<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-24289
ASYMETRIX LEARNING SYSTEMS, INC.
(Exact name of registrant as specified in its chapter)
DELAWARE 91-1276003
(State or other jurisdiction of (I.R.S. Employer Identification No.)
000incorporation or organization)
110-110/TH/ AVENUE NE, BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) (Zip Code)
(425) 462-0501
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes_________ No X
-----
The number of shares outstanding of the issuer's Common Stock, par value $0.01,
as of September 30, 1998 was 13,593,131 shares.
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC.
FORM 10 -Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1998
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PART I - FINANCIAL INFORMATION PAGE
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of September 30, 1998 and
December 31, 1997 3
Condensed Consolidated Statements of Operations for the three and nine months
ended September 30, 1998 and 1997 4
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and 1997 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 2. Changes in Securities and Use of Proceeds 19
Item 3. Defaults upon Senior Securities 19
Item 4. Submission of Matters to a Vote of Securities Holders 19
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
SIGNATURES 20
EXHIBIT INDEX 21
</TABLE>
2
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------------ --------------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $23,391 $ 2,541
Accounts receivable, net of allowance for returns and
doubtful accounts of $1,387 and $1,903 7,649 7,424
Inventories 377 484
Prepaid royalties and licenses 92 79
Receivables from related companies 320 299
Other current assets 938 425
------------------ --------------------
Total current assets 32,767 11,252
Property and equipment, net 2,381 1,939
Goodwill and other intangible assets, net 9,980 8,641
Investment in Infomodelers, Inc. - 204
Other assets 127 133
------------------ --------------------
Total assets $45,255 $22,169
================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable $ - $ 844
Accounts payable 1,482 2,392
Accrued liabilities 1,668 2,539
Deferred revenue 974 3,267
Other current liabilities 1,992 2,276
------------------ --------------------
Total current liabilities 6,116 11,318
Other noncurrent liabilities 297 425
------------------ --------------------
Total liabilities 6,413 11,743
------------------ --------------------
Redeemable common stock - 1,468
Stockholders' equity:
Class B stock - 43
Common stock 137 69
Additional paid-in capital 204,077 169,369
Accumulated deficit (164,500) (160,362)
Deferred stock compensation (635) -
Accumulated other comprehensive loss (236) (161)
------------------ --------------------
Total stockholders' equity 38,842 8,958
------------------ --------------------
Total liabilities and stockholders' equity $45,255 $22,169
================== ====================
</TABLE>
See the accompanying notes to Condensed Consolidated Financial Statements
3
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
------------------------- ---------------------------
1998 1997 1998 1997
------------------------- ---------------------------
<S> <C> <C> <C> <C>
Revenue:
Product revenue:
Online learning products $2,811 $2,237 $7,704 $5,719
Other products 1,683 2,352 3,953 7,802
----------- --------- ----------- -----------
Total product revenue 4,494 4,589 11,657 13,521
Services revenue 4,635 1,790 14,042 4,024
----------- --------- ----------- -----------
Total revenue 9,129 6,379 25,699 17,545
----------- --------- ----------- -----------
Cost of revenue:
Product revenue:
Online learning products 231 174 709 340
Other products 208 452 785 1,447
----------- --------- ----------- -----------
Total cost of product revenue 439 626 1,494 1,787
Services revenue 3,282 1,271 9,274 2,614
----------- --------- ----------- -----------
Total cost of revenue 3,721 1,897 10,768 4,401
----------- --------- ----------- -----------
Gross margin 5,408 4,482 14,931 13,144
----------- --------- ----------- -----------
Operating expenses:
Research and development 1,568 2,284 4,638 6,838
Sales and marketing 3,559 3,905 10,620 10,942
General and administrative 1,352 867 4,296 2,688
Amortization of goodwill 213 - 592 -
Acquired in-process research and development - 4,064 - 4,064
----------- --------- ----------- -----------
Total operating expenses 6,692 11,120 20,146 24,532
----------- --------- ----------- -----------
Loss from operations (1,284) (6,638) (5,215) (11,388)
Other income(expense), net 281 (66) 2,447 (55)
----------- --------- ----------- -----------
Net loss (1,003) (6,704) (2,768) (11,443)
Accretion of redemption value of redeemable common stock - - (1,370) -
----------- --------- ----------- -----------
Net loss attributable to common stockholders $(1,003) $(6,704) $(4,138) $(11,443)
=========== ========= =========== ===========
Net loss per share, basic and diluted $(0.07) $(1.07) $(0.43) $(1.83)
=========== ========= =========== ===========
Weighted average common shares outstanding, basic and
diluted 13,565 6,284 9,724 6,240
=========== ========= =========== ===========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
4
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------------------
1998 1997
----------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,768) $ (11,443)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 1,244 862
Write-off property and equipment 8 -
Stock compensation expense 250 150
Accrued interest on note receivable from principal stockholder - (329)
Accrued interest on Class B stock subscription receivable - (28)
