<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number 000-24289
ASYMETRIX LEARNING SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 91-1276003
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110-110th Avenue NE, Bellevue, Washington 98004
(Address of principal executive offices) (Zip Code)
(425) 462-0501
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value per share
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period
<PAGE>
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X No
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 15, 1999 was $26,333,700.
The number of shares outstanding of the registrant's common stock as of March
15, 1999 was 13,988,057.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held May 25, 1999 are
incorporated by reference into Part III.
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC.
FORM 10-K
FOR THE YEAR ENDED December 31, 1998
INDEX
<TABLE>
<C> <S> <C>
PART I
Item 1. Business............................................................. 4
Item 2. Properties........................................................... 11
Item 3. Legal Proceedings.................................................... 12
Item 4. Submission of Matters to a Vote of Security Holders.................. 12
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters. 13
Item 6. Selected Consolidated Financial Data................................. 14
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.................................................. 15
Item 7a. Quantitative and Qualitative Disclosures about Market Risk........... 29
Item 8. Financial Statements and Supplementary Data.......................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures................................................ 31
PART III
Item 10. Directors and Executive Officers of the Registrant................... 32
Item 11. Executive Compensation............................................... 32
Item 12. Security Ownership of Certain Beneficial Owners and Management....... 32
Item 13. Certain Relationships and Related Transactions....................... 32
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...... 32
Signatures..................................................................... 35
</TABLE>
<PAGE>
PART I
Except for historical information, this Annual Report contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-
looking statements involve risks and uncertainties, including, among other
things, statements regarding Asymetrix's anticipated costs and expenses, revenue
mix and plans for addressing Year 2000 issues. Such forward-looking statements
include, among others, those statements including the words "expects,"
"anticipates," "intends," "believes" and similar language. Asymetrix's actual
results may differ significantly from those projected in the forward-looking
statements. Factors that might cause or contribute to such differences include,
but are not limited to, those discussed in the section "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Factors That May
Affect Future Results of Operations." You should carefully review the risks
described in other documents Asymetrix files from time to time with the
Securities and Exchange Commission, including the Quarterly Reports on Form 10-Q
that Asymetrix will file in 1999. You are cautioned not to place undue reliance
on the forward-looking statements, which speak only as of the date of this
Annual Report on Form 10-K. Asymetrix undertakes no obligation to publicly
release any revisions to the forward-looking statements or reflect events or
circumstances after the date of this document.
Item 1. Business
History.
Asymetrix Learning Systems, Inc. ("Asymetrix") provides a single source
online learning solution that includes both a technology platform for online
learning and related professional services that enable customers to create,
distribute and manage learning applications throughout an enterprise. 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.
Asymetrix was incorporated in the State of Washington in 1984. Prior to
focusing on the online learning market, Asymetrix developed and marketed a wide
range of software products. As a result of Asymetrix's decision to focus on
online learning, between October 1996 and July 1998, Asymetrix divested several
product lines and made a number of acquisitions to strengthen its position in
the market. Asymetrix also focused its research and development efforts on
products for online learning and began developing a professional services
organization through internal growth and acquisition.
During 1997 and 1998 Asymetrix completed a number of acquisitions,
including the following:
. Aimtech Corporation, a developer of tools for the creation of computer
based training and web development tools based in Nashua, New Hampshire
. Oakes Interactive Incorporated, a professional services company located
in Needham, Massachusetts focused on the development of custom online
learning applications
. Acorn Associates Incorporated, a consulting firm located in Needham,
Massachusetts focused on online learning and corporate training
. TopShelf Multimedia, Inc., a reseller of online learning titles located
in Needham, Massachusetts
. Graham-Wright Interactive, Inc., a professional services company located
in Atlanta, Georgia
. Communication Strategies, Inc., a professional services company located
in Fort Worth, Texas
4
<PAGE>
. Strategic Systems Associates, Inc., a professional services company
located in the Chicago area
. Meliora Systems, Inc., a developer of tools for the online management of
traditional training activities and skills assessment located in
Rochester, New York
The integration of these acquired companies is an ongoing process and was
substantially completed as of the end of 1998.
In connection with its initial public offering in June 1998, Asymetrix
reincorporated as a Delaware corporation through a merger with a Delaware
subsidiary.
Products and Services.
Asymetrix's business strategy is to offer a solutions-based approach to
online enterprise learning. Asymetrix provides its customers with needs analysis
and consulting, online learning authoring and management products, custom
content development, off-the-shelf content, and learning systems integration
services. Online learning enables organizations to maximize access to learning
materials, minimize cost of deployment, easily keep learning content current,
and track and measure learning effectiveness. Asymetrix's online learning
products support open standards and Internet protocols, including TCP/IP, Java,
HTML, and ActiveX, and Asymetrix's approach is structured to allow the customer
maximum flexibility in implementing an online learning solution. The Asymetrix
solution includes the following products and professional services.
Asymetrix Products.
Asymetrix Librarian. Asymetrix Librarian is a server-based learning
management system designed to allow enterprises of all sizes to centralize
management of their learning activities. Librarian manages users, lessons and
scores from both online and instructor-led training, and includes built-in
support for collaboration. Librarian is able to deploy and manage a wide range
of learning content, and enables administrators to monitor usage and assess the
effectiveness of learning applications by providing feedback to both learners
and instructors on learner progress. Librarian is based on Internet standards,
including HTML, Java and TCP/IP. It is available on Windows NT and Solaris UNIX
and can connect to databases that comply with the open database connectivity
("ODBC") standard. Librarian installations are priced based on the number of
servers on which Librarian will be installed and the number of individual
users on which data will be maintained. The list price for a single Librarian
server is $3,000 and the price per individual user varies from $20 to $50
depending on the number of users. Librarian is also offered in a single server,
unlimited user format at a list price of $50,000.
Asymetrix Ingenium. Asymetrix Ingenium is a skills-based training
management system designed to automate instructor-led training, logistics and
tracking of individual and group competencies and skills, and was originally
offered by Meliora Systems, Inc. ("Meliora"). Ingenium offers tools to help
organizations maximize their return on investment such as the Qualified Employee
Finder tool, which searches for employees who have a particular set of skills,
and the Organizational Health tool, which measures skills and skill deficiencies
at an organizational level. Asymetrix intends to integrate Ingenium with its
Librarian learning management system to create a comprehensive learning
management solution for both online and instructor-led training. Ingenium is a
client-server implementation and is priced by the number of concurrent
users for each copy of Ingenium. The list price for an Ingenium implementation
varies from $16,995 for up to five concurrent users, to $94,995 for up to 100
concurrent users. Pricing for larger implementations is negotiated on a case by
case basis. A number of add-on products are available to extend the
functionality of Ingenium, including Ingenium Web Connect which
5
<PAGE>
permits Ingenium to be used over the Internet or a corporate intranet through a
Web browser. Pricing for Ingenium Web Connect varies depending on the number
employees permitted to use the product, with list prices from $9,495 for up to
1,000 users to $39,495 for up to 15,000 users. Pricing for larger numbers of
users is negotiated on a case by case basis.
ToolBook II Instructor. ToolBook II Instructor is a multimedia
development system for creating sophisticated online learning applications. With
ToolBook II Instructor, authors can create online learning applications in the
standard Microsoft Windows environment. ToolBook II applications can be
delivered in the ToolBook II runtime on the Windows platform, or in HTML and
Java format over the Internet or an intranet. Interactive question objects and
other objects designed explicitly for online learning provide the interactivity
that is required for effective learning. ToolBook II Instructor is easy to use
and includes the powerful OpenScript scripting language that allows courseware
developers instructional design flexibility. The list price for ToolBook II
Instructor is $2,495.
ToolBook II Assistant. ToolBook II Assistant is an easy-to-use online
learning authoring product, designed for content experts rather than
professional application developers. ToolBook II Assistant automates much of the
process of developing online learning applications, through the use of a large
catalog of ready-made objects and templates to help authors become immediately
productive. The ToolBook II Assistant catalog and interface can be modified
using ToolBook II Instructor to create a product that is customized for a
particular organization, look and feel, or instructional design. The list price
for ToolBook II Assistant is $1,095.
Content Creation Tools. These products consist of Asymetrix Digital Video
Producer and Asymetrix Web 3D. Asymetrix Digital Video Producer is an easy-to-
use product for capturing, assembling, and editing digital video. Its drag-and-
drop interface and intuitive timeline enable even novice users to assemble
video, audio, and animation clips for multimedia projects, presentations,
training and many other uses. The list price of Digital Video Producer is $195.
Asymetrix Web 3D is an easy-to-use, inexpensive tool for creating web-based 3D
content, including graphics, bullets, animation and web pages. The list price
for Asymetrix Web 3D is $129.
Standard Learning Content Products. Asymetrix also offers a number of
standard online learning content titles from third party publishers. The current
catalog of standard online learning titles includes over 100 applications
covering subjects such as conflict resolution, business finance, and supervisory
development. Standard learning content products sold by Asymetrix are generally
learning titles that any organization can use as part of its overall training
strategy. The list prices for these content titles varies depending on the title
and the number of licensed users.
Asymetrix Services.
Custom Applications Development. Asymetrix's award-winning development
services group offers a full range of customized services for the design and
production of online learning and performance support applications. The custom
development staff includes experienced professionals with a wide spectrum of
development skills, including needs assessment, content and audience analysis,
instructional design, graphic and animation development, OpenScript, Java and
C++ programming, application localization, testing, and deployment support. The
custom development group also offers additional strategies such as instructor-
led training, job aids, documentation, and user manuals to reinforce the online
learning experience.
Consulting. Asymetrix offers a broad range of consulting services
related to its customers learning needs. Consulting activities include
performance assessments, training needs, technical capabilities, organizational
development, and training program development, including corporate and
6
<PAGE>
virtual universities, and consulting with respect to specific projects. The
consulting organization also provides seminars in learning theory and
integrative learning, trends in knowledge management, needs and performance
analysis, project management and technology-based learning for public and
private groups.
Systems Integration. Asymetrix provides the services necessary to set up
and integrate Asymetrix Librarian and its other online learning products with
its customers' network environments. Systems integration services include
product installation; design of user profiles, lesson structures, organizational
structures, user interface customizations; integration with databases, email and
web servers; and installation of courses, implementation of self-registration
mechanism, template building, client administration, and student orientation.
Training Services. Asymetrix offers training that helps organizations
become more self-reliant in the area of online learning. Training includes
courses in the use of Asymetrix's online learning products and multimedia
design. Asymetrix has training centers at its offices in Bellevue, Washington;
Needham Massachusetts; Fort Worth, Texas; and Des Plaines, Illinois. Training is
also available through authorized training partners throughout the United States
and Canada.
Technical Support and Maintenance. Asymetrix offers a variety of optional
technical support and maintenance packages for its software products. Generally
such packages include access to support engineers and technical information,
software maintenance releases and upgrades of existing products if made
available.
Customers
Asymetrix provides its products and services to customers across a
broad range of industries including financial services, accounting, health care,
insurance, computer hardware and software, manufacturing, networking,
telecommunications, government and education. The following is a partial list
of customers that purchased products or services from Asymetrix in 1998:
Financial Services/Insurance Technology/Telecommunications
- ----------------------------- -----------------------------
Arthur Andersen Dictaphone
Chase Manhattan EDS
Ernst & Young GTE
First USA Hewlett-Packard
MetLife Lucent
New York Stock Exchange (NYSE) MCI WorldCom.
PaineWebber Microsoft
PriceWaterhouseCoopers Nortel Networks
Prudential
Manufacturing/Other Government/Education
- ----------------------------- -----------------------------
American Airlines California State University
Boeing Duke University
Buckman Laboratories U.S. Air Force
Duracell U.S. Department of Energy
Liz Claiborne Washington State University
No single customer accounted for 10% or more of Asymetrix's total
consolidated revenues in any of the last three fiscal years.
7
<PAGE>
Competition
The online learning market is highly fragmented and very competitive, and
no single competitor holds a dominant market share. Because there are no
significant barriers to entry in its market, Asymetrix expects a number of new
competitors to enter this market in the future. Asymetrix's online learning
authoring products face competition from developers of multimedia authoring
tools, its learning management systems face competition from vendors of other
management systems, including those offered by vendors of learning content such
as CBT Systems and NETg, 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. Asymetrix believes there currently is no single
competitor that offers a comprehensive online learning solution of authoring
products, learning management systems, and professional services, and that its
complete solution provides it with a competitive advantage.
Asymetrix believes that the principal competitive factors affecting the
market for online enterprise learning include product features such as
adaptability, scalability, ability to integrate with other technology-based
training products; the scope and quality of professional services offered, and
the expertise and technical knowledge of employees; the functionality, ease of
use, quality and performance of online learning solutions; pricing; customer
service and support; the effectiveness of sales and marketing efforts; and
company reputation. Although Asymetrix believes that its solution currently
competes favorably with respect to all these factors, Asymetrix may not be able
to maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, technical and
other resources. Several of Asymetrix's competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than Asymetrix, and several large companies have announced an
intention to enter the online learning market. These companies may be able to
respond more quickly than Asymetrix to new or changing opportunities,
technologies, standards or customer requirements. In addition, if such
competitors were to offer a complete online learning solution, Asymetrix's
competitive position could be adversely affected.
Sales and Marketing
Asymetrix markets its products and professional services primarily through
its direct sales force. As of December 31, 1998, Asymetrix's sales, marketing
and support organizations consisted of 79 employees based at its corporate
headquarters in Bellevue, Washington and at its other offices in California,
Georgia, Kansas, Massachusetts, New Hampshire, New Jersey, New York, Virginia
and the United Kingdom. The direct sales organization includes a telesales force
that handles smaller orders and assists with lead generation. The direct sales
organization also includes engineers who answer technical questions and assist
customers with product installation implementation. The Asymetrix direct sales
force accounted for 53%, 51% and 83% of total revenue in 1996, 1997 and 1998,
respectively, reflecting the shift in Asymetrix's sales and distribution
strategy to primarily a direct sales approach.
International revenue accounted for 30%, 29% and 10% of Asymetrix's total
revenue for 1996, 1997 and 1998, respectively. Asymetrix believes that the
online enterprise learning market has not yet developed significantly outside
the United States. Therefore, Asymetrix presently intends to continue to focus
primarily on the United States, as well as the United Kingdom and a limited
number of other foreign markets. As a result, Asymetrix anticipates that its
international revenue may be a smaller percentage of total revenue in the
future.
8
<PAGE>
Asymetrix 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. Asymetrix and Lakewood
Publications, the publisher of Training magazine, jointly sponsor an annual
online learning conference. The first such conference, named "Online Learning
`98" was held in Anaheim in September 1998. "Online Learning `99" will be held
in Los Angeles in October 1999. Asymetrix also participates as an exhibitor and
speaker at technology-based training trade shows, and maintains a Web site
where potential customers can obtain information about Asymetrix and its
products and services.
During 1999, Asymetrix will focus its marketing efforts on the following
customer training application areas:
. Training on custom information technology applications, such as custom
SAP implementations, which vary significantly from customer to customer,
or information technology systems developed within a customer's IT
department.
. New product and sales readiness training, to enable customers to train
their sales forces rapidly and effectively on new product sales and to
provide a mechanism to monitor the effectiveness of that training.
. Customer service and support call centers, where there is significant
turnover of personnel and often a wide variety of products on which call
center employees must have current knowledge.
. Government skill training, to enable government agencies to
keep their employees' skills current cost-effectively.
Technology, Research and Development
Asymetrix believes that its long-standing focus on research has attracted
qualified engineering and other technical personnel and has contributed to its
core technology capabilities. Asymetrix has three primary research and
development groups located in Bellevue, Washington; Rochester, New York; and
Nashua, New Hampshire. Research and development expenses were $12.4 million,
$8.4 million and $6.1 million in 1996, 1997 and 1998, respectively and
represented 67%, 33% and 18% of total revenue for those respective periods.
Asymetrix expects to 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 in 1996, when
Asymetrix was investing in the Infomodelers and SuperCede product lines, which
have since been divested.
Key Features of Asymetrix's technology platform include:
. Open Learning Management Platform. Asymetrix's Librarian learning
management system is based on an open architecture. A key element of
this open architecture is a communications protocol, known as OLX, which
is designed to facilitate communications between Librarian and learning
applications. The OLX protocol is a published, specified interface that
enables organizations to integrate learning applications authored from a
variety of sources and that accelerates Asymetrix's ability to
incorporate emerging technologies into its platform.
. Support of Open Internet Standards. Asymetrix'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 Asymetrix's experience with
9
<PAGE>
rapidly changing technologies such as multimedia management, facilitates
the incorporation of internally or externally developed advanced
technologies.
. Scalable Authoring. Asymetrix'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 Asymetrix'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 technologies incorporated in
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.
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.
Asymetrix's success will depend on its ability to continue to enhance its
current product line and to develop and introduce new products or offer new
services that keep pace with competitive product and service offerings, new
technologies and industry standards, and diverse and changing customer
requirements. Although Asymetrix believes it is well positioned to do so, it may
not be able to develop and market new future products or services on a timely
and cost effective basis. In the past, Asymetrix has experienced delays in the
development, introduction and marketing of new products and services, and may
experience similar delays in the future. In addition, Asymetrix's business could
be adversely affected if it is unable to respond to technological changes in a
timely and cost-effective manner.
Proprietary Rights
Asymetrix relies on a combination of copyrights, trademarks, trade secret
laws, restrictions on disclosure and other methods to protect its intellectual
property and trade secrets. Asymetrix also enters into confidentiality
agreements with its employees and consultants, and controls access to its
proprietary information. Despite these precautions, it may be possible for
unauthorized parties to copy or otherwise obtain or use Asymetrix's intellectual
property or trade secrets without authorization. In addition, other companies
may independently develop equivalent technology or intellectual property. The
misappropriation or infringement of its technology could have a significant
negative impact on Asymetrix's business. In the future, Asymetrix may become
involved in litigation related to its own intellectual property or the
intellectual property of others, which could result in substantial costs and
diversion of management and technical resources, either of which could have a
significant negative impact on Asymetrix's business.
Asymetrix also licenses technology from others for use in some of its
products, and may continue to do so in the future. In these license agreements,
the licensors have generally agreed to assume all liability for any claim that
their technology infringes any patent or other proprietary right. Nevertheless,
any litigation or dispute related to licensed technology could result in an
injunction on Asymetrix's continued use of the technology or in royalty
obligations for which the licensor has not agreed to assume liability or for
which the licensor does not have adequate resources to cover the liability it
agreed to assume. In such a situation, Asymetrix might not be able to obtain a
license to the technology at issue or to other similar technology on
commercially reasonable terms or at all. The inability to obtain or continue
10
<PAGE>
to use licensed technology could result in product delays or reduced
functionality of existing products, and could have a significant negative effect
on Asymetrix's business.
Asymetrix uses the following trademarks or registered trademarks in the
conduct of its business: Asymetrix, Asymetrix Digital Video Producer,
IconAuthor, OpenScript and ToolBook are registered trademarks, and Librarian,
ToolBook II Assistant, ToolBook II Instructor, Ingenium, iLearnToday.com, Neuron
and Web 3D are trademarks.
Employees
As of December 31, 1998, Asymetrix had 317 full-time employees, including
57 in research and development, 79 in sales, marketing and support, 137 in
professional services and technical support and 44 in administration. Asymetrix
has never had a work stoppage and none of its employees are represented under
collective bargaining agreements. Asymetrix considers its relations with its
employees to be good. Asymetrix believes that its future success will depend in
part on its continued ability to attract, integrate, retain and motivate highly
qualified sales, technical, professional services and managerial personnel.
Competition for qualified personnel is intense, and Asymetrix may not be
successful in attracting, integrating, retaining and motivating a sufficient
numbers of qualified personnel.
Item 2. Properties.
Asymetrix does not own any of the physical properties where it conducts its
business. Asymetrix's primary business is conducted in the following leased
office space:
. Bellevue, Washington: approximately 35,293 square feet of leased office
space, expiring in October 2003, which is Asymetrix's principal
administrative, sales, marketing and research and development facility.
