<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 23, 1998
REGISTRATION NO. 333-49037
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
PRE-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ASYMETRIX LEARNING SYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 7371 91-1276003
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION OF CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
INCORPORATION OR
ORGANIZATION)
----------------
110-110TH AVENUE NE
BELLEVUE, WASHINGTON 98004
(425) 462-0501
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
----------------
JOHN D. ATHERLY
VICE PRESIDENT, FINANCE AND ADMINISTRATION AND CHIEF FINANCIAL OFFICER
ASYMETRIX LEARNING SYSTEMS, INC.
110-110TH AVENUE NE
BELLEVUE, WASHINGTON 98004
(425) 462-0501
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
----------------
COPIES TO:
MARK C. STEVENS, ESQ. THERESE A. MROZEK, ESQ.
JEFFREY R. VETTER, ESQ. NORA L. GIBSON, ESQ.
MICHAEL J. MCADAM, ESQ. RANDALL M. LAKE, ESQ.
FENWICK & WEST LLP BROBECK, PHLEGER & HARRISON LLP
TWO PALO ALTO SQUARE TWO EMBARCADERO PLACE
PALO ALTO, CALIFORNIA 94306 2200 GENG ROAD
(650) 494-0600 PALO ALTO, CALIFORNIA 94303
(650) 424-0160
----------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 23, 1998
3,000,000 SHARES
[LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Asymetrix
Learning Systems, Inc. ("Asymetrix" or the "Company"). Prior to this offering,
there has been no public market for the Common Stock of the Company. It is
currently estimated that the initial public offering price will be between
$10.00 and $12.00 per share. See "Underwriting" for a discussion of the factors
to be considered in determining the initial public offering price. The Company
has applied to have its Common Stock approved for quotation on the Nasdaq
National Market under the symbol "ASYM."
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" COMMENCING
ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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Price to Underwriting Proceeds to
Public Discount (1) Company (2)
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<S> <C> <C> <C>
Per Share.................................. $ $ $
Total (3).................................. $ $ $
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</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting offering expenses payable by the Company estimated at
$900,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 450,000 additional shares of Common Stock, solely to cover over-
allotments, if any. If the Underwriters exercise this option in full, the
Price to Public will total $ , the Underwriting Discount will total $
and the Proceeds to Company will total $ . See "Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of NationsBanc Montgomery Securities LLC on or about , 1998.
-----------
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Hambrecht & Quist
, 1998
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK
OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary should be read in conjunction with, and is qualified in
its entirety by, the more detailed information including "Risk Factors" and the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus. The discussion in this Prospectus contains forward-looking
statements. The outcome of the events described in such forward-looking
statements is subject to risks and uncertainties. The Company's actual results
may differ materially from those discussed in such forward-looking statements.
Factors that may cause or contribute to such differences include those
discussed in sections entitled "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business" as
well as those discussed elsewhere in this Prospectus.
THE COMPANY
Asymetrix is a leading provider of online enterprise learning solutions
designed to enable organizations to capture, deploy and manage knowledge more
effectively for use as a competitive advantage. The Company's comprehensive
learning solution consists of an open, standards-based, Internet-centric
technology platform as well as professional services for the online learning
market. The Company's technology platform includes ToolBook II Instructor and
ToolBook II Assistant, products which enable customers to author online
learning applications, and Librarian, a learning management system designed to
enable customers to deploy and manage such applications. The Company's
professional services include a wide range of consulting and custom development
services focused on the online learning market as well as training and customer
support.
Information technology has been successfully used to automate mission
critical business processes, such as manufacturing, human resources, finance,
sales, distribution and customer support. However, a critical function which
technology-based solutions have not adequately addressed is training and
education. The Company believes there is a need for an enterprise learning
solution that enables organizations to improve employee productivity,
coordinate their training efforts, measure the effectiveness of training and
deliver knowledge to employees and business partners more rapidly, broadly and
uniformly. The Company believes the market for enterprise learning solutions
will be fueled by the convergence of trends and technologies that enable
technology-based training solutions, including computer-based training, video-
based training and Internet-based training solutions, to be deployed
increasingly as substitutes for, or complements to, instructor-led and other
traditional forms of training. The primary advantages of technology-based
training over traditional forms of training include performance improvements
and potential cost savings in the form of reduced instructor salaries,
compressed training times and reduced travel costs. Furthermore, the ease and
speed of deployment associated with Internet-based training allows for "just-
in-time" delivery of content, broadens the potential use of training within the
enterprise and offers a cost- and time-effective way to accumulate and retain
company knowledge. According to International Data Corporation ("IDC"),
revenues from all technology-based training applications in the United States
are expected to grow from $1.7 billion in 1997 to $4.1 billion in 2001.
Asymetrix believes that by providing a single source solution, it is well-
positioned to be the leading provider of online enterprise learning products
and services. Beginning in 1996, the Company redirected its focus to its online
learning products, divested several product lines and discontinued development
efforts not directly related to its online enterprise learning solution. A key
component of the Company's strategy is to provide an online learning solution
at the enterprise level. In February 1998, the Company introduced an enhanced
version of Librarian which the Company believes significantly extends the
existing features and functionality of Librarian by enabling enterprise-wide
deployment of online learning applications. In addition, the Company has
significantly expanded its professional services capabilities and, since July
1, 1997, has acquired six professional services companies and the Company may
seek to acquire additional professional services companies in the future.
The Company has licensed its online learning products or provided
professional services to leading companies in a variety of industries. Such
customers include The Boeing Company, Hewlett-Packard Company, IBM Corporation,
Intel Corporation, Lucent Technologies, Inc., MCI Communications Corporation,
Metropolitan Life Insurance Company, Microsoft Corporation, Pfizer, Inc. and
the United States Army.
3
<PAGE>
The Company was incorporated in Washington in December 1984. The Company
intends to reincorporate under the laws of Delaware prior to the closing of
this offering. The Company's executive offices are located at 110-110th Avenue
NE, Bellevue, Washington 98004 and its telephone number is (425) 462-0501.
----------------
As used in this Prospectus, the "Company" and "Asymetrix" refer to Asymetrix
Learning Systems, Inc., a Delaware corporation, its Washington predecessor and
its wholly-owned subsidiaries. Except as otherwise noted herein, information in
this Prospectus (i) assumes no exercise of the Underwriters' over-allotment
option, (ii) gives effect to the conversion of all outstanding shares of Class
B Stock of the Company into shares of Common Stock of the Company, which will
occur upon the closing of this offering, (iii) reflects the reincorporation of
the Company in Delaware prior to the closing of this offering, (iv) refers to
historical and not pro forma financial information, (v) gives effect to a 3-
for-4 reverse stock split to be effected immediately prior to the consummation
of this offering and (vi) gives effect to the filing, upon the closing of this
offering, of an Amended and Restated Certificate of Incorporation, authorizing
2,000,000 shares of undesignated Preferred Stock.
Asymetrix, Asymetrix Digital Video Producer, IconAuthor and ToolBook are
registered trademarks of the Company and Librarian, ToolBook II Assistant,
ToolBook II Instructor, Librarian and Web 3D are trademarks of the Company.
This Prospectus also includes trademarks of companies other than the Company.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.............................. 3,000,000 shares
Common Stock to be outstanding after the
offering......................................... 13,124,822 shares (1)
For general corporate purposes, including working capital.
Use of proceeds................................... See "Use of Proceeds."
Proposed Nasdaq National Market symbol............ ASYM
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA
------------
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED MARCH 31,
---------------------------- DECEMBER 31, ---------------
CONSOLIDATED STATEMENT OF 1995 1996 1997 1997 (6) 1997 1998
OPERATIONS DATA: -------- -------- -------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue:
Online learning
products (2).......... $ -- $ 3,135 $ 7,056 $ 7,056 $1,403 $ 2,069
Other products......... 16,238 11,165 10,425 12,080 2,811 1,540
Total product
revenue.............. 16,238 14,300 17,481 19,136 4,214 3,609
Services revenue........ 1,926 2,955 6,583 14,784 770 4,186
Total revenue........ 18,164 17,255 24,064 33,920 4,984 7,795
Gross margin............ 13,551 12,073 17,273 20,664 3,955 4,564
Loss from operations.... (19,063) (23,221) (12,927) (9,182) (2,631) (1,718)
Net income (loss)....... (19,715) (23,555) (13,115) (9,468) (2,555) 455
Accretion of redemption
value of redeemable
common stock (3)....... -- -- -- -- -- (766)
Net loss attributable to
common stockholders
(3).................... (19,715) (23,555) (13,155) (9,468) (2,555) (311)
Basic and diluted net
loss per share (4)(5).. (4.14) (4.01) (2.17) (1.48) (0.43) (0.05)
Shares used to compute
basic and diluted net
loss per share (4)(5).. 4,766 5,879 6,038 6,397 5,932 6,657
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
-----------------------
ACTUAL AS ADJUSTED (8)
------- ---------------
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 2,911 $32,701
Working capital........................................ 1,849 31,639
Total assets........................................... 20,780 50,570
Long-term obligations.................................. 164 164
Redeemable common stock (7)............................ 2,234 --
Total stockholders' equity............................. 9,888 41,912
</TABLE>
- --------
(1) Based on the number of shares outstanding as of March 31, 1998. Excludes
(i) 3,600,111 shares of Common Stock issuable upon the exercise of options
then outstanding with a weighted average exercise price of $3.95 per share,
(ii) 174,902 shares of Common Stock reserved for issuance under the
Company's 1995 Combined Incentive and Nonqualified Stock Option Plan (the
"1995 Plan") as of such date, (iii) 1,687,500 shares reserved for issuance
under the Company's 1998 Equity Incentive Plan and 1998 Directors Stock
Option Plan and (iv) 14,573 shares of Common Stock subject to an
outstanding option not granted under the 1995 Plan. Includes 331,246 shares
of Common Stock subject to an escrow to secure certain indemnification
obligations of former stockholders of Aimtech Corporation ("Aimtech")
relating to the acquisition of Aimtech. See "Capitalization," "Management--
Employee Benefit Plans" and Note 11 of Notes to the Company's Consolidated
Financial Statements.
(2) The Company's online learning products consist of its Librarian learning
management system, its ToolBook II Instructor and ToolBook II Assistant
authoring products, its ToolBook II Synergy pre-authoring product and the
Allen Communications' Designer's Edge product, for which the Company is a
reseller. See "Business--Products and Services."
(3) See Note 8 of Notes to the Company's Consolidated Financial Statements.
(4) See Note 1 of Notes to the Company's Consolidated Financial Statements for
an explanation of the determination of the number of shares used to compute
basic and diluted net loss per share.
(5) See Note (f) of Notes to Consolidated Pro Forma Financial Statements for an
explanation of the determination of the number of pro forma shares used to
compute basic and diluted pro forma net loss per share.
(6) Pro forma consolidated statement of operations data for the year ended
December 31, 1997 reflects (i) the acquisitions of Oakes Interactive
Incorporated, TopShelf Multimedia, Inc. and Acorn Associates, Incorporated
(collectively, the "Oakes Companies"), Aimtech and Communications
Strategies, Incorporated ("CSI") and (ii) the dispositions of SuperCede,
Inc. ("SuperCede") and Infomodelers, Inc. ("Infomodelers"), in each case as
if such transaction had occurred on January 1, 1997. See Consolidated
Condensed Pro Forma Financial Statements.
(7) Redeemable common stock represents 191,489 shares of Common Stock issued in
connection with the acquisition of CSI which are subject to a put right
held by the two former shareholders of CSI. See Note 8 of Notes to the
Company's Consolidated Financial Statements.
(8) As adjusted to reflect (i) the conversion of all outstanding shares of
Class B Stock into shares of Common Stock upon the closing of this
offering, (ii) the expiration of a put right held by the former
shareholders of CSI with respect to 191,489 shares of Common Stock issued
in connection with the acquisition of CSI and (iii) the sale of the
3,000,000 shares of Common Stock offered hereby at an assumed initial
public offering price of $11.00 per share and after deducting estimated
underwriting discount and estimated offering expenses. See "Use of
Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. In addition to the other
information set forth in this Prospectus, the following risk factors should be
considered carefully in evaluating the Company and its business before
purchasing any of the shares of Common Stock of the Company. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties, such as statements of the Company's plans, objectives,
expectations and intentions. The cautionary statements made in this Prospectus
should be read as being applicable to all forward-looking statements wherever
they appear in this Prospectus. The Company's actual results could differ
materially from the results discussed in this Prospectus. Factors that could
cause or contribute to such differences include those discussed below, as well
as those discussed elsewhere in this Prospectus.
SUBSTANTIAL HISTORICAL OPERATING LOSSES; LIMITED OPERATING HISTORY IN TARGET
MARKET; UNCERTAIN PROFITABILITY
The Company was incorporated in December 1984. Until early 1995, the Company
was engaged in various technology and development activities and in the
development and marketing of multimedia authoring products, database and
Internet tools, World Wide Web publishing products and other ancillary
products, most of which are not included as part of the Company's online
enterprise learning solution. Starting in 1995, the Company recapitalized and
redirected its focus to the development and marketing of authoring products
and a learning management system designed to capitalize on the advantages of
the Internet as a means of delivering technology-based training applications.
Since 1995 the Company has also introduced a variety of professional services.
Accordingly, the Company has only a limited operating history upon which to
base an evaluation of its current business and prospects. The Company's
prospects must be considered in light of the risks and uncertainties
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets such as online enterprise
learning and by companies engaged in a business transition from developing and
marketing software products to offering an integrated product and services
solution. Such risks include, but are not limited to: the demand for
technology-based training and online enterprise learning applications; the
management of both internal and acquisition-based growth; demand for the
Company's products and services; the ability of the Company to meet the needs
of sophisticated corporate customers; and competition. To address these risks,
the Company must, among other things: successfully introduce new products and
services; achieve commercial acceptance of its new products and services,
including the latest release of its Librarian product; continue to expand its
professional services business; successfully identify, acquire and integrate
acquired businesses; respond to competitive developments; attract, integrate,
retain and motivate qualified personnel; and address new or evolving
technologies and standards. There can be no assurance that the Company will be
successful in addressing such risks and the failure to do so could have a
material adverse effect on the Company's business, operating results and
financial condition.
From December 1984, the Company's inception, through 1997, the Company
incurred net losses on an annual basis, and as of March 31, 1998, the Company
had an accumulated deficit of $159.6 million. Such net losses and accumulated
deficit resulted from the Company's lack of substantial revenues and the
significant costs incurred as a result of the Company's focus on a variety of
technology and development activities and the development and marketing of
products which have been sold or discontinued or which are not part of the
Company's online enterprise learning solution. The Company incurred net losses
of $23.6 million and $13.1 million in 1996 and 1997, respectively, and an
operating loss of $1.7 million in the three months ended March 31, 1998, and
has yet to achieve income from operations under its new business model. The
Company's limited operating history under its new business model, the emerging
nature of the market for online enterprise learning and the factors described
under "--Fluctuations in Quarterly Operating Results; Unpredictability of
Future Revenue; Seasonality," among other factors, make prediction of the
Company's future operating results difficult. Although the Company has
experienced revenue growth in certain recent periods and although the pro
forma financial statements also reflect revenue growth in certain recent
periods, there can be no assurance that such growth rates are sustainable or
indicative of actual growth rates that the Company may experience. Therefore,
they should not be considered indicative of future operating results. In
addition, the Company intends to continue to invest in acquisitions and
research and
6
<PAGE>
development, among other things. As a result, the Company expects to continue
to incur operating losses at least through 1998. There can be no assurance
that the Company will achieve profitability or that, if profitability is
achieved, it will be sustained. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Asymetrix
Strategy."
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS; UNPREDICTABILITY OF FUTURE
REVENUE; SEASONALITY
The Company'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 the Company's control. Factors
that may adversely affect the Company's quarterly operating results include:
the demand for technology-based training in general and demand for online
enterprise learning solutions in particular; 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
inability of the Company to meet its own or client project milestones or to
meet client expectations; market acceptance of the Company's or competitors'
products and services; the ability of the Company to develop and market new or
enhanced products and services in a timely manner and market acceptance of
such products, including the latest release of Librarian, and services; the
Company's ability to integrate acquisitions successfully and to identify,
acquire and integrate suitable acquisition candidates; the timing of revenue
recognition; charges related to acquisitions; competitive conditions;
technological changes; personnel changes; general economic conditions; and
economic conditions specific to the technology-based training and online
learning markets. With its new emphasis on providing an online enterprise
learning solution, the Company is targeting its selling and marketing efforts
towards customers with the potential need for enterprise-wide solutions.
Because the Company believes that the implementation of its solutions may
require an enterprise-wide decision by prospective customers, the Company may
be required to provide a significant level of education to prospective
customers regarding the Company's solutions. Therefore, the Company believes
that the period between initial contact and the sale of the Company's
solutions could be lengthy, and the implementation cycle could lengthen
because of increases in the size and complexity of customer implementations.
Uncertainty of timing with respect to sales or implementations could have a
material adverse effect on the Company's business and operations and cause the
Company's operating results to vary significantly from quarter to quarter.
Therefore, the Company's operating results for any particular quarterly period
may not be indicative of future operating results.
The Company's limited operating history under its current business model,
its recent acquisitions and dispositions and the emerging nature of its market
make prediction of future revenue and expenses difficult. The Company's
expense levels are based, in part, on its expectations as to future revenue
and to a large extent are fixed in the short term. There can be no assurance
that the Company will be able to predict its future revenue accurately and the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall of
revenue in relation to the Company's expectations could cause significant
fluctuations in quarterly operating results, which would have an adverse
effect on the Company's business, operating results and financial condition.
Due to all of the foregoing factors, the Company's quarterly revenue and
operating results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future
performance. It is likely that the Company's operating results will fall below
the expectations of the Company, securities analysts or investors in some
future quarter. In such event, the trading price of the Common Stock would
likely be materially and adversely affected. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Like many companies in the software industry, the Company has experienced
higher revenue in its last quarter as a result of efforts to meet sales quotas
and as many customers complete annual budgetary cycles and lower revenue in
its first quarter. Additionally, the Company believes that many of its
customers in the education and government markets tend to have higher product
purchasing activity during the last few weeks of the third quarter as compared
to other periods. Furthermore, revenue recognized by some components of the
Company's services business is dependent in part upon the number of business
days during the particular period and budget
7
<PAGE>
cycles of its customers. Because of these factors, the Company anticipates
that its professional services and training revenue growth could be slower in
the first and fourth quarters than in other quarters because of this
seasonality. Although the Company has not been able to determine the extent to
which its current business is affected by any seasonal trends because of the
refocusing and growth of its business since 1995, there can be no assurance
that the Company's results in any future quarter will not be negatively
affected by such trends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
NEW BUSINESS MODEL
Although the Company was incorporated in 1984, it is in the process of
transitioning to a new business model which is focused on the online
enterprise learning market. In transitioning to this new business model, the
Company is undergoing many substantial changes in its product emphasis,
distribution channels, business operations, sales and implementation
practices, customer service and support and management focus. These changes
include: the divestiture of a number of product lines, including its consumer
products, database tools and Internet tools, products for which the Company
had previously devoted substantial financial and other resources to develop
and market; the acquisition of eight businesses since July 1, 1997; the change
of the Company's product emphasis from general purpose multimedia authoring
and other multimedia products to products targeted for the development and
management of online learning applications; the change of the Company's prior
product distribution strategy from retail and other indirect distribution
channels to a direct sales model with a current focus on the United States,
which has required the Company to develop a sales infrastructure to market its
products to a new customer base and to introduce customer support services to
address the needs of enterprise customers; and the introduction of
professional services, which are businesses with which the Company has had
limited experience and which typically have lower gross margins than software
product sales businesses and the growth of which are substantially dependent
upon and limited by the number of professional services personnel employed by
the Company.
The Company introduced its most recent version of Librarian in February
1998. The Company believes that this new version significantly extends the
existing features and functionality of Librarian and that market acceptance of
this new version of Librarian is key to its ability to offer an enterprise-
level solution that will satisfy the increasingly complex requirements of
sophisticated corporate customers. See "--Dependence on Online Learning
Products" and "--Rapid Technological Change; Product Development."
The change in the Company's business model has also required the Company to
face new risks and challenges that it previously had not faced, including,
among others: the acquisition-related risks described under "--Risks Related
to Acquisitions;" the need to hire, train, integrate and motivate a larger
direct sales force and a professional services organization; the need to adopt
new and more focused marketing and research and development strategies; the
need to market its solutions successfully to enterprise customers; the need
for the Company to expand further the functionality of its products and
customer support services to address the needs of enterprise customers;
greater potential fluctuations in gross margins resulting from the mix of
products and services sold; less meaningful historic financial data on which
to plan future budgets; competition from a wider range of sources than the
Company had previously faced; and the other factors described under "Risk
Factors." The failure of the Company to address these risks successfully in
completing its transition to a new business model could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business--The Asymetrix Solution" and "--
Asymetrix Strategy."
RISKS RELATED TO ACQUISITIONS
Since July 1, 1997, the Company has acquired eight businesses: Oakes
Interactive Incorporated, Acorn Associates Incorporated and TopShelf
Multimedia, Inc. (collectively, the "Oakes Companies"); Aimtech Corporation
("Aimtech"); Communications Strategies, Incorporated ("CSI"); Graham-Wright
Interactive, Inc. ("Graham-Wright"); Socha Computing, Inc. ("Socha"); and
Adams Consulting Group, Inc. ("Adams Consulting"). The
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Company's future performance will depend in part on its ability to integrate
and grow these acquired businesses. Acquisitions involve a number of risks,
including: the integration of acquired products and technologies in a timely
manner; the integration of businesses and employees with the Company's
business; the management of geographically-dispersed operations; adverse
effects on the Company's reported operating results from acquisition-related
charges and amortization of goodwill; potential increases in stock
compensation expense and increased compensation expense resulting from newly-
hired employees; the diversion of management attention; the assumption of
unknown liabilities; potential disputes with the sellers of one or more
acquired entities; the inability of the Company to maintain customers or
goodwill of an acquired business; and the possible failure to retain key
acquired personnel. Client satisfaction or performance problems with an
acquired firm could also have a material adverse effect on the reputation of
the Company as a whole, and any acquired business could significantly
underperform relative to the Company's expectations. In addition, the Oakes
Companies, CSI, Graham-Wright and Adams Consulting were primarily professional
services businesses and prior to acquiring these businesses, the Company had
limited experience in providing professional services. The Company is
currently facing all of these challenges and its ability to meet them over the
long term has not been established. As a result, there can be no assurance
that the Company will be able to integrate acquired businesses, products or
technologies successfully or in a timely manner in accordance with its
strategic objectives, which could have a material adverse effect on the
Company's business, operating results and financial condition.
The Company's past acquisitions have been accounted for using the purchase
method of accounting. Because most software and professional services business
acquisitions involve the purchase of significant amounts of intangible assets,
acquisitions of such businesses also result in goodwill and significant
amortization charges and may also involve charges for acquired research and
development projects. For example, as a result of the acquisitions of Aimtech
and Socha, the Company has incurred charges relating to acquired in-process
research and development of $4.1 million for 1997 and, in connection with all
of its acquisitions from July 1, 1997 through March 31, 1998, has recorded an
aggregate of $8.5 million in goodwill, approximately $1.5 million of which
will be amortized on a straight-line basis over a five year period and the
remainder (approximately $7.0 million) of which will be amortized over a 15
year period. If the Company were to incur additional charges for acquired in-
process research and development and amortization of goodwill with respect to
future acquisitions, the Company's business, operating results and financial
condition could be materially and adversely affected.
In order to grow its business, the Company may continue to acquire
businesses that it believes are complementary. The successful implementation
of this strategy depends on the Company's ability to identify suitable
acquisition candidates, acquire such companies on acceptable terms, integrate
their operations and technology successfully with those of the Company, retain
existing customers and maintain the goodwill of the acquired business. There
can be no assurance that the Company will be able to identify additional
suitable acquisition candidates, acquire any such candidates on acceptable
terms, integrate their operations or technology successfully, or retain
customers or maintain the goodwill of the acquired business, particularly in
light of the Company's limited experience with operating a professional
services business. Moreover, in pursuing acquisition opportunities, the
Company may compete for acquisition targets with other companies with similar
growth strategies. Some of these competitors may be larger and have greater
financial and other resources than the Company. Competition for these
acquisition targets likely could also result in increased prices of
acquisition targets and a diminished pool of companies available for
acquisition. In addition, the Company would likely face the same integration
issues described above with respect to any future acquisitions. If the Company
is unable to manage internal or acquisition-based growth effectively, the
Company's business, operating results and financial condition would be
materially and adversely affected.
Due to all of the foregoing, the Company's execution on an acquisition
strategy or any individual completed or future acquisition may have a material
adverse effect on the Company's business, operating results and financial
condition. Although to date the Company has not used a material amount of cash
for acquisition consideration, to the extent the Company chooses to do so in
the future, the Company may be required to obtain additional financing, and
there can be no assurance that such financing will be available on favorable
terms, if at all. In addition, if the Company issues equity securities as
consideration for any future acquisitions, existing stockholders will
experience further ownership dilution and such equity securities could have
rights, preferences,
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privileges or other rights superior to those of the Common Stock. See "--
Dilution," "--Management of Growth and Expansion" and "--Future Capital Needs;
Uncertainty of Additional Funding," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business--Asymetrix
Strategy."
DEPENDENCE ON ONLINE LEARNING PRODUCTS
The Company derived approximately 29% and 27% of its total revenue and
approximately 40% and 57% of its product revenue from the sale and licensing
of its online learning products, which include ToolBook II Instructor,
ToolBook II Assistant and Librarian, in 1997 and the three months ended March
31, 1998, respectively. The Company intends to focus its product development
and product sales and marketing efforts on its online learning products, and
therefore any growth in product revenue will be substantially dependent on
increased sales of its online learning products. In addition, the Company
believes it will be particularly dependent upon market acceptance of the most
recent version of its Librarian product because it believes that this new
version is key to its ability to offer an enterprise-level solution and that
market acceptance of Librarian may influence sales of the Company's other
online learning products and professional services. This new version of
Librarian was only recently introduced and the Company intends to devote
significant resources to the sales and marketing of this product. The
Company's shift from the development and marketing of multimedia authoring
products, database and Internet tools, Web publishing products and other
ancillary products to the development and marketing of its online learning
products has required the Company to, among other things, focus its attention
and resources away from its other products, market its products to enterprise
customers and shift its development and marketing efforts to its online
learning products. Accordingly, the Company's future operating results are
substantially dependent on the market acceptance and growth of its online
learning products and enhancements thereto. As a result, a reduction in demand
for or an increase in competition with respect to the Company's online
learning products, including price competition, or a decline in sales, would
have a material adverse effect on the Company's product revenue. See "--Rapid
Technological Change; Product Development" and "Business--Products and
Services."
DEMANDING CUSTOMER REQUIREMENTS; PRODUCT FUNCTIONALITY AND DEFECTS
The online learning market is a developing market characterized by complex
and varied customer expectations and requirements, a lack of technical
standards and frequent introductions or announcements of new products and
services. Because the Company's online learning solution is targeted for
customers with enterprise-wide deployments in an emerging market, customers
and potential customers may have a greater sensitivity to product integration,
interoperability and defects than customers in the market for software
products generally. In addition, these customers may have evolving and rapidly
changing requirements for their online enterprise learning needs, which the
Company must address satisfactorily. The Company has recently released new
versions of Librarian and ToolBook II Assistant. Software products as complex
as those offered by the Company frequently contain errors or failures,
especially when first introduced or when new versions are released. Although
the Company conducts extensive product testing during product development, the
Company has in the past discovered errors in its products after their initial
release. There can be no assurance that, despite testing by the Company and by
current and potential customers, errors will not be found in recently
introduced versions of its online learning products or in other new product
releases after commencement of commercial shipments, resulting in loss of
revenue or delay in market acceptance, diversion of development resources,
damage to the Company's reputation, or increased service and warranty costs,
any of which could have a material adverse effect on the Company's business,
operating results and financial condition.
Many of the Company's professional services engagements require the Company
to develop learning applications to suit unique customer requirements. The
Company's failure or inability to meet a customer's expectations or
requirements in the performance of its services could potentially damage the
Company's reputation or result in a claim for substantial damages against the
Company, regardless of the Company's responsibility for such failure. The
Company attempts to limit contractually its liability for damages arising from
product defects or negligent acts, errors, mistakes or omissions in rendering
professional services; however, there can be no assurance that any contractual
protections will be enforced or would otherwise protect the Company from
liability for damages. Furthermore, certain acquired businesses may not
include limitation of liability
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provisions in their customer agreements. Although the Company maintains
general liability insurance coverage, including coverage for errors and
omissions, there can be no assurance that such coverage will continue to be
available on reasonable terms or will be available in sufficient amounts to
cover one or more large claims, or that the insurer will not disclaim coverage
as to any future claim. The successful assertion of one or more large claims
against the Company that are uninsured, exceed available insurance coverage or
result in changes to the Company's insurance policies, including premium
increases or the imposition of a large deductible or co-insurance
requirements, could have a material adverse effect on the Company's business,
operating results and financial condition. See "Business--Products and
Services" and "--Technology, Research and Development."
MANAGEMENT OF GROWTH AND EXPANSION
The Company is currently experiencing a period of significant expansion. The
Company's historical growth has placed, and any further growth is likely to
continue to place, a significant strain on the Company's managerial,
operational, financial and other resources. The Company has grown from 175
employees at September 30, 1995 to 317 employees at March 31, 1998. During
this period, the Company has also significantly expanded its operations both
internally and through acquisitions. The Company's future success will depend,
in part, upon the ability of its senior management to manage growth
effectively, which will require the Company to implement additional management
information systems, to develop further its operating, administrative,
financial and accounting systems and controls and to maintain close
coordination among its engineering, accounting, finance, marketing, sales,
customer support and professional services organizations. Furthermore, the
Company's future performance will depend in part upon its ability to integrate
recently acquired businesses and future acquisitions, and there can be no
assurance that the Company will be able to integrate such businesses in a
timely manner or in accordance with its strategic objectives. The difficulties
of such integration may be further compounded by the necessity of coordinating
geographically-dispersed divisions and integrating personnel with disparate
backgrounds, all of which could divert management's attention from the day-to-
day business of the Company. The failure of the Company to manage successfully
its historic and future growth could have a material adverse effect on the
Company's business, operating results and financial condition. See "--New
Business Model" and "--Risks Related to Acquisitions" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
DEVELOPING MARKET
The market for online enterprise learning is a new and emerging market.
Corporate training and education has historically been conducted primarily
through classroom instruction and instructor-led training and has
traditionally been performed by in-house personnel. 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 Company's future success will depend upon, among other factors, the extent
to which companies adopt technology-based training solutions, particularly
online learning solutions, and the extent to which companies utilize the
services or purchase products of third-party providers. There can be no
assurance that the use of technology-based training or online learning
applications will become widespread or that the Company's products and
services will achieve commercial success. In addition, companies that have
already invested substantial resources in other methods of corporate training
may be reluctant to adopt a new strategy that may limit or compete with their
existing investments. Any failure of technology-based training, and online
learning in particular, to gain wider market acceptance would have a material
adverse effect on the Company's business, operating results and financial
condition. Even if companies implement technology-based training or online
learning solutions, they may still choose to design, develop or manage all or
a part of their education and training internally. The failure of companies to
utilize third parties to design, develop or manage their education and
training applications would materially and adversely affect the Company's
services revenue and would also have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Industry Background."
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COMPETITION
The online 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, the Company expects that a number of new
competitors will enter this market in the future.
The Company's competitors vary in size and scope and the breadth of products
and services offered. The Company's online learning authoring products face
competition from developers of multimedia authoring tools. Librarian faces
competition from vendors of other management systems, including those offered
with off-the-shelf technology-based training courses, and the Company's
professional services business faces competition from many small, regional
online learning and technology-based training services businesses as well as
large professional consulting firms and in-house training departments. Because
of the emerging nature of the market for online learning, the Company believes
that being first to achieve market or brand awareness should provide a
competitive advantage. A number of large companies have announced an intention
to enter the market for online learning and technology-based training. There
can be no assurance that additional companies will not enter the online
learning market and offer products and services that are competitive with
those of the Company. Increased competition could result in pricing pressures,
reduced margins or the failure of the Company's products and services to
achieve or maintain market acceptance, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
Several of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company and therefore may be able to respond more
quickly than the Company 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 deliver
competing products or services directly to customers. If such competitors were
to bundle competing products or services for their customers and offer a
complete online learning solution, the demand for the Company's products and
services might be substantially reduced and the ability of the Company to
market and sell its products and services successfully might be substantially
diminished. In addition, the existence or announcement of collaborative
relationships involving competitors of the Company could adversely affect the
Company's ability to attract and retain customers. As a result of the
foregoing and other factors, there can be no assurance that the Company will
compete effectively with current or future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, operating results and financial condition. See "Business--
Competition."
ADOPTION OF INTERNET AND INTRANET SOLUTIONS
In order for the Company to be successful, the Internet and intranets must
continue to be adopted as a means of communication, particularly for corporate
training and education. Because information exchange over these networks is
continuing to evolve, it is difficult to estimate with any assurance the size
of this market and its growth rate, if any. To date, many businesses have been
deterred from utilizing these networks for a number of reasons, including but
not limited to potentially inadequate development of network infrastructure,
security concerns, inconsistent quality of service, lack of availability of
cost-effective high-speed service, limited numbers of local access points for
corporate users, the inability to integrate business applications on these
networks, the need to interoperate with multiple and frequently incompatible
products and a lack of tools to simplify access to and use of these networks.
Even if the Internet and intranets are widely adopted, the adoption of these
networks for corporate training and education, particularly by companies that
have relied on traditional means of training their personnel, will require
broad acceptance of new training methods. In addition, companies that have
already invested substantial resources in other methods of corporate training
and education may be reluctant to adopt a new strategy that may limit or
compete with their existing investments.
The use of the Internet and intranets may not increase or may increase more
slowly than expected because the infrastructure required to support such
networks may not fully develop. For example, the Internet has
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experienced, and may continue to experience, significant growth in its number
of users and amount of traffic. There can be no assurance that the Internet
infrastructure will continue to support the demands placed on it by this
continued growth or that the performance or reliability of the Internet will
not be adversely affected by this continued growth. In addition, the Internet
and intranets could lose their viability due to delays in the development or
adoption of new standards and protocols to handle increased levels of activity
or due to increased governmental regulation. Changes in or insufficient
availability of communications services to support the Internet and intranets
could result in slower response times and could adversely affect their usage.
If the use of the Internet and intranets for information exchange and
particularly for corporate education and training fails to develop or develops
more slowly than expected, or if the Internet infrastructure does not
adequately support continued growth, the Company's business, operating results
and financial condition would be materially and adversely affected. See
"Business--Industry Background" and "--Customers."
RAPID TECHNOLOGICAL CHANGE; PRODUCT DEVELOPMENT
The market for technology-based training and online learning products and
services, particularly Internet or intranet-based products and services, is
characterized by rapid technological advances, changes in customer
requirements and frequent new product introductions and enhancements. The
introduction of products embodying new technologies and the emergence of new
industry standards could render existing products obsolete and unmarketable.
The Company must also respond rapidly to developments related to Internet
technology, hardware platforms and operating systems and applicable
programming languages. Such developments will require the Company to continue
to make substantial product development investments. Any failure by the
Company to anticipate or respond adequately to technological developments or
customer requirements, or any significant delays in product development or
introduction, could result in a loss of competitiveness and revenue, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products and offer new services that keep pace with competitive product
introductions and technological developments, satisfy diverse and evolving
customer requirements and otherwise achieve market acceptance. In particular,
the Company believes that its future success will be dependent, in large part,
upon market acceptance of the most recent version of Librarian which was
introduced in February 1998. There can be no assurance that the Company will
be successful in developing and marketing on a timely and cost-effective basis
future products or product enhancements, or offer new services that respond to
technological advances. There can also be no assurance that this new product
or any other new products, enhancements or services will achieve market
acceptance. The Company has in the past experienced delays in the development,
introduction and marketing of new or enhanced products, and there can be no
assurance that the Company will not experience similar delays with respect to
other new products or product enhancements. Any failure by the Company to
anticipate or respond adequately to changes in technology and customer
preferences, or any significant delays in other product development efforts,
could have a material adverse effect on the Company's business, operating
results and financial condition. The introduction or announcement of new
product offerings by the Company or its competitors may cause customers to
defer or forego purchases of the Company's products or services, which could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Technology, Research and Development."
RISKS OF FIXED-PRICE ENGAGEMENTS
The Company has experienced an increased number of professional services
engagements that are billed on a fixed-price basis and intends to pursue such
engagements in the future with the goal of increasing the percentage of
services revenue derived from fixed-price engagements. Prior to its recent
acquisitions, the Company has had limited experience in the professional
services area, and to date the Company has primarily relied upon acquisitions
to develop its professional services business. The Company's failure to
estimate accurately the resources and time required for an engagement, to
manage client expectations effectively regarding the scope of services to be
delivered for the estimated fees or to complete fixed-price engagements within
budget,
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on time and to clients' satisfaction would expose the Company to risks
associated with cost overruns and may expose the Company, in certain cases, to
penalties, any of which could have a material adverse effect on the Company's
business, operating results and financial condition. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
RISKS ASSOCIATED WITH CHANGING ECONOMIC CONDITIONS
The Company's revenue is subject to fluctuation as a result of general
economic conditions. A significant portion of the Company's revenue is derived
from the sale of products and services to Fortune 1000 companies, educational
organizations and 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 generally, and on
technology-based training and online learning in particular, which could have
an adverse effect on the Company's business, operating results and financial
condition. See "Business--Asymetrix Strategy" and "--Sales and Marketing."
DEPENDENCE ON KEY PERSONNEL
The Company's future success will be highly dependent on the performance of
its senior management team and other key employees. The Company's success will
also depend on its ability to attract, integrate, motivate and retain
additional highly skilled technical, sales and marketing and professional
services personnel. Furthermore, the Company's ability to provide a complete
solution to a large number of enterprise customers and therefore to achieve
growth is dependent upon its ability to attract, integrate, motivate and
retain additional professional services personnel. There is intense
competition for such personnel in the areas of the Company's activities. The
Company does not have employment agreements with most of its executives or
other key employees. In addition, the Company does not maintain key person
life insurance for any of its officers or key employees. The loss of the
services of any of the Company's senior management team or other key employees
or the failure of the Company to attract, integrate, motivate and retain
additional key employees, including professional services personnel, could
have a material adverse effect on the Company's business, operating results
and financial condition. See "Business--Employees" and "Management."
INTELLECTUAL PROPERTY; LITIGATION
The Company relies primarily on a combination of copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods to protect its
intellectual property and trade secrets. While the Company also has two
patents covering technology related to its current products, there can be no
assurance that these patents will not be invalidated, circumvented or
challenged, or that the rights granted under such patents will provide
competitive advantages to the Company. The Company also enters into
confidentiality agreements with its employees and consultants, and generally
controls access to and distribution of its documentation and other proprietary
information. Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use the Company's intellectual property or
trade secrets without authorization. In addition, there can be no assurance
that others will not independently develop substantially equivalent
intellectual property. There can be no assurance that the precautions taken by
the Company will prevent misappropriation or infringement of its technology. A
failure by the Company to protect its intellectual property in a meaningful
manner could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, litigation may be
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets or to determine the validity and scope
of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of management and technical resources, either
of which could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company also uses certain licensed third-party technology in some of its
products. In these license agreements, the licensors have generally agreed to
defend, indemnify and hold the Company harmless with respect to any claim by a
third party that the licensed software infringes any patent or other
proprietary right.
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There can be no assurance that the outcome of any litigation between such
licensors and a third party or between the Company and a third party will not
lead to royalty obligations of the Company for which the Company is not
indemnified or for which such indemnification is insufficient, or that the
Company will be able to obtain any additional license on commercially
reasonable terms or at all. In the future, the Company may seek to license
additional technology to incorporate in its products. There can be no
assurance that any third-party technology licenses that the Company may be
required to obtain in the future will be available to the Company on
commercially reasonable terms or at all. The loss of or inability to obtain or
maintain any of these technology licenses could result in delays in
introduction of the Company's products until equivalent technology, if
available, is identified, licensed and integrated, which could have a material
adverse effect on the Company's business, operating results and financial
condition.
From time to time the Company has received, and the Company may in the
future receive, notice of claims of infringement of other parties' proprietary
rights. The Company is currently involved in litigation filed in May 1996
relating to a claim that its ToolBook and Multimedia ToolBook products
infringe a patent owned by Richard B. Grant. The plaintiff is seeking an
unspecified amount of damages. This action is still in the discovery stage and
it is not yet possible to assess its outcome or its effect on the Company. An
adverse outcome in this litigation could have a material adverse effect on the
Company's business, operating results and financial condition. Although the
Company has received an opinion from counsel that its Multimedia ToolBook
product does not infringe this patent and that the patent is invalid, the cost
of the Company's defense of this claim, regardless of outcome, could have a
material adverse effect on the Company's business, operating results and
financial condition.
There can be no assurance that additional infringement or other claims will
not be asserted or prosecuted against the Company in the future or that any
assertions or prosecutions will not materially adversely affect the Company's
business, operating results and financial condition. Any such claims, with or
without merit, could be time-consuming, result in costly litigation and
diversion of technical and management personnel, cause product shipment delays
or require the Company to develop non-infringing technology or enter into
royalty or licensing agreements. Such royalty or licensing agreements, if
required, may not be available on commercially reasonable terms or at all. In
the event of a successful claim of intellectual property infringement against
the Company and the failure or inability of the Company to develop non-
infringing technology or license the infringed or similar technology on a
timely basis, the Company's business, operating results and financial
condition could be materially and adversely affected. See "Business--
Proprietary Rights" and "--Legal Proceedings."
DILUTION
Investors participating in this offering will incur immediate, substantial
dilution in net tangible book value in the amount of $8.47 per share (based
upon an assumed initial public offering price of $11.00 per share). To the
extent that outstanding options to purchase the Company's Common Stock are
exercised, there will be further dilution. In addition, the Company intends to
continue its acquisition program for the foreseeable future and in connection
with such acquisitions, the Company generally intends when feasible to issue
shares of Common Stock as acquisition consideration and may grant additional
stock options and stock bonuses to employees of acquired businesses who become
employed by the Company. Accordingly, the Company's acquisition strategy will
result in further ownership dilution to investors participating in this
offering. See "Dilution."
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company anticipates that the net proceeds from this offering, together
with cash, cash equivalents and short-term investments will be sufficient to
meet its working capital needs and capital expenditures for at least the next
12 months. The Company's long-term liquidity will be affected by numerous
factors, including acquisitions of businesses or technologies, demand for the
Company's online learning products and services, the extent to which such
online learning products and services achieve market acceptance, the timing of
and extent to which the Company 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
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increasing their own market share, the level and timing of revenues, and other
factors. To the extent that resources are insufficient to fund the Company's
activities, the Company may need to raise additional funds. There can be no
assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. If adequate funds are not available on
acceptable terms, the Company 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 the Company's business, operating results and financial condition.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Liquidity and Capital Resources."
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field and cannot distinguish
21st century dates from 20th century dates. These date code fields will need
to distinguish 21st century dates from 20th century dates and, as a result,
many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements. Although the
Company believes that its products and internal systems are Year 2000
compliant, the Company utilizes third-party equipment and software that may
not be Year 2000 compliant. Failure of such third-party equipment or software
to operate properly with regard to the Year 2000 and thereafter could require
the Company to incur unanticipated expenses to remedy any problems, which
could have a material adverse effect on the Company's business, operating
results and financial condition. Furthermore, the purchasing patterns of
customers or potential customers may be affected by Year 2000 issues as
companies expend significant resources to correct their current systems for
Year 2000 compliance. These expenditures may result in reduced funds available
to purchase products and services such as those offered by the Company, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
CERTAIN ANTI-TAKEOVER PROVISIONS
Upon completion of this offering, the Company's Board of Directors will have
the authority to issue up to 2,000,000 shares of Preferred Stock and to
determine the price, rights, preferences, privileges and restrictions,
including voting rights, of those shares without any further vote or action by
the stockholders. The rights of the holders of Common Stock will be subject
to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock, while providing flexibility in connection with possible financings,
acquisitions or other corporate purposes, may have the effect of delaying,
deferring or preventing a change in control of the Company, may discourage
bids for the Company's Common Stock at a premium over the market price of the
Common Stock, and may adversely affect the market price of, and the voting and
other rights of the holders of, the Common Stock. The Company has no current
plans to issue shares of Preferred Stock. In addition, certain provisions of
the Company's Amended and Restated Certificate of Incorporation and Bylaws
which will become effective upon the closing of this offering will have the
effect of delaying, deferring or preventing a change of control of the
Company. These provisions will provide, among other things, that the Board of
Directors is divided into three classes to serve staggered three-year terms,
that stockholders may not take actions by written consent and that the ability
of stockholders to call special meetings will be restricted. In addition, the
Company will be subject to the anti-takeover provisions of Section 203 of the
Delaware General Corporation Law, which will prohibit the Company from
engaging in a "business combination" with an "interested stockholder" for a
period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
in a prescribed manner. The Company's indemnity agreements provide and the
Company's Certificate of Incorporation and Bylaws will provide that the
Company will indemnify officers and directors against losses that they may
incur in investigations and legal proceedings resulting from their services to
the Company, which may be broad enough to include services in connection with
takeover defense measures. Such provisions may have the effect of preventing
changes in the management of the Company. See "Description of Capital Stock."
16
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following this offering could adversely affect the market price of the
Company's Common Stock. The number of shares of Common Stock available for
sale in the public market is limited by restrictions under the Securities Act
of 1933, as amended (the "Securities Act"), and lock-up agreements executed by
certain of the security holders of the Company under which such security
holders have agreed not to sell or otherwise dispose of any of their shares
for a period of 180 days after the date of this Prospectus without the prior
written consent of NationsBanc Montgomery Securities LLC. NationsBanc
Montgomery Securities LLC may, however, in its sole discretion and at any time
without notice, release all or any portion of the shares subject to lock-up
agreements. In addition to the 3,000,000 shares of Common Stock offered hereby
(assuming no exercise of the Underwriters' over-allotment option), there will
be 10,124,822 shares of Common Stock outstanding as of the date of this
Prospectus, all of which are "restricted securities" under the Securities Act.
On the date of this Prospectus, 1,897 of these shares will be eligible for
sale in the public market. Ninety days after the date of this Prospectus an
additional 238,412 shares will be eligible for sale. Upon the expiration of
lock-up agreements 180 days after the date of this Prospectus, an additional
3,761,733 shares will become eligible for sale, subject in the case of
3,515,168 of such shares to the volume limitations and other conditions of
Rule 144 adopted under the Securities Act ("Rule 144"). The remaining
6,121,562 shares will become eligible for sale at various times from October
29, 1998 to March 16, 1999, subject to the volume limitations and other
conditions of Rule 144. In addition, the Company intends to file a
registration statement on Form S-8 with the Securities and Exchange Commission
shortly after this offering covering (i) the 1,687,500 shares of Common Stock
reserved or to be reserved for issuance under the Company's 1998 Equity
Incentive Plan and 1998 Directors Stock Option Plan, (ii) an additional number
of shares of Common Stock to be reserved for issuance under the Equity
Incentive Plan equal to the number of shares reserved for future issuance
under the Company's 1995 Combined Incentive and Nonqualified Stock Option Plan
(the "1995 Plan") as of the date of this Prospectus (169,728 as of March 31,
1998), and (iii) the shares subject to outstanding options as of the date of
this Prospectus (3,614,684 as of March 31, 1998). The holder of 291,294 shares
of Common Stock will also be entitled to certain rights with respect to
registration of such shares of Common Stock for offer or sale to the public.
If this holder were to exercise these rights, the holders of an additional
3,478,597 shares of Common Stock with "piggyback" registration rights could
also include all or a portion of their shares in such a registration. Such
sales could have an adverse effect on the market price for the Company's
Common Stock. See "Management--Director Compensation" and "--Employee Benefit
Plans," "Description of Capital Stock--Registration Rights" and "Shares
Eligible for Future Sale."
NO PRIOR TRADING MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common Stock
of the Company and there can be no assurance that an active trading market
will develop or be sustained upon completion of this offering. The initial
public offering price, which will be established by negotiations between the
Company and the representatives of the Underwriters based upon a number of
factors, may not be indicative of prices that will prevail in the trading
market. See "Underwriting" for a discussion of the factors to be considered in
determining the initial public offering price. The stock market from time to
time has experienced significant price and volume fluctuations. In addition,
the market prices of securities of other technology companies, particularly
Internet-related companies, have been highly volatile. Factors such as
fluctuations in the Company's operating results, announcements of
technological innovations or new products by the Company or its competitors,
analysts' reports and projections and general market conditions may have a
significant effect on the market price of the Company's Common Stock. See
"Underwriting." 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. Such litigation could result in
substantial costs and a diversion of management's attention and resources,
which would have a material adverse effect on the Company's business,
operating results and financial condition.
CONTROL BY EXISTING STOCKHOLDERS
Upon completion of this offering, the present executive officers and
directors of the Company and their affiliates will beneficially own
approximately 55.8% of the Company's outstanding Common Stock (54.0%
17
<PAGE>
if the Underwriters' over-allotment option is exercised in full). In
particular, Paul Allen, a director of the Company, will beneficially own
approximately 44.8% of the Company's Common Stock upon the completion of this
offering. As a result, these stockholders will be able to control the
management and affairs of the Company and all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions such as a merger, consolidation or sale of
substantially all of the Company's assets. Such concentration of ownership
might have the effect of delaying or preventing a change in control of the
Company, impede a merger, consolidation, takeover or other business
combination involving the Company or discourage a potential acquiror from
making a tender offer or otherwise attempting to obtain control of the
Company, which in turn could have an adverse effect on the market price of the
Company's Common Stock. See "Principal Stockholders."
UNSPECIFIED USE OF PROCEEDS
The Company plans to use substantially all of the net proceeds from this
offering for general corporate purposes, including working capital. The
Company may also use a portion of the net proceeds from this offering to
acquire or invest in businesses, technologies and product lines that are
complementary to the Company's business. In the ordinary course of business,
the Company evaluates potential acquisitions of such businesses, technologies
and product lines. However, the Company has no agreements or commitments and
is not currently engaged in any negotiations with respect to such
transactions. As a result, the Company will have significant discretion as to
the use of the net proceeds from this offering. See "Use of Proceeds."
18
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,000,000 shares of
Common Stock offered hereby are estimated to be approximately $29.8 million
(approximately $34.4 million if the Underwriters' over-allotment option is
exercised in full), at an assumed initial public offering price of $11.00 per
share and after deducting the estimated underwriting discount and estimated
offering expenses. The primary purposes of this offering are to obtain
additional capital, create a public market for the Company's Common Stock and
facilitate future access by the Company to public equity markets.
The Company intends to use the net proceeds for general corporate purposes,
including working capital and other general corporate purposes, including
expansion of sales and marketing activities and its professional services
organization to accommodate anticipated growth in these areas. The amounts
actually expended by the Company for such working capital purposes may vary
significantly and will depend on a number of factors, including the amount of
the Company's future revenues and cash generated by operations and the other
factors described under "Risk Factors." Accordingly, the Company's management
will retain broad discretion in the allocation of the net proceeds of this
offering. A portion of the net proceeds may also be used to acquire or invest
in complementary businesses, technologies, product lines or products. In the
ordinary course of business, the Company evaluates potential acquisitions of
such businesses, technologies and product lines. However, the Company has no
current agreements or commitments with respect to any such acquisition, and
the Company is not currently engaged in any negotiations with respect to any
such transaction. Pending such uses, the net proceeds of this offering will be
invested in short-term, interest-bearing, investment grade securities. See
"Risk Factors--Risks Related to Acquisitions" and "--Unspecified Use of
Proceeds."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its capital
stock and does not anticipate paying any cash dividends on its capital stock
in the foreseeable future.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of March
31, 1998 (i) on an actual basis and (ii) on an as adjusted basis to give
effect to the conversion of each outstanding share of Class B Stock into
approximately 0.75 shares of Common Stock and the expiration of a put right
with respect to 191,489 shares of the Company's Common Stock, both of which
will occur upon the closing of this offering, and the sale of the 3,000,000
shares of Common Stock offered hereby, at an assumed initial public offering
price of $11.00 per share and after deducting estimated underwriting discount
and estimated offering expenses.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
Redeemable Common Stock, $.01 par value; 191,489 shares
issued and outstanding, actual; no shares issued and
outstanding, as adjusted(1)............................ $ 2,234 --
Stockholders' equity:
Class B Stock, $.01 par value; 5,000,000 shares
authorized, 4,321,389 shares issued and outstanding,
actual; 2,000,000 shares authorized, no shares issued
and outstanding, as adjusted.......................... 43 --
Common Stock, $.01 par value; 40,000,000 shares
authorized, 6,692,365 shares issued and outstanding
actual; 13,124,822 shares issued and outstanding, as
adjusted(2)........................................... 67 131
Additional paid-in capital............................. 169,426 201,429
Accumulated deficit.................................... (159,572) (159,572)
Accumulated other comprehensive income (loss).......... (76) (76)
--------- ---------
Total stockholders' equity........................... 9,888 41,912
--------- ---------
Total capitalization................................ $ 12,122 $ 41,912
========= =========
</TABLE>
- --------
(1) Redeemable Common Stock represents 191,489 shares of Common Stock issued
in connection with the acquisition of CSI which are subject to a put right
held by the two former shareholders of CSI. See Note 8 of Notes to the
Company's Consolidated Financial Statements.
(2) Excludes (i) 3,600,111 shares of Common Stock issuable upon exercise of
options outstanding as of March 31, 1998 under the 1995 Plan with a
weighted average exercise price of $3.95 per share, (ii) 174,902 shares of
Common Stock reserved for issuance under the 1995 Plan as of such date,
(iii) 1,500,000 additional shares of Common Stock reserved for issuance
under the Company's 1998 Equity Incentive Plan, (iv) 187,500 shares of
Common Stock reserved for issuance under the Company's 1998 Directors'
Stock Option Plan and (v) 14,573 shares of Common Stock subject to an
outstanding option not granted under the 1995 Plan. Includes 331,246
shares of Common Stock subject to an escrow to secure certain
indemnification obligations of former stockholders of Aimtech relating to
the acquisition of Aimtech. See "Management--Employee Benefit Plans,"
"Description of Capital Stock" and Note 10 of Notes to the Company's
Consolidated Financial Statements.
