other products 8.3 3.1 2.2
--------- --------- ---------
Total cost of product revenue 10.7 6.0 4.7
Services revenue 18.0 37.3 41.6
--------- --------- ---------
Total cost of revenue 28.7 43.2 46.3
--------- --------- ---------
Gross margin 71.3 56.8 53.7
--------- --------- ---------
Operating expenses:
Research and development 32.8 18.3 21.4
Sales and marketing 57.1 42.4 46.0
General and administrative 17.5 17.3 15.0
Amortization of goodwill 0.5 2.5 2.6
Loss on impairment of assets - - -
Restructuring charges - - -
21
Acquired in-process research and development 15.8 - -
--------- --------- ---------
Total operating expenses 123.7 80.5 85.0
--------- --------- ---------
Loss from operations (52.4) (23.7) (31.3)
--------- --------- ---------
Other income (expense):
Other income (expense) (0.1) (0.1) 0.1
Interest income from principal stockholder 1.7 - -
Other interest income, net - 1.8 2.4
Equity in income (losses) from Infomodelers, Inc. (2.5) 6.5 -
--------- --------- ---------
Total other income (expense) (0.9) 8.2 2.5
--------- --------- ---------
Net loss (53.3)% (15.5)% (28.8)%
========= ========= =========
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE. Total revenue increased 4% from $33.4 million in 1998 to $34.7
million in 1999. This increase was due primarily to growing demand for
click2learn's solutions offset by a 70% decline in non e-learning, other
product revenues. Future growth in revenues, if any, is expected to originate
primarily from the click2learn.com network initiative launched during the
fourth quarter of 1999 and continued enhancements to existing enterprise
e-learning solutions.
Online learning product revenue increased 19% from $10.8 million in
1998 to $12.9 million in 1999. Offsetting this growth, other product revenue
decreased 70% from $4.4 million in 1998 to $1.3 million in 1999. Other product
revenue consists of revenue from click2learn's products which were not targeted
at the e-learning market, all of which have been discontinued. Total product
revenue decreased 6% from $15.2 million in 1998 to $14.2 million in 1999.
Services revenue increased 13% from $18.2 million in 1998 to $20.5
million in 1999. Click2learn has experienced an increased number of professional
services engagements which are billed on a fixed price basis and intends to
pursue such engagements in the future. See "Factors That May Affect Future
Operating Results-Customer Requirements and Fixed Price Engagements."
COST OF REVENUE. Total cost of revenue increased 12% from $14.4 million
in 1998 to $16.1 million in 1999. Total cost of product revenue decreased 18%
from $2.0 million in 1998 to $1.6 million in 1999. Cost of online learning
product revenue decreased 7% from $947,000 in 1998 to $882,000 in 1999, due
primarily to increased sales of click2learn's higher margin online learning
management system products. Cost of other product revenue decreased 28% from
$1.0 million in 1998 to $751,000 in 1999. This decrease was due primarily to
decreased sales of click2learn's other products. Total product gross margin
increased as a percentage of product revenue from 87% in 1998 to 89% in 1999.
Cost of services revenue increased 16% from $12.4 million in 1998 to
$14.4 million in 1999. This increase was due primarily to increased
professional services projects in 1999. Services gross margin as a percentage
of services revenue decreased from 32% in 1998 to 30% in 1999 due to lower
services personnel utilization in the first half of 1999. Click2learn
anticipates that cost of services revenue will increase in absolute dollars
as it adds additional professional services personnel. To the extent services
revenue increases relative to product sales revenue as a percentage of total
revenue, overall gross margins would decline.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses include
expenses associated with the development of new products and new product
versions and consist primarily of salaries, depreciation of development
equipment, supplies and overhead allocations. Research and development
expenses increased 21% from $6.1 million in 1998 to $7.4 million in 1999.
This increase was due to incremental spending to develop the click2learn.com
network technology platform. Research and development expenses as a
percentage of total revenue increased from 18% in 1998 to 21% in 1999.
Click2learn expects research and development expenses to increase in absolute
dollars in the future.
22
SALES AND MARKETING. Sales and marketing expenses consist primarily of
sales and marketing personnel costs, including sales commissions, travel,
advertising, public relations, seminars, trade shows and other marketing
literature and overhead allocations. Sales and marketing expenses increased 13%
from $14.1 million in 1998 to $16.0 million in 1999. Sales and marketing
expenses as a percentage of total revenue increased from 42% in 1998 to 46% in
1999. The increases were due primarily to marketing expenses relating to the
launch of the click2learn.com network during the fourth quarter of 1999 and an
increase in the number of field sales representatives. Click2learn expects that
sales and marketing expenses will increase in absolute dollars in the future as
click2learn continues to grow its sales and marketing efforts in the e-learning
market.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other personnel-related expenses for click2learn's
administrative, executive and finance personnel as well as outside legal and
audit costs. General and administrative expenses decreased 9% from $5.8 million
in 1998 to $5.2 million in 1999. This decrease was due primarily to increased
synergies at acquired companies. General and administrative expenses as a
percentage of total revenue decreased from 17% in 1998 to 15% in 1999.
Click2learn expects that general and administrative expenses will increase in
absolute dollars in the future as click2learn pursues the e-learning market.
AMORTIZATION OF GOODWILL. Amortization of goodwill expense relates to
the amortization of excess purchase price over the fair value of identifiable
tangible and intangible assets acquired in acquisitions recorded using the
purchase method of accounting. Amortization of goodwill increased from $825,000
in 1998 to $888,000 in 1999 due to the acquisition of Pixelmedia Visual
Communications, Inc. ("Pixelmedia"), an e-learning developer located in
Richmond, British Columbia, in July 1999 and as a result of a full year's
amortization being taken on acquisitions made in 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Click2learn recognized no
cost of acquired in-process research and development in 1998 or 1999.
OTHER INCOME (EXPENSE). Interest income on cash and cash equivalents in
1998 was $609,000 as compared to $855,000 in 1999. Equity in income from
Infomodelers was $2.2 million in 1998 and $0 in 1999. Equity in income
(losses) from Infomodelers in 1998 resulted from the sale by Infomodelers of
substantially all of its assets to Visio Corporation. Because click2learn
sold substantially all of its interest in Infomodelers in March 1998,
click2learn did not record equity in income (losses) from Infomodelers in
1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Total revenue increased 30% from $25.7 million in 1997 to
$33.4 million in 1998. Online learning product revenue increased 35% from
$8.0 million in 1997 to $10.8 million in 1998. This increase was due
primarily to increased demand for click2learn's online learning products as a
result of click2learn's focus on the online learning market. Other product
revenue decreased 58% from $10.4 million in 1997 to $4.4 million in 1998.
Other product revenue consists of revenue from click2learn's products which
are not targeted at the online learning market. These products include
SuperCede products (prior to its spin-off in September 1997), 3D F/X, Digital
Video Producer, ToolBook, Multimedia ToolBook, IconAuthor, CBT Express, Web
3D and other non-online learning products. Included in other product revenue
in 1997 was approximately $2.0 million from sales of SuperCede products.
Total product revenue decreased 21% from $18.5 million in 1997 to $15.2
million in 1998, reflecting the decrease in other product revenue. Services
revenue increased 151% from $7.2 million 1997 to $18.2 million in 1998 due
primarily to the expansion of click2learn's professional services business.
23
COST OF REVENUE. Total cost of revenue increased 96% from $7.4 million
in 1997 to $14.4 million in 1998. Total cost of product revenue decreased 27%
from $2.7 million in 1997 to $2.0 million 1998. Cost of online learning product
revenue increased 56% from $608,000 in 1997 to $947,000 in 1998, due primarily
to increased sales of click2learn's online learning products. Cost of other
product revenue decreased 51% from $2.1 million in 1997 to $1.0 million in 1998.
This decrease was due primarily to decreased sales of click2learn's other
products. Cost of other product revenue attributable to sales of SuperCede
products was $273,000 in 1997. Total product gross margin as a percentage of
product revenue increased to 87% in 1998 from 85% in 1997.
Cost of services revenue increased 168% from $4.6 million in 1997 to
$12.4 million 1998. This increase was due primarily to increased professional
service projects in 1998. Services gross margin as a percentage of services
revenue decreased from 36% in 1997 to 32% in 1998 due to lower services
personnel utilization.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
27% from $8.4 million in 1997 to $6.1 million in 1998. This decrease was due
primarily to the spin off of SuperCede. Research and development expenses as a
percentage of total revenue decreased from 33% in 1997 to 18% in 1998 as a
result of the spin-off of SuperCede and higher total revenues. Research and
development expenses related to SuperCede were $2.6 million in 1997.
SALES AND MARKETING. Sales and marketing expenses decreased 4% from
$14.7 million in 1997 to $14.1 million in 1998. Sales and marketing expenses as
a percentage of total revenue decreased from 57% in 1997 to 42% in 1998. The
decreases were due primarily to sales and marketing expenses relating to
SuperCede products in 1997. Sales and marketing expenses related to SuperCede
were $2.5 million in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 28% from $4.5 million in 1997 to $5.8 million in 1998. This increase
was due primarily to increased overhead due to click2learn's increased size as
well as costs of being a public company. General and administrative expenses as
a percentage of total revenue were unchanged at 17%. General and administrative
expenses related to SuperCede were $653,000 in 1997.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased from
$119,000 in 1997 to $825,000 in 1998. Click2learn began acquiring other
companies in the latter half of 1997, therefore, the increase is due to a full
year of amortization reflected in 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Click2learn recognized no
cost of acquired in-process research and development in 1998. In 1997,
click2learn recognized the cost of acquired in-process research and
development totaling $4.1 million. This amount represented in-process
research and development acquired by click2learn in connection with Aimtech
Corporation ("Aimtech") of $3.6 million and $484,000 resulting from one other
acquisition.
OTHER INCOME (EXPENSE). Interest income from the principal
stockholder was $436,000 and $0 in 1997 and 1998, respectively, and was
related to interest payments to click2learn on a note receivable from
click2learn's principal stockholder. This note receivable was repaid in full
in October 1997. Other interest income, net was $8,000 and $609,000 in 1997
and 1998, respectively. Interest income in 1998 was derived primarily from
interest earned on proceeds from click2learn's initial public offering.
Equity in income (losses) from Infomodelers was $(634,000) and $2.2 million
in 1997 and 1998, respectively, representing click2learn's equity in the net
income (losses) from Infomodelers in such periods. Equity in income (losses)
from Infomodelers in 1998 resulted from the sale by Infomodelers of
substantially all of its assets to Visio Corporation.
24
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, click2learn had cash and cash equivalents
totaling $19.5 million, a decrease of $2.2 million from December 31, 1998. The
decrease in cash was due primarily to uses of cash for operating expenses. At
December 31, 1999, the principal source of liquidity for click2learn was $27.8
million of working capital.