Acquired in-process research and development - 4,064
Equity in income (losses) from Infomodelers, Inc. (2,169) 485
Changes in assets and liabilities:
Accounts receivable (9) (2,613)
Inventories 107 259
Prepaid royalties and licenses (13) 159
Receivables from related companies (21) (10)
Other current assets (606) (592)
Accounts payable (1,121) (1,114)
Accrued liabilities (544) (468)
Deferred revenue (2,293) 133
Other current liabilities (928) (76)
------------ -----------
Net cash used in operating activities (8,863) (10,561)
------------ -----------
Cash flows from investing activities:
Purchase of property and equipment (955) (134)
Cash received in acquisition 45 -
Disposal of (investment in) Infomodelers, Inc. 2,373 -
Disposal of other assets 3 49
------------ -----------
Net cash provided by investing activities 1,466 (85)
------------ -----------
Cash flows from financing activities:
Proceeds from (repayment) of notes payable (1,530) 264
Payments received on notes receivable from principal
stockholder - 5,915
Payments received on Class B stock subscription receivable - 500
Proceeds from exercise of stock options 521 227
Proceeds from initial public offering 29,331 -
------------ -----------
Net cash provided by financing activities 28,322 6,906
------------ -----------
Effect of foreign exchange rate changes on cash (75) (95)
------------ -----------
Net increase(decrease) in cash and cash
equivalents 20,850 (3,835)
Cash and cash equivalents at beginning of period 2,541 3,788
------------ -----------
Cash and cash equivalents at end of period $ 23,391 $ (47)
============ ===========
</TABLE>
See accompanying notes to Condensed Consolidated Financial Statements
5
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements of
Asymetrix Learning Systems, Inc. (the "Company") include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. These statements reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position and results of operations for
the periods presented. The condensed consolidated financial statements and notes
thereto should be read in conjunction with the Company's audited consolidated
financial statements as of and for the year ended December 31, 1997 included in
the Company's Prospectus, dated June 12, 1998, filed as part of a Registration
Statement on Form S-1 (Registration No. 333-49037), as amended (the
"Registration Statement") in connection with the Company's initial public
offering ("IPO"). Certain information and footnote disclosures normally included
in financial statements prepared in conformity with generally accepted
accounting principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. Interim results of
operations for the nine months ended September 30, 1998 are not necessarily
indicative of the operating results for the full fiscal year. Factors that may
affect such operating results, include, but are not limited to, those discussed
in "FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS".
ACQUISITIONS
In July 1998, the Company acquired Meliora Systems, Inc. ("Meliora"), an
online learning software developer and provider of consulting services based in
Rochester, New York. The acquisition of Meliora was accounted for using the
pooling of interests method of accounting. The Company issued 268,000 shares of
Common Stock in connection with this acquisition. The accompanying financial
statements for the three months and nine months ended September 30, 1998 are
based on the assumption that the companies were combined for the full year, and
financial statements for prior years have been restated to give effect to the
combination.
The summarized results of operations of the separate companies for the six
months ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Six months ended
June 30,
------------------------------
1998 1997
---------- ----------
<S> <C> <C>
Revenue:
As previously reported $15,909 $10,376
Meliora 661 790
----------- ----------
As restated $16,570 $11,166
=========== ==========
Net Loss:
As previously reported $(2,444) $(4,661)
Meliora (691) (78)
----------- ----------
As restated $(3,135) $(4,739)
=========== ==========
</TABLE>
In May 1998, the Company acquired Strategic Systems Associates, Inc.
("SSA"), an Illinois-based provider of custom development and consulting
services for the online learning market. The acquisition of SSA was accounted
for using the purchase method of accounting. The Company issued 102,000 shares
of Common Stock valued at approximately $1.1 million in connection with this
acquisition and granted options to purchase
6
<PAGE>
150,000 shares of Common Stock. 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):
Property and equipment and other assets $ 400,000
Goodwill 1,700,000
Net current liabilities (1,000,000)
--------------
Total $ 1,100,000
==============
INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------- ------------
<S> <C> <C>
Raw materials $ 268 $ 355
Finished goods 187 180
Less obsolescence reserve (78) (51)
------------- ------------
$ 377 $ 484
============= ============
</TABLE>
STOCKHOLDERS' EQUITY
On June 12, 1998, the Company completed its IPO and issued 3,000,000 shares
of its Common Stock at an initial public offering price of $11.00 per share plus
an additional 25,000 shares pursuant to the exercise of the underwriters' over-
allotment option. The net proceeds to the Company after deducting underwriting
discounts and offering expenses incurred by the Company, were approximately
$29.0 million. Concurrent with the IPO, each outstanding share of the Company's
Class B Stock was automatically converted into approximately 0.75 shares of
Common Stock.