20
<PAGE>
DILUTION
The pro forma net tangible book value of the Company as of March 31, 1998
was approximately $3.5 million or $0.34 per share of Common Stock. Pro forma
net tangible book value per share represents the amount of total tangible
assets less total liabilities, divided by the pro forma shares of Common Stock
outstanding as of March 31, 1998. After giving effect to the issuance and sale
of the 3,000,000 shares of Common Stock offered hereby (at an assumed initial
public offering price of $11.00 per share and after deducting estimated
underwriting discount and estimated offering expenses) and the expiration of a
put right with respect to 191,489 shares of Common Stock, the Company's pro
forma net tangible book value as of March 31, 1998 would have been $33.3
million, or $2.53 per share. This represents an immediate increase in pro
forma net tangible book value of $2.19 per share to existing stockholders and
an immediate dilution of $8.47 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share................... $11.00
Pro forma net tangible book value per share at March 31, 1998.... $0.34
Increase in pro forma net tangible book value per share
attributable to new investors................................... 2.19
-----
Pro forma net tangible book value per share after offering........ 2.53
------
Dilution per share to new investors............................... $ 8.47
======
</TABLE>
The foregoing discussion and tables assume no exercise of any stock options
outstanding as of March 31, 1998. As of March 31, 1998, there were (i) options
outstanding to purchase a total of 3,600,111 shares of Common Stock with a
weighted average exercise price of $3.95 per share under the 1995 Plan, (ii)
174,902 shares of Common Stock reserved for issuance under the 1995 Plan and
(iii) 14,573 shares of Common Stock subject to an outstanding option not
granted under the 1995 Plan. To the extent that any of these options are
exercised, there will be further dilution to new investors. See "Risk
Factors--Dilution," "Capitalization," "Management--Employee Benefit Plans" and
Note 10 of Notes to the Company's Consolidated Financial Statements.
21
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial data is qualified
by reference to, and should be read in conjunction with, the Company's
historical Consolidated Financial Statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere in this Prospectus. The selected historical
consolidated statement of operations data for the year ended December 31, 1997
and the selected historical consolidated balance sheet data as of December 31,
1997 are derived from historical consolidated financial statements of the
Company that have been audited by KPMG Peat Marwick LLP, independent auditors,
and are included elsewhere in this Prospectus. The selected historical
consolidated statement of operations data presented below for each of the two
years in the period ended December 31, 1996, and the selected historical
consolidated balance sheet data as of December 31, 1996, are derived from
historical consolidated financial statements of the Company that have been
audited by Ernst & Young LLP, independent auditors, and are included elsewhere
in this Prospectus. The selected historical consolidated statement of
operations data for the two years in the period ended December 31, 1994 and
the selected historical consolidated balance sheet data as of December 31,
1993, 1994 and 1995 are derived from audited historical consolidated financial
statements of the Company not included in this Prospectus. The selected
historical consolidated statement of operations data for the three months
ended March 31, 1997 and 1998, and the selected historical consolidated
balance sheet data as of March 31, 1998, are derived from unaudited historical
consolidated financial statements of the Company included elsewhere in this
Prospectus. The unaudited financial statements include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the Company's financial position and results of operations for
these periods. The financial data for the three months ended March 31, 1998
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1998 or any other future period.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------------ ---------------
1993 1994 1995 1996 1997 1997 1998
-------- -------- -------- -------- -------- ------- ------
HISTORICAL CONSOLIDATED
STATEMENT OF OPERATIONS
DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue:
Online learning
products (1).......... $ -- $ -- $ -- $ 3,135 $ 7,056 $ 1,403 $2,069
Other products......... 7,178 12,409 16,238 11,165 10,425 2,811 1,540
-------- -------- -------- -------- -------- ------- ------
Total product
revenue.............. 7,178 12,409 16,238 14,300 17,481 4,214 3,609
Services revenue....... 1,140 1,639 1,926 2,955 6,583 770 4,186
-------- -------- -------- -------- -------- ------- ------
Total revenue........ 8,318 14,048 18,164 17,255 24,064 4,984 7,795
Cost of revenue:
Product revenue:
Online learning
products (1).......... -- -- -- 136 585 58 196
Other products......... 2,849 4,487 3,343 2,946 2,069 481 289
-------- -------- -------- -------- -------- ------- ------
Total cost of product
revenue.............. 2,849 4,487 3,343 3,082 2,654 539 485
Services revenue....... 484 1,186 1,270 2,100 4,137 490 2,746
-------- -------- -------- -------- -------- ------- ------
Total cost of
revenue............. 3,333 5,673 4,613 5,182 6,791 1,029 3,231
-------- -------- -------- -------- -------- ------- ------
Gross margin............ 4,985 8,375 13,551 12,073 17,273 3,955 4,564
Operating expenses:
Research and
development........... 11,948 16,630 13,315 12,122 8,115 2,246 1,435
Sales and marketing.... 7,878 13,169 11,984 14,989 13,589 3,443 3,251
General and
administrative........ 4,735 4,432 3,997 4,292 4,432 897 1,596
Loss on impairment of
assets (2)............ -- 3,836 -- 2,787 -- -- --
Restructuring charge
(3)................... -- -- 3,318 1,104 -- -- --
Acquired in-process
research and
development (4)....... -- -- -- -- 4,064 -- --
-------- -------- -------- -------- -------- ------- ------
Total operating
expenses.............. 24,561 38,067 32,614 35,294 30,200 6,586 6,282
-------- -------- -------- -------- -------- ------- ------
Loss from operations.... (19,576) (29,692) (19,063) (23,221) (12,927) (2,631) (1,718)
Other income (expense):
Other expense.......... -- -- -- (1,128) -- -- --
Interest income from
principal stockholder
(5)................... -- -- 1,222 1,066 436 182 --
Interest expense paid
by principal
stockholder........... (2,978) (5,007) (1,846) -- -- -- --
Other interest income
(expense), net........ (301) (440) 50 36 48 44 4
Equity in income
(losses) from
Infomodelers, Inc..... -- -- -- (112) (634) (150) 2,169
-------- -------- -------- -------- -------- ------- ------
Total other income
(expense)............. (3,279) (5,447) (574) (138) (150) 76 2,173
-------- -------- -------- -------- -------- ------- ------
Income (loss) before
income taxes........... (22,855) (35,139) (19,637) (23,359) (13,077) (2,555) 455
Provision for income
taxes.................. 11 32 78 196 38 -- --
-------- -------- -------- -------- -------- ------- ------
Net income (loss)....... $(22,866) $(35,171) $(19,715) $(23,555) $(13,115) $(2,555) $ 455
Accretion of redemption
value of redeemable
common stock........... -- -- -- -- -- -- (766)
-------- -------- -------- -------- -------- ------- ------
Net loss attributable to
common stockholders.... (22,866) (35,171) (19,715) (23,555) (13,115) (2,555) (311)
======== ======== ======== ======== ======== ======= ======
Basic and diluted net
loss per share (6)..... $(206.00) $(268.48) $ (4.14) $ (4.01) $ (2.17) $ (0.43) $(0.05)
======== ======== ======== ======== ======== ======= ======
Shares used to compute
basic and diluted net
loss per share (6)..... 111 131 4,766 5,879 6,038 5,932 6,657
</TABLE>
(footnotes appear on next page)
22
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
-------- -------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
HISTORICAL CONSOLIDATED BALANCE SHEET
DATA:
Cash and cash equivalents................. $ 490 $ 1,296 $ 3,551 $ 3,763 $ 2,454 $ 2,911
Working capital (deficit)................. (64,069) (91,347) 25,323 9,847 607 1,849
Total assets.............................. 13,531 16,033 35,259 18,727 21,564 20,780
Long-term obligations..................... -- 605 68 -- 181 164
Redeemable common stock (7)............... -- -- -- -- 1,468 2,234
Total stockholders' equity (deficit)...... (55,277) (85,368) 29,736 12,310 9,762 9,888
</TABLE>
- --------
(1) The Company's online learning products consist of its Librarian learning
management system, its ToolBook II Instructor and ToolBook II Assistant
authoring products, its ToolBook II Synergy pre-authoring product and
Allen Communications' Designer's Edge product, for which the Company is a
reseller. See "Business--Products and Services."
(2) Loss on impairment of assets in 1996 related to products and technologies
written-off as a result of the spin-off of Infomodelers. See Note 9 of
Notes to the Company's Consolidated Financial Statements. Loss on
impairment of assets in 1994 related to asset write-offs related to
products and technologies which were discontinued in 1994.
(3) Restructuring charge in 1995 relates to the Company's restructuring of its
domestic operations and restructuring charge in 1996 relates to the
Company's restructuring of its European operations and a non-cash expense
associated with a modification of stock option plan rights of Asymetrix
employees who transferred to Infomodelers. See Note 9 of Notes to the
Company's Consolidated Financial Statements.
(4) Acquired in-process research and development relates to the costs of in-
process research and development acquired by the Company in connection
with the acquisitions of Aimtech and Socha. See Note 8 of Notes to the
Company's Consolidated Financial Statements.
(5) Interest income on note receivable from stockholder relates to interest
earned on a note receivable from the Company's principal stockholder which
was repaid to the Company in full in October 1997. See "Certain
Transactions" and Note 7 of Notes to the Company's Consolidated Financial
Statements.
(6) See Note 1 of Notes to the Company's Consolidated Financial Statements for
an explanation of the determination of the number of shares used to
compute basic and diluted net loss per share.
(7) Redeemable common stock represents 191,489 shares of Common Stock issued
in connection with the acquisition of CSI which are subject to a put right
held by the two former shareholders of CSI. This put right will expire
upon the closing of this offering. See "Capitalization" and Note 8 of
Notes to the Company's Consolidated Financial Statements.
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with "Selected
Historical Consolidated Financial Data" and the Company's Consolidated
Financial Statements and related Notes thereto included elsewhere in this
Prospectus. This Prospectus contains forward-looking statements that involve
risks and uncertainties. The Company'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
"Risk Factors."
OVERVIEW
Asymetrix was founded in 1984 by Paul Allen, a co-founder of Microsoft
Corporation, and during the Company's first ten years it operated in large
part as a technology development organization, with less emphasis on the
commercialization of technologies. Starting in 1995, Asymetrix recapitalized
and redirected its focus to the development and marketing of authoring
products and learning management systems designed to capitalize on the
advantages of the Internet as a means of delivering technology-based training
applications. Research and development and product lines not directly related
to this focus were decreased, eliminated or subsequently spun off. In order to
offer a more complete online enterprise learning solution, the Company also
introduced a variety of professional services, including a wide range of
consulting and development services, training programs and customer and
technical support targeted for the online enterprise learning market. The
Company's principal products include its learning management system known as
Librarian, its online learning authoring products, consisting of ToolBook II
Instructor and ToolBook II Assistant and its multimedia products, consisting
of media creation products, and third-party learning titles.
The Company anticipates that future revenue growth, if any, will be
attributable to its online learning products and its professional services. To
the extent these products and services do not achieve commercial acceptance or
that revenue from these products or services do not increase or meet the
Company's expectations, the Company's business, operating results and
financial condition will be materially and adversely affected. To date, the
Company has not realized a substantial amount of its product revenue from its
Librarian product. The Company believes that it will be dependent in large
part on market acceptance of the latest release of its Librarian product for
future growth because the Company believes that market acceptance of Librarian
may influence sales of the Company's other online learning products and
professional services. See "Risk Factors--Dependence on Online Learning
Products."
The Company has acquired several technologies and services businesses in
pursuing the online enterprise learning market. On September 12, 1997, the
Company acquired Aimtech Corporation ("Aimtech"), a developer of multimedia
authoring products and Internet authoring technologies for an aggregate of
2,183,894 shares of its Series 4 Class B Stock valued at $3.1 million (which
are convertible into an aggregate of 1,637,178 shares of Common Stock). On
September 30, 1997, the Company acquired the Oakes Companies, which provide
online learning consulting, custom development and training services and also
distribute certain technology-based training applications. The Company issued
an aggregate of 1,512,500 shares of its Series 5 Class B Stock valued at $2.1
million (which are convertible into an aggregate of 1,134,371 shares of Common
Stock) in connection with the acquisition of the Oakes Companies. On December
23, 1997, the Company acquired CSI, a provider of online learning consulting,
custom development and training services and issued an aggregate of 550,193
shares of its Common Stock valued at $4.8 million. The Company has also
acquired three other small businesses, Socha in July 1997, Graham-Wright
Interactive, Inc. in December 1997 and Adams Consulting Group, Inc. in March
1998. All of these eight acquisitions were accounted for using the purchase
method of accounting. Accordingly, the Company's historical consolidated
financial statements do not include results of operations, financial position
or cash flows of these entities prior to their respective dates of
acquisition. In addition, as a result of the acquisitions of Aimtech and
Socha, the Company has incurred charges relating to the cost of acquired in-
process research and development of $4.1 million for 1997 and, in connection
with all of its acquisitions from July 1, 1997 through March 31, 1998, has
recorded an aggregate of $8.5 million in goodwill, approximately $1.5 million
of which will be amortized on a straight-line basis over a five year period
and the remainder (approximately
24
<PAGE>
$7.0 million) of which will be amortized over a 15 year period. If the Company
were to incur additional charges for acquired in-process research and
development and amortization of goodwill with respect to any future
acquisitions, the Company's business, operating results and financial
condition could be materially and adversely affected. See "Risk Factors--New
Business Model" and "--Risks Related to Acquisitions."
As part of its strategy to focus on the online enterprise learning market,
the Company divested product lines and technologies which were unrelated to
this market. In October 1996, the Company completed the spin-off of its
Database Tools Division to Infomodelers, Inc. ("Infomodelers") and distributed
a controlling interest in Infomodelers to its stockholders. In March 1998, the
Company sold substantially all of its remaining interest in Infomodelers to
Vulcan Ventures, Inc. for an aggregate purchase price of approximately $2.4
million in cash. See "Certain Transactions." In July 1997, the Company
established SuperCede, Inc. ("SuperCede"), which is now a 50%-owned
subsidiary, and transferred the assets of its Internet Development Tools
Division and SuperCede products to SuperCede. The Company's historical
financial statements do not consolidate the results of operations, financial
position or cash flows of Infomodelers subsequent to October 1996 or of
SuperCede subsequent to September 1997. The Company accounts for its
Infomodelers and SuperCede investments using the equity method of accounting.
See "Certain Transactions" and Note 9 of Notes to the Company's Consolidated
Financial Statements.
The Company incurred net losses of $23.6 million and $13.1 million in 1996
and 1997, respectively, and an operating loss of $1.7 million in the three
months ended March 31, 1998, and has yet to achieve operating income under its
new business model. The Company's limited operating history under its new
business model, the emerging nature of the market for online enterprise
learning and the factors described under "Risk Factors--Potential Fluctuations
in Quarterly Operating Results; Unpredictability of Future Revenue;
Seasonality," among other factors, make prediction of the Company's future
operating results difficult. Although the Company has experienced revenue
growth in certain recent periods and although the pro forma 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 the Company may experience and, therefore, they should not
be considered indicative of future operating results. In addition, the Company
intends to continue to invest in acquisitions, its professional services
business and research and development, among other things. As a result, the
Company expects to continue to incur operating losses at least through 1998.
There can be no assurance that the Company will achieve profitability or, if
profitability is achieved, that it will be sustained. See "Risk Factors--
Substantial Historical Operating Losses; Limited Operating History in Target
Market; Uncertain Profitability" and "--New Business Model."
The Company derives its revenue principally from sales of its software
products and fees from professional services, training, support and
maintenance. The Company recognizes revenue from product sales at such time as
the software product has been shipped, collection is probable and there are no
significant obligations of the Company remaining to be performed. Product
license fees are generally determined on a per user basis, except that its
learning management system is licensed on either a per server per user basis
or on a single server unlimited user basis at the option of the customer. In
the case of non-refundable royalties from OEMs, resellers or other
distributors, the Company recognizes revenue when it delivers its product to
the OEM, reseller or other distributor provided no significant obligations of
the Company remain. Additional royalties are paid to the extent that the
advances are exceeded and these additional royalties are recognized upon
delivery of the products to customers by the OEM, reseller or other
distributer. Professional services revenue is derived primarily from
professional fees billed to clients and is recognized as services are
performed, for contracts that are billed on a time and materials basis, and on
the percentage of completion method, based on the ratio of costs incurred to
the total estimated project cost, for fixed-price contracts. Revenue from
training fees is recognized in the month in which the last day of the training
event falls. Maintenance revenue associated with technical support contracts
is recognized ratably over the term of the contract, typically one year.
Services revenue represented approximately 17%, 27% and 54% of total revenue
in 1996, 1997 and the three months ended March 31, 1998, respectively.
Effective January 1, 1998, the Company adopted Statement of Position (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
25
<PAGE>
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 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.
Revenue allocated to software products, specified upgrades and enhancements is
generally recognized upon delivery of the related products, upgrades and
enhancements. Revenue allocated to post contract customer support is generally
recognized ratably over the term of the support, and revenue allocated to
service elements is generally recognized as the services are performed. The
adoption of SOP 97-2 did not have a material effect on revenue recognition for
the three months ended March 31, 1998.
As a result of focusing its business on the online enterprise learning
market, the Company has changed its distribution strategy from emphasizing
retail and other indirect distribution channels to emphasizing a direct sales
model. Direct sales accounted for approximately 50%, 48% and 82% of the
Company's total revenue for 1996, 1997 and the three months ended March 31,
1998, respectively. See "Risk Factors--New Business Model." While
international revenue accounted for approximately 32%, 31% and 14% of total
revenue for 1996, 1997 and the three months ended March 31, 1998,
respectively, the Company believes that the online enterprise learning market
has not yet developed significantly outside the United States and currently
does not intend to market actively its online learning products and
professional services internationally other than in the United Kingdom and in
a limited number of other foreign markets. Therefore, the Company anticipates
that international revenue will constitute a lesser percentage of total
revenue in the future.
In accordance with Statement of Financial Accounting Standards No. 86,
Accounting for Costs of Computer Software to be Sold, Leased or Otherwise
Marketed, software development costs are expensed as incurred until
technological feasibility has been established, at which time such costs are
capitalized until the product is available for general release to customers.
To date, establishment of technological feasibility of the Company's products
and general release of such software have substantially coincided. As a
result, software development costs qualifying for capitalization have not been
significant, and therefore the Company has not capitalized any internal
software development costs.
26
<PAGE>
RESULTS OF OPERATIONS
The following table presents the Company's results of operations as a
percentage of total revenue for the periods indicated.
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- -------------
1995 1996 1997 1997 1998
STATEMENT OF OPERATIONS DATA: -------- -------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
Product revenue:
Online learning products...... --% 18.2% 29.3% 28.2 % 26.5%
Other products................ 89.4 64.7 43.3 56.4 19.8
-------- -------- ------- ----- -----
Total product revenue........ 89.4 82.9 72.6 84.6 46.3
Services revenue............... 10.6 17.1 27.4 15.4 53.7
-------- -------- ------- ----- -----
Total revenue................ 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Product revenue:
Online learning products...... -- 0.8 2.4 1.2 2.5
Other products................ 18.4 17.1 8.6 9.6 3.7
-------- -------- ------- ----- -----
Total cost of product
revenue..................... 18.4 17.9 11.0 10.9 6.2
Services revenue............... 7.0 12.1 17.2 9.8 35.2
-------- -------- ------- ----- -----
Total cost of revenue........ 25.4 30.0 28.2 20.6 41.4
-------- -------- ------- ----- -----
Gross margin.................... 74.6 70.0 71.8 79.4 58.6
Operating expenses:
Research and development....... 73.3 70.2 33.7 45.1 18.4
Sales and marketing............ 66.0 86.9 56.5 69.1 41.6
General and administrative..... 22.0 24.9 18.4 18.0 20.6
Loss on impairment of assets... -- 16.1 -- -- --
Restructuring charge........... 18.3 6.4 -- -- --
Acquired in-process research
and development............... -- -- 16.9 -- --
-------- -------- ------- ----- -----
Total operating expenses...... 179.6 204.5 125.5 132.2 80.6
-------- -------- ------- ----- -----
Loss from operations............ (105.0) (134.6) (53.7) (52.8) (22.0)
Other income (expense), net:
Other expense.................. -- (6.5) -- -- --
Interest income from principal
stockholder................... 6.7 6.1 1.8 3.6 --
Interest expense paid by
principal stockholder......... (10.2) -- -- -- --
Other interest income, net..... 0.3 0.2 0.2 0.9 --
Equity in income (losses) from
Infomodelers, Inc............. -- (0.6) (2.6) (3.0) 27.8
-------- -------- ------- ----- -----
Total other income (expense).. (3.2) (0.8) (0.6) 1.5 27.8
-------- -------- ------- ----- -----
Income (loss) before income
taxes.......................... (108.1) (135.4) (54.3) (51.3) 5.8
Provision for income taxes...... 0.4 1.1 0.2 -- --
-------- -------- ------- ----- -----
Net income (loss)............... (108.5)% (136.5)% (54.5)% (51.3)% 5.8%
======== ======== ======= ===== =====
</TABLE>
THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31,
1997
Revenue. Total revenue increased 56% from $5.0 million in the three months
ended March 31, 1997 to $7.8 million in the three months ended March 31, 1998.
Total product revenue decreased 14% from $4.2 million in the three months
ended March 31, 1997 to $3.6 million in the three months ended March 31, 1998.
Online learning product revenue increased 47% from $1.4 million in the three
months ended March 31, 1997 to $2.1 million in the three months ended March
31, 1998. This increase was due primarily to increased demand for the
Company's online learning products as a result of the Company's focus on the
online learning market. Other
27
<PAGE>
product revenue decreased 41% from $2.8 million in the three months ended
March 31, 1997 to $1.7 million in the three months ended March 31, 1998.
Included in other product revenue in the three months ended March 31, 1997 was
approximately $690,000 from sales of SuperCede products. As a result of the
Company's strategy to focus on the online enterprise learning market, the
Company anticipates that future growth in product sales, if any, will be
attributable to its online learning products and that its other product
revenue will decrease in the future. Services revenue increased 444% from
$770,000 in the three months ended March 31, 1997 to $4.2 million in the three
months ended March 31, 1998 due primarily to the expansion of the Company's
professional services business. The Company 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 "Risk
Factors--Risks of Fixed-Price Engagements."
Cost of Revenue. Cost of product revenue includes costs of media, manuals
and distribution costs. Gross margin from the Company's online learning
products is generally higher than that of its other products because these
products are typically sold by the Company's direct sales force, as compared
with other products sold through indirect channels, such as OEMs and
resellers. 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.
Total cost of revenue increased 214% from $1.0 million in the three months
ended March 31, 1997 to $3.2 million in the three months ended March 31, 1998.
Total cost of product revenue decreased 10% from $539,000 in the three months
ended March 31, 1997 to $485,000 in the three months ended March 31, 1998.
Cost of online learning products revenue increased 238% from $58,000 in the
three months ended March 31, 1997 to $196,000 in the three months ended March
31, 1998, due primarily to increased sales of the Company's online learning
products. Cost of other products revenue decreased 40% from $481,000 in the
three months ended March 31, 1997 to $289,000 in the three months ended March
31, 1998. This decrease was due primarily to decreased sales of the Company's
other products. Cost of other products revenue attributable to sales of
SuperCede products was $131,000 in the three months ended March 31, 1997.
Total product gross margin remained constant at 87% in the three months ended
March 31, 1997 and 1998. Online learning products gross margin was 96% and 90%
in the three months ended March 31, 1997 and 1998, respectively. Other
products gross margin remained constant at 83% in the three months ended March
31, 1997 and 1998.
Cost of services revenue increased 460% from $490,000 in the three months
ended March 31, 1997 to $2.7 million in the three months ended March 31, 1998.
This increase was due primarily to increased professional service projects in
the first quarter of 1998. Services gross margin decreased from 36% in the
three months ended March 31, 1997 to 34% in the three months ended March 31,
1998. The Company 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 decreased 36% from
$2.2 million in the three months ended March 31, 1997 to $1.4 million in the
three months ended March 31, 1998. This decrease was due primarily to the spin
off of SuperCede. Research and development expenses as a percentage of total
revenue decreased from 45% in the three months ended March 31, 1997 to 18% in
the three months ended March 31, 1998 as a result of the spin-off of
SuperCede. Research and development expenses related to SuperCede were
$845,000 in the three months ended March 31, 1997. The Company expects
research and development expenses to increase in absolute dollars in the
future.
28
<PAGE>
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 decreased 6%
from $3.4 million in the three months ended March 31, 1997 to $3.3 million in
the three months ended March 31, 1998. Sales and marketing expenses as a
percentage of total revenue decreased from 69% in the three months ended March
31, 1997 to 42% in the three months ended March 31, 1998. The decreases were
due primarily to sales and marketing expenses relating to the launch of the
SuperCede products in the first quarter of 1997, and version 6.0 of ToolBook
II Assistant in March 1997, offset by expenses relating to the launch of
Librarian and new versions of ToolBookII Instructor and TookBook II Assistant
in the first quarter of 1998. Sales and marketing expenses related to
SuperCede were $913,000 in the three months ended March 31, 1997. The Company
expects that sales and marketing expenses will increase in absolute dollars in
the future as the Company continues to increase its sales and marketing
efforts in the online learning market.
General and Administrative. General and administrative expenses consist
primarily of salaries and other personnel-related expenses for the Company's
administrative, executive and finance personnel as well as outside legal and
audit costs. General and administrative expenses increased 78% from $897,000
in the three months ended March 31, 1997 to $1.6 million in the three months
ended March 31, 1998. This increase was due primarily to increased overhead
due to the Company's increased size as well as a $185,000 expense relating to
the amortization of goodwill and a $135,000 charge relating to the cashless
exercise of stock options by employees of the Company who transferred to
Infomodelers. General and administrative expenses as a percentage of total
revenue increased from 18% in the three months ended March 31, 1997 to 21% in
the three months ended March 31, 1998. General and administrative expenses
related to SuperCede were $316,000 in the three months ended March 31, 1997.
The Company expects that general and administrative expenses will increase in
absolute dollars in the future as the Company incurs additional costs
(including directors' and officers' liability insurance, investor relations
programs and increased professional fees) related to being a public company.
Other Income (Expense). The Company recorded no other expense in the three
months ended March 31, 1997 and 1998. Interest income from principal
stockholder was $182,000 in the three months ended March 31, 1997 and was
related to interest payments to the Company on a note receivable from the
Company's principal stockholder. This note receivable was repaid in full in
October 1997. Other interest income, net was $44,000 and $4,000 in the three
months ended March 31, 1997 and 1998, respectively. Equity in income (losses)
from Infomodelers was $(150,000) and $2.2 million in the three months ended
March 31, 1997 and 1998, respectively, representing the Company'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. Because the Company sold
substantially all of its interest in Infomodelers in March 1998, the Company
does not anticipate that it will record equity in income (losses) from
Infomodelers in future periods.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenue. Total revenue increased 39% from $17.3 million in 1996 to $24.1
million in 1997. Product revenue increased 22% from $14.3 million in 1996 to
$17.5 million in 1997. Online learning product revenue increased 129% from
$3.1 million in 1996 to $7.1 million in 1997. This increase was due primarily
to increased demand for the Company's online learning products as a result of
the Company's focus on the online learning market. Other product revenue
decreased 7% from $11.2 million in 1996 to $10.4 million in 1997. Included in
other product revenue in 1997 was approximately $2.0 million from SuperCede.
Services revenue increased 123% from $3.0 million in 1996 to $6.6 million in
1997 due primarily to the expansion of the Company's custom development
efforts and the acquisition of the Oakes Companies in September 1997.
Cost of Revenue. Total cost of revenue increased 31% from $5.2 million in
1996 to $6.8 million in 1997. Cost of product revenue decreased 13% from $3.1
million in 1996 to $2.7 million in 1997. Cost of online learning products
revenue increased 330% from $136,000 in 1996 to $585,000 in 1997, due
primarily to increased sales of the Company's online learning products. Cost
of other products revenue decreased 28% from
29
<PAGE>
$2.9 million in 1996 to $2.1 million in 1997. This decrease was due primarily
to the shift from retail distribution and to inventory write-offs and returns
associated with the Company's multimedia products due to the change in
distribution method during 1996. Cost of other products revenue attributable
to SuperCede was $273,000 in 1997 and cost of other product revenue
attributable to Infomodelers was $160,000 in 1996. Total product gross margin
increased from 78% in 1996 to 85% in 1997. Online learning products gross
margin was 96% and 92% in 1996 and 1997 respectively. Other products gross
margin was 74% and 80% in 1996 and 1997, respectively. Cost of services
revenue increased 95% from $2.1 million in 1996 to $4.1 million in 1997. This
increase was due primarily to increased professional services projects in such
period. Services gross margin increased from 29% in 1996 to 37% in 1997.
Operating Expenses
Research and Development. Research and development expenses decreased 33%
from $12.1 million in 1996 to $8.1 million in 1997. This decrease was due
primarily to the exclusion of research and development expenses relating to
Infomodelers in 1997. Research and development expenses as a percentage of
total revenue decreased from 70% in 1996 to 34% in 1997 as a result of the
spin-offs of Infomodelers and SuperCede. Research and development expenses
related to SuperCede were $2.5 million and $2.6 million in 1996 and 1997,
respectively, and research and development expenses related to Infomodelers
were $3.0 million in 1996.
Sales and Marketing. Sales and marketing expenses decreased 9% from $15.0
million in 1996 to $13.6 million in 1997. Sales and marketing expenses as a
percentage of total revenue decreased from 87% in 1996 to 57% in 1997. The
decreases were due primarily to sales and marketing expenses relating to the
Company's "Web event" launch of Tool Book II Instructor and the launch of
Infomodelers products during 1996, partially offset by sales and marketing
expenses relating to the launch of the SuperCede products in the first quarter
of 1997, version 6.0 of Tool Book II Assistant in March 1997 and version 5.5
of Librarian in July 1997. Sales and marketing expenses related to SuperCede
were $172,000 and $2.5 million in 1996 and 1997, respectively, and sales and
marketing expenses related to Infomodelers were $1.3 million in 1996.
General and Administrative. General and administrative expenses increased 2%
from $4.3 million in 1996 to $4.4 million in 1997. This increase was due
primarily to a one-time charge in October 1997 of $670,000 relating to the
cashless exercise of stock options by employees of the Company who transferred
to SuperCede. General and administrative expenses as a percentage of total
revenue decreased from 25% in 1996 to 18% in 1997 as a result of a small
increase in expenses relative to increased revenue. General and administrative
expenses related to SuperCede were $989,000 and $653,000 in 1996 and 1997,
respectively and general and administrative expenses related to Infomodelers
were $941,000 in 1996.
Loss on Impairment of Assets. Loss on impairment of assets in 1996 relates
to asset write-offs related to the spin-off of Infomodelers. As a result of
this spin-off, the Company reviewed the technology remaining in the Company
and recorded an impairment charge of $2.8 million in the fourth quarter of
1996.
Restructuring Charge. In the third quarter of 1996, the Company adopted a
plan to restructure its European operations and recorded an expense of
$604,000, which included involuntary termination benefits for employee
compensation and certain exit costs. The Company also recorded a non-cash
restructuring expense of $500,000 in 1996 related to a modification of stock
option plan rights of Asymetrix employees who transferred to Infomodelers. As
of December 31, 1997, the restructuring plans were completed and all costs
associated with the restructuring plans have been incurred.
Acquired In-Process Research and Development. The Company recognized the
cost of acquired in-process research and development totaling $4.1 million in
1997. This amount represented all in-process research and development acquired
by the Company in connection with the acquisitions of Aimtech and Socha during
1997 and consisted of $3.6 million resulting from the Aimtech acquisition and
$484,000 resulting from the Socha acquisition.
30
<PAGE>
Other Income (Expense). The Company recorded no other expense in 1997 and
other expense of $(1.1 million) in 1996 relating to a terminated acquisition.
Interest income from principal stockholder was $1.1 million and $436,000 in
1996 and 1997, respectively and was related to interest payments to the
Company on a note receivable from the Company's principal stockholder. This
note receivable was repaid in October 1997. Other interest income, net was
$36,000 and $48,000 in 1996 and 1997, respectively. Equity in income (losses)
from Infomodelers was $(112,000) and $(634,000) in 1996 and 1997,
respectively, representing the Company's equity in the net losses of
Infomodelers in such period. Because the Company sold substantially all of its
interest in Infomodelers in March 1998, the Company does not anticipate that
it will record equity in income (losses) from Infomodelers in future periods.
Provision for Income Taxes. The Company accounts for income taxes under the
asset and liability method. Under the asset and liability method, the
provision for income taxes includes income taxes currently payable and
deferred taxes arising from temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and amounts used
for income tax purposes. As of December 31, 1997, the Company had $47.4
million total deferred tax assets, primarily reflecting potential future tax
savings attributable to its federal operating loss and tax credit
carryforwards. These assets were reduced by a $47.4 million valuation
allowance, reflecting uncertainty as to their realization. As of December 31,
1997, the Company had federal tax loss carry forwards of approximately $128.2
million and federal tax credit carry forwards of approximately $2.6 million.
The federal tax loss carryforwards expire in 2000 through 2011. The Tax Reform
Act of 1986 imposes substantial restrictions on the utilization of operating
losses and tax credits in the event of an "ownership change" of a corporation.
The Company's ability to utilize net operating loss carry forwards and tax
credits may be limited as a result of an "ownership change" with respect to
the Company.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenue. Total revenue decreased approximately 5% from $18.2 million in 1995
to $17.3 million in 1996. Product revenue decreased 12% from $16.2 million in
1995 to $14.3 million in 1996. The Company first introduced its online
learning products during the second quarter of 1996 and the Company's online
learning product revenue was $3.1 million in 1996. Other products revenue
decreased approximately 31% from $16.2 million in 1995 to $11.2 million in
1996. This decrease was due primarily to the Company's shift in focus to
online learning products and a decrease in sales of the Company's Infomodeler
products from $1.0 million in 1995 to $200,000 in 1996 as a result of the
spin-off of Infomodelers in October 1996. The Company's SuperCede product was
released during the fourth quarter of 1996 and contributed approximately
$200,000 to other products revenue in 1996. Services revenue increased 53%
from $1.9 million in 1995 to $3.0 million in 1996 as the Company began to
emphasize providing online learning-related professional services.
Cost of Revenue. Total cost of revenue increased 12% from $4.6 million in
1995 to $5.2 million in 1996. Cost of product revenue decreased 8% from $3.3
million in 1995 to $3.1 million in 1996. Cost of online learning product
revenue was $136,000 in 1996. Cost of other product revenue decreased 12% from
$3.3 million in 1995 to $2.9 million in 1996, due primarily to decreased other
product revenue and the spin-off of Infomodelers in October 1996. Total
product gross margin remained relatively constant at 79% and 78% in 1995 and
1996, respectively. Online learning products gross margin was 96% in 1996 and
other products gross margin was 74% in 1996. Cost of services revenue
increased 65% from $1.3 million in 1995 to $2.1 million in 1996. This increase
was due primarily to higher professional services revenue. Services gross
margin decreased from 39% in 1995 to 29% in 1996.
Research and Development. Research and development expenses decreased 9%
from $13.3 million in 1995 to $12.1 million in 1996. This decrease was due
primarily to the spin-off of Infomodelers. Research and development expenses
as a percentage of total revenue decreased slightly from 73% in 1995 to 70% in
1996. Research and development expenses related to SuperCede were $3.3 million
in 1996 and research and development expenses related to Infomodelers were
$4.7 million and $3.0 million in 1995 and 1996, respectively.
31
<PAGE>
Sales and Marketing. Sales and marketing expenses increased 25% from $12.0
million in 1995 to $15.0 million in 1996. This increase was due primarily to
an increase in the number of sales representatives, sales engineers and
marketing personnel as the Company continued to invest in the development of
its online learning business and moved towards a direct sales model. Sales and
marketing expenses as a percentage of total revenue increased from 61% in 1995
to 87% in 1996, as a result of increases in the Company's direct sales force
and the time required for new sales employees to generate revenue. Sales and
marketing expenses related to SuperCede were approximately $373,000 in 1996
and sales and marketing expenses related to Infomodelers were $1.7 million and
$1.3 million in 1995 and 1996, respectively.
General and Administrative. General and administrative expenses increased 7%
from $4.0 million in 1995 to $4.3 million in 1996. General and administrative
expenses as a percentage of total revenue increased slightly from 22% in 1995
to 25% in 1996. These increases were due primarily to accruals for legal
expenses to defend against the Grant patent litigation. See "Business--Legal
Proceedings." General and administrative expenses related to SuperCede were
$1.3 million in 1996 and general and administrative expenses related to
Infomodelers were $1.2 million and $941,000 in 1995 and 1996, respectively.
Restructuring Charge. In 1995, the Company adopted a plan to restructure its
domestic operations. Under this plan, the Company discontinued development of
certain products and reduced its product development, support and sales work
force by a total of 89 full-time employees (approximately 30% of the Company's
then-current total work force). The Company recorded an aggregate expense of
$3.3 million in the third and fourth quarters of 1995 as a result of this
reorganization. As described above, in 1996, the Company recorded aggregate
non-cash restructuring expenses of $1.1 million due to the restructuring of
its European operations and the modification of stock option plan rights
related to employees who transferred to Infomodelers.
Other Income (Expense). The Company recorded other expense of $1.1 million
in 1996 relating to a terminated acquisition. Interest income from principal
stockholder was $1.2 million and $1.1 million in 1995 and 1996, respectively.
Other interest income, net was $50,000 and $36,000 in 1995 and 1996,
respectively. Equity interest in income (losses) from Infomodelers was
$(112,000) in 1996, representing the Company's equity in the net losses of
Infomodelers from October 17 through December 31, 1996.
32
<PAGE>
SELECTED HISTORICAL QUARTERLY RESULTS OF OPERATIONS
The following table sets forth certain unaudited historical quarterly
results of operations for the nine quarters ended March 31, 1998, as well as
such data expressed as a percentage of total revenue. In management's opinion,
this information has been prepared on the same basis as the audited historical
consolidated financial statements and includes all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
information for the quarters presented, when read in conjunction with the
Company's Historical Consolidated Financial Statements and the notes thereto.
The results of operations for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
-------- -------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue:
Online learning
products (1).......... $ -- $ 426 $ 1,199 $ 1,510 $ 1,403 $ 1,648 $ 1,907 $ 2,097 $2,069
Other products......... 4,597 2,922 1,569 2,077 2,811 2,639 2,352 2,624 1,540
------- ------- ------- ------- ------- ------- ------- ------- ------
Total product
revenue.............. 4,597 3,348 2,768 3,587 4,214 4,287 4,259 4,721 3,609
Services revenue....... 480 872 1,034 569 770 1,105 1,656 3,052 4,186
------- ------- ------- ------- ------- ------- ------- ------- ------
Total revenue........ 5,077 4,220 3,802 4,156 4,984 5,392 5,915 7,773 7,795
Cost of revenue:
Product revenue:
Online learning
products (1).......... -- 6 46 84 58 108 168 251 196
Other products......... 940 826 572 608 481 456 452 680 289
------- ------- ------- ------- ------- ------- ------- ------- ------
Total cost of product
revenue.............. 940 832 618 692 539 564 620 931 485
Services revenue....... 327 536 918 319 490 648 1,136 1,863 2,746
------- ------- ------- ------- ------- ------- ------- ------- ------
Total cost of
revenue............. 1,267 1,368 1,536 1,011 1,029 1,212 1,756 2,794 3,231
------- ------- ------- ------- ------- ------- ------- ------- ------
Gross margin............ 3,810 2,852 2,266 3,145 3,955 4,180 4,159 4,979 4,564
Operating expenses:
Research and
development........... 3,439 3,115 3,258 2,310 2,246 2,159 2,206 1,504 1,435
Sales and marketing.... 3,115 4,243 3,950 3,681 3,443 3,241 3,718 3,187 3,251
General and
administrative........ 954 1,311 900 1,127 897 847 817 1,871 1,596
Loss on impairment of
assets (2)............ -- -- -- 2,787 -- -- -- -- --
Restructuring charge
(3)................... -- -- 604 500 -- -- -- -- --
Acquired in-process
research and
development (4)....... -- -- -- -- -- -- 4,064 -- --
------- ------- ------- ------- ------- ------- ------- ------- ------
Total operating
expenses.............. 7,508 8,669 8,712 10,405 6,586 6,247 10,805 6,562 6,282
------- ------- ------- ------- ------- ------- ------- ------- ------
Loss from operations.... (3,698) (5,817) (6,446) (7,260) (2,631) (2,067) (6,646) (1,583) (1,718)
Other income (expense):
Other expense.......... -- -- -- (1,128) -- -- -- -- --
Interest income from
principal stockholder
(5)................... 388 289 209 180 182 147 92 15 --
Other interest income
(expense), net........ (25) 5 8 48 44 2 3 (1) 4
Equity in income
(losses) from
Infomodelers, Inc. ... -- -- -- (112) (150) (188) (148) (148) 2,169
------- ------- ------- ------- ------- ------- ------- ------- ------
Total other income
(expense)............. 363 294 217 (1,012) 76 (39) (53) (134) 2,173
------- ------- ------- ------- ------- ------- ------- ------- ------
Income (loss) before
income taxes........... (3,335) (5,523) (6,229) (8,272) (2,555) (2,106) (6,699) (1,717) 455
Provision for income
taxes.................. 22 130 23 21 -- -- -- 38 --
------- ------- ------- ------- ------- ------- ------- ------- ------
Net income (loss)....... $(3,357) $(5,653) $(6,252) $(8,293) $(2,555) $(2,106) $(6,699) $(1,755) $ 455
======= ======= ======= ======= ======= ======= ======= ======= ======
</TABLE>
(footnotes appear on next page)
33
<PAGE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1996 1996 1996 1996 1997 1997 1997 1997 1998
AS A PERCENTAGE OF TOTAL REVENUE: -------- -------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product revenue:
Online learning products
(1)........................ --% 10.1% 31.5% 36.3% 28.2% 30.6% 32.2% 27.0% 26.5%
Other products.............. 90.5 69.2 41.3 50.0 56.4 48.9 39.8 33.8 19.8
----- ------ ------ ------ ----- ----- ------ ----- -----
Total product revenue..... 90.5 79.3 72.8 86.3 84.6 79.5 72.0 60.8 46.3
Services revenue............ 9.5 20.7 27.2 13.7 15.4 20.5 28.0 39.2 53.7
----- ------ ------ ------ ----- ----- ------ ----- -----
Total revenue........... 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue:
Product revenue:
Online learning products
(1)........................ -- 0.1 1.2 2.0 1.2 2.0 2.8 3.2 2.5
Other products.............. 18.5 19.6 15.1 14.7 9.6 8.5 7.6 8.8 3.7
----- ------ ------ ------ ----- ----- ------ ----- -----
Total cost of product
revenue.................. 18.5 19.7 16.3 16.7 10.8 10.5 10.4 12.0 6.2
Services revenue............ 6.4 12.7 24.1 7.7 9.8 12.0 19.2 24.0 35.2
----- ------ ------ ------ ----- ----- ------ ----- -----
Total cost of revenue... 24.9 32.4 40.4 24.4 20.6 22.5 29.6 36.0 41.4
----- ------ ------ ------ ----- ----- ------ ----- -----
Gross margin................. 75.1 67.6 59.6 75.6 79.4 77.5 70.4 64.0 58.6
Operating expenses:
Research and development.... 67.7 73.8 85.7 55.6 45.1 40.0 37.3 19.4 18.4
Sales and marketing......... 61.4 100.5 103.9 88.6 69.1 60.1 62.9 41.0 41.6
General and administrative.. 18.8 31.1 23.7 27.1 18.0 15.7 13.8 24.1 20.6
Loss on impairment of assets
(2)........................ -- -- -- 67.1 -- -- -- -- --
Restructuring charge (3).... -- -- 15.9 12.0 -- -- -- -- --
Acquired in-process research
and development (4)........ -- -- -- -- -- -- 68.7 -- --
----- ------ ------ ------ ----- ----- ------ ----- -----
Total operating expenses.... 147.9 205.4 229.2 250.4 132.2 115.8 182.7 84.5 80.6
----- ------ ------ ------ ----- ----- ------ ----- -----
Loss from operations......... (72.8) (137.8) (169.6) (174.8) (52.8) (38.3) (112.3) (20.5) (22.0)
Other income (expense):
Other expense............... -- -- -- (27.1) -- -- -- -- --
Interest income from
principal stockholder (5).. 7.6 6.8 5.5 4.3 3.7 2.7 1.6 0.2 --
Other interest income
(expense), net............. -- 0.1 0.2 1.2 0.9 -- -- -- --
Equity in income (losses) of
Infomodelers, Inc. ........ -- -- -- (2.7) (3.0) (3.5) (2.5) (1.9) 27.8
----- ------ ------ ------ ----- ----- ------ ----- -----
Total other income
(expense).................. 7.6 6.9 5.7 (24.3) 1.6 (0.8) (0.9) (1.7) 27.8
----- ------ ------ ------ ----- ----- ------ ----- -----
Income (loss) before income
taxes....................... (65.2) (130.9) (163.9) (199.0) (51.2) (39.1) (113.2) (22.2) 5.8
Provision for income taxes... 0.4 3.1 0.6 0.5 -- -- -- 0.5 --
----- ------ ------ ------ ----- ----- ------ ----- -----
Net income (loss)............ (65.6)% (134.0)% (164.5)% (199.5)% (51.2)% (39.1)% (113.2)% (22.7)% 5.8%
===== ====== ====== ====== ===== ===== ====== ===== =====
</TABLE>
- --------
(1) The Company's online learning products consist of its Librarian learning
management system, its ToolBookII Instructor and ToolBook II Assistant
authoring products, its ToolBook II Synergy pre-authoring product and
Allen Communications' Designer's Edge product, for which the Company is a
reseller. See "Business--Products and Services."
(2) Loss on impairment of assets in 1996 related to products and technologies
written off as a result of the spin-off of Infomodelers. See Note 9 of
Notes to the Company's Consolidated Financial Statements.
(3) Restructuring charge in 1996 relates to the Company's restructuring of its
European operations and a non-cash expense associated with a modification
of stock option plan rights of Asymetrix employees who transferred to
Infomodelers. See Note 9 of Notes to the Company's Consolidated Financial
Statements.
(4) Acquired in-process research and development relates to the costs of in-
process research and development acquired by the Company in connection
with the acquisitions of Aimtech and Socha. See Note 8 of Notes to the
Company's Consolidated Financial Statements.
(5) Interest income on note receivable from stockholder relates to interest
earned on a note receivable from the Company's principal stockholder which
was repaid to the Company in October 1997. See "Certain Transactions" and
Note 7 of Notes to the Company's Consolidated Financial Statements.
The Company'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 the Company's control. Factors
that may adversely affect the Company's quarterly operating results include:
the demand for technology-based training in general and demand for online
enterprise learning solutions in particular; 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
inability of the Company to meet its own or client project milestones or
client expectations; market acceptance of the Company's or competitors'
products and services; the ability of the Company to develop and market new or
enhanced products and services in a timely manner and market acceptance of
such products, including the latest release of Librarian, and services; the
Company's
34
<PAGE>
ability to integrate acquisitions successfully and to identify, acquire and
integrate suitable acquisition candidates; the timing of revenue recognition;
charges related to acquisitions; competitive conditions; technological
changes; personnel changes; general economic conditions; and economic
conditions specific to the technology-based training and online learning
markets. With its new emphasis on providing an online enterprise learning
solution, the Company is targeting its selling and marketing efforts towards
customers with the potential need for enterprise-wide solutions. Because the
Company believes that the implementation of its solutions may require an
enterprise-wide decision by prospective customers, the Company may be required
to provide a significant level of education to prospective customers regarding
the Company's solutions. Therefore, the Company believes that the period
between initial contact and the sale of the Company's solutions could be
lengthy, and this implementation cycle could lengthen because of increases in
the size and complexity of customer implementations. Uncertainty of timing
with respect to sales or implementations could have a material adverse effect
on the Company's business and operations and cause the Company's operating
results to vary significantly from quarter to quarter. Therefore, the
Company's operating results for any particular quarterly period may not be
indicative of future operating results.
The Company's limited operating history under its current business model,
its recent acquisitions and dispositions and the emerging nature of its market
make prediction of future revenue and expenses difficult. The Company's
expense levels are based, in part, on its expectations as to future revenue
and to a large extent are fixed in the short term. There can be no assurance
that the Company will be able to predict its future revenue accurately and the
Company may be unable to adjust spending in a timely manner to compensate for
any unexpected revenue shortfall. Accordingly, any significant shortfall of
revenue in relation to the Company's expectations could cause significant
fluctuations in quarterly operating results, which would have an adverse
effect on the Company's business, operating results and financial condition.
Due to all of the foregoing factors, the Company's quarterly revenue and
operating results are difficult to forecast, and the Company believes that
period-to-period comparisons of its operating results will not necessarily be
meaningful and should not be relied upon as an indication of future
performance. It is likely that the Company's operating results will fall below
the expectations of the Company, securities analysts or investors in some
future quarter. In such event, the trading price of the Common Stock would
likely be materially and adversely affected.
Like many companies in the software industry, the Company has experienced
higher revenue in its last fiscal quarter as a result of efforts to meet sales
quotas and as many customers complete annual budgetary cycles, and lower
revenue in its first quarter. Additionally, the Company believes that many of
its customers in the education and government markets tend to have higher
product purchasing activity during the last few weeks of the third quarter as
compared to other periods. Furthermore, revenue recognized by some components
of the Company's services business is dependent in part upon the number of
business days during the particular period and budget cycles of its customers.
Because of these factors, the Company anticipates that its professional
services and training revenue growth could be slower in the first and fourth
quarters than in other quarters because of this seasonality. Although the
Company has not been able to determine the extent to which its current
business is affected by any seasonal trends because of the refocusing and
growth of its business since 1995, there can be no assurance that the
Company's results in any future quarter will not be negatively affected by
such trends. See "Risk Factors--Fluctuations in Quarterly Operating Results;
Unpredictability in Future Revenue; Seasonality."
LIQUIDITY AND CAPITAL RESOURCES
Since 1995, the Company has funded its operations from cash flows from
operations, the private sale of equity securities and the sale of its interest
in Infomodelers in March 1998. At March 31, 1998, the principal sources of
liquidity for the Company were $1.8 million in working capital and a $5.0
million bank line of credit. Borrowings under the Company's line of credit
will bear interest at the bank's reference rate or LIBOR plus 1.0% per annum,
and this line of credit expires on December 31, 1998. The Company's
obligations under this line of credit are secured by the Company's accounts
receivable. As of March 31, 1998, the Company had no outstanding borrowings
under this line of credit.
35
<PAGE>
The Company has had significant negative cash flows from operating
activities to date. Net cash used by operating activities was $13.6 million,
$15.0 million, $7.4 million and $2.1 million in 1995, 1996, 1997 and the three
months ended March 31, 1998, respectively. Net cash used by operating
activities through 1997 was primarily the result of net losses, which include
a non cash expense of $4.1 million for acquired in-process research and
development in 1997, partially offset by an increase in accounts receivable
over such periods. Net cash provided by operating activities in the three
months ended March 31, 1998 was due primarily to net income offset by equity
in the income of Infomodelers.
Net cash provided by (used in) investing activities was $(1.8 million),
$(1.7 million), $(645,000) and $2.3 million in 1995, 1996, 1997 and the three
months ended March 31, 1998, respectively. Net cash used in investing
activities through 1997 was primarily the result of capital expenditures for
computer equipment, purchased software, office equipment, furniture and
fixtures and, in 1997, acquisition-related costs. In addition, in November
1996, the Company used $1.0 million of cash for the investment in
Infomodelers, Inc., which was partially offset by $200,000 of proceeds from
the sale of assets in 1996. Net cash provided by investing activities in the
three months ended March 31, 1998 was primarily due to proceeds received from
the sale of the Company's investment in Infomodelers. As of March 31, 1998,
the Company had no material commitments for capital expenditures. The
Company's planned capital expenditures for 1998 are approximately $1.2
million, primarily for computer equipment and contingent acquisition payments.
As of December 31, 1997, the Company also had commitments under noncancelable
operating leases with terms in excess of one year of $3.7 million through
2002.
Cash provided by financing activities was $17.7 million, $16.9 million, $6.9
million and $107,000 in 1995, 1996, 1997 and the three months ended March 31,
1998, respectively, resulting primarily from payments received on the note
receivable from principal stockholder of $11.9 million in 1996 and $6.7
million in 1997, net proceeds of $5.3 million and $500,000 from the sale of
Class B Stock in 1996 and 1997, respectively, and proceeds from the sale of
Common Stock, primarily from the exercise of stock options. Cash used for
payments on long-term debt was $523,000 and $398,000 in 1996 and 1997,
respectively, and was not significant in the three months ended March 31,
1998.
The Company anticipates that the net proceeds from this offering, together
with cash, cash equivalents and short-term investments will be sufficient to
meet its working capital needs and capital expenditures for at least the next
12 months. The Company's long-term liquidity will be affected by numerous
factors, including acquisitions of businesses or technologies, demand for the
Company's online learning products and services, the extent to which such
online learning products and services achieve market acceptance, the timing of
and extent to which the Company 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. To the extent that resources are insufficient to fund the Company's
activities, the Company may need to raise additional funds. There can be no
assurance that such additional funding, if needed, will be available on terms
attractive to the Company, or at all. If adequate funds are not available on
acceptable terms, the Company 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 the Company's business, operating results and financial condition.
See "Risk Factors--Future Capital Needs; Uncertainty of Additional Funding."
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131
establishes standards for the way that public business enterprises report
information about operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Statement 131 is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years must be restated. The Company has not determined the manner
in which it will present the information required by Statement 131.
36
<PAGE>
BUSINESS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in these forward-looking statements. Factors that may cause
such a difference include, but are not limited to, those discussed in "Risk
Factors."
OVERVIEW
Asymetrix is a leading provider of online enterprise learning solutions
designed to enable organizations to capture, deploy and manage knowledge more
effectively for use as a competitive advantage. The Company's comprehensive
learning solution consists of an open, standards-based, Internet-centric
technology platform as well as professional learning services for the online
learning market. The Company's technology platform includes ToolBook II
Instructor and ToolBook II Assistant, products which enable customers to
author online learning applications, and Librarian, a learning management
system designed to enable customers to deploy and manage such applications.
The Company's professional services include a wide range of consulting and
custom development services focused on the online learning market as well as
training and customer support.
Asymetrix believes that by providing a single source solution, it is well-
positioned to be the leading provider of online enterprise learning products
and services. Beginning in 1996, the Company redirected its focus to its
online learning products, divested several product lines and discontinued
development efforts not directly related to its online enterprise learning
solution. A key component of the Company's strategy is to provide an online
learning solution at the enterprise level. In February 1998, the Company
introduced an enhanced version of Librarian which the Company believes
significantly extends the existing features and functionality of Librarian by
enabling enterprise-wide deployment of online learning applications. In
addition, the Company has significantly expanded its professional services
capabilities and, since July 1, 1997, has acquired six professional services
companies, and the Company may seek to acquire additional professional
services companies in the future.