Click2learn has had negative cash flows from operating activities to
date. Net cash used by operating activities was $7.4 million, $10.7 million,
and $13.1 million in 1997, 1998 and 1999, respectively. In 1997, net cash
used in operating activities was primarily the result of net losses, which
include a non-cash expense of $4.1 million for acquired in-process research
and development. Net cash used in operating activities in 1998 and 1999 was
also primarily due to net losses.
Net cash provided by (used in) investing activities was $(713,000),
$1.2 million and $(2.5) million in 1997, 1998 and 1999, respectively. Net cash
used in investing activities in 1997 was primarily the result of capital
expenditures and acquisition-related costs. Net cash provided by investing
activities in 1998 was primarily due to proceeds received from the sale of
click2learn's investment in Infomodelers. In 1999, net cash used in investing
activities was primarily the result of capital expenditures for computer
equipment, purchased software, office equipment, furniture and fixtures. As of
December 31, 1999, click2learn had no material commitments for capital
expenditures and click2learn also had commitments under non-cancelable
operating leases with terms in excess of one year of $5.4 million through
2003.
Cash provided by financing activities was $7.1 million, $28.8 million
and $13.5 million in 1997, 1998 and 1999 respectively, resulting primarily
from payments received on the note receivable from principal stockholder in
1997, click2learn's initial public offering in 1998 and private placements of
common and preferred stock in 1999 with Go2Net, Marshall Capital Management
and Vulcan Ventures. Cash used for payments on long-term debt was $398,000,
$592,000, and $120,000 in 1997, 1998 and 1999, respectively.
Click2learn anticipates that its cash and cash equivalents will be
sufficient to meet its working capital needs and capital expenditures for at
least the next 12 months. Click2learn's long-term liquidity will be affected by
numerous factors, including acquisitions of businesses or technologies, demand
for click2learn's online learning products and services, the extent to which
such online learning products and services achieve market acceptance, the timing
and extent to which click2learn invests in new technology, the expenses of sales
and marketing and new product development, the extent to which competitors are
successful in developing their own products and services and increasing their
own market share, the level and timing of revenues and other factors. In
addition, click2learn from time to time evaluates potential acquisitions of
businesses, products or technologies that complement click2learn's business. To
the extent that resources are insufficient to fund click2learn's activities,
click2learn may need to raise additional funds. Such additional funding, if
needed, may not be available on terms attractive to click2learn, or at all. If
adequate funds are not available on acceptable terms, click2learn may be unable
to expand its business, develop or enhance its products and services, take
advantage of future opportunities or respond to competitive pressures, any of
which could have a material adverse effect on click2learn's business, operating
results and financial condition.
YEAR 2000 COMPLIANCE
25
Click2learn spent approximately $80,000 in connection with
evaluating and remediating year 2000 issues. Such expenditures represented
approximately 6% of click2learn's total information technology budget. To
date, click2learn has not experienced any material year 2000 related problems
with its software or third party software or computer systems.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
CLICK2LEARN HAS A LIMITED OPERATING HISTORY IN ITS CURRENT MARKETS.
Until early 1995, click2learn was engaged in various research and development
activities and in developing and marketing multimedia authoring products,
database and Internet tools, web publishing products and other ancillary
products, most of which click2learn does not currently sell. Starting in 1995,
click2learn began to focus its development and marketing efforts on products and
services for the enterprise learning market. Click2learn announced the
click2learn.com network in July 1999, and has not previously hosted, operated
and managed e-commerce web sites. Accordingly, click2learn has a limited
operating history on which to evaluate its current business and prospects.
Risks click2learn faces under its new business models include, but are
not limited to, the demand for technology-based training and e-learning
applications, demand for e-learning products and services, broad and timely
acceptance of the click2learn.com network, competition and those other risks
described in this section. To address these risks, click2learn must, among other
things:
- successfully introduce and build the click2learn.com e-learning
network and attract user traffic to the e-learning network;
- establish corporate e-learning sites for its customers and
generate revenues from such customers;
- continue to establish relationships with leading providers of
learning content to sell that content through the click2learn.com
network;
- continue to establish co-branded e-learning sites for Internet
portals and corporate customers for the use of click2learn.com as
the "learning channel" for their web sites;
26
- respond to competitive developments;
- attract, integrate, retain and motivate qualified personnel;
- successfully introduce new products and services; and
- address and establish new technologies and technology standards.
Although click2learn intends to derive revenue from the click2learn.com
network, the pricing, expense and revenue model for the click2learn.com network
has not been broadly tested in the marketplace. If the pricing, expense and
revenue model is not acceptable to users, customers, content providers or
advertisers, the click2learn.com network may not be commercially successful.
This would seriously harm click2learn's business, particularly if it experiences
a decline in the growth of revenues from its enterprise e-learning products and
services. Click2learn expects to continue to derive the majority of its revenues
over at least the next 12 months from its enterprise e-learning products, rather
than the click2learn.com network.
CLICK2LEARN'S OPERATING RESULTS COULD VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER. Click2learn's quarterly operating results have varied significantly
in the past and are expected to fluctuate significantly in the future as a
result of a variety of factors, many of which are outside click2learn's control.
Factors that may adversely affect click2learn's quarterly operating results
include:
- the demand for technology-based training and demand for
e-learning solutions;
- the size and timing of product orders and the timing and
execution of professional services engagements;
- the mix of revenue from products and services;
- the mix of products sold;
- the ability to meet client project milestones;
- market acceptance of click2learn's or its competitors' products
and services;
- click2learn's ability to develop and market new or enhanced
products and services in a timely manner and the market
acceptance of these products and services;
- timing of revenues and expenses relating to the click2learn.com
network; and
- the timing of revenue recognition.
Click2learn's future revenues are difficult to predict and click2learn
may not be able to adjust spending in response to revenue shortfalls.
Click2learn's limited operating history under its current business model,
including the click2learn.com network, possible acquisitions and the emerging
nature of the market make prediction of future revenue and expenses difficult.
Expense levels are based, in part, on expectations as to future revenue and to a
large extent are fixed in the short term. If click2learn is not able to predict
future revenue accurately, it may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall.
CLICK2LEARN IS IN A DEVELOPING MARKET. The e-learning market is in the
early stages of development. Corporate training and education has historically
been conducted primarily through classroom instruction and has traditionally
been performed by a company's internal personnel. Many companies have invested
heavily in their current training solutions. Although technology-based training
applications have been available for several years, they currently account for
only a small portion of the overall training market. Accordingly, the future
success of click2learn will depend upon, among other factors, the extent to
which companies adopt technology-based solutions and use the Internet in
connection with their training activities and the extent to which companies
utilize the services or purchase products of third-party providers, and more
particularly whether companies adopt solutions delivered over the Internet on an
application service provider basis, including private e-learning sites hosted by
third parties such as those on the click2learn.com network. Many companies that
have already invested substantial resources in traditional methods of corporate
training may be reluctant to adopt a new strategy that may limit or compete with
their existing investments. Even if companies implement technology-based
training or e-learning solutions, they may still choose to design, develop,
deliver or manage all or a part of their education and training internally. If
technology-based learning and the use of the Internet for learning do not become
widespread, or if companies do not use the products and services
27
of third parties to develop, deliver or manage their training needs, then
click2learn's products and services, including the click2learn.com network, may
not achieve commercial success.
CLICK2LEARN DEPENDS ON INCREASING USE OF THE INTERNET. The
click2learn.com network depends on the increased acceptance and use of the
Internet, both generally and as a means for the purchase and delivery of
learning content. Rapid growth in the use of the Internet is a recent
phenomenon. As a result, acceptance and use may not continue to develop at
historical rates and a sufficiently broad base of business customers or
consumers may not adopt or continue to use the Internet, particularly for
training and education. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and there exist few proven services and products.
Click2learn's business would be seriously harmed if:
- use of the Internet and other online services does not continue
to increase or increases more slowly than expected;
- the technology underlying the Internet and other online services
does not effectively support any expansion that may occur;
- the Internet and other online services do not create a viable
commercial marketplace, reducing the need for our services;
- the necessary communication and computer network technology for
the Internet does not continue to develop; or
- governmental regulation of the Internet increases.
INTERNET SECURITY RISKS. A significant barrier to the widespread use
of the Internet for applications such as training and education is the secure
transmission of confidential information over public networks. Advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of
click2learn's security systems or those of other web sites. If any
well-publicized security breach were to occur, the Internet may not become
widely accepted for commerce and communications. Anyone who circumvents
click2learn's security measures could misappropriate proprietary information
or cause interruptions in our services or operations.
The Internet is a public network, and data is sent over this network
from many sources. In the past, computer viruses, software programs that disable
or impair computers, have been distributed and have rapidly spread over the
Internet. Computer viruses could be introduced into our systems or those of our
customers or content providers, which could disrupt the click2learn.com network
or make it inaccessible to users. We may be required to expend significant
capital and other resources to protect against the threat of security breaches
or to alleviate problems caused by breaches. To the extent that our activities
may involve the storage and transmission of proprietary information, such as
personal information or credit card numbers, security breaches could expose us
to a risk of loss or litigation and possible liability.
POSSIBILITY OF PERFORMANCE PROBLEMS. The click2learn.com network has
only been recently introduced. If the volume of traffic or content on the
click2learn.com network increases, the network may experience slower response
times or other problems. In addition, both click2learn and users depend on
Internet service providers, telecommunications companies and the efficient
operation of their computer networks and other computer equipment for the
operation of and access to the click2learn.com network. Each of these has
experienced significant outages in the past and could experience outages,
delays and other difficulties due to system failures unrelated to
click2learn's systems. Any delays in response time or performance problems
could cause users of the click2learn.com network to perceive this service as
not functioning properly and therefore not use the click2learn.com network
for their training needs.
COMPETITION. The e-learning market is highly fragmented and
competitive, rapidly evolving and subject to rapid technological change, with no
single competitor accounting for a dominant market share. Because of the lack of
significant barriers to entry in its market, click2learn expects that new
competitors
28
will enter this market in the future. Click2learn's competitors vary in size and
scope and the breadth of products and services offered. Click2learn faces
competition from:
- other web sites focused on learning and education, such as
headlight.com, fatbrain.com and smartforce.com, with respect to
the click2learn.com network, as well developers or resellers of
training content who make their content available over the
Internet;
- developers of multimedia authoring tools with respect to its
authoring and authoring support products;
- other developers of enterprise learning management systems, such
as Saba and Docent, as well as publishers of e-learning courses
that sell management systems with their titles with respect to
its learning management systems;
- many small, regional e-learning and technology-based training
services businesses; and
- large professional consulting firms and in-house training
departments, with respect to all aspects of its enterprise
learning solutions.