NET LOSS PER SHARE
Basic earnings per share is computed by dividing the sum of net 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 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. 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 three
and nine months ended September 30, 1998 are options to acquire approximately
4,097,729 shares of Common Stock with a weighted average share price of $5.03
because their effects would be anti-dilutive.
REVENUE RECOGNITION
Effective January 1, 1998, the Company adopted Statement of Position 97-2
("SOP 97-2"), Software Revenue Recognition, issued by the American Institute of
Certified Public Accountants. The statement provides specific industry guidance
and stipulates that revenue recognized from software arrangements is to be
allocated to each element of the arrangement based on the relative fair values
of the elements, such as software products, upgrades, enhancements, post
contract customer support, installation, or training. Under SOP 97-2, the
determination of fair value is based on objective evidence which is specific to
the vendor. If such evidence of fair value for each element of the 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. The adoption of SOP 97-2 did not have a material effect on
revenue recognition for the three and nine months ended September 30, 1998.
7
<PAGE>
Prior to January 1, 1998, 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 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. Additional royalties are paid to the
extent that the advances are exceeded and these additional royalties are
recognized upon delivery of the products by the OEM reseller or other
distributor to its customers. 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.
COMPREHENSIVE LOSS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards 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 loss for the three months and nine months ended September 30, 1998
was approximately $1,043,000 and $2,842,000, respectively and consisted of net
loss and foreign currency translation.
SIGNIFICANT CUSTOMERS
No customer accounted for more than 10% of the total revenues for the three
months and nine months ended September 30, 1998 and 1997.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, Disclosure About Segments of an
Enterprise and Related Information ("Statement 131"). Statement 131 established
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("Statement 133"). Statement 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. Statement 133 is effective for fiscal years beginning after
June 15, 1999. The Company does not expect the adoption of Statement 133 to have
a material impact on its consolidated financial statements.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
condensed consolidated financial statements and notes thereto contained herein.
In addition to historical information, this Quarterly Report on Form 10-
Q 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 below in the "FACTORS THAT MAY
AFFECT FUTURE RESULTS OF OPERATIONS."
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, Librarian, a learning management system designed
to enable customers to deploy and manage such applications and Ingenium a
skills-based training management system designed for automating instructor-led
training, logistics and tracking of individual and group competencies. The
Company's professional services include a wide range of consulting, integration
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.
From September 12, 1997 to July 1998, the Company acquired seven
companies and issued an aggregate of 3,597,748 shares of Common Stock. All of
these 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
approximately $4.1 million for 1997 and, in connection with all of its
acquisitions from July 1, 1997 through September 30, 1998, has recorded an
aggregate of approximately $10.2 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 $8.7 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. In July 1998, the Company
acquired Meliora Systems, Inc., an online learning product and consulting
company, which has been accounted for under the pooling of interests method.
268,000 shares of the Company's common stock were issued in exchange for all
outstanding shares of Meliora Systems, Inc. common stock. The financial
statements have been restated to give effect to the combination.
As part of its strategy to focus on the online enterprise learning
market, the Company divested product lines and technologies that 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, which price included approximately $2.0 million for shares of
Infomodelers Series A Preferred Stock and approximately $390,000 for shares of
Infomodelers Common Stock. 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
9
<PAGE>
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.
The Company incurred net losses of $20.2 million and $13.7 million in
1996 and 1997, respectively, and an operating loss of $5.2 million in the nine
months ended September 30, 1998, and has yet to achieve operating income under
its new business model. The Company's limited operating history under its new
business model, and the emerging nature of the market for online enterprise
learning 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 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.
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 Nine Months
Ended September 30, Ended September 30,
------------------------------------- -------------------------------------
------------------------------------- -------------------------------------
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
% % % %
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenue:
Product revenue:
Online learning products 31 35 30 33
Other products 18 37 15 44
--------------- --------------- --------------- ---------------
Total product revenue 49 72 45 77
Services revenue 51 28 55 23
--------------- --------------- --------------- ---------------
Total revenue 100 100 100 100
Cost of revenue:
Product revenue:
Online learning products 3 3 3 2
Other products 2 7 3 8
--------------- --------------- --------------- ---------------
Total cost of product revenue 5 10 6 10
Services revenue 36 20 36 15
--------------- --------------- --------------- ---------------
Total cost of revenue 41 30 42 25
--------------- --------------- --------------- ---------------
Gross margin 59 70 58 75
Operating expenses:
Research and development 17 36 18 39
Sales and marketing 39 61 41 62
General and administrative 15 14 17 15
Amortization of goodwill 2 0 2 0
Acquired in-process research and 0 64 0 23
development
--------------- --------------- --------------- ---------------
Total operating expenses 73 174 78 140
--------------- --------------- --------------- ---------------
Loss from operations -14 -104 -20 -65
--------------- --------------- --------------- ---------------
Other income(loss), net 3 -1 10 0
Net loss -11 -105 -11 -65
=============== =============== =============== ===============
</TABLE>
10
<PAGE>
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE AND NINE MONTHS
ENDED SEPTEMBER 30, 1997
Revenue. Total revenue increased 43% from $6.4 million in the three months
ended September 30, 1997 to $9.1 million in the three months ended September 30,
1998. Total revenue increased 46% from $17.5 million in the nine months ended
September 30, 1997 to $25.7 million in the nine months ended September 30, 1998.