INDUSTRY BACKGROUND
Need for an Enterprise Learning Solution
Information technology has been successfully used to automate mission
critical business processes, such as manufacturing, human resources, finance,
sales, distribution and customer support. However, a critical function which
technology-based solutions have not adequately addressed is training and
education. In today's knowledge-based economy, an organization's ability to
learn and to apply knowledge is increasingly becoming a key competitive
advantage. With escalating job complexity, rapidly changing business
processes, shorter product life cycles, continuous investments in new
technologies that require skilled workforces, greater geographic dispersion
and increased employee mobility, organizations must be able to capture and
distribute knowledge rapidly throughout the organization. Organizations must
also frequently share this knowledge with suppliers, customers and
distributors. Training magazine estimates that U.S. organizations with 100 or
more employees budgeted an aggregate of approximately $58 billion in 1997 on
disparate training and education solutions, including instructor-led training,
conferences, seminars, written reference materials, computer-based training,
distance learning and, more recently, Internet and intranet-based training. In
addition, many organizations outsource the design, development and
implementation of training and learning management applications to third
parties. The Company believes there is a need for a learning solution that
enables organizations to improve employee productivity, coordinate their
training efforts, measure the effectiveness of training and deliver knowledge
to employees and business partners more rapidly, broadly and uniformly.
Enabling Trends and Technologies
The Company believes the market for enterprise learning solutions will be
fueled by the convergence of trends and technologies that enable technology-
based training solutions, including computer-based training, video-based
training and Internet-based training solutions, to be deployed increasingly as
substitutes for or
37
<PAGE>
complements to, instructor-led and other traditional forms of training. These
trends and enabling technologies include the proliferation of multimedia-
capable computers and networking solutions throughout all levels of
organizations, advances in PC processing power and in audio and video
streaming technologies that allow for the delivery of multimedia content in
digital format, high speed communications capabilities, object-oriented
programming technologies and, most importantly, the emergence of the Internet
and corporate intranets (collectively, the "Internet") as platforms for a wide
variety of business applications. The primary advantages of technology-based
training over traditional forms of training include performance improvements
and potential cost savings in the form of performance improvements and reduced
instructor salaries, compressed training times and reduced travel costs.
Derived from improved retention, consistent content quality, customization to
individual training needs and the ability to deliver training on CD-ROM or
through a network connection. According to International Data Corporation
("IDC"), revenues from all technology-based training applications in the
United States are expected to grow from $1.7 billion in 1997 to $4.1 billion
in 2001.
Internet-based training applications offer additional advantages over other
forms of technology-based training. Course content and application
enhancements can be deployed and updated without the need to create and
redistribute CD-ROMs or make substantial modifications to client software. The
ability to deploy and update centrally is particularly important for
organizations with dispersed or rapidly changing operations or with
significant training requirements. The ease and speed of deployment associated
with Internet-based training allows for "just-in-time" delivery for a
particular task, broadens the potential use of training within the enterprise
and offers a cost- and time-effective way to accumulate and retain company
knowledge. Internet-based training also provides the opportunity to track and
optimize individual or group performance and to collect feedback to
individualize and monitor the effectiveness of training applications. Finally,
training applications delivered over the Internet are platform independent and
require only a Web browser, eliminating the need for specialized hardware or
client software. This allows for greater accessibility at a lower cost and the
opportunity for on-demand training. Because of these benefits, the Company
believes that many organizations will target training and education as an
important corporate intranet application. IDC estimates that 75% of U.S.
corporations will have deployed an intranet by the end of 1998.
Limitations of Existing Solutions
Notwithstanding the many advantages of Internet-based training, to date, few
corporations have deployed Internet-based training applications throughout the
enterprise. Due to the lack of an established technology platform for the
development of these applications, organizations that have attempted to deploy
Internet-based training systems or applications typically have been forced to
rely on internal development efforts. Such solutions usually are costly, time-
consuming and characterized by the use of a variety of authoring products
purchased from different vendors that are not supported by a comprehensive,
standards-based development or management platform and are not optimized for
an Internet-based solution. As a result, the authoring and management products
employed are difficult to maintain, do not interoperate easily and do not
enable organizations to schedule, deploy, track and measure the effectiveness
of the training application or leverage the scalability inherent in Internet
deployment. In addition, the authoring products employed are often designed
for expert developers, which forces organizations to rely on their limited and
often over-burdened software development staffs to develop and deploy
Internet-based training applications.
Given the complexity of developing and deploying Internet-based training
applications and the scarcity of in-house technology-based training expertise
and resources, many organizations have sought assistance from third-party
experts for their technology-based training needs. However, the professional
services providers that offer technology-based training solutions typically
are small consulting and custom development firms with limited financial and
personnel resources and a narrow geographic focus. Even those professional
services firms with the resources to serve the needs of a large organization
cannot offer or deploy a single source solution and must rely on third parties
for technology, upgrades and technical support.
The Company believes that many organizations have a need for both a
technology platform and professional services that support the development and
deployment of Internet-based training applications. The Company also
38
<PAGE>
believes that the integration of products and professional services by a
single-source vendor will be a key customer requirement in the emerging market
for Internet-based training solutions. Vendors that provide the most effective
solutions as measured by increased employee productivity and return on
investment should enjoy a significant competitive advantage.
THE ASYMETRIX SOLUTION
Asymetrix is a leading provider of online enterprise learning solutions
designed to enable organizations to capture, deploy and manage knowledge more
effectively for use as a competitive advantage. The Company's online learning
solution is characterized by the following elements:
Tightly Integrated Product Offerings. The Company provides authoring
products for users with a broad range of skills and a learning management
system that collectively provide a technology platform for the development,
deployment and management of online learning applications. The Company's
online learning authoring products and learning management system are
tightly integrated ensuring that online learning applications created with
the Company's ToolBook II Instructor or ToolBook II Assistant authoring
products can be modified, reused and managed throughout an organization.
Open, Internet-Centric Approach. The Company's solution supports relevant
open standards and Internet protocols, including TCP/IP, HTML, Java and
ActiveX, enabling organizations to capitalize on the advantages of the
Internet, such as "anywhere, anytime" accessibility, cost effective
deployment, ease of updating and enhanced tracking and measurement
capabilities. The Company's learning management system uses the Open
Library Exchange ("OLX"), a published, specified interface that enables
organizations to integrate learning applications authored from a variety of
sources and that facilitates the Company's ability to incorporate emerging
technologies rapidly.
Flexibility. Customers can purchase the Company's online learning
products and professional services as a comprehensive solution or
individual products on a stand-alone basis for internal application
development with assurance that initial implementations can be integrated
into an online enterprise learning solution at a later date.
Manageability. The Company's Librarian learning management system
provides centralized, flexible control and easy administration of online
learning applications. Utilizing the interactive capabilities of the
Internet, this management system is designed to allow organizations to
track and optimize individual or group performance, collect feedback and
monitor the effectiveness of learning applications.
Comprehensive Professional Services. The Company's professional services
address a wide range of corporate education and training needs, including
needs assessment, creation of online learning applications, assimilation of
legacy and third-party content and performance evaluation services. The
Company's custom development services can also supplement customers' own
internal development efforts to enable more rapid development and
deployment of learning applications, the creation of larger and more
complex learning applications and access to instructional design or
technical, production or project management expertise not available
internally.
ASYMETRIX STRATEGY
The Company's objective is to be the leading provider of online enterprise
learning solutions. Key elements of the Company's strategy to achieve this
objective are:
Provide a Single Source Online Enterprise Learning Solution. The Company
seeks to distinguish its solution by providing a single source for online
enterprise learning. The Company's single source solution provides
organizations with both an open, standards-based, Internet-centric
technology platform for authoring, deploying and managing learning
applications and a wide range of professional services to assist
organizations in developing and implementing learning applications rapidly.
The Company believes its latest release of Librarian offers an enhanced
solution that will enable organizations to deploy and manage online
learning solutions throughout an enterprise.
39
<PAGE>
Extend Technology Leadership. Since its inception in 1984, the Company
has invested heavily in the development of advanced technologies, many of
which are incorporated in the Company's open, Internet-centric, tightly-
integrated, object-oriented technology platform for online learning. The
Company intends to continue to capitalize on advanced technologies and
rapidly incorporate new technologies into its online learning products.
Provide Superior Professional Services. The Company believes that
superior professional services can enhance and accelerate the successful
implementation of online enterprise learning solutions. The Company offers
a broad range of custom development, consulting, training and technical
support services to accelerate customer adoption and the successful
implementation of its online enterprise learning solution. The Company
intends to continue to expand its professional services capabilities both
internally and through acquisitions. The Company has recently acquired the
Oakes Companies, CSI, as well as two other smaller professional services
companies and it may seek to acquire additional professional services
companies in the future.
Expand Sales and Marketing Capabilities and Leverage Relationships. To
facilitate the shift in the Company's focus to online enterprise learning
solutions, the Company has substantially expanded its North American direct
sales organization. The Company intends to continue to expand its sales and
marketing activities in this market. In addition, the Company has entered
into relationships with providers of learning applications such as CBT
Systems, and intends to pursue such relationships in the future to
accelerate the adoption of the Company's solution.
Broaden Market for Online Learning Authoring Products. The Company seeks
to broaden the market for online learning with a multi-tiered approach to
its authoring product line. The Company's ToolBook II Instructor addresses
the market for professional developers of online learning applications.
ToolBook II Assistant is designed for professional trainers and educators.
ToolBook II Instructor can be used to create customized template for use by
subject matter experts using ToolBook II Assistant who do not have
programming or authoring expertise. The Company believes that this largely
untapped market segment provides an opportunity for additional growth.
Promote Successful Enterprise Implementations at Key Accounts. The
Company's online enterprise learning solution is designed to meet the
requirements of large organizations with geographically-dispersed
operations and continually changing training needs. The Company intends to
market its solution to leading organizations in a broad range of industries
and to promote successful enterprise implementations of its online learning
solution to create awareness and to drive further adoption of its solution.
PRODUCTS AND SERVICES
The Company's online enterprise learning solution includes software products
that collectively provide a technology platform and a wide variety of
professional services including consulting and custom development services
focused on the online learning market as well as training and customer
support.
PRODUCTS
The Company's software products offer customers a platform for online
enterprise learning applications. The Company's technology platform is
comprised of Librarian, a learning management system, and ToolBook II
Instructor and ToolBook II Assistant, online learning authoring products. The
Company also offers a variety of multimedia products.
40
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The following table depicts the Company's key products:
<TABLE>
<CAPTION>
END USER
PRODUCT DESCRIPTION LIST PRICE*
<S> <C> <C>
ONLINE LEARNING PRODUCTS
Learning Management System:
Librarian Online learning management system $4,000 to
designed to provide centralized, $50,000
flexible control and easy and above
administration of online learning
applications.
Authoring Products:
ToolBook II Instructor Object-oriented authoring product $2,495
designed for professional software
developers to create multimedia-
rich, interactive learning
applications. ToolBook II Instructor
can be used to create customized
templates for use by subject matter
experts using ToolBook II Assistant.
ToolBook II Assistant Object-oriented authoring product $1,195
designed for professional trainers
and educators to create online
learning applications.
MULTIMEDIA PRODUCTS
Digital Video Producer Video capture, editing and assembly $495
product for creating video content.
Web 3D Three-dimensional modeling program $129
designed to help create and edit 3D
graphics.
Learning Titles Selection of over 100 third-party $125 to
CD-ROM learning applications. $1,795
</TABLE>
* The terms and conditions, including sales prices and discounts from list
prices, may be negotiated based on product volumes and related services and
therefore may vary from customer to customer. The list price for Librarian
varies based on the number of registered users and server site
configuration. The Company typically receives a percentage of the end user
list price for products that are sold through the Company's distribution
channels.
Online Learning Products
Learning Management System. The Company's Librarian product is an object-
oriented, client-server learning management system designed to provide
centralized and flexible control and administration of online learning
applications. Librarian 5.0 was first shipped in July 1996. Librarian includes
an Internet- and intranet-based server implementation and utilizes standard,
Java-enabled Web browsers as the client for both learners and administrators.
Based on Internet standards, including HTML, Java and TCP/IP, Librarian is
available on Windows NT and Solaris UNIX and can connect to Microsoft
SQLServer, Oracle and other databases that comply with the open database
connectivity ("ODBC") standard.
The Company released version 6.0 of Librarian, the most recent version of
Librarian, in February 1998. The Company believes that this new version of
Librarian significantly extends the features and functionality of Librarian.
This new version is targeted for the enterprise market and is designed to
manage a wide range of tasks,
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diverse content and a large number of concurrent users. This new version of
Librarian is designed to provide the following key features not available in
previous versions of Librarian:
Scalability. Librarian is designed to scale from one server to multiple
servers while maintaining a single database view whether on a centrally-
located database or multiple distributed databases and, with proper
authorization, can be administered from any geographic location within an
organization. Librarian also supports a large and variable number of
concurrent users and can be configured to avoid the performance limitations
typically associated with such systems.
Organizational flexibility. In order to manage large numbers of learners
and courses at an enterprise level, Librarian permits users to define
centrally an organizational tree which mirrors their departmental or
enterprise structure as well as numerous alternative groups. With this
flexible structure, administrators can efficiently establish and update
groupings such as new employees or employees assigned to a particular
project, and can assign, track and manage various subsets of courses and
learners.
Collaborative learning. In addition to online discussion capabilities
integrated with Librarian, the product is designed to support third-party
Internet-based synchronous applications such as threaded discussion, chat
and online whiteboard programs.
Management of online and offline content. In addition to the management
of online content, Librarian can catalog and track learner activity in
offline learning content such as books and videos through the creation of
HTML pages.
Enhanced features. Librarian offers a variety of enhanced features
including: an enhanced visual interface; sophisticated search and online
help features; broadcast email notification; controlled access to courses
and to a variety of administrative functions; enhanced reporting
capabilities; security features, including encryption and authentication
features; and enhanced course management capabilities, such as automatic
course assignments based on pre-assessment and conditional movement in
courses.
To date, the Company has not realized a substantial amount of its online
learning product revenue from its learning management system. There can be no
assurance that Librarian 6.0 will achieve market acceptance or that it will
produce substantial revenue in the future. See "Risk Factors--Rapid
Technological Change; Product Development," "--Dependence on Online Learning
Products" and "--Demanding Customer Requirements; Product Functionality and
Defects."
Authoring Products. The Company has a multi-tiered approach to its authoring
product line. The Company's ToolBook II Instructor addresses the market for
professional developers of online learning applications. ToolBook II Assistant
is designed for professional trainers and educators. ToolBook II Instructor
can be used to create customized templates for use by subject matter experts
using ToolBook II Assistant who do not have programming or authoring
experience. The Company's authoring products are designed to ensure that
learning applications created with the Company's authoring products are
optimized for deployment and management by its Librarian learning management
system. The Company's authoring products also provide a range of distribution
options, including an "export to Web" feature, which outputs applications in
HTML or Java, an Internet-ready format. The Company's authoring products also
enable hybrid distribution, combining Internet or LAN distribution with a CD-
ROM, permitting an online learning application running within a browser to
call multimedia-rich files from a client-based CD-ROM, thereby optimizing
delivery of the application notwithstanding network bandwidth constraints.
ToolBook II Instructor. ToolBook II Instructor is a Windows-based, object-
oriented authoring product designed for professional software developers to
create multimedia-rich, online learning applications. ToolBook II Instructor
contains a number of features that are designed to simplify the authoring and
deployment process, such as a book and page metaphor, a drag and drop
interface, book specialists that function like wizards, templates, question
objects, online help, a catalog of more than 1,000 objects to facilitate
creation of online learning applications and a "publish to Librarian" button.
Although scripting is not required, ToolBook II Instructor incorporates an
object-oriented scripting language known as OpenScript, which is designed to
extend the functionality of ToolBook II Instructor to support the creation of
custom templates and objects that can be
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used for authoring in ToolBook II Instructor and ToolBook II Assistant. To
augment ToolBook II Instructor, the Company resells Allen Communications'
Designer's Edge pre-authoring product and sells its ToolBook II Synergy
product which functions as the link between Designer's Edge and ToolBook II
Instructor.
ToolBook II Assistant. ToolBook II Assistant is a Windows-based, object-
oriented authoring product designed for use by professional trainers and
educators. This product incorporates many of ToolBook II Instructor's ease of
use features, including pre-defined templates and book specialists, and
streamlines user options to facilitate the creation of high-quality learning
applications without the need for any programming or scripting. Objects and
templates can be created in ToolBook II Instructor and exported to ToolBook II
Assistant, and applications authored in ToolBook II Assistant can be modified
or enhanced in ToolBook II Instructor, enabling professional trainers and
applications developers to collaborate on content creation.
Multimedia Products
The Company offers several digital media products which can be used to
create high quality multimedia content, such as digital video, 3D models and
animations. These products can be used on a stand-alone basis or in
conjunction with the Company's authoring products. Through its TopShelf
Multimedia subsidiary, the Company also resells a variety of CD-ROM-based
online learning applications.
Digital Video Producer. Digital Video Producer is a Windows-based video
capture, editing and assembling product designed to make sophisticated desktop
video editing capabilities intuitive and easy to use. Users can drag and drop
captured video and audio files on timeline tracks and add transitions, text
and graphics and can preview and optimize the images.
Web 3D. Web 3D is an easy-to-use Windows-based 3D modeling product. Users
can drag and drop a 3D graphic from a large catalog of 3D models, add color,
and choose from a large number of surface effects and lighting settings with
multiple camera views, shadows, animation paths and backdrop scenes.
Learning Titles. The Company offers over 100 third-party CD-ROM based online
learning applications. These titles include Development Dimensions
International's award-winning Targeted Selection and a variety of other
management and professional skills, PC skills and IT training, OSHA compliance
and health and safety titles. The Company has a staff of online learning
professionals who can consult with and advise customers so that they can
select the courses most appropriate for their online learning needs.
As a result of the Company's strategy to focus on the online enterprise
learning market, the Company anticipates that growth in product sales, if any,
will be attributable primarily to its online learning products and that its
other product revenue will decrease in the future. See "Risk Factors--
Dependence on Online Learning Products."
PROFESSIONAL SERVICES
In order to provide a complete solution for the online learning needs of its
customers, the Company offers a variety of learning services, including a wide
range of consulting and development services, training programs and customer
and technical support. The Company's professional services organization has
employees located in Georgia, Illinois, Massachusetts, New Hampshire, North
Carolina, Texas, Washington and the United Kingdom.
Consulting Services. Through the Asymetrix Consulting Organization, known as
ACORN, the Company provides customers with needs identification and
assessment, learner analysis and training performance evaluation services.
Customers may use consulting services as a supplement to internal development
efforts or in conjunction with other learning services provided by the
Company.
Custom Development. The Company's project teams provide a wide range of
development services, including the planning, design, development,
administration and evaluation of online learning applications. The Company's
custom development services supplement customers' own internal development
efforts by enabling
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more rapid development and deployment of online learning applications, the
creation of larger and more complex applications and access to instructional
design, technical, production or project management expertise not available
internally. The Company employs many skilled personnel in its development
services organization, including instructional designers who participate in
project analysis, writing and design development, graphic artists who create
graphics and multimedia content, and programmers.
Training. The Company offers a variety of training classes for its products.
These classes provide instruction on the use of the Company's authoring and
management products and are offered for novice developers as well as
sophisticated programmers. The Company also offers customized classes to meet
a customer's unique requirements. Training classes are offered at the
Company's facilities, at client locations or at other locations across the
country. The Company also has a network of approximately 55 authorized
training centers which provide training for the Company's authoring products.
Customer Support. The Company generally requires Librarian customers to
purchase installation services at the time of the initial licensing of the
product. For additional fees, the Company also integrates Librarian with the
customer's online learning environment. The Company provides technical support
without charge for a limited period of time for its authoring and multimedia
products. Thereafter, the Company offers fee-based telephone support and
various levels of support contracts which can include email support, telephone
support, upgrades and monthly bulletins. For its Librarian product,
maintenance is sold at the time of product purchase. The Company also offers
Web-based support which includes an online knowledge base.
CUSTOMERS
The Company has licensed its online learning products or provided
professional services to customers in a wide variety of markets. No single
customer accounted for more than 10% of total revenues in 1996, 1997 or the
three months ended March 31, 1998. The following table sets forth a
representative list of the Company's customers who have purchased at least
$50,000 of the Company's online learning products or professional services
from the Company since January 1, 1996:
Financial/Accounting Health Care/Insurance
Deloitte & Touche LLP CUNA Mutual Group
Fidelity Investments Harvard Pilgrim Health Care
First Union Corp. The Hartford Financial Services
Ford Motor Credit Company Group, Inc.
Merrill Lynch & Co., Inc. Metropolitan Life Insurance
New York Stock Exchange, Inc. Company
Price Waterhouse LLP Oxford Health Plans, Inc.
Prudential Securities Incorporated
Government
Networking/Communications
Los Alamos National Laboratory
Lucent Technologies Inc. United States Air Force
MCI Communications Corporation United States Army
United States Department of
Defense
Manufacturing/Other
The Boeing Company Hardware/Software
Development Dimensions International
Duracell Inc. Cheyenne Software
The Laurasian Institute Hewlett-Packard Company
Lockheed Martin Corporation IBM Corporation
Pfizer Inc. Intel Corporation
The Proctor & Gamble Company Microsoft Corporation
Raytheon Company Pinnacle Systems, Inc.
Union Camp Corporation Symbol Technologies, Inc.
Systems & Computer Technology
Corp.
Tandy Corporation
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The following examples illustrate how certain organizations use the
Company's products and services:
Boeing. To increase productivity and reduce rework time, the Boeing
Company needs to capture the shop-floor knowledge of its experienced
factory workers and efficiently distribute that information to other
workers throughout the organization. The Company and Boeing's Everett
Multimedia Implementation Planning Group collaborated on a customized
version of the Company's ToolBook II Assistant authoring product that
certain Everett factory area and support personnel are using to create
multimedia-rich online job aids, including videos capturing expert
demonstrations on topics such as riveting, skin quality, wiring and color-
coded schema for pipes and tubes. These skill training modules are then
made available by CD-ROM to factory workers and are prototyped for
deployment over Boeing's corporate intranet.
Lucent. Lucent Technologies needs to ensure that its customers have the
most appropriate training for its telecommunications products and
solutions. Lucent worked with the Company's consulting organization to
determine the appropriate mix of traditional instructor-led training and
online learning to improve the implementation process and overall customer
satisfaction. The Company's consulting organization designated integrated
instructor-led and online training for Lucent's INTUITY messaging system
and DEFINITY PBX system.
Hewlett-Packard. The Hewlett-Packard Company needs to train and test
approximately 5,000 internal and third-party authorized field service
engineers worldwide on new and rapidly evolving products and procedures.
The Company's professional services organization developed a Web-based
training and testing application to meet Hewlett-Packard's strict testing
requirements. The application includes unique and randomly-assigned test
questions which permit the generation of unique tests for different
learners. Librarian is used for the management and administration of the
application's knowledge and skill tests and of students' course evaluation
forms.
Metropolitan Life. Metropolitan Life Insurance Company ("MetLife") needs
to deploy state-of-the-art laptop computers with custom-designed software
applications to over 7,000 agents nationwide, many of whom have little or
no experience with computers. MetLife looked to the Company to create a
solution that would significantly reduce training time. The Company
performed a needs assessment and audience analysis and, using its authoring
product, created a learning application using a comic strip theme with
application-specific characters that leads users through a tutorial on how
to operate the computer and the customized applications.
TECHNOLOGY, RESEARCH AND DEVELOPMENT
Asymetrix was founded in 1984 by Paul Allen, a co-founder of Microsoft
Corporation, and during the Company's first ten years it operated in large
part as a technology development organization, with less emphasis on the
commercialization of technologies. Mr. Allen continues to contribute to the
Company's technological direction as a member of the Company's Board of
Directors and as a technology advisor. This technical heritage continues to
provide the foundation for the Company's current products, has benefited the
Company's development efforts and has resulted in a number of award-winning
products.
Starting in 1995, Asymetrix redirected its focus to the development and
marketing of authoring products and learning management systems designed to
capitalize on the advantages of the Internet. Research and development and
product lines not directly related to this focus were decreased, eliminated or
subsequently spun off. The Company invests aggressively in its core
technologies and believes that its future success and competitiveness will
depend on continued product innovation.
Key features of the Company's technology include:
Open Learning Management Platform. The Company's Librarian product is
based on an open architecture. A key element of this open architecture is a
Company-developed communications protocol, OLX, which is designed to
facilitate communications between Librarian and learning applications. The
OLX
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protocol is a published, specified interface that enables organizations to
integrate learning applications authored from a variety of sources and that
accelerates the Company's ability to incorporate emerging technologies.
Support of Open Internet Standards. The Company's development efforts
support open and de facto standards including HTML, DHTML, Java, ActiveX,
AICC, Netscape and Microsoft browsers and streaming technologies. This
focus, together with the Company's experience with rapidly changing
technologies such as multimedia management, facilitates the incorporation
of internally or externally developed advanced technologies.
Scalable Authoring. The Company'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 the
Company'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.
Enterprise-Class Architecture. The Company's technologies incorporated in
the latest version of Librarian support integrated management solutions
that are designed to scale from one server to multiple servers while
maintaining centralized administration, and support a large number of
concurrent users. This version of Librarian also provides for an adaptable
hierarchical organizational structure that can mirror the many
organizational structures within an enterprise, controlled access to
administrative functions and other advanced security features such as
encryption and authentication features, and supports emerging Internet
collaborative learning applications.
The Company believes that its focus on research has attracted qualified
engineering and other research and development personnel and has contributed
to the Company's core technology capabilities, which it believes include
expertise in object-oriented programming languages and tools; multimedia
design, including video and audio; multimedia authoring and interactive user
interface design; instructional design; and client/server and Internet
technologies. The Company's research and development group is located in
Bellevue, Washington, with an additional team in Nashua, New Hampshire.
Research and development expenses were $13.3 million, $12.1 million,
$8.1 million and $1.4 million in 1995, 1996, 1997 and the three months ended
March 31, 1998, respectively and represented 73%, 70%, 34% and 18% of total
revenue for those respective periods. The Company expects that it will
continue to commit significant resources to research and development in the
future, although it anticipates that research and development expenses in the
near term will not be at the same levels as 1996 and prior periods.
The Company's future success will depend on its ability to continue to
enhance its current product line and to continue to develop and introduce new
products or offer new services that keep pace with competitive product
introductions, technological developments and emerging industry standards,
satisfy diverse and evolving customer requirements and otherwise achieve
market acceptance. There can be no assurance that the Company will be
successful in developing and marketing on a timely and cost-effective basis
future products or product enhancements, or offer new services that respond to
technological advances. In addition, the Company has in the past experienced
delays in the development, introduction and marketing of new or enhanced
products, and there can be no assurance that the Company will not experience
similar delays with respect to other new products or product enhancements. Any
failure by the Company to anticipate or respond adequately to changes in
technology and customer preferences, or any significant delays in product
development or introduction, could have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Rapid Technological Change; Product Development."
SALES AND MARKETING
The Company markets its online learning products and professional services
principally in the U.S. and through its direct sales force. The Company
targets its direct sales and marketing activities to Fortune 1000 companies,
educational organizations and government agencies. As of March 31, 1998, the
Company's sales,
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marketing and support organization consisted of 68 employees based at the
Company's corporate headquarters in Bellevue, Washington and at its field
offices in California, Georgia, Kansas, Maryland, Massachusetts, New
Hampshire, New Jersey, New York, Ohio and Virginia. The direct sales
organization includes a small telesales force that handles smaller orders and
assists with lead generation. The Company's direct sales organization also
includes engineers who answer technical questions and assist customers with
product installation implementation. The Company's direct sales force
accounted for 50%, 48% and 82% of total revenue in 1996, 1997 and the three
months ended March 31, 1998, respectively. The Company expects this level to
increase as a result of the acquisitions of Aimtech, the Oakes Companies and
CSI and as a result of the Company's focus on the online learning market.
The Company offers its learning services in a small number of foreign
markets. While international revenue accounted for 32%, 31% and 14% of the
Company's total revenue for 1996, 1997 and the months ended March 31, 1998,
respectively, the Company believes that the online enterprise learning market
has not yet developed significantly outside the United States and currently
does not intend to market actively its online learning products and
professional services internationally other than in the United Kingdom and in
a limited number of other foreign markets. Therefore, the Company anticipates
that international revenue will constitute a lesser percentage of total
revenue in the future.
The Company conducts a variety of marketing programs to promote its products
and services, including direct mail, advertising, seminars, trade shows,
public relations and distribution of product literature. The Company sponsors
an online learning conference, the most recent of which was named "Asymetrix
Online Learning '97," which had over 500 attendees, that featured a variety of
speakers representing key participants in the online learning industry. For
1998, the Company and Lakewood Publications, the publisher of Training
magazine, will jointly present the "Online Learning '98" conference in
September 1998. The Company also participates as an exhibitor and speaker at
many technology-based training trade shows. In addition, the Company offers
jointly-sponsored seminars and other marketing events with other companies in
the training market, such as Systems & Computing Technology Corporation and
CBT Systems, to help promote awareness of online learning and the Company's
solutions. The Company also maintains a Web site where potential customers can
obtain information about the Company and its products, services and
distributors.
COMPETITION
The online 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, the Company expects that a number of new
competitors will enter this market in the future.
The Company's competitors vary in size and scope and the breadth of products
and services offered. The Company's online learning authoring products face
competition from developers of multimedia authoring tools, Librarian faces
competition from vendors of other management systems, including those offered
with off-the-shelf technology-based training courses, and its professional
services business faces competition from many small, regional online learning
and technology-based training services businesses as well as large
professional consulting firms and in-house training departments. Because of
the emerging nature of the market for online learning, the Company believes
that being first to achieve market or brand awareness should provide a
competitive advantage. A number of large companies have announced an intention
to enter the market for online learning and technology-based training. There
can be no assurance that additional companies will not enter the online
learning market and offer products and services that are competitive with
those of the Company. Increased competition could result in pricing pressures,
reduced margins or the failure of the Company's products and services to
achieve or maintain market acceptance, any of which could have a material
adverse effect on the Company's business, operating results and financial
condition.
The Company believes that the principal competitive factors affecting its
market include: product features such as adaptability, scalability, ability to
integrate with other technology-based training products; quality of
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professional services; expertise and technical knowledge; functionality and
ease of use of products or developed
learning applications; quality and performance of online learning solutions;
pricing; customer service and support; the effectiveness of sales and
marketing efforts; and company reputation. Although the Company believes that
its solution currently competes favorably with respect to such factors, there
can be no assurance that the Company can maintain its competitive position
against current and potential competitors, especially those with significantly
greater financing, marketing, service, support, technical and other resources.
Several of the Company's current and potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources than the Company and therefore may be able to respond more
quickly than the Company 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 deliver
competing products or services directly to customers. If such competitors were
to bundle competing products or services for their customers and offer a
complete online learning solution, the demand for the Company's products and
services might be substantially reduced and the ability of the Company to
market and sell its products and services successfully might be substantially
diminished. In addition, the existence or announcement of collaborative
relationships involving competitors of the Company could adversely affect the
Company's ability to attract and retain customers. As a result of the
foregoing and other factors, there can be no assurance that the Company will
compete effectively with current or future competitors or that competitive
pressures faced by the Company will not have a material adverse effect on the
Company's business, operating results and financial condition. See "Risk
Factors--Competition."
PROPRIETARY RIGHTS
The Company relies primarily on a combination of copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods to protect its
intellectual property and trade secrets. While the Company also has two
patents, there can be no assurance that these patents will not be invalidated,
circumvented or challenged, or that the rights granted under such patents will
provide competitive advantages to the Company. The Company also enters into
confidentiality agreements with its employees and consultants, and generally
controls access to and distribution of its documentation and other proprietary
information. Despite these precautions, it may be possible for a third party
to copy or otherwise obtain and use the Company's intellectual property or
trade secrets without authorization. In addition, there can be no assurance
that others will not independently develop substantially equivalent
intellectual property. There can be no assurance that the precautions taken by
the Company will prevent misappropriation or infringement of its technology. A
failure by the Company to protect its intellectual property in a meaningful
manner could have a material adverse effect on the Company's business,
operating results and financial condition. In addition, litigation may be
necessary in the future to enforce the Company's intellectual property rights,
to protect the Company's trade secrets or to determine the validity and scope
of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of management and technical resources, either
of which could have a material adverse effect on the Company's business,
operating results and financial condition.
The Company also uses certain licensed third-party technology in some of its
products. In these license agreements, the licensors have generally agreed to
defend, indemnify and hold the Company harmless with respect to any claim by a
third party that the licensed software infringes any patent or other
proprietary right. There can be no assurance that the outcome of any
litigation between such licensors and a third party or between the Company and
a third party will not lead to royalty obligations of the Company for which
the Company is not indemnified or for which such indemnification is
insufficient, or that the Company will be able to obtain any additional
license on commercially reasonable terms or at all. In the future, the Company
may seek to license additional technology to incorporate in its products.
There can be no assurance that any third-party technology licenses that the
Company may be required to obtain in the future will be available to the
Company on commercially reasonable terms or at all. The loss of or inability
to obtain or maintain any of these technology licenses could result in delays
in introduction of the Company's products until equivalent technology, if
available, is identified, licensed and integrated, which could have a material
adverse effect on the Company's business, operating results and financial
condition. See "Risk Factors--Intellectual Property; Litigation" and
"Business--Legal Proceedings."
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EMPLOYEES
As of March 31, 1998, Asymetrix had 317 full-time employees, including 50 in
research and development, 68 in sales, marketing and support, 161 in
professional services and customer support and 38 in administration. The
Company has never had a work stoppage and no employees are represented under
collective bargaining agreements. The Company considers its relations with its
employees to be good. The Company 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, and upon the continued service of its senior management and key
sales, professional services and technical personnel, none of whom is bound by
an employment agreement. Competition for qualified personnel is intense, and
there can be no assurance that the Company will be successful in attracting,
integrating, retaining and motivating a sufficient numbers of qualified
personnel to conduct its business in the future. See "Risk Factors--Management
of Growth and Expansion" and "--Dependence on Key Personnel."
FACILITIES
The Company's principal administrative, sales, marketing and research
development facilities are located in approximately 63,815 square feet of
leased office space in Bellevue, Washington, which lease expires in October
1999. The Company subleases approximately 23,000 square feet of its premises
to certain related entities including Vulcan Northwest and SuperCede, Inc. for
monthly rental equivalent to that paid by Asymetrix. See "Certain
Transactions." The Company also has facilities in Atlanta, Georgia; Nashua,
New Hampshire; Needham, Massachusetts; and Fort Worth, Texas for certain of
its research and development teams and for its professional services group.
The Company 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. The Company also maintains sales offices in
California, Georgia, Kansas, Maryland, New Jersey, New York, Ohio, Virginia
and London, England.
LEGAL PROCEEDINGS
From time to time, the Company is involved in legal proceedings and
litigation arising in the ordinary course of business. As of the date of this
Prospectus, except as described below, the Company is not a party to any
litigation or other legal proceeding that, in the opinion of management, could
have a material adverse effect on the Company's business, operating results
and financial condition.
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 the Company's ToolBook and Multimedia ToolBook products infringe
a patent owned by him and seeking unspecified damages. The Company has
received an opinion 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 the Company's
business, operating results and financial condition. Although the Company
believes that it does not infringe this patent and that the patent is invalid,
and although the Company intends to vigorously defend this action, the results
of litigation can never be predicted with certainty, and the costs of defense,
regardless of outcome, could have a material adverse effect on the business,
operating results and financial condition of the Company.
In addition, litigating this claim could be time-consuming and distract
management personnel, or require the Company to develop non-infringing
technology or enter into royalty licensing agreements. Such royalty or
licensing agreements, if required, might not be available on commercially
reasonable terms, or at all. In the event of a successful claim of
intellectual property infringement against the Company and the failure or
inability of the Company to develop noninfringing technology or license the
infringed or similar technology on a timely basis, the Company's business,
operating results and financial condition could be materially and adversely
affected.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth certain information regarding the executive
officers and directors of the Company as of March 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
James A. Billmaier.................. 42 Chief Executive Officer and Director
Kevin M. Oakes...................... 34 President, General Manager, Learning
Services and Director
E. Charles Ellison.................. 44 Vice President, Business Development
John M. Kellum...................... 47 Vice President and General Manager,
Online Learning Products
Steven Martino...................... 39 Vice President, Sales
John D. Atherly..................... 39 Vice President, Finance and
Administration and Chief Financial
Officer
Steven Esau......................... 35 Vice President, General Counsel and
Corporate Secretary
Bert Kolde (1)(2)................... 43 Chairman of the Board
Paul G. Allen....................... 45 Director
Shelley Harrison, Ph.D. (1)(2)...... 55 Director
Gary Rieschel (1)(2)................ 41 Director
</TABLE>
- --------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Mr. Billmaier has served as Chief Executive Officer and a director of the
Company since July 1995 and served as President of the Company 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., and before that he was responsible for UNIX
workstation products and strategies at Digital Equipment Corporation.
Mr. Oakes has served as President and General Manager, Learning Services,
since he joined the Company in September 1997. Prior to that time, Mr. Oakes
was the President of each of Oakes Interactive Incorporated, TopShelf
Multimedia, Inc. and Acorn Associates Incorporated (together, the "Oakes
Companies"), which he founded in March 1993, January 1996 and March 1997,
respectively, and each of which the Company acquired in September 1997. See
"Certain Transactions." Prior to forming the Oakes Companies, Mr. Oakes was a
Senior Account Representative for The Minnesota Mutual Life Insurance Company.
Mr. Ellison has served as Vice President, Business Development of the
Company since October 1997, was the Company's Senior Vice President, Worldwide
Sales from September 1995 to October 1997, and was the Company's Vice
President, Sales and Marketing from July 1993, when he joined the Company,
until September 1995. From December 1991 until July 1993 he was the Senior
Vice President, Client Services at Upgrade Corporation of America (now
SOFTBANK Services Group), a telemarketing and fulfillment company. Prior to
that time, he served as a Vice President for each of Gupta Technologies,
Government Technology Services, Inc., and Ashton-Tate, and as National Manager
for government, education and corporate accounts for Microsoft.
50
<PAGE>
Mr. Kellum has served as Vice President and General Manager, Online Learning
Products since November 1995, and prior to that was the Company's Senior
Director of Business Development since he joined the Company in September
1995. From May 1993 to September 1995 he served as Director of 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. Martino has served as Vice President, Sales of the Company since October
1997, and prior to that was the Company's Vice President and General Manager,
Professional Services from February 1997 to October 1997 and the Company's
Vice President, Marketing from September 1995, when he joined the Company, to
February 1997. 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. Atherly has served as Vice President, Finance and Administration and
Chief Financial Officer of the Company since February 1995, and prior to that
was the Company's Director of Finance and Operations, Treasurer and Secretary
from February 1993 until February 1995. Mr. Atherly held various other
positions since he joined the Company in June 1990, including the Company's
Controller from February 1991 until February 1993. Prior to joining the
Company, Mr. Atherly was a Finance and Operations Manager at MicroDisk
Services, a software manufacturing services company.
Mr. Esau has served as General Counsel of the Company since October 1995 and
also as a Vice President and the Secretary of the Company since January 1997.
Prior to that time, Mr. Esau was the Company's Director of Legal Affairs from
February 1995 until October 1995, and before that he was counsel to the
Company since he joined the Company 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 serving software and
technology startup companies.
Mr. Kolde was appointed Chairman of the Board of the Company in July 1997,
and has been a director of the Company since it was founded in December 1984.
Mr. Kolde served as Executive Vice President of the Company from December 1984
until April 1993, and thereafter as President of the Company until November
1994. Mr. Kolde is Vice Chairman of Trail Blazers Inc., Football Northwest
LLC, First & Goal Inc. and Oregon Arena Corporation. Mr. Kolde serves as a
director of those organizations, MetaCreations Corporation and Precision
Systems, Inc. Prior to joining the Company, Mr. Kolde was the Vice President
of Management Reporting of Seafirst Corporation.
Mr. Allen founded the Company in 1984 and has served as a director of the
Company since that time. Mr. Allen also served as the President of the Company
from its founding until April 1993, and as the Chief Executive Officer of the
Company from its founding until July 1995. Mr. Allen was a co-founder of
Microsoft Corporation and is a member of Microsoft's board of directors. Mr.
Allen owns and invests in a suite of companies exploring the potential of
multimedia digital communications. Mr. Allen is the owner of Interval Research
Corp., Vulcan Ventures, Inc., Trail Blazers Inc. and Football Northwest LLC,
is a partner in the entertainment studio Dreamworks SKG, and holds investments
in more than 35 technology companies. Mr. Allen is also a director of USA
Networks, Inc.
Dr. Harrison has served as a director of the Company since September 1997,
when the Company acquired Aimtech. See "Certain Transactions." Dr. Harrison
serves as Chairman and Chief Executive Officer of Spacehab, Incorporated, a
developer of habitable modules for the United States space shuttle fleet.
Since 1987, Dr. Harrison has been a Managing General Partner of Poly Ventures,
Limited Partnership, a venture capital fund. Prior to that time, Dr. Harrison
co-founded and served as Chairman and Chief Executive Officer of Symbol
Technologies, Inc., a provider of bar code laser scanners and portable
terminals. Dr. Harrison is also a Director of Netmanage, Inc., Globecomm
Systems Inc. and JetFax, Inc.
51
<PAGE>
Mr. Rieschel has served as a director of the Company since October 1996. Mr.
Rieschel has been a Senior Vice President of SOFTBANK Holdings, Inc., a
venture capital fund, since January 1996. Prior to that time, Mr. Rieschel
served as Vice President of Marketing for nCUBE from August 1994 to December
1995, as Director of Channel Sales for Cisco Systems from September 1993 to
August 1994, and as General Manager, Asia for Sequent Computer from January
1989 to July 1993. Mr. Rieschel is a director of OnLive! Technologies, Inc.,
Concentric Network Corporation, USWeb Corporation and several private
companies.
Directors are elected by the stockholders at each annual meeting of
stockholders to serve until the next annual meeting of stockholders or until
their successors are duly elected and qualified. Three of the existing
directors were elected pursuant to certain provisions of the Series A
Preferred Stock Purchase Agreement and voting agreements entered into in
connection with each of the Company's acquisitions of Aimtech and the Oakes
Companies, each of which is described in "Certain Transactions." These
provisions will terminate upon the completion of this offering. Executive
officers are elected by, and serve at the discretion of, the Company's Board
of Directors (the "Board"). The Company's Amended and Restated Bylaws, which
will become effective upon the completion of this offering, will provide that
the Board will be divided into three classes, Class I, Class II and Class III,
with each class serving staggered three-year terms. The Class I directors,
initially Messrs. Allen and Rieschel, will stand for reelection or election at
the 1999 annual meeting of stockholders. The Class II directors, initially Dr.
Harrison and Mr. Oakes, will stand for reelection or election at the 2000
annual meeting of stockholders. The Class III directors, initially Messrs.
Billmaier and Kolde, will stand for reelection or election at the 2001 annual
meeting of stockholders.
BOARD COMMITTEES
The Board has established an Audit Committee to meet with and consider
suggestions from members of management and the Company's internal audit staff,
as well as the Company's independent accountants, concerning the financial
operations of the Company. The Audit Committee also has the responsibility to
review audited financial statements of the Company and consider and recommend
the employment of, and approve the fee arrangements with, independent
accountants for both audit functions and for advisory and other consulting
services. The Audit Committee is currently comprised of Dr. Harrison and
Messrs. Kolde and Rieschel. The Board has also established a Compensation
Committee to review and approve the compensation and benefits for the
Company's key executive officers, administer the Company's stock purchase,
equity incentive and stock option plans and make recommendations to the Board
regarding such matters. The Compensation Committee is currently comprised of
Dr. Harrison and Messrs. Kolde and Rieschel.
DIRECTOR COMPENSATION
Directors do not receive any cash fees for their service on the Board or any
Board committee, but they are entitled to reimbursement of all reasonable out-
of-pocket expenses incurred in connection with their attendance at Board and
Board committee meetings. All Board members are eligible to receive stock
options under the Company's 1995 Plan. In July 1995, the Company granted to
each of Mr. Allen and Mr. Kolde options to purchase 75,000 shares and 90,000
shares, respectively, of its Common Stock under its 1995 Plan, each with an
exercise price per share of $1.55.
In December 1997, the Board adopted, subject to stockholder approval, the
1998 Directors Stock Option Plan (the "Directors Plan") and reserved a total
of 187,500 shares of the Company's Common Stock for issuance thereunder.
Members of the Board who are not employees of the Company or any parent,
subsidiary or affiliate of the Company are eligible to participate in the
Directors Plan. Option grants under the Directors Plan are automatic and
nondiscretionary, and the exercise price of such options is 100% of the fair
market value of the Common Stock on the date of grant. Each eligible director
who is a member of the Board on or after the effective date of the
Registration Statement of which this Prospectus forms a part (the "Effective
Date") will be granted an option to purchase 7,500 shares (an "Initial Grant")
on the later of the Effective Date or the date such director first becomes a
director. On each anniversary of a director's Initial Grant, each eligible
director will automatically be granted an additional option to purchase 7,500
shares if such director has served continuously as a member of the Board since
the date of such director's Initial Grant. The term of such options
52
<PAGE>
is ten years, provided that they will terminate seven months following the
date the director ceases to be a director of the Company or a consultant of
the Company (twelve months if the termination is due to death or disability).
All options granted under the Directors Plan will vest as to 2.77% of the
shares each month after the date of grant, provided the optionee continues as
a director of the Company or a consultant of the Company. Additionally,
immediately prior to the dissolution or liquidation of the Company or a
"change in control" transaction, all options granted pursuant to the Directors
Plan will accelerate and will be exercisable for a period of up to six months
following the transaction, after which period any unexercised options will
expire.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this offering, the Company's Board did not have a compensation
committee and all compensation decisions, other than grants of stock options,
were made by the full Board or the Chief Executive Officer. Since October
1997, grants of stock options have been made by the Company's Stock Option
Plan Administration Committee, which is comprised of Messrs. Billmaier and
Kolde. Neither Mr. Billmaier nor Mr. Oakes has participated in Board
deliberations regarding his respective compensation, and the Stock Option Plan
Administration Committee has not granted any options to its members. Upon
completion of this offering, the Compensation Committee will make all
compensation decisions. No interlocking relationship exists between the Board
or Compensation Committee and the board of directors or compensation committee
of any other company, nor has any such interlocking relationship existed in
the past.
EXECUTIVE COMPENSATION
The following table sets forth certain summary information concerning the
compensation awarded to, earned by, or paid for services rendered to the
Company in all capacities during the year ended December 31, 1997 by the
Company's Chief Executive Officer and the four most highly compensated
executive officers, other than the Chief Executive Officer, who were serving
as executive officers at the end of 1997 (collectively, the "Named Executive
Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL COMPENSATION AWARDS
--------------------------------- ---------------------
NAME AND PRINCIPAL POSITION OTHER ANNUAL SECURITIES UNDERLYING
(1) SALARY BONUS COMPENSATION OPTIONS (#)
- --------------------------- -------- ------- ------------ ---------------------
<S> <C> <C> <C> <C>
James A. Billmaier....... $250,000 $74,875 (2) -- 187,500
Chief Executive Officer
E. Charles Ellison....... 175,000 93,911 (3) -- --
Vice President, Business
Development
Steven Martino........... 133,404 36,075 (2) -- 37,500
Vice President, Sales
John D. Atherly.......... 119,327 28,260 (2) -- 15,000
Vice President, Finance
and Administration and
Chief Financial Officer
John M. Kellum........... 121,827 26,643 (2) -- 37,500
Vice President and
General Manager,
Online Learning
Products
</TABLE>
- --------
(1) Kevin M. Oakes, the Company's President and General Manager, Learning
Services, joined the Company in September 1997. Based on his annual
salary, Mr. Oakes would have been a Named Executive Officer if he had been
with the Company during all of 1997.
(2) Includes certain bonus compensation earned in 1996 but not paid until
1997, and does not include bonus compensation earned in 1997 but not paid
in 1997.
(3) All bonus compensation for this individual consists of sales commissions.
Includes commissions earned with respect to certain sales made in 1996 but
not paid until 1997, and excludes commissions earned with respect to
certain sales made in 1997 but not paid in 1997.
53
<PAGE>
OPTION GRANTS IN FISCAL 1997
The following table sets forth certain information regarding stock options
granted to each of the Named Executive Officers during the year ended December
31, 1997.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
STOCK PRICE
APPRECIATION
INDIVIDUAL GRANTS(1) FOR OPTION TERMS (2)
------------------------------------------------------ ---------------------
NUMBER OF PERCENT OF TOTAL
SECURITIES OPTIONS GRANTED TO
UNDERLYING EMPLOYEES IN EXERCISE
OPTIONS FISCAL YEAR (%) PRICE EXPIRATION
NAME GRANTED (3) PER SHARE (4) DATE 5% 10%
- ---- ---------- ------------------ ------------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
James A. Billmaier...... 187,499 13.6 $7.67 12/4/07 $ 904,036 $ 2,291,005
E. Charles Ellison...... -- -- -- -- -- --
Steven Martino.......... 29,999 2.2 6.00 10/20/07 113,201 286,874
7,500 0.5 6.00 4/22/07 28,300 71,718
John D. Atherly......... 7,500 0.5 6.00 10/20/07 28,300 71,718
7,500 0.5 6.00 4/22/07 28,300 71,718
John M. Kellum.......... 29,999 2.2 6.00 10/20/07 113,201 286,874
7,500 0.5 6.00 4/22/07 28,300 71,718
</TABLE>
- --------
(1) Options granted in 1997 were granted under the Company's 1995 Plan. These
options become exercisable with respect to 25% of the shares covered by
the option on the first anniversary of the date of grant and with respect
to an additional 2.08% of these shares each month thereafter, subject to
acceleration upon certain changes in control of the Company. These options
have a term of ten years. See "--Employee Benefit Plans" for a description
of the material terms of these options.
(2) Potential realizable value is based on the assumption that the Common
Stock of the Company appreciates at the annual rate shown (compounded
annually) from the date of grant until the expiration of the ten-year
term. These numbers are calculated based on Securities and Exchange
Commission requirements and do not reflect the Company's projection or
estimate of future stock price growth.
(3) The Company granted options to purchase an aggregate of 1,380,823 shares
of Common Stock to all employees during 1997.
(4) Options were granted at an exercise price equal to the fair market value
of the Company's Common Stock, as determined by the Board.
FISCAL YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
number and year-end value of exercisable and unexercisable options for the
year ended December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
OPTIONS AT 12/31/97 (1) AT 12/31/97 (2)
------------------------- -------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
James A. Billmaier.......... 271,875 365,624 $2,569,219 $2,307,653
E. Charles Ellison.......... 123,750 56,250 1,169,438 531,563
Steven Martino.............. 44,999 75,000 425,241 541,879
John D. Atherly............. 62,229 43,320 588,064 342,624
John M. Kellum.............. 43,748 76,251 413,419 553,701
</TABLE>
- --------
(1) Options shown were granted under the 1995 Plan and are subject to vesting
as described in footnote (1) to the option grant table above. See "--
Employee Benefit Plans" for a description of the material terms of these
options.
(2) Based on an assumed initial public offering price of $11.00 per share, net
of exercise price.
54
<PAGE>
No options were exercised during 1997 by the Named Executive Officers. No
compensation intended to serve as incentive for performance to occur over a
period longer than one year was paid pursuant to a long-term incentive plan
during 1997 to any Named Executive Officer. The Company does not have any
defined benefit or actuarial plan under which benefits are determined
primarily by final compensation and years of service with any of the Named
Executive Officers.
EMPLOYEE BENEFIT PLANS
1995 Combined Incentive and Nonqualified Stock Option Plan. In July 1995,
the Board adopted and the stockholders approved the 1995 Plan. At that time,
3,150,000 shares of Common Stock were reserved for issuance under the 1995
Plan, which number was increased to 3,525,000 shares in April 1996 and to
4,275,000 shares in December 1996. As of March 31, 1998, options to purchase
499,986 shares had been exercised, options to purchase an additional 3,600,111
shares of Common Stock were outstanding with a weighted average exercise price
of $3.90 and 169,728 shares remained available for future grants. Following
the closing of this offering, no additional options will be granted under the
1995 Plan. Options granted under the 1995 Plan are subject to terms
substantially similar to those described below with respect to options to be
granted under the Equity Incentive Plan. The 1995 Plan does not provide for
issuance of restricted stock or stock bonus awards.
1998 Equity Incentive Plan. In December 1997, the Board adopted, subject to
stockholder approval, the 1998 Equity Incentive Plan (the "Equity Incentive
Plan"). The total number of shares of Common Stock reserved for issuance
thereunder is 1,500,000. The Equity Incentive Plan will become effective on
the closing of the initial public offering and will serve as the successor to
the 1995 Plan. Options granted under the 1995 Plan before their termination
will remain outstanding according to their terms, but no further options will
be granted under the 1995 Plan after the closing of the initial public
offering. Shares that: (a) are subject to issuance upon exercise of an option
granted under the 1995 Plan or the Equity Incentive Plan that cease to be
subject to such option for any reason other than exercise of such option; (b)
have been issued pursuant to the exercise of an option granted under the 1995
Plan or the Equity Incentive Plan with respect to which the Company's right of
repurchase has not lapsed and are subsequently repurchased by the Company; (c)
are subject to an award granted pursuant to restricted stock purchase
agreements under the Equity Incentive Plan that are forfeited or are
repurchased by the Company at the original issue price; or (d) are subject to
stock bonuses granted under the Equity Incentive Plan that otherwise terminate
without shares being issued, will again be available for grant and issuance
under the Equity Incentive Plan. Any authorized shares not issued or subject
to outstanding grants under the 1995 Plan on the Effective Date will no longer
be available for grant and issuance under the 1995 Plan but will be available
for grant and issuance under the Equity Incentive Plan. The Equity Incentive
Plan will terminate in December 2007, unless sooner terminated in accordance
with the terms of the Equity Incentive Plan. The Equity Incentive Plan
authorizes the award of options, restricted stock awards and stock bonuses
(each an "Award"). No person will be eligible to receive more than 375,000
shares in any calendar year pursuant to Awards under the Equity Incentive Plan
other than a new employee of the Company who will be eligible to receive no
more than 750,000 shares in the calendar year in which such employee commences
employment. The Equity Incentive Plan will be administered by the Compensation
Committee. The Compensation Committee has the authority to construe and
interpret the Equity Incentive Plan and any agreement made thereunder, grant
Awards and make all other determinations necessary or advisable for the
administration of the Equity Incentive Plan.