. Rochester, New York: approximately 6,392 square feet of leased office
space, expiring in February, 2000, which is the primary facility for
Ingenium research and development and related sales and administration.
. Nashua, New Hampshire: approximately 6,749 square feet of leased office
space, expiring in December, 2000, which is primarily a research and
development facility.
. Needham, Massachusetts: approximately 19,960 square feet of leased
office space, expiring in September 2001, which is primarily a
professional services facility.
. Fort Worth, Texas: approximately 11,500 square feet of leased office
space, expiring in May 2003, which is primarily a professional services
facility.
. Des Plaines, Illinois: approximately 5,005 square feet of leased office
space, expiring in February 2002, which is primarily a professional
services facility.
. Atlanta, Georgia: approximately 6,870 square feet of leased office
space, expiring in May, 1999, which is primarily a professional services
facility.
Asymetrix 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. Asymetrix also maintains offices in
11
<PAGE>
California, Georgia, Idaho, Kansas, Maryland, New Jersey, New York, Ohio,
Virginia and London, England.
Item 3. Legal Proceedings
From time to time, Asymetrix is involved in legal proceedings and
litigation arising in the ordinary course of its business. As of March 15, 1999,
Asymetrix is not a party to any litigation or other legal proceeding that, in
the opinion of management, could have a material adverse effect on its business,
operating results and financial condition, except as described below.
Richard B. Grant v. Asymetrix Corporation, No. CV-96-3635 HLH, Central
District of California. On May 21, 1996, Richard B. Grant filed a complaint
alleging that Asymetrix's ToolBook and Multimedia ToolBook products infringe a
patent owned by him and seeking unspecified damages. Asymetrix has received an
opinion from its patent counsel that the products do not infringe this patent
and that the patent is invalid. This action is still in the discovery stage, and
it is not yet possible to assess the likelihood of its outcome. An adverse
outcome in this litigation could have a material adverse effect on Asymetrix's
business, operating results and financial condition.
Although management believes that Asymetrix does not infringe this patent
and that the patent is invalid, and although Asymetrix intends to defend this
action vigorously, the results of litigation can never be predicted with
certainty. Moreover, the costs of defending the action, regardless of outcome,
could have significant negative effect on Asymetrix's business. Litigating this
claim could be time-consuming and distract management personnel, and if
Asymetrix is unsuccessful in its defense, it may be required to develop non-
infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, might not be available on
commercially reasonable terms, or at all. If Asymetrix were unsuccessful in its
defense of this action, then the inability to develop non-infringing technology
or obtain a license on commercially reasonable terms could have a material
adverse effect on Asymetrix's business, operating results and financial
condition.
Item 4. Submission of Matters to a Vote of Securities Holders
Not applicable.
12
<PAGE>
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
Prior to the initial public offering of its common stock on June 12, 1998,
there was no public market for Asymetrix's common stock. Since the initial
public offering, Asymetrix's common stock has been listed on the Nasdaq National
Market under the symbol ASYM. The following table sets forth the high and low
sales prices per share for each fiscal quarter since the initial public
offering.
<TABLE>
<CAPTION>
Fiscal Quarter High Low
- ------------------------------------------------------------------------
1998
- ----
<S> <C> <C>
Second Quarter (beginning June 12, 1998) $11.06 $8.88
Third Quarter 11.00 6.00
Fourth Quarter 6.88 2.94
</TABLE>
As of March 15, 1999, there were 313 holders of record of Asymetrix's
common stock. Because many of the shares of Asymetrix's stock are held by
brokers and other institutions on behalf of stockholders, Asymetrix is unable to
estimate the actual number of stockholders represented by these record holders.
Asymetrix has never declared or paid any cash dividends on its common stock.
Asymetrix currently intends to retain any future earnings to finance future
growth and, thus, does not anticipate paying any cash dividends in the
foreseeable future.
The stock market from time to time has experienced significant price and
volume fluctuations. In addition, the market price of Asymetrix common stock has
been highly volatile since the initial public offering. Factors such as
fluctuations in Asymetrix's operating results, announcements of technological
innovations or new products by Asymetrix or its competitors, analysts' reports
and projections and general market conditions may have a significant effect on
the market price of Asymetrix's common stock. Decreases in the price of
Asymetrix's stock limit its ability to pursue its acquisition strategy by making
it more difficult to acquire companies on terms acceptable to Asymetrix using
its stock, which could have a material adverse effect on Asymetrix'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. The
institution of such litigation against Asymetrix could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect on Asymetrix's business, operating results and
financial condition.
Recent Sales of Unregistered Securities
During the three months ended December 31, 1998, Asymetrix issued 196,637
shares of unregistered common stock pursuant to the exercise of stock options.
The issuance of these shares of common stock was exempt pursuant to Section 4(2)
of the Securities Act of 1933 and/or under Rule 701.
Use of Proceeds
In connection with Asymetrix's initial public offering, it registered for
public sale 3,000,000 shares of common stock, all of which were sold by
Asymetrix. The Registration Statement on Form S-1 (Registration No. 333-49037),
as amended, was declared effective by the Securities and Exchange Commission on
June 11, 1998. NationsBanc Montgomery Securities LLC was the managing
underwriter of the IPO. The IPO commenced on June 12, 1998, and terminated
following the sale of all of the securities registered under the Registration
Statement, plus an additional 25,000 shares pursuant to the
13
<PAGE>
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 Asymetrix received net proceeds of $29,331,000.
From the effective date of the Registration Statement through December 31,
1998, Asymetrix has incurred an estimated $3,944,000 in expenses for Asymetrix's
account in connection with the issuance and distribution of the Common Stock,
including underwriting discounts and commissions of $2,329,250 and other
expenses of $1,614,750. No finders' fees or expenses were paid to or for the
underwriters. None of these payments were made, directly or indirectly, to: (1)
directors or officers of Asymetrix, or their associates; (2) persons owning ten
percent or more of any class of equity securities of Asymetrix; or (3)
affiliates of Asymetrix.
From the effective date of the Registration Statement through December 31,
1998, Asymetrix has applied approximately $7.6 million of the Offering proceeds
to working capital requirements. None of these payments were made, directly or
indirectly, to: (1) directors or officers of Asymetrix, or their associates; (2)
persons owning ten percent or more of any class of equity securities of
Asymetrix; or (3) affiliates of Asymetrix. To date, Asymetrix believes that it
has used the offering proceeds in a manner consistent with the use of proceeds
described in the Registration Statement. The remaining $21.7 million of the
offering proceeds is invested in short-term marketable debt securities, money
market funds and other cash equivalents.
Item 6. Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Years Ended December 31,
1994 1995 1996 1997 1998
------------------------------------------------------------
(In thousands except per share data)
Statement of Operations Data:
Revenue:
Product revenue:
<S> <C> <C> <C> <C> <C>
Online learning products $ 295 $889 $3,716 $8,036 $10,828
Other products 12,409 16,238 11,165 10,426 4,365
------------------------------------------------------------
Total product revenue 12,704 17,127 14,881 18,462 15,193
Services revenue 2,121 2,579 3,600 7,243 18,159
------------------------------------------------------------
Total revenue 14,825 19,706 18,481 25,705 33,352
------------------------------------------------------------
Cost of revenue:
Product revenue:
Online learning products 34 98 198 608 947
Other products 4,487 3,343 2,946 2,127 1,038
------------------------------------------------------------
Total cost of product revenue 4,521 3,441 3,144 2,735 1,985
Services revenue 1,537 1,757 2,549 4,635 12,432
------------------------------------------------------------
Total cost of revenue 6,058 5,198 5,693 7,370 14,417
------------------------------------------------------------
Gross margin 8,767 14,508 12,788 18,335 18,935
------------------------------------------------------------
Operating expenses:
Research and development 16,788 13,610 12,375 8,423 6,113
Sales and marketing 13,392 12,399 15,636 14,704 14,149
General and administrative 4,536 4,182 4,535 4,491 5,767
Amortization of goodwill - - - 119 825
Loss on impairment of assets 3,836 - 2,787 - -
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Restructuring charge - 3,318 1,104 - -
Acquired in-process research and development - - - 4,064 -
------------------------------------------------------------
Total operating expenses 38,552 33,509 36,437 31,801 26,854
------------------------------------------------------------
Loss from operations (29,785) (19,001) (23,649) (13,466) (7,919)
Other income(expense) (5,481) (667) (348) (228) 2,760
------------------------------------------------------------
Net loss $(35,266) $(19,668) $(23,997) $(13,694) $(5,159)
Accretion of redemption value of
redeemable common stock - - - - (1,370)
------------------------------------------------------------
Net loss attributable to common stockholders $(35,266) $(19,668) $(23,997) $(13,694) $(6,529)
============================================================
Net loss per share, basic and diluted $(118.74) $(6.36) $(3.90) $(2.17) $(.62)
============================================================
Weighted average common shares outstanding,
basic and diluted 297 3,093 6,158 6,306 10,599
============================================================
</TABLE>
<TABLE>
<CAPTION>
December 31,
1994 1995 1996 1997 1998
------------------------------------------------------------
(In thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 1,332 $ 3,583 $ 3,788 $ 2,541 $21,713
Working capital (deficit) (91,324) 25,373 9,569 (66) 24,913
Total assets 16,379 35,673 19,122 22,169 43,622
Long-term obligations 607 70 24 425 268
Stockholders' equity (85,310) 29,862 12,097 8,958 37,010
</TABLE>
(a) Historical information was restated to reflect the combination of Asymetrix
and Meliora, accounted for as a pooling-of-interests.
(b) Historical results of operations are not necessarily indicative of future
results. Refer to the "Factors that May Affect Future Results of Operations"
under Item 7: "Management's Discussion and Analysis of Financial Condition and
Results of Operations" for the discussion of factors which may impact future
results.
Item 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition
The following discussion of the financial condition and results of
operations of Asymetrix should be read in conjunction with "Selected
Consolidated Financial Data" and Asymetrix's Consolidated Financial Statements
and related Notes thereto included elsewhere in this Report. This Report
contains forward-looking statements that involve risks and uncertainties.
Asymetrix's actual results may differ significantly from the results discussed
in the forward-looking statements. Factors that
15
<PAGE>
may cause such a difference include, but are not limited to, those discussed in
"Factors that May Affect Future Results of Operations."
Overview
Asymetrix's comprehensive learning solution consists of an open, standards-
based, Internet-centric technology platform as well as a variety of professional
learning services for the online learning market. Asymetrix's technology
platform includes ToolBook II Instructor and ToolBook II Assistant, products
which enable customers to author online learning applications; Asymetrix
Librarian, a learning management system designed to enable customers to deploy
and manage such applications;and Asymetrix Ingenium a skills-based training
management system designed for automating instructor-led training, logistics and
tracking individual and group competencies. Asymetrix'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, Asymetrix 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 Asymetrix's strategy is to provide an online learning solution at
the enterprise level. In February 1998, Asymetrix introduced an enhanced version
of Librarian, which Asymetrix believes significantly extends the existing
features and functionality of Librarian by enabling enterprise-wide deployment
of online learning applications.
From September 12, 1997 through June 1998, Asymetrix acquired eight
companies and issued an aggregate of 3,457,504 shares of Common Stock. All of
these acquisitions were accounted for using the purchase method of accounting.
Accordingly, Asymetrix'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 certain acquisitions, Asymetrix 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, of which approximately $1.5 million will be amortized
on a straight-line basis over a five-year life and approximately $8.7 million
will be amortized over a fifteen-year life. In 1998, Asymetrix amortized
$293,402 of the goodwill with a five-year life and $532,731 of the goodwill with
a fifteen-year life. At December 31, 1998, net goodwill of $1,100,256 with an
original five-year life and $8,181,080 with an original fifteen-year life
remained to be amortized. If Asymetrix were to incur additional charges for
acquired in-process research and development and amortization of goodwill with
respect to any future acquisitions, Asymetrix's business, operating results and
financial condition could be materially and adversely affected. In July 1998,
Asymetrix acquired Meliora, an online learning product and consulting company,
which has been accounted for under the pooling of interests method. Asymetrix
issued 268,000 shares of common stock in exchange for all outstanding shares of
Meliora. The consolidated financial statements of Asymetrix have been restated
to give effect to the combination as if the companies had been combined since
their inception.
As part of its strategy to focus on the online enterprise learning market,
Asymetrix divested product lines and technologies that were unrelated to this
market. In October 1996, Asymetrix 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, Asymetrix 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 included approximately $2.0 million for shares of
16
<PAGE>
Infomodelers Series A Preferred Stock and approximately $390,000 for shares of
Infomodelers Common Stock.
In July 1997, Asymetrix established SuperCede, Inc. ("SuperCede"), a
subsidiary, and transferred the assets of its Internet Development Tools
Division and SuperCede products to SuperCede. Following an investment by Vulcan
Ventures, Inc. and certain related transactions, 50% of SuperCede was owned by
Asymetrix. However, Asymetrix held Series B Preferred Stock which was
subordinate to the Series A Preferred stock held by Vulcan Ventures. All of the
assets of SuperCede were subsequently acquired by Instantiations, Inc. in
January of 1999 and SuperCede was dissolved. Because the total consideration
received in the transaction was less than the liquidation preference of the
Series A Preferred Stock, Asymetrix received no portion of that consideration
and believes that it will receive no future value from its SuperCede interest.
Asymetrix'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.
Asymetrix incurred net losses of $24.0 million, $13.7 million, and $5.2
million in 1996, 1997, and 1998, respectively, and has yet to achieve operating
income or net income under its new online learning business model. Asymetrix's
limited operating history under this new business model, and the emerging nature
of the market for online enterprise learning among other factors, make
prediction of Asymetrix's future operating results difficult. Although Asymetrix
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 Asymetrix may experience and, therefore, they should
not be considered indicative of future operating results. In addition, Asymetrix
intends to continue to invest in acquisitions, its professional services
business, and research and development, among other things. As a result,
Asymetrix expects to continue to incur annual operating losses at least through
1999. There can be no assurance that Asymetrix will achieve profitability or, if
profitability is achieved, that it will be sustained.
Asymetrix derives its revenue principally from sales of its software
products and fees from professional services, training, support and maintenance.
Asymetrix 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 Asymetrix remaining to be performed. Product license fees are
generally determined on a per user basis, except that its Librarian 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, and its
Ingenium product is licensed based on the number of concurrent users. In the
case of non-refundable royalties from OEMs, resellers or other distributors,
Asymetrix recognizes revenue when it delivers its product to the OEM, reseller
or other distributor provided no significant obligations of Asymetrix remain.
Additional royalties are paid to Asymetrix to the extent that the advances are
exceeded and these additional royalties are recognized when earned. 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
and maintenance agreements.
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. Asymetrix recognizes revenue from installation services as the
services are provided. Services revenue represented approximately 20%, 28% and
54% of total revenue in 1996, 1997 and 1998, respectively.
17
<PAGE>
Effective January 1, 1998, Asymetrix 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 year ended December 31, 1998.
As a result of focusing its business on the online enterprise learning
market, Asymetrix has changed its distribution strategy from emphasizing retail
and other indirect distribution channels to emphasizing a direct sales model.
Direct sales accounted for approximately 53%, 51% and 83% of the Company's total
revenue for 1996, 1997 and 1998, respectively. While international revenue
accounted for approximately 30%, 29% and 10% of total revenue for 1996, 1997 and
1998, respectively, Asymetrix 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, Asymetrix anticipates that
international revenue will constitute a lesser percentage of total revenue in
future periods than in 1996 and 1997.
Results of Operations
The following table presents Asymetrix's results of operations as a percentage
of total revenue for the periods indicated.
<TABLE>
<CAPTION>
Statement of Operations Data:
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Revenue:
Product revenue:
Online learning products 20.1% 31.3% 32.5%
Other products 60.4 40.5 13.1
---------- ---------- ----------
Total product revenue 80.5 71.8 45.6
Services revenue 19.5 28.2 54.4
---------- ---------- ----------
Total revenue 100.0 100.0 100.0
---------- ---------- ----------
Cost of revenue:
Product revenue:
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C> <C>
Online learning products 1.1 2.4 2.8
Other products 15.9 8.3 3.1
----------- ---------- ----------
Total cost of product revenue 17.0 10.7 6.0
Services revenue 13.8 18.0 37.3
----------- ---------- ----------
Total cost of revenue 30.8 28.7 43.2
----------- ---------- ----------
Gross margin 69.2 71.3 56.8
----------- ---------- ----------
Operating expenses:
Research and development 67.0 32.8 18.3
Sales and marketing 84.6 57.1 42.4
General and administrative 24.5 17.5 17.3
Amortization of goodwill - 0.5 2.5
Loss on impairment of assets 15.1 - -
Restructuring charge 6.0 - -
Acquired in-process research
and development - - -
----------- ---------- ----------
Total operating expenses 197.2 123.7 80.5
Loss from operations (128.0) (52.4) (23.7)
----------- ---------- ----------
Other income/(expense):
Other expense (7.2) (0.1) (0.1)
Interest income from
principal stockholder 5.8 1.7 -
Other interest income, net 0.1 - 1.8
Equity in income (losses)
from Infomodelers, Inc. (0.6) (2.5) 6.5
----------- ---------- ----------
Total other income(expense) (1.9) (0.9) 8.2
----------- ---------- ----------
Net loss (129.9)% (53.3)% (15.5)%
=========== ========== ==========
</TABLE>
Year Ended December 31, 1998 Compared To Year Ended December 31, 1997
Revenue. Total revenue increased 30% from $25.7 million in 1997 to $33.4
million in 1998. Online learning product revenue increased 35% from $8.0 million
in 1997 to $10.8 million in 1998. This increase was due primarily to increased
demand for Asymetrix's online learning products as a result of Asymetrix's focus
on the online learning market. Other product revenue decreased 58% from $10.4
million in 1997 to $4.4 million in 1998. Other product revenue consists of
revenue from Asymetrix's products which are not targeted at the online learning
market. These products include SuperCede products (prior to its spin-off in
September 1997), 3D F/X, Digital Video Producer, ToolBook, Multimedia ToolBook,
IconAuthor, CBT Express, Web 3D and other non-online learning products. Included
in other product revenue in 1997 was approximately $2.0 million from sales of
SuperCede products. Total product revenue decreased 21% from $18.5 million in
1997 to $15.2 million in 1998, reflecting the decrease in other product revenue.
As a result of Asymetrix's strategy to focus on the online learning market,
Asymetrix 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 151% from $7.2 million
1997 to $18.2 million in 1998 due primarily to the expansion of Asymetrix's
professional services business. Asymetrix has experienced an increased number of
professional services engagements which are billed on a fixed price basis and
intends to pursue such engagements in the future. See "Factors That May Affect
Future Operating Results--Customer Requirements; Fixed-Price Engagements."
Cost of Revenue. Cost of product revenue includes costs of media, manuals
and distribution costs. Gross margin from Asymetrix's online learning products
is generally higher than that of its other products because these products are
typically sold by Asymetrix's direct sales force, as compared with other
products sold through indirect channels, such as OEMs and resellers. Costs of
services revenue consists
19
<PAGE>
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 $7.4 million in 1997 to $14.4
million in 1998. Total cost of product revenue decreased 27% from $2.7 million
in 1997 to $2.0 million 1998. Cost of online learning product revenue increased
56% from $608,000 in 1997 to $947,000 in 1998, due primarily to increased sales
of Asymetrix's online learning products. Cost of other product revenue
decreased 51% from $2.1 million in 1997 to $1.0 million in 1998. This decrease
was due primarily to decreased sales of Asymetrix's other products. Cost of
other product revenue attributable to sales of SuperCede products was $273,000
in 1997. Total product gross margin increased to 87% in 1998 from 85% in 1997.
Cost of services revenue increased 168% from $4.6 million in 1997 to $12.4
million 1998. This increase was due primarily to increased professional service
projects in 1998. Services gross margin decreased from 36% in 1997 to 32% in
1998 due to lower services personnel utilization. Asymetrix 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 27% from $8.4 million in 1997 to $6.1 million in 1998. This decrease
was due primarily to the spin off of SuperCede. Research and development
expenses as a percentage of total revenue decreased from 33% in 1997 to 18% in
1998 as a result of the spin-off of SuperCede and higher total revenues.