Online learning product revenue increased 26% from $2.2 million in the
three months ended September 30, 1997 to $2.8 million in the three months ended
September 30, 1998. Online learning product revenue increased 35% from $5.7
million in the nine months ended September 30, 1997 to $7.7 million in the nine
months ended September 30, 1998. The increase in online learning product revenue
for both periods 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 in particular the Company's Librarian 6.0 and Ingenium 4.0 products.
Other product revenue decreased 28% from $2.4 million in the three months ended
September 30, 1997 to $1.7 in the three months ended September 30, 1998. Other
product revenue decreased 49% from $7.8 million in the nine months ended
September 30, 1997 to $4.0 million for the nine months ended September 30, 1998.
Other product revenue consists of revenue from the Company's products which are
not targeted at the online learning market, and also includes revenue from
SuperCede products prior to its spin-off by the Company. Included in other
product revenue in the three months and nine months ended September 30, 1997 was
approximately $490,000 and $2.0 million, respectively, from sales of SuperCede
products. Total product revenue decreased 2% from $4.6 million in the three
months ended September 30, 1997 to $4.5 million in the three months ended
September 30, 1998. Total product revenue decreased 14% from $13.5 million in
the nine months ended September 30, 1997 to $11.7 million in the nine months
ended September 30, 1998. 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 continue to decrease.
Services revenue increased 159% from $1.8 million in the three months ended
September 30, 1997 to $4.6 million in the three months ended September 30, 1998.
Services revenue increased 249% from $4.0 million for the nine months ended
September 30, 1997 to $14.0 million for the nine months ended September 30,
1998. The increases in services revenue for each of these periods was due
primarily to the expansion of the Company's professional services business.
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. Cost 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 96% from $1.9 million in the three months
ended September 30, 1997 to $3.7 million in the three months ended September 30,
1998. Total cost of revenue increased 145% from $4.4 million in the nine months
ended September 30, 1997 to $10.8 million in the nine months ended September 30,
1998.
Cost of online learning products revenue increased 33% from $174,000 in the
three months ended September 30, 1997 to $231,000 in the three months ended
September 30, 1998. Cost of online learning products revenue increased 109% from
$340,000 for the nine months ended September 30, 1997 to $709,000 for the nine
months ended September 30, 1998. The increase for both periods was due primarily
to increased sales of the Company's online learning products. Cost of other
products revenue decreased 54% from $452,000 in the three months ended September
30, 1997 to $208,000 in the three months ended September 30, 1998. Cost of other
product revenue declined 46% from $1.4 million for the nine months ended
September 30, 1997 to $785,000 for the nine months ended September 30, 1998. The
respective declines were due primarily to decreased sales of the Company's other
products. Cost of other products revenue attributable to sales of SuperCede
products were $70,000 and $273,000 in the three and nine months ended September
30, 1997. Total cost of product revenue decreased 30% from $626,000 in the three
months ended September 30, 1997 to $439,000 in the three months ended September
30, 1998. Total cost of product revenue decreased 16% from $1.8 million for the
nine months ended September 30, 1997 to $1.5 million for the nine months ended
September 30, 1998.
11
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Online learning products gross margin was 92% in the three months ended
September 30, 1997 and 1998, respectively. Online learning products gross margin
was 94% and 91% in the nine months ended September 30, 1997 and 1998,
respectively. Other products gross margin increased from 81% in the three months
ended September 30, 1997 to 88% in the three months ended September 30, 1998.
This increase was primarily due to an increase in revenue from an OEM
arrangement which had a higher gross margin. Other products gross margin for the
nine months ended September 30, 1998 was 80% compared to 81% in the prior year
period. Total product gross margin increased from 86% in the three months ended
September 30, 1997 to 90% in the three months ended September 30, 1998 and was
unchanged from 87% in the nine months ended September 30, 1997 and 1998.
Cost of services revenue increased 158% from $1.3 million in the three
months ended September 30, 1997 to $3.3 million in the three months ended
September 30, 1998. Cost of services revenue increased 255% from $2.6 million
for the nine months ended September 30, 1997 to $9.3 million for the nine months
ended September 30, 1998. The increase for each of these periods was due
primarily to increased professional service projects in 1998.