The Equity Incentive Plan provides for the grant of both incentive stock
options ("ISOs") that qualify under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code"), and nonqualified stock options ("NQSOs").
ISOs may be granted only to employees of the Company or of a parent or
subsidiary of the Company. NQSOs (and all other Awards other than ISOs) may be
granted to employees, officers, directors, consultants, independent
contractors and advisors of the Company or any parent or subsidiary of the
Company, provided such consultants, independent contractors and advisors
render bona fide services not in connection with the offer and sale of
securities in a capital-raising transaction ("Eligible Service Providers").
The exercise price of ISOs must be at least equal to the fair market value of
the Company's Common Stock on the date of grant. The exercise price of NQSOs
must be at least equal to 85% of the fair market value of the Company's Common
Stock on the date of grant. The maximum term of options granted under the
Equity Incentive Plan is ten years.
55
<PAGE>
Awards granted under the Equity Incentive Plan may not be transferred in any
manner other than by will or by the laws of descent and distribution and may
be exercised during the lifetime of the optionee only by the optionee (unless
otherwise determined by the Compensation Committee and set forth in the Award
agreement with respect to Awards that are not ISOs). Options granted under the
Equity Incentive Plan generally expire three months after the termination of
the optionee's service to the Company or a parent or subsidiary of the
Company, except in the case of death or disability, in which case the options
generally may be exercised up to 12 months following the date of death or
termination of service. Options will generally terminate immediately upon
termination for cause. In the event of the Company's dissolution or
liquidation or a "change in control" transaction, outstanding Awards may be
assumed or substituted by the successor corporation (if any). If a successor
corporation (if any) does not assume or substitute the Awards, they will
accelerate prior to the effectiveness of the transaction.
401(k) Plans. The Company maintains the PGA Companies 401(k) Plan (the
"401(k) Plan"), a defined contribution plan intended to qualify under Section
401 of the Code. All eligible employees who are at least 18 years old are
eligible to participate in the 401(k) Plan. An eligible employee of the
Company may begin to participate in the 401(k) Plan on the first day of
January, April, July or October of the Plan year following the date on which
such employee meets the eligibility requirements. A participating employee may
make pre-tax contributions of a percentage of his or her eligible
compensation, subject to limitations under the federal tax laws. Employee
contributions and the investment earnings thereon are fully vested at all
times. The Company does not make matching or profit-sharing contributions.
The Company also maintains the Oakes Interactive Incorporated 401(k) Plan
and Trust (the "Oakes 401(k) Plan"), a defined contribution plan intended to
qualify under Section 401 of the Code. All eligible employees who are at least
21 years old and have completed six months' service are eligible to
participate in the Oakes 401(k) Plan. An eligible employee may begin to
participate in the Oakes 401(k) Plan on the first day of January or July of
the Plan year coinciding with or next following the date on which such
employee meets the eligibility requirements. A participating employee may make
pre-tax contributions of a percentage (up to 10 percent) of his or her
eligible compensation, subject to limitations under the federal tax laws.
Employee contributions and the investment earnings thereon are fully vested at
all times. The Company does not make matching or profit-sharing contributions.
The Company also maintains the CSI 401(k) Plan and Trust (the "CSI 401(k)
Plan"), a defined contribution plan intended to qualify under Section 401 of
the Code. All eligible employees who are at least 21 years old and have
completed six months' service are eligible to participate in the CSI 401(k)
Plan. An eligible employee may begin to participate in the CSI 401(k) Plan on
the first day of January, April, July or October coincident with or
immediately following the date on which such employee meets the eligibility
requirements. A participating employee may make pre-tax contributions of a
percentage of his or her eligible compensation, subject to limitations under
the federal tax laws. Employee contributions and the investment earnings
thereon are fully vested at all times. The Company, at its discretion, may
make discretionary contributions on behalf of participants.
EMPLOYMENT AGREEMENT
In September 1997, in connection with the Company's acquisitions of the
Oakes Companies, the Company entered into an Employment Agreement with Kevin
Oakes, the Company's President and General Manager, Learning Services.
Pursuant to the terms of this agreement, Mr. Oakes receives an annual salary
of $150,000, has a target bonus of 35% of his annual salary, and is eligible
to receive a maximum bonus of 100% of his annual salary. In addition, Mr.
Oakes was granted an option to purchase 17,250 shares of the Company's Common
Stock at a price per share of $6.00, in accordance with the terms of the
Company's 1995 Plan. Upon the involuntary termination of Mr. Oakes' employment
during the one-year term of the employment agreement for other than "Cause"
(as defined in the agreement), Mr. Oakes shall be entitled, for a period
ending on the later of one year after the effective date of the agreement or
six months following the date of such termination, to receive his then-current
salary in addition to his then-accrued compensation and benefits (including
his accrued pro-rata bonus compensation).
56
<PAGE>
INDEMNIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS AND LIMITATION OF
LIABILITY
As permitted by the Delaware General Corporation Law (the "DGCL"), the
Company's Amended and Restated Certificate of Incorporation, which will become
effective upon the closing of this offering, includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Company or its stockholders,
(ii) for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law, (iii) under section 174 of the DGCL
(regarding unlawful dividends and stock purchases) or (iv) for any transaction
from which the director derived an improper personal benefit.
As permitted by the DGCL, the Company's Bylaws which will become effective
upon the completion of this offering provide that (i) the Company is required
to indemnify its directors and officers to the fullest extent permitted by the
DGCL, subject to certain very limited exceptions, (ii) the Company may
indemnify its other employees and agents to the extent that it indemnifies its
officers and directors, unless otherwise required by law, its Amended and
Restated Certificate of Incorporation, its Bylaws or agreements, (iii) the
Company is required to advance expenses, as incurred, to its directors and
executive officers in connection with a legal proceeding to the fullest extent
permitted by the DGCL, subject to certain very limited exceptions and (iv) the
rights conferred in the Bylaws are not exclusive.
Prior to the completion of this offering, the Company intends to enter into
Indemnification Agreements with each of its current directors and executive
officers to give such directors and officers additional contractual assurances
regarding the scope of the indemnification set forth in the Company's Amended
and Restated Certificate of Incorporation and Bylaws and to provide additional
procedural protections. At present, there is no pending litigation or
proceeding involving a director, officer or employee of the Company regarding
which indemnification is sought, nor is the Company aware of any threatened
litigation that may result in claims for indemnification.
57
<PAGE>
CERTAIN TRANSACTIONS
Since January 1, 1995 there has not been, nor is there currently proposed,
any transaction or series of similar transactions to which the Company or any
of its subsidiaries was or is to be a party in which the amount involved
exceeded or will exceed $60,000 and in which any director, executive officer,
holder of more than 5% of the Common Stock of the Company or any member of the
immediate family of any of the foregoing persons had or will have a direct or
indirect material interest other than (i) compensation agreements and other
arrangements, which are described where required in "Management," and (ii) the
transactions described below.
1995 Restructuring and Recapitalization. In January 1995, the Company sold
Mr. Allen 225,000 shares of Common Stock for an aggregate purchase price of
$150,000. In February 1995, the Company underwent a restructuring of its
operations. In connection with this restructuring, in March 1995, the Company
merged with ASX R&D Corporation, which was formed for the sole purpose of
consummating the restructuring, and all of the outstanding capital stock of
which was owned by Paul Allen, the founder and a director of the Company. In
connection with this merger, Mr. Allen received 11,250 shares of the Company's
Common Stock in exchange for the shares of ASX R&D Corporation Common Stock
owned by Mr. Allen. All outstanding shares of Common Stock of the Company
(other than 288,750 shares of Common Stock then held by Mr. Allen) were
repurchased by the Company at a price per share of $0.67 and were canceled in
the merger. In July 1995 the Company issued to Mr. Allen an additional
5,550,000 shares of Common Stock in consideration of (i) Mr. Allen's
assumption of the Company's outstanding indebtedness under a credit agreement
in the amount of approximately $114.6 million and (ii) the issuance by Mr.
Allen of a demand promissory note in the aggregate principal amount of
approximately $18.6 million, which bore interest at a rate of 8% per annum.
Interest accrued under this note to the Company was approximately $1.2
million, $1.1 million and $436,000 in 1995, 1996 and 1997, respectively, and
principal payments received under this note were approximately $11.9 million
and $9.0 million in 1996 and 1997, respectively. This note was repaid in full
in October 1997.
SOFTBANK Investment. In October 1996, the Company sold an aggregate of
388,395 shares of its Class B Stock called "Series A Preferred Stock" at a
cash purchase price of $12.88 per share to SOFTBANK Holdings, Inc.
("SOFTBANK"). Gary Rieschel, Senior Vice President of SOFTBANK, serves on the
Company's Board of Directors. The Company also entered into an Investor's
Rights Agreement with SOFTBANK pursuant to which SOFTBANK has certain demand
and piggyback registration rights with respect to the 291,296 shares of Common
Stock issuable upon conversion of the Series A Preferred Stock following this
offering. Upon the closing of this offering, each share of Series A Preferred
Stock will be converted into approximately .75 shares of Common Stock of the
Company. See "Description of Capital Stock--Registration Rights."
Aimtech Acquisition. In September 1997, the Company acquired Aimtech (the
"Aimtech Acquisition"). In connection with the Aimtech Acquisition, the
Company issued an aggregate of 2,111,795 shares of Series 4 Class B Stock in
exchange for all of Aimtech's outstanding common stock. Dr. Shelley Harrison,
a director of the Company, is a managing general partner of Poly Ventures,
Limited Partnership ("Poly Ventures"), which was a stockholder of Aimtech.
Poly Ventures received 409,392 shares of Series 4 Class B Stock in the Aimtech
Acquisition. Upon the closing of this offering, each share of Series 4 Class B
Stock will be converted into approximately .75 shares of Common Stock of the
Company. In addition, in connection with the Aimtech Acquisition, the Company,
Dr. Harrison (as representative of the former stockholders of Aimtech) and Mr.
Allen entered into a Voting Agreement, pursuant to which the former Aimtech
stockholders were given the right to designate one director of the Company.
Dr. Harrison was named as the initial director of the Company designated in
this Voting Agreement. This Voting Agreement will terminate upon the
completion of this offering.
Oakes Acquisitions. In September 1997, the Company acquired the Oakes
Companies, which consisted of Oakes Interactive Incorporated, Acorn Associates
Incorporated and TopShelf Multimedia, Inc. (the "Oakes Acquisitions"). In
connection with the Oakes Acquisitions, the Company issued an aggregate of
1,512,500 shares of Series 5 Class B Stock in exchange for all of the
outstanding shares of common stock of each of the Oakes Companies. Kevin
Oakes, the Company's President and General Manager, Learning Services, who at
the
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time of the Oakes Acquisitions was the President and a principal shareholder
of each of the Oakes Companies, received an aggregate of 680,625 shares of
Series 5 Class B Stock in connection with the Oakes Acquisitions. Furthermore,
Mr. Oakes' father, Gordon Oakes, who was at the time of the Oakes Acquisitions
a principal shareholder of each of the Oakes Companies, also received an
aggregate of 680,625 shares of Series 5 Class B Stock in connection with the
Oakes Acquisitions. Upon the closing of this offering, each share of Series 5
Class B Stock will be converted into approximately .75 shares of Common Stock
of the Company. In addition, in connection with the Oakes Acquisitions, the
Company, the shareholders of the Oakes Companies and Mr. Allen entered into a
Voting Agreement pursuant to which the former shareholders of the Oakes
Companies were given the right to designate one director of the Company. Mr.
Oakes was named as the initial director of the Company designated in this
Voting Agreement. This Voting Agreement will terminate upon the completion of
this offering.
Vulcan Transactions. The Company subleases approximately 8,200 square feet
of office space to Vulcan Northwest Inc. ("Vulcan Northwest"), a company
controlled by Mr. Allen. Pursuant to the terms of this sublease, Vulcan
Northwest pays rent of $18.25 per square foot per year in monthly installments
plus its pro rata portion of any additional rent the Company is required to
pay under the prime lease. The term of this sublease commenced in November
1995 and expires upon the expiration of the prime lease. Payments by Vulcan
Northwest under this sublease were approximately $27,000, $200,000, $150,000
and $50,000 in 1995, 1996, 1997 and the three months ended March 31, 1998,
respectively.
In March 1998, the Company entered into a Directed Engineering Agreement
(the "Engineering Agreement") with Vulcan Northwest, d/b/a APEX ("APEX"),
pursuant to which the Company has agreed to develop customized extensions of
its Librarian product. Pursuant to the terms of the Engineering Agreement, the
Company will retain all intellectual property rights to these extensions. APEX
is obligated to pay the Company an aggregate of $250,000 in non-refundable
installments upon the achievement by the Company of certain milestones.
SuperCede Transactions. In June 1997, the Company contributed certain
technology assets related to its SuperCede development project to a wholly-
owned subsidiary in exchange for 3,500,000 shares of common stock of that
subsidiary and a license back to the Company of such technology assets for use
in the Company's online learning products (the "SuperCede License"). In August
1997, Vulcan Ventures Inc. ("Vulcan Ventures"), a venture capital company
controlled by Mr. Allen, loaned to SuperCede an aggregate of $1.75 million
which was evidenced by a convertible promissory note (the "SuperCede Note").
In September 1997, the Company's SuperCede common stock was converted into
3,500,000 shares of SuperCede Series B Preferred Stock in consideration for
the cancellation of the SuperCede License, pursuant to the terms of a Series B
Preferred Stock Exchange Agreement between the Company and SuperCede. In
September 1997, SuperCede sold an aggregate of 3,500,000 shares of its Series
A Preferred Stock to Vulcan Ventures for a purchase price of $2.00 per share,
including cancellation of the indebtedness represented by the SuperCede Note.
The Company subleases approximately 8,500 square feet of office space in the
Company's headquarters to SuperCede pursuant to a sublease which was entered
into in June 1997. Pursuant to the terms of this sublease, SuperCede pays rent
of $20.00 per square foot per year in monthly installments plus SuperCede's
pro rata portion of any additional rent the Company is required to pay under
the prime lease. The term of this sublease commenced in June 1997 and expires
upon the expiration of the prime lease for the Company's headquarters in
October 1999. In 1997, SuperCede made payments to the Company under this
sublease of $40,000 and $40,000 in 1997 and the three months ended March 31,
1998, respectively.
Infomodelers Spin-off, Investment and Sublease. In October 1996, the Company
spun off certain assets, employees and liabilities relating to its
Client/Server Tools Division into a newly-created wholly-owned subsidiary, ASX
Corporation, which was subsequently renamed ConQuer Data, Inc. and later
renamed Infomodelers, Inc. ("Infomodelers"). In connection with this spin-off
(the "Infomodelers Spin-off"), the Company and Infomodelers entered into a
Technology Transfer and License Agreement (the "Technology Transfer and
License Agreement") under which the Company transferred to Infomodelers
certain technologies relating to its Client/Server Tools Division (the
"Infomodelers Technology") in exchange for (i) 3,500,000 shares of
Infomodelers Common Stock, (ii) a royalty of 8% of sales of products and
services based on the Infomodelers
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Technology for a five year period and (iii) a license for the Company to use
the then-current Infomodelers Technology in non-competing products. The
Technology Transfer and License Agreement was amended in January 1998 to
provide that (i) the Company would be licensed to use the then-most recent
versions of the Infomodelers Technology and of Infomodelers' "Active Query"
technology in its online enterprise learning products, (ii) the Company would
forego the 8% royalty on sales of products and services based on the
Infomodelers Technology and (iii) the Company would license Infomodelers to
use the Company's InfoAssistant technology, a technology unrelated to the
Company's online enterprise learning products.
The Company and Infomodelers also entered into an Asset Purchase and Loan
Agreement, whereby (i) the Company sold to Infomodelers the assets (including
patents and trademarks covering the Infomodelers Technology) of the Company's
Client/Server Tools Division in exchange for $500,000 and Infomodelers'
agreement to assume certain liabilities, and (ii) the Company loaned
Infomodelers $1.0 million. Both the purchase price of the assets and the loan
were reflected in a $1.5 million promissory note from Infomodelers to the
Company. In November 1996, this promissory note was canceled in exchange for
the issuance to the Company of 700,000 shares of Infomodelers Series A
Preferred Stock.
In October 1996, the Company distributed an aggregate of 2,802,774 shares of
Infomodelers Common Stock to its existing stockholders (in the form of a
dividend) and holders of vested options (in the form of a stock bonus). In
connection with this distribution, Mr. Allen, a director and principal
stockholder of the Company, received 2,422,243 shares of Infomodelers Common
Stock.
In October 1996, the Company entered into a sublease agreement with
Infomodelers, under which the Company subleases to Infomodelers approximately
6,350 square feet of office space in the Company's headquarters. Rent is
payable directly from Infomodelers to the prime landlord in accordance with
the terms of the Company's prime lease on the property. Infomodelers has
notified the Company that it intends to terminate this sublease in May 1998.
Infomodelers made payments to the Company under this sublease of $36,000,
$145,000 and $26,000 in 1996, 1997 and the three months ended March 31, 1998,
respectively.
In March 1998, the Company sold all 700,000 shares of its Infomodelers
Series A Preferred Stock for an aggregate purchase price of approximately $2.0
million in cash, and sold 16 of its 19 shares (on a post 1-for-35,647 reverse
stock split basis) of Infomodelers Common Stock for an aggregate purchase
price of approximately $390,000 in cash, to Vulcan Ventures, Inc., an entity
controlled by Mr. Allen.
Transactions with Multimedia Asia Pacific. In December 1996, the Company
issued, pursuant to a Series B Stock Purchase Agreement (the "Series B
Agreement"), 388,395 shares of its Class B Stock called "Series B Preferred
Stock" to Multimedia Asia Pacific Pty Ltd ("Multimedia Asia Pacific") for an
aggregate purchase price of approximately $5.0 million. Of this amount,
$502,528 was paid in cash (representing 39,015 shares of Series B Preferred
Stock which were fully paid) and $4.5 million was paid with a promissory note
(the "Series B Note"), which bore interest at a rate of 6% per annum. Of these
shares, 349,380 shares were pledged to secure the Series B Note. Mr. Allen
owns 10% of the outstanding capital stock of Multimedia Asia Pacific. Under
the terms of the Series B Note, one installment of $500,000 (plus accrued
interest) was paid to the Company in January 1997, resulting in the release of
an additional 38,820 shares of Series B Preferred Stock from the pledge. The
remaining indebtedness was to be repaid in four consecutive monthly
installments of $1.0 million (plus accrued interest).
In January 1997, the Company and Asymetrix Asia Pacific Pty. Ltd., which is
a wholly-owned subsidiary of Multimedia Asia Pacific and which is licensed by
the Company to use the name Asymetrix Asia Pacific ("Asymetrix Asia Pacific"),
entered into an Exclusive Master Distributor Agreement (the "Distributor
Agreement") under which Asymetrix Asia Pacific acted as the exclusive
distributor of certain of the Company's products within the Asia Pacific
region (excluding Japan). The Distributor Agreement replaced a previous
distributor agreement entered into between the Company and Asymetrix Asia
Pacific in January 1994. As of October 31, 1997, Asymetrix Asia Pacific owed
the Company $870,686 pursuant to the terms of the Distributor Agreement, a
substantial portion of which was overdue and, therefore, caused a breach of
the Distributor
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Agreement, which breach caused the entire amount owed thereunder to become
immediately due and payable. In addition, as of October 31, 1997, Multimedia
Asia Pacific owed the Company $4.0 million (plus accrued interest) under the
Series B Note.
In settlement of these outstanding amounts, on October 31, 1997 the Company,
Asymetrix Asia Pacific and Multimedia Asia Pacific entered into an agreement
(the "Resolution Agreement") which resolved the outstanding debts of Asymetrix
Asia Pacific and Multimedia Asia Pacific to the Company and which set forth
revised terms and conditions pursuant to which Asymetrix Asia Pacific may
continue to function as the Company's exclusive distributor in the Asia
Pacific region. Pursuant to the Resolution Agreement, (i) all shares of Series
B Preferred Stock that were pledged to secure the Series B Note were retained
and canceled by the Company in full satisfaction of the amounts due under the
Series B Note, (ii) all 77,835 shares of Series B Preferred Stock that were
then fully paid were redeemed by the Company in exchange for $750,000, which
amount was applied to the unpaid balance of $870,686 owed by Asymetrix Asia
Pacific to the Company under the Distributor Agreement, and (iii) the Series B
Agreement and the Series B Note were canceled. Asymetrix Asia Pacific repaid
all remaining amounts owned under the Distributor Agreement in January 1998.
In addition, the Company and Asymetrix Asia Pacific entered into an Amended
and Restated Exclusive Master Distributor Agreement (the "Amended Distributor
Agreement"), which took effect as of January 1, 1998 and which replaced the
Distributor Agreement. Pursuant to the Amended Distributor Agreement,
Asymetrix Asia Pacific was to be the exclusive distributor of certain of the
Company's products in the Asia Pacific region so long as Asymetrix Asia
Pacific met certain quarterly minimum commitment levels and meets certain
other obligations. The exclusivity under the Amended Distributor Agreement was
terminated in March 1998 when Asymetrix Asia Pacific failed to meet its
performance obligations. In connection with the termination of this
exclusivity, the Company revoked the license to use the name Asymetrix Asia
Pacific, subject to a transition period ending July 1, 1998. The Amended
Distributor Agreement terminates on December 31, 1998.
The Company believes that the terms of each of the transactions described
above, taken as a whole, were no less favorable than the Company could have
obtained from unaffiliated third parties. All future transactions between the
Company and its officers, directors and principal stockholders and their
affiliates will be approved by a majority of the Board of Directors, including
a majority of the independent and disinterested outside directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information known to the Company with
respect to the beneficial ownership of the Company's Common Stock as of March
31, 1998 and as adjusted to reflect the sale by the Company of the 3,000,000
shares of Common Stock offered hereby by: (i) each person who is known by the
Company to own beneficially more than 5% of the Company's Common Stock, (ii)
each director of the Company, (iii) each of the Named Executive Officers and
(iv) all directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
PERCENTAGE OF
COMMON STOCK
NUMBER OF BENEFICIALLY OWNED(1)
SHARES --------------------------
BENEFICIALLY BEFORE AFTER
NAME OF BENEFICIAL OWNER OWNED OFFERING OFFERING(2)
- ------------------------ ------------ ---------- ------------
<S> <C> <C> <C>
Paul G. Allen(3)..................... 5,909,374 58.0% 44.8%
Cynthia Boyd(4)...................... 550,193 5.4 4.2
James Boyd(5)........................ 550,193 5.4 4.2
Kevin M. Oakes(6).................... 510,467 5.0 3.9
Gordon Oakes......................... 510,467 5.0 3.9
James A. Billmaier(7)................ 318,749 3.1 2.4
Shelley Harrison, Ph.D.(8)........... 307,043 3.0 2.3
Gary Rieschel(9)..................... 291,294 2.9 2.2
E. Charles Ellison(10)............... 142,500 1.4 1.1
John D. Atherly(11).................. 73,775 * *
Bert Kolde(12)....................... 71,250 * *
Steven Martino(13)................... 55,623 * *
John M. Kellum(14)................... 55,375 * *
All officers and directors as a group
(11 persons)(15).................... 7,767,702 71.1 55.8
</TABLE>
- --------
* Less than 1% of the Company's outstanding Common Stock
(1) Percentage ownership is based on 10,124,822 shares outstanding as of
March 31, 1998, including shares issuable upon conversion of all
outstanding Class B Stock into Common Stock in connection with this
offering (of which 331,246 shares will remain held in escrow to secure
certain indemnification obligations of former stockholders of Aimtech
under the Agreement and Plan of Reorganization relating to the
acquisition of Aimtech), and shares outstanding after the offering.
Shares of Common Stock subject to options currently exercisable or
exercisable within 60 days of March 31, 1998 are deemed outstanding for
the purpose of computing the percentage ownership of the person holding
such options but are not deemed outstanding for computing the percentage
ownership of any other person. The address for each holder of more than
5% of the Company's Common Stock is c/o the Company, 110-110th Avenue NE,
Bellevue, Washington 98004. Unless otherwise indicated below, the persons
and entities named in the table have sole voting and sole investment
power with respect to all shares beneficially owned, subject to community
property laws where applicable.
(2) Assumes the Underwriters' over-allotment option is not exercised.
(3) Includes 59,374 shares subject to stock options exercisable within 60
days of March 31, 1998. Mr. Allen is the founder and a director of the
Company.
(4) Includes 137,548 shares held of record by James Boyd, Ms. Boyd's spouse.
(5) Includes 412,645 shares held of record by Cynthia Boyd, Mr. Boyd's
spouse.
(6) Mr. Oakes is President and General Manager, Learning Services and a
director of the Company.
(7) Represents shares subject to stock options exercisable within 60 days of
March 31, 1998. Mr. Billmaier is the Chief Executive Officer and a
director of the Company.
(8) Represents shares held of record by Poly Ventures, Limited Partnership
("Poly Ventures"). Dr. Harrison is a managing general partner of Poly
Ventures. Dr. Harrison disclaims beneficial ownership of shares held by
Poly Ventures except to the extent of his pecuniary interest therein.
(9) Represents shares held of record by SoftVen No. 2 Investment Enterprise
Partnership. Mr. Rieschel, a Senior Vice President of SOFTBANK, an
affiliate of SoftVen No. 2 Investment Enterprise Partnership, is a
director of the Company. Mr. Rieschel disclaims beneficial ownership of
such shares.
(10) Represents shares subject to stock options exercisable within 60 days of
March 31, 1998. Mr. Ellison is Vice President, Business Development of
the Company.
(11) Includes 73,700 shares subject to stock options exercisable within 60
days of March 31, 1998. Mr. Atherly is Vice President, Finance and
Administration and Chief Financial Officer of the Company.
(12) Represents shares subject to stock options exercisable within 60 days of
March 31, 1998. Mr. Kolde is Chairman of the Board of the Company.
(13) Represents shares subject to stock options exercisable within 60 days of
March 31, 1998. Mr. Martino is Vice President, Sales of the Company.
(14) Represents shares subject to stock options exercisable within 60 days of
March 31, 1998. Mr. Kellum is Vice President and General Manager, Online
Learning Products of the Company.
(15) Represents the shares described in footnotes (3) and (6)-(14), plus an
additional 32,252 shares beneficially owned by one other executive
officer of the Company, of which 30,002 shares were subject to stock
options exercisable within 60 days of March 31, 1998.
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DESCRIPTION OF CAPITAL STOCK
As of March 31, 1998, assuming the conversion of all outstanding shares of
Class B Stock into shares of Common Stock, there were outstanding 10,124,822
shares of Common Stock, each with a par value of $0.01, held of record by
approximately 225 stockholders, and outstanding options to purchase 3,600,111
shares of Common Stock.
Immediately prior to the closing of this offering, the Company intends to
reincorporate in the State of Delaware and, upon the closing of this offering,
the Company intends to amend and restate its Certificate of Incorporation. The
following summary of certain provisions of the Common Stock and Preferred
Stock does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the forms of the Company's Amended and Restated
Certificate of Incorporation and Bylaws to be effective upon the closing of
this offering, which are included as exhibits to the Registration Statement of
which this Prospectus forms a part, and by the provisions of applicable law.
COMMON STOCK
Upon the closing of this offering, the Company will be authorized to issue
40,000,000 shares of Common Stock. Subject to preferences that may be
applicable to any Preferred Stock outstanding at the time, the holders of
outstanding shares of Common Stock are entitled to receive dividends out of
assets legally available therefor at such times and in such amounts as the
Board from time to time may determine. Holders of Common Stock are entitled to
one vote for each share held on all matters submitted to a vote of
shareholders. Cumulative voting for the election of directors will not be
authorized by the Company's Amended and Restated Certificate of Incorporation,
which means that the holders of a majority of the shares voted can elect all
of the directors then standing for election. The Common Stock is not entitled
to preemptive rights and is not subject to conversion or redemption. Upon
liquidation, dissolution or winding-up of the Company, the assets legally
available for distribution to stockholders are distributable ratably among the
holders of the Common Stock and any participating Preferred Stock outstanding
at that time after payment of liquidation preferences, if any, on any
outstanding Preferred Stock and payment of other claims of creditors. Each
outstanding share of Common Stock is, and all shares of Common Stock to be
outstanding upon completion of this offering will be, fully paid and
nonassessable.
PREFERRED STOCK
Upon the closing of this offering, all outstanding shares of Class B Stock
(the "Convertible Preferred") will be converted into shares of Common Stock.
See Note 10 of Notes to the Company's Consolidated Financial Statements for a
description of the Convertible Preferred. Following the offering, the Company
will be authorized to issue 2,000,000 shares of Preferred Stock. The Board is
authorized, subject to any limitations prescribed by Delaware law, to provide
for the issuance of Preferred Stock in one or more series, to establish from
time to time the number of shares to be included in each such series, to fix
the rights, preferences and privileges of the shares of each wholly unissued
series and any qualifications, limitations or restrictions thereon, and to
increase or decrease the number of shares of any such series (but not below
the number of shares of such series then outstanding), without any further
vote or action by the stockholders. The Board may authorize the issuance of
Preferred Stock with voting or conversion rights that could adversely affect
the voting power or other rights of the holders of Common Stock. The issuance
of Preferred Stock, while providing flexibility in connection with possible
acquisitions and other corporate purposes, could, among other things,
adversely affect the voting power of holders of Common Stock and, under
certain circumstances, have the effect of delaying, deferring or preventing a
change in control of the Company. The Company has no current plan to issue any
shares of Preferred Stock.
REGISTRATION RIGHTS
Following this offering, the holder of 291,294 shares of Common Stock
(representing the Common Stock issuable upon conversion of the series of the
Company's Class B Stock called "Series A Preferred Stock") will
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have certain rights to cause the Company to register those shares (the
"Registrable Securities") under the Securities Act pursuant to the Investors'
Rights Agreement. The Company is required to effect one such demand
registration. These registration rights are subject to certain conditions and
limitations, including (i) the right, under certain circumstances, of the
underwriters of an offering to limit the number of shares included in such
registration and (ii) the right of the Company to delay the filing of a
registration statement for not more than 90 days after receiving the
registration demand. The Company is obligated to pay all registration expenses
incurred in connection with such registration (other than underwriters'
discounts and commissions) and the reasonable fees and expenses of a single
counsel to the selling stockholder.
The holder of the Series A Preferred Stock may also require the Company, on
no more than two occasions, to register all or a portion of the Registrable
Securities on Form S-3 under the Securities Act when such form becomes
available for use by the Company, if the securities to be so registered
represent an aggregate selling price to the public of not less than $250,000.
These registration rights are subject to certain conditions and limitations,
including the right of the Company to delay the filing of such a registration
statement for a period of not more than 90 days after receiving the
registration demand. The Company is obligated to pay all registration expenses
incurred in connection with such registration (other than underwriters'
discounts and commissions) and the reasonable fees and expenses of a single
counsel to the selling holder.
If the Company proposes to register any of its securities under the
Securities Act, whether or not for sale for its own account, other than in
connection with a Company employee benefit plan or a corporate reorganization,
the holder of the Series A Preferred Stock, together with the holders of an
aggregate of 3,479,597 shares of Common Stock, will be entitled to notice of
such registration and are entitled to include such securities therein. These
rights are subject to certain conditions and limitations, including the right,
under certain circumstances, of the underwriters of an offering to limit the
number of shares included in such registration. The Company is obligated to
pay all registration expenses incurred in connection with such registration
(other than underwriters' discounts and commissions). If the Company were to
initiate a registration and include shares pursuant to this "piggyback" right,
such sales might have an adverse effect on the Company's ability to raise
capital.
Each stockholder's registration rights expire upon the earlier of the fifth
anniversary of the closing of this offering or such time that such stockholder
can sell all of his, her or its stock under Rule 144(k).
DELAWARE ANTI-TAKEOVER LAW AND CERTAIN CHARTER AND BYLAW PROVISIONS
Upon the closing of this offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law (the "Anti-
Takeover Law") regulating corporate takeovers. The Anti-Takeover Law prevents
certain Delaware corporations, including those whose securities are listed on
the Nasdaq National Market, from engaging, under certain circumstances, in a
"business combination" (which includes a merger or sale of more than 10% of
the corporation's assets) with any "interested stockholder" (a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of any such persons) for three years following the
date that such stockholder became an "interested stockholder" unless (i) the
transaction is approved by the Board of Directors prior to the date the
"interested stockholder" attained such status, (ii) upon consummation of the
transaction that resulted in the stockholder's becoming an "interested
stockholder," the "interested stockholder" owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced
(excluding those shares owned by (a) persons who are directors and also
officers and (b) employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer), or (iii) on or
subsequent to such date the "business combination" is approved by the Board of
Directors and authorized at an annual or special meeting of stockholders by
the affirmative vote of at least two-thirds of the outstanding voting stock
that is not owned by the "interested stockholder." A Delaware corporation may
"opt out" of the Anti-Takeover Law with an express provision in its original
certificate of incorporation or an express provision in its certificate of
incorporation or bylaws resulting from a stockholders' amendment approved by
at least a majority of the outstanding voting shares. The Company has not
"opted out" of the provisions of the Anti-
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Takeover Law. The statute could prohibit or delay mergers or other takeover or
change-in-control attempts with respect to the Company and, accordingly, may
discourage attempts to acquire the Company.
The Company's Amended and Restated Certificate of Incorporation and Bylaws,
which will be in effect upon the completion of this offering, will provide for
the division of the Board into three classes as nearly equal in size as
possible with staggered three-year terms. The classification of the Board
could have the effect of making it more difficult for a third party to
acquire, or of discouraging a third party from acquiring, control of the
Company. In addition, the Bylaws will provide that any action required or
permitted to be taken by the stockholders of the Company at an annual meeting
or special meeting of stockholders may only be taken if it is properly brought
before such meeting and may not be taken by written action in lieu of a
meeting. The Bylaws will provide that special meetings of the stockholders may
only be called by the Chairman of the Board, the Chief Executive Officer of
the Company or the Board.
The Company's Amended and Restated Certificate of Incorporation and Bylaws
will provide that the Company will indemnify officers and directors against
losses that they may incur in investigations and legal proceedings resulting
from their services to the Company, which may include services in connection
with takeover defense measures. Such provisions may have the effect of
preventing changes in the management of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is
ChaseMellon Shareholder Services, L.L.C.
LISTING
The Company has applied to list its Common Stock on the Nasdaq National
Market under the trading symbol ASYM.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to
time. Furthermore, since the substantial majority of the Company's outstanding
Common Stock (other than the shares offered hereby) will not be available for
sale immediately after this offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after these restrictions
lapse could adversely affect the prevailing market price of the Common Stock
and the ability of the Company to raise equity capital in the future.
Upon completion of this offering, the Company will have outstanding an
aggregate of 13,124,822 shares of Common Stock, assuming no exercise of the
Underwriters' over-allotment option and no exercise of outstanding options. Of
these shares, all of the shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" of the Company as that term is
defined in Rule 144 under the Securities Act (the "Affiliates"). The remaining
10,124,822 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if they are registered or if they qualify for an exemption
from registration under Rule 144 or 701 promulgated under the Securities Act,
which rules are summarized below. All officers and directors and certain
stockholders and option holders of the Company have agreed not to offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly (or
enter into any swap or other arrangement that transfers to another, in whole
or in part, any of the economic consequences of ownership of), any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for shares of Common Stock, for a period of 180 days after the date of this
Prospectus, without the prior written consent of NationsBanc Montgomery
Securities LLC. As a result of the contractual restrictions described below
and the provisions of Rule 144 and 701, the Restricted Shares will be
available for sale in the public market as follows: (i) 1,897 shares will be
eligible for immediate sale on the date of this Prospectus; (ii) 238,412
shares will be eligible for sale 90 days after the date of this Prospectus;
(iii) an additional 3,761,733 shares will be eligible for sale upon expiration
of the lock-up agreements 180 days after the date of this Prospectus, subject
in the case of 3,515,168 of such shares to the volume limitations of Rule 144,
and (iv) the remaining shares will become eligible for sale on October 29,
1998 with respect to 5,550,000 shares, on December 19, 1998 with respect to
9,372 shares, on December 22, 1998 with respect to 550,193 shares and on March
16, 1999 with respect to 13,215 shares, in each case subject to the volume
limitations of Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled
to sell within any three-month period a number of shares that does not exceed
the greater of: (i) 1% of the number of shares of Common Stock then
outstanding (which will equal approximately 131,248 shares immediately after
this offering); or (ii) the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale. Sales under Rule 144
are also subject to certain manner of sale provisions and notice requirements
and to the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144; therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering. In general, under Rule 701 of the Securities Act
as currently in effect, any employee, consultant or advisor of the Company who
purchases shares from the Company in connection with a compensatory stock or
option plan or other written agreement is eligible to resell such shares
66
<PAGE>
90 days after the effective date of this offering in reliance on Rule 144, but
without compliance with certain restrictions, including the holding period,
contained in Rule 144.
Upon completion of this offering, the holder of 291,294 shares of Common
Stock issuable upon conversion of Class B Stock, or its transferees, will be
entitled to certain demand registration rights with respect to such shares.
See "Description of Capital Stock--Registration Rights." Registration of such
shares under the Securities Act would result in such shares becoming freely
tradable without restriction under the Securities Act (except for share
purchases by affiliates) immediately upon the effectiveness of such
registration.
The Company intends to file a registration statement under the Securities
Act covering (i) 1,687,500 shares of Common Stock reserved for issuance under
the Equity Incentive Plan and the Directors Plan, (ii) the shares subject to
outstanding options under the 1995 Plan, (iii) 14,573 shares of Common Stock
subject to an option not granted under the 1995 Plan and (iv) an additional
number of shares to be reserved for issuance under the Equity Incentive Plan
equal to the number of shares reserved for future issuance under the 1995
Plan. As of March 31, 1998, options to purchase 3,600,111 shares of Common
Stock were issued and outstanding and 174,902 shares of Common Stock were
reserved for future issuance under the 1995 Plan. See "Management--Employee
Benefit Plans." Such registration statement is expected to be filed and become
effective as soon as practicable after the effective date of this offering.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 volume limitations applicable to Affiliates, be available for sale
in the open market, unless such shares are subject to vesting restrictions
with the Company or the lock-up agreements described above.
67
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), represented by
NationsBanc Montgomery Securities LLC, BancAmerica Robertson Stephens and
Hambrecht & Quist LLC (the "Representatives"), have severally agreed, subject
to the terms and conditions set forth in the Underwriting Agreement, to
purchase from the Company the number of shares of Common Stock indicated below
opposite their respective names at the initial public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriting Agreement provides that the obligations of the Underwriters are
subject to certain conditions precedent and that the Underwriters are
committed to purchase all of the shares if they purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
------------ ---------
<S> <C>
NationsBanc Montgomery Securities LLC..............................
BancAmerica Robertson Stephens.....................................
Hambrecht & Quist LLC..............................................
---------
Total............................................................ 3,000,000
=========
</TABLE>
The Representatives have advised the Company that the Underwriters initially
propose to offer the shares of Common Stock to the public on the terms set
forth on the cover page of this Prospectus. The Underwriters may allow to
selected dealers a concession of not more than $ per share, and the
Underwriters may allow, and such dealers may reallow, a concession of not more
than $ per share to certain other dealers. After the offering, the offering
price and concessions and other selling terms may be changed by the
Representatives. No change in such terms shall change the amount of proceeds
to be received by the Company as set forth on the cover page of this
Prospectus. The Common Stock is offered subject to receipt and acceptance by
the Underwriters and to certain other conditions, including the right to
reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to a
maximum of 450,000 additional shares of Common Stock to cover over-allotments,
if any, at the same price per share as the initial 3,000,000 shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, each of the Underwriters will be committed to purchase such additional
shares in approximately the same proportion as set forth in the above table.
The Underwriters may purchase such shares only to cover over-allotments made
in connection with this offering.
The Underwriting Agreement provides that the Company will indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Securities Act, or will contribute to payments the Underwriters may be
required to make in respect thereof.
All of the Company's officers and directors and certain stockholders have
agreed that, subject to certain exceptions, for a period of 180 days after the
date of this Prospectus, they will not, without the prior written consent of
NationsBanc Montgomery Securities LLC, directly or indirectly sell, offer to
sell or otherwise dispose of any such shares of Common Stock or any right to
acquire such shares. In addition, the Company has agreed that, for a period of
180 days after the date of this Prospectus, it will not, without the prior
written consent of NationsBanc Montgomery Securities LLC, issue, offer, sell,
grant options to purchase or otherwise dispose of any of the Company's equity
securities or any other securities convertible into or exchangeable for the
Common Stock or other equity security, other than the grant of options to
purchase Common Stock, or the issuance of shares of Common Stock under the
Company's stock option and stock purchase plans, the issuance of shares of
Common Stock in connection with certain acquisitions and the issuance of
shares of Common Stock pursuant to the exercise of outstanding options.
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations between the Company and the Representatives. Among
68
<PAGE>
the factors to be considered in such negotiations will be the history of, and
the prospects for, the Company and the industry in which it competes, an
assessment of the Company's management, the prospects for future earnings of
the Company, the present state of the Company's development, the general
condition of the securities markets at the time of the offering, the market
prices of and demand for publicly traded common stock of comparable companies
in recent periods and other factors deemed relevant.
The Representatives, on behalf of the Underwriters, may engage in over-
allotment, stabilizing transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Securities and Exchange
Act of 1934. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions
permit bids to purchase the underlying security so long as the stabilizing
bids do not exceed a specified maximum. Syndicate covering transactions
involve purchases of shares of Common Stock in the open market after the
distribution has been completed in order to cover syndicate short positions.
Penalty bids permit the Representatives to reclaim a selling concession from a
syndicate member when the shares of Common Stock originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Common Stock to be
higher than it would otherwise be in the absence of such transactions. These
transactions may be effected on the Nasdaq National Market or otherwise and,
if commenced, may be discontinued at any time.
The Representatives have informed the Company that the Underwriters do not
expect to make sales in excess of five percent of the number of shares of
Common Stock offered hereby to accounts over which they exercise discretionary
authority.
Certain affiliates of the Representatives have, from time to time, performed
certain banking services for the Company, for which they have received
customary fees and expenses.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Fenwick & West LLP, Palo Alto, California. Certain
legal matters in connection with this offering will be passed upon for the
Underwriters by Brobeck, Phleger & Harrison LLP, Palo Alto, California.
CHANGES IN ACCOUNTANTS
In December 1997, the Board of Directors authorized the Company to retain
KPMG Peat Marwick LLP as its independent public accountants and to dismiss its
former accountants, Ernst & Young LLP. The report of Ernst & Young LLP for the
year ended December 31, 1996 contained no adverse opinion or disclaimer of
opinion and was not qualified or modified as to uncertainty, audit scope or
applications or accounting principles. During the year ended December 31, 1996
and through the date of replacement, there were no disagreements with Ernst &
Young LLP on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure.
EXPERTS
The consolidated financial statements of the Company as of and for the year
ended December 31, 1997 have been included herein and in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
auditors, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The consolidated financial statements of the Company at December 31, 1996,
and for each of the two years in the period ended December 31, 1996; appearing
in this Prospectus and Registration Statement have been
69
<PAGE>
audited by Ernst & Young LLP, independent auditors, as set forth in their
report thereon appearing elsewhere herein, and are included in reliance upon
such report given upon the authority of such firm as experts in accounting and
auditing.
The financial statements of Aimtech Corporation as of December 31, 1996 and
for the year ended December 31, 1996 included in this Prospectus and elsewhere
in the Registration Statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in giving said report. Reference is made to said report which
includes an explanatory paragraph that describes the uncertainty regarding the
substantial doubt about Aimtech Corporation's ability to continue as a going
concern discussed in note 1 to the financial statements.
The financial statements of Communications Strategies, Incorporated at
December 31, 1996 and September 30, 1997 and for the year ended December 31,
1996 and the nine months ended September 30, 1997 have been included herein
and in the Registration Statement in reliance upon the report of KPMG Peat
Marwick LLP, independent auditors, appearing elsewhere herein and upon the
authority of such firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the shares of Common Stock offered hereby. This Prospectus
does not contain all of the information set forth in the Registration
Statement and the exhibits and schedule filed therewith. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedule
filed therewith. Statements contained in this Prospectus regarding the
contents of any contract or any other document to which reference is made are
not necessarily complete, and, in each instance, reference is made to the copy
of such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. A copy of the Registration Statement and the exhibits and schedule
filed therewith may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at
the Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the Registration Statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. The Commission maintains a World Wide Web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. The address of the
site is http://www.sec.gov.
70
<PAGE>
INDEX TO FINANCIAL STATEMENTS
ASYMETRIX LEARNING SYSTEMS, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ASYMETRIX LEARNING SYSTEMS, INC.
Independent Auditors' Reports.............................................. F-2
Consolidated Balance Sheets................................................ F-4
Consolidated Statements of Operations...................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit).................. F-6
Consolidated Statements of Cash Flows...................................... F-7
Notes to Consolidated Financial Statements................................. F-9
CONSOLIDATED CONDENSED PRO FORMA FINANCIAL STATEMENTS
Overview................................................................... F-25
Pro Forma Consolidated Statement of Operations............................. F-27
Notes to Consolidated Pro Forma Financial Statements....................... F-28
AIMTECH CORPORATION
Report of Independent Public Accountants .................................. F-29
Consolidated Balance Sheets................................................ F-30
Consolidated Statements of Operations...................................... F-31
Consolidated Statements of Stockholders' Equity (Deficit).................. F-32
Consolidated Statements of Cash Flows...................................... F-33
Notes to Consolidated Financial Statements................................. F-34
COMMUNICATIONS STRATEGIES, INCORPORATED
Independent Auditors' Report .............................................. F-41
Balance Sheets............................................................. F-42
Statements of Income and Retained Earnings................................. F-43
Statements of Cash Flows................................................... F-44
Notes to Financial Statements.............................................. F-45
</TABLE>
F-1
<PAGE>
WHEN THE TRANSACTION REFERRED TO IN NOTE 12 OF THE NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER
THE FOLLOWING REPORT.
/s/ KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Asymetrix Learning Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Asymetrix
Learning Systems, Inc. and subsidiaries as of December 31, 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for year then ended. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Asymetrix
Learning Systems, Inc. and subsidiaries at December 31, 1997, and the
consolidated results of its operations and its cash flows for year then ended,
in conformity with generally accepted accounting principles.
Seattle, Washington
March 27, 1998, except as to note 12 which is as of May , 1998.
F-2
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Asymetrix Learning Systems, Inc.:
We have audited the accompanying consolidated balance sheet of Asymetrix
Learning Systems, Inc. as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity (deficit), and cash flows for
each of the two years in the period ended December 31, 1996. These financial
statements are the responsibility of the Companys' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Asymetrix
Learning Systems, Inc. at December 31, 1996, and the consolidated results of
its operations and its cash flows for each of the two years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles.
Seattle, Washington
April 23, 1997
- -------------------------------------------------------------------------------
The foregoing report is in the form that will be signed upon completion of
the reverse stock split described in note 12 to the consolidated financial
statements.
Seattle, Washington
April 22, 1998 Ernst & Young LLP
F-3
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
MARCH 31,
1996 1997 1998
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 3,763 $ 2,454 $ 2,911
Note receivable from principal stockholder.. 9,035 -- --
Accounts receivable, net of credit and sales
allowances of $3,346 in 1996, $1,148 in
1997, and $1,173 in 1998................... 1,793 7,105 5,876
Inventories................................. 720 480 421
Prepaid royalties and licenses.............. 278 79 118
Receivables from related companies.......... 128 299 314
Other current assets........................ 547 343 703
--------- --------- --------
Total current assets....................... 16,264 10,760 10,343
Property and equipment, net.................. 1,182 1,834 1,718
Purchased technology......................... 316 451 405
Goodwill, net ............................... -- 8,190 8,189
Investment in Infomodelers, Inc. ............ 838 204 --
Other assets................................. 127 125 125
--------- --------- --------
Total assets............................... $ 18,727 $ 21,564 20,780
========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................ $ 2,354 $ 1,956 $ 1,455
Accrued compensation and benefits........... 1,696 2,164 2,209
Deferred revenue............................ 1,103 2,981 2,247
Payables to related companies............... 26 -- --
Notes payable............................... -- 762 810
Reserve for restructuring costs ............ 653 375 375
Other current liabilities................... 585 1,915 1,398
--------- --------- --------
Total current liabilities.................. 6,417 10,153 8,494
Other noncurrent liabilities................. -- 181 164
--------- --------- --------
Total liabilities............................ 6,417 10,334 8,658
--------- --------- --------
Redeemable common stock, $0.01 par value;
issued and outstanding no shares in 1996 and
191,489 shares in 1997 and 1998; (aggregate
redemption value of $3,000 in 1997 and
1998)....................................... -- 1,468 2,234
Stockholders' equity:
Class B Stock, $0.01 par value:
Authorized 5,000,000 shares; issued and
outstanding, 814,290 shares in 1996,
4,322,289 shares in 1997, and 4,321,389
shares in 1998.............................
Liquidation preference of $5,805 in 1996 and
$5,303 in 1997 and 1998.................... 8 43 43
Common stock, $0.01 par value:
Authorized 40,000,000 shares; issued and
outstanding 5,915,201 shares in 1996,
6,625,036 shares in 1997, and 6,692,365
shares in 1998............................. 59 66 67
Additional paid-in capital.................. 162,862 169,075 169,426
Accumulated deficit......................... (146,146) (159,261) (159,572)
Class B stock subscription receivable ...... (4,500) -- --
Accumulated other comprehensive income
(loss)..................................... 27 (161) (76)
--------- --------- --------
Total stockholders' equity................. 12,310 9,762 9,888
Commitments..................................