Several of click2learn's current and potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources and therefore may be able to respond more quickly to new or
changing opportunities, technologies, standards and customer requirements. Many
of these competitors also have broader and more established distribution
channels that may be used to establish strategic alliances or deliver competing
products or services directly to customers. If these competitors were to bundle
competing products or services with the products and services of their strategic
partners, the demand for click2learn's products and services might be
substantially reduced and its ability to market and sell products and services
successfully may be substantially diminished. In addition, the existence or
announcement of strategic relationships involving click2learn's competitors
could adversely affect its ability to attract and retain customers.
DEPENDENCE ON THIRD PARTY RELATIONSHIPS. Click2learn must pursue
distribution relationships with Internet web sites in an effort to attract
traffic to the click2learn.com network, including the click2learn.com e-learning
portal. There is intense competition for placements on certain of these sites,
and click2learn may not be able to enter into relationships with certain of
these sites on commercially reasonable terms, or at all. Even if click2learn
enters into distribution relationships with these web sites, they themselves may
not attract significant numbers of users to the click2learn.com network.
Therefore, click2learn may not receive significant additional users from these
relationships. Moreover, click2learn may have to pay fees to establish certain
of these relationships or issue securities to companies that operate these web
sites, even if click2learn.com does not receive additional users as a result.
Click2learn uses licensed third party technology in its products and in
the click2learn.com network and it licenses content from third parties for the
click2learn.com network. Click2learn may not be able to continue to license
technology or content from third parties. Future licenses to this technology and
content may not be available to click2learn on commercially reasonable terms or
at all. The loss of or inability to obtain or maintain any of these technology
or content licenses could result in delays in introduction of new products or
could force click2learn to discontinue permitting access to portions of the
click2learn.com network until equivalent technology or content, if available, is
identified, licensed and integrated. Furthermore, although it has taken steps to
protect itself in the relevant license agreements, click2learn may be subjected
to legal claims related to licensed technology or content based on defamation,
negligence, product liability, infringement of intellectual property or other
legal theories.
CUSTOMER REQUIREMENTS AND FIXED PRICE ENGAGEMENTS. Click2learn could
face liability from customers if it does not meet their expectations. Many of
click2learn's professional services engagements require it to develop e-learning
applications to suit unique customer requirements. The failure or inability to
meet a customer's expectations or requirements in the performance of services
could injure click2learn's business reputation or result in a claim for damages,
regardless of click2learn's responsibility for the failure. Click2learn attempts
to limit contractually its liability for damages arising from product defects,
negligent acts, errors, mistakes or omissions in rendering professional
services. However, these contractual protections are not always obtained and may
not be enforced or otherwise
29
protect click2learn from liability for damages. Click2learn's insurance may not
be sufficient to cover one or more claims.
Many professional services projects are performed on a fixed-price
basis rather than on a time and materials basis. If click2learn does not
accurately predict the costs of these projects, it could incur unexpected costs.
If click2learn does not complete fixed-price engagements within budget, on time
and to clients' satisfaction, click2learn would bear the risk of cost overruns.
SOFTWARE DEFECTS. Software products frequently contain errors or
failures, especially when first introduced or when new versions are released.
Click2learn has in the past discovered errors in its products and those of third
parties after their initial release. Because click2learn's enterprise e-learning
products are complex products targeted for enterprise customers in an emerging
market, customers and potential customers may have a greater sensitivity to
product defects than the market for software products generally. These companies
may also have more sensitivity to product integration and interoperability of
commercial shipments. Product defects could result in loss of revenue or delay
in market acceptance, diversion of development resources, damage to our
reputation, or increased service and warranty costs.
KEY PERSONNEL. Click2learn's future success depends on the performance
of the senior management team and other key employees, and on its ability to
attract, integrate, motivate and retain additional highly skilled technical,
sales and marketing, and professional services personnel. There is intense
competition for these personnel. Click2learn does not have employment agreements
with most of its executives or other key employees. In addition, click2learn
does not maintain key person life insurance for any officers or key employees.
INTELLECTUAL PROPERTY. Despite click2learn's precautions, it may be
possible for a third party to copy or otherwise obtain and use its intellectual
property or trade secrets without authorization. In addition, others could
independently develop substantially equivalent intellectual property. Litigation
may be necessary in the future to enforce click2learn's intellectual property
rights, to protect trade secrets or to determine the validity and scope of the
proprietary rights of others. This litigation could result in substantial costs
and diversion of management and technical resources.
From time to time click2learn has received, and may in the future
receive, notice of claims of infringement of other parties' proprietary rights.
Infringement or other claims could be asserted or prosecuted against click2learn
in the future. Any such claims, with or without merit, could be time-consuming,
and result in costly litigation and diversion of technical and management
personnel. They could also cause product shipment delays or require click2learn
to develop non-infringing technology or enter into royalty or licensing
agreements. These royalty or licensing agreements, if required, may not be
available on reasonable terms, or at all.
GENERAL ECONOMIC CONDITIONS. Click2learn's revenues are subject to
fluctuation as a result of general economic conditions. A significant portion of
click2learn's revenues are derived from the sale of products and services to
Fortune 1000 companies or government agencies, which historically have adjusted
their expenditures for education and training during economic downturns. Should
the economy weaken in any future period, these organizations may not increase or
may reduce their expenditures on education and training, which could have an
adverse effect on click2learn's business.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Click2learn holds its assets primarily in cash and cash equivalents,
such as short-term marketable debt securities, money market funds and other cash
equivalents. Click2learn minimizes its risk by investing in financial
instruments with a maturity of typically three months or less. Click2learn does
not use derivative financial instruments.
30
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS, SUPPLEMENTARY DATA, AND FINANCIAL STATEMENT
SCHEDULE
Page
-------
CONSOLIDATED FINANCIAL STATEMENTS:
Independent Auditors' Report................................................................... 32
Consolidated Balance Sheets as of December 31, 1998 and 1999................................... 33
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998, and 1999.............................................................. 34
Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1997, 1998, and 1999.............................................................. 35
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998, and 1999.............................................................. 36
Notes to Consolidated Financial Statements..................................................... 37
SUPPLEMENTARY DATA SCHEDULE (UNAUDITED):
Quarterly Results (Note 15 of Notes to Consolidated Financial Statements)...................... 52
FINANCIAL STATEMENT SCHEDULE:
Independent Auditors' Report on Financial Statement Schedule................................... 58
Schedule II. Valuation and Qualifying Accounts................................................ 59
31
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
click2learn.com, inc.;
We have audited the accompanying consolidated balance sheets of click2learn.com,
inc. and subsidiaries as of December 31, 1998 and 1999, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
click2learn.com, inc. and subsidiaries as of December 31, 1998 and 1999, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
Seattle, Washington
January 26, 2000
32
CLICK2LEARN.COM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
DECEMBER 31,
-------------------------------------
1998 1999
--------------- ------------------
ASSETS
Current assets:
Cash and cash equivalents $21,713 $19,481
Accounts receivable, net of allowance for returns and
doubtful accounts of $1,148 in 1998 and $945 in 1999 7,917 13,717
Inventories 370 203
Prepaid royalties and licenses 66 95
Receivables from related companies 193 9
Other current assets 998 2,272
--------------- ------------------
Total current assets 31,257 35,777
Property and equipment, net 2,320 2,583
Goodwill and other intangible assets, net 9,917 10,475
Other assets 128 571
--------------- ------------------
Total assets $43,622 $49,406
=============== ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,494 $2,146
Accrued liabilities 1,637 2,382
Deferred revenue 1,401 1,687
Customer prepayments 281 591
Other current liabilities 1,531 1,153
--------------- ------------------
Total current liabilities 6,344 7,959
Other noncurrent liabilities 268 92
--------------- ------------------
Total liabilities 6,612 8,051
--------------- ------------------
Stockholders' equity:
Preferred stock, $0.01 par value; authorized 2,000,000 shares; issued and
outstanding no shares in 1998 and in 1999 - -
Common stock, $0.01 par value; authorized 40,000,000 shares, issued and
outstanding 13,948,018 shares in 1998 and 16,115,339 shares in 1999 140 162
Additional paid-in capital 203,249 217,521
Accumulated deficit (165,522) (175,527)
Deferred stock compensation (580) (484)
Accumulated other comprehensive loss (277) (317)
--------------- ------------------
Total stockholders' equity 37,010 41,355
=============== ==================
Total liabilities and stockholders' equity $43,622 $49,406
=============== ==================
See accompanying notes to Consolidated Financial Statements
33
CLICK2LEARN.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1997 1998 1999
--------------- --------------- ----------------
Revenue:
Product revenue:
Online learning products $8,036 $ 10,828 $12,897
Other products 10,426 4,365 1,309
--------------- --------------- ----------------
Total product revenue 18,462 15,193 14,206
Services revenue 7,243 18,159 20,527
--------------- --------------- ----------------
Total revenue 25,705 33,352 34,733
--------------- --------------- ----------------
Cost of revenue:
Product revenue:
Online learning products 608 947 882
Other products 2,127 1,038 751
--------------- --------------- ----------------
Total cost of product revenue 2,735 1,985 1,633
Services revenue 4,635 12,432 14,444
--------------- --------------- ----------------
Total cost of revenue 7,370 14,417 16,077
--------------- --------------- ----------------
Gross margin 18,335 18,935 18,656
--------------- --------------- ----------------
Operating expenses:
Research and development 8,423 6,113 7,425
Sales and marketing 14,704 14,149 15,977
General and administrative 4,491 5,767 5,227
Amortization of goodwill 119 825 888
Acquired in-process research and development 4,064 -
--------------- --------------- ----------------
Total operating expenses 31,801 26,854 29,517