Services gross margin was unchanged from 29% in the three months ended
September 30, 1997 and September 30, 1998. For the nine months ended September
30, 1998 services gross margin decreased to 34% from 35% in the nine months
ended September 30, 1997. 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 31% from $2.3 million in the three months ended September 30, 1997 to
$1.6 million in the three months ended September 30, 1998. Research and
development expenses decreased 32% from $6.8 million to $4.6 million for the
nine months ended September 30, 1997 and 1998. Research and development expenses
as a percentage of total revenue decreased from 36% in the three months ended
September 30, 1997 to 17% in the three months ended September 30, 1998. Research
and development expenses as a percent of total revenue were 39% and 18% in the
nine months ended September 30, 1997 and 1998. The decrease in each of these
periods was due to the spin-off of SuperCede. Research and development expenses
related to SuperCede were $869,000 and $2.6 million in the three and nine months
ended September 30, 1997. The Company expects research and development expenses
to increase in absolute dollars in the future.
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 9%
from $3.9 million in the three months ended September 30, 1997 to $3.6 million
in the three months ended September 30, 1998. Sales and marketing expenses
decreased 3% from $10.9 million to $10.6 million in the nine months ended
September 30, 1997 and 1998. Sales and marketing expenses as a percentage of
total revenue decreased from 61% and 62% in the three and nine months ended
September 30, 1997, respectively, to 39% and 41% in the three and nine months
ended September 30, 1998 respectively. Selling expense increased in absolute
dollars, due to the adoption of a direct sales model and marketing expense
declined because of the spin off of Supercede in September 1997. Sales and
marketing expenses related to SuperCede were $848,000 and $2.5 million in the
three and nine months ended September 30, 1997, respectively. 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 56% from $867,000 for
the three months ended September 30, 1997 to $1.35 million in the three months
ended September 30, 1998. General and administrative expenses increased 60% from
$2.7 million to $4.3 million in the nine months ended September 30, 1997 and
1998. Both the three and nine month increase was due primarily to increased
overhead due to the Company's increased size. General and administrative
expenses as a percentage of total revenue increased slightly
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from 14% to 15% in the three months ended September 30, 1997 compared to three
months ended September 30, 1998. For the nine months ended September 30, 1997
compared to nine months ended September 30, 1998 the percent increased from 15%
to 17. General and administrative expenses related to SuperCede were $0 and
$653,000 in the three and nine months ended September 30, 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 prof essional fees) related to being a public company.
AMORTIZATION OF GOODWILL
Amortization of goodwill expense relates to the amortization of excess
purchase price over net assets, from acquired companies booked under the
purchase method of accounting. For the three and nine months ended September 30,
1997 the Company did not have amortization of goodwill expense. For the three
and nine months ended September 30, 1998, $213,000 and $592,000 of expense was
recorded. These amounts reflect the amortization of goodwill acquired in
connection with the acquisitions of Aimtech, the Oakes Companies, CSI, Graham-
Wright Interactive, Inc., Adams Consulting Group, Inc. and SSA.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT
The Company recorded a $4.1 million charge in the three and nine months
ended September 30, 1997 associated with in-process research and development
acquired with Aimtech Corporation and Socha Computing. There have been no in-
process research and development charges in the three months or nine months
ended September 30, 1998. The in-process research and development acquired in
the Socha acquisition relates to future simulation and animation functionality
that management expects may be incorporated in future versions of the Company's
online learning products within the next two years. Technological feasibility
has not yet been established and the Company has no future alternative uses for
this technology. Failure to complete the project may result in competitive
disadvantages in the future, which could have a material adverse affect on the
Company's business, results of operations and financial condition. The in-
process research and development acquired in the Aimtech acquisition is
applicable to the Company's future online learning authoring products and
relates to streaming technologies (Dynamic HTML, ActiveX and Java). Management
expects that such in-process research and development may be incorporated with
the next two years at an estimated cost of $1.25 million to $1.9 million.
Technological feasibility has not yet been established and the Company has no
future alternative uses for this technology. Failure to complete the project may
result in competitive disadvantages in the future, which could have a material
adverse affect on the Company's business, results of operations and financial
condition.
OTHER INCOME (EXPENSE)
The Company recorded no other expense in the three or nine months ended
September 30, 1997 and 1998. Interest income from principal stockholder was
$92,000 and $421,000 in the three and nine months ended September 30, 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 full in October 1997. Other interest income, net was $3,000 and
$281,000 in the three months ended September 30, 1997 and 1998, respectively.
For the nine months ended September 30, 1997 and 1998, other interest income,
net was $49,000 and $336,000 respectively. The increase was due to interest
earned on the Company's higher cash and cash equivalents balance as a result of
its initial public offering. Equity in income (losses) from Infomodelers was
$(148,000) and $(486,000) in the three and nine months ended September 30, 1997,
respectively, and $0 and $2.2 million, respectively, in the three and nine
months ended September 30, 1998, 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 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'
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software and computer systems may need to be upgraded or replaced in order to
comply with such "year 2000" requirements.