Research and development expenses related to SuperCede were $2.6 million in
1997. Asymetrix 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 4%
from $14.7 million in 1997 to $14.1 million in 1998. Sales and marketing
expenses as a percentage of total revenue decreased from 57% in 1997 to 42% in
1998. The decreases were due primarily to sales and marketing expenses relating
to SuperCede products in 1997. Sales and marketing expenses related to SuperCede
were $2.5 million in 1997. Asymetrix expects that sales and marketing expenses
will increase in absolute dollars in the future as Asymetrix 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 Asymetrix's
administrative, executive and finance personnel as well as outside legal and
audit costs. General and administrative expenses increased 28% from $4.5 million
in 1997 to $5.8 million in 1998. This increase was due primarily to increased
overhead due to Asymetrix's increased size as well as costs of being a public
company. General and administrative expenses as a percentage of total revenue
were unchanged at 17%. General and administrative expenses related to SuperCede
were $653,000 in 1997. Asymetrix expects that general and administrative
expenses will increase in absolute dollars in the future as Asymetrix incurs
additional costs (including directors'
20
<PAGE>
and officers' liability insurance, investor relations programs and increased
professional fees) related to being a public company.
Amortization of Goodwill. Amortization of goodwill expense relates to the
amortization of excess purchase price over the fair value of identifiable
tangible and intangible assets acquired in acquisitions recorded using the
purchase method of accounting. Amortization of goodwill increased from $119,000
in 1997 to $825,000 in 1998. Asymetrix began acquiring other companies in the
latter half of 1997, therefore, the increase is due to a full year of
amortization reflected in 1998.
Acquired In-Process Research and Development. Asymetrix recognized no
cost of acquired in-process research and development in 1998. In 1997, Asymetrix
recognized the cost of acquired in-process research and development totaling
$4.1 million. This amount represented all in-process research and development
acquired by Asymetrix in connection with Aimtech Corporation ("Aimtech") and one
other acquisition during 1997 and consisted of $3.6 million resulting from the
Aimtech acquisition and $484,000 resulting from the other acquisition.
Other Income (Expense). Interest income from principal stockholder was
$436,000 and $0 in 1997 and 1998 respectively and was related to interest
payments to Asymetrix on a note receivable from Asymetrix's principal
stockholder. This note receivable was repaid in full in October 1997. Other
interest income, net was $8,000 and $609,000 in 1997 and 1998, respectively.
Interest income in 1998 was derived primarily from interest earned on proceeds
from Asymetrix initial public offering. Equity in income (losses) from
Infomodelers was $(634,000) and $2.2 million in 1997 and 1998, respectively,
representing Asymetrix'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 Asymetrix sold substantially all of its interest in
Infomodelers in March 1998, Asymetrix 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 $18.4 million in 1996 to $25.7
million in 1997. Product revenue increased 24% from $14.9 million in 1996 to
$18.5 million in 1997. Online learning product revenue increased 116% from $3.7
million in 1996 to $8.0 million in 1997. This increase was due primarily to
increased demand for Asymetrix's online learning products as a result of
Asymetrix's focus on the online learning market. Other product revenue decreased
1% from $11.2 million in 1996 to $10.4
21
<PAGE>
million in 1997. Included in other product revenue in 1997 was approximately
$2.0 million from SuperCede. Services revenue increased 101% from $3.6 million
in 1996 to $7.2 million in 1997 due primarily to the expansion of Asymetrix's
custom development efforts and the acquisition of Oakes Interactive
Incorporated, TopShelf Multimedia, Inc., and Acorn Associates Incorporated
(collectively the "Oakes Companies") in September 1997.
Cost of Revenue. Total cost of revenue increased 30% from $5.7 million in
1996 to $7.4 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 product revenue
increased 207% from $198,000 in 1996 to $608,000 in 1997, due primarily to
increased sales of Asymetrix's online learning products. Cost of other product
revenue decreased 28% from $2.9 million in 1996 to $2.1 million in 1997. This
decrease was due primarily to the shift in distribution method from distributors
to direct sales and the subsequent return of products from the distribution
channel in 1996. Distributors received discounts of 20% to 40% off suggested
retail prices, requiring higher volumes and associated costs of revenue to
realize the same level of revenue generated from direct sales. In association
with changing to a direct sales model in 1996, $465,000 of inventory returned
from distributors was discarded. 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 79%
in 1996 to 85% in 1997. Online learning products gross margin was 95% 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 84% from $2.5 million
in 1996 to $4.6 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 36% in 1997.
Operating Expenses
Research and Development. Research and development expenses decreased 32%
from $12.4 million in 1996 to $8.4 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 67% in 1996 to 33% 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 6% from $15.6
million in 1996 to $14.7 million in 1997. Sales and marketing expenses as a
percentage of total revenue decreased from 85% in 1996 to 57% in 1997. The
decreases were due primarily to sales and marketing expenses during 1996
relating to Asymetrix's "Web event" launch of Tool Book II Instructor and the
launch of Infomodelers products, 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 are
unchanged from $4.5 million in 1996 to $4.5 million in 1997. 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.
22
<PAGE>
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, Asymetrix reviewed the technology remaining in Asymetrix and
recorded an impairment charge of $2.8 million in the fourth quarter of 1996.
Restructuring Charge. In the third quarter of 1996, Asymetrix adopted a
plan to restructure its European operations, closing its offices in France and
Germany, and recorded an expense of $604,000, which included involuntary
termination benefits for employee compensation of $208,000 and certain exit
costs of $396,000, which consisted of costs related to terminated leases, legal
costs, and accounting and other services. The restructuring was required due to
Asymetrix's focus on online learning, which requires customers to have access to
the Internet, or installed intranets. Asymetrix determined that this market was
immature outside the United States, which made the continued operation of three
European offices economically prohibitive. Asymetrix continues to maintain a
small office in the United Kingdom to manage its European operations. Asymetrix
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. Asymetrix 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 Asymetrix in connection with Aimtech Corporation ("Aimtech") and one other
acquisition during 1997 and consisted of $3.6 million resulting from the Aimtech
acquisition and $484,000 resulting from the other acquisition.
The in-process research and development acquired in the Aimtech acquisition
is applicable to Asymetrix'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 will be incorporated in
its ToolBook II version 7.0 products scheduled to begin shipping in 1999. As
such, Asymetrix has not yet realized any revenue from the acquired technology
through December 31, 1998.
At the date of the acquisition, the development of the acquired in-process
research and development was estimated to be 60% complete. The fair value of the
acquired in-process research and development was based on projected cash flows
which were discounted based upon the risks associated with achieving such
projected cash flows upon successful completion of the projects. Asymetrix then
adjusted the discounted cash flows using the estimated percentage complete to
reflect the value of development efforts completed at the date of acquisition.
The cash flow projections for revenues were based on the projected
incremental increase in revenue attributable to the in-process technology that
Asymetrix will receive as a result of the acquisition. Revenues derived from the
in-process technology were expected to increase through 2001. No revenue was
assigned to in-process research and development in 2002 or beyond because 2001
is estimated to be the end of the in-process technology's economic life.
Estimated operating expenses were deducted from estimated revenue projections to
arrive at estimated cash flows. Projected operating expenses were estimated as a
percentage of revenue and were based primarily on projections prepared by
Asymetrix's management and industry averages.
An after-tax discount rate of 33% was used to discount the net cash flows
to their present value. This discount rate represents a premium to the Company's
cost of capital and was determined based upon the Company's assessment of the
risk in completing the project.
Failure to complete the project may result in competitive disadvantages in
the future, which could have a material adverse affect on Asymetrix's business,
results of operations and financial condition. The in-process research and
development acquired in the other acquisition related to future simulation and
animation functionality. The development effort with respect to this technology
was discontinued in 1998.
Other Income (Expense). Asymetrix recorded other expense of $1.3 million in
1996 of which $1.1 million was 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 Asymetrix on a note
receivable from Asymetrix's principal stockholder. This note receivable was
repaid in October 1997. Other interest income, net was $22,000 and $8,000 in
1996 and 1997, respectively. Equity in income (losses) from Infomodelers was
$(112,000) and $(634,000) in 1996 and 1997, respectively, representing
Asymetrix's equity in the net losses of Infomodelers in such period. Because
Asymetrix sold substantially all of its interest in Infomodelers in March 1998,
Asymetrix does not anticipate that it will record equity in income (losses) from
Infomodelers in future periods. Asymetrix recorded no equity in earnings in
SuperCede subsequent to its spin-off in 1997, as its SuperCede Series B
Preferred Stock. Such stock had a liquidation preference subordinate to the
Series A Preferred Stock. Asymetrix has no further funding obligation for
SuperCede and, therefore, Asymetrix will not record a share of the losses at
SuperCede in the future. SuperCede has discontinued its business operations and
has liquidated its assets. The total amount received was less than the
liquidation preference of the Series A Preferred Stock.
23
<PAGE>
Liquidity and Capital Resources
At December 31, 1998, Asymetrix had cash and cash equivalents totaling
$21.7 million, an increase of $19.2 million from December 31, 1997. The increase
in cash and cash equivalents was due primarily to the proceeds of $29.3 million
generated from Asymetrix's initial public offering, $880,000 from the exercise
of employee stock options, and $2.4 million from the sale of Infomodelers'
shares, offset by $10.7 million used in operating activities, $1.2 million used
in investing activities and $1.4 million net, used to repay notes payable and
capital lease obligations. At December 31, 1998, the principal sources of
liquidity for Asymetrix were $24.9 million in working capital.
Asymetrix has had negative cash flows from operating activities to date.
Net cash used by operating activities was $15.0 million, $7.4 million and $10.7
million in 1996, 1997 and 1998, respectively. Net cash used in operating
activities was primarily the result of net losses, which include a non-cash
expense of $4.1 million for acquired in-process research and development,
partially offset by an increase in accounts receivable in 1997. Net cash used in
operating activities in 1998 was primarily due to a net loss and decreases in
deferred revenue and other assets.
Net cash provided by (used in) investing activities was $(1.7 million),
$(645,000) and $1.2 million in 1996, 1997 and 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, Asymetrix 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 1998 was
primarily due to proceeds received from the sale of Asymetrix's investment in
Infomodelers. As of December 31, 1998, Asymetrix had no material commitments for
capital expenditures. Asymetrix's capital expenditures in 1998 were
approximately $1.2 million, primarily for computer equipment and acquisition-
related payments. As of December 31, 1998, Asymetrix also had commitments under
non-cancelable operating leases with terms in excess of one year of $6.1 million
through 2003.
Cash provided by financing activities was $17.0 million, $7.1 million and
$28.8 million in 1996, 1997 and 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 in 1996 and 1997 and primarily from Asymetrix's initial public offering
in 1998. Cash used for payments on long-term debt was $413,000, $398,000, and
$592,000 in 1996, 1997, and 1998 respectively.
Asymetrix anticipates that the net proceeds received from its initial
public offering, together with cash and cash equivalents will be sufficient to
meet its working capital needs and capital expenditures for
24
<PAGE>
at least the next 12 months. Asymetrix's long-term liquidity will be affected by
numerous factors, including acquisitions of businesses or technologies, demand
for Asymetrix's online learning products and services, the extent to which such
online learning products and services achieve market acceptance, the timing and
extent to which Asymetrix 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, Asymetrix from time to time evaluates potential acquisitions of
businesses, products or technologies that complement Asymetrix's business. To
the extent that resources are insufficient to fund Asymetrix's activities,
Asymetrix may need to raise additional funds. Such additional funding, if
needed, may not be available on terms attractive to Asymetrix, or at all. If
adequate funds are not available on acceptable terms, Asymetrix 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 Asymetrix's business, operating
results and financial condition.
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.
Asymetrix has designed and tested the most current versions of its products
to be year 2000 compliant. However, some of Asymetrix's customers may be using
older versions of its products that are not year 2000 compliant. Asymetrix has
been encouraging its customers to upgrade to current product versions, and
Asymetrix has been required by customers to warrant that the current versions of
its products are year 2000 compliant. Although Asymetrix believes the current
versions of its products are year 2000 compliant, the current product versions
may contain undetected errors or defects associated with year 2000 date
functions. These undetected date functions may result in material costs to
Asymetrix, as well as claims against Asymetrix for breach of its warranties of
year 2000 compliance. Furthermore, although Asymetrix 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, Asymetrix may still
face claims or litigation based on older versions of its products. Asymetrix is
aware of a growing number of lawsuits against other software vendors related to
year 2000 compliance, including lawsuits based on those 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, Asymetrix is uncertain of the extent to which it may be
affected. If Asymetrix is affected by such litigation, it could have a material
adverse effect on Asymetrix's business, operating results and financial
condition. Asymetrix is not currently a party to any such litigation.
With respect to Asymetrix's internal information technology systems,
Asymetrix's year 2000 internal readiness program primarily covers the following
activities: (1) taking inventory of hardware and software systems, (2)
determining those systems' level of year 2000 compliance, (3) assessing the
business and customer satisfaction risks associated with those systems, (4)
creating action plans to address known risks, (5) executing and monitoring
its action plans, and (6) contingency planning.
At this time Asymetrix has substantially completed its review of its most
mission critical information technology systems including finance, order
processing, customer service, project
25
<PAGE>
management, and sales management, and believes that those systems are
substantially year 2000 compliant. Asymetrix is currently reviewing and
addressing year 2000 issues in its second tier information technology systems,
including its network servers, network software and widely used software
applications. Asymetrix expects that it will substantially complete its year
2000 readiness preparations with respect to its second tier systems and network
hardware and software systems by third quarter 1999. Asymetrix expects to
continue implementation and testing of year 2000 compliance activities
throughout calendar 1999. Asymetrix has no current plans to perform an
assessment of imbedded technology outside of its information technology systems,
and believes that the failure of any such imbedded technology to be year 2000
compliance will not have a material effect on Asymetrix's business. Asymetrix
has no current plan to retain any outside consultants to assist in its year 2000
compliance activities.
Asymetrix has not sent detailed questionnaires to vendors and service
providers to certify year 2000 readiness, but Asymetrix has obtained or relied
upon published assurances of year 2000 compliance in relation to purchases of
new information technology systems and Asymetrix has conducted and is continuing
to conduct its own internal year 2000 analysis. While Asymetrix has no plans to
broadly survey its vendors and service providers for year 2000 compliance,
Asymetrix does intend to obtain and review the year 2000 readiness statements of
its significant vendors who are required to file proxy statements and annual and
quarterly reports with the SEC in order to determine their level of year 2000
compliance. Asymetrix does not rely on products and services provided by any
single vendor in the conduct of its business, and believes that even if the
ability of one of its suppliers to provide goods or services was negatively
impacted by a year 2000 problem, alternative sources would be available to
supply such goods and services on commercially reasonable terms.
Asymetrix 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, most of Asymetrix's significant customers are large
business enterprises and government agencies which Asymetrix believes are
devoting significant resources to ensuring their own internal year 2000
compliance. Most of Asymetrix's significant customers are also required to file
proxy statements and annual and quarterly reports with the SEC disclosing their
own year 2000 readiness, and Asymetrix intends to obtain and review such
disclosure for its significant customers to determine their level of year 2000
compliance. Moreover, Asymetrix has received and responded to a large number of
detailed year 2000 questionnaires from its customers as a part of their own year
2000 compliance programs. Asymetrix believe that its customers' or potential
customers' year 2000 compliance efforts may affect their purchasing patterns as
these companies or agencies expend significant resources and focus personnel on
ensuring their own internal year 2000 compliance. Devoting resources and
personnel to year 2000 compliance may result in reduced funds available to
purchase other products or services and may delay the implementation of new
information technology systems such as those offered by Asymetrix, either of
which could have a material adverse effect on Asymetrix's business, operating
results and financial condition.
Asymetrix estimates that the total cost of evaluating and addressing its
year 2000 issues will be approximately $250,000. In 1998 Asymetrix spent
$38,000, in connection with evaluating and addressing year 2000 issues. Such
expenditures represented 6% of Asymetrix's total information technology budget
in 1998. All funds used for evaluating and addressing year 2000 issues are from
Asymetrix'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 Asymetrix 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, Asymetrix may experience serious
unanticipated negative consequences and material costs caused by undetected
errors or
26
<PAGE>
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: (1) loss or corruption of data contained in
Asymetrix's internal information systems, (2) hardware failure, (3) the failure
of infrastructure services provided by government agencies and other third
parties (e.g., electricity, phone service, water transport, internet services,
etc.); and (4) the failure of the internal systems of Asymetrix's vendors or
customers, resulting in problems with providing services or making payments to
Asymetrix. Asymetrix is in the early phases of contingency planning at this time
and expects to undertake more in depth contingency planning following the
completion of its analysis and correction of its internal year 2000 issues.
Asymetrix 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.
Factors That May Affect Future Results of Operations
Limited Operating History in Online Learning Market. Asymetrix was
incorporated in December 1984. Until early 1995, Asymetrix 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 Asymetrix's online enterprise learning solution. Starting in
1995, Asymetrix 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, Asymetrix has also
introduced a variety of professional services. Accordingly, Asymetrix has only a
limited operating history upon which to base an evaluation of its current
business and prospects. Asymetrix'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 Asymetrix's products and services; the ability of Asymetrix to meet
the needs of sophisticated corporate customers; and competition. To address
these risks, Asymetrix 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. Asymetrix may not be
successful in addressing such risks and the failure to do so could have a
material adverse effect on Asymetrix's business, operating results and financial
condition.
Fluctuations in Quarterly Operating Results. Asymetrix'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 Asymetrix's control. Factors that may adversely affect
Asymetrix'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 Asymetrix to meet its own
or client project milestones or to meet client expectations; market acceptance
of Asymetrix's or competitors' products and services; the ability of Asymetrix
to develop and market new or enhanced products and services in a timely manner
and market acceptance of such products and services; Asymetrix'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
27
<PAGE>
learning markets. With its emphasis on providing an online enterprise learning
solution, Asymetrix is targeting its selling and marketing efforts towards
customers with the potential need for enterprise-wide solutions. Because the
implementation of its solutions may require an enterprise-wide decision by
prospective customers, Asymetrix may be required to provide a significant level
of education to prospective customers regarding Asymetrix's solutions before a
sale is completed. Therefore, Asymetrix believes that the period between initial
contact and the sale of Asymetrix'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 Asymetrix's
business and operations and cause Asymetrix's operating results to vary
significantly from quarter to quarter. Therefore, Asymetrix's operating results
for any particular quarterly period may not be indicative of future operating
results.
Acquisitions. Asymetrix has acquired ten companies since July 1997 and is
continuing to pursue a strategy of growth that includes acquisitions. The
successful implementation of this strategy depends on Asymetrix's ability to
identify suitable acquisition candidates, acquire such companies on acceptable
terms, integrate their operations and technology successfully with those of
Asymetrix, 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 Asymetrix's business; the management of
geographically-dispersed operations; adverse effects on Asymetrix'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 Asymetrix 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 Asymetrix as a whole, and
any acquired business could significantly under-perform relative to Asymetrix's
expectations. Moreover, in pursuing acquisition opportunities, Asymetrix may
compete for acquisition targets with other companies with similar growth
strategies that may have greater resources than Asymetrix, which could result in
increased prices of acquisition targets and a diminished pool of companies
available for acquisition. If Asymetrix were unable to manage internal or
acquisition-based growth effectively, Asymetrix's business, operating results
and financial condition would be materially and adversely affected.
Management of Growth; Dependence on Key Personnel. Asymetrix's future
success will be highly dependent on the performance of its senior management
team and other key employees and on Asymetrix'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 Asymetrix's activities. Asymetrix does not have employment
agreements with most of its executives or other key employees. In addition,
Asymetrix does not maintain key person life insurance for any of its officers or
key employees. The loss of the services of any of Asymetrix's senior management
team or other key employees or the failure of Asymetrix to attract, integrate,
motivate and retain additional key employees, including professional services
personnel, could have a material adverse effect on Asymetrix's business,
operating results and financial condition.
Customer Requirements; Fixed Price Engagements. 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 and announcements of new products and services. Because
Asymetrix's online learning solution is targeted at 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,
28
<PAGE>
these customers may have evolving and rapidly changing requirements for their
online enterprise learning needs, which Asymetrix must address satisfactorily.