--------------- --------------- ----------------
Loss from operations (13,466) (7,919) (10,861)
--------------- --------------- ----------------
Other income (expense):
Other income (expense) (38) (18) 3
Interest income from principal stockholder 436 - -
Other interest income, net 8 609 853
Equity in income (losses) from Infomodelers, Inc. (634) 2,169 -
--------------- --------------- ----------------
Total other income (expense) (228) 2,760 856
--------------- --------------- ----------------
Net loss $(13,694) $ (5,159) $(10,005)
Accretion of redemption value of redeemable common stock - (1,370) -
Non cash dividend associated with preferred stock - - (2,754)
--------------- --------------- ----------------
Net loss attributable to common stockholders $(13,694) $ (6,529) $(12,759)
=============== =============== ================
Net loss per share, basic and diluted $ (2.17) $ (.62) $ (.87)
=============== =============== ================
Weighted average common shares outstanding, basic and diluted 6,306 10,599 14,626
=============== =============== ================
See accompanying notes to Consolidated Financial Statements
34
CLICK2LEARN.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
PREFERRED STOCK ADDI- DEFERRED
SERIES A CLASS B STOCK COMMON STOCK TIONAL STOCK
----------------- ------------------- -------------------- PAID-IN COMPEN-
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL SATION
-------- -------- ---------- -------- ---------- --------- -------- ---------
BALANCES AT DECEMBER 31, 1996 - - 814,290 $ 8 6,194,327 $62 $163,168 -
Stock options exercised - - - - 341,757 3 362 -
Series 4 Class B issued in
acquisitions - - 2,383,894 24 - - 3,361 -
Series 5 Class B issued in
acquisitions - - 1,512,500 15 - - 2,133 -
Common stock issued in acquisitions - - - - 356,952 4 2,806 -
Stock options issued in acquisitions - - - - - - 89 -
Net liability spun off in SuperCede
transaction - - - - - - 1,402 -
Stock compensation - - - - - - 822 -
Payment of Class B stock
subscription receivable - - - - - - - -
Interest on Class B stock
subscription receivable - - - - - - - -
Cancellation of Series B preferred
Class B stock - - (388,395) (4) - - (4,774) -
Comprehensive loss:
Net loss - - - - - - - -
Translation adjustments - - - - - - - -
Total comprehensive loss
-------- -------- ---------- -------- ---------- --------- -------- ---------
BALANCES AT DECEMBER 31, 1997 - - 4,322,289 $ 43 6,893,036 $69 $169,369 -
Stock options exercised - - - - 484,953 6 874
Stock compensation - - - - 2,250 2 961 (736)
Amortization of deferred stock - - - - - - - 156
compensation
Cancellation of Series 4 Class B - - (900) - - - - -
stock
Cancellation of common stock - - - - (4,967) - (2) -
Common stock issued in acquisitions - - - - 115,215 1 1,267 -
Common stock issued in Initial - - - - 3,025,000 30 29,301 -
Public Offering net of offering
costs of $3,944
Conversion of Class B stock to - - (4,321,389) (43) 3,241,042 32 11 -
common stock
Conversion of redeemable common
stock to common stock - - - 191,489 - 1,468 -
Comprehensive loss:
Net loss - - - - - - - -
Translation adjustments - - - - - - - -
Total comprehensive loss
-------- -------- ---------- -------- ---------- --------- -------- --------
BALANCES AT DECEMBER 31, 1998 - - - - 13,948,018 $140 $203,249 $(580)
Stock options exercised - - - - 348,437 4 865 -
Amortization of deferred stock - - - - - - -
compensation 96
Common stock issued in acquisitions - - - - 100,000 1 399 -
Sale of common stock, net of
offering costs of $141 - - - - 428,571 4 2,854 -
Common stock warrants issued for
services - - - - - - 240 -
Sale of preferred stock, net of
offering costs of $73 10,000 - - - - - 7,173 -
Non cash preferred stock dividend - - - - - - 2,754 -
Conversion of preferred stock,
Series A, to common stock (10,000) - - - 1,290,313 13 (13) -
Comprehensive loss:
Net loss - - - - - - - -
Translation adjustments - - - - - - - -
Total comprehensive loss
-------- -------- ---------- -------- ---------- --------- -------- --------
BALANCES AT DECEMBER 31, 1999 - - - - 16,115,339 $162 $217,521 $(484)
======== ======== ========== ======== ========== ========= ======== ========
ACCUMU-
CLASS B LATED
STOCK OTHER
SUBSCRIP- COMPRE-
TION HENSIVE ACCUMU- COMPRE-
RECEIV- INCOME LATED HENSIVE
ABLE (LOSS) DEFICIT (LOSS) TOTAL
-------- --------- ---------- --------- -------
BALANCES AT DECEMBER 31, 1996 (4,500) $27 $(146,668) - $12,097
Stock options exercised - - - - 365
Series 4 Class B issued in
acquisitions - - - - 3,385
Series 5 Class B issued in
acquisitions - - - - 2,148
Common stock issued in acquisitions - - - - 2,810
Stock options issued in acquisitions - - - - 89
Net liability spun off in SuperCede
transaction - - - - 1,402
Stock compensation - - - - 822
Payment of Class B stock
subscription receivable 500 - - - 500
Interest on Class B stock
subscription receivable (28) - - - (28)
Cancellation of Series B preferred
Class B stock 4,028 - - - (750)
Comprehensive loss:
Net loss - - (13,694) (13,694) (13,694)
Translation adjustments - (188) - (188) (188)
--------
Total comprehensive loss (13,882)
-------- --------- ---------- -------- -------
BALANCES AT DECEMBER 31, 1997 - $(161) $(160,362) - $ 8,958
Stock options exercised - - - - 880
Stock compensation - - - - 227
Amortization of deferred stock - - - - 156
compensation
Cancellation of Series 4 Class B - - - - -
stock
Cancellation of common stock - - - - (2)
Common stock issued in acquisitions - - - - 1,267
Common stock issued in Initial - - - - 29,331
Public Offering net
Conversion of Class B stock to - - - -
common stock
Conversion of redeemable common
stock to common stock - - - - 1,468
Comprehensive loss:
Net loss - - (5,159) (5,159) (5,159)
Translation adjustments - (116) - (116) (116)
-------
Total comprehensive loss $(5,275)
--------- --------- ---------- -------- -------
BALANCES AT DECEMBER 31, 1998 - $(277) $(165,522) $37,010
Stock options exercised - - - - 869
Amortization of deferred stock - - - -
compensation 96
Common stock issued in acquisitions - - - - 400
Sale of common stock, net of
offering costs of $141 - - - - 2,858
Common stock warrants issued
for services - - - - 240
Sale of preferred stock, net of
offering costs of $73 - - - - 7,173
Non cash preferred stock dividend - - - - 2,754
Conversion of preferred stock,
Series A, to common stock - - - - -
Comprehensive loss:
Net loss - - (10,005) (10,005) (10,005)
Translation adjustments - (40) - (40) (40)
-------
Total comprehensive loss $(10,045)
--------- --------- ---------- -------- --------
BALANCES AT DECEMBER 31, 1999 - $(317) $(175,527) $ 41,355
========= ========= ========== ========
See accompanying notes to Consolidated Financial Statements
35
CLICK2LEARN.COM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
Cash flows from operating activities:
Net loss $(13,694) $(5,159) $(10,005)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,170 1,662 2,222
Stock compensation expense 822 383 96
Accrued interest on note receivable from principal stockholder 2,288 - -
Accrued interest on Class B stock subscription receivable (28) - -
Acquired in-process research and development 4,064 - -
Equity in (income) losses from Infomodelers, Inc. 634 (2,169) -
Changes in assets and liabilities:
Accounts receivable (4,191) (477) (5,776)
Inventories 208 114 167
Prepaid royalties and licenses (212) 13 (29)
Receivables from related companies (171) 106 (76)
Other current assets 167 (558) (1,192)
Accounts payable (1,690) (1,109) 642
Accrued liabilities 398 (550) 732
Deferred revenue 774 (2,242) 286
Other current liabilities and customer prepayments 2,031 (664) (204)
--------------- --------------- ---------------
Net cash used in operating activities (7,430) (10,650) (13,137)
--------------- --------------- ---------------
Cash flows from investing activities:
Purchase of property and equipment (384) (1,242) (2,195)
Payments related to acquisitions, net of cash acquired (321) (155) (126)
Sale of Infomodelers, Inc. - 2,373 -
Sale of other assets (8) 187 (185)
--------------- --------------- ---------------
Net cash (used in) provided by investing activities (713) 1,163 (2,506)
--------------- --------------- ---------------
Cash flows from financing activities:
Repayment of notes payable (131) (843) (82)
Payments received on notes receivable from principal
stockholder 6,747 - -
Payments on long-term debt (398) (592) (120)
Payments received on Class B stock subscription receivable 500 - -
Proceeds from exercise of stock options 365 880 869
Net proceeds from sale of common and preferred stock
and common stock warrants - 29,331 12,785
--------------- --------------- ---------------
Net cash provided by financing activities 7,083 28,776 13,452
--------------- --------------- ---------------
Effect of foreign exchange rate changes on cash (188) (116) (41)
--------------- --------------- ---------------
Net increase (decrease) in cash and cash
equivalents (1,248) 19,172 (2,232)
Cash and cash equivalents at beginning of year 3,789 2,541 21,713
=============== =============== ===============
Cash and cash equivalents at end of year $2,541 $ 21,713 $19,481
=============== =============== ===============
See accompanying notes to Consolidated Financial Statements
36
CLICK2LEARN.COM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BUSINESS
Click2learn.com, inc. ("click2learn") is a provider of e-learning solutions
designed to enable organizations to capture, deploy and manage knowledge
effectively via a hosted application service provider (ASP) model or a
customer's internal information systems. Click2learn offers a single source
solution by incorporating its learning management (Ingenium) and authoring
software products (ToolBook II Instructor and ToolBook II Assistant) with
professional services (e.g. consulting, custom development, integration).
On November 23, 1999, the stockholders of click2learn approved the
corporate name change from Asymetrix Learning Systems, Inc. to
click2learn.com, inc.
(b) BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of
click2learn and its wholly-owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Investments in 20% to 50% owned companies are accounted for using the
equity method of accounting.
(c) USE OF ESTIMATES
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Accordingly, actual results may differ
from these estimates.
(d) FOREIGN CURRENCY TRANSLATION
The functional currency of click2learn's foreign subsidiaries is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to U.S.
dollars at the exchange rate in effect on the balance sheet date. Revenues
and expenses are translated at the average rates of exchange prevailing
during the year. The translation adjustment resulting from this process is
presented separately as a component of accumulated other comprehensive loss
in stockholders' equity. Gains and losses on foreign currency transactions
are included in the consolidated statement of operations as incurred. To
date, gains and losses on foreign currency transactions have not been
significant.
(e) CASH AND CASH EQUIVALENTS
All highly liquid financial instruments purchased with a remaining maturity
of three months or less at the date of purchase are reported as cash
equivalents. The carrying amounts reported in the consolidated balance
sheets for cash and cash equivalents approximate their fair values.
(f) CONCENTRATION OF CREDIT AND SALES RISK
Click2learn has a diverse customer base. Click2learn performs ongoing
credit evaluations of its customers' financial condition and generally
requires no collateral. No single customer accounted for greater than 10%
of total revenues during the years ended December 31, 1997, 1998, and 1999.
37
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(g) INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
principally using a first-in, first-out cost flow assumption.
(h) FINANCIAL INSTRUMENTS
At December 31, 1998 and 1999, the carrying values of financial
instruments, such as trade receivables and accounts payable approximated
their fair values based on the short-term maturities of these instruments.
(i) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost less accumulated depreciation
and amortization. Depreciation is computed using the straight-line method
over the estimated useful lives of three to seven years. Leasehold
improvements are amortized over the lesser of the lease term or estimated
useful life. Repairs and maintenance that do not improve or extend the
lives of the respective assets are expensed in the period incurred.