--------- --------- --------
Total liabilities and stockholders' equity. $ 18,727 $ 21,564 $ 20,780
========= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
DECEMBER 31, MARCH 31,
---------------------------- --------------
1995 1996 1997 1997 1998
-------- -------- -------- ------ ------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
Revenue:
Product revenue:
Online learning products...... $ -- $ 3,135 $ 7,056 $1,403 $2,069
Other products................ 16,238 11,165 10,425 2,811 1,540
-------- -------- -------- ------ ------
Total product revenue........ 16,238 14,300 17,481 4,214 3,609
Services revenue............... 1,926 2,955 6,583 770 4,186
-------- -------- -------- ------ ------
Total revenue............... 18,164 17,255 24,064 4,984 7,795
-------- -------- -------- ------ ------
Cost of revenue:
Product revenue:
Online learning products...... -- 136 585 58 196
Other products................ 3,343 2,946 2,069 481 289
-------- -------- -------- ------ ------
Total cost of product
revenue..................... 3,343 3,082 2,654 539 485
Services revenue............... 1,270 2,100 4,137 490 2,746
-------- -------- -------- ------ ------
Total cost of revenue....... 4,613 5,182 6,791 1,029 3,231
-------- -------- -------- ------ ------
Gross margin..................... 13,551 12,073 17,273 3,955 4,564
-------- -------- -------- ------ ------
Operating expenses:
Research and development...... 13,315 12,122 8,115 2,246 1,435
Sales and marketing........... 11,984 14,989 13,589 3,443 3,251
General and administrative.... 3,997 4,292 4,432 897 1,596
Loss on impairment of assets.. -- 2,787 -- -- --
Restructuring charge.......... 3,318 1,104 -- -- --
Acquired in-process research
and development.............. -- -- 4,064 -- --
-------- -------- -------- ------ ------
Total operating expenses...... 32,614 35,294 30,200 6,586 6,282
-------- -------- -------- ------ ------
Loss from operations............. (19,063) (23,221) (12,927) (2,631) (1,718)
-------- -------- -------- ------ ------
Other income (expense):
Other expense................. -- (1,128) -- -- --
Interest income from principal
stockholder.................. 1,222 1,066 436 182 --
Interest expense paid by
principal stockholder........ (1,846) -- -- -- --
Other interest income, net.... 50 36 48 44 4
Equity in income (losses) from
Infomodelers, Inc............ -- (112) (634) (150) 2,169
-------- -------- -------- ------ ------
Total other income (expense). (574) (138) (150) 76 2,173
-------- -------- -------- ------ ------
Income (loss) before income
taxes........................... (19,637) (23,359) (13,077) (2,555) 455
Provision for income taxes....... 78 196 38 -- --
-------- -------- -------- ------ ------
Net income (loss)................ $(19,715) $(23,555) $(13,115) (2,555) 455
Accretion of redemption value of
redeemable common stock......... -- -- -- -- (766)
-------- -------- -------- ------ ------
Net loss attributable to common
stockholders.................... $(19,715) (23,555) (13,115) (2,555) (311)
======== ======== ======== ====== ======
Basic and diluted net loss per
share........................... $ (4.14) $ (4.01) $ (2.17) $(0.43) $(0.05)
======== ======== ======== ====== ======
Shares used to compute basic and
diluted net loss per share...... 4,766 5,879 6,038 5,932 6,657
======== ======== ======== ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
ACCUMU-
LATED
OTHER
CLASS B COMPRE-
CLASS B STOCK COMMON STOCK ADDITIONAL STOCK ACCUMU- HENSIVE
----------------- ----------------- PAID-IN SUBSCRIPTION LATED INCOME
SHARES AMOUNT SHARES AMOUNT CAPITAL RECEIVABLE DEFICIT (LOSS) TOTAL
--------- ------ --------- ------ ---------- ------------ --------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1995................... -- $-- 347,500 $ 3 $ 17,592 $ -- $(102,876) $ (87) $(85,368)
Common stock
repurchased............ -- -- (58,750) (1) (38) -- -- -- (39)
Exchange of common stock
for debt and note
receivable............. -- -- 5,561,250 56 132,956 -- -- -- 133,012
Stock options exercised. -- -- 4,583 -- 7 -- -- -- 7
Interest expense paid by
stockholder............ -- -- -- -- 1,846 -- -- -- 1,846
Net loss................ -- -- -- -- -- -- (19,715) -- (19,715)
Translation adjustments. -- -- -- -- -- -- -- (7) (7)
--------- --- --------- --- -------- ------ --------- ----- --------
Balance at December 31,
1995................... -- -- 5,854,583 58 152,363 -- (122,591) (94) 29,736
Common stock issued for
services............... -- -- 6,076 -- 7 -- -- -- 7
Series 1 Class B stock
issued for services.... 37,500 -- -- -- 300 -- -- -- 300
Series A preferred Class
B stock issued for
cash................... 388,395 4 -- -- 4,826 -- -- -- 4,830
Series B preferred Class
B stock issued for
cash................... 388,395 4 -- -- 4,999 (4,500) -- -- 503
Stock options exercised. -- -- 54,542 1 86 -- -- -- 87
Dividend of Infomodelers
stock.................. -- -- -- -- (219) -- -- -- (219)
Stock compensation...... -- -- -- -- 500 -- -- -- 500
Net loss................ -- -- -- -- -- -- (23,555) -- (23,555)
Translation adjustments. -- -- -- -- -- -- -- 121 121
--------- --- --------- --- -------- ------ --------- ----- --------
Balance at December 31,
1996................... 814,290 8 5,915,201 59 162,862 (4,500) (146,146) 27 12,310
Stock options exercised. -- -- 341,757 3 362 -- -- -- 365
Series 4 Class B stock
issued in acquisitions. 2,383,894 24 -- -- 3,361 -- -- -- 3,385
Series 5 Class B stock
issued in acquisitions. 1,512,500 15 -- -- 2,133 -- -- -- 2,148
Common stock issued in
acquisitions........... -- -- 368,078 4 2,818 -- -- -- 2,822
Stock options issued in
acquisitions........... -- -- -- -- 89 -- -- -- 89
Net liability spun off
in SuperCede
transaction............ -- -- -- -- 1,402 -- -- -- 1,402
Stock compensation...... -- -- -- -- 822 -- -- -- 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.................. (388,395) (4) -- -- (4,774) 4,028 -- -- (750)
Net loss................ -- -- -- -- -- -- (13,115) -- (13,115)
Translation adjustments. -- -- -- -- -- -- -- (188) (188)
--------- --- --------- --- -------- ------ --------- ----- --------
Balance at December 31,
1997................... 4,322,289 $43 6,625,036 $66 $169,075 $ -- $(159,261) $(161) $ 9,762
Stock options exercised
(unaudited)............ -- -- 55,369 1 73 -- -- -- 74
Common stock issued in
acquisitions
(unaudited)............ -- -- 13,215 -- 145 -- -- -- 145
Stock compensation
(unaudited)............ -- -- -- -- 135 -- -- -- 135
Cancellation of common
stock (unaudited)...... -- -- (1,255) -- (2) -- -- -- (2)
Cancellation of Series 4
Class B stock
(unaudited)............ (900) -- -- -- -- -- -- -- --
Accretion of redemption
value of redeemable
common stock
(unaudited)............ -- -- -- -- -- -- (766) -- (766)
Net income (unaudited).. -- -- -- -- -- -- 455 -- 455
Translation adjustments
(unaudited)............ -- -- -- -- -- -- -- 85 85
--------- --- --------- --- -------- ------ --------- ----- --------
Balance at March 31,
1998 (unaudited)....... 4,321,389 $43 6,692,365 $67 $169,426 $ -- $(159,572) $ (76) $ 9,888
========= === ========= === ======== ====== ========= ===== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- --------------------
1995 1996 1997 1997 1998
-------- -------- -------- ------- ------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income (loss)........ $(19,715) $(23,555) $(13,115) $(2,555) $ 455
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization........... 2,086 1,696 1,118 287 390
Interest expense paid by
principal stockholder.. 1,846 -- -- -- --
Write-off of property
and equipment.......... 1,333 -- -- -- 8
Write-off of capitalized
software and license
agreements............. 509 -- -- -- --
Acquired in-process
research and
development............ -- -- 4,064 -- --
Impairment of
intangibles............ -- 2,787 -- -- --
Accrued interest on note
receivable from
principal stockholder.. (1,222) (1,066) 2,288 (182) --
Accrued interest on
Class B stock
subscription
receivable............. -- -- (28) (28) --
Equity in income
(losses) from
Infomodelers, Inc...... -- 112 634 150 (2,169)
Stock compensation
expense................ -- 500 822 -- 135
Class B stock issued in
exchange for services.. -- 300 -- -- --
Common stock issued in
exchange for services.. -- 7 -- -- --
Changes in assets and
liabilities:
Accounts receivable... 289 3,190 (4,130) (560) 1,229
Inventories........... 609 73 207 43 59
Prepaid royalties and
licenses............. (561) (298) (212) (381) (39)
Receivables from
related companies.... 566 (13) (171) (392) (15)
Other current assets.. (159) (156) 231 242 (360)
Accounts payable...... (275) 367 (1,779) (197) (501)
Accrued compensation
and benefits......... 491 89 398 (206) 7
Payable to related
companies............ 332 (306) (27) (6) --
Reserve for
restructuring costs.. 316 337 (278) (411) --
Deferred revenue...... (195) 1,095 573 74 (734)
Other current
liabilities.......... 129 (165) 2,030 528 (517)
-------- -------- -------- ------- ------
Net cash used in
operating
activities......... (13,621) (15,006) (7,375) (3,594) (2,052)
-------- -------- -------- ------- ------
Cash flows from investing
activities:
Purchase of property and
equipment.............. (591) (805) (316) (66) (56)
Purchase of technology.. (1,290) -- -- -- --
Payments related to
acquisitions, net of
cash acquired.......... -- -- (321) -- --
Disposition of
(investment in)
Infomodelers, Inc...... -- (1,000) -- -- 2,373
Disposal (purchase) of
other assets........... 57 155 (8) (1) --
-------- -------- -------- ------- ------
Net cash used in
investing
activities......... (1,824) (1,650) (645) (67) 2,317
-------- -------- -------- ------- ------
Subtotal, carried
forward............ $(15,445) $(16,656) $ (8,020) $(3,661) $ 265
======== ======== ======== ======= ======
</TABLE>
F-7
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
--------------------------- ---------------
1995 1996 1997 1997 1998
-------- -------- ------- ------- ------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Subtotal, brought
forward............... $(15,445) $(16,656) $(8,020) $(3,661) $ 265
Cash flows from financing
activities:
Repayment of capital lease
obligations................ -- -- (16) -- (15)
Proceeds from (repayment of)
notes payable.............. -- -- (299) -- 48
Borrowings on note payable
to stockholder............. 18,285 -- -- -- --
Payments received on note
receivable from principal
stockholder................ -- 11,850 6,747 -- --
Payments on long-term debt.. (546) (523) (398) -- --
Payments received on Class B
stock subscription
receivable................. -- -- 500 500 --
Proceeds from sale of Class
B stock, net............... -- 5,333 -- -- --
Proceeds from exercise of
stock options.............. 7 87 365 18 74
Repurchase of common stock.. (39) -- -- -- --
-------- -------- ------- ------- ------
Net cash provided by
financing activities.. 17,707 16,747 6,899 518 107
-------- -------- ------- ------- ------
Effect of exchange rate
changes on cash............ (7) 121 (188) (86) 85
-------- -------- ------- ------- ------
Net increase (decrease)
in cash and cash
equivalents........... 2,255 212 (1,309) (3,229) 457
Cash and cash equivalents at
beginning of period......... 1,296 3,551 3,763 3,763 2,454
-------- -------- ------- ------- ------
Cash and cash equivalents at
end of period............... $ 3,551 $ 3,763 $ 2,454 $ 534 $2,911
======== ======== ======= ======= ======
</TABLE>
F-8
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997 AND MARCH 31, 1997 AND 1998
(INFORMATION AS OF MARCH 31, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997 AND 1998 IS UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Business
Asymetrix Learning Systems, Inc. (Asymetrix or the Company) is a provider of
online enterprise learning solutions designed to enable organizations to
capture, deploy and manage knowledge more effectively. The Company's products
can be used by clients on a variety of computer platforms. The Company's
online learning products include its learning management system known as
Librarian, its online learning authoring products, consisting of ToolBook II
Instructor and ToolBook II Assistant, its multimedia products, consisting of
media creation products and third-party learning titles. The Company's other
products include multimedia authoring tools and other products not related to
online learning. The Company also offers a variety of professional services,
including consulting and development services, training programs and customer
and technical support targeted for the online learning market.
(b) Working Capital
At December 31, 1997, the Company had working capital of $607,000. In 1998,
the Company obtained a line of credit for $5.0 million which provides funds
available to the Company through July 1, 1998. Additionally in 1998, the
Company received $2.4 million in cash from the sale of its Infomodelers stock.
The Company continues to seek additional working capital in the form of
additional lines of credit, extensions of existing lines of credit or
investments of equity in the Company which will be adequate to sustain
operations through at least December 31, 1998. The Company will manage its
operations commensurate with its level of available working capital.
(c) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
the Company 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.
(d) 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.
(e) Foreign Currency Translation
The functional currency of the Company'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 shown
separately as a component of 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.
F-9
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(f) 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.
(g) Concentration of Credit and Sales Risk
The Company distributes its products through direct sales to end-users and
on an indirect basis through resellers, distributors, and original equipment
manufacturers (OEMs). The Company performs ongoing credit evaluations of its
customers' financial condition and generally requires no collateral.
(h) Inventories
Inventories are stated at the lower of cost or market and include
adjustments for estimated obsolescence. Cost is determined principally using
periodically adjusted standards, which approximate actual cost on a first-in,
first-out basis.
(i) Other Financial Instruments
At December 31, 1997, the carrying values of financial instruments, such as
trade receivables and current payables, approximated their fair values based
on the short-term maturities of these instruments.
(j) Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation.
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.
(k) Intangible Assets
Purchased technology consists of software products acquired by the Company
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.
Goodwill represents excess purchase price over the fair value of tangible
and identifiable intangible assets acquired and is amortized over estimated
useful lives of 5 to 15 years.
(l) Accounting for Long-Lived Assets
The Company 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 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.
(m) Revenue Recognition
Revenue from sales of software products to end-users, resellers, and
distributors is recognized when the products are shipped provided that no
significant obligations of the Company remain and collection of the
F-10
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
resulting receivable is deemed probable. The Company'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,
reseller or other distributor, provided that no significant obligations of the
Company remain, the Company recognizes revenue when it delivers its product to
the OEM reseller or other distributor, provided that no significant
obligations of the Company remain. 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. The
Company recognizes revenue associated with technical support agreements over
the life of the contract.
The Company 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.
Effective January 1, 1998, the Company adopted Statement of Position (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
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. Revenue allocated to software products, specified
upgrades and enhancements is generally recognized upon delivery of the related
products, upgrades and enhancements. Revenue allocated to post contract
customer support is generally recognized ratably over the term of the support,
and revenue allocated to service elements is generally recognized as the
services are performed. The adoption of SOP 97-2 did not have a material
effect on revenue recognition for the three months ended March 31, 1998.
(n) 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 the software is established. Under the Company's
current practice of developing new products and enhancements, the
technological feasibility of the underlying software is not established until
substantially all product development is complete, including the development
of a working model. No such costs have been capitalized because the impact of
capitalizing such costs would not be material.
(o) 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.
F-11
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(p) Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 123, "Accounting for Stock-Based Compensation" (Statement 123). The
Company has adopted the disclosure-only provisions of Statement 123 and
applies Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" (APB 25) and related interpretations in accounting for
its stock option plans. Accordingly, the Company'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 9 to the financial statements.
(q) Advertising
Advertising costs are expensed as incurred and are included in sales and
marketing expense. Advertising expense was $667,000, $1,257,000 and $1,241,000
during the years ended December 31, 1995, 1996 and 1997, respectively, and
$332,000 and $193,000 during the three months ended March 31, 1997 and 1998,
respectively.
(r) Net Loss Per Share
The Financial Accounting Standards Board (FASB) recently issued SFAS No.
128, Earnings Per Share. SFAS No. 128 requires the presentation of basic
earnings per share, and for companies with complex capital structures, diluted
earnings per share. Basic earnings per share is computed by dividing the sum
of net income (loss) plus accretion of redemption value of redeemable common
stock by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is computed by dividing the sum of net
income (loss) plus accretion of redemption value of redeemable common stock by
the weighted average number of common and dilutive common equivalent shares
outstanding during the period. The Company has presented historical basic and
diluted net loss per share in accordance with SFAS No. 128. As the Company had
a net loss attributable to common stockholders in each of the periods
presented, basic and diluted net loss per share is the same.
Excluded from the computation of diluted earnings per share for the year
ended December 31, 1997 are options to acquire 3,389,835 shares of Common
Stock with a weighted-average exercise price of $3.46 because their effects
would be anti-dilutive. Also excluded from the computation of diluted earnings
per share for the year ended December 31, 1997 are 3,241,645 common equivalent
shares resulting from the assumed conversion of the Class B stock because
their effects would be anti-dilutive.
(s) Comprehensive Income
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income
(Statement 130), which 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. Statement 130 is
effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods to be provided
for comparative purposes. The Company has not determined the manner in which
it will present the information required by Statement 130 in its annual
financial statements for the year ending December 31, 1998. The Company's
total comprehensive income (loss) for the years ended December 31, 1995, 1996
and 1997, and the three months ended March 31, 1997 and 1998 was $(19,722),
$(23,434), $(13,303), $(2,641) and $540, respectively.
(t) New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 131, Disclosure About Segments of an
Enterprise and Related Information, (Statement 131). Statement 131 establishes
standards for the way that public business enterprises
F-12
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
report information about operating segments. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. Statement 131 is effective for fiscal years beginning after
December 15, 1997. In the initial year of application, comparative information
for earlier years must be restated. The Company has not determined the manner
in which it will present the information required by Statement 131.
(2) INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
MARCH 31,
1996 1997 1998
------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Raw materials...................................... $ 686 $ 351 $238
Finished goods..................................... 419 180 231
Less obsolescence reserve.......................... (385) (51) (48)
------ ------ ----
$ 720 $ 480 $421
====== ====== ====
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------- MARCH 31,
1996 1997 1998
------ ------ ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Leasehold improvements............................... $ 181 $ 247 $ 273
Equipment............................................ 4,004 5,753 5,734
Furniture and fixtures............................... 402 494 525
------ ------ ------
4,587 6,494 6,532
Less accumulated depreciation........................ 3,405 4,660 4,814
------ ------ ------
$1,182 $1,834 $1,718
====== ====== ======
</TABLE>
(4) NOTES PAYABLE
The Company maintains a $500,000 revolving line of credit facility with a
bank. Interest is payable at the bank's stated rate plus 1.0% (10% at December
31, 1997). The facility expires April 1, 1998 and is unsecured. The Company
had outstanding borrowings under the facility of $274,000 and $322,000 at
December 31, 1997 and March 31, 1998, respectively.
At December 31, 1997 and March 31, 1998, the Company is also obligated under
a note payable to a former stockholder of the Oakes Companies in the amount of
$488,000. This note bears interest at the prime rate (8.5% at December 31,
1997) and matures in 1998.
In January 1998, the Company entered into a $5.0 million line of credit with
a bank which expires on July 1, 1998. Borrowings under this line of credit
bear interest at the bank's reference rate or LIBOR plus 1.0% per annum and
are secured by the Company's accounts receivable. There were no borrowings
outstanding under this line of credit at March 31, 1998.
F-13
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(5) LEASES
The Company leases office space under noncancelable operating leases. Future
minimum lease payments under noncancelable operating leases with terms in
excess of one year are as follows (in thousands):
<TABLE>
<S> <C>
Years ending December 31:
1998............................................................ $1,828
1999............................................................ 1,107
2000............................................................ 454
2001............................................................ 258
2002............................................................ 26
------
Total minimum lease payments.................................. $3,673
======
</TABLE>
The Company sublets a portion of its office space to related parties and
offsets rent expense through sublease billings. Total sublease billings through
1999 are expected to approximate $717,000. No sublease billings are expected
beyond 1999. Rent expense under operating leases approximated $1,080,000,
$1,343,000 and $1,189,000 during the years ended December 31, 1995, 1996 and
1997, respectively and $277,000 and $444,000 during the three months ended
March 31, 1997 and 1998, respectively.
(6) INCOME TAXES
Income (loss) before income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
U.S. ............................................ $(19,786) $(23,498) $(13,107)
Foreign.......................................... 149 139 30
-------- -------- --------
Total loss before income taxes................. $(19,637) $(23,359) $(13,077)
======== ======== ========
</TABLE>
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Current tax expense:
U.S. Federal.............. $ -- $ -- $ --
State..................... 3 6 --
Foreign................... 75 190 38
------- -------- -------
Total provision for
income taxes........... $ 78 $ 196 $ 38
======= ======== =======
</TABLE>
The effective rate differs from the U.S. federal statutory rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Income tax expense (benefit) at statutory
rate of 34%................................ $(6,677) $(7,942) $(4,446)
Losses producing no current tax benefit..... 6,621 7,869 2,954
Acquired in-process research and
development................................ -- -- 1,382
Foreign taxes............................... 75 190 38
Other, net.................................. 59 79 110
------- ------- -------
Total provision for income taxes.......... $ 78 $ 196 $ 38
======= ======= =======
</TABLE>
F-14
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997, Asymetrix had federal net operating loss (NOL)
carryforwards and research and development (R&D) tax credit carryforwards whose
expiration approximated the following:
<TABLE>
<CAPTION>
NOL R&D
-------- ------
(IN THOUSANDS)
<S> <C> <C>
From 2000 through 2001...................................... $ 2,392 $ --
From 2002 through 2006...................................... 27,080 928
From 2007 through 2012...................................... 98,710 1,630
-------- ------
$128,182 $2,558
======== ======
</TABLE>
The Company's ability to utilize NOL carryforwards may be limited in the
event that a change in ownership, as defined in the Internal Revenue Code,
occurs in the future.
Deferred income tax assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $40,660 $43,582
Research and development tax credit carryforwards........... 2,463 2,558
Provisions for credit and sales allowances.................. 1,138 390
Provision for inventory obsolescence........................ 131 17
Stock compensation.......................................... 170 398
Other provisions and expenses not currently deductible...... 271 427
------- -------
44,833 47,372
Valuation allowance for deferred tax assets................. (44,833) (47,372)
------- -------
Net deferred tax assets................................... $ -- $ --
======= =======
</TABLE>
For financial reporting purposes, the deferred tax assets valuation allowance
has been established due to the uncertainty of realization of the deferred tax
assets. The valuation allowance increased $5,581,000, $7,637,000 and $2,539,000
in 1995, 1996 and 1997, respectively.
(7) RELATED-PARTY TRANSACTIONS
Prior to March 1995, the Company financed its operations through a bank-
provided line of credit up to $120,000,000 guaranteed by its principal
stockholder, who was also coborrower under the line of credit. The credit
facility was secured by collateral pledged by the Company's principal
stockholder. As interest on the debt was paid directly by the Company's
principal stockholder, in accordance with SEC Staff Accounting Bulletin No. 79,
interest expense of $1,846,000 in 1995 was recognized by the Company and
treated as a contribution to capital from the stockholder.
In March 1995, the Company effected a recapitalization under which all of the
outstanding shares of common stock, except for 385,000 shares held by the
principal stockholder, were repurchased for $.50 per share, the estimated fair
value of the Company's Common Stock. Subsequent to this repurchase, the Company
issued 7,415,000 shares of stock to its then sole stockholder, bringing the
total outstanding shares to 7,800,000. In exchange for this stock, the sole
stockholder contributed $18,404,000 in the form of a note receivable and
canceled the note payable which, at that date, had an outstanding balance of
$114,608,000. The note receivable is due on demand, bears interest at 8%, and
had a balance of $9,035,000 at December 31, 1996. The note receivable was
repaid in full in October 1997.
F-15
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) ACQUISITIONS
(a) Socha Computing, Inc. (Socha)
In July 1997, the Company acquired all the outstanding shares of common stock
of Socha. The acquisition was recorded under the purchase method of accounting.
The purchase price included $200,000 in cash and 200,000 shares of Series 4
Class B Stock (which are convertible into an aggregate of 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. 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 reached.
As a result, the aggregate purchase price of $484,000 has been allocated to
acquired in-process research and development. An additional $400,000 will be
paid contingent upon the satisfaction of certain performance milestones related
to technology purchased in the acquisition. In addition, the Company is
obligated to pay 10% of net revenues generated from the purchased technology,
as well as 2% of net revenues from products developed utilizing the purchased
technology, not to exceed maximum aggregate royalties of $5,400,000.
(b) Aimtech Corporation (Aimtech)
In September 1997, the Company acquired all the outstanding shares of common
stock of Aimtech, a provider of computer based training (CBT) development
products based in Nashua, New Hampshire. The Aimtech acquisition was recorded
under the purchase method of accounting. Accordingly, the results of Aimtech's
operations from September 12, 1997 are included in the Company's consolidated
financial statements. The purchase price consisted of 2,183,894 shares of
Series 4 Class B Stock (which are convertible into an aggregate of 1,637,178
shares of Common Stock) and options to purchase 19,431 shares of Series 4 Class
B Stock (which are convertible into an aggregate of 14, 573 shares of Common
Stock) valued at $3,101,000, and $154,000 of other acquisition costs. The
purchase price has been allocated to assets acquired and liabilities assumed
based on their fair value at the date of acquisition as follows (in thousands):
<TABLE>
<S> <C>
Acquired in-process research and development...................... $3,580
Purchased technology.............................................. 350
Goodwill.......................................................... 1,467
Net current liabilities........................................... (2,243)
Property and equipment and other assets........................... 101
------
$3,255
======
</TABLE>
In connection with the acquisition of Aimtech, 441,705 shares of the Series 4
Class B stock issued in connection with the acquisition of Aimtech (which are
convertible into an aggregate of 331,246 shares of Common Stock) were placed in
escrow to secure certain indemnification obligations of former stockholders of
Aimtech. Subsequent to the acquisition of Aimtech, the Company entered into an
agreement to license to a third party certain technology acquired from Aimtech.
Pursuant to the agreement, the licensee is required to pay royalties to the
Company over a three-year period based on percentages of net revenue. Total
royalties paid are not to exceed $5,000,000, with minimum guaranteed royalties
of $500,000, payable through 1998.
(c) The Oakes Companies
In September 1997, the Company acquired all of the outstanding shares of
common stock of the Oakes Companies. The Oakes Companies consist 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 acquisition of the Oakes Companies was recorded under
the purchase method of accounting. The purchase price consisted of 1,512,500
shares of Series 5
F-16
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Class B Stock (which are convertible into an aggregate of 1,134,371 shares of
Common Stock) valued at $2,148,000, and $72,000 of other acquisition costs, and
has been allocated to assets acquired and liabilities assumed based on their
fair value at the date of acquisition as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment and other assets........................... $ 686
Goodwill.......................................................... 2,809
Net current liabilities........................................... (197)
Long-term obligations............................................. (1,078)
------
$2,220
======
</TABLE>
(d) Communications Strategies, Incorporated (CSI)
In December 1997, the Company 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 the Company's Common
Stock at $7.67 per share to stockholders of CSI and acquisition costs of
$10,000. The fair value of the options issued is $89,000. The acquisition of
CSI has been recorded under the purchase method of accounting. Accordingly, the
purchase price has been allocated to assets acquired and liabilities assumed
based on their fair value at the date of acquisition as follows (in thousands):
<TABLE>
<S> <C>
Property and equipment and other assets........................... $1,233
Goodwill.......................................................... 3,901
Current liabilities............................................... (817)
------
$4,317
======
</TABLE>
In the event the Company does not complete an initial public offering of its
Common Stock with aggregate proceeds not less than $10,000,000 on or prior to
June 30, 1998, the former shareholders of CSI have the right to require the
Company to repurchase up to 191,490 shares of the Common Stock issued in the
acquisition at a price of $15.67 per share. This right expires upon the earlier
of the closing of an initial public offering as described above, the date such
stockholder no longer holds any shares of the Company's Common Stock, or July
31, 1998. The shares subject to this right have been classified as redeemable
common stock outside of stockholders' equity pursuant to the rules and
regulations of the Securities and Exchange Commission.
(e) Graham-Wright Interactive, Inc. (GWI)
In December 1997, the Company acquired all the outstanding shares of common
stock of GWI. The acquisition of GWI was accounted for under the purchase
method of accounting. The purchase price consisted of 12,500 shares of common
stock valued at $72,000, and has been allocated to assets acquired and
liabilities assumed based on their fair value at the date of acquisition as
follows (in thousands):
<TABLE>
<S> <C>
Property and equipment............................................. $ 52
Goodwill........................................................... 132
Net current liabilities............................................ (112)
-----
$ 72
=====
</TABLE>
A summary of the purchase price paid for all of the 1997 acquisitions is as
follows:
<TABLE>
<S> <C>
Consideration:
Cash, including acquisition costs.............................. $ 436
Current liabilities assumed.................................... 4,944
Non-current liabilities assumed................................ 1,078
Stock and stock options........................................ 9,912
-------
$16,370
=======
</TABLE>
F-17
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A summary of the allocation of the purchase price for all of the 1997
acquisitions is as follows:
<TABLE>
<S> <C>
Cash acquired..................................................... $ 115
Current assets acquired........................................... 2,437
Property and equipment and other non-current assets............... 1,095
Software technology--completed.................................... 350
Software technology in progress--charged to in-process research
and development.................................................. 4,064
Goodwill.......................................................... 8,309
-------
$16,370
=======
</TABLE>
(f) Unaudited Pro Forma Financial Information
The following table presents unaudited pro forma results of operations as if
the acquisitions of Socha, Aimtech, Oakes, CSI and GWI had occurred on January
1, 1996:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
DECEMBER 31, ENDED
---------------- MARCH 31,
1996 1997 1997
------- ------- ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C> <C>
Revenue....................................... $30,772 $35,951 $8,888
Net loss...................................... (29,030) (17,505) (3,959)
Net loss per share............................ (4.65) (2.74) (0.63)
</TABLE>
(9) IMPAIRMENT OF ASSETS AND RESTRUCTURINGS
(a) Restructuring of Domestic Operations
In January 1995, the Company adopted a plan to restructure its domestic
operations. Pursuant to this plan, the Company discontinued development of
certain products and reduced its development, sales, and support work force by
89 full-time employees (approximately 30% of the work force). The Company
recognized a charge to income of $3,318,000 as a result of this reorganization.
This charge related to involuntary termination benefits for employee
compensation and certain exit costs, including guaranteed royalties, product
returns, cost for abandoned office space, computer equipment, furniture and
office equipment and other nonrecurring expenses.
(b) Restructuring of European Operations
In September 1996, the Company adopted a plan to restructure its European
operations. The Company recognized a charge to income of $604,000, which
included involuntary termination benefits for employee compensation and certain
exit costs.
(c) Spin-Off of Client/Server Tools Division
On October 7, 1996, the Company transferred employees previously employed in
the Company's Client/Server Tools Division to a new wholly-owned subsidiary
(ASX Corporation, formed in August 1996). The Company entered into two
agreements with ASX Corporation: (1) a Technology Transfer and License
Agreement, whereby the Infomodelers and Conceptual Query technologies were
transferred to ASX Corporation in exchange for 3,500,000 shares of ASX
Corporation's common stock (all of the outstanding stock of ASX Corporation), a
royalty of 8% on sales of ASX Corporation's products and services based on this
technology over the next five years; and a license for the Company to use the
technology in noncompeting products; and (2) an Asset Purchase and Loan
Agreement, whereby the Company sold ASX Corporation all net assets (including
patents and trademarks covering the technology) of the Client/Server Tools
Division for $500,000. Additionally,
F-18
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
the Company loaned ASX Corporation $1,000,000. Both the purchase price of the
assets and the loan were reflected in a $1,500,000 promissory note from ASX
Corporation to the Company. The Company recorded a noncash restructuring
expense of $500,000 related to a modification of Asymetrix stock option plan
rights related to employees who transferred to ASX. ASX Corporation was renamed
Conquer Data, Inc. and subsequently Infomodelers, Inc. (Infomodelers). The
Company canceled the $1,500,000 promissory note in exchange for 700,000 shares
of Infomodelers preferred stock.
On October 17, 1996, the Company distributed, in the form of a dividend,
2,434,262 shares of Infomodelers common stock to its existing stockholders, and
distributed 368,512 shares of Infomodelers common stock (in the form of
compensation) to employees who held vested options of the Company's common
stock.
Subsequent to these transactions, the Company owned approximately 28% of the
outstanding voting stock of Infomodelers at December 31, 1996 and accounts for
its investment in Infomodelers using the equity method of accounting.
As a result of this spin-off, the Company reviewed the technology remaining
in the Client/Server Tools Division and development activities using the
technology were abandoned. Therefore, the Company recorded an impairment charge
of $2,787,000 in 1996, to write-off previously capitalized amounts related to
licenses for the technology.
(d) Spin-Off of Internet Tools Division
In June 1997, the Company 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, the Company
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 the Company to use the technology in noncompeting products
specifically including the Company's online enterprise learning products. In
September 1997, the Company exchanged its SuperCede common stock for an
equivalent number of shares of SuperCede Series B preferred stock, and the
license of SuperCede technology to the Company was terminated. Also in
September 1997, an additional investor controlled by the Company's principal
stockholder purchased 3,500,000 shares of SuperCede Series A preferred stock
for $2.00 per share, reducing the Company's investment in SuperCede to 50%.
Each of the Series A and Series B preferred stock are 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 the Company exchanged its SuperCede common stock for SuperCede
Series B preferred stock and SuperCede sold Series A preferred stock to the
Company's principal stockholder, SuperCede had net liabilities of $1,357,000.
The Company treated the transaction as a sale of stock by its subsidiary.
Because SuperCede's Series A preferred stockholder has rights and preferences
superior to those of the Company's Series B preferred stock, the Company's
share of SuperCede's net assets is $0 and, therefore, the Company increased the
carrying amount of its investment in SuperCede to $0. The increase in the
carrying amount of the Company's investment in SuperCede was reflected as an
increase of $1,402,000 to additional paid-in capital. The Company accounts for
its investment in SuperCede using the equity method of accounting.
Additionally, the Company 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.
F-19
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(10) STOCKHOLDERS' EQUITY
(a) Class B Stock
SERIES 1 CLASS B STOCK
On September 5, 1996, the Company designated a total of 50,000 shares of $.01
par value Series 1 Class B Stock (Series 1 Stock). These shares have a
preference on liquidation of $8.00 per share. On September 5, 1996, the Company
issued 37,500 shares of Series 1 Stock valued at $300,000 to EnCompass Group,
Inc. in consideration for certain localization services.
SERIES A PREFERRED CLASS B STOCK
On October 11, 1996, the Company designated 388,395 shares of $.01 par value
Series A Preferred Class B Stock (Series A Stock). These shares have a
preference on liquidation equal to the original issue price of the shares plus
all declared but unpaid dividends thereon. On October 25, 1996, the Company
issued 388,395 shares of Series A Stock to SOFTBANK Holdings, Inc. in exchange
for cash of $5,002,528, reduced by offering costs of $173,000.
SERIES B PREFERRED CLASS B STOCK
On December 13, 1996, the Company designated 388,395 shares of $.01 par value
Series B Preferred Class B Stock (Series B Stock). These shares have a
preference on liquidation equal to the original issue price of the shares plus
all declared but unpaid dividends thereon. On December 20, 1996, Multimedia
Asia Pacific Pty. Ltd. (MAP) purchased 388,395 shares of Series B Stock in
exchange for $502,528 in cash and a promissory note for $4,500,000, bearing
interest at an annual rate of 6%. The note calls for a series of scheduled
payments through May of 1997, and payment for $500,000 was received in January
1997.
As of December 31, 1996, 349,380 shares of Series B Stock were pledged as
security on the note. In February of 1997, MAP defaulted on the note, with
310,560 shares remaining pledged against the note. Subsequent to the default,
the Company granted MAP an extension to pay off all, or a portion of, the
unpaid principal on the note of $4,000,000, plus accrued interest, by December
31, 1997.
In October 1997, the Company and MAP effected a settlement of the note
through the following transactions:
. All shares of Series B Stock that were pledged to secure the note were
cancelled in full satisfaction of the balance of the note, and
. All shares of Series B Stock that were then fully paid were redeemed by the
Company in exchange for $750,000 of accounts receivable owed to the Company
by Asymetrix Asia Pacific Pty. Ltd., a wholly-owned subsidiary of MAP.
SERIES 4 AND 5 CLASS B STOCK
On June 24, 1997 and July 10, 1997, the Company designated a total of
2,500,000 shares of $0.01 par value Series 4 Class B Stock (Series 4 Stock).
These shares have no preference on liquidation. In July 1997, the Company
issued 200,000 shares of Series 4 Stock valued at $284,000 to effect the
acquisition of Socha. In September 1997, the Company issued 2,183,894 shares of
Series 4 Stock valued at $3,101,000 to effect the acquisition of Aimtech.
On September 26, 1997, the Company designed a total of 1,512,500 shares of
$0.01 par value Series 5 Class B Stock (Series 5 Stock). These shares have no
preference on liquidation. In September 1997, the Company issued 1,512,500
shares of Series 5 Stock valued at $2,148,000 to effect the acquisition of the
Oakes Companies.
F-20
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STOCK RIGHTS AND PREFERENCES
The Series 1 Stock, the Series A Stock, Series B Stock, Series 4 Stock and
Series 5 Stock (collectively known as Class B Stock) are convertible into
common stock at a conversion ratio of 0.75 to 1.0 (subject to subsequent
adjustments for stock dividends or other events). Such conversion may occur at
the option of the holder of the shares, upon an initial public offering, or
certain other events. Each holder of paid-up Class B Stock is entitled to vote
upon all matters which the holders of common stock have the right to vote, in
accordance with the conversion ratio described above. Dividends for Class B
Stock are not mandatory or cumulative and are at the discretion of the Board
of Directors. However, any dividends which are declared must be paid to the
holders of the Series A Stock and Series B Stock before dividends are paid to
the holders of the Series 1 Stock, Series 4 Stock, Series 5 Stock or common
stock. Additionally, the holders of Series 4 and 5 Stock are not entitled to
receive any dividends which may be paid upon the Company's disposition of its
investment in SuperCede. All dividends are paid on an as-converted to common
stock basis.
The Series 1 Stock liquidation preference rights are subordinate to the
Series A Stock and Series B Stock, whose liquidation preference rights are
equal.
A summary of Class B Stock follows:
<TABLE>
<CAPTION>
ISSUED AND OUTSTANDING
----------------------------
DESIGNATED
SHARES 1996 1997
---------- ------- ---------
<S> <C> <C> <C>
Series 1 Stock..................................... 50,000 37,500 37,500
Series A Stock..................................... 388,395 388,395 388,395
Series B Stock..................................... 388,395 388,395 --
Series 4 Stock..................................... 2,500,000 -- 2,383,894
Series 5 Stock..................................... 1,512,500 -- 1,512,500
Undesignated....................................... 160,710 -- --
--------- ------- ---------
5,000,000 814,290 4,322,289
========= ======= =========
</TABLE>
(b) Stock Option Plan
In 1995, the Company's Board of Directors adopted and approved the Asymetrix
Corporation 1995 Combined Incentive and Nonqualified Stock Option Plan (the
Plan) that provides for the issuance of nonqualified and incentive stock
options to officers, employees, and consultants to acquire 4,275,000 shares of
common stock. The Board of Directors 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 Plan inception date vest ratably each month over four
years. Options granted subsequent to Plan inception 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.
The Company 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 the Company'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.
F-21
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Under APB 25, because the exercise price of the Company's employee stock
options equals the fair value of the underlying stock on the date of grant, no
compensation expense is recognized. Had stock compensation expense for the
Company's stock option plan been determined based on the fair value methodology
under Statement 123, the Company's net loss would have increased to these pro
forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1996 1997
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net loss:
As reported.................................... $(19,715) $(23,555) $(13,115)
Pro forma...................................... (19,859) (23,926) (13,616)
Basic and diluted net loss per share:
As reported.................................... $ (4.14) $ (4.01) $ (2.17)
Pro forma...................................... (4.17) (4.07) (2.26)
</TABLE>
The fair value for these options was estimated at the date of grant using the
minimum value option pricing model 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 6.5% during
1995 and 1996, and 6.0% during 1997 over the expected life of the options.
Compensation expense recognized in providing pro forma disclosures may not be
representative of the effects on pro forma net income or loss for future years
because the amounts above include only the amortization for the fair value of
the 1995, 1996 and 1997 grants.
The weighted-average fair value of stock options granted in 1995, 1996 and
1997 was $0.41, $0.64 and $1.57, respectively.
A summary of the Company's stock option activity is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER EXERCISE
FOR GRANT OF SHARES PRICE
---------- ----------- ---------
<S> <C> <C> <C>
Outstanding at January 1, 1995............ -- -- --
Plan introduction....................... 4,275,000 -- --
Options granted......................... (3,164,473) 3,164,473 $ 1.55
Options exercised....................... -- (4,583) 1.55
Options canceled........................ 266,322 (266,322) 1.55
---------- -----------
Balances at December 31, 1995............. 1,376,849 2,893,568 1.55
Options granted......................... (750,434) 750,434 2.37
Options exercised....................... -- (54,542) 1.55
Options canceled........................ 482,603 (482,603) 1.55
---------- -----------
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
Options granted......................... (396,399) 396,399 7.67
Options exercised....................... -- (55,369) 1.55
Options canceled in cashless exercises.. -- (3,647) 1.55
Options canceled........................ 127,107 (127,107) 3.41
---------- -----------
Balances at March 31, 1998................ 174,902 3,600,111 3.95
========== ===========
</TABLE>
F-22
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 1997:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
EXERCISE NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
PRICE OUTSTANDING LIFE PRICE EXERCISABLE PRICES
-------- ----------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.55 2,004,428 7.6 years $1.55 1,297,158 $1.55
6.00 1,197,908 9.6 years 6.00 99,900 6.00
7.67 187,499 9.9 years 7.67 -- --
--------- ---------
3,389,835 8.4 years 3.46 1,397,058 1.87
========= =========
</TABLE>
(c) Common Shares Reserved for Future Issuance
At December 31, 1997, the Company has reserved shares of Common Stock as
follows:
<TABLE>
<S> <C>
Employee stock options............................................. 3,389,835
Stock options issued in acquisitions............................... 37,073
Conversion of Class B Stock:
Series 1 Class B................................................. 28,125
Series A Class B................................................. 291,296
Series 4 Class B................................................. 1,787,853
Series 5 Class B................................................. 1,134,371
---------
6,668,553
=========
</TABLE>
(d) 1998 Equity Incentive Plan
In December 1997, the Board adopted, subject to stockholder approval, the
1998 Equity Incentive Plan (the "Equity Incentive Plan"). The total number of
shares of Common Stock reserved for issuance thereunder is 1,500,000. The
Equity Incentive Plan will become effective on the closing of the initial
public offering and will serve as the successor to the 1995 Plan. Options
granted under the 1995 Plan before their termination will remain outstanding
according to their terms, but no further options will be granted under the 1995
Plan after the closing of the initial public offering.
(e) 1998 Directors Stock Option Plan
In December 1997, the Board adopted, subject to stockholder approval, the
1998 Directors Stock Option Plan (the "Directors Plan") and reserved a total of
187,500 shares of the Company's Common Stock for issuance thereunder. Members
of the Board who are not employees of the Company or any parent, subsidiary or
affiliate of the Company are eligible to participate in the Directors Plan.
Option grants under the Directors Plan are automatic and nondiscretionary, and
the exercise price of such options is 100% of the fair market value of the
Common Stock on the date of grant.
(11) BENEFIT PLANS
The Company 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, the Company has made no
contributions.
(12) REVERSE STOCK SPLIT
On December 29, 1997, the Board approved, subject to stockholder approval, a
3-for-4 reverse split of its Common Stock. The consolidated financial
statements, including all share and per share amounts, have been restated to
reflect the reverse stock split.
F-23
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(13) SALE OF INFOMODELERS STOCK
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 the Company 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, the Company sold to its principal stockholder Infomodelers
shares with an aggregate book value of $2.4 million to the Company's principal
stockholder for cash of $2.4 million.
(14) ADAMS CONSULTING GROUP, INC. ACQUISITION
In March 1998, the Company acquired Adams Consulting Group, Inc. (Adams) by
issuing 13,215 shares of the Company's Common Stock. The acquisition of Adams
was accounted for under the purchase method of accounting. The purchase price
consisted of the Common Stock issued valued at $145,000, and has been allocated
to assets acquired and liabilities assumed based on their fair values at the
date of acquisition as follows (in thousands):
<TABLE>
<S> <C>
Goodwill............................................................... $183
Current liabilities.................................................... (38)
----
$145
====
</TABLE>
F-24
<PAGE>
CONSOLIDATED CONDENSED PRO FORMA FINANCIAL STATEMENTS
ASYMETRIX AND SUBSIDIARIES
During the period from January 1, 1997 to March 17, 1998, Asymetrix Learning
Systems, Inc. ("the Company") recognized the effect of the acquisition of eight
entities in separate transactions whereby the Company acquired all of the
outstanding stock of eight entities in exchange for either Class B Stock or
Common Stock of the Company. In addition, in a separate transaction in
September 1997, the Company spun off certain of its assets and liabilities, and
employees in exchange for stock of a newly created entity.
ACQUISITIONS
The acquisitions of Communications Strategies, Incorporated ("CSI"), Aimtech
Corporation ("Aimtech"), and Oakes Interactive Incorporated, TopShelf
Multimedia, Inc. and Acorn Associates Incorporated (collectively, the "Oakes
Companies"), have been accounted for using the purchase method of accounting,
and accordingly, each purchase price has been allocated to the tangible and
identifiable intangible assets acquired and liabilities assumed on the basis of
their fair values on the acquisition dates. The fair value of the Company's
stock issued in the acquisitions was estimated to be $1.42 per share for the
acquisitions of Aimtech and the Oakes Companies, and $5.75 per share for the
acquisition of CSI.
In September 1997, the Company acquired Aimtech by issuing an aggregate of
2,183,894 shares of Series 4 Class B Stock in exchange for all of Aimtech's
outstanding common stock. Upon the closing of this offering, each share of
Series 4 Class B Stock will be converted into 0.75 share of Common Stock of the
Company.
In September 1997, the Company acquired the Oakes Companies by issuing an
aggregate of 1,512,500 shares of Series 5 Class B Stock in exchange for all of
the outstanding shares of common stock of each of the Oakes Companies. Upon the
closing of this offering, each share of Series 5 Class B Stock will be
converted into 0.75 share of Common Stock in the Company.
In December 1997, the Company acquired CSI by issuing an aggregate of 550,193
shares of Common Stock and options to purchase 30,000 shares of Common Stock at
an exercise price of $7.67 per share in exchange for all of the outstanding
shares of CSI's common stock.
In addition to the acquisitions discussed above, in 1997 the Company
completed an acquisition of Socha Computing, Inc. (Socha) and an acquisition of
Graham-Wright Interactive, Inc. (Graham-Wright), and in 1998 the Company
completed an acquisition of Adams Consulting Group, Inc. (Adams). The purchase
price for Socha consisted of $200,000 cash and 200,000 shares of Series 4 Class
B Stock. The purchase price for Graham-Wright consisted of 9,375 shares of
Common Stock. The purchase price for Adams consisted of 13,215 shares of Common
Stock. The impact of the acquisitions of Socha, Graham-Wright and Adams have
not been included in the pro forma financial statements as the impact would not
be significant to the pro forma financial statements taken as a whole.
DISPOSITION
In September 1997, the Company contributed certain technology assets related
to its SuperCede development project to a wholly-owned subsidiary in exchange
for 3,500,000 shares of Common Stock in that subsidiary. In August 1997, Vulcan
Ventures Inc. ("Vulcan Ventures"), a venture capital company controlled by the
principal stockholder of the Company, loaned to SuperCede an aggregate of
$7,000,000 which was evidenced by a convertible promissory note (the "SuperCede
Note"). In September 1997, SuperCede sold an aggregate of 3,500,000 shares of
its Series A Preferred Stock to Vulcan Ventures for a purchase price of $2.00
per share, including cancellation of the indebtedness represented by the
SuperCede Note. Also in September 1997, the Company exchanged its SuperCede
Common Stock for an equivalent number of shares of SuperCede Series B Preferred
Stock.
F-25
<PAGE>
The following unaudited pro forma consolidated statement of operations
consolidates the operating results of the Company with those of CSI for the
period from January 1, 1997 to December 23, 1997, Aimtech for the period from
January 1, 1997 to September 12, 1997 and the Oakes Companies for the period
from January 1, 1997 to September 30, 1997 , and removes the operating results
of SuperCede for the period from January 1, 1997 to September 30, 1997 as if
each such transaction had occurred on January 1, 1997.
The pro forma financial information is presented for informational purposes
only and is not necessarily indicative of the results of operations had the
acquisitions occurred on such date, nor do they purport to be indicative of the
Company's future results of operations.
F-26
<PAGE>
ASYMETRIX AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
ACQUISITIONS DISPOSITION
-------------------------- ----------- PRO FORMA
OAKES ADJUSTMENTS
ASYMETRIX CSI AIMTECH COMPANIES SUPERCEDE DR. (CR.) PRO FORMA
--------- ------ ------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Product Revenue:
Online learning
products............. $ 7,056 $ -- $ -- $ -- $ -- $ -- $ 7,056
Other products........ 10,425 -- 2,545 1,267 (2,031) 126 (a) 12,080
-------- ------ ------- ------- ------- ------- --------
Total product
revenue............ 17,481 -- 2,545 1,267 (2,031) 126 19,136
Services.............. 6,583 4,489 825 2,887 -- -- 14,784
-------- ------ ------- ------- ------- ------- --------
Total revenue....... 24,064 4,489 3,370 4,154 (2,031) 126 33,920
Cost of revenue:
Product Revenue:
Online learning
products............. 585 -- -- -- -- -- 585
Other products........ 2,069 -- 447 644 (273) (73)(b) 2,708
-------- ------ ------- ------- ------- ------- --------
Total cost of
product revenue.... 2,654 -- 447 644 (273) (73) 3,293
Services.............. 4,137 2,690 800 2,230 -- -- 9,857
-------- ------ ------- ------- ------- ------- --------
Total cost of
revenue............ 6,791 2,690 1,247 2,874 (273) (73) 13,256
-------- ------ ------- ------- ------- ------- --------
Gross margin............ 17,273 1,799 2,123 1,280 (1,758) 53 20,664
Operating expenses:
Research and
development.......... 8,115 -- 1,368 -- (2,619) -- 6,864
Sales and marketing... 13,589 227 2,812 707 (2,459) -- 14,876
General
administrative....... 4,432 1,520 1,340 1,124 (653) 343 (c) 8,106
Acquired in-process
research and
development.......... 4,064 -- -- -- -- (4,064)(d) --
-------- ------ ------- ------- ------- ------- --------
Total operating
expenses........... 30,200 1,747 5,520 1,831 (5,731) (3,721) 29,846
-------- ------ ------- ------- ------- ------- --------
Loss from operations.... (12,927) 52 (3,397) (551) 3,973 (3,668) (9,182)
Other income (expense):
Interest income from
principal
shareholder.......... 436 -- -- -- -- -- 436
Other interest income
(expense), net....... 48 (41) 31 (88) -- -- (50)
Equity in losses from
Infomodelers......... (634) -- -- -- -- -- (634)
-------- ------ ------- ------- ------- ------- --------
Income (loss) before
income taxes........... (13,077) 11 (3,366) (639) 3,973 (3,668) (9,430)
Provision for income
taxes.................. 38 4 -- -- -- (4)(e) 38
-------- ------ ------- ------- ------- ------- --------
Net income (loss)....... $(13,115) $ 7 $(3,366) $ (639) $ 3,973 $(3,672) $ (9,468)
======== ====== ======= ======= ======= ======= ========
Basic and diluted net
loss per share......... (f) $ (1.48)
</TABLE>
(See accompanying notes to pro forma financial statements)
F-27
<PAGE>
ASYMETRIX AND SUBSIDIARIES
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)
The following adjustments were applied to the historical consolidated
financial statements of the Company, CSI, Aimtech, and the Oakes Companies to
arrive at the pro forma consolidated financial information:
(a) Represents the elimination of intercompany revenues of $126,000
associated with CSI, Aimtech and the Oakes Companies.
(b) Represents the elimination of intercompany expenses of $126,000
associated with CSI, Aimtech and the Oakes Companies and recognition of
$53,000 of amortization expense related to purchased technology
associated with Aimtech.
(c) Represents amortization expense related to goodwill associated with the
acquisitions of CSI, Aimtech and the Oakes Companies, which is
amortized on an entity by entity basis over its estimated useful life
of fifteen, five and fifteen years, respectively, and the elimination
of discretionary bonus compensation received by shareholders of CSI as
these shareholders entered into employment contracts in conjunction
with the acquisition of CSI. These adjustments are summarized as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
DR. (CR.)
--------------
(IN THOUSANDS)
<S> <C>
Amortization of goodwill:
CSI........................... $ 260
Aimtech....................... 220
Oakes Companies............... 140
-----
620
Discretionary bonus
compensation................. (277)
-----
$ 343
=====
</TABLE>
(d) Represents the in-process research and development acquired in
conjunction with the acquisitions of Aimtech and Socha of $3,580,000
and $484,000, respectively.
(e) Represents the reduction of provision for income taxes of $4,000 as a
result of operating losses incurred on a consolidated basis.
(f) Pro forma basic and diluted net loss per share is computed using the
weighted average number of common shares outstanding during the period,
including shares of Common Stock issued to effect acquisitions as if
they were issued on January 1, 1997. Excluded from pro forma basic and
diluted net loss per share is 191,489 shares of redeemable common stock
issued in the acquisition of CSI as they are classified outside of
stockholders' equity pursuant to the rules and regulations of the
Securities and Exchange Commission. The following is a reconciliation
of shares used to compute historical basic and diluted net loss per
share to shares used to compute pro forma basic and diluted net loss
per share (in thousands):
<TABLE>
<S> <C>
Weighted average common shares
outstanding........................... 6,038
Shares issued in CSI acquisition....... 359
-----
6,397
=====
</TABLE>
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders
Aimtech Corporation:
We have audited the accompanying consolidated balance sheet of Aimtech
Corporation (a Delaware corporation) and subsidiaries as of December 31, 1996,
and the related consolidated statements of operations, stockholders' equity
(deficit) and cash flows for the year then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Aimtech
Corporation and subsidiaries as of December 31, 1996, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from its
operations and requires additional financing to fund its 1997 operations that
raises substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 1. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
Arthur Andersen LLP
Boston, Massachusetts
May 9, 1997
F-29
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1996 1997
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................... $ 2,536,571 $ 319,856
Accounts receivable, net of allowance for returns
and doubtful accounts of approximately $243,000
in 1996 and $131,341 in 1997..................... 1,121,814 349,399
Inventory......................................... 145,474 137,213
Prepaid and other current assets.................. 127,060 86,041
------------ -----------
Total current assets............................ 3,930,919 892,509
------------ -----------
Property and equipment, at cost:
Computer equipment................................ 1,194,711 1,335,490
Furniture and fixtures............................ 353,534 356,708
Equipment under capital leases.................... 265,311 265,311
Leasehold improvements............................ 67,302 60,042
------------ -----------
1,880,858 2,017,551
Less-accumulated depreciation and amortization.... 1,308,656 1,582,474
------------ -----------
Net property and equipment...................... 572,202 435,077
------------ -----------
Other assets........................................ 13,496 13,496
------------ -----------
Total assets.................................... $ 4,516,617 $ 1,341,082
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portion of capital lease obligations...... $ 30,917 $ 28,491
Accounts payable.................................. 687,586 653,538
Deferred revenue.................................. 1,067,480 724,412
Other accrued expenses............................ 576,754 382,941
Customer advances................................. 681,000 686,500
------------ -----------
Total current liabilities....................... 3,043,737 2,475,882
------------ -----------
Capital lease obligations, net of current portion... 32,446 16,556
------------ -----------
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $.0.01 par value. Authorized
5,000,000 shares; issued and outstanding--none... -- --
Common stock, $0.01 par value. Authorized
20,000,000 shares; issued and outstanding
7,311,911 shares in 1996 and 7,576,700 shares in
1997............................................. 73,119 75,767
Additional paid-in capital........................ 14,776,286 14,809,917
Accumulated deficit............................... (13,450,635) (16,080,624)
Cumulative translation adjustment................. 41,664 43,584
------------ -----------
Total stockholders' equity (deficit)............ 1,440,434 (1,151,356)
------------ -----------
Total liabilities and stockholders' equity
(deficit)...................................... $ 4,516,617 $ 1,341,082
============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-30
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------
1996 1996 1997
------------ ------------ -----------
(UNAUDITED)
<S> <C> <C> <C>
Net revenues:
Product............................... $ 5,697,000 $ 3,099,558 $ 2,168,091
Service............................... 1,707,524 1,035,876 616,691
----------- ------------ -----------
Total revenues ..................... 7,404,524 4,135,434 2,784,782
----------- ------------ -----------
Cost of revenues:
Product............................... 439,646 123,907 280,011
Service............................... 896,148 528,380 649,652
----------- ------------ -----------
Total cost of revenues.............. 1,335,794 652,287 929,663
----------- ------------ -----------
Gross profit........................ 6,068,730 3,483,147 1,855,119
----------- ------------ -----------
Selling and marketing expenses.......... 6,780,251 3,570,811 2,436,915
Product development expenses............ 2,745,183 1,500,033 1,075,295
General and administrative expenses..... 1,549,689 666,369 1,002,881
----------- ------------ -----------
Loss from operations................ (5,006,393) (2,254,066) (2,659,972)
Interest expense........................ (11,896) (5,663) (3,984)
Interest income......................... 157,473 79,123 33,967
----------- ------------ -----------
Net loss............................ $(4,860,816) $ (2,180,606) $(2,629,989)
=========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-31
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ADDITIONAL CUMULATIVE TOTAL
NUMBER OF $0.01 PAID-IN ACCUMULATED TRANSLATION STOCKHOLDERS'
SHARES PAR VALUE CAPITAL DEFICIT ADJUSTMENT EQUITY (DEFICIT)
--------- --------- ---------- ----------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1995................... 5,155,957 $51,560 9,428,212 (8,589,819) 52,866 942,819
Sale of common stock,
net of issuance costs
of $18,304............. 1,703,910 17,039 5,076,387 -- -- 5,093,426
Sale of common stock
under employee stock
purchase plan.......... 40,544 405 109,464 -- -- 109,869
Exercise of options..... 111,000 1,110 142,490 -- -- 143,600
Exercise of warrants and
stock rights........... 300,500 3,005 11,920 -- -- 14,925
Compensation expense
associated with stock
options................ -- -- 7,813 -- -- 7,813
Cumulative translation
adjustment............. -- -- -- -- (11,202) (11,202)
Net loss................ -- -- -- (4,860,816) -- (4,860,816)
--------- ------- ---------- ----------- ------- ----------
Balance at December 31,
1996................... 7,311,911 73,119 14,776,286 (13,450,635) 41,664 1,440,434
Exercise of warrants
(unaudited)............ 218,673 2,187 -- -- -- 2,187
Exercise of options
(unaudited)............ 46,116 461 33,631 -- -- 34,092
Net loss (unaudited).... -- -- -- (2,629,989) -- (2,629,989)
Cumulative translation
adjustment (unaudited). -- -- -- -- 1,920 1,920
--------- ------- ---------- ----------- ------- ----------
Balance at June 30, 1997
(unaudited)............ 7,576,700 $75,767 14,809,917 (16,080,624) 43,584 (1,151,356)
========= ======= ========== =========== ======= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-32
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------------
1996 1996 1997
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................... $(4,860,816) $(2,180,606) $(2,629,989)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization......... 433,217 205,609 273,818
Compensation expense associated with
stock options........................ 7,813 5,860 --
Provision for sales returns and
doubtful accounts.................... 164,939 -- --
Loss on sale of fixed assets.......... 10,413 -- --
Changes in assets and liabilities:
Accounts receivable.................. 292,699 605,245 772,415
Inventory............................ (42,989) (94,502) 8,261
Prepaid and other current assets..... (15,694) (41,340) 41,019
Other assets......................... 2,642 (6,628) --
Accounts payable..................... 112,395 38,200 (34,049)
Deferred revenue..................... 103,505 326,923 (343,068)
Customer advances.................... (137,068) 5,978 5,500
Other accrued expenses............... (202,937) 16,920 (193,813)
----------- ----------- -----------
Net cash used in operating
activities........................ (4,131,881) (1,118,341) (2,099,906)
----------- ----------- -----------
Cash flows from investing activities:
Purchases of property and equipment.... (206,710) (164,178) (136,692)
Proceeds from sale of property and
equipment............................. 12,231 -- --
----------- ----------- -----------
Net cash used in investing
activities........................ (194,479) (164,178) (136,692)
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock,
net of issuance costs................. 5,203,295 5,203,295 --
Repayment of long-term debt and
capitalized lease obligations......... (36,527) (18,250) (18,316)
Proceeds from exercise of warrants and
options............................... 158,525 117,768 36,279
----------- ----------- -----------
Net cash provided by financing
activities........................ 5,325,293 5,302,813 17,963
----------- ----------- -----------
Effect of exchange rate changes......... (11,202) (10,516) 1,920
----------- ----------- -----------
Net increase (decrease) in cash and
cash equivalents.................. 987,731 4,009,778 (2,216,715)
Cash and cash equivalents at beginning
of period.............................. 1,548,840 1,548,840 2,536,571
----------- ----------- -----------
Cash and cash equivalents at end of
period................................. $ 2,536,571 $ 5,558,618 $ 319,856
----------- ----------- -----------
Supplemental disclosures of cash flow
information--cash paid during the year
for:
Interest.............................. $ 11,069 $ 8,000 $ 4,000
Taxes................................. 800 -- --
Supplemental disclosure of noncash
financing activities--acquisition of
equipment under capital lease
obligations............................ $ 82,785 $ 63,722 $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-33
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996
(INFORMATION WITH REGARD TO JUNE 30, 1996 AND 1997 IS UNAUDITED)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
Aimtech Corporation and subsidiaries (the Company) are engaged in developing
and marketing interactive multimedia and Internet software applications. The
Company's products are visual authoring tools used to create Internet and
computer-based training courses, sales and manufacturing product
demonstrations, informational and transactional kiosks and CD-ROM titles. In
1996, the Company released a new product for web designers and creative
professionals that creates Java Applets and applications for use on web sites.