Many of Asymetrix's professional services engagements require Asymetrix to
develop learning applications to suit unique customer requirements. Asymetrix's
failure or inability to meet a customer's expectations or requirements in the
performance of its services could potentially damage Asymetrix's reputation or
result in a claim for substantial damages against Asymetrix, regardless of
Asymetrix's responsibility for such failure. In addition, most such professional
services engagements that are billed on a fixed-price basis. Asymetrix'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 Asymetrix to risks
associated with cost overruns and may expose Asymetrix, in certain cases, to
penalties, any of which could have a material adverse effect on Asymetrix'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 wide market acceptance within the time
frame anticipated by Asymetrix could have a material adverse effect on
Asymetrix's business, operating results and financial condition. Asymetrix's
success depends on the continued adoption of the Internet and intranets as 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
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.
General Economic Conditions. Asymetrix's revenue is subject to
fluctuation as a result of general economic conditions. A significant portion of
Asymetrix'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 Asymetrix's business,
operating results and financial condition.
Item 7a. Quantitative and Qualitative Disclosures about Market Risk
Asymetrix holds its assets primarily in cash and cash equivalents, such as
short-term marketable debt securities, money market funds and other cash
equivalents. Asymetrix minimizes its risk by investing in financial instruments
with a maturity of three months or less. Asymetrix does not use derivative
financial instruments.
29
<PAGE>
Item 8. Financial Statements and Supplementary Data
The information required by this item is included in Part III,
Item 14.
30
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
Not applicable.
31
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The information required by this Item is incorporated by reference to the
information in the definitive Proxy Statement for Asymetrix's Annual Meeting of
Stockholders scheduled to be held on May 25, 1999.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the
information in the definitive Proxy Statement for Asymetrix's Annual Meeting of
Stockholders scheduled to be held on May 25, 1999.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this Item is incorporated by reference to the
information in the definitive Proxy Statement for Asymetrix's Annual Meeting of
Stockholders scheduled to be held on May 25, 1999.
Item 13. Certain Relationships and Related Transactions
The information required by this Item is incorporated by reference to the
information in the definitive Proxy Statement for Asymetrix's Annual Meeting of
Stockholders scheduled to be held on May 25, 1999.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements
The following financial statements are filed as part of this report:
Independent Auditors' Report
Consolidated Financial Statements:
Balance Sheets as of December 31, 1997 and 1998
Statements of Operations for the years ended December 31, 1996,
1997, and 1998
Statements of Cash Flows for the years ended December 31, 1996,
1997, and 1998
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
The following financial statement schedules are filed as part of this
report:
I Independent Auditors' Report on Financial Statement Schedule
II Valuation and Qualifying Accounts
All other schedules are omitted because they are not applicable, not required or
the information required is shown in the consolidated financial statements or
notes thereto.
3. Exhibits
The following Exhibits are attached to this Annual Report on Form 10-K:
Exhibit
Number Exhibit Title
- ------- -------------
2.01 Agreement and Plan of Reorganization dated May 22, 1998 by and between
the Company and Strategic Systems Associates, Inc.*
2.02 Agreement and Plan of Reorganization dated June 22, 1998 by and
between the Company and Meliora Systems, Inc.*
2.03 Amended and Restated Agreement and Plan of Reorganization, dated as of
June 24, 1997, by and among Asymetrix, ASX Merger Corporation and
Aimtech Corporation.**
2.04 Agreement and Plan of Reorganization, dated as of September 30, 1997,
by and among Asymetrix, Oakes Acquisition Corp., TopShelf Acquisition
Corp., Acorn Acquisition Corp., Oakes Interactive Incorporated,
TopShelf Multimedia, Inc., Acorn Associates, Incorporated and Gordon
Oakes and Kevin Oakes.**
32
<PAGE>
2.05 Agreement and Plan of Reorganization, dated as of December 22, 1997,
by and among Asymetrix, Asymetrix Acquisition Corp., Communication
Strategies, Incorporated, and Cynthia Boyd and James Boyd.**
3.01 Amended and Restated Certificate of Incorporation of Asymetrix.**
3.02 Bylaws of Asymetrix.**
4.01 Registration Rights Agreement dated as of May 22, 1998, among
Asymetrix, Gary Johnson, Richard M. Johnson and Mike Spingola.
4.02 Registration Rights Agreement dated as of July 1, 1998, among
Asymetrix, Gordon Rogers and Veda Storey.
4.03 Restated and Amended Investors' Rights Agreement, dated as of December
20, 1996, between Asymetrix and the persons and entities listed
therein.**
4.04 Form of Specimen Stock Certificate for Asymetrix's Common Stock.**
4.05 Registration Rights Agreement dated, as of September 11, 1997, between
Asymetrix and persons and entities listed therein.**
4.06 Registration Rights Agreement dated as of September 30, 1997, among
Asymetrix, Gordon Oakes, Kevin Oakes and Doug Foster.**
4.07 Registration Rights Agreement, dated as of December 22, 1997, among
Asymetrix, Cynthia Boyd and James Boyd.**
10.01 Employment Agreement dated as of July 1, 1998, between Asymetrix and
Gordon Rogers.
10.02 Services Agreement, dated as of July 27, 1998, between Asymetrix and
Vulcan Northwest, Inc.
10.03 Eighth Amendment to Lease, dated as of October 16, 1998, by and
between Asymetrix and 110 Atrium Place Associates, LLC.
10.04 Form of Indemnification Agreement entered into by Asymetrix with each
of its directors and executive officers.**
10.05 Asymetrix's 1995 Combined Incentive and Nonqualified Stock Option Plan
and related documents.**
10.06 Asymetrix's 1998 Directors Stock Option Plan and related documents.**
10.07 Asymetrix's 1998 Equity Incentive Plan and related documents.**
10.08 Sublease dated as of October 30, 1995, between Asymetrix and Vulcan
Northwest Inc.**
10.09 Series B Preferred Stock Exchange Agreement, dated as of September 30,
1997, between Asymetrix and SuperCede.**
33
<PAGE>
10.10 Asset Transfer, License and Stock Issuance Agreement, dated as of June
24, 1997, between Asymetrix and SuperCede, Inc.**
10.11 Sublease, dated as of June 24, 1997, between Asymetrix and SuperCede,
Inc.**
10.12 Promissory Note dated as of March 14, 1995, between Asymetrix and Paul
Allen.**
10.13 Infomodelers Technology Transfer and License Agreement dated as of
October 7, 1996, between Asymetrix and ASX Corporation, as amended
January 14, 1998.**
10.14 Sublease dated as of October 7, 1995, between Asymetrix and ASX
Corporation.**
10.15 Asset Purchase and Loan Agreement, dated as of October 7, 1996,
between Asymetrix and ASX Corporation.**
10.16 Lease Agreement, dated as of May 24, 1991, by and between Asymetrix
and Dean Witter Realty Income Partnership II, L.P. and amendments
thereto.**
10.17 Employment Agreement dated as of September 30, 1997, between Asymetrix
and Kevin Oakes.**
10.18 Stock Purchase and Sale Agreement dated as of March 27, 1998 between
Asymetrix and Vulcan Ventures Inc.**
10.19 Directed Engineering Agreement, dated as of March 27, 1998, between
Asymetrix and Vulcan Northwest, Inc.**
21.01 Subsidiaries of Asymetrix.
23.01 Consent of KPMG Peat Marwick LLP.
27.01 Financial Data Schedule
* These Exhibits are incorporated herein by reference to Asymetrix's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998
** These Exhibits are incorporated herein by reference to Asymetrix's
Registration Statement on Form S-1 (Registration no. 333-49037), as amended
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
34
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, Asymetrix
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
ASYMETRIX LEARNING SYSTEMS, INC.
March 31, 1999 /s/ John D. Atherly
- ------------------------------- ---------------------------------------------
Date John D. Atherly Vice President, Finance and
Administration
and Chief Financial Officer (Duly Authorized
Officer and Chief Accounting Officer)
POWER OF ATTORNEY
Each individual whose signature appears below constitutes and appoints James A.
Billmaier and John D. Atherly, and each of them, his true lawful attorneys-in-
fact and agents, with full power of substitution, for him and in his name, place
and stead, in any and all capacities, to sign any and all amendments to this
Annual Report on Form 10-K and to file the same, with all exhibits thereto and
all documents in connection therewith, with the Securities and Exchange
Commission, granted unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Exchange Act of
1934,this report has been signed by the following persons on behalf of the
Registrant in the capacities and on the dates indicated.
March 31, 1999 /s/ James A. Billmaier
- ------------------------- -----------------------------------------------
Date James A. Billmaier, Chief Executive Officer and
Director
March 31, 1999 /s/ Bert Kolde
- ------------------------- ----------------------------------------------
Date Bert Kolde, Chairman of the Board
March 31, 1999 /s/ Paul G. Allen
- ------------------------- ----------------------------------------------
Date Paul G. Allen, Director
March 31, 1999 /s/ Shelley Harrison, Ph.D.
- ------------------------- ----------------------------------------------
Date Shelley Harrison, Ph.D., Director
March 31, 1999 /s/ Gary Rieschel
- ------------------------- ----------------------------------------------
Date Gary Rieschel, Director
March 31, 1999 /s/ Kevin Oakes
- ------------------------- ----------------------------------------------
Date Kevin Oakes, President and Director
March 31, 1999 /s/ Ronald S. Posner
- ------------------------- ----------------------------------------------
Date Ronald S. Posner, Director
35
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Asymetrix Learning Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Asymetrix
Learning Systems, Inc. and subsidiaries as of December 31, 1997 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Asymetrix Learning Systems, Inc. and subsidiaries as of December 31, 1997 and
1998, and the results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1998, in conformity with
generally accepted accounting principles.
KPMG LLP
Seattle, Washington
February 1, 1999
36
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
December 31,
-------------------------
1997 1998
----------- ----------
Assets
Current assets:
<S> <C> <C>
Cash and cash equivalents $2,541 $21,713
Accounts receivable, net of allowance for returns and
doubtful accounts of $1,148 and $1,397 7,424 7,917
Inventories 484 370
Prepaid royalties and licenses 79 66
Receivables from related companies 299 193
Other current assets 425 998
----------- ----------
Total current assets 11,252 31,257
Property and equipment, net 1,939 2,320
Goodwill and other intangible assets, net 8,641 9,917
Investment in Infomodelers, Inc. 204 -
Other assets 133 128
----------- ----------
Total assets $22,169 $43,622
=========== ==========
</TABLE>
Liabilities and Stockholders' Equity
<TABLE>
<CAPTION>
Current liabilities:
<S> <C> <C>
Accounts payable $2,392 $1,494
Accrued liabilities 2,539 1,637
Deferred revenue 3,267 1,401
Notes payable 844 -
Other current liabilities 2,276 1,812
----------- ----------
Total current liabilities 11,318 6,344
Other noncurrent liabilities 425 268
----------- ----------
Total liabilities 11,743 6,612
----------- ----------
Redeemable common stock, $0.01 par value; issued and
outstanding 191,489 shares in 1997 and no shares in 1998. 1,468 -
Stockholders' equity:
Class B stock, $0.01 par value; authorized 5,000,000
shares; issued and outstanding 4,322,289 shares in 1997
and no shares in 1998. 43 -
Common stock, $0.01 par value; authorized 40,000,000
shares, issued and outstanding 6,893,036 shares in 1997
and 13,948,018 shares in 1998. 69 140
Additional paid-in capital 169,369 203,249
Accumulated deficit (160,362) (165,522)
Deferred stock compensation - (580)
Accumulated other comprehensive loss (161) (277)
----------- ----------
Total stockholders' equity 8,958 37,010
----------- ----------
Total liabilities and stockholders' equity $22,169 $43,622
=========== ==========
</TABLE>
See the accompanying notes to Consolidated Financial Statements
37
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1996 1997 1998
-------------- -------------- ---------------
<S> <C> <C> <C>
Revenue:
Product revenue:
Online learning products $ 3,716 $ 8,036 $10,828
Other products 11,165 10,426 4,365
---------- ----------- ----------
Total product revenue 14,881 18,462 15,193
Services revenue 3,600 7,243 18,159
---------- ----------- ----------
Total revenue 18,481 25,705 33,352
---------- ----------- ----------
Cost of revenue:
Product revenue:
Online learning products 198 608 947
Other products 2,946 2,127 1,038
---------- ----------- ----------
Total cost of product revenue 3,144 2,735 1,985
Services revenue 2,549 4,635 12,432
---------- ----------- ----------
Total cost of revenue 5,693 7,370 14,417
---------- ----------- ----------
Gross margin 12,788 18,335 18,935
---------- ----------- ----------
Operating expenses:
Research and development 12,375 8,423 6,113
Sales and marketing 15,636 14,704 14,149
General and administrative 4,535 4,491 5,767
Amortization of goodwill - 119 825
Loss on impairment of assets 2,787 - -
Restructuring charge 1,104 - -
Acquired in-process research
and development - 4,064 -
---------- ----------- ----------
Total operating expenses 36,437 31,801 26,854
---------- ----------- ----------
Loss from operations (23,649) (13,466) (7,919)
---------- ----------- ----------
Other income/(expense):
Other expense (1,324) (38) (18)
Interest income from principal stockholder 1,066 436 -
Other interest income, net 22 8 609
Equity in income (losses) from
Infomodelers, Inc. (112) (634) 2,169
---------- ----------- ----------
Total other income (expense) (348) (228) 2,760
---------- ----------- ----------
Net loss $(23,997) $(13,694) $(5,159)
---------- ----------- ----------
Accretion of redemption value of
redeemable common stock - - (1,370)
---------- ----------- ----------
Net loss attributable to common stockholders $(23,997) $(13,694) $(6,529)
========== =========== ==========
Net loss per share, basic and diluted $(3.90) $(2.17) $(.62)
========== =========== ==========
Weighted average common shares outstanding,
basic and diluted 6,158 6,306 10,599
========== =========== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements
38
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
Accumu-
Class B lated
Stock Other
Addi- Deferred Subscrip- Compre- Compre-
Class B. Stock Common Stock tional Stock tion hensive Accumu- hensive
-------------- ------------ Paid-In Compen- Receiv- Income lated Income
Shares Amount Shares Amount Capital sation able (Loss) Deficit (Loss) Total
------ ------ ------ ------ ------- ------- -------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1995 - - 6,040,573 $ 60 $152,567 - - $ (94) $(122,671) - $ 29,862
Common stock issued
for services - - 6,076 - 7 - - - - - 7
Series 1 Class B
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
and Class B Stock
subscription
receivable 388,395 4 - - 4,999 - (4,500) - - - 503
Stock options
exercised - - 54,542 1 86 - - - - - 87
Common stock issued
in acquisitions - - 93,136 1 102 - - - - - 103
Dividend on
Infomodelers stock - - - - (219) - - - - - (219)
Stock compensation - - - - 500 - - - - - 500
Comprehensive loss:
Net loss - - - - - - - - (23,997) (23,997) (23,997)
Translation
adjustment - - - - - - - 121 - 121 121
--------
Total comprehensive
loss (23,867)
========
------------------------------------------------------------------------------------------ ----------
Balances at
December 31, 1996 814,290 8 6,194,327 62 163,168 - (4,500) 27 (146,668) - 12,097
Stock options
exercised - - 341,757 3 362 - - - - - 365
Series 4 Class B
issued in
acquisitions 2,383,894 24 - - 3,361 - - - - - 3,385
Series 5 Class B
issued in
acquisitions 1,512,500 15 - - 2,133 - - - - - 2,148
Common stock
issued in
acquisitions - - 356,952 4 2,806 - - - - - 2,810
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)
Comprehensive loss:
Net loss - - - - - - - - (13,694) (13,694) (13,694)
Translation
adjustments - - - - - - - (188) - (188) (188)
--------
Total comprehensive
loss - - - - - - - - - (13,882)
========
------------------------------------------------------------------------------------------ ----------
Balances at
December 31, 1997 4,322,289 43 6,893,036 69 169,369 - - (161) (160,362) - 8,958
Stock options
exercised - - 484,953 6 874 - - - - 880
Stock compensation - - 2,250 2 961 (736) - - - - 227
Amortization of
deferred stock
compensation - - - - - 156 - - - - 156
Cancellation of
Series 4 Class B
stock (900) - - - - - - - - - -
Cancellation of
common stock - - (4,967) - (2) - - - - - (2)
Common stock
issued in
acquisitions - - 115,215 1 1,357 - - - - - 1,358
Common stock issued
in Initial Public
Offering net of
offering costs of
$3,944 - - 3,025,000 30 29,301 - - - - - 29,331
Conversion of
Class B stock to
common stock (4,321,389) (43) 3,241,042 32 11 - - - - -
Conversion of
redeemable common
stock to common
stock - - 191,489 - 1,468 - - - - - 1,468
Comprehensive loss:
Net loss - - - - - - - - (5,159) (5,159) (5,159)
Translation
adjustments - - - - - - - (116) - (116) (116)
--------
Total comprehensive
loss - - - - - - - - - $ (5,275)
========
------------------------------------------------------------------------------------------ ----------
Balances at
December 31, 1998 - - 13,948,018 $140 $203,249 $(580) - $(277) $(165,522) $ 37,010
========================================================================================== ==========
</TABLE>
See accompanying notes to Consolidated Financial Statements
39
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1996 1997 1998
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss $(23,997) $(14,273) $(5,159)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 1,737 1,170 1,662
Stock compensation expense 500 822 383
Accrued interest on note receivable
from principal stockholder (1,066) 2,288 -
Accrued interest on Class B stock
subscription receivable - - -
Acquired in-process research
and development - 4,064 -
Equity in (income) losses
from Infomodelers, Inc. 112 634 (2,169)
Impairment of intangibles 2,787 - -
Class B stock issued in
exchange for services 300 - -
Common stock issued in
exchange for services 7 - -
Changes in assets and liabilities:
Accounts receivable 3,152 (4,191) (477)
Inventories 79 208 114
Prepaid royalties and licenses (298) (212) 13
Receivables from related companies (13) (171) 106
Other current assets (101) 167 (558)
Accounts payable 466 (1,690) (1,109)
Accrued liabilities 89 398 (550)
Deferred revenue 1,180 774 (2,242)
Other current liabilities (106) 2,031 (664)
-------- ------- --------
Net cash used in operating activities (15,172) (7,375) (10,650)
-------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment (857) (316) (1,242)
Payments related to acquisitions,
net of cash acquired - (321) (155)
Disposal of (investment in)
Infomodelers, Inc. (1,000) - 2,373
Disposal of other assets 155 (8) 187
-------- ------- --------
Net cash (used in)/provided by
investing activities (1,702) (645) 1,163
-------- ------- --------
Cash flows from financing activities:
Proceeds from (repayment)
of notes payable 101 (131) (843)
Payments received on notes receivable
from principal stockholder 11,850 6,747 -
Payments on long-term debt (413) (398) (592)
Payments received on Class B
stock subscription receivable - 500 -
Proceeds from sale of Class B stock, net 5,333 - -
Proceeds from exercise of stock options 87 365 880
Net proceeds from initial
public offering - - 29,331
-------- ------- --------
Net cash provided by
financing activities 16,958 7,083 28,775
-------- ------- --------
Effect of foreign exchange rate
changes on cash 121 (188) (116)
-------- ------- --------
Net increase/(decrease) in cash
and cash equivalents 205 (1,248) 19,172
Cash and cash equivalents at
beginning of year 3,584 3,789 2,541
-------- ------- --------
Cash and cash equivalents at
end of year $3,789 $2,541 $21,713
======== ======= ========
</TABLE>
See accompanying notes to Consolidated Financial Statements
40
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997, AND 1998
(1) Summary of Significant Accounting Policies
(a) Business
Asymetrix Learning Systems, Inc. (Asymetrix) is a provider
of online enterprise learning solutions designed to enable organizations to
capture, deploy and manage knowledge more effectively. Asymetrix's
products can be used by clients on a variety of computer platforms.