The Company has designed and tested the most current versions of its
products to be year 2000 compliant. However, some of the Company's customers may
be using older versions of its products that are not year 2000 compliant. The
Company has been encouraging its customers to upgrade to current product
versions, and the Company has been required by customers to warrant that the
current versions of its products are year 2000 compliant. Although the Company
believes the current versions of its products are year 2000 compliant, there can
be no assurances that the current product versions do not contain undetected
errors or defects associated with year 2000 date functions that may result in
material costs to the Company, as well as claims against the Company for breach
of its warranties of year 2000 compliance. Furthermore, certain of the Company's
products interact or are used with other software and hardware products provided
by third parties such as operating systems, network file servers, networking
software, databases, and web browsers. In certain events the Company's products
will processes date data generated by these third party products. The failure of
these third party products to be year 2000 compliant could cause the Company's
products to generate incorrect date output as a result of processing incorrect
date input generated by such third party products. Although the Company
believes, based on published assurances of year 2000 compliance by the vendors
of such products, that such third party products are year 2000 compliant, there
can be no assurances that such third party products do not contain undetected
errors or defects associated with year 2000 date functions.
Although the Company has not made any express representations or warranties
with respect to year 2000 compliance of older versions of its products and has
included clauses disclaiming any implied warranties and limiting its liability
for product defects in the agreements under which those older versions were
licensed to customers, there can be no assurance that the Company will not face
claims or litigation based on older versions of its products. The Company is
aware of a growing number of lawsuits against other software vendors related to
year 2000 compliance, including lawsuits based on such companies charging their
customers for new versions of their products that are year 2000 compliant rather
than providing such versions for free. Because of the unprecedented nature of
such litigation, it is uncertain to what extent the Company may be affected, and
if the Company is affected by such litigation there can be no assurance that
such litigation would not have a material adverse effect on the Company's
business operating results and financial condition.
With respect to the Company's internal information technology systems, the
Company's year 2000 internal readiness program primarily covers taking inventory
of hardware and software systems, determining the level of year 2000 compliance
of such systems, assessing business and customer satisfaction risks associated
with such systems, creating action plans to address known risks, executing and
monitoring action plans, and contingency planning. At this point the Company has
substantially completed its review of its most mission critical information
technology systems such as finance, order processing, customer service, project
management, and sales management, and believes that it has brought those systems
substantially into year 2000 compliance. The Company is currently reviewing and
addressing year 2000 issues in its second tier information technology systems,
including its network servers, network software and widely used desktop software
applications. The Company expects to substantially complete year 2000 readiness
preparations by the end of calendar 1998 with respect to its mission critical
business and software systems and by early in the third quarter of 1999 with
respect to its second tier systems and network hardware and software systems. In
each case, the Company expects to continue implementation and testing through
calendar 1999. The Company has no current plans to perform an assessment of
imbedded technology outside of its information technology systems, and believes
that the failure to be year 2000 compliant of imbedded technology in systems
such as photocopiers, building elevators, HVAC and cardkey readers will not have
a material effect on the Company's business.
The Company has not sent detailed questionnaires to vendors and service
providers to certify year 2000 readiness, but the Company has obtained or relied
upon published assurances of year 2000 compliance in relation to its existing
information technology systems and purchases of new information technology
systems, in addition to conducting its own internal year 2000 analysis. While
the Company has no plans to broadly survey all of its vendors and service
providers, the Company does intend to send such questionnaires to certain key
suppliers. As most of the Company's significant vendors are required to file
proxy statements and annual and quarterly reports with the SEC disclosing their
own year 2000 readiness, the Company intends to obtain and review such
disclosure for its key vendors to determine their level of year 2000 compliance.
The Company will determine what additional action is necessary, if any,
following such review.
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The Company has not sent and does not currently plan to send questionnaires
to its customers to independently verify its customers' level of year 2000
compliance. However, the Company's significant customers are large business
enterprises and government agencies which the Company believes are devoting
significant resources to ensuring their own internal year 2000 compliance. The
Company's significant customers are also required to file proxy statements and
annual and quarterly reports with the SEC disclosing their own year 2000
readiness, the Company intends to obtain and review such disclosure for its
significant customers to determine their level of year 2000 compliance.
Moreover, the Company has received and responded to year 2000 questionnaires
from its customers as a part of their own year 2000 compliance programs. The
Company does believe that the purchasing patterns of the Company's customers or
potential customers may be affected by their internal year 2000 issues as these
companies or agencies expend significant resources and focus personnel on
ensuring their own internal year 2000 compliance. Devoting resources and
personnel on year 2000 compliance may result in reduced funds available to
purchase other products and services, and may delay the implementation of new
information technology systems such as those offered by the Company, either of
which could have a material adverse effect on the Company's business, operating
results and financial condition.