(j) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill represents excess of the purchase price over the fair value of
tangible and identifiable intangible assets acquired and is amortized over
their estimated useful lives of 5 to 15 years.
Other intangible assets consist of software products acquired by
click2learn from third parties. At the time of their acquisition, the
products had either reached technological feasibility or were complete.
Purchased technology is amortized on a product-by-product basis using the
greater of the amount computed using the ratio that current sales bear to
the total of current and anticipated future gross revenues for that product
or the straight-line method over the remaining estimated economic life of
the product.
(k) IMPAIRMENT OF LONG-LIVED ASSETS
Click2learn reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets held and used other than
goodwill is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
their carrying amount or fair value less cost to sell. The recoverability
of goodwill is assessed whenever the facts and circumstances suggest that
the asset may be impaired and the write-down material. Click2learn assesses
the recoverability of goodwill by determining whether the unamortized
goodwill balance can be recovered through undiscounted future cash flows.
(l) REVENUE RECOGNITION
Effective January 1, 1998, click2learn adopted Statement of Position 97-2
("SOP 97-2"), SOFTWARE REVENUE RECOGNITION, issued by the American
Institute of Certified Public Accountants. The statement provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on
the relative fair values of the elements, such as software products,
upgrades, enhancements, post contract customer support, installation, or
training. Under SOP 97-2, the determination of fair value is based on
objective evidence which is specific to the vendor. If such evidence of
fair value for each element of the
38
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
arrangement does not exist, all revenue from the arrangement is deferred
until such time that evidence of fair value does exist or until all
elements of the arrangement are delivered.
Prior to January 1, 1998, revenue from sales of software products to
end-users, resellers, and distributors was recognized when the products
were shipped provided that no significant obligations of click2learn
remained and collection of the resulting receivable was deemed probable.
Click2learn's agreements with certain distributors and resellers permit
them to exchange products under certain circumstances and permit returns
from certain resellers subject to specific limitations. When appropriate,
accruals are established for estimated returns and exchanges. In the case
of nonrefundable minimum royalties from an OEM (Original Equipment
Manufacturer), reseller or other distributor, provided that no significant
obligations of click2learn remain, click2learn recognizes revenue when it
delivers its product to the OEM reseller or other distributor. Additional
royalties are paid to the extent that the advances are exceeded and these
additional royalties are recognized upon delivery of the products by the
OEM reseller or other distributor to its customers. Click2learn recognizes
revenue associated with technical support agreements over the life of the
contract.
Click2learn recognizes revenue under custom development contracts as
services are provided for time and materials contracts or by using the
percentage-of-completion method of accounting, based on the ratio of costs
incurred to the total estimated project cost, for individual fixed-price
contracts. Provisions for any estimated losses on uncompleted contracts are
made in the period in which such losses become evident.
Click2learn has an e-commerce site where third party e-learning and
tangible goods, including books, videotapes, and CD-ROMs, are purchased by
consumers. The e-learning revenue is recognized at the time click2learn has
fulfilled substantially all of its obligations to the customer. Revenue
from the sale of tangible goods is recognized at the time the order is
shipped to the consumer.
(m) RESEARCH AND DEVELOPMENT
Research and development costs, which consist primarily of software
development costs, are expensed as incurred. Financial accounting standards
provide for the capitalization of certain software development costs after
technological feasibility of software is established. Under click2learn's
current practice of developing new products and enhancements, the
technological feasibility of the underlying software is not established
until the completion of a working model at which time all product
development is substantially complete. Accordingly, no such costs have been
capitalized because the impact would not be material.
(n) INCOME TAXES
Income taxes are computed using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
results of operations in the period that includes the enactment date.
(o) STOCK-BASED COMPENSATION
Click2learn has adopted the disclosure-only provisions of SFAS No. 123,
ACCOUNTING FOR STOCK-BASED COMPENSATION ("Statement 123") and applies
Accounting Principles Board Opinion No. 25,
39
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES ("APB 25") and related
interpretations in accounting for its stock-based compensation.
Accordingly, click2learn's stock-based compensation expense is recognized
based on the intrinsic value of the option on the date of grant.
Recognition of stock-based compensation expense under Statement 123
requires the use of a fair value method to value stock options using option
valuation models. Pro forma disclosure of net loss under Statement 123 is
provided in Note 11 to the consolidated financial statements.
(p) ADVERTISING
Advertising costs are expensed as incurred and are included in sales and
marketing expenses. Advertising expense was $1,312,000, $652,000, and
$694,000, respectively during the years ended December 31, 1997, 1998, and
1999.
(q) NET LOSS PER SHARE
Basic net loss per share is computed by dividing the sum of net loss
plus accretion of redemption value of redeemable common stock and the
non cash preferred stock dividend by the weighted average number of
common shares outstanding during the period. Diluted earnings per share
is computed by dividing the sum of net loss plus accretion of redemption
value of redeemable common stock and the non cash preferred stock
dividend by the weighted average number of common and dilutive common
equivalent shares outstanding during the period. As click2learn had a
net loss attributable to common stockholders in each of the periods
presented, basic and diluted net loss per share are the same.
Excluded from the computation of diluted earnings per share for the year
ended December 31, 1999 are options to acquire approximately 4,744,988
shares of common stock with a weighted average share price of $5.36 and
warrants to purchase 1,426,313 shares of common stock with a weighted
average share price of $8.61 because their effects would be
anti-dilutive. Excluded from the computation of diluted earnings per
share for the years ended December 31, 1997 and 1998 are options to
acquire approximately 3,389,835 and 3,990,190, respectively, shares of
common stock with a weighted average share price of $3.46 and $5.05,
respectively, because their effects would be anti-dilutive.
(r) COMPREHENSIVE LOSS
Click2learn has adopted the provisions of Statement of Financial Accounting
Standards No. 130, REPORTING COMPREHENSIVE INCOME ("Statement 130").
Statement 130 establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. Click2learn
has disclosed the comprehensive loss in the consolidated statements of
stockholders' equity. Click2learn's total comprehensive loss for the years
ended December 31, 1997, 1998, and 1999 was $13,882,000, $5,275,000 and
$10,045,000, respectively and consisted of net loss and foreign currency
translation adjustments. The tax effects on the foreign currency
translation adjustments were not significant.
(s) NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position No. 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER
SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1
establishes guidance on accounting for the costs incurred related to
internal use software. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. Click2learn capitalizes costs related to
internal use software, including its management information systems and
web site infrastructure and processing systems. Capitalized costs consist
primarily of external direct costs for software licenses and services and
payroll costs for employees directly involved in related projects. The
adoption of SOP 98-1 did not have a material impact on click2learn's
consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES ("Statement
133"). Statement 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities.
Statement 133 is effective for fiscal years beginning after June 15, 2000.
40
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Click2learn does not expect the adoption of Statement 133 to have a
material impact on its consolidated financial statements.
In December 1998, the AICPA issued Statement of Position 98-9, MODIFICATION
OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
TRANSACTIONS ("SOP 98-9") which amends certain elements of SOP 97-2 and is
effective for fiscal years beginning after March 15, 1999. Click2learn
believes that the adoption of SOP 98-9 will not have a material effect on
the Company's results of operations or financial position.
In December 1999, the United States Securities and Exchange Commission
(SEC) released Staff Accounting Bulletin No. 101, REVENUE RECOGNITION IN
FINANCIAL STATEMENTS ("SAB 101"), which click2learn expects to adopt on
January 1, 2000. SAB 101 provides guidance on revenue recognition and the
SEC staff's view on the application of accounting principles to selected
revenue recognition issues. Click2learn does not expect that the adoption
of SAB 101 will have a material effect on its consolidated financial
statements.
(2) INVENTORIES
Inventories consist of the following:
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
Raw materials............................... $247 $175
Finished goods.............................. 226 52
Less obsolescence reserve................... (103) (24)
============ ============
$370 $203
============ ============
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
Leasehold improvements...................... $ 393 $ 596
Equipment................................... 6,681 7,240
Furniture and fixtures...................... 568 1,023
----------- -----------
7,642 8,859
Less accumulated depreciation and
amortization.......................... 5,322 6,276
----------- -----------
$ 2,320 $ 2,583
=========== ===========
(4) GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets consists of the following:
DECEMBER 31,
--------------------------
1998 1999
----------- -----------
Goodwill.................................... $10,426 $11,128
Other intangible assets..................... 1,922 2,925
----------- -----------
12,348 14,053
Less accumulated amortization............... 2,431 3,578
----------- -----------
$ 9,917 $10,475
=========== ===========
(5) NOTES PAYABLE
41
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Click2learn was obligated under a note payable to a former stockholder of
the Oakes Companies in the amount of $488,000. This note was repaid in
1998.
(6) LEASES
Click2learn leases office space under noncancelable operating leases
expiring through 2003. Future minimum lease payments under noncancelable
operating leases with terms in excess of one year are as follows (in
thousands):
Years ending December 31:
2000........................................... $1,687
2001........................................... 1,533
2002........................................... 1,218
2003........................................... 922
----------
Total minimum lease payments........... $5,360
==========
Rent expense under operating leases approximated $1,275,000, $1,989,000 and
$1,887,000 during the years ended December 31, 1997, 1998, and 1999,
respectively.
(7) INCOME TAXES
Income (loss) before income taxes consists of the following:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
(IN THOUSANDS)
U.S............................................ $(13,724) $(3,846) $(8,345)
Foreign........................................ 30 (1,313) (1,660)
---------------- ---------------- ----------------
Total loss before income taxes........ $(13,694) $(5,159) $(10,005)
================ ================ ================
Click2learn has recorded no provision for income taxes due to operating
losses incurred. Click2learn's income tax benefit differs from the
expected income tax benefit computed by applying the U.S.
federal statutory rate of 34% to net loss before income taxes as follows:
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1998 1999
------------- -------------- -------------
(IN THOUSANDS)
Income tax benefit at statutory rate of 34%............ $(4,643) $(1,754) $(3,402)
Losses producing no current tax benefit................ 3,151 1,438 3,067
Acquired in-process research and development........... 1,382 - -
Other, net............................................. 110 316 335
------------- -------------- -------------
Total provision for income taxes.......... $ - $ - $ -
============= ============== =============
As of December 31, 1999, click2learn had federal net operating loss (NOL)
carryforwards and research and development (R&D) tax credit carryforwards,
substantially all of which relate to the U.S., available to offset future
taxable income, whose expiration approximated the following:
NOL R&D
--------------- --------------
(IN THOUSANDS)
From 2000 through 2001................................ $ 2,392 $ -
From 2002 through 2006................................ 65,680 929
From 2007 through 2020................................ 113,709 2,629
--------------- --------------
$181,781 $3,558
=============== ==============
42
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Click2learn's ability to utilize NOL carryforwards is limited due to the
change in ownership, as defined in the Internal Revenue Code, which
occurred at the time of click2learn's Initial Public Offering.