Asymetrix'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 skills-based
management system known as Ingenium, its multimedia products, consisting of
media creation products and third-party learning titles. Asymetrix's
other products include multimedia authoring tools and other products not
related to online learning. Asymetrix 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) Basis of Presentation
The accompanying consolidated financial statements include the accounts of
Asymetrix and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Investments in 20% to 50% owned companies are accounted for using the
equity method of accounting.
(c) Use of Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Accordingly, actual results may differ
from these estimates.
(d) Foreign Currency Translation
The functional currency of Asymetrix foreign subsidiaries is the local
currency in the country in which the subsidiary is located. Assets and
liabilities denominated in foreign currencies are translated to U.S.
dollars at the exchange rate in effect on the balance sheet date. Revenues
and expenses are translated at the average rates of exchange prevailing
during the year. The translation adjustment resulting from this process is
presented separately as a component of accumulated other comprehensive loss
in stockholders' equity. Gains and losses on foreign currency transactions
are included in the consolidated statement of operations as incurred. To
date, gains and losses on foreign currency transactions have not been
significant.
(e) Cash and Cash Equivalents
All highly liquid financial instruments purchased with a remaining maturity
of three months or less at the date of purchase are reported as cash
equivalents. The carrying amounts reported in the consolidated balance
sheets for cash and cash equivalents approximate their fair values.
(f) Concentration of Credit and Sales Risk
Asymetrix distributes it products through direct sales to end-users and
on an indirect basis through resellers, distributors, and original
equipment manufacturers (OEMs). Asymetrix performs ongoing credit
evaluations of its customers' financial condition and generally requires no
collateral.
41
<PAGE>
(g) 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.
(h) Other Financial Instruments
At December 31, 1997 and 1998, 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.
(i) 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.
(j) Goodwill and Other Intangible Assets
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.
Other intangible assets consist of software products acquired by Asymetrix
from third parties. At the time of their acquisition, the products had
either reached technological feasibility or were complete. Purchased
technology is amortized on a product-by-product basis using the greater of
the amount computed using the ratio that current sales bear to the total of
current and anticipated future gross revenues for that product or the
straight line method over the remaining estimated economic life of the
product.
(k) Impairment of Long-Lived Assets
Asymetrix reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not be recoverable. Recoverability of assets held and used, other than
goodwill is measured by a comparison of the carrying amount of an asset to
future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair
value of the assets. Assets to be disposed of are reported at the lower of
their carrying amount or fair value less cost to sell. The recoverability
of goodwill is assessed whenever the facts and circumstances suggest that
the asset may be impaired and the write-down material. Asymetrix assesses
the recoverability of goodwill by determining whether the unamortized
goodwill balance can be recovered through undiscounted future cash flows.
(l) Revenue Recognition
Effective January 1, 1998, Asymetrix 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 year ended December 31, 1998.
42
<PAGE>
Prior to January 1, 1998, revenue from sales of software products to end-
users, resellers, and distributors was recognized when the products were
shipped provided that no significant obligations of Asymetrix remain and
collection of the resulting receivable is deemed probable.
Asymetrix 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 Asymetrix
remain, Asymetrix 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. Asymetrix recognizes revenue associated
with technical support agreements over the life of the contract.
Asymetrix 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.
(m) Research and Development
Research and development costs, which consist primarily of software
development costs, are expensed as incurred. Financial accounting standards
provide for the capitalization of certain software development costs after
technological feasibility of the software is established. Under Asymetrix'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.
(n) Income Taxes
Income taxes are computed using the asset and liability method. Under this
method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to the differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in
results of operations in the period that includes the enactment date.
(o) Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, Accounting for Stock-Based Compensation (Statement 123).
Asymetrix 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-based compensation. Accordingly, Asymetrix'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 10 to the financial
statements.
(p) Advertising
Advertising costs are expensed as incurred and are included in sales and
marketing expenses. Advertising expense was $1,290,000, $1,312,000, and
$652,000 during the years ended December 31, 1996, 1997, and 1998.
43
<PAGE>
(q) 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 Asymetrix 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, 1998 are options to acquire approximately 3,990,190
shares of Common Stock with a weighted average share price of $5.05 because
their effects would be anti-dilutive.
(r) Comprehensive Loss
Asymetrix has adopted the provisions of Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income (Statement 130).
Statement 130 establishes standards for reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. Asymetrix
has disclosed the comprehensive loss in the Consolidated Statements of
Stockholders' Equity. Asymetrix's total comprehensive loss for the years
ended December 31, 1996, 1997, and 1998 was $23,867,000, $13,882,000 and
$5,275,000 respectively and consisted of net loss and foreign currency
translation adjustments. There was no tax effect from the foreign currency
translation adjustments.
(s) Reclassifications
Certain amounts in the 1996 and 1997 consolidated financial statements have
been reclassified to conform to the 1998 presentation.
(t) New Accounting Pronouncements
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position No. 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use (SOP 98-1). SOP 98-1
establishes guidance on accounting for the costs incurred related to
internal use software. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. Asymetrix anticipates the adoption of SOP 98-1
will not have a material impact on its consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities (Statement
133). Statement 133 provides a comprehensive and consistent standard for
the recognition and measurement of derivatives and hedging activities.
Statement 133 is effective for fiscal years beginning after June 15, 1999.
Asymetrix does not expect the adoption of Statement 133 to have a
material impact on its consolidated financial statements.
(2) Inventories
Inventories consist of the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1997 1998
------ ------
(In thousands)
<S> <C> <C>
Raw materials..................... $351 $ 247
Finished goods.................... 184 226
Less obsolescence reserve......... (51) (103)
---- ----
$484 $ 370
==== =====
</TABLE>
44
<PAGE>
(3) Property and Equipment
<TABLE>
<CAPTION>
Property and equipment consists of the following:
December 31,
-------------------------------
1997 1998
------------- -------------
(In thousands)
<S> <C> <C>
Leasehold improvements........................ $ 251 $ 393
Equipment..................................... 6,055 6,681
Furniture and fixtures........................ 517 568
------------- -------------
6,823 7,642
Less accumulated depreciation................. 4,884 5,322
------------- -------------
$1,939 $2,320
============= =============
</TABLE>
(4) Goodwill and Other Intangible Assets
Goodwill and other intanbible assets consists of the following:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1998
--------- ----------
(In thousands)
<S> <C> <C>
Goodwill..................................... $ 8,309 $ 10,426
Other intangible assets...................... 1,714 1,922
------- --------
10,023 12,348
Less accumulated amortization................ 1,382 2,431
------ -------
$ 8,641 $ 9,917
======= ========
</TABLE>
(5) Notes Payable
Asymetrix maintained an unsecured $500,000 revolving line of credit facility
with a bank. Interest was payable at the bank's stated rate plus 1.0%. Asymetrix
had outstanding borrowings under the facility of $274,000 at December 31, 1997.
The facility expired April 1, 1998 and all amounts outstanding were repaid.
Asymetrix was obligated under a note payable to a former stockholder of the
Oakes Companies in the amount of $488,000. This note was paid in 1998.
(6) Leases
Asymetrix 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>
<CAPTION>
Years ending December 31:
<S> <C>
1999............................ $1,613
2000............................ 1,363
2001............................ 464
2002............................ 159
2003............................ 60
---------
Total minimum lease payments.... $3,659
=========
</TABLE>
Asymetrix has sublet a portion of its office space to related parties and
offsets rent expense through sublease billings. No sublease billings are
expected beyond 1998. Rent expense under operating leases, net of sublease
billings, approximated $1,441,000, $1,275,000 and $1,989,000 during the years
ended December 31, 1996, 1997, and 1998, respectively.
(7) Income Taxes
<TABLE>
<CAPTION>
Income (loss) before income taxes consists of the following:
Year Ended December 31,
1996 1997 1998
--------- --------- --------
(In thousands)
<S> <C> <C> <C>
U.S................................. $(23,940) $(13,686) $(3,846)
Foreign............................. 139 30 (1,313)
--------- -------- --------
Total loss before income taxes...... $(23,801) $(13,656) $(5,159)
</TABLE>
45
<PAGE>
Asymetrix has recorded no provision for income taxes due to operating
losses incurred. Asymetrix's effective tax rate differs from the U.S. federal
statutory rate of 34% as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1996 1997 1998
---------- --------- ----------
(In thousands)
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate of 34%..... $(8,092) $(4,643) $(1,754)
Losses producing no current tax benefit................... 8,019 3,151 1,438
Acquired in-process research and development.............. - 1,382 -
Other, net................................................ 73 110 316
---------- --------- ----------
Total provision for income taxes................. $ - $ - $ -
========== ========= ==========
</TABLE>
As of December 31, 1998, 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 .................................. 26,561 928
From 2007 through 2019................................... 99,793 1,981
--------- -------
$128,746 $2,909
========= =======
</TABLE>
Asymetrix'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 consists of the following:
<TABLE>
<CAPTION>
December 31,
-----------------------
1997 1998
---------- ---------
(In thousands)
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards............................ $ 43,582 $43,774
Research and development tax credit carryforwards............ 2,558 2,909
Provisions for credit and sales allowance................... 390 647
Other provisions and expenses not currently deductible...... 427 507
---------- ---------
47,372 47,837
Valuation allowance for deferred tax assets................. (47,372) (47,837)
---------- ---------
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 $7,637,000,
$2,539,000 and $465,000 in 1996, 1997 and 1998, respectively.
(8) Related-Party Transactions
During 1996 and 1997, Asymetrix recognized interest income on a note
receivable from the principal stockholder of $1,066,000 and $436,000
respectively. The note receivable was repaid in full in October 1997.
46
<PAGE>
In March 1998, Asymetrix entered into a Directed Engineering Agreement
(the Engineering Agreement) with Vulcan Northwest, d/b/a APEX (APEX), an
entity controlled by Asymetrix's principal stockholder pursuant to which
Asymetrix has agreed to develop customized extensions of its Librarian
product on a best efforts basis. The terms of the Engineering Agreement
are similar to those of other custom development arrangements which
Asymetrix has entered into with other third parties. Pursuant to the terms
of the Engineering Agreement, Asymetrix will retain all intellectual
property rights to these extensions. Revenue is recognized based upon the
percentage of completion method. Asymetrix recognized $415,000 of revenue
under the engineering agreement in 1998.
(9) Acquisitions
(a) Pooling of Interests Transactions:
Meliora Systems, Inc. (Meliora)
In July 1998, Asymetrix 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.
Asymetrix issued 268,000 shares of Common Stock in connection with
this acquisition. The accompanying consolidated financial statements
have been restated for all periods presented to give effect to the
combination.
The summarized results of operations of the separate companies for the
years ended December 31, 1996, and 1997 and the six months ended June
30, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------- Six Months Ended
1996 1997 June 30, 1998
----------- ------------ ----------------
(In thousands)
Revenue:
<S> <C> <C> <C>
As previously reported............ $ 17,255 $ 24,064 $15,909
Meliora........................... 1,226 1,641 661
---------- ---------- ---------
As restated....................... $ 18,481 $ 25,705 $16,570
========== ========== =========
Net loss:
As previously reported........... $(23,555) $(13,115) $(2,444)
Meliora.......................... (442) (579) (691)
---------- ---------- ---------
As restated...................... $(23,997) $(13,694) $(3,135)
========== ========== =========
</TABLE>
(b) Purchase Transactions:
Socha Computing, Inc. (Socha)
In July 1997, Asymetrix 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 converted to 150,000 shares of
Common Stock) valued at $284,000. At the time of the acquisition, the
operations of Socha consisted primarily of development of technology. At
the date of the acquisition, the in-process research and development was
evaluated as to its state of completion and it was determined that
technological feasibility had not yet been established and that the
technology had no alternative future uses. As a result, the aggregate
purchase price of $484,000 has been allocated to acquired in-process
research and development.
47
<PAGE>
Aimtech Corporation (Aimtech)
In September 1997, Asymetrix acquired all the outstanding shares of common stock
of Aimtech, a provider of computer based training (CBT) and web development
products based in Nashua, New Hampshire. The Aimtech acquisition was recorded
under the purchase method of accounting.
The purchase price consisted of 2,183,894 shares of Series 4 Class B Stock
(which converted into 1,637,853 shares of Common Stock) valued at $3,101,000 and
$154,000 of other acquisition costs. The purchase price has been allocated to
assets acquired and liabilities assumed based on their fair value at the date of
acquisitions 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>
At the date of the acquisition, technological feasibility of the acquired in-
process technology had not been established, and the technology had not
alternative future uses. In connection with the acquisition of Aimtech, 441,705
shares of Series 4 Class B Stock (which converted into 331,246 shares of Common
Stock) were placed in escrow to secure certain indemnification obligations of
former stockholders of Aimtech. At December 31, 1998, the shares remained in
escrow.
The Oakes Companies
In September 1997, Asymetrix 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 Class B Stock (which
converted into 1,134,371 shares of Common Stock) valued at $2,148,000 and
$72,000 of other acquisition costs, 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>
Communications Strategies, Incorporated (CSI)
In December 1997, Asymetrix 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 Asymetrix's Common Stock at
$7.67 per share, and acquisition costs of $10,000. The fair value of the options
issued (determined using a Black-Scholes option valuation model with the
following assumptions: expected life of four years, expected volatility of 60%,
expected dividend yield of 0% and a risk-free interest rate of 6.0%) 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
48
<PAGE>
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>
At December 31, 1997, 191,489 shares of Common Stock issued in the acquisition
were classified as Redeemable Common Stock due to certain rights of former CSI
stockholders to require Asymetrix to repurchase these shares. Those rights
expired in June 1998 and the shares were transferred to Common Stock.
Graham-Wright Interactive, Inc. (GWI)
In December 1997, Asymetrix 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 9,372 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 and other assets................................ $ 52
Goodwill............................................................... 132
Current liabilities.................................................... (112)
-----
$ 72
=====
</TABLE>
Adams Consulting Group, Inc. (Adams)
In March 1998, Asymetrix acquired Adams by issuing 13,215 shares of Asymetrix'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 value at the date of acquisition as follows (in
thousands):
<TABLE>
<S> <C>
Goodwill.............................................................. $183
Current liabilities................................................... (38)
-----
$145
=====
</TABLE>
Strategic Systems Associates, Inc. (SSA)
In May 1998, Asymetrix acquired 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 purchase price consisted of 102,000 shares of Common Stock valued at
$1,100,000. 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............................... $ 400
Goodwill.............................................................. 1,700
Net current liabilities............................................... (1,000)
-------
$ 1,100
=======
</TABLE>
49
<PAGE>
(b) 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, and as if the acquisitions of Adams and SSA had occurred
on January 1, 1997 (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------------------
1996 1997 1998
--------------- ---------------- --------------
<S> <C> <C> <C>
Revenue.......................... $ 31,998 $ 39,919 $34,042
Net loss......................... (29,472) (18,053) (6,687)
Net loss per share............... (4.52) (2.71) (.63)
</TABLE>
(10) Impairment of Assets and Restructurings
(a) Restructuring of European Operations
In September 1996, Asymetrix adopted a plan to restructure its
European operations. Asymetrix recognized a charge to income of
$604,000, which included involuntary termination benefits for employee
compensation and certain exit costs.
(b) Spin-Off of Client/Server Tools Division
On October 7, 1996, Asymetrix transferred employees previously
employed in Asymetrix's Client/Server Tools Division to a wholly-
owned subsidiary Infomodelers, Inc. (Infomodelers), previously ASX
Corporation, formed in August 1996. Asymetrix entered into two
agreements with Infomodelers: (1) a Technology Transfer and License
Agreement, whereby the Infomodelers and Conceptual Query technologies
were transferred to Infomodelers in exchange for 3,500,000 shares of
Infomodelers' common stock (all of the outstanding stock of ASX
Corporation), a royalty of 8% on sales of Infomodelers' products and
services based on this technology over the next five years; and a
license for Asymetrix to use the technology in noncompeting
products; and (2) an Asset Purchase and Loan Agreement, whereby
Asymetrix sold Infomodelers all net assets (including patents and
trademarks covering the technology) of the Client/Server Tools
Division for $500,000. Additionally, Asymetrix loaned Infomodelers
$1,000,000. Both the purchase price of the assets and the loan were
reflected in a $1,500,000 promissory note from Infomodelers to
Asymetrix. Asymetrix recorded a noncash restructuring expense of
$500,000 related to a modification of Asymetrix stock option plan
rights related to employees who transferred to Infomodelers.
Asymetrix canceled the $1,5000,000 promissory note in exchange for
700,000 shares of Infomodelers preferred stock.
On October 17, 1996, Asymetrix distributed, in the form of a
dividend, 2,434,262 shares of Infomodelers common stock valued at
$219,000 to its existing stockholders, and distributed 368,512 shares
of Infomodelers common stock valued at $33,000 (in the form of
compensation) to holders of vested options of Asymetrix's common
stock.
Subsequent to these transactions, and the sale of $700,000 shares of
Infomodelers preferred stock by Infomodelers to a third party,
Asymetrix 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, Asymetrix reviewed the technology
remaining in the Client/Server Tools Division and development
activities using the technology were abandoned. Therefore,
50
<PAGE>
Asymetrix recorded an impairment of $2,787,000 in 1996, to write-off
previously capitalized amounts related to licenses for the technology.
During the years ended December 31, 1996, 1997, and 1998, Asymetrix
recognized equity in income (losses) of Infomodelers of ($112,000),
($634,000) and $2,169,000, respectively.
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
Asymetrix 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, Asymetrix sold to its principal stockholder
Infomodelers shares with the aggregate book value of $2.4 million to
Asymetrix's principal stockholder for cash of $2.4 million.
(c) Spin-Off of Internet Tools Division
In June 1997, Asymetrix 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, Asymetrix 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
Asymetrix to use the technology in noncompeting products specifically
including Asymetrix's online enterprise learning products. In
September 1997, Asymetrix exchanged its SuperCede common stock for
an equivalent number of shares of SuperCede Series B preferred stock,
and the license of SuperCede technology to Asymetrix was terminated.
Also in September 1997, an additional investor controlled by
Asymetrix's principal stockholder purchased 3,500,000 shares of
SuperCede Series A preferred stock for $2.00 per share, reducing
Asymetrix'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 Aysmetrix exchanged its SuperCede common stock for
SuperCede common stock for SuperCede Series B preferred stock and
SuperCede sold Series A preferred stock to Asymetrix's principal
stockholder, SuperCede had net liabilities of $1,357,000. Asymetrix
treated the transaction as a sale of stock by its subsidiary. Because
SuperCede's Series A preferred stockholder has rights, preferences and
privileges superior to those of Asymetrix's Series B preferred
stock, Asymetrix's share of SuperCede's net assets is $0 and,
therefore, Asymetrix increased the carrying amount of its investment
in SuperCede to $0. The increase in the carrying amount of Asymetrix's
investment in SuperCede was reflected as an increase of
$1,402,000 to additional paid-in capital. Asymetrix accounts for its
investment in SuperCede using the equity method of accounting.
Additionally, Asymetrix will record no equity in earnings in
SuperCede until the net assets of SuperCede exceed the then
liquidation preference on the Series A preferred stock.
All of the assets of SuperCede were subsequently acquired by
Instantiations, Inc. in January of 1999, and SuperCede was dissolved.
Because the total consideration received in the transaction was less
than the liquidation preference of the Series A Preferred Stock,
Asymetrix received no portion of that consideration and believes that
it will receive no future value from its SuperCede interest.
(11) Stockholder's Equity
(a) Class B Stock
At December 31, 1997 and 1998, Class B Stock consisted of the
following shares:
<TABLE>
<CAPTION>
Issued and Outstanding
------------------- -----------------------------------------
Designated Shares 1997 1998
------------------- ------------------- ------------------
<S> <C> <C> <C>
Series 1.................. 50,000 37,500 -
Series A ................. 388,395 388,395 -
Series B ................. 388,395 - -
Series 4 ................. 2,500,000 2,383,894 -
Series 5 ................. 1,512,500 1,512,500 -
Undesignated.............. 160,710 - -
------------------- ------------------- ------------------
5,000,000 4,322,289 -
=================== =================== ==================
</TABLE>
(b) Common Stock
On June 12, 1998, Asymetrix completed its Initial Public Offering (IPO) and
issued 3,000,000 shares of its Common Stock at an initial public offering
price of $11.00 per share plus an additional 25,000 shares pursuant to the
exercise of the underwriters'
51
<PAGE>
over-allotment option. The net proceeds to Asymetrix after deducting
underwriting discounts and offering expenses incurred by Asymetrix
were approximately $29.3 million. Concurrent with the IPO, each
outstanding share of Asymetrix's Class B Stock was automatically
converted into approximately 0.75 shares of Common Stock.