The Company estimates that the total cost of evaluating and addressing its
year 2000 issues will be $67,000. To date the Company has spent $9,500 and
$28,500 in the three and nine months ending September 30, 1998, respectively, in
connection with evaluating and addressing year 2000 issues. Such expenditures
represented 6% and 6%, respectively, of the Company's total information
technology budget in the three and nine months ending September 30, 1998. All
funds used for evaluating and addressing year 2000 issues are from the Company's
information technology budget, and no additional budget dollars were allocated
specifically to address year 2000 compliance. As a result, resources devoted to
year 2000 compliance are not available for other information technology systems
or projects.
Although the Company does not believe that it will incur any material costs
or experience material disruptions in its business associated with preparing its
internal systems for the year 2000, there can be no assurances that the Company
will not experience serious unanticipated negative consequences and/or material
costs caused by undetected errors or defects in the technology used in its
internal systems, which are composed of third party software, third party
hardware and internally developed software, or in the internal systems of its
vendors or customers. The most reasonably likely worst case scenarios would
include: (i) loss or corruption of data contained in the Company's internal
information systems, (ii) hardware failure, (iii) the failure of infrastructure
services provided by government agencies and other third parties (e.g.,
electricity, phone service, water transport, internet services, etc.); (iv) the
failure of the internal systems of the Company's vendors or customers, resulting
in problems with providing services or making payments to the Company. The
Company is in the early phases of contingency planning at this time and expects
to undertake more in depth contingency planning after following the completion
of its analysis and correction of its internal year 2000 issues. The Company
expects its contingency plans to include, among other things, manual work-
arounds for software and hardware failures, as well as substitution of systems
or vendors, if necessary.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had cash and cash equivalents totaling
$23.4 million, an increase of $20.9 million from December 31, 1997. The increase
in cash and cash equivalents was due primarily to the proceeds of $29.3 million
generated from the Company's IPO, $521,000 from the exercise of employee
options, and $2.4 million from the sale of Infomodelers' shares, offset by $8.9
million used in operating activities, $907,000 used in investing activities and
$1,530,000 net, used to repay notes payable and capital lease obligations. At
September 30, 1998, the principal sources of liquidity for the Company were
$26.7 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 September 30, 1998, the
Company had no outstanding borrowings under this line of credit.
The Company anticipates that the net proceeds received from its IPO,
together with cash and cash equivalents 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
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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. In addition, the Company from time to
time evaluates potential acquisitions of businesses, products or technologies
that complement the Company's business. 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
Limited Operating History In Online Learning Market. 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;
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.
Fluctuations in Quarterly Operating Results. 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 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 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.
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Acquisitions. The Company has acquired eight companies since July 1997 and
is continuing to pursue a strategy of growth through acquisition. 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
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; the need to divest
unwanted assets or products; 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. Moreover, in pursuing acquisition opportunities, the
Company may compete for acquisition targets with other companies with similar
growth strategies that may have greater resources than the Company, which could
result in increased prices of acquisition targets and a diminished pool of
companies available for acquisition.
Management of Growth; Dependence on Key Personnel. The Company is currently
experiencing a period of significant expansion. The Company's future success
will depend, in part, upon the ability of its senior management to manage growth
effectively. 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. In addition, the Company's future
success will be highly dependent on the performance of its senior management
team and other key employees, and on the Company's ability to attract,
integrate, motivate and retain additional highly skilled technical, sales and
marketing and 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.
Customer Requirements; Fixed Price Engagements. 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. 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. In addition, most
such professional services engagements are billed on a fixed-price basis. 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, 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.
Developing Market. The market for online enterprise learning is a new and
emerging market. Although technology-based training applications have been
available for several years, they currently account for only a small portion of
the overall training market. The failure of technology-based training, and
online learning in particular, to gain wider market acceptance within the time
frame anticipated by the Company could have a material adverse effect on the
Company's business, operating results and financial condition. The Company's
success also depends on the Internet and intranets to continue to be adopted as
a means of communication, particularly for corporate training and education.
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
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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.
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, and a number of large
companies have announced an intention to enter the market for online learning
and technology-based training. 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. Furthermore, 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. 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.
General 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. Likewise, expenditures on year 2000
compliance could cause organizations to reduce their expenditures on education
and training generally, and on technology-based training and online learning in
particular. The risks associated with year 2000 compliance are more fully
discussed in Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Volatility of Stock 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. Decreases in the price of the
Company's stock would limit its ability to pursue its strategy of growth through
acquisition by making it more difficult to acquire businesses or technologies in
stock-based transactions on terms acceptable to the Company, which could have a
material adverse effect on the Company's business, operating results and
financial condition. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 1, 1998 the Company issued 268,000 shares of Common Stock in
exchange for all of the issued and outstanding capital stock of Meliora Systems,
Inc. ("Meliora"), and the conversion into equity of certain debts owed by
Meliora to its principal stockholder. The shares were issued to two individual
shareholders of Meliora in exchange for all of such shareholders' capital stock
of Meliora and for the conversion of debt into equity as described above. The
proceeds were used to acquire all of the capital stock of Meliora, and to
convert the debt owed by Meliora to its principal stockholder in equity. The
issuance of such securities was exempt pursuant to Section 4(2) of the
Securities Act of 1933 under Rule 506 of Regulation D in that there were two
individuals who received securities in the transaction, each of whom was capable
of evaluating the merits and risks of the transaction.