The Company sells its products both directly and through a network of domestic
and international resellers into corporate, governmental and educational
markets.
The Company is subject to the same risks that other technology-based
companies in similar stages of development face, including the need for
adequate financing to fund future operations, dependence on key individuals and
the continued successful development and marketing of its products.
The Company has incurred significant operating losses since inception.
Management believes that additional financing will be required during fiscal
year 1997 to continue to fund its current level of operations and to achieve
the Company's strategic plan. The Company is actively pursuing arrangements to
secure additional equity financing and other sources of liquidity, including
the possible sale of the Company. However, there can be no assurance such
efforts will be successful. In the event these or other steps are not
accomplished, there exists substantial doubt concerning the Company's ability
to continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty. See note 7.
The accompanying consolidated financial statements reflect the application of
certain significant accounting policies as described below and elsewhere in the
notes to consolidated financial statements.
(a) Management Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
(b) Consolidation
The Company's consolidated financial statements include the accounts of its
wholly owned subsidiaries, Aimtech Europe Limited and Aimtech Deutschland,
GmbH. All material intercompany transactions and balances have been eliminated
in consolidation.
(c) Cash and Cash Equivalents
The Company classifies all highly liquid, short-term investments with initial
maturities of less than three months as cash and cash equivalents. All amounts
are recorded at cost.
(d) Revenue Recognition
Revenue from the sale of software licenses is recognized upon shipment,
provided that no significant vendor obligations remain outstanding and
collection of the resulting receivable is deemed probable. The Company provides
reserves for any returns and warranty expenses upon shipment of the product.
Postcontract customer
F-34
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
support bundled in the sale of initial license fees is deferred and amortized
over the maintenance period. The Company recognizes revenue associated with
separately billed maintenance and customer support ratably over the life of the
contract. These contracts generally have terms of one year or less.
The Company recognizes revenue under courseware development contracts as
services are provided for per diem contracts or by using the percentage-of-
completion method of accounting based on the ratio of hours incurred to the
total estimated hours of a contract for individual fixed-price contracts. The
Company recognizes revenue under development contracts requiring completed
software products upon delivery of the products and acceptance by the customer.
Provisions for any estimated losses on uncompleted contracts are made in the
period in which such losses become evident. If a transaction includes both
license and service elements, license fee revenue is recognized upon shipment
of the product, provided services do not include significant customization or
modification of the base products and payment terms for licenses are not
subject to acceptance criteria. In cases in which license fee payments are
contingent upon the acceptance of services, revenues for both the license and
service elements are deferred until the acceptance criteria are met.
(e) Foreign Operations
The Company's United Kingdom and German subsidiaries use the local currency
as the functional currency and translate all assets and liabilities at year-end
exchange rates and all income and expense accounts at average rates. Resulting
translation adjustments are included in the accompanying consolidated balance
sheets as the cumulative translation adjustment within stockholders' equity.
In June of 1996, the Company closed their German subsidiary, Aimtech
Deutschland, GmbH. The costs incurred to close the facility were not
significant and were fully incurred and paid by December 31, 1996.
(f) Depreciation and Amortization
The Company provides for depreciation and amortization using accelerated
methods by charges to operations in amounts that allocate the cost of assets
over their estimated useful lives, as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
-------------------- ---------------------
<S> <C>
Computer equipment................................. 2-3 years
Furniture and fixtures............................. 5 years
Equipment under capital leases..................... Term of lease
Leasehold improvements............................. Term of lease
</TABLE>
(g) Impairment of Long-Lived Assets
In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets To Be Disposed Of. This statement
addresses the accounting for the impairment of long-lived assets, certain
identifiable intangibles and goodwill related to assets to be held and used,
and for long-lived assets and certain identifiable intangibles to be disposed
of.
This statement requires that long-lived assets, including intangibles, be
reviewed for impairment whenever events or changes in circumstances, such as a
change in market value, indicate that asset carrying amounts may not be
recoverable. In performing the review for recoverability, if estimated future
undiscounted cash flows (without interest charges) from the use and ultimate
dispositions of the assets are less than their carrying value, an impairment
loss is recognized. Impairment losses are to be measured based on the fair
value of the asset.
F-35
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's adoption of the statement did not have a material impact on the
Company's financial statements.
(h) Software Research and Development Costs
The Company capitalizes product development costs subsequent to the
establishment of technological and commercial feasibility until the product is
available for general release. Costs incurred prior to the establishment of
technological feasibility are charged to product development expense.
Development costs associated with product enhancements that extend the life of
the original product or significantly improve the marketability of the original
product are also capitalized upon technological feasibility. Amortization of
product development costs begins the month after the products are released over
the shorter of the estimated useful life of the product or three years, which
results in amortization expense no less than that which would result from using
the ratio of current gross revenues to total expected gross revenues. The
Company records the amortization as a component of cost of revenues.
For the year ended December 31, 1996 and the six months ended June 30, 1996
and 1997, the Company did not capitalize any significant amount of product
development costs because the costs incurred after technological feasibility
was established were not material.
(i) Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market and
consists of software diskettes, CD-ROMs and related documentation.
(j) Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under the liability method specified by SFAS No.
109, a deferred tax asset or liability is determined based on the difference
between the financial statement and tax bases of assets and liabilities, as
measured by the enacted tax rates assumed to be in effect when these
differences reverse.
The sources of deferred income tax and the related tax effect at December 31,
1996 are approximately as follows:
<TABLE>
<S> <C>
Net operating loss carryforwards............................ $ 3,800,000
Temporary differences....................................... 127,000
Less-valuation allowance.................................... (3,927,000)
-----------
Deferred income taxes....................................... $ --
===========
</TABLE>
The Company has recorded a valuation allowance equal to the full value of the
deferred tax assets, including net operating loss carryforwards, because of the
uncertainty of their future utilization.
At December 31, 1996, the Company has federal net operating loss
carryforwards of approximately $11,200,000 to be offset against future taxable
income and tax credit carryforwards to be offset against future federal tax, if
any. These carryforwards expire in varying amounts through 2011 and are subject
to review and possible adjustment by the Internal Revenue Service (the IRS).
The Tax Reform Act of 1986 contains provisions that may severely limit the net
operating loss carryforwards available to be used in any given year in the
event a significant change in ownership occurs, as defined in the tax
regulations.
F-36
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(k) Postretirement and Postemployment Benefits
The Company has no obligations for postretirement or postemployment benefits.
(l) Derivative Financial Instruments
SFAS No. 119, Disclosure About Derivative Financial Instruments and Fair
Value of Financial Instruments, requires certain disclosures about derivative
financial instruments, including futures, forward swap and option contracts and
other financial instruments with similar characteristics. As of December 31,
1996, the Company had no instruments requiring disclosure under SFAS No. 119.
(m) Interim Financial Statements
The accompanying balance sheet as of June 30, 1997, and the statements of
operations and cash flows for the six months ended June 30, 1996 and June 30,
1997, and the statement of stockholders' equity (deficit) for the six months
ended June 30, 1997 are unaudited, but in the opinion of management, include
all adjustments (consisting of normal, recurring adjustments) necessary for a
fair presentation of results for these interim periods. The results of
operations for the six months ended June 30, 1997 are not necessarily
indicative of the results to be expected for the entire fiscal year.
(2) COMMITMENTS AND CONTINGENCIES--LEASES
The Company leases various office space and equipment expiring in varying
amounts through 2000.
The future minimum annual lease payments at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
Year ending December 31:
1997.................................................... $365,694 $39,408
1998.................................................... 67,086 30,682
1999.................................................... 45,234 --
2000.................................................... 3,292 --
2001.................................................... -- --
-------- -------
Total minimum lease payments.......................... $481,306 $70,090
========
Less amount representing interest....................... 6,727
-------
Present value of minimum lease payments............... 63,363
Less current portion of capital lease obligations....... 30,917
-------
Long-term portion of capital lease obligations........ $32,446
=======
</TABLE>
Rental expense charged to operations was approximately $387,000 for the year
ended December 31, 1996. One of the facility operating leases is considered
excess. The Company has accrued approximately $14,000 to cover its expected
loss, net of subrental income.
(3) STOCKHOLDERS' EQUITY
(a) Preferred Stock
The Company has authorized the issuance of 5,000,000 shares of preferred
stock, none of which have been issued. The Board of Directors shall determine
the number, designation, preferences, voting power, qualifications and other
rights and privileges of each series of preferred stock.
F-37
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(b) Common Stock
Certain stockholders have entered into an agreement that allows these
stockholders to participate in a purchase offer should one be received by a
significant stockholder. These stockholders also have a right of first refusal
on any purchase offer received by a stockholder on the same terms and
conditions. If the other stockholders refuse to acquire the shares, the Company
also has a right of refusal to acquire the shares on the same terms and
conditions. These stockholders also have a right of refusal to purchase all or
any part of new securities issued by the Company sufficient for the
stockholders to maintain their pro rata interest. These stockholders'
agreements terminate upon the closing of an initial public offering.
On May 2, 1996, the Company sold 1,703,910 shares of common stock with
warrants to purchase an additional 511,173 shares of common stock at an
exercise price of $.01 per share in exchange for total consideration of
$5,111,730. The warrants are fully exercisable and expire upon the earlier of
the closing of a public offering, the closing of the sale or merger of the
Company, or on January 31, 1997. As of December 31, 1996, 292,500 of these
warrants have been exercised. The balance of the warrants were exercised in
1997.
(c) Employee Stock Purchase Plan
Effective July 1, 1993, the Company adopted the Aimtech Corporation Employee
Stock Purchase Plan (the Purchase Plan). The Company has reserved and may issue
up to 200,000 shares of common stock in semiannual offerings over a 10-year
period. The offering price shall never be less than 85% of the fair market
value per share on the offering date. Employee contributions to each individual
stock purchase account shall not exceed 10% of the employee's compensation, as
defined. The Purchase Plan prohibits any employee from owning 5% or more of the
total combined voting power or value of all classes of stock of the Company, or
from purchasing shares valued in excess of $25,000 (at the offering date) in
any calendar year.
(d) Stock Options
In 1989, the Company adopted the 1989 Stock Incentive Plan (the Plan),
pursuant to which options to purchase up to 2,000,000 shares of the Company's
common stock are available for issuance. The Plan provides for the granting of
stock options, restricted stock or performance share awards to eligible
employees of the Company. Incentive stock options are granted at an exercise
price of not less than the fair market value of the common stock at the date of
grant. Nonqualified stock options are granted at an exercise price that is
determined by the Board of Directors and which may be less than the fair market
value of the common stock at the date of grant. All outstanding options have
exercise prices equal to the estimated fair value of the common stock at the
date of grant. Generally, the options vest over four years and expire not more
than 10 years from the date of grant. Stock awarded pursuant to the Plan may be
subject to certain restrictions and conditions as decided by the Board of
Directors. No restricted stock or performance share awards had been granted as
of December 31, 1996. At December 31, 1996, 1,838,449 shares have been reserved
for issuance under the Plan. Stock option activity for the year ended December
31, 1996 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE PRICE
OF SHARES PER SHARE
--------- -------------
<S> <C> <C>
Outstanding, December 31, 1995.................... 1,470,251 $2.60
Granted........................................... 376,123 2.37
Exercised......................................... (111,000) 1.29
Canceled.......................................... (627,458) 2.33
---------
Outstanding, December 31, 1996.................... 1,107,916 2.67
=========
Exercisable, December 31, 1996.................... 320,959 2.37
=========
</TABLE>
The weighted average fair value of options granted in 1996 was $0.48.
F-38
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In addition to the above Plan, in 1991, the Company issued to an officer an
option to purchase 8,000 shares of common stock with an exercise price of $1.50
per share. The officer exercised this option in 1996. In 1993, the Company
issued to an individual an option to purchase 10,000 shares of common stock
with an exercise price of $3.00 per share. The exercise prices represented the
fair value at the date of grant.
On January 1, 1994, the Company adopted the Stock Option Plan for Nonemployee
Directors, pursuant to which 200,000 shares were reserved for issuance. The
Company granted a total of 30,000 options to two Directors with an exercise
price of $3.00 per share. Each Nonemployee Director initially elected to the
Board of Directors in the future will also receive an option to purchase 15,000
shares of common stock. These options vest in three equal annual installments
beginning on the date of grant.
In August 1994, the Company extended the exercise period of certain options
granted under the terms of the Plan. This resulted in compensation expense to
the Company equal to the difference between the grant price and the fair market
value at the new measurement date, which was recognized over the remaining
terms of the options. For the year ended December 31, 1996, the Company
recorded compensation expense related to this transaction of $7,813.
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
Accounting for Stock-Based Compensation, which defines a fair value based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of their
employee stock compensation plans. However, it also allows an entity to
continue to measure compensation costs for those plans using the intrinsic
method of accounting prescribed by APB Opinion No. 25. Entities electing to
remain with the accounting in APB Opinion No. 25 must make pro forma
disclosures of net income and earnings per share, if presented, as if the fair
value based method of accounting defined in SFAS No. 123 had been applied.
The Company has elected to account for its stock-based compensation plan
under APB Opinion No. 25. However, the Company has computed, for pro forma
disclosure purposes, the value of all options granted during 1996 using the
Black-Scholes option pricing model as prescribed by SFAS No. 123, using the
following weighted average assumptions for grants in 1996:
<TABLE>
<S> <C>
Risk-free interest................................................ 5.98%
Expected dividend yield........................................... 0%
Expected life..................................................... 1 year
Expected volatility............................................... 0%
</TABLE>
The total value of options granted during 1996 would be amortized on a pro
forma basis over the vesting period of the options. Options generally vest
equally over four years. Because the SFAS No. 123 method of accounting has not
been applied to options granted prior to January 1, 1995, the resulting pro
forma compensation costs may not be representative of that to be expected in
future years. If the Company had accounted for these plans, including the
Employee Stock Purchase Plan, in accordance with SFAS No. 123, the Company's
net loss for the year ended December 31, 1996 would have increased as reflected
in the following pro forma amounts:
<TABLE>
<S> <C>
Net loss:
As reported............................................... $(4,860,816)
Pro forma................................................. (5,036,770)
</TABLE>
F-39
<PAGE>
AIMTECH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Set forth is a summary of options outstanding and exercisable as of December
31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICE SHARES LIFE (YEARS) PRICE OPTIONS PRICE
---------- ----------- ------------ -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.30-2.00 147,500 5.13 $1.57 137,250 $1.54
2.31-3.00 960,416 9.07 2.84 183,709 3.00
---------- --------- ---- ----- ------- -----
$1.30-3.00 1,107,916 8.55 $2.67 320,959 $2.37
========== ========= ==== ===== ======= =====
</TABLE>
(4) AIMTECH CORPORATION 401(K) PROFIT SHARING PLAN
Effective January 1, 1994, the Company established the Aimtech Corporation
401(k) Profit Sharing Plan (the 401(k) Plan) under Section 401(k) of the
Internal Revenue Code. The 401(k) Plan allows eligible employees to make
contributions up to a specified percentage, not to exceed 15% of their
compensation, subject to certain IRS limitations.
The Company may elect to make contributions to the 401(k) Plan, at the
discretion of the Board of Directors, not to exceed 5% of an employee's
compensation, as defined. The Company did not make a 401(k) Plan contribution
in 1996.
(5) SIGNIFICANT CUSTOMERS AND CONCENTRATION OF CREDIT RISK
In 1996, two customers accounted for 26% of the Company's net sales.
SFAS No. 105, Disclosure of Information About Financial Instruments with Off-
Balance-Sheet Risk and Financial Instruments with Concentrations of Credit
Risk, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. The Company has no significant off-balance-sheet concentrations
of credit risk such as foreign exchange contracts, option contracts or other
foreign hedging arrangements. The Company's accounts receivable credit risk is
not concentrated within any geographic area, and no single customer represents
a significant credit risk to the Company.
(6) GEOGRAPHIC DATA
United States and international sales as a percentage of total revenues are
as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
GEOGRAPHIC AREA 1996
--------------- ------------
<S> <C>
United States............................................... 71%
Canada...................................................... 2
Europe...................................................... 21
Far East.................................................... 4
Other....................................................... 2
---
100%
===
</TABLE>
(7) SUBSEQUENT EVENT (UNAUDITED)
On September 12, 1997, Asymetrix Learning Systems, Inc. acquired the Company
in exchange for 2,183,894 shares of Asymetrix Learning Systems, Inc. Series 4
Class B Stock.
F-40
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Communication Strategies, Inc.:
We have audited the accompanying balance sheets of Communication Strategies,
Inc. (the "Company") as of December 31, 1996 and September 30, 1997, and the
related statements of income and retained earnings and cash flows for the year
ended December 31, 1996 and the nine-month period ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Communication Strategies, Inc.
as of December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the year ended December 31, 1996 and the
nine-month period ended September 30, 1997 in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
December 19, 1997
Dallas, Texas
F-41
<PAGE>
COMMUNICATION STRATEGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
ASSETS ------------ -------------
<S> <C> <C>
Current assets:
Cash and cash equivalents.......................... $ 38,957 $ 96,753
Accounts receivable................................ 703,007 776,479
Unbilled receivables............................... 4,006 54,976
Prepaid expenses and other current assets.......... 7,393 21,999
---------- ----------
Total current assets............................. 753,363 950,207
Property, plant and equipment, net................. 380,210 415,915
---------- ----------
Total assets..................................... $1,133,573 $1,366,122
========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<S> <C> <C>
Current liabilities:
Accounts payable........................................ $ 25,860 $ 81,958
Accrued payroll-related expenses........................ 71,460 135,845
Bank line of credit..................................... 394,942 319,538
Deferred revenue........................................ 164,912 166,804
Income tax payable...................................... 11,925 69,220
Deferred tax liability.................................. 158,261 158,558
---------- ----------
Total liabilities..................................... 827,360 931,923
Stockholders' equity:
Common stock, $1 par value; 1,000 shares authorized;
1,000 shares issued and outstanding.................... 1,000 1,000
Retained earnings....................................... 305,213 433,199
---------- ----------
Total stockholders' equity............................ 306,213 434,199
---------- ----------
Commitments
Total liabilities and stockholders' equity............ $1,133,573 $1,366,122
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-42
<PAGE>
COMMUNICATION STRATEGIES, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Consulting and placement service revenue............. $3,966,151 $3,394,924
---------- ----------
Cost and expenses:
Consulting and placement service cost of revenue.... 2,346,563 2,016,579
Selling, general and administrative expenses........ 1,465,732 1,150,686
---------- ----------
Total costs and expenses......................... 3,812,295 3,167,265
---------- ----------
Operating income................................. 153,856 227,659
Interest expense, net................................ 22,289 28,607
---------- ----------
Income before income taxes....................... 131,567 199,052
Income taxes......................................... 47,912 71,066
---------- ----------
Net income....................................... 83,655 127,986
Retained earnings at beginning of year............... 221,558 305,213
---------- ----------
Retained earnings at end of year..................... $ 305,213 $ 433,199
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-43
<PAGE>
COMMUNICATION STRATEGIES, INC.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................... $ 83,655 $127,986
Adjustments to reconcile net income to net cash
used in
operating activities:
Depreciation and amortization................... 123,818 75,500
Deferred income taxes........................... 30,385 297
Loss on disposition of property, plant and
equipment...................................... 5,604 8,228
Changes in operating assets and liabilities:
Accounts receivable............................ (205,361) (73,472)
Unbilled receivables........................... (4,006) (50,970)
Prepaid expenses and other current assets...... 1,410 (14,606)
Income taxes................................... 1,840 57,295
Accounts payable............................... (25,403) 56,098
Accrued expenses............................... (33,465) 64,385
Deferred revenue............................... 116,516 1,892
-------- --------
Net cash used in operating activities........ 94,993 252,633
-------- --------
Cash flows used in investing activities--purchases
of property, plant
and equipment..................................... (334,324) (119,433)
-------- --------
Cash flows from financing activities:
Proceeds from line of credit..................... 909,749 859,000
Repayment of line of credit...................... (654,807) (934,404)
-------- --------
Net cash provided by financing activities...... 254,942 (75,404)
-------- --------
Net increase in cash and cash equivalents.......... 15,611 57,796
Cash and cash equivalents, beginning of
year/period........................................ 23,346 38,957
-------- --------
Cash and cash equivalents, end of year/period...... $ 38,957 $ 96,753
======== ========
Cash paid during the year:
Interest......................................... $ 20,799 $ 22,986
======== ========
Income taxes..................................... $ 15,687 $ 13,474
======== ========
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
COMMUNICATION STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1996 and September 30, 1997
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) The Company
Communication Strategies, Inc. ("CSI" or the "Company") was incorporated
under the laws of the State of Texas on September 19, 1983. The Company
provides consulting and paper-based documentation services related to
instructional design. The Company also provides multi-media based deliverables
and placement services, on a temporary or permanent basis. Its principal
operations are located in Fort Worth, Texas.
(b) Revenue Recognition
The Company provides services under time and materials and fixed-price
contracts. Fixed price contracts for consulting services typically span a
period of three to five months. Revenue related to fixed price contracts is
recognized on the percentage-of-completion method measured by the percentage of
labor hours incurred to date to estimated total labor hours for each contract.
Changes in estimates, if any, are made in the period they are determined.
Provisions for estimated losses on uncompleted contracts, if any, are made on a
contract by contract basis and are recognized in the period in which the losses
are determined. Unbilled receivables represent revenue recognized based on
services performed in excess of billings in accordance with the terms of the
contracts. Billings in excess of recognized revenue are classified as deferred
revenues. Revenue is recognized on time and material contracts based upon
agreed upon billing amounts as services are rendered. Revenues related to
placement services are recognized on a time and materials basis for temporary
placements and after completion of a contractually determined probation period
for permanent placements.
(c) Cash and Cash Equivalents
Cash equivalents consist of investments in money market accounts with
original maturities of 90 days or less.
(d) Fair Value of Financial Instruments
Most of the Company's financial instruments, including cash, trade
receivables and payables and accruals, are short-term in nature. Accordingly,
the carrying amount of the Company's financial instruments approximates its
fair value.
(e) Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Depreciation of property,
plant and equipment, other than leasehold improvements, is provided over the
estimated useful lives of the respective assets (ranging from 5 to 7 years)
using the double-declining method. Leasehold improvements are amortized on a
straight-line basis over the shorter of the respective lease term or estimated
useful life of the asset.
(f) Income Taxes
The Company accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized with respect to tax
consequences attributable to the differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. Deferred
tax assets and liabilities are measured using enacted tax rates expected to be
in effect when such amounts are realized or settled. The resulting deferred tax
assets and liabilities are adjusted to reflect changes in tax laws or rates in
the period of enactment.
F-45
<PAGE>
COMMUNICATION STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(g) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from these estimates.
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Furniture and fixtures............................... $288,140 $170,064
Computer equipment and accessories................... 484,698 588,929
Autos................................................ 45,509 45,509
Leasehold improvements............................... 12,453 14,342
-------- --------
830,800 818,844
Less accumulated depreciation and amortization....... (450,590) (402,929)
-------- --------
Property, plant and equipment, net................. $380,210 $415,915
======== ========
</TABLE>
(3) CREDIT AGREEMENT WITH BANK
The Company entered into a letter agreement with Camp Bowie National Bank
("Bank") on April 1, 1997. Under this letter agreement, the Bank has agreed to
loan the Company $500,000 in the form of a revolving line of credit note and
due in full on April 1, 1998. Interest on the principal amount accrues from the
date of each advance at the Bank's stated base rate plus one percent (9.75% and
10% on December 31, 1996 and September 30, 1997, respectively) and is payable
on the first day of every month. The note is guaranteed in full by officers of
the Company. The Company has certain financial and non-financial covenants
related to the credit agreement. The Company was in compliance with those
covenants as of December 31, 1996 and September 30, 1997.
(4) INCOME TAXES
Income tax expense for the year ended December 31, 1996 and the nine month
period ended September 30, 1997 includes deferred tax expense of $30,385 and
$297, respectively.
Total income tax expense differs from the amount computed by applying the
federal corporate income tax rate of 35% to income before taxes as follows:
<TABLE>
<CAPTION>
NINE-MONTH
YEAR ENDED PERIOD ENDED
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Computed ("expected") income tax expense............. $ 46,048 $69,668
Meals and entertainment.............................. 1,864 1,398
-------- -------
$ 47,912 $71,066
======== =======
</TABLE>
F-46
<PAGE>
COMMUNICATION STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The tax effected temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1996 and September
30, 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
-------- --------
<S> <C> <C>
Deferred tax assets:
Accrued liabilities (cash to accrual adjustment)............ $ 34,062 $ 63,920
Deferred revenue............................................ 57,719 76,231
-------- --------
Total deferred tax assets.................................. 91,781 140,151
Deferred tax liabilities:
Accrued receivables (cash to accrual adjustment)............ 247,454 291,009
Prepaid expenses(cash to accrual adjustment)................ 2,588 7,700
-------- --------
Total deferred tax liabilities............................. 250,042 298,709
-------- --------
Net deferred tax liabilities............................... $158,261 $158,558
======== ========
</TABLE>
The temporary differences between the book and tax bases of assets and
liabilities principally result from the use of the cash method for tax purposes
and the accrual method for financial reporting purposes.
(5) EMPLOYEE RETIREMENT PLAN
Employees of the Company may participate in a salary deferral 401(k) plan.
The 401(k) plan allows eligible employees to defer part of their income on a
tax-favored basis. All employees are eligible and may participate in the plan
after six months of service during the twelve month period that begins with the
employee's hiring date. The Company may make matching contributions to the
Plan, non-elective or discretionary contributions and required minimum
contributions, pursuant to legal and statutory requirements. For the year ended
December 31, 1996 and the nine month period ended September 30, 1997, the
Company matched 25% of up to the first 6% of the participant's contribution.
Contributions by the Company totaled $18,000 and $13,615 for the year ended
December 31, 1996 and the nine month period ended September 30, 1997,
respectively. Matching and discretionary employer contributions vest 20% per
year after four years of service.
(6) CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of trade accounts receivable. Concentration of
credit risk is reduced due to the large number of customers comprising the
customer base. One customer accounted for approximately twenty percent of the
Company's sales for the year ended December 31, 1996 and the nine month period
ended September 30, 1997 and $80,238 and $96,501 of accounts receivable as of
December 31, 1996 and September 30, 1997, respectively. No other single
customer accounted for more than ten percent of the Company's sales for the
year ended December 31, 1996 or the nine month period ended September 30, 1997
or the Company's accounts receivable as of December 31, 1996 or September 30,
1997.
F-47
<PAGE>
COMMUNICATION STRATEGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(7) COMMITMENTS
As of September 30, 1997, the Company was obligated under several
noncancelable operating lease agreements for office space. A summary of future
minimum lease payments follows:
<TABLE>
<S> <C>
1998.......................................... $105,567
1999.......................................... 64,419
2000.......................................... 23,271
2001.......................................... 11,635
--------
Total....................................... $204,892
========
</TABLE>
Rental expense under noncancelable operating leases for facilities and
equipment approximated $ 93,931 and $ 79,175 for the year ended December 31,
1996 and for the nine-month period ended September 30, 1997, respectively.
(8) SUBSEQUENT EVENTS
On December 23, 1997, Asymetrix Learning Systems, Inc. ("Asymetrix") acquired
all of the outstanding shares of CSI in exchange for Asymetrix preferred stock
and options valued at approximately $4.8 million.
F-48
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
No dealer, salesperson or other person has been authorized to give
information or make any representations other than those contained in this
Prospectus in connection with this offering and, if given or made, such
information or representations must not be relied upon as having been
authorized by the Company or any Underwriter. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer in such jurisdiction. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create
any implication that the information contained herein is correct as of any
time subsequent to the date hereof or that there has been no change in the
affairs of the Company since the date hereof.
---------------------------
TABLE OF CONTENTS
---------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 6
Use of Proceeds........................................................... 19
Dividend Policy........................................................... 19
Capitalization............................................................ 20
Dilution.................................................................. 21
Selected Historical Consolidated Financial Data........................... 22
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 24
Business.................................................................. 37
Management................................................................ 50
Certain Transactions...................................................... 58
Principal Stockholders.................................................... 62
Description of Capital Stock.............................................. 63
Shares Eligible for Future Sale........................................... 66
Underwriting.............................................................. 68
Legal Matters............................................................. 69
Changes in Accountants.................................................... 69
Experts................................................................... 69
Additional Information.................................................... 70
Financial Statements...................................................... F-1
</TABLE>
-------------------
Until , 1998 (25 days after the date of this Prospectus), all dealers
effecting transaction in the Common Stock offered hereby, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as Underwriters and with respect to their unsold allotments or
subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,000,000 SHARES
[LOGO]
COMMON STOCK
----------------
PROSPECTUS
----------------
NationsBanc Montgomery
Securities LLC
BancAmerica
Robertson Stephens
Hambrecht & Quist
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The expenses to be paid by the Registrant in connection with this offering
are as follows. All amounts other than the SEC registration fee, NASD filing
fee and Nasdaq National Market application fee are estimates.
<TABLE>
<S> <C>
SEC Registration Fee............................................... $ 11,800
NASD Filing Fee.................................................... 4,500
Nasdaq National Market Application Fee............................. 82,000
Printing........................................................... 150,000
Legal Fees and Expenses............................................ 350,000
Accounting Fees and Expenses....................................... 200,000
Road Show Expenses................................................. 50,000
Blue Sky Fees and Expenses......................................... 5,000
Transfer Agent and Registrar Fees.................................. 10,000
Miscellaneous...................................................... 36,700
--------
Total............................................................ $900,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, or a corporation's board of directors to grant, indemnity to directors
and officers in terms sufficiently broad to permit such indemnification under
certain circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act of 1933, as amended (the
"Securities Act").
As permitted by the Delaware General Corporation Law, the Registrant's
Amended and Restated Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors for monetary damages for
breach of fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to the Registrant or its
stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under section 174
of the Delaware General Corporation Law (regarding unlawful dividends and
stock purchases) or (iv) for any transaction from which the director derived
an improper personal benefit.
As permitted by the Delaware General Corporation Law, the Bylaws of the
Registrant provide that (i) the Registrant is required to indemnify its
directors and officers to the fullest extent permitted by the Delaware General
Corporation Law, subject to certain very limited exceptions, (ii) the
Registrant may indemnify its other employees and agents as set forth in the
Delaware General Corporation Law, (iii) the Registrant is required to advance
expenses, as incurred, to its directors and executive officers in connection
with a legal proceeding to the fullest extent permitted by the Delaware
General Corporation Law, subject to certain very limited exceptions and (iv)
the rights conferred in the Bylaws are not exclusive.
The Registrant intends to enter into Indemnification Agreements with each of
its current directors and executive officers to give such directors and
officers additional contractual assurances regarding the scope of the
indemnification set forth in the Registrant's Amended and Restated Certificate
of Incorporation and to provide additional procedural protections. At present,
there is no pending litigation or proceeding involving a director, officer or
employee of the Registrant regarding which indemnification is sought, nor is
the Registrant aware of any threatened litigation that may result in claims
for indemnification.
II-1
<PAGE>
Reference is also made to Section 8 of the Underwriting Agreement, which
provides for the indemnification of officers, directors and controlling
persons of the Registrant against certain liabilities. The indemnification
provision in the Registrant's Amended and Restated Certificate of
Incorporation, Bylaws and the Indemnification Agreements entered into between
the Registrant and each of its directors and executive officers may be
sufficiently broad to permit indemnification of the Registrant's directors and
executive officers for liabilities arising under the Securities Act.
The Registrant, with approval by the Registrant's Board of Directors,
expects to obtain directors' and officers' liability insurance.
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
DOCUMENT EXHIBIT NUMBER
-------- --------------
<S> <C>
Underwriting Agreement (draft dated March 31, 1998).......... 1.01
Form of Amended and Restated Certificate of Incorporation of
Registrant.................................................. 3.04
Form of Bylaws of Registrant................................. 3.06
Form of Indemnification Agreement............................ 10.02
</TABLE>
II-2
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following table sets forth information regarding all securities sold by
the Registrant since January 1, 1995.
<TABLE>
<CAPTION>
AGGREGATE
NUMBER OF PURCHASE FORM OF
CLASS OF PURCHASER DATE OF SALE TITLE OF SECURITIES SHARES(1) PRICE CONSIDERATION
------------------ ------------ ------------------- ---------- --------- -------------
<S> <C> <C> <C> <C> <C>
1 individual 1/2/95 Common Stock 225,000 $ 150,000 Cash
1 individual 2/14/95 Common Stock 11,250 7,500 All of the issued
and out-standing
shares of ASX R&D
Corporation
1 individual 7/14/95 Common Stock 5,550,000 133,200,000 Assumption of
indebtedness and
issuance of
promissory note
1 entity 9/27/96 Series 1 Class B Stock(2) 37,500 300,000 Services
1 entity 10/21/96 Series A Preferred Stock(2) 388,395 5,002,528 Cash
1 entity 12/20/96 Series B Preferred Stock 388,395(3) 5,002,528 Cash/Notes
1 shareholder of Socha 07/17/97 Series 4 Class B Stock(2) 200,000 All of the issued
Computing, Inc. and out-standing
("Socha") capital stock of
Socha
91 stockholders of 09/11/97 Series 4 Class B Stock(2) 2,111,795(4) 2,998,749 All of the issued
Aimtech Corporation and out-standing
("Aimtech") capital stock of
Aimtech
1 entity 09/11/97 Series 4 Class B Stock(2) 44,171 62,723 Financial advisory
fee
20 employees of Aimtech 09/11/97 Series 4 Class B Stock(2) 27,928 (5) (5)
3 shareholders of Oakes 09/30/97 Series 5 Class B Stock(2) 1,512,500 2,147,750 All of the issued
Interactive and outstanding
Incorporated, Top capital stock of
Shelf Multimedia, Inc. the Oakes
and Acorn Associates Companies
Incorporated
(collectively, the
"Oakes Companies")
2 shareholders of 12/22/97 Common Stock 550,193 4,768,342 All of the issued
Communications and out-standing
Strategies, capital stock of
Incorporated ("CSI") CSI
4 shareholders of 12/22/97 Common Stock 9,372 81,250 All of the issued
Graham-Wright and out-standing
Interactive, Inc. capital stock of
("Graham Wright") Graham Wright
3 consultants 6/26/96-9/5/96 Common Stock 6,075 38,250 Services
120 employees 8/13/95-4/20/98 Common Stock 519,306(6) 731,257 Cash and redemption
(option exercises) of shares
1 individual 3/17/98 Common Stock 13,215 130,000 All of the issued
and outstanding
capital stock of
Adams Consulting
Group, Inc.
1 individual 4/16/98 Common Stock 2,250 17,500 Services
</TABLE>
- -------
(1) The Company intends to effect a 3-for-4 reverse stock split of its Common
Stock immediately prior to the consummation of this offering. Therefore,
all share numbers for Common Stock have been restated to give effect to
such reverse stock split. Outstanding shares of the Company's Series B
Stock (which includes the Series of Class B Stock known as Series A
Preferred Stock and Series B Preferred Stock) will not be affected by the
reverse stock split. Rather, pursuant to the terms of the Company's
Certificate of Incorporation the conversion rate for such shares of Class
B Stock will be adjusted to take into account such stock split.
(2) Each outstanding share of Class B Stock (which includes the Series A
Preferred Stock) will convert automatically into approximately .75 shares
of Common Stock upon the consummation of the offering.
(3) All of these shares were redeemed or canceled in connection with the
cancellation of a promissory note and other indebtedness to the
Registrant.
(4) Of these shares of Series 4 Class B Stock, 441,705 are held in escrow to
secure certain indemnification obligations.
(5) These securities were distributed to employees of Aimtech pursuant to
Aimtech's "change of control," severance and retention policy. No
consideration was paid for such shares.
(6) Of these shares, 53,495 shares were redeemed by the Company in payment for
certain of the shares issued upon exercise of such options.
II-3
<PAGE>
All sales of Common Stock to employees made pursuant to the exercise of
stock options granted under the Registrant's stock option plans or pursuant to
restricted stock purchase agreements, and all sales to consultants for
services, were made pursuant to the exemption from the registration
requirements of the Securities Act afforded by Rule 701, Section 4(2) of the
Securities Act and/or Regulation D promulgated under the Securities Act.
All other sales were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated under the Securities Act. These sales were
made without general solicitation or advertising. Each purchaser was an
"accredited investor" or a sophisticated investor with access to all relevant
information necessary to evaluate the investment who represented to the
Registrant that the shares were being acquired for investment.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE.
(a) The following exhibits are filed herewith:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
1.01 Underwriting Agreement (draft dated March 31, 1998).+
2.01 Amended and Restated Agreement and Plan of Reorganization, dated as of
June 24, 1997, by and among the Registrant, ASX Merger Corporation
and Aimtech Corporation.+
2.02 Agreement and Plan of Reorganization, dated as of September 30, 1997,
by and among the Registrant, Oakes Acquisition Corp., TopShelf
Acquisition Corp., Acorn Acquisition corp., Oakes Interactive
Incorporated, TopShelf Multimedia, Inc., Acorn Associates,
Incorporated, and Gordon Oakes and Kevin Oakes.+
2.03 Agreement and Plan of Reorganization, dated as of December 22, 1997,
by and among the Registrant, Asymetrix Acquisition Corp.,
Communication Strategies, Incorporated, and Cynthia Boyd and James
Boyd.+
2.04 Plan of Merger, dated as of February 14, 1995, by and between ASX R&D
Corporation and the Registrant.+
3.01 Amended and Restated Articles of Incorporation of the Registrant, as
amended.+
3.02 Form of Certificate of Incorporation of the Registrant to be effective
upon the Reincorporation of the Registrant in Delaware (amended from
previous filing).
3.03 Form of Certificate of Amendment of Certificate of Incorporation of
the Registrant to become effective upon the effectiveness of this
Registration Statement.+
3.04 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be effective upon the closing of this offering (amended
from previous filing).
3.05 Amended and Restated Bylaws of the Registrant, as amended to date.+
3.06 Form of Bylaws of the Registrant, to be adopted prior to the closing
of this offering (amended from previous filing).
4.01 Restated and Amended Investors' Rights Agreement, dated as of December
20, 1996, between the Registrant and the persons and entities listed
therein.+
4.02 Form of Specimen Stock Certificate for the Registrant's Common Stock.
4.03 Registration Rights Agreement dated, as of September 11, 1997, between
the Registrant and the persons and entities listed therein.+
4.04 Registration Rights Agreement, dated as of September 30, 1997, among
the Registrant, Gordon Oakes, Kevin Oakes and Doug Foster.+
4.05 Registration Rights Agreement, dated as of December 22, 1997, among
the Registrant, Cynthia Boyd and James Boyd.+
5.01 Opinion of Fenwick & West LLP regarding legality of the securities
being registered.*
10.01 Series A Preferred Stock Purchase Agreement, dated October 21, 1996,
between the Registrant and SOFTBANK Holdings, Inc.+
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
10.02 Form of Indemnification Agreement entered into by the Registrant with
each of its directors and executive officers.+
10.03 Registrant's 1995 Combined Incentive and Nonqualified Stock Option
Plan and related documents.+
10.04 Credit Agreement, dated as of November 4, 1992, between Paul Allen and
Asymetrix Corporation, as Borrowers, Seattle-First National Bank,
Bank of America National Trust and Savings Association, First
Interstate Bank of Washington, N.A. and First Interstate Bank of
Oregon, N.A. as Lenders, and Seattle-First National Bank as Agent for
the Lenders.+
10.05 Registrant's 1998 Directors Stock Option Plan and related documents.+
10.06 Registrant's 1998 Equity Incentive Plan and related documents.+
10.07 Sublease, dated as of October 30, 1995, between Registrant and Vulcan
Northwest Inc.+
10.08 Series B Preferred Stock Exchange Agreement, dated as of September 30,
1997, between the Registrant and SuperCede, Inc.+
10.09 Asset Transfer, License and Stock Issuance Agreement, dated as of June
24, 1997, between the Registrant and SuperCede, Inc.+
10.10 Sublease, dated as of June 24, 1997, between the Registrant and
SuperCede, Inc.+
10.11 Promissory Note, dated as of March 14, 1995, between the Registrant
and Paul Allen.+
10.12 Infomodeler Technology Transfer and License Agreement, dated as of
October 7, 1996, between the Registrant and ASX Corporation, as
amended January 14, 1998.+
10.13 Sublease, dated as of October 7, 1995, between the Registrant and ASX
Corporation.+
10.14 Asset Purchase and Loan Agreement, dated as of October 7, 1996,
between the Registrant and ASX Corporation.+
10.15 Lease Agreement, dated as of May 24, 1991, by and between the
Registrant and Dean Witter Realty Income Partnership II, L.P., and
amendments thereto.+
10.16 Employment Agreement, dated as of September 30, 1997, between the
Registrant and Kevin Oakes.+
10.17 Stock Purchase and Sale Agreement, dated as of March 27, 1998 between
the Registrant and Vulcan Ventures Inc.+
10.18 Directed Engineering Agreement, dated as of March 27, 1998, between
the registrant and Vulcan Northwest, Inc.+
21.01 Subsidiaries of the Registrant.+
23.01 Consent of Fenwick & West LLP (included in Exhibit 5.01).*
23.02 Consent of Ernst & Young LLP.
23.03 Consent of Arthur Andersen LLP.
23.04 Consent of KPMG Peat Marwick LLP.
23.05 Consent of KPMG Peat Marwick LLP.
24.01 Power of Attorney.+
27.01 Financial Data Schedule (EDGAR Version Only)
</TABLE>
- --------
* To be supplied by amendment.
+ Previously filed.
(b) The following financial statement schedule is filed herewith:
Schedule II--Valuation and Qualifying Accounts (see page S-3).
Other financial statement schedules are omitted because the information
called for is not required or is shown either in the financial statements or
the notes thereto.
II-5
<PAGE>
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described under Item 14 above, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, THE REGISTRANT HAS DULY
CAUSED THIS AMENDMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF BELLEVUE, STATE OF WASHINGTON, ON THE 22ND DAY
OF APRIL, 1998.
ASYMETRIX LEARNING SYSTEMS, INC.
By: /s/ James A. Billmaier
---------------------------------
James A. Billmaier
Chief Executive Officer
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT, THIS AMENDMENT
WAS SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
Chief Executive Officer
/s/ James A. Billmaier and Director April 22, 1998
- ---------------------------------
James A. Billmaier
PRINCIPAL FINANCIAL AND PRINCIPAL ACCOUNTING OFFICER:
/s/ John D. Atherly Vice President, Finance
- --------------------------------- and Administration and April 22, 1998
John D. Atherly Chief Financial Officer
DIRECTORS:
Chairman of the Board
* April 22, 1998
- ---------------------------------
Bert Kolde
Director
April 22, 1998
*
- ---------------------------------
Paul G. Allen
Director
* April 22, 1998
- ---------------------------------
Shelley Harrison, Ph.D.
President and Director
* April 22, 1998
- ---------------------------------
Kevin Oakes
Director
* April 22, 1998
- ---------------------------------
Gary Rieschel
/s/ John D. Atherly Attorney-in-fact April 22, 1998
* By________________________
John D. Atherly
</TABLE>
II-7
<PAGE>
WHEN THE TRANSACTION REFERRED TO IN NOTE 12 OF THE NOTES TO
THE CONSOLIDATED FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE
WILL BE IN A POSITION TO RENDER THE FOLLOWING REPORT.
/s/ KPMG PEAT MARWICK LLP
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Asymetrix Learning Systems, Inc.:
Under date of March 27, 1997, except as to note 12 which is as of May , 1998,
we reported on the consolidated balance sheets of Asymetrix Learning Systems,
Inc. and subsidiaries as of December 31, 1997, and the related consolidated
statements of operations, stockholders' equity and cash flows for the year
then ended, which are included in the registration statement on Form S-1. In
connection with our audit of the aforementioned consolidated financial
statements, we also audited the related consolidated financial statement
schedule in the registration statement. This 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 audit.
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.
Seattle, Washington
March 27, 1998
S-1
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Asymetrix Learning Systems, Inc.
We have audited the consolidated financial statements of Asymetrix Learning
Systems, Inc. as of December 31, 1996, and for each of the two years in the
period ended December 31, 1996, and have issued our report thereon dated April
23, 1997 (included elsewhere in this Registration Statement). Our audits also
included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ Ernst & Young LLP
Seattle, Washington
April 23, 1997
S-2
<PAGE>
Asymetrix Learning Systems, Inc.
VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- --------- ------------ ---------- --------
BALANCE
AT CHARGED TO BALANCE
BEGINNING OTHER COSTS (1) AT END
OF YEAR AND EXPENSES DEDUCTIONS OF YEAR
--------- ------------ ---------- --------
<S> <C> <C> <C> <C>
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
Year ended December 31, 1996:
Valuation accounts deducted from
assets:
Allowance for doubtful receivables
and sales returns................ $2,951 $2,890 $2,495 $3,346
Reserve for inventory
obsolescence..................... 541 556 712 385
Year ended December 31, 1995:
Valuation accounts deducted from
assets:
Allowance for doubtful receivables
and sales returns................ $3,406 $1,089 $1,544 $2,951
Reserve for inventory
obsolescence..................... 425 581 465 541
</TABLE>
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT TITLE
------- -------------
<C> <S>
3.02 Form of Certificate of Incorporation of the Registrant to be effective
upon the Reincorporation of the Registrant in Delaware (amended from
previous filing).
3.04 Form of Amended and Restated Certificate of Incorporation of the
Registrant to be effective upon the closing of this offering (amended
from previous filing).
3.06 Form of Bylaws of the Registrant, to be adopted prior to the closing
of this offering (amended from previous filing).
4.02 Form of Specimen Stock Certificate for the Registrant's Common Stock.
23.02 Consent of Ernst & Young LLP.
23.03 Consent of Arthur Andersen LLP.
23.04 Consent of KPMG Peat Marwick LLP.
23.05 Consent of KPMG Peat Marwick LLP.
27.01 Financial Data Schedule (EDGAR Version Only)
</TABLE>
1
<PAGE>
EXHIBIT 3.02
CERTIFICATE OF INCORPORATION
OF
ASYMETRIX LEARNING SYSTEMS, INC.
ARTICLE I
The name of the corporation is Asymetrix Learning Systems, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle. The
name of its registered agent at that address is The Corporation Trust Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
A. Authorized Stock. The corporation is authorized to issue two classes
----------------
of stock to be designated respectively, "Common Stock" and "Preferred Stock".
The total number of shares which the corporation is authorized to issue is Forty
Five Million (45,000,000) shares. The number of shares of Preferred Stock
authorized to be issued is Five Million (5,000,000) shares, par value $0.01 per
share, of which 50,000 shares shall be designated as Series 1 Preferred Stock,
388,395 shares shall be designated Series A Preferred Stock, 388,395 shares
shall be designated Series B Preferred Stock, 2,500,000 shall be designated
Series 4 Preferred Stock and 1,512,500 shall be designated Series 5 Preferred
Stock. The number of shares of Common Stock authorized to be issued is Forty
Million (40,000,000) shares, par value $0.01 per share.
B. Series 1 Preferred Stock. The rights, preferences, privileges and
------------------------
restrictions granted to and imposed on Series 1 Preferred Stock are as follows.
1. Preference on Liquidation, etc. In the event of any voluntary or
-------------------------------
involuntary liquidation, dissolution or winding-up of the Company, before any
payment or distribution of the assets of the Company (whether capital, surplus
or earnings) shall be made to or set apart for the holders of any shares of the
Common Stock of the Company, the holders of shares of Series 1 Preferred Stock
shall be entitled to receive payment of $8.00 per share of Series 1 Preferred
<PAGE>
Stock held by them (as appropriately adjusted for any stock dividend, stock
split, recapitalization, combination of shares or other similar event involving
the Series 1 Preferred Stock). Future series of Preferred Stock may be entitled
to priority over the Series 1 Preferred Stock in the payment or distribution of
the assets of the Company in the event of any such dissolution or winding-up.
If, upon any liquidation, dissolution or winding-up of the Company, the
assets of the Company, or proceeds thereof, distributable among the holders of
shares of Series 1 Preferred Stock shall be insufficient to pay in full the
respective preferential amounts on the shares of Series 1 Preferred Stock then
such assets, or the proceeds thereof, shall be distributed among such holders
ratably in accordance with the respective amounts which would be payable on such
shares if all amounts payable thereon were paid in full.
Whenever the distribution provided for in this section shall be payable in
securities or property other than cash, the value of such distribution shall be
the fair market value of such securities or other property as determined in good
faith by the Company's Board of Directors.
2. Voting. The holders of shares of Series 1 Preferred Stock shall be
------
entitled to vote upon all matters upon which holders of the Common Stock have
the right to vote, and each share of Series 1 Preferred Stock shall be entitled
to the number of votes equal to the largest number of full shares of Common
Stock into which such shares of Series 1 Preferred Stock could be converted
pursuant to the applicable provisions of Section B.3 below, at the record date
established by the Board of Directors of the Company for the determination of
the stockholders entitled to vote on such matters, or, if no such record date is
so established, at the record date provided by law, such votes to be counted
together with all other shares of capital stock having general voting powers and
not separately as a class. Except as otherwise expressly required by law, in no
event shall the holders of shares of Series 1 Preferred Stock have the right to
vote separately as a class.
3. Conversion Rights. The Series 1 Preferred Stock shall be convertible
-----------------
into Common Stock as follows:
(a) Optional Conversion. Subject to and upon compliance with the
-------------------
provisions of this Section 3, the holder of any shares of Series 1 Preferred
Stock shall have the right at such holder's option, at any time or from time to
time, to convert any of such shares of Series 1 Preferred Stock into fully paid
and nonassessable shares of Common Stock at the Series 1 Conversion Ratio (as
hereinafter defined) in effect on the Series 1 Conversion Date (as hereinafter
defined) upon the terms hereinafter set forth.
(b) Automatic Conversion. Each outstanding share of Series 1
--------------------
Preferred Stock shall automatically be converted, without any further act of the
Company or its stockholders, into fully paid and nonassessable shares of Common
Stock pursuant to the formula as set forth in subsection 3(c) below: (i) upon
the "effective date" of a registration statement under the Securities Act of
1933 for a primary public offering by the Company of shares of Common Stock; or
(ii) upon the conversion of a simple majority of the shares originally issued of
Series 1 Preferred Stock to Common Stock pursuant to this Section B.3; or (iii)
upon acquisition of the Company by another entity by means of merger,
consolidation or otherwise, resulting in the exchange of the outstanding shares
of the Company for securities or
-2-
<PAGE>
consideration issued or caused to be issued by the acquiring entity or any of
its affiliates, but not resulting in a liquidation, dissolution or winding-up of
the Company.
(c) Series 1 Conversion Ratio. Each share of Series 1 Preferred Stock
-------------------------
shall be converted into one share of Common Stock. The Series 1 Conversion
Ratio shall be subject to adjustment as set forth in subsection 3(f).