(c) Stock Option Plan
Asymetrix has adopted stock option plans (the Plans) that provide for
the issuance of nonqualified and incentive stock options to officers,
employees, consultants, and directors to acquire 5,962,500 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
inception date of the initial plan in 1995 vest ratably each month
over four years. Subsequent Option grants generally vest at 25% after
the first year and ratably each month for the next three years. When
options are issued at less than fair market value, compensation
expense is recorded. All canceled options revert back to the option
pool.
Asymetrix 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 Asymetrix's employee
stock options is measured based on the intrinsic value of the stock
option. Statement 123 requires companies that continue to follow APB
25 to provide a pro forma disclosure of the impact of applying the
fair value method of Statement 123.
Under APB 25, because the exercise price of Asymetrix's employee stock
options equals the fair value of the underlying stock on the date of
grant, no compensation expense is recognized except $736,000 of
deferred stock compensation expense recorded in 1998. Had stock
compensation expense for Asymetrix'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,
---------------------------------------------
1996 1997 1998
---------------------------------------------
<S> <C> <C> <C>
(In thousands)
Net loss:
As reported $(23,997) $(13,694) $(5,159)
Pro forma (24,368) (14,195) $(6,594)
Basic and diluted net
loss per share:
As reported $ (3.90) $ (2.17) $ (.62)
Pro forma $ (3.95) $ (2.25) $ (.75)
</TABLE>
Prior to the Initial Public Offering (IPO), the fair value for the options
was estimated at the date of grant using the minimum value method that
takes into account (1) the stock price at the grant date, (2) the exercise
price, (3) a five-year expected life of the options, (4) no dividends, and
(5) a risk-free interest rate of 6.5% during 1996 and 6.0% during 1997 and
1998. After the IPO, the fair value for the options granted was estimated
using the Black-Scholes option pricing model using the above assumptions
and a volatility of 84%. Compensation expense recognized in providing pro
forma disclosures may not be representative of the effects on pro forma
income or loss for future years because the amounts above include only the
amortization for the fair value of the 1996, 1997, and 1998 grants.
The weighted-average fair value of stock options granted in 1996, 1997, and
1998 was $0.64, $1.57, and $3.25, respectively.
52
<PAGE>
A summary of Asymetrix's stock option activity is as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------------------------
Shares available Number of shares Weighted average
for grant exercise price
------------------- ------------------- -------------------
<S> <C> <C> <C>
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
Increase in shares available for grant 1,687,500 - -
Options granted (1,597,579) 1,597,579 7.86
Options exercised - (484,953) 1.62
Options canceled 512,271 (512,271) 6.49
------------------- -------------------
Balances at December 31, 1998 1,046,386 3,990,190 5.05
=================== ===================
</TABLE>
The following table summarizes information concerning currently outstanding
and exercisable options at December 31, 1998:
<TABLE>
<CAPTION>
Weighted-average Weighted-average Weighted-average
Range of Number remaining exercise Number exercise prices
Exercise Prices Outstanding contractual life price exercisable prices
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.55 - $ 3.75 1,806,165 7.24 years $ 1.98 1,239,588 $ 1.55
5.19 - 6.38 1,003,502 8.66 years 5.97 393,351 6.00
7.67 - 8.94 769,643 9.21 years 8.12 136,847 7.67
10.00 - 11.00 410,880 9.40 years 10.54 5,000 11.00
----------- ----------
1.55 - 11.00 3,990,190 8.20 years 5.05 1,774,786 3.03
=========== ==========
</TABLE>
(12) Benefit Plans
Asymetrix 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, Asymetrix has
made no contributions.
47
<PAGE>
(13) Litigation
In 1996, a complaint seeking unspecified damages was filed against
Asymetrix alleging that Asymetrix's ToolBook and Multimedia ToolBook
products infringe a patent. Asymetrix has received an opinion from
counsel that the products do not infringe this patent and that the patent
is invalid. The action is still in the discovery stage. Although Asymetrix
does not believe that the resolution of this litigation will have a
material impact on its financial position and results of operations, it is
reasonably possible that the outcome will result in a loss to Asymetrix.
Asymetrix's best estimate of the range of loss is insignificant. Asymetrix
intends to vigorously defend this action.
(14) Segment Information
Asymetrix has adopted the provisions of SFAS No. 131, Disclosures About
Segments of an Enterprise and Related Information. SFAS No. 131 establishes
standards for the reporting by public business enterprises about operating
segments, products and services, geographic areas, and major customers. The
method for determining what information to report is based on the way that
management organizes the operating segments within Asymetrix for making
operating decisions and assessing financial performance.
Asymetrix's chief operating decision-maker is considered to be Asymetrix's
Chief Executive Officer (CEO). The CEO reviews financial information on a
consolidated basis with disaggregated information about revenues by product
categories and geographic region for purposes of making operating decisions
and assessing financial performance. The product categories reviewed by the
CEO are on-line learning products and other products. These categories are
identical to those in the accompanying consolidated statements of
operations. The consolidated financial information reviewed by the CEO does
not include information regarding profitability of Asymetrix's different
products or services. Therefore, Asymetrix operates in a single operating
segment, on-line learning.
Revenue and long-lived asset information regarding operations in the United
States and International primarily Europe is as follows (in thousands):
<TABLE>
<CAPTION>
Year Ended
December 31,
---------------------------------------------------------------------
1996 1997 1998
------------------- ------------------- -------------------
<S> <C> <C> <C>
Revenue:
Domestic $12,937 $18,809 $ 29,527
International - primarily Europe 5,544 6,896 3,825
------------------- ------------------- -------------------
$18,481 $25,705 $33,352
------------------- ------------------- -------------------
December 31,
--------------------------------------------
1997 1998
------------------- -------------------
Long-lived assets:
Domestic operations $10,082 $11,695
International operations - primarily Europe 46 74
------------------- -------------------
$10,128 $11,769
=================== ===================
</TABLE>
No single customer accounted for greater than 10% of total revenues in any
period presented.
54
<PAGE>
(15) Unaudited Quarterly Financial Information
<TABLE>
<CAPTION>
For the Quarter Ended
March 31, June 30, Sept. 30, Dec. 31,
1997 1997 1997 1997
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 5,388 $ 5,778 $ 6,379 $ 8,160
Gross margin 4,239 4,423 4,482 5,191
Operating loss (2,642) (2,108) (6,638) (2,078)
Net loss (2,579) (2,160) (6,704) (2,251)
Net loss per share, basic
and diluted (.42) (.35) (1.07) (.35)
</TABLE>
<TABLE>
<CAPTION>
For the Quarter Ended
March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 8,198 $ 8,372 $ 9,129 $ 7,653
Gross margin 4,848 4,675 5,408 4,004
Operating loss (1,861) (2,070) (1,284) (2,704)
Net loss (476) (2,659) (1,003) (2,391)
Net loss per share, basic
and diluted (.07) (.32) (.07) (.17)
</TABLE>
55
<PAGE>
INDEPENDENT AUDITORS REPORT
The Board of Directors and Stockholders
Asymetrix Learning Systems, Inc.:
Under date of February 1, 1999, we reported on the consolidated balance sheets
of Asymetrix Learning Systems, Inc. and subsidiaries as of December 31, 1997 and
1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the years in the three-year period ended
December 31, 1998, which are included in the 1998 Annual Report on Form 10-K of
Asymetrix Learning Systems, Inc. In connection with our audit of the
aforementioned consolidated financial statements, we also audited the related
consolidated financial statement schedule of valuation and qualifying accounts.
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 audits.
In our opinion, such consolidated financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole,
presents fairly, in all material respects, the information set forth therein.
KPMG LLP
Seattle, Washington
February 1, 1999
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE OF VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE
AT CHARGED TO BALANCE
BEGINNING OTHER COSTS AT END
OF YEAR AND EXPENSES DEDUCTIONS OF YEAR
--------- ------------ ---------- -------
<S> <C> <C> <C> <C>
Year ended December 31, 1998:
Valuation accounts deducted
from assets:
Allowance for doubtful receivables
and sales returns........................ $1,148 $1,564 $1,315 $1,397
Reserve for inventory
obsolescence............................. 51 135 83 103
Year ended December 31, 1997:
Valuation accounts deducted
from assets:
Allowance for doubtful receivables
and sales returns........................ $3,346 $1,121 $3,319 $1,148
Reserve for inventory
obsolescence............................. 385 357 691 51
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
</TABLE>
57
<PAGE>
EXHIBIT INDEX
Exhibit
Number Exhibit Title
- ------- -------------
2.01 Agreement and Plan of Reorganization dated May 22, 1998 by and between
the Company and Strategic Systems Associates, Inc.*
2.02 Agreement and Plan of Reorganization dated June 22, 1998 by and
between the Company and Meliora Systems, Inc.*
2.03 Amended and Restated Agreement and Plan of Reorganization, dated as of
June 24, 1997, by and among Asymetrix, ASX Merger Corporation and
Aimtech Corporation.**
2.04 Agreement and Plan of Reorganization, dated as of September 30, 1997,
by and among Asymetrix, Oakes Acquisition Corp., TopShelf Acquisition
Corp., Acorn Acquisition Corp., Oakes Interactive Incorporated,
TopShelf Multimedia, Inc., Acorn Associates, Incorporated and Gordon
Oakes and Kevin Oakes.**
2.05 Agreement and Plan of Reorganization, dated as of December 22, 1997,
by and among Asymetrix, Asymetrix Acquisition Corp., Communication
Strategies, Incorporated, and Cynthia Boyd and James Boyd.**
3.01 Amended and Restated Certificate of Incorporation of Asymetrix.**
3.02 Bylaws of Asymetrix.**
4.01 Registration Rights Agreement dated as of May 22, 1998, among
Asymetrix, Gary Johnson, Richard M. Johnson and Mike Spingola.
4.02 Registration Rights Agreement dated as of July 1, 1998, among
Asymetrix, Gordon Rogers and Veda Storey.
4.03 Restated and Amended Investors' Rights Agreement, dated as of December
20, 1996, between Asymetrix and the persons and entities listed
therein.**
4.04 Form of Specimen Stock Certificate for Asymetrix's Common Stock.**
4.05 Registration Rights Agreement dated, as of September 11, 1997, between
Asymetrix and persons and entities listed therein.**
4.06 Registration Rights Agreement dated as of September 30, 1997, among
Asymetrix, Gordon Oakes, Kevin Oakes and Doug Foster.**
4.07 Registration Rights Agreement, dated as of December 22, 1997, among
Asymetrix, Cynthia Boyd and James Boyd.**
<PAGE>
10.01 Employment Agreement dated as of July 1, 1998, between Asymetrix and
Gordon Rogers.
10.02 Services Agreement, dated as of July 27, 1998, between Asymetrix and
Vulcan Northwest, Inc.
10.03 Eighth Amendment to Lease, dated as of October 16, 1998, by and
between Asymetrix and 110 Atrium Place Associates, LLC.
10.04 Form of Indemnification Agreement entered into by Asymetrix with each
of its directors and executive officers.**
10.05 Asymetrix's 1995 Combined Incentive and Nonqualified Stock Option Plan
and related documents.**
10.06 Asymetrix's 1998 Directors Stock Option Plan and related documents.**
10.07 Asymetrix's 1998 Equity Incentive Plan and related documents.**
10.08 Sublease dated as of October 30, 1995, between Asymetrix and Vulcan
Northwest Inc.**
10.09 Series B Preferred Stock Exchange Agreement, dated as of September 30,
1997, between Asymetrix and SuperCede.**
10.10 Asset Transfer, License and Stock Issuance Agreement, dated as of June
24, 1997, between Asymetrix and SuperCede, Inc.**
10.11 Sublease, dated as of June 24, 1997, between Asymetrix and SuperCede,
Inc.**
10.12 Promissory Note dated as of March 14, 1995, between Asymetrix and Paul
Allen.**
10.13 Infomodelers Technology Transfer and License Agreement dated as of
October 7, 1996, between Asymetrix and ASX Corporation, as amended
January 14, 1998.**
10.14 Sublease dated as of October 7, 1995, between Asymetrix and ASX
Corporation.**
10.15 Asset Purchase and Loan Agreement, dated as of October 7, 1996,
between Asymetrix and ASX Corporation.**
10.16 Lease Agreement, dated as of May 24, 1991, by and between Asymetrix
and Dean Witter Realty Income Partnership II, L.P. and amendments
thereto.**
10.17 Employment Agreement dated as of September 30, 1997, between Asymetrix
and Kevin Oakes.**
10.18 Stock Purchase and Sale Agreement dated as of March 27, 1998 between
Asymetrix and Vulcan Ventures Inc.**
10.19 Directed Engineering Agreement, dated as of March 27, 1998, between
Asymetrix and Vulcan Northwest, Inc.**
<PAGE>
21.01 Subsidiaries of Asymetrix.
23.01 Consent of KPMG Peat Marwick LLP.
27.01 Financial Data Schedule
* These Exhibits are incorporated herein by reference to Asymetrix's
Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 1998
** These Exhibits are incorporated herein by reference to Asymetrix's
Registration Statement on Form S-1 (Registration no. 333-49037), as amended
<PAGE>
EXHIBIT 4.01
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of May 22, 1998, by and between Asymetrix Learning Systems, Inc., a
Washington corporation (the "Company"), Gary A. Johnson and Richard M. Johnson
and Mike Spingola (collectively, the "Shareholders" and each individually, a
"Shareholder") who immediately prior to the Effective Time of the Merger (as
defined below) are all of the shareholders of Strategic Systems Associates,
Inc., an Illinois corporation ("SSA").
RECITALS
A. Each of the Shareholders, SSA, the Company and Asymetrix Acquisition
Corp., a Delaware corporation and a wholly-owned subsidiary of the Company
("Merger Sub"), have entered into an Agreement and Plan of Reorganization dated
as of May 22, 1998 (the "Plan"), pursuant to which Merger Sub will merge with
and into SSA in a reverse triangular merger, with SSA to be the surviving
corporation of the merger (the "Merger").
B. As a condition precedent to the consummation of the Merger, Section 8.6
of the Plan provides that the Shareholders shall be granted certain registration
rights with respect to the shares of the Company's Common Stock that are issued
to the Shareholders in the Merger, subject to the terms and conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. REGISTRATION RIGHTS
1.1 Certain Definitions. For purposes of this Agreement:
(a) Registration. The terms "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act of 1933, as amended
(the "Securities Act"), and the declaration or ordering of effectiveness of such
registration statement.
(b) Registrable Securities. The term "Registrable Securities" means:
(1) all the shares of Common Stock of the Company issued pursuant to the Plan;
and (2) any shares of Common Stock of the Company issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, all such shares of Common Stock described in clause (1) of
this subsection (b); excluding in all cases, however, (i) any Registrable
Securities sold by a person in a transaction in which rights under this Section
1 are not assigned in accordance with this Agreement, (ii) any Registrable
Securities sold to the public or sold pursuant
<PAGE>
to Rule 144 promulgated under the Securities Act or (iii) any Registrable
Securities which may be sold in the public market in a three-month period
without registration under the Securities Act pursuant to Rule 144 under the
Securities Act.
(c) Registrable Securities Then Outstanding. The number of shares of
"Registrable Securities then outstanding" shall mean the number of shares of
Common Stock which are Registrable Securities and (1) are then issued and
outstanding or (2) are then issuable pursuant to the exercise or conversion of
then outstanding and then exercisable options, warrants or convertible
securities.
(d) Holder. For purposes of this Section 1 and Section 2 hereof, the
term "Holder" means any person owning of record Registrable Securities that have
not been sold to the public or pursuant to Rule 144 promulgated under the
Securities Act or any assignee of record of such Registrable Securities to whom
rights under this Section 1 have been duly assigned in accordance with this
Agreement.
(e) SEC. The term "SEC" or "Commission" means the U.S. Securities and
Exchange Commission.
1.2 Piggyback Registrations. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to filing any
registration statement under the Securities Act for purposes of effecting a
public offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to (i) the Company's
initial public offering; (ii) any employee benefit plan or (iii) any
acquisition, merger, consolidation or other corporate reorganization) and will
afford each such Holder an opportunity to include in such registration statement
all or any part of the Registrable Securities then held by such Holder. Each
Holder desiring to include in any such registration statement all or any part of
the Registrable Securities held by such Holder shall, within twenty (20) days
after receipt of the above-described notice from the Company, so notify the
Company in writing, and in such notice shall inform the Company of the number of
Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(a) Underwriting. If a registration statement under which the Company
gives notice under this Section 1.2 is for an underwritten offering, then the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 1.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an underwriting agreement in customary form with
the managing underwriter or underwriter(s)
2
<PAGE>
selected for such underwriting. Notwithstanding any other provision of this
Agreement, if the managing underwriter determine(s) in good faith that marketing
factors require a limitation of the number of shares to be underwritten, then
the managing underwriter(s) may exclude shares (including Registrable
Securities) from the registration and the underwriting, and the number of shares
that may be included in the registration and the underwriting shall be
allocated, first, to the Company; second to holders of the Company's Series A
Preferred Stock and Series 1 Class B Stock (or Registrable Securities issuable
upon conversion of such Series A Preferred Stock and Series 1 Class B Stock);
third, to the holders of "registrable securities," as that term is defined in,
and pursuant to, that certain Acquisition Agreement, dated as of July 17, 1997,
by and among the Company, Socha Computing, Inc., Asymocha Merger Corporation and
John Socha; fourth to the holders of "registrable securities," as that term is
defined in, and pursuant to, that certain Registration Rights Agreement, dated
as of September 11, 1997, by and among the Company and certain shareholders of
Aimtech Corporation; fifth to the holders of "registrable securities," as that
term is defined in, and pursuant to, that certain Registration Rights Agreement,
dated as of September 30, 1997, by and among the Company and certain
stockholders of Oakes Interactive, Inc., TopShelf Multimedia, Inc. and Acorn
Associates Incorporated; sixth to the holders of "registrable securities," as
that term is defined in, and pursuant to, that certain Registration Rights
Agreement, dated as of December 22, 1997, by and among the Company and certain
shareholders of Communication Strategies, Incorporated; and seventh to the
Holders requesting inclusion of their Registrable Securities in such
registration statement pursuant to this Section 1.2 on a pro rata basis based on
the total number of Registrable Securities held by each such Holder. If any
Holder disapproves of the terms of any such underwriting, such Holder may elect
to withdraw therefrom by written notice to the Company and the underwriter,
delivered at least ten (10) business days prior to the effective date of the
registration statement. Any Registrable Securities excluded or withdrawn from
such underwriting shall be excluded and withdrawn from the registration. For any
Holder which is a partnership or corporation, the partners, retired partners and
shareholders of such Holder, or the estates and family members of any such
partners and retired partners and any trusts for the benefit of any of the
foregoing persons shall be deemed to be a single "Holder", and any pro rata
reduction with respect to such "Holder" shall be based upon the aggregate amount
of shares carrying registration rights owned by all entities and individuals
included in such "Holder," as defined in this sentence.
(b) Expenses. All expenses incurred in connection with a registration
pursuant to this Section 1.2 (excluding underwriters' and brokers' discounts and
commissions and the fees and expenses of Holders' counsel), including, without
limitation all federal and "blue sky" registration, qualification and filing
fees, printers' and accounting fees, fees and disbursements of counsel for the
Company shall be borne by the Company.
1.3 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as commercially reasonable:
(a) Furnish to the Holders and to the underwriters, if any, such
number of copies of the registration statement, prospectus, and preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as they may reasonably request
3
<PAGE>
in order to facilitate the disposition of the Registrable Securities owned by
them that are included in such registration.