Deferred income tax assets consists of the following:
DECEMBER 31,
----------------------------
1998 1999
------------ ------------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards........................... $58,914 $ 61,805
Research and development tax credit carryforwards.......... 2,909 3,558
Provisions for credit and sales returns allowances......... 647 324
Other provisions and expenses not currently deductible..... 507 480
------------ ------------
62,977 66,167
Valuation allowance for deferred tax assets................ (62,977) (66,167)
============ ============
Net deferred tax assets................................ $ - $ -
============ ============
For financial reporting purposes, the deferred tax assets valuation
allowance has been established due to the uncertainty of the realization
of the deferred tax assets. The valuation allowance increased
$2,539,000, $465,000 and $3,190,000 in the years ended December 31,
1997, 1998 and 1999, respectively.
(8) RELATED-PARTY TRANSACTIONS
During 1997, click2learn recognized interest income on a note receivable
from the principal stockholder of $436,000. The note receivable was
repaid in full in October 1997.
In March 1998, click2learn entered into a Directed Engineering Agreement
(the "Engineering Agreement") with Vulcan Northwest, d/b/a APEX, an entity
controlled by click2learn's principal stockholder pursuant to which
click2learn has agreed to develop customized extensions of its Librarian
product on a best efforts basis. The terms of the Engineering Agreement are
similar to those of other custom development arrangements which click2learn
has entered into with other third parties. Pursuant to the terms of the
Engineering Agreement, click2learn will retain all intellectual property
rights to these extensions. Revenue is recognized based upon the percentage
of completion method. Under the Engineering Agreement, click2learn
recognized revenue of $415,000 in the year ended December 1998 and $171,000
in the year ended 1999.
In August 1999, click2learn entered into a three year Co-branding and
Marketing Agreement ("the Marketing Agreement") with Go2Net, Inc.
("Go2Net"), an entity that click2learn's principal stockholder has a
significant interest in. Go2Net and click2learn will offer co-branded
on-line learning sites throughout the Go2Net network and under the
Marketing Agreement, click2learn has agreed to pay a three-year marketing
fee to Go2Net. The costs are recognized over the term of the agreement.
In addition, the agreement calls for click2learn to pay Go2Net fees
based upon revenues derived from co-branded Internet web sites upon
attainment of certain revenue milestones. No payments were made
in 1999 as these milestones were not been met.
(9) ACQUISITIONS
(a) POOLING OF INTERESTS TRANSACTIONS:
MELIORA SYSTEMS, INC. (MELIORA)
In July 1998, click2learn acquired Meliora, an online learning software
developer and provider of consulting services based in Rochester, New York.
The acquisition of Meliora was accounted for
43
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
using the pooling of interests method of accounting. Click2learn issued
268,000 shares of common stock in connection with this acquisition. The
accompanying consolidated financial statements have been restated for all
periods presented to give effect to the combination.
The summarized results of operations of the separate companies for the year
ended December 31, 1997 and for the six months ended June 30, 1998 are as
follows:
SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
1997 1998
------------------- -----------------
Revenue:
As previously reported............ $24,064 $15,909
Meliora........................... 1,641 661
------------------- -----------------
As restated................. $25,705 $16,570
=================== =================
Net loss:
As previously reported............ $(13,115) $(2,444)
Meliora........................... (579) (691)
------------------- -----------------
As restated................. $(13,694) $(3,135)
=================== ================
(b) PURCHASE TRANSACTIONS:
SOCHA COMPUTING, INC. ("SOCHA")
In July 1997, click2learn acquired all the outstanding shares of common
stock of Socha. The purchase price included $200,000 in cash and 200,000
shares of Series 4 Class B Stock (which converted to 150,000 shares of
common stock) valued at $284,000. At the time of the acquisition, the
operations of Socha consisted primarily of development of technology. At
the date of the acquisition, the in-process research and development was
evaluated as to its state of completion and it was determined that
technological feasibility had not yet been established and that the
technology had no alternative future uses. As a result, the aggregate
purchase price of $484,000 was allocated to acquired in-process
research and development in 1997.
AIMTECH CORPORATION ("AIMTECH")
In September 1997, click2learn acquired all the outstanding shares of
common stock of Aimtech, a provider of computer based training
development products based in Nashua, New Hampshire. The purchase price
consisted of 2,183,894 shares of Series 4 Class B Stock (which converted
into 1,637,853 shares of common stock) valued at $3,101,000 and $154,000
of other acquisition costs. Click2learn recorded $1,467,000 of goodwill
and $3,580,000 of acquired in-process research and development costs in
1997 associated with the acquisition. At the date of the acquisition,
technological feasibility of the acquired in-process technology had not
been established, and the technology had no alternative future uses.
THE OAKES COMPANIES
In September 1997, click2learn acquired all of the outstanding shares of
common stock of the Oakes Companies. The Oakes Companies consisted of Oakes
Interactive Incorporated, a multimedia training developer based in Needham,
Massachusetts, Acorn Associates Incorporated, a consulting services
organization, and Top Shelf Multimedia, Inc., a reseller of third-party
multimedia titles. The purchase price consisted of 1,512,500 shares of
Series 5 Class B Stock (which converted into 1,134,371 shares of common
stock) valued at $2,148,000 and $72,000 of other acquisition costs.
Click2learn recorded $2,809,000 of goodwill associated with the
acquisition.
44
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
COMMUNICATIONS STRATEGIES, INCORPORATED ("CSI")
In December 1997, click2learn acquired all the outstanding shares of common
stock of CSI. The purchase price consisted of 550,193 shares of common
stock valued at $4,218,000, options to purchase 22,500 shares of
click2learn's common stock at $7.67 per share, and acquisition costs of
$10,000. Click2learn recorded $3,901,000 of goodwill associated with the
acquisition.
At December 31, 1997, 191,489 shares of common stock issued in the
acquisition were classified as redeemable common stock due to certain
rights of former CSI stockholders to require click2learn to repurchase
these shares. Those rights expired in June 1998 and the shares were
transferred to common stock.
GRAHAM-WRIGHT INTERACTIVE, INC. ("GWI")
In December 1997, click2learn acquired all the outstanding shares of common
stock of GWI. The purchase price consisted of 9,372 shares of common stock
valued at $72,000. Goodwill of $132,000 was recorded.
ADAMS CONSULTING GROUP, INC. ("ADAMS")
In March 1998, click2learn acquired Adams by issuing 13,215 shares of
click2learn's common stock valued at $145,000. Goodwill of $183,000 was
recorded.
STRATEGIC SYSTEMS ASSOCIATES, INC. ("SSA")
In May 1998, click2learn acquired SSA, an Illinois-based provider of custom
development and consulting services for the online learning market. The
purchase price consisted of 102,000 shares of common stock valued at
$1,100,000. Goodwill of $1,700,000 was recorded.
PIXELMEDIA VISUAL COMMUNICATIONS, INC. ("PIXELMEDIA")
In July 1999, click2learn acquired Pixelmedia, an online learning
development firm based in Richmond, British Columbia. Click2learn issued
100,000 shares of Common Stock, and paid approximately $500,000 to acquire
all of the issued and outstanding Pixelmedia capital stock and to repay
debt owed by Pixelmedia to its principal shareholders. Click2learn recorded
$901,788 of goodwill associated with the acquisition.
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following table presents unaudited pro forma results of operations as
if the acquisitions of Socha, Aimtech, Oakes, CSI, GWI, Adams, SSA, and
Pixelmedia had occurred on January 1, 1997 (in thousands, except per share
data):
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1997 1998 1999
-------------------- -------------------- --------------------
Revenue................................ $39,974 $ 34,146 $34,802
Net loss............................... (18,086) (6,820) (12,863)
Net loss per share..................... (2.71) (.63) (.88)
(10) IMPAIRMENT OF ASSETS AND RESTRUCTURINGS
45
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(a) SPIN-OFF OF CLIENT/SERVER TOOLS DIVISION
During the years ended December 31, 1997, and 1998, click2learn recognized
equity in income (losses) of Infomodelers of $(634,000), and $2,169,000,
respectively. Click2learn owned approximately 28% of the outstanding voting
stock of Infomodelers during the years presented and accounted for its
investment in Infomodelers using the equity method of accounting.
In February 1998, Infomodelers sold substantially all of its assets to
Visio Corporation, a publicly traded company, in exchange for Visio
Corporation common stock. In connection with this transaction click2learn
included in equity in earnings of Infomodelers approximately $2.2 million,
which represents its share of the gain which Infomodelers realized on this
transaction. In March 1998, click2learn sold to its principal stockholder
Infomodelers shares with the aggregate book value of $2.4 million for cash
of $2.4 million.
(b) SPIN-OFF OF INTERNET TOOLS DIVISION
In June 1997, click2learn established a wholly owned subsidiary, SuperCede,
Inc. ("SuperCede"), and transferred the assets and liabilities of its
Internet Tools Division to SuperCede. In connection with the transfer,
click2learn entered into an Asset Transfer, License and Stock Issuance
Agreement under which these assets and liabilities, including technologies,
were transferred to SuperCede in exchange for 3,500,000 shares of Supercede
common stock and a license for click2learn to use the technology in
noncompeting products specifically including click2learn's online
enterprise learning products. In September 1997, click2learn exchanged its
SuperCede common stock for an equivalent number of shares of SuperCede
Series B preferred stock, and the license of SuperCede technology to
click2learn was terminated. Also in September 1997, an additional investor
controlled by click2learn's principal stockholder purchased 3,500,000
shares of SuperCede Series A preferred stock for $2.00 per share, reducing
click2learn's investment in SuperCede to 50%. Each of the Series A and
Series B preferred stock were convertible into one share of SuperCede
common stock at the option of the holder and carry liquidation preferences
of $2.00 per share plus any declared but unpaid dividends. The liquidation
preference on SuperCede Series A preferred stock is senior to that of the
SuperCede Series B preferred stock.
On the date click2learn exchanged its SuperCede common stock for SuperCede
Series B preferred stock and SuperCede sold Series A preferred stock to
click2learn's principal stockholder, SuperCede had net liabilities of
$1,357,000. Click2learn treated the transaction as a sale of stock by its
subsidiary. Because SuperCede's Series A preferred stockholder has rights,
preferences and privileges superior to those of click2learn's Series B
preferred stock, click2learn's share of SuperCede's net assets is $0 and,
therefore, click2learn increased the carrying amount of its investment in
SuperCede to $0. The increase in the carrying amount of click2learn's
investment in SuperCede was reflected as an increase of $1,402,000 to
additional paid-in capital. Click2learn accounts for its investment in
SuperCede using the equity method of accounting. Additionally, click2learn
will record no equity in earnings in SuperCede until the net assets of
SuperCede exceed the then liquidation preference on the Series A preferred
stock.