(d) Mechanics of Conversion. Upon the occurrence of the events
-----------------------
specified in subsection 3(b), the outstanding shares of Series 1 Preferred Stock
shall be converted automatically without any further action by the holders of
such shares and whether or not the certificates representing such shares are
surrendered to the Company or its transfer agent; provided that the Company
shall not be obligated to issue to any such holder certificates evidencing the
shares of Common Stock issuable upon such conversion unless certificates
evidencing the shares of Series 1 Preferred Stock are delivered to the Company
or any transfer agent of the Company. The holder of any shares of Series 1
Preferred Stock may exercise the conversion right specified in subsection 3(a)
as to any part thereof by surrendering to the Company or any transfer agent of
the Company the certificate or certificates for the shares to be converted,
accompanied by written notice stating that the holder elects to convert all or a
specified portion of the shares represented thereby. Conversion of the Series 1
Preferred Stock shall be deemed to have been effected on the date on which the
event specified with respect to such Series 1 Preferred Stock in subsection 3(b)
shall have occurred or on the date when delivery of notice of an election to
convert and certificates for shares is made, as the case may be, and such date
is referred to herein with respect to the Series 1 Preferred Stock as the
"Series 1 Conversion Date." Subject to the provisions of subsection 3(f)(v), as
promptly as practicable thereafter (and after surrender of the certificate or
certificates representing such holder's shares of Series 1 Preferred Stock to
the Company or any transfer agent of the Company in the case of conversions
pursuant to subsection 3(b)) the Company shall issue and deliver to such holder
a certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled and a check or cash with respect to any fractional
interest in a share of Common Stock as provided in subsection 3(e) and any
dividends on the Series 1 Preferred Stock which such holder is entitled to
receive, but has not yet received. Subject to the provisions of subsection
3(f)(v), the Person in whose name the certificate or certificates for Common
Stock are to be issued shall be deemed to have become a holder of record of such
Common Stock on the applicable Series 1 Conversion Date. Upon conversion of
only a portion of the number of shares covered by a certificate representing
shares of Series 1 Preferred Stock surrendered for conversion (in the case of
conversion pursuant to subsection 3(a)), the Company shall issue and deliver to
the holder of the certificate so surrendered for conversion, at the expense of
the Company, a new certificate covering the number of shares of Series 1
Preferred Stock representing the unconverted portion of the certificate so
surrendered.
(e) Fractional Shares. No fractional shares of Common Stock or scrip
-----------------
shall be issued upon conversion of shares of Series 1 Preferred Stock. If more
than one share of Series 1 Preferred Stock shall be surrendered for conversion
at any one time by the same holder, the number of full shares of Common Stock
issuable upon conversion thereof shall be computed on the basis of the aggregate
number of shares of Series 1 Preferred Stock so surrendered. Instead of any
fractional shares of Common Stock which would otherwise be issuable upon
conversion of any shares of Series 1 Preferred Stock, the Company shall pay a
cash adjustment in respect of
-3-
<PAGE>
such fractional interest in an amount equal to that fractional interest of the
then fair value per share of Common Stock, as determined by the Board of
Directors.
(f) Conversion Ratio Adjustments for the Series 1 Preferred Stock.
-------------------------------------------------------------
The Conversion Ratio for the Series 1 Preferred Stock shall be subject to
adjustment from time to time as follows:
(i) Stock Dividends. If the number of shares of Common Stock
---------------
outstanding at any time after the date of issuance of the Series 1 Preferred
Stock is increased by a stock dividend or other distribution on Common Stock
payable in shares of Common Stock or by a subdivision, split-up or
reclassification of outstanding shares of Common Stock, then immediately after
the record date fixed for the determination of holders of Common Stock entitled
to receive such stock dividend or the effective date of such subdivision, split-
up or reclassification, as the case may be, the Series 1 Conversion Ratio shall
be appropriately increased so that the holder of any shares of Series 1
Preferred Stock thereafter converted shall be entitled to receive the number of
shares of Common Stock of the Company which the holder would have owned
immediately following such action had such shares of Series 1 Preferred Stock
been converted immediately prior thereto.
(ii) Combination of Stock. If the number of shares of Common Stock
--------------------
outstanding at any time after the date of issuance of the Series 1 Preferred
Stock is decreased by a combination or reclassification of the outstanding
shares of Common Stock, then, immediately after the effective date of such
combination or reclassification, the Series 1 Conversion Ratio shall be
appropriately decreased so that the holder of any shares of Series 1 Preferred
Stock thereafter converted shall be entitled to receive the number of shares of
Common Stock of the Company which the holder would have owned immediately
following such action had such shares of Series 1 Preferred Stock been converted
immediately prior thereto.
(iii) Capital Reorganization or Reclassification. If the Common
------------------------------------------
Stock issuable upon the conversion of the Series 1 Preferred Stock shall be
changed into the same or a different number of shares of any class or classes of
stock, whether by capital reorganization, reclassification or otherwise (other
than a subdivision or combination of shares or stock dividend provided for
elsewhere in this subsection 3(f)), then and in each such event the holder of
each share of Series 1 Preferred Stock shall have the right thereafter to
convert such share into the kind and amount of shares of stock and other
securities and property receivable upon such reorganization, reclassification or
other change by the holders of the number of shares of Common Stock into which
such share of Series 1 Preferred Stock might have been converted immediately
prior to such reorganization, reclassification or change, all subject to further
adjustment as provided herein.
(iv) Rounding of Calculations; Minimum Adjustment. All
------------------------
calculations under this subsection (f) shall be made to the nearest one
hundredth (1/100th) of a share. Any provision of this Section B.3 to the
contrary notwithstanding, no adjustment in the Series 1 Conversion Ratio shall
be made if the amount of such adjustment would be less than 1% of the Series 1
Conversion Ratio then in effect, but any such amount shall be carried forward
and an adjustment with respect thereto shall be made at the time of and together
with any subsequent
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<PAGE>
adjustment which, together with such amount and any other amount or amounts so
carried forward, shall aggregate 1% or more of the Series 1 Conversion Ratio
then in effect.
(v) Timing of Issuance of Additional Common Stock Upon Certain
----------------------------------------------------------
Adjustments. In any case in which the provisions of this subsection (f) shall
- -----------
require that an adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence of such event (A)
issuing to the holder of any share of Series 1 Preferred Stock converted after
such record date and before the occurrence of such event the additional shares
of Common Stock issuable upon such conversion by reason of the adjustment
required by such event over and above the shares of Common Stock issuable upon
such conversion before giving effect to such adjustment and (B) paying to such
holder any amount of cash in lieu of a fractional share of Common Stock pursuant
to subsection (e) of this Section B.3; provided that the Company upon request
--------
shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares, and such cash,
upon the occurrence of the event requiring such adjustment.
(g) Statement Regarding Adjustments. Whenever the Series 1 Conversion
-------------------------------
Ratio shall be adjusted as provided in subsection 3(f), the Company shall
forthwith file, at the office of any transfer agent for the Series 1 Preferred
Stock and at the principal office of the Company, a statement showing in detail
the facts requiring such adjustment and the Series 1 Conversion Ratio that shall
be in effect after such adjustment, and the Company shall also cause a copy of
such statement to be sent by mail, first-class postage prepaid, to each holder
of shares of Series 1 Preferred Stock at its address appearing on the Company's
records.
(h) Costs. The Company shall pay all documentary, stamp, transfer or
-----
other transactional taxes attributable to the issuance or delivery of shares of
Common Stock of the Company upon conversion of any shares of Series 1 Preferred
Stock; provided that the Company shall not be required to pay any taxes which
--------
may be payable in respect of any transfer involved in the issuance or delivery
of any certificate for such shares in a name other than that of the holder of
the shares of Series 1 Preferred Stock in respect of which such shares are being
issued.
(i) Reservation of Shares. So long as any shares of Series 1
---------------------
Preferred Stock remain outstanding, the Company shall reserve out of its
authorized but unissued shares of Common Stock, free from preemptive rights,
.sufficient shares of Common Stock to provide for the conversion of all shares
of Series 1 Preferred Stock outstanding, solely for the purpose of effecting
such conversion.
(j) Valid Issuance. All shares of Common Stock which may be issued
--------------
upon conversion of the shares of Series 1 Preferred Stock will upon issuance by
the Company be duly and validly issued, fully paid and nonassessable and free
from all taxes, liens and charges with respect to the issuance thereof and the
Company shall take no action which will cause a contrary result (including
without limitation, any action which would cause the Series 1 Conversion Ratio
to be less than the par value, if any, of the Common Stock).
4. Dividends. Dividends shall be declared and set aside for any shares of
---------
the Series 1 Preferred Stock only upon resolution of the Board of Directors of
the Company.
-5-
<PAGE>
C. Series A Preferred Stock and Series B Preferred Stock.. The rights,
-----------------------------------------------------
preferences, privileges and restrictions granted to and imposed on Series A
Preferred Stock and Series B Preferred Stock are as follows:
Definitions. For purposes of this Section C the following definitions
-----------
shall apply:
1.1 "Board" shall mean the Board of Directors of the Company.
-----
1.2 "Series 1 Preferred Stock" shall mean the Series 1 Preferred
------------------------
Stock, par value $0.01 per share, of the Company.
1.2 "Company" shall mean this corporation.
-------
1.3 "Common Stock" shall mean the Common Stock, par value $0.01 per
------------
share, of the Company.
1.4 "Common Stock Dividend" shall mean a stock dividend declared and
---------------------
paid on the Common Stock that is payable in shares of Common Stock.
1.5. "Original Issue Date" shall mean, with respect to the Series A
-------------------
Preferred Stock and Series B Preferred Stock, the date on which the first share
of Series A Preferred Stock or Series B Preferred Stock, respectively, is issued
by the Company.
1.6. "Original Issue Price" shall mean $12.88 per share for the Series
--------------------
A Preferred Stock and Series B Preferred Stock.
1.7. "Permitted Repurchases" shall mean the repurchase by the Company
---------------------
of shares of Common Stock held by employees, officers, directors, consultants,
independent contractors, advisors, or other persons performing services for the
Company or a subsidiary that are subject to stock issuance and restriction
agreements, restricted stock purchase agreements, or other similar agreements,
or stock option exercise agreements under which the Company has the option to
repurchase such shares: (i) at cost, upon the occurrence of certain events,
such as the termination of employment or services; or (ii) at any price pursuant
to the Company's exercise of a right of first refusal to repurchase such shares;
provided, that the Board approves such repurchase.
1.8. "Series A Preferred Stock and Series B Preferred Stock" shall
-----------------------------------------------------
mean the Series A Preferred Stock and Series B Preferred Stock, par value $0.01
per share, of the Company.
1.9. "Subsidiary" shall mean any corporation of which at least fifty
----------
percent (50%) of the outstanding voting stock is at the time owned directly or
indirectly by the Company or by one or more of such subsidiary corporations.
-6-
<PAGE>
2. Dividend Rights
---------------
2.1 Dividend Preference.
--------------------
No dividends (other than a Common Stock Dividend) shall be paid with
respect to the Common Stock or Series 1 Preferred Stock during any calendar year
unless a dividend in the total amount of any dividend proposed to be paid with
respect to the Common Stock or Series 1 Preferred Stock shall have first been
paid or declared and set apart for payment to the holders of the Series A
Preferred Stock and Series B Preferred Stock (on an as-converted to Common Stock
basis); provided, however, that this restriction shall not apply to Permitted
-------- -------
Repurchases. Dividends on the Series A Preferred Stock and Series B Preferred
Stock shall not be mandatory or cumulative, and no rights or interest shall
accrue to the holders of the Series A Preferred Stock and Series B Preferred
Stock by reason of the fact that the Company shall fail to declare or pay
dividends on the Series A Preferred Stock or Series B Preferred Stock in any
calendar year or any fiscal year of the Company, whether or not the earnings of
the Company in any calendar year or fiscal year were sufficient to pay such
dividends in whole or in part.
2.2 Non-Cash Dividends. Whenever a dividend provided for in this
------------------
Section 2 shall be payable in property other than cash, the value of such
dividend shall be deemed to be the fair market value of such property as
determined in good faith by the Board.
2.3 No Payment on Conversion. If the Company shall have declared but
------------------------
unpaid dividends with respect to any Series A Preferred Stock or Series B
Preferred Stock upon its conversion as provided in Section C.5, then all such
declared but unpaid dividends on such converted shares shall be canceled.
3. Liquidation Rights. In the event of any liquidation, dissolution or
------------------
winding up of the Company, whether voluntary or involuntary, the funds and
assets of the Company that may be legally distributed to the Company's
stockholders (the "Available Funds and Assets") shall be distributed to
--------------------------
stockholders in the following manner:
3.1 Liquidation Preferences. The holders of each share of Series A
-----------------------
Preferred Stock and Series B Preferred Stock then outstanding shall be entitled
to be paid, out of the Available Funds and Assets, and prior and in preference
to any payment or distribution (or any setting apart of any payment or
distribution) of any Available Funds and Assets on any shares of Common Stock or
Series 1 Preferred Stock, an amount per share equal to the Original Issue Price
for each such share plus all declared but unpaid dividends thereon. If upon any
liquidation, dissolution or winding up of the Company, the Available Funds and
Assets shall be insufficient to permit the payment to holders of the Series A
Preferred Stock and Series B Preferred Stock of their full preferential amounts
described in this subsection, then all of the remaining Available Funds and
Assets shall be distributed among the holders of the then outstanding Series A
Preferred Stock and Series B Preferred Stock pro rata, on an equal priority,
pari passu basis based upon the aggregate full amounts to which the shares of
Series A Preferred Stock and Series B Preferred Stock would otherwise be
entitled. Except as provided in this Section C.3.1, holders of Series A
Preferred Stock and Series B Preferred Stock shall not be entitled to any
distribution upon any liquidation, dissolution or winding up of the Company.
-7-
<PAGE>
3.2 Merger or Sale of Assets. A (i) consolidation or merger of the
------------------------
Company with or into any other corporation or corporations in which the holders
of the Company's outstanding shares immediately before such consolidation or
merger do not, immediately after such consolidation or merger, retain stock
representing a majority of the voting power of the surviving corporation of such
consolidation or merger; or (ii) sale of all or substantially all of the assets
of the Company, shall each be deemed to be a liquidation, dissolution or winding
up of the Company as those terms are used in this Section C.3.
3.3 Non-Cash Consideration. If any assets of the Company distributed
----------------------
to stockholders in connection with any liquidation, dissolution, or winding up
of the Company are other than cash, then the value of such assets shall be their
fair market value as determined in good faith by the Board, except that any
------ ----
securities to be distributed to stockholders in a liquidation, dissolution, or
winding up of the Company shall be valued as follows:
(a) The method of valuation of securities not subject to
investment letter or other similar restrictions on free marketability shall be
as follows:
(i) if the securities are then traded on a national securities
exchange or the NASDAQ National Market (or a similar national quotation system),
then the value shall be deemed to be the average of the closing prices of the
securities on such exchange or system over the 30-day period ending three (3)
days prior to the distribution; and
(ii) if actively traded over-the-counter, then the value shall
be deemed to be the average of the closing bid prices over the 30-day period
ending three (3) days prior to the closing of such merger, consolidation or
sale; and
(iii) if there is no active public market, then the value
shall be the fair market value thereof, as determined in good faith by the Board
of Directors of the Company.
(b) The method of valuation of securities subject to investment letter
or other restrictions on free marketability shall be to make an appropriate
discount from the market value determined as above in subparagraphs (a)(i), (ii)
or (iii) of this subsection to reflect the approximate fair market value
thereof, as determined in good faith by the Board.
4. Voting Rights
-------------
4.1. Series A Preferred Stock and Series B Preferred Stock. Except as
-----------------------------------------------------
may be otherwise agreed to in writing between the holders of Series B Preferred
Stock and the Company, each holder of shares of Series A Preferred Stock and
Series B Preferred Stock shall be entitled to the number of votes equal to the
number of whole shares of Common Stock into which such shares of Series A
Preferred Stock and Series B Preferred Stock could be converted pursuant to the
provisions of Section C.5 below at the record date for the determination of the
stockholders entitled to vote on such matters or, if no such record date is
established, the date such vote is taken or any written consent of stockholders
is solicited.
4.2. General. Subject to the foregoing provisions of this Section
-------
C.4, each holder of Series A Preferred Stock and Series B Preferred Stock shall
have full voting rights and powers equal to the voting rights and
-8-
<PAGE>
powers of the holders of Common Stock and Series 1 Preferred Stock, and shall be
entitled to notice of any stockholders' meeting in accordance with the bylaws of
the Company (as in effect at the time in question) and applicable law, and shall
be entitled to vote, together with the holders of Common Stock and Series 1
Preferred Stock, with respect to any question upon which holders of Common Stock
and Series 1 Preferred Stock have the right to vote, except as may be otherwise
provided by applicable law. Except as otherwise expressly provided herein or as
required by law, the holders of Series A Preferred Stock and Series B Preferred
Stock and the holders of Common Stock and Series 1 Preferred Stock shall vote
together as one class and not as separate classes.
4.5. Board of Directors Election and Removal
---------------------------------------
(a) Election. (i) The holders of the Series A Preferred Stock,
--------
voting as a separate class in accordance with paragraph (b) below, shall be
entitled to elect one (1) director of the Company (the "Series A Director"),
-----------------
which director shall, upon his or her nomination as a board member be subject to
the reasonable approval of the Company, and (ii) the holders of the Series 1
Preferred Stock and the Common Stock, voting together as a single class shall be
entitled to elect the remaining directors of the Company. Provided that any
promissory note executed by a holder of Series B Preferred Stock in favor of the
Company, and which promissory note was executed as part of the purchase price of
Series B Preferred Stock from the Company, has been paid in full, (i) the
holders of the Series B Preferred Stock, voting as a separate class in
accordance with paragraph (b) below, shall be entitled to elect one (1) director
of the Company (the "Series B Director"), which director shall, upon his or her
-----------------
nomination as a board member be subject to the reasonable approval of the
Company, (ii) the holders of the Series A Preferred Stock, voting as a separate
class, shall be entitled to elect one (1) director of the Company, and (iii) the
holders of the Series 1 Preferred Stock and the Common Stock, voting together as
a single class shall be entitled to elect the remaining directors of the
Company.
(b) Quorum; Required Vote
---------------------
(i) Quorum. At any meeting held for the purpose of electing
------
the Series A Director, the presence in person or by proxy of the holders of a
majority of the shares of the Series A Preferred Stock then outstanding shall
constitute a quorum of the Series A Preferred Stock for the election of the
Series A Director. At any meeting held for the purpose of electing the Series B
Director, the presence in person or by proxy of the holders of a majority of the
shares of the Series B Preferred Stock then outstanding shall constitute a
quorum of the Series B Preferred Stock for the election of the Series B Director
(ii) Required Vote. With respect to the election of the
-------------
Series A Director pursuant to subsection 4.5(a) above, that candidate shall be
elected and who either: (i) in the case of any such vote conducted at a meeting
of the holders of the Series A Preferred Stock, receives the highest number of
affirmative votes of the outstanding shares of the Series A Preferred Stock; or
(ii) in the case of any such vote taken by written consent without a meeting,
are elected by the unanimous written consent of the holders of shares of the
Series A Preferred Stock. With respect to the election of the Series B Director
pursuant to subsection 4.5(a) above, that candidate shall be elected and who
either: (i) in the case of any such vote conducted at a meeting of the holders
of the Series B Preferred Stock, receives the highest number of
-9-
<PAGE>
affirmative votes of the outstanding shares of the Series B Preferred Stock; or
(ii) in the case of any such vote taken by written consent without a meeting,
are elected by the unanimous written consent of the holders of shares of the
Series B Preferred Stock.
(c) Vacancy. If there shall be any vacancy in the office of the
-------
Series A Director or Series B Director, then a successor to hold office for the
unexpired term of the Series A Director or Series B Director shall be elected by
the affirmative vote of holders of the shares of the Series A Preferred Stock or
Series B Preferred Stock, respectively, that are entitled to elect such director
under subsection 4.5(a).
(d) Removal. Subject to applicable law the Series A Director or Series
-------
B Director may be removed during his or her term of office, either with or
without cause, by, and only by, the affirmative vote of shares representing a
majority of the voting power of all the outstanding shares of the Series A
Preferred Stock or Series B Preferred Stock, respectively, entitled to vote,
given either at a meeting of such stockholders duly called for that purpose or
pursuant to a written consent of stockholders without a meeting, and any vacancy
created by such removal may be filled only in the manner provided in subsection
4.5(c).
(e) Procedures. Any meeting of the holders of the Series A Preferred
----------
Stock or Series B Preferred Stock, and any action taken by the holders of the
Series A Preferred Stock or Series B Preferred Stock, respectively, by written
consent without a meeting, in order to elect or remove the Series A Director or
Series B Director, respectively, under this subsection 4.5, shall be held in
accordance with the procedures and provisions of the Company's Bylaws and
applicable law regarding stockholder meetings and stockholder actions by written
consent, as such are then in effect (including but not limited to procedures and
provisions for determining the record date for shares entitled to vote).
(f) Termination. Notwithstanding anything in this subsection 4.5 to
-----------
the contrary, the provisions of this subsection 4.5 relating to the Series A
Director shall cease to be of any further force or effect upon the first date
that either: (i) the total number of outstanding shares of Series A Preferred
Stock is less than two hundred thousand (200,000) shares (such number of shares
being subject to proportional adjustment to reflect combination or subdivisions
of such Series A Preferred Stock or dividends declared in shares of such stock);
or (ii) upon the merger or consolidation of the Company with or into any other
corporation or corporations if such consolidation or merger is approved by the
stockholders of the Company in compliance with applicable law and the
Certificate of Incorporation and Bylaws of the Company; or (iii) a sale of all
or substantially all of the Company's assets. Notwithstanding anything in this
subsection 4.5 to the contrary, the provisions of this subsection 4.5 relating
to the Series B Director shall cease to be of any further force or effect upon
the first date that either: (i) the total number of outstanding shares of
Series B Preferred Stock is less than two hundred thousand (200,000) shares
(such number of shares being subject to proportional adjustment to reflect
combination or subdivisions of such Series B Preferred Stock or dividends
declared in shares of such stock); or (ii) upon the merger or consolidation of
the Company with or into any other corporation or corporations if such
consolidation or merger is approved by the stockholders of the Company in
compliance with applicable law and the Certificate of Incorporation and Bylaws
of the Company; or (iii) a sale of all or substantially all of the Company's
assets.
-10-
<PAGE>
5. Conversion Rights. The outstanding shares of Series A Preferred Stock
-----------------
and Series B Preferred Stock shall be convertible into Common Stock as follows:
5.1 Optional Conversion
-------------------
(a) At the option of the holder thereof, each share of Series
A Preferred Stock and Series B Preferred Stock shall be convertible, at any time
or from time to time prior to the close of business on the business day before
any date fixed for redemption of such share, into fully paid and nonassessable
shares of Common Stock at the Conversion Price (as defined in subsection 5.3
below) as provided herein.
(b) Each holder of Series A Preferred Stock and Series B
Preferred Stock who elects to convert the same into shares of Common Stock shall
surrender the certificate or certificates therefor, duly endorsed, at the office
of the Company or any transfer agent for the Series A Preferred Stock or Series
B Preferred Stock, respectively, or Common Stock, or notify the Company that
such certificate(s) have been lost, stolen or destroyed and execute an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
the Company in connection with such certificate(s), and shall give written
notice to the Company at such office that such holder elects to convert the same
and shall state therein the number of shares of Series A Preferred Stock or
Series B Preferred Stock being converted. Thereupon the Company shall promptly
issue and deliver at such office to such holder a certificate or certificates
for the number of shares of Common Stock to which such holder is entitled upon
such conversion. Such conversion shall be deemed to have been made immediately
prior to the close of business on the date of such surrender of the certificate
or certificates representing the shares of Series A Preferred Stock or Series B
Preferred Stock to be converted, and the person entitled to receive the shares
of Common Stock issuable upon such conversion shall be treated for all purposes
as the record holder of such shares of Common Stock on such date.
5.2 Automatic Conversion
--------------------
(a) Each share of Series A Preferred Stock shall automatically
be converted into fully paid and nonassessable shares of Common Stock at the
Conversion Price (as defined in subsection 5.3 below), as provided herein: (i)
immediately prior to the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Company at an aggregate offering price to the public of
not less than $10,000,000; or (ii) upon the Company's receipt of the written
consent of the holders of not less than a majority of the then outstanding
shares of Series A Preferred Stock to the conversion of all then outstanding
Series A Preferred Stock under this Section C.5. This subsection (ii) shall not
be amended except by a vote of the majority of the then outstanding Series A
Preferred Stock.
(b) Upon the occurrence of any event specified in subparagraph
5.2(a) (i) or (ii) above, the outstanding shares of Series A Preferred Stock
shall be converted into Common Stock automatically without the need for any
further action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Company or its transfer agent;
provided, however, that the Company shall not be obligated to
- -------- -------
-11-
<PAGE>
issue certificates evidencing the shares of Common Stock issuable upon such
conversion unless the certificates evidencing such shares of Series A Preferred
Stock are either delivered to the Company or its transfer agent as provided
below, or the holder notifies the Company or its transfer agent that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection with such certificates. Upon the occurrence of such automatic
conversion of the Series A Preferred Stock, the holders of Series A Preferred
Stock shall surrender the certificates representing such shares at the office of
the Company or any transfer agent for the Series A Preferred Stock or Common
Stock. Thereupon, there shall be issued and delivered to such holder promptly at
such office and in its name as shown on such surrendered certificate or
certificates, a certificate or certificates for the number of shares of Common
Stock into which the shares of Series A Preferred Stock surrendered were
convertible on the date on which such automatic conversion occurred.
(c) Each share of Series B Preferred Stock shall automatically be
converted into fully paid and nonassessable shares of Common Stock at the
Conversion Price (as defined in subsection 5.3 below), as provided herein: (i)
immediately prior to the closing of a firm commitment underwritten public
offering pursuant to an effective registration statement filed under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Company at an aggregate offering price to the public of
not less than $10,000,000; or (ii) upon the Company's receipt of the written
consent of the holders of not less than a majority of the then outstanding
shares of Series B Preferred Stock to the conversion of all then outstanding
Series B Preferred Stock under this Section C.5. This subsection (ii) shall not
be amended except by a vote of the majority of the then outstanding Series B
Preferred Stock.
(d) Upon the occurrence of any event specified in subparagraph 5.2(c)
(i) or (ii) above, the outstanding shares of Series B Preferred Stock shall be
converted into Common Stock automatically without the need for any further
action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Company or its transfer agent;
provided, however, that the Company shall not be obligated to issue certificates
- -------- -------
evidencing the shares of Common Stock issuable upon such conversion unless the
certificates evidencing such shares of Series B Preferred Stock are either
delivered to the Company or its transfer agent as provided below, or the holder
notifies the Company or its transfer agent that such certificates have been
lost, stolen or destroyed and executes an agreement satisfactory to the Company
to indemnify the Company from any loss incurred by it in connection with such
certificates. Upon the occurrence of such automatic conversion of the Series B
Preferred Stock, the holders of Series B Preferred Stock shall surrender the
certificates representing such shares at the office of the Company or any
transfer agent for the Series B Preferred Stock or Common Stock. Thereupon,
there shall be issued and delivered to such holder promptly at such office and
in its name as shown on such surrendered certificate or certificates, a
certificate or certificates for the number of shares of Common Stock into which
the shares of Series B Preferred Stock surrendered were convertible on the date
on which such automatic conversion occurred.
5.3. Conversion Price. Each share of Series A Preferred Stock and
----------------
Series B Preferred Stock shall be convertible in accordance with subsection 5.1
or subsection 5.2 above into the number of shares of Common Stock which results
from dividing the Original Issue Price
-12-
<PAGE>
by the conversion price for the Series A Preferred Stock or Series B Preferred
Stock, respectively, that is in effect at the time of conversion (the
"Conversion Price"). The initial Conversion Price for the Series A Preferred
----------------
Stock and Series B Preferred Stock shall be the Original Issue Price. The
Conversion Price shall be subject to adjustment from time to time as provided
below.
5.4. Adjustment Upon Common Stock Event. Upon the happening of a
----------------------------------
Common Stock Event (as hereinafter defined), the Conversion Price of the Series
A Preferred Stock and Series B Preferred Stock shall, simultaneously with the
happening of such Common Stock Event, be adjusted by multiplying the Conversion
Price, in effect immediately prior to such Common Stock Event by a fraction, (i)
the numerator of which shall be the number of shares of Common Stock issued and
outstanding immediately prior to such Common Stock Event, and (ii) the
denominator of which shall be the number of shares of Common Stock issued and
outstanding immediately after such Common Stock Event, and the product so
obtained shall thereafter be the Conversion Price. The Conversion Price shall
be readjusted in the same manner upon the happening of each subsequent Common
Stock Event. As used herein, the term "Common Stock Event" shall mean (i) the
------------------
issue by the Company of additional shares of Common Stock as a dividend or other
distribution on outstanding Common Stock, (ii) a subdivision of the outstanding
shares of Common Stock into a greater number of shares of Common Stock, or (iii)
a combination of the outstanding shares of Common Stock into a smaller number of
shares of Common Stock.
5.5. Adjustments for Other Dividends and Distributions. If at any
-------------------------------------------------
time or from time to time after the Original Issue Date the Company pays a
dividend or makes another distribution to the holders of the Common Stock
payable in securities of the Company other than shares of Common Stock, then in
each such event provision shall be made so that the holders of the Series A
Preferred Stock and Series B Preferred Stock shall receive upon conversion
thereof, in addition to the number of shares of Common Stock receivable upon
conversion thereof, the amount of securities of the Company which they would
have received had their Series A Preferred Stock and Series B Preferred Stock
converted into Common Stock on the date of such event (or such record date, as
applicable) and had they thereafter, during the period from the date of such
event (or such record date, as applicable) to and including the conversion date,
retained such securities receivable by them as aforesaid during such period,
subject to all other adjustments called for during such period under this
Section C.5 with respect to the rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock or with respect to such other securities by
their terms.
5.6. Adjustment for Reclassification, Exchange and Substitution. If
----------------------------------------------------------
at any time or from time to time after the Original Issue Date the Common Stock
issuable upon the conversion of the Series A Preferred Stock and Series B
Preferred Stock is changed into the same or a different number of shares of any
class or classes of stock, whether by recapitalization, reclassification or
otherwise (other than by a Common Stock Event or a stock dividend,
----- ----
reorganization, merger, consolidation or sale of assets provided for elsewhere
in this Section C.5), then in any such event each holder of Series A Preferred
Stock and Series B Preferred Stock shall have the right thereafter to convert
such stock into the kind and amount of stock and other securities and property
receivable upon such recapitalization, reclassification or other change by
holders of the number of shares of Common Stock into which such shares of Series
A
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<PAGE>
Preferred Stock and Series B Preferred Stock could have been converted
immediately prior to such recapitalization, reclassification or change, all
subject to further adjustment as provided herein or with respect to such other
securities or property by the terms thereof.
5.7. Sale of Shares Below Conversion Price
-------------------------------------
(a) Adjustment Formula. If at any time or from time to time
------------------
after the Original Issue Date the Company issues or sells, or is deemed by the
provisions of this subsection 5.7 to have issued or sold, Additional Shares of
Common Stock (as hereinafter defined), otherwise than in connection with a
Common Stock Event as provided in subsection 5.4, a dividend or distribution as
provided in subsection 5.5 or a recapitalization, reclassification, other change
as provided in subsection 5.6, for an Effective Price (as hereinafter defined)
that is less than the Conversion Price for the Series A Preferred Stock and
Series B Preferred Stock in effect immediately prior to such issue or sale,
then, and in each such case, the Conversion Price for the Series A Preferred
Stock and Series B Preferred Stock shall be reduced, as of the close of business
on the date of such issue or sale, to the price obtained by multiplying such
Conversion Price by a fraction:
(i) The numerator of which shall be the sum of (A) the
number of Common Stock Equivalents Outstanding (as hereinafter defined)
immediately prior to such issue or sale of Additional Shares of Common Stock
plus (B) the quotient obtained by dividing the Aggregate Consideration Received
(as hereinafter defined) by the Company for the total number of Additional
Shares of Common Stock so issued or sold (or deemed so issued and sold) by the
Conversion Price for the Series A Preferred Stock and Series B Preferred Stock
in effect immediately prior to such issue or sale; and
(ii) The denominator of which shall be the sum of (A) the
number of Common Stock Equivalents Outstanding immediately prior to such issue
or sale plus (B) the number of Additional Shares of Common Stock so issued or
sold (or deemed so issued and sold).
(b) Certain Definitions. For the purpose of making any
-------------------
adjustment required under this subsection 5.7:
(i) "Additional Shares of Common Stock" shall mean all
---------------------------------
shares of Common Stock issued by the Company, whether or not subsequently
reacquired or retired by the Company, other than: (A) shares of Common Stock
issued or issuable upon conversion of the Series A Preferred Stock or Series B
Preferred Stock; (B) shares of Common Stock (or options, warrants or rights
therefor) issued to employees, officers, or directors of, or contractors,
consultants or advisers to, the Company or any Subsidiary pursuant to stock
purchase or stock option plans, stock bonuses or awards, warrants, contracts or
other arrangements that are approved by the Board of Directors; (C) up to 50,000
shares in the aggregate of the Company's Series 1 Preferred Stock (and the
shares of Common Stock issued or issuable upon conversion of such Series 1
Preferred Stock) issued or issuable in connection with a written agreement
concerning a business relationship between the Company and the holder of such
Series 1 Preferred Stock; (D) any shares of Common Stock or Preferred Stock
issued to parties providing the Company with equipment leases, real property
leases, loans, credit lines, guaranties of indebtedness, cash price reductions
or similar financing under
-14-
<PAGE>
arrangements approved by the Board of Directors; and (E) shares of Common Stock
issued pursuant to the acquisition of another corporation or entity by the
Company by consolidation, merger, purchase of all or substantially all of the
assets, or other reorganization in which the Company acquires, in a single
transaction or series of related transactions, all or substantially all of the
assets of such other corporation or entity or fifty percent (50%) or more of the
voting power of such other corporation or entity or fifty percent (50%) or more
of the equity ownership of such other entity; provided that such transaction or
series of transactions has been approved by the Company's Board of Directors.
(ii) The "Aggregate Consideration Received" by the Company
--------------------------------
for any issue or sale (or deemed issue or sale) of securities shall (A) to the
extent it consists of cash, be computed at the gross amount of cash received by
the Company before deduction of any underwriting or similar commissions,
compensation or concessions paid or allowed by the Company in connection with
such issue or sale and without deduction of any expenses payable by the Company;
(B) to the extent it consists of property other than cash, be computed at the
fair value of that property as determined in good faith by the Board using the
method of valuation set forth in Section C.3.4 hereof; and (C) if Additional
Shares of Common Stock, Convertible Securities or Rights or Options to purchase
either Additional Shares of Common Stock or Convertible Securities are issued or
sold together with other stock or securities or other assets of the Company for
a consideration which covers both, be computed as the portion of the
consideration so received that may be reasonably determined in good faith by the
Board to be allocable to such Additional Shares of Common Stock, Convertible
Securities or Rights or Options.
(iii) "Common Stock Equivalents Outstanding" shall mean the
------------------------------------
number of shares of Common Stock that is equal to the sum of (A) all shares of
Common Stock of the Company that are outstanding at the time in question, plus
(B) all shares of Common Stock of the Company issuable upon conversion of all
shares of Series A Preferred Stock or other Convertible Securities that are
outstanding at the time in question, plus (C) all shares of Common Stock of the
Company that are issuable upon the exercise of Rights or Options that are
outstanding at the time in question assuming the full conversion or exchange
into Common Stock of all such Rights or Options that are Rights or Options to
purchase or acquire Convertible Securities into or for Common Stock.
(iv) "Convertible Securities" shall mean stock or other
----------------------
securities convertible into or exchangeable for shares of Common Stock.
(v) The "Effective Price" of Additional Shares of Common
---------------
Stock shall mean the quotient determined by dividing the total number of
Additional Shares of Common Stock issued or sold, or deemed to have been issued
or sold, by the Company under this subsection 5.7, into the Aggregate
Consideration Received, or deemed to have been received, by the Company under
this subsection 5.7, for the issue of such Additional Shares of Common Stock.
(vi) "Rights or Options" shall mean warrants, options or
-----------------
other rights to purchase or acquire shares of Common Stock or Convertible
Securities.
-15-
<PAGE>
(c) Deemed Issuances. For the purpose of making any adjustment to the
----------------
Conversion Price of the Series A Preferred Stock and Series B Preferred Stock
required under this subsection 5.7, if the Company issues or sells any Rights or
Options or Convertible Securities and if the Effective Price of the shares of
Common Stock issuable upon exercise of such Rights or Options and/or the
conversion or exchange of Convertible Securities (computed without reference to
any additional or similar protective or antidilution clauses) is less than the
Conversion Price then in effect for the Series A Preferred Stock and Series B
Preferred Stock, then the Company shall be deemed to have issued, at the time of
the issuance of such Rights, Options or Convertible Securities, that number of
Additional Shares of Common Stock that is equal to the maximum number of shares
of Common Stock issuable upon exercise or conversion of such Rights, Options or
Convertible Securities upon their issuance and to have received, as the
Aggregate Consideration Received for the issuance of such shares, an amount
equal to the total amount of the consideration, if any, received by the Company
for the issuance of such Rights or Options or Convertible Securities, plus, in
the case of such Rights or Options, the minimum amounts of consideration, if
any, payable to the Company upon the exercise in full of such Rights or Options,
plus, in the case of Convertible Securities, the minimum amounts of
consideration, if any, payable to the Company (other than by cancellation of
liabilities or obligations evidenced by such Convertible Securities) upon the
conversion or exchange thereof; provided that:
-------- ----
(i) if the minimum amounts of such consideration cannot be
ascertained, but are a function of antidilution or similar protective clauses,
then the Company shall be deemed to have received the minimum amounts of
consideration without reference to such clauses;
(ii) if the minimum amount of consideration payable to the Company
upon the exercise of Rights or Options or the conversion or exchange of
Convertible Securities is reduced over time or upon the occurrence or non-
occurrence of specified events other than by reason of antidilution or similar
protective adjustments, then the Effective Price shall be recalculated using the
figure to which such minimum amount of consideration is reduced upon such
reduction becoming effective; and
(iii) if the minimum amount of consideration payable to the Company
upon the exercise of such Rights or Options or the conversion or exchange of
Convertible Securities is subsequently increased, then the Effective Price shall
again be recalculated using the increased minimum amount of consideration
payable to the Company upon the exercise of such Rights or Options or the
conversion or exchange of such Convertible Securities upon such increase
becoming effective.
No further adjustment of the Conversion Price, adjusted upon the
issuance of such Rights or Options or Convertible Securities, shall be made as a
result of the actual issuance of shares of Common Stock on the exercise of any
such Rights or Options or the conversion or exchange of any such Convertible
Securities. If any such Rights or Options or the conversion rights represented
by any such Convertible Securities shall expire without having been fully
exercised, then the Conversion Price as adjusted upon the issuance of such
Rights or Options or Convertible Securities (or upon the effectiveness of
further adjustments as set forth in subparagraphs 5.7(c) (ii) and (iii) above)
shall be readjusted to the Conversion Price which
-16-
<PAGE>
would have been in effect had an adjustment been made on the basis that the only
shares of Common Stock so issued were the shares of Common Stock, if any, that
there actually issued or sold on the partial exercise of such Rights or Options
or rights of conversion or exchange of such Convertible Securities, and such
shares of Common Stock, if any, were issued or sold for the consideration
actually received by the Company upon such exercise, plus the consideration, if
any, actually received by the Company for the granting of all such Rights or
Options, whether or not exercised, plus the consideration received for issuing
or selling all such Convertible Securities actually converted or exchanged, plus
the consideration, if any, actually received by the Company (other than by
cancellation of liabilities or obligations evidenced by such Convertible
Securities) on the conversion or exchange of such Convertible Securities, as the
case may be, provided that such readjustment shall not apply to prior
conversions of Series A Preferred Stock and Series B Preferred Stock.
5.8 Certificate of Adjustment. In each case of an adjustment or
-------------------------
readjustment of the Conversion Price for the Series A Preferred Stock and Series
B Preferred Stock as provided herein, the Company, at its expense, shall cause
its Chief Financial Officer to compute such adjustment or readjustment in
accordance with the provisions hereof and prepare a certificate showing such
adjustment or readjustment, and shall promptly mail such certificate, by first
class mail, postage prepaid, to each registered holder of the Preferred Stock at
the holder's address as shown in the Company's books.
5.9 Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon any conversion of Series A Preferred Stock or Series B Preferred
Stock. In lieu of any fractional share to which the holder would otherwise be
entitled, the Company shall pay the holder cash equal to the product of such
fraction multiplied by the Common Stock's fair market value as determined in
good faith by the Board as of the date of conversion.
5.10 Reservation of Stock Issuable Upon Conversion. The Company
---------------------------------------------
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Series A Preferred Stock and Series B Preferred Stock, such
number of its shares of Common Stock as shall from time to time be sufficient to
effect the conversion of all outstanding shares of the Series A Preferred Stock
and Series B Preferred Stock; and if at any time the number of authorized but
unissued shares of Common Stock shall not be sufficient to effect the conversion
of all then outstanding shares of the Series A Preferred Stock and Series B
Preferred Stock, the Company will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purpose.
5.11 Notices. Any notice required by the provisions of this Section
-------
5 to be given to the holders of shares of the Series A Preferred Stock and
Series B Preferred Stock shall be deemed given upon the earlier of actual
receipt or five business days after deposit in the United States mail, by
certified or registered mail, return receipt requested, postage prepaid,
addressed to each holder of record at the address of such holder appearing on
the books of the Company.
-17-
<PAGE>
5.12 No Impairment. The Company shall not avoid or seek to avoid
-------------
the observance or performance of any of the terms to be observed or performed
hereunder by the Company, but shall at all times in good faith assist in
carrying out all such action as may be reasonably necessary or appropriate in
order to protect the conversion rights of the holders of the Series A Preferred
Stock and Series B Preferred Stock against impairment.
6. Miscellaneous
-------------
6.1 No Reissuance of Series A Preferred Stock and Series B
------------------------------------------------------
Preferred Stock. No share or shares of Series A Preferred Stock and Series B
- ---------------
Preferred Stock acquired by the Company by reason of redemption, purchase,
- ---------------
conversion or otherwise shall be reissued, and all such shares shall be
canceled, retired and eliminated from the shares which the Company shall be
authorized to issue.
7. Restrictions and Limitations.
----------------------------
7.1 Protective Provisions for Holders of Series A Preferred Stock.
-------------------------------------------------------------
So long as any shares of Series A Preferred Stock remain outstanding, the
Company shall not, without the approval, by vote or written consent, of the
holders of a majority of the Series A Preferred Stock then outstanding, voting
together as a separate class:
(1) amend its Certificate of Incorporation to increase
the authorized number of shares of Preferred Stock:
(2) reclassify or recapitalize any outstanding shares of
Preferred Stock of the Company into shares having rights, preferences or
privileges senior to or on a parity with the Series A Preferred Stock;
(3) authorize or issue any other Preferred Stock or any other
capital stock having rights, preferences or privileges senior to or on a parity
with the Series A Preferred Stock;
(4) authorize any amendment or change of the rights,
preferences or powers of the Series A Preferred Stock;
(5) authorize an amendment of the Company's Certificate of
Incorporation that adversely affects the rights of the Series A Preferred Stock;
or
(6) approve a sale, merger, liquidation or other transaction
which would be treated as a liquidation, dissolution or winding up of the
Company pursuant to the provisions of subsection 3.2 hereof, pursuant to which
the holders of Series A Preferred Stock would receive less than the full per
share amount to which such holders are entitled pursuant to subsection 3.1
hereof.
7.2 Protective Provisions for Holders of Series B Preferred Stock.
-------------------------------------------------------------
So long as any shares of Series B Preferred Stock remain outstanding, the
Company shall not, without the approval, by vote or written consent, of the
holders of a majority of the Series B Preferred Stock then outstanding, voting
together as a separate class:
-18-
<PAGE>
(1) amend its Certificate of Incorporation to increase the
authorized number of shares of Preferred Stock:
(2) reclassify or recapitalize any outstanding shares of
Preferred Stock of the Company into shares having rights, preferences or
privileges senior to or on a parity with the Series B Preferred Stock;
(3) authorize or issue any other Preferred Stock or any other
capital stock having rights, preferences or privileges senior to or on a parity
with the Series B Preferred Stock;
(4) authorize any amendment or change of the rights,
preferences or powers of the Series A Preferred Stock or the Series B Preferred
Stock;
(5) authorize an amendment of the Company's Certificate of
Incorporation that adversely affects the rights of the Series B Preferred Stock;
or
(6) approve a sale, merger, liquidation or other transaction
which would be treated as a liquidation, dissolution or winding up of the
Company pursuant to the provisions of subsection 3.2 hereof, pursuant to which
the holders of Series B Preferred Stock would receive less than the full per
share amount to which such holders are entitled pursuant to subsection 3.1
hereof.
D. Series 4 Preferred Stock and Series 5 Preferred Stock. The rights,
-----------------------------------------------------
preferences, privileges and restrictions granted to and imposed on Series 4
Preferred Stock and Series 5 Preferred Stock are as follows.
1. Equivalent to Common Stock. Except as otherwise set forth in
--------------------------
this Section D, the Series 4 Preferred Stock and Series 5 Preferred Stock of the
Company shall have rights, preferences and limitations identical with those of
the Company's Common Stock. In the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Company, the holders of any shares
of the Series 4 Preferred Stock, of the Series 5 Preferred Stock and of the
Common Stock shall be entitled to receive pro rata on an equal priority, pari
passu basis, any payment or distribution of the assets of the Company (whether
capital, surplus or earnings), but not until payment in full of any amounts due
the holders of the Series 1 Preferred Stock, the Series A Preferred Stock, the
Series B Preferred Stock and any future series of Preferred Stock that may be
entitled to priority over the Common Stock in the payment or distribution of the
assets of the Company in the event of any such dissolution or winding-up.
2. Voting. Except as may otherwise be agreed in writing, the
------
holders of shares of Series 4 Preferred Stock and Series 5 Preferred Stock shall
be entitled to vote upon all matters upon which holders of the Common Stock have
the right to vote, and each share of Series 4 Preferred Stock and Series 5
Preferred Stock shall be entitled to the number of votes equal to the largest
number of full shares of Common Stock into which such shares of Series 4
Preferred Stock and Series 5 Preferred Stock could be converted pursuant to the
applicable provisions of subsection 3 below, at the record date established by
the Board of Directors of the Company for the determination of the stockholders
entitled to vote on such matters, or, if no such record date is so established,
at the record date provided by law, such votes to be counted together with all
-19-
<PAGE>
other shares of capital stock having general voting powers and not separately as
a class. The holders of the Series 4 Preferred Stock and Series 5 Preferred
Stock shall be entitled to receive notice of any meeting of the stockholders in
accordance with applicable law and with the bylaws of the Company as in effect
at the time of such notice. Except as otherwise expressly required by law, in
no event shall the holders of shares of Series 4 Preferred Stock and Series 5
Preferred Stock have the right to vote separately as a class.
3. Conversion. The Series 4 Preferred Stock and Series 5 Preferred
----------
Stock shall be converted into Common Stock as follows:
(a) Series 4 Preferred Stock Conversion Events. Each outstanding
------------------------------------------
share of Series 4 Preferred Stock shall automatically be converted, without any
further act of the Company or its stockholders, into fully paid and
nonassessable shares of Common Stock pursuant to the formula as set forth in
subsection 3(c) below upon the earliest to occur of: (i) the distribution by
the Company to holders of its securities (other than the holders of Series 4
Preferred Stock) of a controlling interest in SuperCede, Inc., a wholly-owned
subsidiary of the Company, in a spin-off transaction; (ii) the distribution by
the Company to holders of its securities (other than the holders of Series 4
Preferred Stock) of the consideration received by the Company in one of the
following transactions with respect to SuperCede, Inc.: (1) the sale of all or
substantially all of the assets of SuperCede, Inc., (2) the sale of a
controlling interest in SuperCede, Inc. to a third party, or (3) the acquisition
of SuperCede, Inc. by another entity by means of merger, consolidation or
otherwise, in which the Company does not, immediately after such merger,
consolidation or other transaction, retain stock representing a majority of the
voting power of SuperCede, Inc.; (iii) immediately prior to the closing of a
firm commitment underwritten public offering pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended,
covering the offer and sale of Common Stock for the account of the Company at an
aggregate offering price to the Company of not less than $10,000,000; or (iv)
upon acquisition of the Company by another entity by means of merger,
consolidation or otherwise, in which the holders of the Company's shares
outstanding immediately before such merger, consolidation or other transaction
do not, immediately after such merger, consolidation or other transaction,
retain stock representing a majority of the voting power of the surviving
corporation of such merger, consolidation or other transaction.
(b) Series 4 Conversion Ratio. Each share of Series 4 Preferred
-------------------------
Stock shall be converted into one share of Common Stock. The Series 4 Conversion
Ratio shall be subject to adjustment as set forth in subsection 3(h).
(c) Mechanics of Conversion of Series 4 Preferred Stock. Upon
---------------------------------------------------
the occurrence of one of the events specified in subsection 3(a), the
outstanding shares of Series 4 Preferred Stock shall be converted automatically
without any further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or its
transfer agent; provided that the Company shall not be obligated to issue to any
--------
such holder certificates evidencing the shares of Common Stock issuable upon
such conversion unless certificates evidencing the shares of Series 4 Preferred
Stock are delivered to the Company or any transfer agent of the Company.
Conversion of the Series 4 Preferred Stock shall be deemed to have been effected
on the date on which the event specified with respect to such Series 4 Preferred
Stock in subsection 3(a) shall have occurred, and such date is referred to
-20-
<PAGE>
herein with respect to the Series 4 Preferred Stock as the "Series 4 Conversion
Date." The holder in whose name the certificate or certificates for Common Stock
are to be issued shall be deemed to have become a holder of record of such
Common Stock on the applicable Series 4 Conversion Date. Following the
Conversion Date, upon the request of any holder of Series 4 Preferred Stock so
converted and after surrender of the certificate or certificates representing
such holder's shares of Series 4 Preferred Stock to the Company or any transfer
agent of the Company (except in the case of conversions pursuant to subsection
3(a)(iv)), the Company shall issue and deliver to such holder a certificate or
certificates for the number of full shares of Common Stock to which such holder
is entitled and a check or cash with respect to any fractional interest in a
share of Common Stock as provided in subsection 3(g).
(d) Series 5 Preferred Stock Conversion Events. Each outstanding
------------------------------------------
share of Series 5 Preferred Stock shall automatically be converted, without any
further act of the Company or its stockholders, into fully paid and
nonassessable shares of Common Stock pursuant to the formula as set forth in
subsection 3(f) below upon the earliest to occur of: (i) the distribution by
the Company to holders of its securities (other than the holders of Series 5
Preferred Stock and Series 4 Preferred Stock) of a controlling interest in
SuperCede, Inc., a wholly-owned subsidiary of the Company, in a spin-off
transaction; (ii) the distribution by the Company to holders of its securities
(other than the holders of Series 5 Preferred Stock and Series 4 Preferred
Stock) of the consideration received by the Company in one of the following
transactions with respect to SuperCede, Inc.: (1) the sale of all or
substantially all of the assets of SuperCede, Inc., (2) the sale of a
controlling interest in SuperCede, Inc. to a third party, or (3) the acquisition
of SuperCede, Inc. by another entity by means of merger, consolidation or
otherwise, in which the Company does not, immediately after such merger,
consolidation or other transaction, retain stock representing a majority of the
voting power of SuperCede, Inc.; (iii) immediately prior to the closing of a
firm commitment underwritten public offering pursuant to an effective
registration statement filed under the Securities Act of 1933, as amended,
covering the offer and sale of Common Stock for the account of the Company at an
aggregate offering price to the Company of not less than $10,000,000; or (iv)
upon acquisition of the Company by another entity by means of merger,
consolidation or otherwise, in which the holders of the Company's shares
outstanding immediately before such merger, consolidation or other transaction
do not, immediately after such merger, consolidation or other transaction,
retain stock representing a majority of the voting power of the surviving
corporation of such merger, consolidation or other transaction.
(e) Series 5 Conversion Ratio. Each share of Series 5 Preferred Stock
-------------------------
shall be converted into one share of Common Stock. The Series 5 Conversion
Ratio shall be subject to adjustment as set forth in subsection 3(h).
(f) Mechanics of Conversion of Series 5 Preferred Stock. Upon the
---------------------------------------------------
occurrence of one of the events specified in subsection 3(d), the outstanding
shares of Series 5 Preferred Stock shall be converted automatically without any
further action by the holders of such shares and whether or not the certificates
representing such shares are surrendered to the Company or its transfer agent;
provided that the Company shall not be obligated to issue to any such holder
- --------
certificates evidencing the shares of Common Stock issuable upon such conversion
unless certificates evidencing the shares of Series 5 Preferred Stock are
delivered to the Company or any transfer agent of the Company. Conversion of the
Series 5 Preferred Stock
-21-
<PAGE>
shall be deemed to have been effected on the date on which the event specified
with respect to such Series 5 Preferred Stock in subsection 3(d) shall have
occurred, and such date is referred to herein with respect to the Series 5
Preferred Stock as the "Series 5 Conversion Date." The holder in whose name the
certificate or certificates for Common Stock are to be issued shall be deemed to
have become a holder of record of such Common Stock on the applicable Series 5
Conversion Date. Following the Conversion Date, upon the request of any holder
of Series 5 Preferred Stock so converted and after surrender of the certificate
or certificates representing such holder's shares of Series 5 Preferred Stock to
the Company or any transfer agent of the Company (except in the case of
conversions pursuant to subsection 3(d)(iv)), the Company shall issue and
deliver to such holder a certificate or certificates for the number of full
shares of Common Stock to which such holder is entitled and a check or cash with
respect to any fractional interest in a share of Common Stock as provided in
subsection 3(g).
(g) Fractional Shares. No fractional shares of Common Stock or scrip
-----------------
shall be issued upon conversion of shares of Series 4 Preferred Stock and Series
5 Preferred Stock, but the number of full shares of Common Stock issuable upon
conversion thereof shall be computed on the basis of the aggregate number of
shares of Series 4 Preferred Stock so converted and the aggregate number of
shares of Series 5 Preferred Stock so converted. Instead of any fractional
shares of Common Stock which would otherwise be issuable upon conversion of any
shares of Series 4 Preferred Stock and Series 5 Preferred Stock, the Company
shall pay a cash adjustment in respect of such fractional interest in an amount
equal to that fractional interest of the then fair value per share of Common
Stock, as determined by the Board of Directors.
(h) Conversion Ratio Adjustments for the Series 4 Preferred Stock and
-----------------------------------------------------------------
Series 5 Preferred Stock. The Conversion Ratio for the Series 4 Preferred Stock
- ------------------------
and Series 5 Preferred Stock shall be subject to adjustment from time to time as
follows:
(i) Stock Dividends. If the number of shares of Common Stock
---------------
outstanding at any time after the date of issuance of the Series 4 Preferred
Stock is increased by a stock dividend or other distribution on Common Stock
payable in shares of Common Stock or by a subdivision, split-up or
reclassification of outstanding shares of Common Stock, then immediately after
the record date fixed for the determination of holders of Common Stock entitled
to receive such stock dividend or the effective date of such subdivision, split-
up or reclassification, as the case may be, the Series 4 Conversion Ratio and
Series 5 Conversion Ratio shall be appropriately adjusted so that the holder of
any shares of Series 4 Preferred Stock or Series 5 Preferred Stock thereafter
converted shall be entitled to receive the number of shares of Common Stock of
the Company which the holder would have owned immediately following such action
had such shares of Series 4 Preferred Stock and Series 5 Preferred Stock been
converted immediately prior thereto.