(b) Use its commercially reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(c) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(d) Use its reasonable best efforts either to (i) cause all the
Registrable Securities covered by any Registration Statement to be listed on a
national securities exchange, if the listing of such Registrable Securities is
then permitted under the rules of such exchange, or (ii) secure the quotation of
the Registrable Securities on the Nasdaq National Market.
1.4 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 1.2 that the
selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be reasonably required to timely effect
the registration of their Registrable Securities.
1.5 Delay of Registration. No Holder shall have any right to obtain or
seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.6 Indemnification. In the event any Registrable Securities are included
in a registration statement under Sections 1.2:
(a) By the Company. To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners, officers, directors of
each Holder, any underwriter (as defined in the Securities Act) for such Holder
and each person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act or the Securities Exchange Act of 1934, as amended
(the "1934 Act"), against any expenses, losses, claims, damages, or liabilities
(joint or several) (or actions in respect thereof) to which they may become
subject under the Securities Act, the l934 Act or other federal or state law,
insofar as such expenses, losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"):
4
<PAGE>
(i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, preliminary prospectus, final
prospectus, offering circular or other document contained therein or any
amendments or supplements thereto;
(ii) the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein not
misleading, or
(iii) any violation or alleged violation by the Company of the
Securities Act, the 1934 Act, any federal or state securities law or any rule or
regulation promulgated under the Securities Act, the 1934 Act or any federal or
state securities law in connection with the offering covered by such
registration statement;
and the Company will reimburse each such Holder, partner, officer, director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating, defending or
settling any such loss, claim, damage, liability or action; provided however,
that the indemnity agreement contained in this subsection 1.6(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder or its agent, partner,
officer, director, underwriter or controlling person of such Holder.
(b) By Selling Holders. To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who have signed the registration statement, each person, if any,
who controls the Company within the meaning of the Securities Act, any
underwriter and any other Holder selling securities under such registration
statement or any of such other Holder's partners, directors or officers or any
person who controls such Holder within the meaning of the Securities Act or the
1934 Act, against any losses, claims, damages or liabilities (joint or several)
to which the Company or any such director, officer, controlling person,
underwriter or other such Holder, partner or director, officer or controlling
person of such other Holder may become subject under the Securities Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder or its agent expressly for use in connection with such
registration; and each such Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person, underwriter or other Holder, partner, officer, director or controlling
person of such other Holder in connection with investigating, defending or
settling any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection 1.6(b) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Holder, which
consent shall not be unreasonably withheld; and provided further, that the total
amounts payable in indemnity by a Holder under this Section
5
<PAGE>
1.6(b) in respect of any Violation shall not exceed the net proceeds received by
such Holder in the registered offering out of which such Violation arises.
(c) Notice. Promptly after receipt by an indemnified party under this
Section 1.6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.6, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 1.6.
(d) Defect Eliminated in Final Prospectus. The foregoing indemnity
agreements of the Company and Holders are subject to the condition that, insofar
as they relate to any Violation made in a preliminary prospectus but which
Violation is eliminated or remedied in the amended prospectus on file with the
SEC at the time the registration statement in question becomes effective or the
amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus), such indemnity agreement shall not inure to the benefit of any
person if a copy of the Final Prospectus was furnished to the indemnified party
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
(e) Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
either (i) any Holder exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for indemnification pursuant to this
Section 1.6 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 1.6 provides
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided under this Section
1.6; then, and in each such case, the Company and such Holder will contribute to
the aggregate losses, claims, damages or liabilities to which they may be
subject (after contribution from others) in such proportion as is appropriate to
reflect the relative fault of the indemnifying party on the one hand and of the
indemnified party on the other in connection with the statements or omissions
that resulted in such expense, loss, claim, damage or liability in such
6
<PAGE>
proportion as is appropriate to reflect the relative fault of each such party in
connection with such statements or omissions as well as any other relevant
considerations; provided, however, that, in any such case, (A) the total amounts
payable in contribution by any Holder under this Section 1.6(e) shall not exceed
the net proceeds received by such Holder in the registered offering out of which
such responsibility arises; and (B) no person or entity guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
will be entitled to contribution from any person or entity who was not guilty of
such fraudulent misrepresentation.
(f) Survival. The obligations of the Company and Holders under this
Section 1.6 shall survive the completion of any offering of Registrable
Securities in a registration statement, and otherwise.
1.7 "Market Stand-Off" Agreement. Each Holder hereby agrees that it shall
not, to the extent requested by the Company or an underwriter of securities of
the Company, sell or otherwise transfer or dispose of any Registrable Securities
or any shares of capital stock of the Company then owned by such Holder (other
than to donees or partners of the Holder who agree to be similarly bound) for up
to one hundred eighty (180) days following the effective date of any
registration statement (other than a registration statement relating to any
employee benefit plan or to any acquisition, merger, consolidation or other
corporate reorganization) of the Company filed under the Securities Act (whether
filed pursuant to the provisions of this Agreement or otherwise); provided,
however, that:
(a) such agreement shall not apply to shares of capital stock of the
Company sold pursuant to such registration statement;
(b) all executive officers and directors of the Company then holding
Common Stock of the Company enter into a similar agreement, and any other
stockholder of the Company owning at least as many shares of the Company's
Common Stock as such Holder is also requested by the Company or the underwriter
to enter into a similar agreement; and
(c) in an offering other than the Company's initial public offering,
such agreement shall apply only for a period of 90 days from the effective date
of the registration statement filed under the Securities Act with respect
thereto.
In order to enforce the foregoing covenant, the Company shall have the
right to place restrictive legends on the certificates representing the shares
subject to this Section and to impose stop transfer instructions with respect to
the shares of stock of each Holder (and the shares or securities of every other
person subject to the foregoing restriction) until the end of such period. The
Holders agree that they will, if so requested by the Company, execute and
deliver to NationsBank Montgomery Securities a market stand-off agreement in the
form attached as Exhibit A.
1.8 Rule 144 Reporting. With a view to making available the benefits of
certain rules and regulations of the Commission which may at any time permit the
sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to:
7
<PAGE>
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date of the first registration under the Securities Act filed by
the Company for an offering of its securities to the general public;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act (at
any time after it has become subject to such reporting requirements); and
(c) So long as a Holder owns any Registrable Securities, to furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time after
90 days after the effective date of the first registration statement filed by
the Company for an offering of its securities to the general public), of the
Securities Act and the 1934 Act (at any time after it has become subject to the
reporting requirements of the 1934 Act), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration (at any time after the Company has become subject to the
reporting requirements of the 1934 Act).
2. Assignment
Notwithstanding anything herein to any the contrary, the registration
rights of a Holder under Section 1 hereof may be assigned by a Holder only to a
party who acquires all of the shares of Registrable Securities of such Holder;
provided, however that no party may be assigned any of the foregoing rights
unless the Company is given written notice by the assigning party at the time of
such assignment stating the name and address of the assignee and identifying the
securities of the Company as to which the rights in question are being assigned;
and provided further that any such assignee shall receive such assigned rights
subject to all the terms and conditions of this Agreement, including without
limitation the provisions of this Section 2.
3. GENERAL PROVISIONS
3.1 Amendment of Rights. Any provision of this Agreement may be amended
and the observance thereof may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and Holders of a majority of all Registrable Securities
then outstanding. Any amendment or waiver effected in accordance with this
Section 3.1 shall be binding upon each Holder, each permitted successor or
assignee of such Holder and the Company
3.2 Governing Law. The internal laws of the State of Washington
(irrespective of its conflict of law principles) will govern the validity of
this Agreement, the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties hereto.
3.3 Severability. If any provision of this Agreement, or the application
thereof, will for any reason and to any extent be invalid or unenforceable, the
remainder of this Agreement
8
<PAGE>
and application of such provision to other persons or circumstances will be
interpreted so as reasonably to effect the intent of the parties hereto. The
parties further agree to replace such void or unenforceable provision of this
Agreement with a valid and enforceable provision that will achieve, to the
extent possible, the economic, business and other purposes of the void or
unenforceable provision.
3.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
all parties reflected hereon as signatories. Facsimile copies of such
counterparts are acceptable.
3.5 Notices. Any notice or other communication required or permitted
to be given under this Agreement will be in writing, will be delivered
personally, by registered or certified mail, postage prepaid, by confirmed
facsimile or by nationally recognized courier service, and will be deemed given
upon delivery, if delivered personally, or five days after deposit in the mails,
if mailed, or upon receipt if delivered by confirmed facsimile or nationally
recognized courier service to the following addresses:
(i) If to Asymetrix:
Asymetrix Learning Systems, Inc.
110 110th Avenue NE, Suite 700
Bellevue, WA 98004
Facsimile: (425) 637-1540
Attention: General Counsel
With a copy to:
Mark C. Stevens, Esq.
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Facsimile: (650) 494-1417
(ii) If to Shareholders:
To the addresses set forth on Exhibit A hereto
or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 3.5.
3.6 Termination. The Company will have no obligations pursuant to
Section 1.2 with respect to any Holder if, (i) in the opinion of counsel to the
Company, all Registrable Securities held by such Holder may be sold in a three-
month period without registration under the Securities Act pursuant to Rule 144
promulgated under the Securities Act or otherwise; or (ii) if all Registrable
Securities held by such Holder have been registered and sold to the public or
sold
9
<PAGE>
pursuant to Rule 144 promulgated under the Securities Act and/or have been
transferred or sold in a transaction in which registration rights hereunder have
not been assigned in accordance with this Agreement.
3.7 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof will be personal solely between the parties
to this Agreement.
3.8 Entire Agreement. This Agreement and the exhibits hereto
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties. The express terms hereof control and
supersede any course of performance or usage of the trade inconsistent with any
of the terms hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date and year first above written.
ASYMETRIX LEARNING SYSTEMS, INC. THE SHAREHOLDERS
By: /s/ Gary A. Johnson
----------------------------- ------------------------------------
Gary A. Johnson
Print Name: /s/ Richard M. Johnson
--------------------- ------------------------------------
Richard M. Johnson
Title: /s/ Mike Spingola
-------------------------- ------------------------------------
Mike Spingola
[SIGNATURE PAGE FOR REGISTRATION RIGHTS AGREEMENT]
10
<PAGE>
EXHIBIT 4.02
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement (this "Agreement") is made and entered
into as of July 1, 1998, by and between Asymetrix Learning Systems, Inc., a
Delaware corporation (the "Company"), Gordon A. Rogers and Veda C. Storey
(collectively, the "Shareholders" and each individually, a "Shareholder") who
immediately prior to the Effective Time of the Merger (as defined below) are the
Principals (as defined in the Plan) of Meliora Systems, Inc., a New York
corporation ("Meliora").
RECITALS
A. Each of the Shareholders, Meliora, the Company and Asym Merger Corp., a
Delaware corporation and a wholly-owned subsidiary of the Company ("Merger
Sub"), have entered into an Agreement and Plan of Reorganization dated as of
June 22, 1998 (the "Plan"), pursuant to which Merger Sub will merge with and
into Meliora in a reverse triangular merger, with Meliora to be the surviving
corporation of the merger (the "Merger").
B. As a condition precedent to the consummation of the Merger, Section 8.6
of the Plan provides that the Shareholders shall be granted certain registration
rights with respect to the shares of the Company's Common Stock that are issued
to the Shareholders in the Merger, subject to the terms and conditions set forth
in this Agreement.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual
promises hereinafter set forth, the parties hereto agree as follows:
1. Registration Rights
1.1 Certain Definitions. For purposes of this Agreement:
(a) Registration. The terms "register," "registered," and
"registration" refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act of 1933, as amended
(the "Securities Act"), and the declaration or ordering of effectiveness of such
registration statement.
(b) Registrable Securities. The term "Registrable Securities" means:
(1) all the shares of Common Stock of the Company issued pursuant to the Plan;
and (2) any shares of Common Stock of the Company issued as (or issuable upon
the conversion or exercise of any warrant, right or other security which is
issued as) a dividend or other distribution with respect to, or in exchange for
or in replacement of, all such shares of Common Stock described in clause (1) of
this subsection (b); excluding in all cases, however, (i) any Registrable
Securities sold by a person in a transaction in which rights under this Section
1 are not assigned in accordance with this Agreement, (ii) any Registrable
Securities sold to the public or sold pursuant
<PAGE>
to Rule 144 promulgated under the Securities Act or (iii) any Registrable
Securities which may be sold in the public market in a three-month period
without registration under the Securities Act pursuant to Rule 144 under the
Securities Act, or (4) any Registrable Securities that are being held in escrow
pursuant to the terms of the Plan.
(c) Registrable Securities Then Outstanding. The number of shares of
"Registrable Securities then outstanding" shall mean the number of shares of
Common Stock which are Registrable Securities and (1) are then issued and
outstanding or (2) are then issuable pursuant to the exercise or conversion of
then outstanding and then exercisable options, warrants or convertible
securities.
(d) Holder. For purposes of this Section 1 and Section 2 hereof, the
term "Holder" means any person owning of record Registrable Securities that have
not been sold to the public or pursuant to Rule 144 promulgated under the
Securities Act or any assignee of record of such Registrable Securities to whom
rights under this Section 1 have been duly assigned in accordance with this
Agreement.
(e) SEC. The term "SEC" or "Commission" means the U.S.
Securities and Exchange Commission.
1.2 Piggyback Registrations. The Company shall notify all Holders of
Registrable Securities in writing at least thirty (30) days prior to filing any
registration statement under the Securities Act for purposes of effecting a
public offering of securities of the Company (including, but not limited to,
registration statements relating to secondary offerings of securities of the
Company, but excluding registration statements relating to (i) the Company's
initial public offering; (ii) any employee benefit plan or (iii) any
acquisition, merger, consolidation or other corporate reorganization) and will
afford each such Holder an opportunity to include in such registration statement
all or any part of the Registrable Securities then held by such Holder. Each
Holder desiring to include in any such registration statement all or any part of
the Registrable Securities held by such Holder shall, within twenty (20) days
after receipt of the above-described notice from the Company, so notify the
Company in writing, and in such notice shall inform the Company of the number of
Registrable Securities such Holder wishes to include in such registration
statement. If a Holder decides not to include all of its Registrable Securities
in any registration statement thereafter filed by the Company, such Holder shall
nevertheless continue to have the right to include any Registrable Securities in
any subsequent registration statement or registration statements as may be filed
by the Company with respect to offerings of its securities, all upon the terms
and conditions set forth herein.
(a) Underwriting. If a registration statement under which the Company
gives notice under this Section 1.2 is for an underwritten offering, then the
Company shall so advise the Holders of Registrable Securities. In such event,
the right of any such Holder's Registrable Securities to be included in a
registration pursuant to this Section 1.2 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their Registrable Securities through such
underwriting shall enter into an
2
<PAGE>
underwriting agreement in customary form with the managing underwriter or
underwriter(s) selected for such underwriting. Notwithstanding any other
provision of this Agreement, if the managing underwriter determine(s) in good
faith that marketing factors require a limitation of the number of shares to be
underwritten, then the managing underwriter(s) may exclude shares (including
Registrable Securities) from the registration and the underwriting, and the
number of shares that may be included in the registration and the underwriting
shall be allocated, first, to the Company; second to holders of the Company's
Series A Preferred Stock and Series 1 Class B Stock (or Registrable Securities
issuable upon conversion of such Series A Preferred Stock and Series 1 Class B
Stock); third, to the holders of "registrable securities," as that term is
defined in, and pursuant to, that certain Acquisition Agreement, dated as of
July 17, 1997, by and among the Company, Socha Computing, Inc., Asymocha Merger
Corporation and John Socha; fourth to the holders of "registrable securities,"
as that term is defined in, and pursuant to, that certain Registration Rights
Agreement, dated as of September 11, 1997, by and among the Company and certain
shareholders of Aimtech Corporation; fifth to the holders of "registrable
securities," as that term is defined in, and pursuant to, that certain
Registration Rights Agreement, dated as of September 30, 1997, by and among the
Company and certain stockholders of Oakes Interactive, Inc., TopShelf
Multimedia, Inc. and Acorn Associates Incorporated; sixth to the holders of
"registrable securities," as that term is defined in, and pursuant to, that
certain Registration Rights Agreement, dated as of December 22, 1997, by and
among the Company and certain shareholders of Communication Strategies,
Incorporated; seventh to the holders of "registrable securities," as that term
is defined in, and pursuant to, that certain Registration Rights Agreement,
dated as of May 22, 1998 by and among the Company and certain shareholders of
Strategic Systems Associates, Inc.; eighth to the Holders requesting inclusion
of their Registrable Securities in such registration statement pursuant to this
Section 1.2 on a pro rata basis based on the total number of Registrable
Securities held by each such Holder. If any Holder disapproves of the terms of
any such underwriting, such Holder may elect to withdraw therefrom by written
notice to the Company and the underwriter, delivered at least ten (10) business
days prior to the effective date of the registration statement. Any Registrable
Securities excluded or withdrawn from such underwriting shall be excluded and
withdrawn from the registration, but such Holder shall nevertheless continue to
have the right to include any Registrable Securities in any subsequent
registration statement or registration statements as may be filed by the Company
with respect to offerings of its securities, all upon the terms and conditions
set forth herein.. For any Holder which is a partnership or corporation, the
partners, retired partners and shareholders of such Holder, or the estates and
family members of any such partners and retired partners and any trusts for the
benefit of any of the foregoing persons shall be deemed to be a single "Holder",
and any pro rata reduction with respect to such "Holder" shall be based upon the
aggregate amount of shares carrying registration rights owned by all entities
and individuals included in such "Holder," as defined in this sentence.
(b) Expenses. All expenses incurred in connection with a registration
pursuant to this Section 1.2 (excluding underwriters' and brokers' discounts and
commissions and the fees and expenses of Holders' counsel), including, without
limitation all federal and "blue sky" registration, qualification and filing
fees, printers' and accounting fees, fees and disbursements of counsel for the
Company shall be borne by the Company.
3
<PAGE>
1.3 Obligations of the Company. Whenever required to effect the
registration of any Registrable Securities under this Agreement, the Company
shall, as expeditiously as commercially reasonable:
(a) Furnish to the Holders and to the underwriters, if any, such
number of copies of the registration statement, prospectus, and preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as they may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by them that are included in
such registration.
(b) Use its commercially reasonable efforts to register and qualify
the securities covered by such registration statement under such other
securities or Blue Sky laws of such jurisdictions as shall be reasonably
requested by the Holders, provided that the Company shall not be required in
connection therewith or as a condition thereto to qualify to do business or to
file a general consent to service of process in any such states or
jurisdictions.
(c) Notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any event
as a result of which the prospectus included in such registration statement, as
then in effect, includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading in the light of the circumstances then
existing.
(d) Use its reasonable best efforts either to (i) cause all the
Registrable Securities covered by any Registration Statement to be listed on a
national securities exchange, if the listing of such Registrable Securities is
then permitted under the rules of such exchange, or (ii) secure the quotation of
the Registrable Securities on the Nasdaq National Market.
1.4 Furnish Information. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to Section 1.2 that the
selling Holders shall furnish to the Company such information regarding
themselves, the Registrable Securities held by them, and the intended method of
disposition of such securities as shall be reasonably required to timely effect
the registration of their Registrable Securities.
1.5 Delay of Registration. No Holder shall have any right to obtain
or seek an injunction restraining or otherwise delaying any such registration as
the result of any controversy that might arise with respect to the
interpretation or implementation of this Section 1.