All of the assets of SuperCede were subsequently acquired by
Instantiations, Inc. in January of 1999 and SuperCede was dissolved.
Because the total consideration received in the transaction was less than
the liquidation preference of the Series A Preferred Stock, click2learn
received no portion of that consideration and believes that it will receive
no future value from its SuperCede interest.
(11) STOCKHOLDER'S EQUITY
(a) CLASS B STOCK
46
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
At December 31, 1997, Class B Stock consisted of the following shares:
DESIGNATED ISSUED AND
SHARES OUTSTANDING
---------------- -----------------
Series 1..................... 50,000 37,500
Series A..................... 388,395 388,395
Series B..................... 388,395 -
Series 4..................... 2,500,000 2,383,894
Series 5..................... 1,512,500 1,512,500
Undesignated................. 160,710 -
================ =================
5,000,000 4,322,289
================ =================
At the time of the Initial Public Offering on June 12, 1998, each
outstanding share of the Class B Stock was converted into approximately
0.75 shares of common stock.
(b) PREFERRED STOCK
On October 6, 1999, click2learn sold 6,000 shares of Series A Convertible
Preferred Stock (`Series A stock") to Marshall Capital Management, Inc.
("Marshall Capital") and sold 4,000 shares of Series A stock to Vulcan
Ventures, Inc. ("Vulcan Ventures") for a total purchase price of
$10,000,000 in connection with a securities purchase agreement dated
September 30, 1999. On November 1, 1999, the Series A stock held by
Marshall Capital converted into 774,193 shares of common stock and the
Series A stock held by Vulcan Ventures converted into 516,120 shares of
common stock at a conversion price of $7.75 per share.
(c) COMMON STOCK
On June 12, 1998, click2learn completed its Initial Public Offering ("IPO")
and issued 3,000,000 shares of its common stock at an initial public
offering price of $11.00 per share plus an additional 25,000 shares
pursuant to the exercise of the underwriters' over-allotment option. The
net proceeds to click2learn after deducting underwriting discounts and
offering expenses incurred by click2learn, were approximately $29.3
million.
On August 18, 1999, click2learn sold 428,571 shares of common stock to
Go2Net, Inc. ("Go2Net") for an aggregate purchase price of $3,000,000 which
includes the cost of the warrants assigned to the services agreement.
Warrants were issued to Go2Net for the purchase of 428,571 shares
of common stock at an exercise price of $7.00 per share. The warrants
were all outstanding at December 31, 1999 and expire on August 18, 2004.
On October 6, 1999, in connection with the purchase of the Series A stock,
click2learn issued Marshall Capital warrants for the purchase of 580,646
shares of common stock and Vulcan Ventures warrants for the purchase of
387,096 shares of common stock at an exercise price of $9.30 per share.
Click2learn allocated approximately $3.4 million of the proceeds to the
warrants using the Black-Scholes option pricing model with the following
assumptions: (1) the stock price at the date of the securities purchase
agreement, (2) the exercise price, (3) a five-year life of the warrants,
(4) no dividends, (5) risk-free interest rate of 5.0%, and (6) a
volatility of approximately 60%. Because the fair value of the preferred
stock and common stock warrants issued exceeded the proceeds received,
click2learn recorded a non cash dividend associated with the preferred
stock of $2,754,000.
Alpine Capital Partners, Inc. received warrants for the purchase of
30,000 shares of commons stock at an exercise price of $9.30 as a
finder's fee. The warrants were all outstanding at December 31, 1999 and
expire on October 6, 2004.
(d) STOCK OPTION PLAN
Click2learn has adopted stock option plans (the "Plans") that provide for
the issuance of nonqualified and incentive stock options to officers,
employees, consultants, and directors to acquire 6,962,500 shares of common
stock. The Board of Directors or Compensation Committee determines the
terms and conditions of options granted under the Plans, including the
exercise price. The exercise price for incentive stock options shall not be
less than the fair market value at the date of grant, and the options
expire ten years from the date of grant. Options granted on the inception
date of the initial plan in
47
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
1995 vest ratably each month over four years. Subsequent option grants
generally vest at 25% after the first year and ratably each month for the
next three years. When options are issued at less than fair market value,
compensation expense is recorded. All canceled options revert back to the
option pool.
Click2learn has elected to follow APB 25 and related interpretations in
accounting for its employee stock options rather than the alternative fair
value accounting allowed by Statement 123. APB 25 provides that
compensation expense relative to click2learn's employee stock options is
measured based on the intrinsic value of the stock option. Statement 123
requires companies that continue to follow APB 25 to provide a pro forma
disclosure of the impact of applying the fair value method of Statement
123.
Under APB 25, because the exercise price of click2learn's employee stock
options equals the fair value of the underlying stock on the date of grant,
no compensation expense is recognized, except $736,000 of deferred stock
compensation expense recorded in 1998. Had stock compensation expense for
click2learn's stock option plan been determined based on the fair value
methodology under Statement 123, click2learn's net loss would have
increased to the pro forma amounts as follows:
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1997 1998 1999
----------------- ---------------- -----------------
(IN THOUSANDS)
Net loss:
As reported $(13,694) $(5,159) $(10,005)
Pro forma (14,195) $(6,594) $(12,417)
Basic and diluted net loss per share:
As reported $(2.17) $(.62) $(.87)
Pro forma $(2.25) $(.75) $(1.04)
Prior to the IPO, the fair value for the options was estimated at the date
of grant using the minimum value method that takes into account (1) the
stock price at the grant date, (2) the exercise price, (3) a five-year
expected life of the options, (4) no dividends, and (5) a risk-free
interest rate of 6.0% during 1997, 6.0% during 1998 and 5.5% during 1999.
After the IPO, the fair value for the options granted was estimated using
the Black-Scholes option pricing model using the above assumptions and a
volatility of 84% in 1998 and 60% in 1999. Compensation expense recognized
in providing pro forma disclosures may not be representative of the effects
on pro forma income or loss for future years because the amounts above
include only the amortization for the fair value of the 1997, 1998, and
1999 grants.
The weighted-average fair value of stock options granted in 1997, 1998, and
1999 was $1.57, $3.25, and $3.54 per option, respectively.
A summary of click2learn's stock option activity is as follows:
OUTSTANDING OPTIONS
-------------------------------------
SHARES WEIGHTED
AVAILABLE FOR NUMBER OF AVERAGE
GRANT SHARES EXERCISE PRICE
----------------- ----------------- ----------------
Balances at December 31, 1996 1,109,018 3,106,857 1.75
Options granted (1,380,823) 1,380,823 6.23
Options exercised - (341,757) 1.55
Options canceled in cashless exercises - (40,089) 1.55
Options canceled 715,999 (715,999) 2.33
----------------- -----------------
Balances at December 31, 1997 444,194 3,389,835 3.46
Increase in shares available for grant 1,687,500 - -
48
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
Options granted (1,597,579) 1,597,579 7.86
Options exercised - (484,953) 1.62
Options canceled 512,271 (512,271) 6.49
----------------- -----------------
Balances at December 31, 1998 1,046,386 3,990,190 5.05
Increase in shares available for grant 1,000,000 - -
Options granted (1,857,343) 1,857,343 6.26
Options exercised - (348,437) 2.51
Options canceled 753,484 (753,484) 7.29
----------------- -----------------
Balances at December 31, 1999 942,527 4,745,612 5.36
================= =================
The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 1999:
WEIGHTED-
WEIGHTED-AVERAGE WEIGHTED-AVERAGE AVERAGE
RANGE OF EXERCISE NUMBER REMAINING EXERCISE NUMBER EXERCISE
PRICES OUTSTANDING CONTRACTUAL LIFE PRICE EXERCISABLE PRICES
------------------- -------------- ----------------- ---------------- --------------- -------------
$ 1.55 - $ 3.69 1,456,701 6.26 years $1.99 1,231,366 $1.70
3.75 - 6.00 1,598,528 8.47 years 5.21 500,004 5.89
6.21 - 8.94 1,382,738 9.08 years 7.97 277,117 8.05
9.00 - 11.00 307,645 8.90 years 10.34 88,333 10.50
------------- -------------
1.55 - 11.00 4,745,612 8.00 years 5.36 2,096,820 3.91
============= =============
(12) BENEFIT PLANS
Click2learn has a Retirement Savings Plan to provide for voluntary salary
deferral contributions on a pretax basis in accordance with Section 401(k)
of the Internal Revenue Code of 1986, as amended. To date, click2learn has
made no contributions.
On March 24, 1999, the 1999 Employee Stock Purchase Plan ("ESPP") was
adopted by click2learn's Board of Directors. The ESPP authorizes the
issuance of a maximum of 450,000 shares of common stock annually for a
term of ten years and is administered by click2learn's Board of
Directors' Compensation Committee. All eligible employees can elect to
have deducted from 1% to 10% of their total compensation up to $25,000
per year. The purchase price shall be the lesser of 85% of the fair
value of the stock on the offering date or the purchase date. No shares
were issued in 1999.
(13) LITIGATION
In 1996, a complaint seeking unspecified damages was filed against
click2learn alleging that click2learn's ToolBook and Multimedia ToolBook
products infringe a patent. Click2learn has received an opinion from
counsel that the products do not infringe this patent and that the patent
is invalid. The action is still in the discovery stage. Although
click2learn does not believe that the resolution of this litigation will
have a material impact on its financial position and results of operations,
it is reasonably possible that the outcome will result in a loss to
click2learn. Click2learn intends to vigorously defend this action.
In July 1999, a lawsuit was filed and alleged that click2learn conspired
with several other named defendants to misappropriate certain
intellectual property of the plaintiff and engaged in other tortuous
activities to the detriment of the plaintiff. Click2learn and the
plaintiff settled this lawsuit in December 1999. The settlement did not
have a material impact on click2learn's business, operating results or
financial condition.
(14) SEGMENT INFORMATION
Click2learn has adopted the provisions of SFAS No. 131, DISCLOSURES ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the reporting by public business enterprises about operating
segments, products and services, geographic areas, and major customers. The
method for determining what information to report is based on the way that
management organizes the operating segments within click2learn for making
operating decisions and
49
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
assessing financial performance.
Click2learn has two primary segments: enterprise and electronic
commerce. The enterprise segment refers to the single source solution
designed for implementation on a customer's internal information system
using click2learn's products and services. In July 1999, click2learn
launched its e-commerce network. The electronic commerce segment did not
exist prior to 1999. Accordingly information for 1997 and 1998 is
unavailable. The click2learn network is an Internet based service for
the delivery and management of e-learning over the Internet including a
portal and e-commerce site. The accounting policies of the operating
segments are the same as those described in the summary of significant
accounting policies. There have been no transactions between segments.