(ii) Combination of Stock. If the number of shares of Common Stock
--------------------
outstanding at any time after the date of issuance of the Series 4 Preferred
Stock is decreased by a combination or reclassification of the outstanding
shares of Common Stock, then, immediately after the effective date of such
combination or reclassification, the Series 4 Conversion Ratio and Series 5
Conversion Ratio shall be appropriately adjusted so that the holder of any
shares of Series 4 Preferred Stock or Series 5 Preferred Stock thereafter
converted shall be entitled to receive the number of shares of Common Stock of
the Company which the holder would have
-22-
<PAGE>
owned immediately following such action had such shares of Series 4 Preferred
Stock and Series 5 Preferred Stock been converted immediately prior thereto.
(iii) Capital Reorganization or Reclassification. If the Common
------------------------------------------
Stock issuable upon the conversion of the Series 4 Preferred Stock and Series 5
Preferred Stock shall be changed into the same or a different number of shares
of any class or classes of stock, whether by capital reorganization,
reclassification or otherwise (other than a subdivision or combination of shares
or stock dividend provided for elsewhere in this subsection 3(h)), then and in
each such event the holder of each share of Series 4 Preferred Stock and Series
5 Preferred Stock shall have the right thereafter to convert such share into the
kind and amount of shares of stock and other securities and property receivable
upon such reorganization, reclassification or other change by the holders of the
number of shares of Common Stock into which such share of Series 4 Preferred
Stock or Series 5 Preferred Stock might have been converted immediately prior to
such reorganization, reclassification or change, all subject to further
adjustment as provided herein.
(iv) Rounding of Calculations; Minimum Adjustment. All calculations
--------------------------------------------
under this subsection (h) shall be made to the nearest one hundredth (1/100th)
of a share. Any provision of this Section D.3 to the contrary notwithstanding,
no adjustment in the Series 4 Conversion Ratio shall be made if the amount of
such adjustment would be less than 1% of the Series 4 Conversion Ratio then in
effect, but any such amount shall be carried forward and an adjustment with
respect thereto shall be made at the time of and together with any subsequent
adjustment which, together with such amount and any other amount or amounts so
carried forward, shall aggregate 1% or more of the Series 4 Conversion Ratio
then in effect. Any provision of this Section D.3 to the contrary
notwithstanding, no adjustment in the Series 5 Conversion Ratio shall be made if
the amount of such adjustment would be less than 1% of the Series 5 Conversion
Ratio then in effect, but any such amount shall be carried forward and an
adjustment with respect thereto shall be made at the time of and together with
any subsequent adjustment which, together with such amount and any other amount
or amounts so carried forward, shall aggregate 1% or more of the Series 5
Conversion Ratio then in effect.
(i) Statement Regarding Adjustments. In each case of an adjustment or
-------------------------------
readjustment of the Conversion Ratio for the Series 4 Preferred Stock or Series
5 Preferred Stock, the Company, at its expense, shall cause its Chief Financial
Officer to compute such adjustment or readjustment in accordance with the
provisions hereof and prepare a certificate showing such adjustment or
readjustment, and shall mail such certificate, by first class mail, postage
prepaid, to each registered holder of the Series 4 Preferred Stock or Series 5
Preferred Stock at the holder's address as shown in the Company's books.
(j) Costs. The Company shall pay all documentary, stamp, transfer or
-----
other transactional taxes attributable to the issuance or delivery of shares of
Common Stock of the Company upon conversion of any shares of Series 4 Preferred
Stock and Series 5 Preferred Stock; provided that the Company shall not be
--------
required to pay any taxes which may be payable in respect of any transfer
involved in the issuance or delivery of any certificate for such shares in a
name other than that of the holder of the shares of Series 4 Preferred Stock and
Series 5 Preferred Stock in respect of which such shares are being issued.
-23-
<PAGE>
(k) Reservation of Shares. So long as any shares of Series 4
---------------------
Preferred Stock and Series 5 Preferred Stock remain outstanding, the Company
shall reserve out of its authorized but unissued shares of Common Stock, free
from preemptive rights, sufficient shares of Common Stock to provide for the
conversion of all shares of Series 4 Preferred Stock and Series 5 Preferred
Stock outstanding, solely for the purpose of effecting such conversion.
(l) Valid Issuance. All shares of Common Stock which may be issued
--------------
upon conversion of the shares of Series 4 Preferred Stock and Series 5 Preferred
Stock will upon issuance by the Company be duly and validly issued, fully paid
and nonassessable and free from all taxes, liens and charges with respect to the
issuance thereof and the Company shall take no action which will cause a
contrary result (including without limitation, any action which would cause the
Series 4 Conversion Ratio or Series 5 Conversion Ratio to be less than the par
value, if any, of the Common Stock).
(m) Notices. Any notice required by the provisions of this Section 3
-------
to be given to the holders of shares of the Series 4 Preferred Stock and Series
5 Preferred Stock shall be deemed given upon the earlier of actual receipt or
three business days after deposit in the United States mail, by certified or
registered mail, return receipt requested, postage prepaid, addressed to each
holder of record at the address of such holder appearing on the books of the
Company.
4. Dividends. Dividends shall be declared and set aside for any
---------
shares of the Series 4 Preferred Stock or Series 5 Preferred Stock only upon
resolution of the Board of Directors of the Company. Except as otherwise set
forth in this Section D.4, no dividends (other than Common Stock dividends in a
transaction described in Section 3(h)(i)) shall be paid to the holders of the
Common Stock, the Series 4 Preferred Stock or the Series 5 Preferred Stock
unless an equivalent dividend is concurrently paid to the holders of the Series
4 Preferred Stock and Series 5 Preferred Stock (on a as-converted to Common
Stock basis); provided, that this restriction shall not apply to Permitted
--------
Repurchases. Notwithstanding the foregoing, no holder of Series 4 Preferred
Stock or Series 5 Preferred Stock shall be entitled to receive in any
distribution thereof to the holders of any other securities of the Company,
including Common Stock: (i) any shares of SuperCede, Inc. or (ii) any
consideration received by the Company in any of the following transactions with
respect to SuperCede, Inc.; (1) the sale of all or substantially all of the
assets of SuperCede, Inc., (2) the sale of a controlling interest in SuperCede,
Inc. to a third party, or (3) the acquisition of SuperCede, Inc. by another
entity by means of merger, consolidation or otherwise, in which the Company does
not, immediately after such merger, consolidation or other transaction, retain
stock representing a majority of the voting power of SuperCede, Inc.;
"Permitted Repurchases" means the repurchase by the Company of shares of Common
Stock held by employees, officers, directors, consultants, independent
contractors, advisors, or other persons performing services for the Company or a
subsidiary that are subject to restricted stock purchase agreements or stock
option exercise agreements under which the Company has the option to repurchase
such shares.
ARTICLE V
The Board of Directors of the corporation shall have the power to adopt,
amend or repeal Bylaws of the corporation.
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<PAGE>
ARTICLE VI
A. Election of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
B. Any action required or permitted to be taken by the stockholders of the
corporation must be effected at a duly called annual or special meeting of
stockholders of the corporation and may not be effected by any consent in
writing by such stockholders.
C. Special meetings of stockholders of the corporation may be called only
by either the Board of Directors pursuant to a resolution adopted by a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such resolution
is presented to the Board for adoption), the Chairman of the Board or the Chief
Executive Officer.
ARTICLE VII
A. To the fullest extent permitted by law, no director of the corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is hereafter amended to authorize the further
elimination or limitation of the liability of a director, then the liability of
a director of the corporation shall be eliminated or limited to the fullest
extent permitted by the Delaware General Corporation Law, as so amended.
B. To the extent permitted by applicable law, this corporation is also
authorized to provide indemnification of (and advancement of expenses to) agents
(and any other persons to which Delaware law permits this corporation to provide
indemnification) through bylaw provisions, agreements with such agents or other
persons, vote of stockholders or disinterested directors or otherwise, in excess
of the indemnification and advancement otherwise permitted by Section 145 of the
Delaware General Corporation Law, subject only to limits created by applicable
Delaware law (statutory or non-statutory), with respect to actions for breach of
duty to the corporation, its stockholders, and others.
C. Neither any amendment nor repeal of any of the foregoing provisions of
this Article VII, nor the adoption of any provision of this Certificate of
Incorporation inconsistent with this Article VII, shall eliminate, reduce or
otherwise adversely affect any limitation on the personal liability of a
director of the corporation existing at the time of such amendment, repeal or
adoption of such an inconsistent provision.
ARTICLE VIII
The name and mailing address of the incorporator is Jason M. Garlick, c/o
Fenwick & West LLP, Two Palo Alto Square, Suite 800, Palo Alto, California
94306.
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<PAGE>
The undersigned incorporator hereby acknowledges that the foregoing
certificate is his act and deed and that the facts stated herein are true.
Date: , 1998
------------------
------------------------------
Jason M. Garlick, Incorporator
-26-
<PAGE>
EXHIBIT 3.04
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ASYMETRIX LEARNING SYSTEMS, INC.
ARTICLE I
The name of the corporation is Asymetrix Learning Systems, Inc.
ARTICLE II
The address of the registered office of the corporation in the State of
Delaware is 1209 Orange Street, City of Wilmington, County of New Castle. The
name of its registered agent at that address is The Corporation Trust Company.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity
for which corporations may be organized under the General Corporation Law of the
State of Delaware.
ARTICLE IV
The total number of shares of all classes of stock which the corporation
has authority to issue is Forty-Two Million (42,000,000) shares, consisting of
two classes: Forty Million (40,000,000) shares of Common Stock, $0.01 par value
per share, and Two Million (2,000,000) shares of Preferred Stock, $0.01 par
value per share.
The Board of Directors is authorized, subject to any limitations prescribed
by the law of the State of Delaware, to provide for the issuance of the shares
of Preferred Stock in one or more series, and, by filing a certificate of
designation pursuant to the applicable law of the State of Delaware, to
establish from time to time the number of shares to be included in each such
series, to fix the designation, powers, preferences and rights of the shares of
each such series and any qualifications, limitations or restrictions thereof,
and to increase or decrease the number of shares of any such series (but not
below the number of shares of such series then outstanding). The number of
authorized shares of Preferred Stock may also be increased or decreased (but not
below the number of shares thereof then outstanding) by the affirmative vote of
the holders of a majority of the stock of the corporation entitled to vote,
unless a vote of any other holders is required pursuant to a certificate or
certificates establishing a series of Preferred Stock.
Except as otherwise expressly provided in any certificate of designation
designating any series of Preferred Stock pursuant to the foregoing provisions
of this Article IV, any new series of Preferred Stock may be designated, fixed
and determined as provided herein by the Board of Directors without approval of
the holders of Common Stock or the holders of Preferred Stock, or any series
thereof, and any such new series may have powers, preferences and rights,
including, without limitation, voting rights, dividend rights, liquidation
rights, redemption rights and conversion rights, senior to, junior to or pari
passu with the rights of the Common Stock, the Preferred Stock, or any future
class or series of Preferred Stock or Common Stock.
<PAGE>
ARTICLE V
The Board of Directors of the corporation shall have the power to adopt,
amend or repeal Bylaws of the corporation.
ARTICLE VI
A. Election of directors need not be by written ballot unless the Bylaws
of the corporation shall so provide.
B. Any action required or permitted to be taken by the stockholders of the
corporation must be effected at a duly called annual or special meeting of
stockholders of the corporation and may not be effected by any consent in
writing by such stockholders.
C. Special meetings of stockholders of the corporation may be called only
by either the Board of Directors pursuant to a resolution adopted by a majority
of the total number of authorized directors (whether or not there exist any
vacancies in previously authorized directorships at the time any such resolution
is presented to the Board for adoption), the Chairman of the Board or the Chief
Executive Officer.
ARTICLE VII
A. The directors, other than those who may be elected by the holders of
Preferred Stock under specified circumstances, shall be divided into three
classes with the term of office of the first class (Class I) to expire at the
annual meeting of the stockholders held in 1999; the term of office of the
second class (Class II) to expire at the annual meeting of stockholders held in
2000; the term of office of the third class (Class III) to expire at the annual
meeting of stockholders held in 2001; and thereafter for each such term to
expire at each third succeeding annual meeting of stockholders after such
election. All directors shall hold office until the expiration of the term for
which elected, and until their respective successors are elected, except in the
case of the death, resignation, or removal of any director.
B. Subject to the rights of the holders of any series of Preferred Stock
then outstanding, newly created directorships resulting from any increase in the
authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation or other cause may be filled (a) by the
stockholders at any meeting, (b) by a majority of the directors, although less
than a quorum, or (c) by a sole remaining director, and directors so chosen
shall hold office for a term expiring at the next annual meeting of stockholders
at which the term of office of the class to which they have been elected
expires, and until their respective successors are elected, except in the case
of the death, resignation, or removal of any director. No decrease in the
number of directors constituting the Board of Directors shall shorten the term
of any incumbent director.
ARTICLE VIII
A. To the fullest extent permitted by law, no director of the corporation
shall be personally liable for monetary damages for breach of fiduciary duty as
a director. Without limiting the effect of the preceding sentence, if the
Delaware General Corporation Law is
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<PAGE>
hereafter amended to authorize the further elimination or limitation of the
liability of a director, then the liability of a director of the corporation
shall be eliminated or limited to the fullest extent permitted by the Delaware
General Corporation Law, as so amended.
B. To the extent permitted by applicable law, this corporation is also
authorized to provide indemnification of (and advancement of expenses to) agents
(and any other persons to which Delaware law permits this corporation to provide
indemnification) through bylaw provisions, agreements with such agents or other
persons, vote of stockholders or disinterested directors or otherwise, in excess
of the indemnification and advancement otherwise permitted by Section 145 of the
Delaware General Corporation Law, subject only to limits created by applicable
Delaware law (statutory or non-statutory), with respect to actions for breach of
duty to the corporation, its stockholders, and others.
C. Neither any amendment nor repeal of any of the foregoing provisions of
this Article VIII, nor the adoption of any provision of this Certificate of
Incorporation inconsistent with this Article VIII, shall eliminate, reduce or
otherwise adversely affect any limitation on the personal liability of a
director of the corporation existing at the time of such amendment, repeal or
adoption of such an inconsistent provision.
IN WITNESS WHEREOF, this Amended and Restated Certificate of Incorporation
of Asymetrix Learning Systems, Inc. has been signed and attested as of this ___
day of _________, 1998.
----------------------------
James A. Billmaier,
Chief Executive Officer
Attest:
- ---------------------------
Steven Esau, Secretary
-3-
<PAGE>
EXHIBIT 3.06
BYLAWS
OF
ASYMETRIX LEARNING SYSTEMS, INC.
(a Delaware corporation)
As Adopted May 7, 1998
ARTICLE I
STOCKHOLDERS
Section 1.1: Annual Meetings. An annual meeting of stockholders shall be
----------- ---------------
held for the election of directors at such date, time and place, either within
or without the State of Delaware, as the Board of Directors shall each year fix.
Any other proper business may be transacted at the annual meeting.
Section 1.2: Special Meetings. Special meetings of stockholders for any
----------- ----------------
purpose or purposes may be called at any time by the Chairman of the Board, the
Chief Executive Officer or by a majority of the members of the Board of
Directors. Special meetings may not be called by any other person or persons.
If a special meeting of stockholders is called by any person or persons other
than by a majority of the members of the Board of Directors, then such person or
persons shall call such meeting by delivering a written request to call such
meeting to each member of the Board of Directors, and the Board of Directors
shall then determine the time, date and place of such special meeting, which
shall be held not more than one hundred twenty (120) nor less than thirty-five
(35) days after the written request to call such special meeting was delivered
to each member of the Board of Directors.
Section 1.3: Notice of Meetings. Written notice of all meetings of
----------- ------------------
stockholders shall be given stating the place, date and time of the meeting and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called. Unless otherwise required by applicable law or the Certificate of
Incorporation of the Corporation, such notice shall be given not less than ten
(10) nor more than sixty (60) days before the date of the meeting to each
stockholder entitled to vote at such meeting.
Section 1.4: Adjournments. Any meeting of stockholders may adjourn from
----------- ------------
time to time to reconvene at the same or another place, and notice need not be
given of any such adjourned meeting if the time, date and place thereof are
announced at the meeting at which the adjournment is taken; provided, however,
-------- -------
that if the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, then a notice
of the adjourned meeting shall be given to each stockholder of record entitled
to vote at the meeting. At the adjourned meeting the Corporation may transact
any business that might have been transacted at the original meeting.
<PAGE>
Section 1.5: Quorum. At each meeting of stockholders the holders of a
----------- ------
majority of the shares of stock entitled to vote at the meeting, present in
person or represented by proxy, shall constitute a quorum for the transaction of
business, except if otherwise required by applicable law. If a quorum shall
fail to attend any meeting, the chairman of the meeting or the holders of a
majority of the shares entitled to vote who are present, in person or by proxy,
at the meeting may adjourn the meeting. Shares of the Corporation's stock
belonging to the Corporation (or to another corporation, if a majority of the
shares entitled to vote in the election of directors of such other corporation
are held, directly or indirectly, by the Corporation), shall neither be entitled
to vote nor be counted for quorum purposes; provided, however, that the
foregoing shall not limit the right of the Corporation or any other corporation
to vote any shares of the Corporation's stock held by it in a fiduciary
capacity.
Section 1.6: Organization. Meetings of stockholders shall be presided
----------- ------------
over by such person as the Board of Directors may designate, or, in the absence
of such a person, the Chief Executive Officer of the Corporation, or, in the
absence of such person, the Chairman of the Board, or, in the absence of such
person, such person as may be chosen by the holders of a majority of the shares
entitled to vote who are present, in person or by proxy, at the meeting. Such
person shall be chairman of the meeting and, subject to Section 1.10 hereof,
shall determine the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the conduct of discussion
as seems to him or her to be in order. The Secretary of the Corporation shall
act as secretary of the meeting, but in his or her absence the chairman of the
meeting may appoint any person to act as secretary of the meeting.
Section 1.7: Voting; Proxies. Unless otherwise provided by law or the
----------- ---------------
Certificate of Incorporation, and subject to the provisions of Section 1.8 of
these Bylaws, each stockholder shall be entitled to one (1) vote for each share
of stock held by such stockholder. Each stockholder entitled to vote at a
meeting of stockholders may authorize another person or persons to act for such
stockholder by proxy. Such a proxy may be prepared, transmitted and delivered
in any manner permitted by applicable law. Voting at meetings of stockholders
need not be by written ballot unless such is demanded at the meeting before
voting begins by a stockholder or stockholders holding shares representing at
least one percent (1%) of the votes entitled to vote at such meeting, or by such
stockholder's or stockholders' proxy; provided, however, that an election of
directors shall be by written ballot if demand is so made by any stockholder at
the meeting before voting begins. If a vote is to be taken by written ballot,
then each such ballot shall state the name of the stockholder or proxy voting
and such other information as the chairman of the meeting deems appropriate.
Directors shall be elected by a plurality of the votes of the shares present in
person or represented by proxy at the meeting and entitled to vote on the
election of directors. Unless otherwise provided by applicable law, the
Certificate of Incorporation or these Bylaws, every matter other than the
election of directors shall be decided by the affirmative vote of the holders of
a majority of the shares of stock entitled to vote thereon that are present in
person or represented by proxy at the meeting and are voted for or against the
matter.
Section 1.8: Fixing Date for Determination of Stockholders of Record. In
----------- -------------------------------------------------------
order that the Corporation may determine the stockholders entitled to notice of
or to vote at any meeting of
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<PAGE>
stockholders or any adjournment thereof, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not precede the date upon which the
resolution fixing the record date is adopted by the Board of Directors and which
shall not be more than sixty (60) nor less than ten (10) days before the date of
such meeting, nor more than sixty (60) days prior to any other action. If no
record date is fixed by the Board of Directors, then the record date shall be as
provided by applicable law. A determination of stockholders of record entitled
to notice of or to vote at a meeting of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
Section 1.9: List of Stockholders Entitled to Vote. A complete list of
----------- -------------------------------------
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder, shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least ten (10) days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof and may be inspected by any stockholder who is present at the meeting.
Section 1.10: Inspectors of Elections.
------------ -----------------------
(a) Applicability. Unless otherwise provided in the Corporation's
-------------
Certificate of Incorporation or required by the Delaware General Corporation
Law, the following provisions of this Section 1.10 shall apply only if and when
the Corporation has a class of voting stock that is: (i) listed on a national
securities exchange; (ii) authorized for quotation on an interdealer quotation
system of a registered national securities association; or (iii) held of record
by more than 2,000 stockholders; in all other cases, observance of the
provisions of this Section 1.10 shall be optional, and at the discretion of the
Corporation.
(b) Appointment. The Corporation shall, in advance of any meeting
-----------
of stockholders, appoint one or more inspectors of election to act at the
meeting and make a written report thereof. The Corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
person presiding at the meeting shall appoint one or more inspectors to act at
the meeting.
(c) Inspector's Oath. Each inspector of election, before
----------------
entering upon the discharge of his duties, shall take and sign an oath
faithfully to execute the duties of inspector with strict impartiality and
according to the best of his ability.
(d) Duties of Inspectors. At a meeting of stockholders, the
--------------------
inspectors of election shall (i) ascertain the number of shares outstanding and
the voting power of each share, (ii) determine the shares represented at a
meeting and the validity of proxies and ballots, (iii)
-3-
<PAGE>
count all votes and ballots, (iv) determine and retain for a reasonable period
of time a record of the disposition of any challenges made to any determination
by the inspectors, and (v) certify their determination of the number of shares
represented at the meeting, and their count of all votes and ballots. The
inspectors may appoint or retain other persons or entities to assist the
inspectors in the performance of the duties of the inspectors.
(e) Opening and Closing of Polls. The date and time of the opening
----------------------------
and the closing of the polls for each matter upon which the stockholders will
vote at a meeting shall be announced by the inspectors at the meeting. No
ballot, proxies or votes, nor any revocations thereof or changes thereto, shall
be accepted by the inspectors after the closing of the polls unless the Court of
Chancery upon application by a stockholder shall determine otherwise.
(f) Determinations. In determining the validity and counting of proxies
--------------
and ballots, the inspectors shall be limited to an examination of the proxies,
any envelopes submitted with those proxies, any information provided in
connection with proxies in accordance with Section 212(c)(2) of the Delaware
General Corporation Law, ballots and the regular books and records of the
Corporation, except that the inspectors may consider other reliable information
for the limited purpose of reconciling proxies and ballots submitted by or on
behalf of banks, brokers, their nominees or similar persons which represent more
votes than the holder of a proxy is authorized by the record owner to cast or
more votes than the stockholder holds of record. If the inspectors consider
other reliable information for the limited purpose permitted herein, the
inspectors at the time they make their certification of their determinations
pursuant to this Section 1.11 shall specify the precise information considered
by them, including the person or persons from whom they obtained the
information, when the information was obtained, the means by which the
information was obtained and the basis for the inspectors' belief that such
information is accurate and reliable.
Section 1.11: Notice of Stockholder Business; Nominations.
------------ -------------------------------------------
(a) Annual Meeting of Stockholders.
------------------------------
(i) Nominations of persons for election to the Board of Directors
and the proposal of business to be considered by the stockholders at an annual
meeting of stockholders shall be made (A) pursuant to the Corporation's notice
of such meeting, (B) by or at the direction of the Board of Directors or (C) by
any stockholder of the Corporation who was a stockholder of record at the time
of giving of the notice provided for in this Section 1.11, who is entitled to
vote at such meeting and who complies with the notice procedures set forth in
this Section 1.11.
(ii) For nominations or other business to be properly brought
before an annual meeting by a stockholder pursuant to clause (C) of subparagraph
(a)(i) of this Section 1.11, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation and such other business
must otherwise be a proper matter for stockholder action. To be timely, a
stockholder's notice must be delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business on the
sixtieth (60th) day nor earlier than the close of business on the ninetieth
(90th) day prior to the first anniversary of the
-4-
<PAGE>
preceding year's annual meeting; provided, however, that in the event that the
-------- -------
date of the annual meeting is more than thirty (30) days before or more than
sixty (60) days after such anniversary date, notice by the stockholder to be
timely must be so delivered not earlier than the close of business on the
ninetieth (90th) day prior to such annual meeting and not later than the close
of business on the later of the sixtieth (60th) day prior to such annual meeting
or the close of business on the tenth (10th) day following the day on which
public announcement of the date of such meeting is first made by the
Corporation. Such stockholder's notice shall set forth: (a) as to each person
whom the stockholder proposes to nominate for election or reelection as a
director all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), including such person's written
------------
consent to being named in the proxy statement as a nominee and to serving as a
director if elected; (b) as to any other business that the stockholder proposes
to bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting and any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made; and (c) as to
the stockholder giving the notice and the beneficial owner, if any, on whose
behalf the nomination or proposal is made (1) the name and address of such
stockholder, as they appear on the Corporation's books, and of such beneficial
owner, and (2) the class and number of shares of the Corporation that are owned
beneficially and held of record by such stockholder and such beneficial owner.
(iii) Notwithstanding anything in the second sentence of
subparagraph (a)(ii) of this Section 1.11 to the contrary, in the event that the
number of directors to be elected to the Board of Directors of the Corporation
is increased and there is no public announcement by the Corporation naming all
of the nominees for director or specifying the size of the increased board of
directors at least seventy (70) days prior to the first anniversary of the
preceding year's annual meeting (or, if the annual meeting is held more than
thirty (30) days before or sixty (60) days after such anniversary date, at least
seventy (70) days prior to such annual meeting), a stockholder's notice required
by this Section 1.11 shall also be considered timely, but only with respect to
nominees for any new positions created by such increase, if it shall be
delivered to the Secretary of the Corporation at the principal executive office
of the Corporation not later than the close of business on the tenth (10th) day
following the day on which such public announcement is first made by the
Corporation.
(b) Special Meetings of Stockholders. Only such business shall be
--------------------------------
conducted at a special meeting of stockholders as shall have been brought before
the meeting pursuant to the Corporation's notice of such meeting. Nominations
of persons for election to the Board of Directors may be made at a special
meeting of stockholders at which directors are to be elected pursuant to the
Corporation's notice of such meeting (i) by or at the direction of the Board of
Directors or (ii) provided that the Board of Directors has determined that
directors shall be elected at such meeting, by any stockholder of the
Corporation who is a stockholder of record at the time of giving of notice of
the special meeting, who shall be entitled to vote at the meeting and who
complies with the notice procedures set forth in this Section 1.11. In the
event the Corporation calls a special meeting of stockholders for the purpose of
electing one or more
-5-
<PAGE>
directors to the Board of Directors, any such stockholder may nominate a person
or persons (as the case may be), for election to such position(s) as specified
in the Corporation's notice of meeting, if the stockholder's notice required by
subparagraph (a)(ii) of this Section 1.11 shall be delivered to the Secretary of
the Corporation at the principal executive offices of the Corporation not
earlier than the ninetieth (90th) day prior to such special meeting and not
later than the close of business on the later of the sixtieth (60th) day prior
to such special meeting or the tenth (10th) day following the day on which
public announcement is first made of the date of the special meeting and of the
nominees proposed by the Board of Directors to be elected at such meeting.
(c) General.
-------
(i) Only such persons who are nominated in accordance with the
procedures set forth in this Section 1.11 shall be eligible to serve as
directors and only such business shall be conducted at a meeting of stockholders
as shall have been brought before the meeting in accordance with the procedures
set forth in this Section 1.11. Except as otherwise provided by law or these
bylaws, the chairman of the meeting shall have the power and duty to determine
whether a nomination or any business proposed to be brought before the meeting
was made or proposed, as the case may be, in accordance with the procedures set
forth in this Section 1.11 and, if any proposed nomination or business is not in
compliance herewith, to declare that such defective proposal or nomination shall
be disregarded.
(ii) For purposes of this Section 1.11, the term "public
------
announcement" shall mean disclosure in a press release reported by the Dow Jones
- ------------
News Service, Associated Press or comparable national news service or in a
document publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to section 13, 14 or 15(d) of the Exchange Act.
(iii) Notwithstanding the foregoing provisions of this Section
1.11, a stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth herein. Nothing in this Section 1.11 shall be deemed to affect
any rights of stockholders to request inclusion of proposals in the
Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
ARTICLE II
BOARD OF DIRECTORS
Section 2.1: Number; Qualifications. The Board of Directors shall consist
----------- ----------------------
of one or more members. The initial number of directors shall be six (6), and
thereafter shall be fixed from time to time by resolution of the Board of
Directors. No decrease in the authorized number of directors constituting the
Board of Directors shall shorten the term of any incumbent director. Directors
need not be stockholders of the Corporation.
Section 2.2: Election; Resignation; Removal; Vacancies. The Board of
----------- -----------------------------------------
Directors shall initially consist of the person or persons elected by the
incorporator or named in the
-6-
<PAGE>
Corporation's initial Certificate of Incorporation. The Board of Directors shall
be divided into three classes, with the term of office of the first class, which
class initially consists of two directors, to expire at the annual meeting of
stockholders held in 1999; the term of office of the second class, which class
initially consists of two directors, to expire at the annual meeting of
stockholders held in 2000; the term of office of the third class, which class
initially consists of two directors, to expire at the annual meeting of
stockholders held in 2001; and thereafter with the term of office of each class
to expire at the third succeeding annual meeting of stockholders after the
election of each such class. Each director shall hold office until the
expiration of his or her term of office and until his or her successor is
elected and qualified, or until his or her earlier death, resignation or
removal. Any director may resign at any time upon written notice to the
Corporation. Subject to the rights of any holders of Preferred Stock then
outstanding: (i) any director or the entire Board of Directors may be removed,
with or without cause, by the holders of a majority of the shares then entitled
to vote at an election of directors and (ii) any vacancy occurring in the Board
of Directors for any cause, and any newly created directorship resulting from
any increase in the authorized number of directors to be elected by all
stockholders having the right to vote as a single class, may be filled by the
stockholders, by a majority of the directors then in office, although less than
a quorum, or by a sole remaining director.
Section 2.3: Regular Meetings. Regular meetings of the Board of Directors
----------- ----------------
may be held at such places, within or without the State of Delaware, and at such
times as the Board of Directors may from time to time determine. Notice of
regular meetings need not be given if the date, times and places thereof are
fixed by resolution of the Board of Directors.
Section 2.4: Special Meetings. Special meetings of the Board of Directors
----------- ----------------
may be called by the Chairman of the Board, the Chief Executive Officer or a
majority of the members of the Board of Directors then in office and may be held
at any time, date or place, within or without the State of Delaware, as the
person or persons calling the meeting shall fix. Notice of the time, date and
place of such meeting shall be given, orally or in writing, by the person or
persons calling the meeting to all directors at least four (4) days before the
meeting if the notice is mailed, or at least twenty-four (24) hours before the
meeting if such notice is given by telephone, hand delivery, facsimile or
similar communication method. Unless otherwise indicated in the notice, any and
all business may be transacted at a special meeting.
Section 2.5: Telephonic Meetings Permitted. Members of the Board of
----------- -----------------------------
Directors, or any committee of the Board, may participate in a meeting of the
Board or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation in a meeting pursuant to
conference telephone or similar communications equipment shall constitute
presence in person at such meeting.
Section 2.6: Quorum; Vote Required for Action. At all meetings of the
----------- --------------------------------
Board of Directors a majority of the total number of authorized directors shall
constitute a quorum for the transaction of business. Except as otherwise
provided herein or in the Certificate of Incorporation, or required by law, the
vote of a majority of the directors present at a meeting at which a quorum is
present shall be the act of the Board of Directors.
-7-
<PAGE>
Section 2.7: Organization. Meetings of the Board of Directors shall be
----------- ------------
presided over by the Chief Executive Officer, or in his or her absence by the
Chairman of the Board, or in his or her absence by a chairman chosen at the
meeting. The Secretary shall act as secretary of the meeting, but in his or her
absence the chairman of the meeting may appoint any person to act as secretary
of the meeting.
Section 2.8: Written Action by Directors. Any action required or
----------- ---------------------------
permitted to be taken at any meeting of the Board of Directors, or of any
committee thereof, may be taken without a meeting if all members of the Board or
such committee, as the case may be, consent thereto in writing, and the writing
or writings are filed with the minutes of proceedings of the Board or committee,
respectively.
Section 2.9: Powers. The Board of Directors may, except as otherwise
------------ ------
required by law or the Certificate of Incorporation, exercise all such powers
and do all such acts and things as may be exercised or done by the Corporation.
Section 2.10: Compensation of Directors. Directors, as such, may receive,
------------ -------------------------
pursuant to a resolution of the Board of Directors, fees and other compensation
for their services as directors, including without limitation their services as
members of committees of the Board of Directors.
ARTICLE III
COMMITTEES
Section 3.1: Committees. The Board of Directors may, by resolution passed
----------- ----------
by a majority of the whole Board, designate one or more committees, each
committee to consist of one or more of the directors of the Corporation. The
Board may designate one or more directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of the committee, the
member or members thereof present at any meeting of such committee who are not
disqualified from voting, whether or not he, she or they constitute a quorum,
may unanimously appoint another member of the Board of Directors to act at the
meeting in place of any such absent or disqualified member. Any such committee,
to the extent provided in a resolution of the Board of Directors, shall have and
may exercise all the powers and authority of the Board of Directors in the
management of the business and affairs of the Corporation and may authorize the
seal of the Corporation to be affixed to all papers that may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation (except that a committee may, to the extent
------
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors as provided in subsection (a) of
Section 151 of the Delaware General Corporation Law, fix the designations and
any of the preferences or rights of such shares relating to dividends,
redemption, dissolution, any distribution of assets of the Corporation, or the
conversion into, or the exchange of such shares for, shares of any other class
or classes or any other series of the same or any other class or classes of
stock of the Corporation, or fix the number of shares of any series of stock or
authorize the increase or decrease of the shares of any series), adopting an
agreement of merger
-8-
<PAGE>
or consolidation under Sections 251 or 252 of the Delaware General Corporation
Law, recommending to the stockholders the sale, lease or exchange of all or
substantially all of the Corporation's property and assets, recommending to the
stockholders a dissolution of the Corporation or a revocation of a dissolution,
or amending the Bylaws of the Corporation; and unless the resolution of the
Board of Directors expressly so provides, no such committee shall have the power
or authority to declare a dividend, authorize the issuance of stock or adopt a
certificate of ownership and merger pursuant to section 253 of the Delaware
General Corporation Law.
Section 3.2: Committee Rules. Unless the Board of Directors otherwise
----------- ---------------
provides, each committee designated by the Board may make, alter and repeal
rules for the conduct of its business. In the absence of such rules each
committee shall conduct its business in the same manner as the Board of
Directors conducts its business pursuant to Article II of these Bylaws.
ARTICLE IV
OFFICERS
Section 4.1: Generally. The officers of the Corporation shall consist of
----------- ---------
a Chief Executive Officer and/or a President, one or more Vice Presidents, a
Secretary, a Treasurer and such other officers, including a Chairman of the
Board of Directors, one or more Assistant Officers and/or Chief Financial
Officer, as may from time to time be appointed by the Board of Directors. All
officers shall be elected by the Board of Directors; provided, however, that the
Board of Directors may empower the Chief Executive Officer of the Corporation to
appoint officers other than the Chairman of the Board, the Chief Executive
Officer, the President, the Chief Financial Officer or the Treasurer. Each
officer shall hold office until his or her successor is elected and qualified or
until his or her earlier resignation or removal. Any number of offices may be
held by the same person. Any officer may resign at any time upon written notice
to the Corporation. Any vacancy occurring in any office of the Corporation by
death, resignation, removal or otherwise may be filled by the Board of
Directors. The Chief Executive Officer may also give one or more employees of
the Corporation position titles that include "Vice President" without making
such persons officers of the Corporation.
Section 4.2: Chief Executive Officer. Subject to the control of the Board
----------- -----------------------
of Directors and such supervisory powers, if any, as may be given by the Board
of Directors, the powers and duties of the Chief Executive Officer of the
Corporation are:
(a) To act as the general manager and, subject to the control of the Board
of Directors, to have general supervision, general management, direction and
control of the business and affairs of the Corporation and the general
supervision and direction of all of the officers, employees and agents of the
Corporation;
(b) To preside at all meetings of the stockholders and of the Board of
Directors;
-9-
<PAGE>
(c) To call meetings of the stockholders and of the Board of Directors to
be held at such times and, subject to the limitations prescribed by law or by
these Bylaws, at such places as he or she shall deem proper; and
(d) To affix the signature of the Corporation to all deeds, conveyances,
mortgages, guarantees, leases, obligations, bonds, certificates and other papers
and instruments in writing which have been authorized by the Board of Directors
or which, in the judgment of the Chief Executive Officer, should be executed on
behalf of the Corporation; to sign certificates for shares of stock of the
Corporation; and, subject to the direction of the Board of Directors, to have
general charge of the property of the Corporation and to supervise and control
all officers, agents and employees of the Corporation.
Section 4.3: Chairman of the Board. The Chairman of the Board shall have
----------- ---------------------
such powers and duties as provided in these bylaws and as the Board of Directors
may from time to time prescribe.
Section 4.4: President. The President shall have all such powers and
----------- ---------
duties as are delegated to him or her by the Board of Directors or the Chief
Executive Officer. A President may be designated by the Board to perform the
duties and exercise the powers of the Chief Executive Officer in the event of
the Chief Executive Officer's absence or disability.
Section 4.5: Vice President. Each Vice President shall have all such
----------- --------------
powers and duties as are delegated to him or her by the Board of Directors or
the Chief Executive Officer. A Vice President may be designated by the Board to
perform the duties and exercise the powers of the Chief Executive Officer or the
President in the event of the Chief Executive Officer's or President's absence
or disability.
Section 4.6: Chief Financial Officer. Subject to the direction of the
----------- -----------------------
Board of Directors and the President, the Chief Financial Officer shall perform
all duties and have all powers that are commonly incident to the office of chief
financial officer.
Section 4.7: Treasurer. The Treasurer shall have custody of all monies
----------- ---------
and securities of the Corporation. The Treasurer shall make such disbursements
of the funds of the Corporation as are authorized and shall render from time to
time an account of all such transactions. The Treasurer shall also perform such
other duties and have such other powers as are commonly incident to the office
of Treasurer, or as the Board of Directors or the President may from time to
time prescribe.
Section 4.8: Secretary. The Secretary shall issue or cause to be issued
----------- ---------
all authorized notices for, and shall keep, or cause to be kept, minutes of all
meetings of the stockholders and the Board of Directors. The Secretary shall
have charge of the corporate minute books and similar records and shall perform
such other duties and have such other powers as are commonly incident to the
office of Secretary, or as the Board of Directors or the President may from time
to time prescribe.
-10-
<PAGE>
Section 4.9: Assistant Officers. The Assistant Officers, which may
----------- ------------------
include one or more Assistant Secretaries and/or one or more Assistant
Treasurers, in general shall perform such duties as are customary or as shall be
assigned to them by resolution of the board of directors. If required by the
Board of Directors, the Assistant Treasurers shall respectively give bonds for
the faithful discharge of their duties in such sums and with such sureties as
the Board of Directors shall determine.
Section 4.10: Delegation of Authority. The Board of Directors may from
------------ -----------------------
time to time delegate the powers or duties of any officer to any other officers
or agents, notwithstanding any provision hereof.
Section 4.11: Removal. Any officer of the Corporation shall serve at the
------------ -------
pleasure of the Board of Directors and may be removed at any time, with or
without cause, by the Board of Directors. Such removal shall be without
prejudice to the contractual rights of such officer, if any, with the
Corporation.
ARTICLE V
STOCK
Section 5.1: Certificates. Every holder of stock shall be entitled to
----------- ------------
have a certificate signed by or in the name of the Corporation by the Chairman
or Vice-Chairman of the Board of Directors, or the President or a Vice
President, and by the Treasurer or an Assistant Treasurer, or the Secretary or
an Assistant Secretary, of the Corporation, certifying the number of shares
owned by such stockholder in the Corporation. Any or all of the signatures on
the certificate may be a facsimile.
Section 5.2: Lost, Stolen or Destroyed Stock Certificates; Issuance of New
----------- -------------------------------------------------------------
Certificates. The Corporation may issue a new certificate of stock in the place
- ------------
of any certificate previously issued by it, alleged to have been lost, stolen or
destroyed, and the Corporation may require the owner of the lost, stolen or
destroyed certificate, or such owner's legal representative, to agree to
indemnify the Corporation and/or to give the Corporation a bond sufficient to
indemnify it, against any claim that may be made against it on account of the
alleged loss, theft or destruction of any such certificate or the issuance of
such new certificate.
Section 5.3: Other Regulations. The issue, transfer, conversion and
----------- -----------------
registration of stock certificates shall be governed by such other regulations
as the Board of Directors may establish.
ARTICLE VI
INDEMNIFICATION
Section 6.1 Indemnification of Officers and Directors. Each person who
----------- -----------------------------------------
was or is made a party to, or is threatened to be made a party to, or is
involved in any action, suit or
-11-
<PAGE>
proceeding, whether civil, criminal, administrative or investigative (a
"proceeding"), by reason of the fact that he or she (or a person of
----------
whom he or she is the legal representative), is or was a director or officer of
the Corporation or a Reincorporated Predecessor (as defined below) or is or was
serving at the request of the Corporation or a Reincorporated Predecessor (as
defined below) as a director or officer of another corporation (including any
subsidiary of the Corporation or a Reincorporated Predecessor), or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the Delaware General Corporation
Law, against all expenses, liability and loss (including attorneys' fees,
judgments, fines, ERISA excise taxes and penalties and amounts paid or to be
paid in settlement) reasonably incurred or suffered by such person in connection
therewith, and such indemnification shall continue as to a person who has ceased
to be a director or officer and shall inure to the benefit of his or her heirs,
executors and administrators; provided, however, that the Corporation shall
-------- -------
indemnify any such person seeking indemnity in connection with a proceeding (or
part thereof) initiated by such person only if such proceeding (or part thereof)
was authorized by the Board of Directors of the Corporation. As used herein,
the term "Reincorporated Predecessor" means a corporation that is merged with
--------------------------
and into the Corporation in a statutory merger where (a) the Corporation is the
surviving corporation of such merger; (b) the primary purpose of such merger is
to change the corporate domicile of the Reincorporated Predecessor to Delaware.
Section 6.2: Advance of Expenses. The Corporation shall pay all expenses
----------- -------------------
(including attorneys' fees) incurred by such a director or officer in defending
any such proceeding as they are incurred in advance of its final disposition;
provided, however, that if the Delaware General Corporation Law then so
requires, the payment of such expenses incurred by such a director or officer in
advance of the final disposition of such proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such director
or officer, to repay all amounts so advanced if it should be determined
ultimately that such director or officer is not entitled to be indemnified under
this Article VI or otherwise; and provided, further, that the Corporation shall
-------- -------
not be required to advance any expenses to a person against whom the Corporation
directly brings a claim, in a proceeding, alleging that such person has breached
his or her duty of loyalty to the Corporation, committed an act or omission not
in good faith or that involves intentional misconduct or a knowing violation of
law, or derived an improper personal benefit from a transaction.
Section 6.3: Non-Exclusivity of Rights. The rights conferred on any
------------ -------------------------
person in this Article VI shall not be exclusive of any other right that such
person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, Bylaw, agreement, vote or consent of stockholders
or disinterested directors, or otherwise. Additionally, nothing in this Article
VI shall limit the ability of the Corporation, in its discretion, to indemnify
or advance expenses to persons whom the Corporation is not obligated to
indemnify or advance expenses pursuant to this Article VI.
Section 6.4: Indemnification Contracts. The Board of Directors is
----------- -------------------------
authorized to cause the Corporation to enter into indemnification contracts with
any director, officer, employee or agent of the Corporation, or any person
serving at the request of the Corporation as a director,
-12-
<PAGE>
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, including employee benefit plans, providing
indemnification rights to such person. Such rights may be greater than those
provided in this Article VI.
Section 6.5: Effect of Amendment. Any amendment, repeal or modification
----------- -------------------
of any provision of this Article VI shall be prospective only, and shall not
adversely affect any right or protection conferred on a person pursuant to this
Article VI and existing at the time of such amendment, repeal or modification.
ARTICLE VII
NOTICES
Section 7.1: Notice. Except as otherwise specifically provided herein or
----------- ------
required by law, all notices required to be given pursuant to these Bylaws shall
be in writing and may in every instance be effectively given by hand delivery
(including use of a delivery service), by depositing such notice in the mail,
postage prepaid, or by sending such notice by prepaid telegram, telex, overnight
express courier, mailgram or facsimile. Any such notice shall be addressed to
the person to whom notice is to be given at such person's address as it appears
on the records of the Corporation. The notice shall be deemed given (i) in the
case of hand delivery, when received by the person to whom notice is to be given
or by any person accepting such notice on behalf of such person, (ii) in the
case of delivery by mail, upon deposit in the mail, (iii) in the case of
delivery by overnight express courier, on the first business day after such
notice is dispatched, and (iv) in the case of delivery via facsimile, when
dispatched.
Section 7.2: Waiver of Notice. Whenever notice is required to be given
----------- ----------------
under any provision of these Bylaws, a written waiver of notice, signed by the
person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to notice. Attendance of a person at a meeting shall
constitute a waiver of notice of such meeting, except when the person attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because the meeting is not lawfully called or
convened. Neither the business to be transacted at, nor the purpose of, any
regular or special meeting of the stockholders, directors or members of a
committee of directors need be specified in any written waiver of notice.
ARTICLE VIII
INTERESTED DIRECTORS
Section 8.1: Interested Directors; Quorum. No contract or transaction
----------- ----------------------------
between the Corporation and one or more of its directors or officers, or between
the Corporation and any other corporation, partnership, association or other
organization in which one or more of its directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board or committee thereof that authorizes
the contract or transaction, or solely
-13-
<PAGE>
because his, her or their votes are counted for such purpose, if: (i) the
material facts as to his, her or their relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum; (ii)
the material facts as to his, her or their relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or (iii) the contract or
transaction is fair as to the Corporation as of the time it is authorized,
approved or ratified by the Board of Directors, a committee thereof, or the
stockholders. Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
ARTICLE IX
MISCELLANEOUS
Section 9.1: Fiscal Year. The fiscal year of the Corporation shall be
----------- -----------
determined by resolution of the Board of Directors.
Section 9.2: Seal. The Board of Directors may provide for a corporate
----------- ----
seal, which shall have the name of the Corporation inscribed thereon and shall
otherwise be in such form as may be approved from time to time by the Board of
Directors.
Section 9.3: Form of Records. Any records maintained by the Corporation
----------- ---------------
in the regular course of its business, including its stock ledger, books of
account and minute books, may be kept on, or be in the form of, magnetic tape,
diskettes, photographs, microphotographs or any other information storage
device, provided that the records so kept can be converted into clearly legible
form within a reasonable time. The Corporation shall so convert any records so
kept upon the request of any person entitled to inspect the same.
Section 9.4: Reliance Upon Books and Records. A member of the Board of
----------- -------------------------------
Directors, or a member of any committee designated by the Board of Directors
shall, in the performance of his or her duties, be fully protected in relying in
good faith upon records of the Corporation and upon such information, opinions,
reports or statements presented to the Corporation by any of the Corporation's
officers or employees, or committees of the Board of Directors, or by any other
person as to matters the member reasonably believes are within such other
person's professional or expert competence and who has been selected with
reasonable care by or on behalf of the Corporation.
Section 9.5: Certificate of Incorporation Governs. In the event of any
----------- ------------------------------------
conflict between the provisions of the Corporation's Certificate of
Incorporation and Bylaws, the provisions of the Certificate of Incorporation
shall govern.
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<PAGE>
Section 9.6: Severability. If any provision of these Bylaws shall be held
----------- ------------
to be invalid, illegal, unenforceable or in conflict with the provisions of the
Corporation's Certificate of Incorporation, then such provision shall
nonetheless be enforced to the maximum extent possible consistent with such
holding and the remaining provisions of these Bylaws (including without
limitation, all portions of any section of these Bylaws containing any such
provision held to be invalid, illegal, unenforceable or in conflict with the
Certificate of Incorporation, that are not themselves invalid, illegal,
unenforceable or in conflict with the Certificate of Incorporation) shall remain
in full force and effect.
ARTICLE X
AMENDMENT
Section 10.1: Amendments. Stockholders of the Corporation holding a
------------ ----------
majority of the Corporation's outstanding voting stock shall have the power to
adopt, amend or repeal Bylaws. To the extent provided in the Corporation's
Certificate of Incorporation, the Board of Directors of the Corporation shall
also have the power to adopt, amend or repeal Bylaws of the Corporation, except
insofar as Bylaws adopted by the stockholders shall otherwise provide.
-15-
<PAGE>
CERTIFICATION OF BYLAWS
OF
ASYMETRIX LEARNING SYSTEMS, INC.
(a Delaware corporation)
KNOW ALL BY THESE PRESENTS:
I, Steven Esau, certify that I am Secretary of Asymetrix Learning Systems,
a Delaware corporation (the "Company"), that I am duly authorized to make and
deliver this certification, that the attached Bylaws are a true and correct copy
of the Bylaws of the Company in effect as of the date of this certificate.
Dated: May 7, 1998
-----------------------------
Steven Esau, Secretary
-16-
<PAGE>
Exhibit 4.02
------------
Number Shares
ASYMETRIX LEARNING SYSTEMS
INCORPORATED UNDER THE LAWS OF SEE REVERSE FOR STATEMENTS RELATING
THE STATE OF DELAWARE TO RIGHTS, PREFERENCES,
PRIVILEGES AND RESTRICTIONS, IF ANY
This Certifies that CUSIP 045927 10 0
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.01 PER
SHARE, OF
ASYMETRIX LEARNING
SYSTEMS, INC.
transferable only on the books of the Corporation by the holder hereof in
person or by duly authorized Attorney upon surrender of this certificate
properly endorsed. This certificate is not valid until countersigned and
registered by the Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
[corporate seal]
/s/ John D. Atherly /s/ Steven Esau
VICE PRESIDENT, FINANCE AND ADMINISTRATION VICE PRESIDENT, GENERAL
AND CHIEF FINANCIAL OFFICER COUNSEL AND CORPORATE
SECRETARY
COUNTERSIGNED AND REGISTERED:
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.
TRANSFER AGENT AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights as established, from time to time, by the Certificate of
Incorporation of the Corporation and by any certificate of designation, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge at
the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as through they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties ------ ------
JT TEN - as joint tenants with right (Cust) (Minor)
of survivorship and not as under Uniform Gifts
tenants in common to Minors Act
---------
(State)
UNIF TRF MIN ACT - Custodian (until
------
(Cust)
age )
-------- ---------
(Minor)
under Uniform
Transfers to Minors
and
-------------------
(State)
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ________________________ hereby sell, assign and
transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- -----------------------------------------------
- -----------------------------------------------
- --------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Shares
- --------------------------------------------------------------------------
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
Attorney
- ------------------------------------------------------------------------
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated
----------------------
<PAGE>
X
-------------------------------------------------
X
-------------------------------------------------
NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY PARTICULAR,
WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By
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THE SIGNATURE(S) MUST BE GUARATNEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-16.
<PAGE>
EXHIBIT 23.02
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Selected
Historical Consolidated Financial Data", "Changes in Accountants", and
"Experts" and to the use of our reports dated April 23, 1997, in Pre-Effective
Amendment No. 1 to the Registration Statement (Form S-1 No. 333-49037) and
related Prospectus of Asymetrix Learning Systems, Inc. for the registration of
3,000,000 shares of its common stock.
/s/ Ernst & Young LLP
Seattle, Washington
April 22, 1998
<PAGE>
EXHIBIT 23.03
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report, dated May 9, 1997; covering the audited financial statements of
Aimtech Corporation as of December 31, 1996 and for the year then ended, and
to all references to our Firm included in or made a part of this registration
statement.
Arthur Andersen LLP
Boston, Massachusetts
April 22, 1998
<PAGE>
EXHIBIT 23.04
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Asymetrix Learning Systems, Inc.:
We consent to the inclusion of our report dated December 19, 1997, with
respect to the balance sheets of Communication Strategies, Inc. as of December
31, 1996 and September 30, 1997, and the related statements of income and
retained earnings and cash flows for the year ended December 31, 1996 and the
nine-month period ended September 30, 1997, which report appears in the
registration statement (No. 333-49037) of Asymetrix Learning Systems, Inc.,
and to the reference to our firm under the heading "Experts" in the
prospectus.
KPMG Peat Marwick LLP
Dallas, Texas
April 22, 1998
<PAGE>
EXHIBIT 23.05
WHEN THE TRANSACTION REFERRED TO IN NOTE 12 OF THE NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS HAS BEEN CONSUMMATED, WE WILL BE IN A POSITION TO RENDER
THE FOLLOWING CONSENT.
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Asymetrix Learning Systems, Inc.:
We consent to the use of our reports included herein and to the reference to
our firm under the headings "Selected Historical Consolidated Financial Data"
and "Experts" in the prospectus.
KPMG Peat Marwick LLP
Seattle, Washington
April 22, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY INFORMATION EXTRACTED FROM THE CONSOLIDATED
FINANCIAL STATEMENTS OF ASYMETRIX LEARNING SYSTEMS, INC. AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 3,763 2,454
<SECURITIES> 0 0
<RECEIVABLES> 5,139 8,253
<ALLOWANCES> 3,346 1,148
<INVENTORY> 720 480
<CURRENT-ASSETS> 16,264 10,760
<PP&E> 4,587 6,494
<DEPRECIATION> 3,405 4,660
<TOTAL-ASSETS> 18,727 21,564
<CURRENT-LIABILITIES> 6,417 10,153
<BONDS> 0 0
0 0
8 43
<COMMON> 59 66
<OTHER-SE> 12,243 9,653
<TOTAL-LIABILITY-AND-EQUITY> 18,727 21,564
<SALES> 14,300 17,481
<TOTAL-REVENUES> 17,255 24,064
<CGS> 3,082 2,654
<TOTAL-COSTS> 5,182 6,791
<OTHER-EXPENSES> 35,294 30,200
<LOSS-PROVISION> 246 227
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (23,359) (13,077)
<INCOME-TAX> 196 38
<INCOME-CONTINUING> (23,555) (13,115)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (23,555) (13,115)
<EPS-PRIMARY> (4.01) (2.17)
<EPS-DILUTED> (4.01) (2.17)
</TABLE>