During the three months ended September 30, 1998, the Company issued 44,678
shares of Common Stock pursuant to the exercise of employee stock options. The
issuance of such securities was exempt pursuant to Section 4(2) of the
Securities Act of 1933 and/or under Rule 701.
In connection with the Company's IPO, the Company registered 3,000,000
shares of its Common Stock, all of which were sold by the Company. The
Registration Statement was declared effective by the Securities and Exchange
Commission on June 11, 1998. NationsBanc Montgomery Securities LLC was the
managing underwriter of the IPO. The IPO commenced on June 12, 1998, and
terminated following the sale of all of the securities registered under the
Registration Statement, plus an additional 25,000 shares pursuant to the
exercise of the underwriters' over-allotment option. The Common Stock was
offered and sold to the public at $11.00 per share, for aggregate consideration
of $33,275,000, of which the Company received net proceeds of $30,945,750, and
the remaining $2,329,250 was the underwriting discount.
From the effective date of the Registration Statement through September 30,
1998, the Company has incurred an estimated $4,255,250 in expenses for the
Company's account in connection with the issuance and distribution of the Common
Stock, including underwriting discounts and commissions of $2,329,250 and other
expenses of $1,926,000. No finders' fees or expenses were paid to or for the
underwriters. None of these payments were made, directly or indirectly, to: (i)
directors or officers of the Company, or their associates; (ii) persons owning
ten percent or more of any class of equity securities of the Company; or (iii)
affiliates of the Company.
From the effective date of the Registration Statement through September 30,
1998, the Company has applied approximately $7.4 million of the Offering
proceeds to working capital requirements. None of these payments were made,
directly or indirectly, to: (i) directors or officers of the Company, or their
associates; (ii) persons owning ten percent or more of any class of equity
securities of the Company; or (iii) affiliates of the Company. To date, the
Company believes that it has used the Offering proceeds in a manner consistent
with the use of proceeds described in the Registration Statement. The remaining
$22.4 million of the Offering proceeds is invested in short-term marketable debt
securities, money market funds and other cash equivalents.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
Not applicable.
19
<PAGE>
ITEM 5. OTHER INFORMATION.
In July 1998, Charles Ellison, the Company's Vice President of Business
Development, resigned as an officer of the Company, although he remained a non-
officer employee of the Company providing similar services on a reduced basis
throughout the remainder of the three months ended September 30, 1998. Mr.
Ellison's employment with the Company ended on October 15, 1998.
In October, Joe DiNucci joined the Company as Senior Vice President,
Worldwide Sales. Mr. DiNucci has over 27 years experience in the computer and
software industries, with particular experience in growing and managing direct
sales organizations and selling enterprise-wide product and services solutions
to Fortune 1000 customers. He has held senior management positions with
companies such as Digital Equipment Corporation, MIPS Computer Systems, Silicon
Graphics and Epiphany, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
Financial Data Schedule
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months ended
September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASYMETRIX LEARNING SYSTEMS,INC.
November 16, 1998 /s/ John D. Atherly
- ------------------------------- ---------------------------------------------
Date John D. Atherly
Vice President, Finance and Administration
and Chief Financial Officer
(Duly Authorized Officer and Chief Accounting
Officer)
20
<PAGE>
EXHIBIT INDEX
27 Financial Data Schedule
21
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED UNAUDITED FINANCIAL STATEMENTS AND RELATED NOTES
CONTAINED IN THIS FILING AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 DEC-31-1997
<CASH> 23,391 2,541
<SECURITIES> 0 0
<RECEIVABLES> 9,036 9,327
<ALLOWANCES> 1,387 1,903
<INVENTORY> 377 484
<CURRENT-ASSETS> 32,767 11,252
<PP&E> 7,502 6,497
<DEPRECIATION> 5,120 4,558
<TOTAL-ASSETS> 45,255 22,169
<CURRENT-LIABILITIES> 6,116 11,318
<BONDS> 0 0
0 0
0 43
<COMMON> 137 69
<OTHER-SE> 38,705 8,846
<TOTAL-LIABILITY-AND-EQUITY> 45,255 22,169
<SALES> 11,657 13,521
<TOTAL-REVENUES> 25,699 17,545
<CGS> 1,494 1,787
<TOTAL-COSTS> 10,768 4,401
<OTHER-EXPENSES> 20,146 24,532
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (2,768) (11,443)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,768) (11,443)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,768) (11,443)
<EPS-PRIMARY> (.43) (1.83)
<EPS-DILUTED> (.43) (1.83)
</TABLE>