REPORTABLE SEGMENT INFORMATION:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
Revenue:
Enterprise $25,705 $33,352 $ 34,488
Electronic commerce - - 245
----------------- ----------------- -----------------
$25,705 $33,352 $ 34,733
----------------- ----------------- -----------------
Operating Loss:
Enterprise $(13,466) $ (7,919) $ (6,340)
Electronic commerce - - (4,521)
----------------- ----------------- -----------------
$(13,466) $ (7,919) $ (10,861)
----------------- ----------------- -----------------
Capital expenditures, depreciation and amortization and total assets
were not significant for the electronic commerce business segment.
GEOGRAPHIC INFORMATION:
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1997 1998 1999
----------------- ----------------- -----------------
Revenue:
Domestic $18,809 $29,527 $29,308
International - primarily Europe 6,896 3,825 5,425
----------------- ----------------- -----------------
$25,705 $33,352 $34,733
----------------- ----------------- -----------------
Revenues are attributed to geographic areas based on the location of
the customers.
DECEMBER 31,
---------------------------------------
1998 1999
----------------- -----------------
Long-lived assets:
Domestic operations $11,695 $11,769
International operations - primarily Europe 74 91
----------------- -----------------
$11,769 $11,860
================= =================
Long-lived assets represents property, plant and equipment and
goodwill, net of accumulated decpreciation and amortization.
50
CLICK2LEARN.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
(15) UNAUDITED QUARTERLY FINANCIAL INFORMATION
FOR THE QUARTER ENDED
---------------- --------------- --------------- ---------------
MARCH 31, 1998 JUNE 30, 1998 SEPT. 30, 1998 DEC. 31, 1998
---------------- --------------- --------------- ---------------
Total revenues $8,198 $8,372 $9,129 $7,653
Gross margins 4,848 4,675 5,408 4,004
Operating loss (1,861) (2,070) (1,284) (2,704)
Net income (loss) 290 (2,055) (1,003) (2,391)
Net income (loss) attributable
to common stockholders (476) (2,659) (1,003) (2,391)
Net loss per share, basic and
diluted (.07) (.32) (.07) (.17)
FOR THE QUARTER ENDED
---------------- --------------- --------------- ---------------
MARCH 31, 1999 JUNE 30, 1999 SEPT. 30, 1999 DEC. 31, 1999
---------------- --------------- --------------- ---------------
Total revenues $7,460 $8,551 $9.089 $9,632
Gross margins 3.870 4,713 4,847 5,226
Operating loss (2,645) (2,204) (2,506) (3,505)
Net income (loss) (2,406) (2,003) (2,370) (3,226)
Net income (loss) attributable
to common stockholders (2,406) (2,003) (2,370) (5,980)
Net loss per share, basic and
diluted (.17) (.14) (.16) (.37)
51
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
the information in the definitive Proxy Statement for click2learn's Annual
Meeting of Stockholders scheduled to be held on May 25, 2000.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to
the information in the definitive Proxy Statement for click2learn's Annual
Meeting of Stockholders scheduled to be held on May 25, 2000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to
the information in the definitive Proxy Statement for click2learn's Annual
Meeting of Stockholders scheduled to be held on May 25, 2000.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to
the information in the definitive Proxy Statement for click2learn's Annual
Meeting of Stockholders scheduled to be held on May 25, 2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) FINANCIAL STATEMENTS
Financial statements filed as part of this report are listed in the index
on page 31.
(2) FINANCIAL STATEMENT SCHEDULES
Financial statement schedules filed as part of this report are listed in
the index on page 31.
All other schedules are omitted because they are not applicable, not
required or the information required is shown in the consolidated financial
statements or notes thereto.
(3) EXHIBITS
See Index to Exhibits
(b) (1) REPORTS ON FORM 8-K
A report on Form 8-K was filed on October 13, 1999 reporting the entry into
the Securities Purchase Agreement for the Series A Convertible Preferred
Stock and the related Registration Rights Agreement and the grant of
warrants to Marshall Capital Management, Inc., and Vulcan Ventures, Inc. No
financial statements were filed with the Form 8-K.
52
(c) INDEX TO EXHIBITS
The following Exhibits are attached to this Annual Report on Form 10-K:
EXHIBIT
NUMBER EXHIBIT TITLE
------ -------------
2.01 Share Purchase Agreement dated June 25, 1999 among click2learn
and Fred Kit Ming Lam, Ivan Kit Leung Lam, and Guinevere King
Fwong Kwong. (1)
3.01 Amended and Restated Certificate of Incorporation of
click2learn.(2)
3.02 Certificate of Designations, Preferences and Rights of the Series
A Convertible Preferred Stock of click2learn filed on October 5,
1999.(3)
3.03 Certificate of Amendment of Amended and Restated Certificate of
Incorporation of click2learn filed on November 23, 1999.
3.04 Bylaws of click2learn.(2)
4.01 Form of Specimen Stock Certificate for click2learn's Common
Stock.
4.02 Securities Purchase Agreement dated as of August 18, 1999 by and
between click2learn and Go2Net, Inc.(4)
4.03 Common Stock Purchase Warrant dated as of August 16, 1999 from
click2learn to Go2Net, Inc.(4)
4.04 Securities Purchase Agreement dated as of October 6, 1999 by and
between click2learn, Marshall Capital Management, Inc. and Vulcan
Ventures, Inc.(3)
4.05 Registration Rights Agreement dated as of October 6, 1999 by and
between click2learn, Marshall Capital Management, Inc. and Vulcan
Ventures, Inc.(3)
4.06 Form of Warrant to Purchase Common Stock dated as of October 6,
1999 from click2learn to Marshall Capital Management, Inc.,
Vulcan Ventures, Inc. and Alpine Capital Partners, Inc. (3)
10.01 Services Agreement, dated as of July 27, 1998, between
click2learn and Vulcan Northwest, Inc.(5)
10.02 Eighth Amendment to Lease, dated as of October 16, 1998, by and
between click2learn and 110 Atrium Place Associates, LLC.(5)
10.03 Form of Indemnification Agreement entered into by click2learn
with each of its directors and executive officers.(2)
10.04 Click2learn's 1995 Combined Incentive and Nonqualified Stock
option Plan and related documents.(2)
10.05 Click2learn's 1998 Directors Stock Option Plan and related
documents.(2)
53
10.06 Click2learn's 1998 Equity Incentive Plan and related
documents.(2)
10.07 Lease Agreement, dated as of May 24. 1991, by and between
click2learn and Dean Witter Realty Income Partnership II, L.P.
and amendments thereto.(2)
10.08 Stock Purchase and Sale Agreement dated as of March 27, 1998
between click2learn and Vulcan Ventures Inc.(2)
10.09 Directed Engineering Agreement, dated as of March 27, 1998,
between click2learn and Vulcan Northwest, Inc.(2)
10.10 Co-Branding and Marketing Agreement dated as of August 18, 1999
between click2learn and Go2Net, Inc.
21.01 Subsidiaries of click2learn.
23.01 Consent of KPMG LLP.
27.01 Financial Data Schedule
(1) Incorporated herein by reference to click2learn's Quarterly
Report on Form 10-Q for the fiscal quarter ended September
30, 1999.
(2) Incorporated herein by reference to click2learn's
Registration Statement on Form S-1 (Registration no.
333-49037), as amended.
(3) Incorporated herein by reference to click2learn's
Registration Statement on Form S-3 (Registration no.
333-89615).
(4) Incorporated herein by reference to click2learn's
Registration Statement on Form S-3 (Registration no.
333-87425).
(5) Incorporated herein by reference to click2learn's Annual
Report on Form 10-K for the fiscal year ended December 31,
1998.
(d) Not applicable
54
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, click2learn
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
CLICK2LEARN.COM, INC.
March 30, 2000 /s/ John D. Atherly
- ---------------------------- ---------------------------------------
Date John D. Atherly Vice President, Finance
and Administration and Chief Financial
Officer (Duly Authorized Officer and
Chief Accounting Officer)
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints Kevin
Oakes and John D. Atherly, and each of them, his true lawful
attorneys-in-fact and agents, with full power of substitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments to this Annual Report on Form 10-K and to file the same, with all
exhibits thereto and all documents in connection therewith, with the Securities
and Exchange Commission, granted unto said attorneys-in-fact and agents, and
each of them, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in and about the premises, as fully to
all intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Exchange Act of
1934,this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
March 30, 2000 /s/ Bert Kolde
- ------------------------- -----------------------------------------
Date Bert Kolde, Chairman of the Board
March 30, 2000 /s/ James A Billmaier
- ------------------------- -----------------------------------------
Date James A Billmaier, Vice Chairman and
Director
March 30, 2000 /s/ Kevin Oakes
- ------------------------- -----------------------------------------
Date Kevin Oakes, President and Chief
Executive Officer and Director
March 30, 2000 /s/ Joseph DiNucci
- ------------------------- -----------------------------------------
Date Joseph DiNucci, Executive Vice
President and Director
55
March 30, 2000 /s/ Shelley Harrison
- ------------------------- -----------------------------------------
Date Shelley Harrison, Ph.D., Director
March 30, 2000 /s/ Sally Narodick
- ------------------------- -----------------------------------------
Date Sally Narodick, Director
March 30, 2000 /s/ Ronald S. Posner
- ------------------------- -----------------------------------------
Date Ronald S. Posner, Director
56
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
click2learn.com, inc.:
Under date of January 26, 2000, we reported on the consolidated balance sheets
of click2learn.com, inc. and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1999,
which are included in the 1999 Annual Report on Form 10-K of click2learn.com,
inc. In connection with our audits of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule of valuation and qualifying accounts. This consolidated financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement schedule
based on our audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Seattle, Washington
January 26, 2000
57
SCHEDULE II
CLICK2LEARN.COM, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS)
CHARGE TO
BALANCE AT OTHER BALANCE AT
BEGINNING COSTS AND END OF
OF YEAR EXPENSES DEDUCTIONS YEAR
-------------- -------------- -------------- --------------
Year ended December 31, 1999:
Valuation accounts deducted from
assets:
Allowance for doubtful receivables
and sales returns $1,397 $275 $727 $945
Reserve for inventory obsolescence 103 99 178 24
Year ended December 31, 1998:
Valuation accounts deducted from
assets:
Allowance for doubtful receivables
and sales returns $1,148 $1,564 $1,315 $1,397
Reserve for inventory obsolescence 51 135 83 103
Year ended December 31, 1997:
Valuation accounts deducted from
assets:
Allowance for doubtful receivables
and sales returns $3,346 $1,121 $3,319 $1,148
Reserve for inventory obsolescence 385 357 691 51
58