1.6 Indemnification. In the event any Registrable Securities are
included in a registration statement under Sections 1.2:
(a) By the Company. To the extent permitted by law, the Company will
indemnify and hold harmless each Holder, the partners, officers, directors of
each Holder, any underwriter (as defined in the Securities Act) for such Holder
and each person, if any, who controls such Holder or underwriter within the
meaning of the Securities Act or the Securities Exchange Act of 1934, as amended
(the "1934 Act"), against any expenses, losses, claims,
4
<PAGE>
damages, or liabilities (joint or several) (or actions in respect thereof) to
which they may become subject under the Securities Act, the l934 Act or other
federal or state law, insofar as such expenses, losses, claims, damages, or
liabilities (or actions in respect thereof) arise out of or are based upon any
of the following statements, omissions or violations (collectively a
"Violation"):
(i) any untrue statement or alleged untrue statement of a material
fact contained in such registration statement, preliminary prospectus, final
prospectus, offering circular or other document contained therein or any
amendments or supplements thereto;
(ii) the omission or alleged omission to state therein a material fact
required to be stated therein, or necessary to make the statements therein not
misleading, or
(iii) any violation or alleged violation by the Company of the
Securities Act, the 1934 Act, any federal or state securities law or any rule or
regulation promulgated under the Securities Act, the 1934 Act or any federal or
state securities law in connection with the offering covered by such
registration statement;
and the Company will reimburse each such Holder, partner, officer, director,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them, as incurred, in connection with investigating, defending or
settling any such loss, claim, damage, liability or action; provided however,
that the indemnity agreement contained in this subsection 1.6(a) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Company (which
consent shall not be unreasonably withheld), nor shall the Company be liable in
any such case for any such loss, claim, damage, liability or action to the
extent that it arises out of or is based upon a Violation which occurs in
reliance upon and in conformity with written information furnished expressly for
use in connection with such registration by such Holder or its agent, partner,
officer, director, underwriter or controlling person of such Holder.
(b) By Selling Holders. To the extent permitted by law, each selling
Holder will indemnify and hold harmless the Company, each of its directors, each
of its officers who have signed the registration statement, each person, if any,
who controls the Company within the meaning of the Securities Act, any
underwriter and any other Holder selling securities under such registration
statement or any of such other Holder's partners, directors or officers or any
person who controls such Holder within the meaning of the Securities Act or the
1934 Act, against any losses, claims, damages or liabilities (joint or several)
to which the Company or any such director, officer, controlling person,
underwriter or other such Holder, partner or director, officer or controlling
person of such other Holder may become subject under the Securities Act, the
1934 Act or other federal or state law, insofar as such losses, claims, damages
or liabilities (or actions in respect thereto) arise out of or are based upon
any Violation, in each case to the extent (and only to the extent) that such
Violation occurs in reliance upon and in conformity with written information
furnished by such Holder or its agent expressly for use in connection with such
registration; and each such Holder will reimburse any legal or other expenses
reasonably incurred by the Company or any such director, officer, controlling
person, underwriter or other Holder, partner, officer, director or controlling
person of such other Holder in connection with
5
<PAGE>
investigating, defending or settling any such loss, claim, damage, liability or
action; provided, however, that the indemnity agreement contained in this
subsection 1.6(b) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Holder, which consent shall not be unreasonably withheld; and
provided further, that the total amounts payable in indemnity by a Holder under
this Section 1.6(b) in respect of any Violation shall not exceed the net
proceeds received by such Holder in the registered offering out of which such
Violation arises.
(c) Notice. Promptly after receipt by an indemnified party under this
Section 1.6 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect thereof
is to be made against any indemnifying party under this Section 1.6, deliver to
the indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party shall
have the right to retain its own counsel, with the fees and expenses to be paid
by the indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential conflict of interests between such indemnified party and any other
party represented by such counsel in such proceeding. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action, if prejudicial to its ability to defend such
action, shall relieve such indemnifying party of any liability to the
indemnified party under this Section 1.6, but the omission so to deliver written
notice to the indemnifying party will not relieve it of any liability that it
may have to any indemnified party otherwise than under this Section 1.6.
(d) Defect Eliminated in Final Prospectus. The foregoing indemnity
agreements of the Company and Holders are subject to the condition that, insofar
as they relate to any Violation made in a preliminary prospectus but which
Violation is eliminated or remedied in the amended prospectus on file with the
SEC at the time the registration statement in question becomes effective or the
amended prospectus filed with the SEC pursuant to SEC Rule 424(b) (the "Final
Prospectus), such indemnity agreement shall not inure to the benefit of any
person if a copy of the Final Prospectus was furnished to the indemnified party
and was not furnished to the person asserting the loss, liability, claim or
damage at or prior to the time such action is required by the Securities Act.
(e) Contribution. In order to provide for just and equitable
contribution to joint liability under the Securities Act in any case in which
either (i) any Holder exercising rights under this Agreement, or any controlling
person of any such Holder, makes a claim for indemnification pursuant to this
Section 1.6 but it is judicially determined (by the entry of a final judgment or
decree by a court of competent jurisdiction and the expiration of time to appeal
or the denial of the last right of appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 1.6 provides
for indemnification in such case, or (ii) contribution under the Securities Act
may be required on the part of any such selling Holder or any such controlling
person in circumstances for which indemnification is provided
6
<PAGE>
under this Section 1.6; then, and in each such case, the Company and such Holder
will contribute to the aggregate losses, claims, damages or liabilities to which
they may be subject (after contribution from others) in such proportion as is
appropriate to reflect the relative fault of the indemnifying party on the one
hand and of the indemnified party on the other in connection with the statements
or omissions that resulted in such expense, loss, claim, damage or liability in
such proportion as is appropriate to reflect the relative fault of each such
party in connection with such statements or omissions as well as any other
relevant considerations; provided, however, that, in any such case, (A) the
total amounts payable in contribution by any Holder under this Section 1.6(e)
shall not exceed the net proceeds received by such Holder in the registered
offering out of which such responsibility arises; and (B) no person or entity
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) will be entitled to contribution from any person or entity
who was not guilty of such fraudulent misrepresentation.
(f) Survival. The obligations of the Company and Holders under this
Section 1.6 shall survive the completion of any offering of Registrable
Securities in a registration statement, and otherwise.
1.7 "Market Stand-Off" Agreement. Each Holder hereby agrees that it
shall not, to the extent requested by the Company or an underwriter of
securities of the Company, sell or otherwise transfer or dispose of any
Registrable Securities or any shares of capital stock of the Company then owned
by such Holder (other than to donees or partners of the Holder who agree to be
similarly bound) for up to one hundred eighty (180) days following the effective
date of any registration statement (other than a registration statement relating
to any employee benefit plan or to any acquisition, merger, consolidation or
other corporate reorganization) of the Company filed under the Securities Act
(whether filed pursuant to the provisions of this Agreement or otherwise);
provided, however, that:
(a) such agreement shall not apply to shares of capital stock of the
Company sold pursuant to such registration statement;
(b) all executive officers and directors of the Company then holding
Common Stock of the Company enter into a similar agreement, and any other
stockholder of the Company owning at least as many shares of the Company's
Common Stock as such Holder is also requested by the Company or the underwriter
to enter into a similar agreement; and
(c) in an offering other than the Company's initial public offering,
such agreement shall apply only for a period of 90 days from the effective date
of the registration statement filed under the Securities Act with respect
thereto.
In order to enforce the foregoing covenant, the Company shall have the
right to place restrictive legends on the certificates representing the shares
subject to this Section and to impose stop transfer instructions with respect to
the shares of stock of each Holder (and the shares or securities of every other
person subject to the foregoing restriction) until the end of such period. The
Holders agree that they will, if so requested by the Company, execute and
deliver to NationsBank Montgomery Securities a market stand-off agreement in the
form attached as Exhibit A.
7
<PAGE>
1.8 Rule 144 Reporting. With a view to making available the benefits
of certain rules and regulations of the Commission which may at any time permit
the sale of the Registrable Securities to the public without registration, after
such time as a public market exists for the Common Stock of the Company, the
Company agrees to:
(a) Make and keep public information available, as those terms are
understood and defined in Rule 144 under the Securities Act, at all times after
the effective date of the first registration under the Securities Act filed by
the Company for an offering of its securities to the general public;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the 1934 Act (at
any time after it has become subject to such reporting requirements); and
(c) So long as a Holder owns any Registrable Securities, to furnish to
the Holder forthwith upon request a written statement by the Company as to its
compliance with the reporting requirements of said Rule 144 (at any time after
90 days after the effective date of the first registration statement filed by
the Company for an offering of its securities to the general public), of the
Securities Act and the 1934 Act (at any time after it has become subject to the
reporting requirements of the 1934 Act), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents of the
Company as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration (at any time after the Company has become subject to the
reporting requirements of the 1934 Act).
2. Assignment
Notwithstanding anything herein to any the contrary, the registration
rights of a Holder under Section 1 hereof may be assigned by a Holder only to a
party who acquires all of the shares of Registrable Securities of such Holder;
provided, however that no party may be assigned any of the foregoing rights
unless the Company is given written notice by the assigning party at the time of
such assignment stating the name and address of the assignee and identifying the
securities of the Company as to which the rights in question are being assigned;
and provided further that any such assignee shall receive such assigned rights
subject to all the terms and conditions of this Agreement, including without
limitation the provisions of this Section 2.
3. GENERAL PROVISIONS
3.1 Amendment of Rights. Any provision of this Agreement may be
amended and the observance thereof may be waived (either generally or in a
particular instance and either retroactively or prospectively), only with the
written consent of the Company and Holders of a majority of all Registrable
Securities then outstanding. Any amendment or waiver effected in accordance
with this Section 3.1 shall be binding upon each Holder, each permitted
successor or assignee of such Holder and the Company
8
<PAGE>
3.2 Governing Law. The internal laws of the State of Washington
(irrespective of its conflict of law principles) will govern the validity of
this Agreement, the construction of its terms, and the interpretation and
enforcement of the rights and duties of the parties hereto.
3.3 Severability. If any provision of this Agreement, or the
application thereof, will for any reason and to any extent be invalid or
unenforceable, the remainder of this Agreement and application of such provision
to other persons or circumstances will be interpreted so as reasonably to effect
the intent of the parties hereto. The parties further agree to replace such
void or unenforceable provision of this Agreement with a valid and enforceable
provision that will achieve, to the extent possible, the economic, business and
other purposes of the void or unenforceable provision.
3.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which will be an original as regards any party whose
signature appears thereon and all of which together will constitute one and the
same instrument. This Agreement will become binding when one or more
counterparts hereof, individually or taken together, will bear the signatures of
all parties reflected hereon as signatories. Facsimile copies of such
counterparts are acceptable.
3.5 Notices. Any notice or other communication required or permitted
to be given under this Agreement will be in writing, will be delivered
personally, by registered or certified mail, postage prepaid, by confirmed
facsimile or by nationally recognized courier service, and will be deemed given
upon delivery, if delivered personally, or five days after deposit in the mails,
if mailed, or upon receipt if delivered by confirmed facsimile or nationally
recognized courier service to the following addresses:
(i) If to Asymetrix:
Asymetrix Learning Systems, Inc.
110 110th Avenue NE, Suite 700
Bellevue, WA 98004
Facsimile: (425) 637-1540
Attention: General Counsel
With a copy to:
Mark C. Stevens, Esq.
Fenwick & West LLP
Two Palo Alto Square
Palo Alto, CA 94306
Facsimile: (650) 494-1417
9
<PAGE>
(ii) If to Shareholders:
To the addresses set forth on Exhibit B hereto
or to such other address as a party may have furnished to the other parties in
writing pursuant to this Section 3.5.
3.6 Termination. The Company will have no obligations pursuant to
Section 1.2 with respect to any Holder if, (i) in the opinion of counsel to the
Company, all Registrable Securities held by such Holder may be sold in a three-
month period without registration under the Securities Act pursuant to Rule 144
promulgated under the Securities Act or otherwise; or (ii) if all Registrable
Securities held by such Holder have been registered and sold to the public or
sold pursuant to Rule 144 promulgated under the Securities Act and/or have been
transferred or sold in a transaction in which registration rights hereunder have
not been assigned in accordance with this Agreement.
3.7 Absence of Third Party Beneficiary Rights. No provisions of this
Agreement are intended, nor will be interpreted, to provide or create any third
party beneficiary rights or any other rights of any kind in any client,
customer, affiliate, stockholder, partner or any party hereto or any other
person or entity unless specifically provided otherwise herein, and, except as
so provided, all provisions hereof will be personal solely between the parties
to this Agreement.
3.8 Entire Agreement. This Agreement and the exhibits hereto
constitute the entire understanding and agreement of the parties hereto with
respect to the subject matter hereof and supersede all prior and contemporaneous
agreements or understandings, inducements or conditions, express or implied,
written or oral, between the parties. The express terms hereof control and
supersede any course of performance or usage of the trade inconsistent with any
of the terms hereof.
[Remainder of page intentionally left blank.]
10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date and year first above written.
ASYMETRIX LEARNING SYSTEMS, INC. THE SHAREHOLDERS
By: /s/ Gordon A. Rogers
----------------------------- ----------------------------------
Gordon A. Rogers
Print Name: /s/ Veda C. Storey
--------------------- ----------------------------------
Veda C. Storey
Title:
--------------------------
[SIGNATURE PAGE FOR REGISTRATION RIGHTS AGREEMENT]
11
<PAGE>
EXHIBIT 10.01
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") is entered into as of July 1, 1998
(the "Effective Date") between ASYMETRIX LEARNING SYSTEMS, INC, a Delaware
corporation with its principal offices located at 110-110th Avenue N.E.,
Bellevue, Washington 98004-5840, and/or one or more subsidiaries of Asymetrix
Learning Systems, Inc. (collectively the "Company"), and GORDON ROGERS
("Employee").
In consideration of the promises and the terms and conditions set forth in this
Agreement, the parties agree as follows:
1. Position.
During the term of this Agreement, Company will employ Employee and Employee
will serve as Vice President, Strategic Alliances for the Company. Employee will
be an executive officer of the Company and will report directly to the Chief
Executive Officer of the Company.
2. Duties.
Employee will be responsible for pursuing the adoption of Librarian/Ingenium as
the industry platform for online learning management systems. Employee will play
a key role in establishing Librarian/Ingenium as the backbone of both internal
corporate training management systems, and as the platform of choice for
commercial training providers and systems integrators. Employee will have such
other commensurate duties as are reasonably determined by the Chief Executive
Officer. Employee will comply with and be bound by Company's operating policies,
procedures, and practices from time to time in effect for executive officers
during Employee's employment. Employee will perform his duties under this
Agreement at the offices of Company in Atlanta, Georgia. Employee hereby
represents and warrants that he is free to enter into and fully perform this
Agreement and the agreements referred to herein without breach of any agreement
or contract to which he is a party or by which he is bound.
3. Exclusive Service.
Employee will devote his full professional time and efforts exclusively to this
employment and apply all his skill and experience to the performance of his
duties and advancing the Company's interests in accordance with Employee's
experience and skills. In addition, Employee will not engage in any consulting
activity except with the prior written approval of Company, or at the direction
of Company, and Employee will otherwise do nothing incompatible with the
performance of his duties hereunder. Employee will be bound by a covenant not to
compete as set forth in the Invention Agreement as set forth below.
4. Term of Agreement.
This Agreement will commence on the Effective Date, and will continue until the
earlier of two years
-1-
<PAGE>
after the Effective Date or when terminated pursuant to Section 7 hereof. The
expiration or termination of this Agreement will not result in the termination
of Employee's employment, but Employee will become an "at will" employee upon
such termination or expiration.
5. Compensation and Benefits.
(a) Base Salary. During the period from the Effective Date through June
30, 1999 Employee will receive a monthly salary of $13,750. Salary after June
30, 1999 will be as negotiated by the parties, but will not be less than $10,000
per month. Employee's salary will be payable as earned in accordance with
Company's customary payroll practice, which currently is to pay salary on a bi-
weekly basis.
(b) Additional Benefits. Employee will be eligible to participate in
Company's employee benefit plans of general application to executive officers,
including without limitation the Company's 401(k) Plan and those plans covering
life, health, disability, and dental insurance in accordance with the rules
established for individual participation in any such plan and applicable law.
Employee will receive such other benefits, including health club membership,
vacation, holidays and sick leave, as the Company generally provides to its
employees holding similar positions as that of Employee.
(c) Bonus Plans. Employee will be eligible to receive bonus compensation
in accordance with one or more bonus plans to be negotiated by the parties. In
the event the parties are unable to negotiate a bonus plan for a particular
period, then Employee shall be entitled to participate as a Vice President in
the Company's standard executive bonus plan in place for such period.
(d) Business Expenses. The Company will reimburse Employee for all
reasonable and necessary expenses incurred by Employee in connection with the
Company's business, provided that such expenses are deductible to the Company,
are in accordance with the Company's applicable policy and are properly
documented and accounted for in accordance with the requirements of the Internal
Revenue Service.
(e) Stock Options. Effective as of the later of the Effective Date of
this Agreement or the date the Company's 1998 Equity Incentive Plan becomes
effective in accordance with its terms, Employee shall be granted under the 1998
Stock Incentive Plan an incentive stock option to purchase132,500 shares of
Common Stock at the fair market value as determined in accordance with the 1998
Equity Incentive Plan the date of grant. Such options shall become exercisable
("vest") one-fourth (1/4) on the first anniversary of Employee's employment and
one-thirty-sixth (1/36) of the remainder on the same day of the month for the
next 36 months; provided, however, that if Employee is terminated without
"cause" as defined herein prior to the time such options have fully vested as
above provided (whether before or after the expiration of this Agreement), then
such options shall become immediately 100% vested. The option grant agreement
shall contain a provision to this effect, which shall survive the expiration of
this Agreement.
-2-
<PAGE>
6. Proprietary Rights.
Employee hereby agrees to execute an Employee Invention, Confidentiality, Non-
raiding and Noncompetition Agreement (the "Invention Agreement") with the
Company in substantially the form attached hereto as Exhibit B.
7. Termination.
(a) Events of Termination. Employee's employment with the Company shall
terminate upon any one of the following:
(i) the Company's determination made in good faith that it is
terminating the Employee for "cause" as defined under Section 7(b) below
("Termination for Cause"); or
(ii) the effective date of a written notice sent to Employee stating
that the Company is terminating his employment for any reason other than "cause"
as defined under Section 7(b) below ("Termination Without Cause"); or
(iii) the effective date of a written notice sent to the Company from
Employee stating that Employee is electing to terminate his employment with the
Company ("Voluntary Termination").
(b) "Cause" Defined. For purposes of this Agreement, "cause" for
Employee's termination will exist at any time after the happening of one or more
of the following events:
(i) a repeated or continuing failure or refusal to comply in any
material respect with the reasonable policies, standards or regulations of the
Company after reasonable notice and an opportunity to cure;
(ii) a good faith determination by the Company's Chief Executive
Officer and/or Board of Directors that Employee's performance is unsatisfactory
after reasonable notice of the ways in which performance is unsatisfactory and
an opportunity to correct any such deficiencies;
(iii) a repeated or continuing failure or refusal to perform in any
material respect his duties determined by the Company in accordance with this
Agreement or the customary duties of Employee's employment (except for any
failure due to ill health or disability) after reasonable notice and an
opportunity to cure;
(iv) unprofessional, unethical or fraudulent conduct or conduct that
materially discredits the Company or is materially detrimental to the
reputation, character or standing of the Company;
(v) dishonest conduct or a deliberate attempt to do an injury to the
Company;
(vi) Employee's material breach of a term of this Agreement or the
Invention Agreement, including, without limitation, Employee's unauthorized
disclosure or theft of the
-3-
<PAGE>
Company's proprietary information;
(vii) an unlawful or criminal act which would reflect badly on the
Company in the Company's reasonable judgment; or
(viii)Employee's death.
8. Effect of Termination.
(a) Termination for Cause or Voluntary Termination. In the event of any
termination of this Agreement pursuant to Sections 7(a)(i) or 7(a)(iii), the
Company shall pay Employee the compensation and benefits otherwise payable to
Employee under Section 5 through the date of termination. Employee's rights
under the Company's benefit plans of general application shall be determined
under the provisions of those plans.
(b) Termination Without Cause. In the event of any termination of this
Agreement pursuant to Section 7(a)(ii) during the period ending two years after
the Effective Date:
(i) The Company shall pay Employee the compensation and benefits
otherwise payable to Employee under Section 5 through the date of termination
(including a pro rata portion of any bonus compensation that may become payable
for the calendar quarter that includes the date of termination, which bonus
compensation shall be paid following the end of such calendar quarter).
(ii) The Company shall continue to pay Employee his base salary under
Section 5(a) above at Employee's then-current salary, less applicable
withholding taxes, payable on the Company's normal payroll dates during that
period from the date of termination and ending two years after the Effective
Date (the "Continuation Period").
(iii) Fully paid health and dental insurance as in effect on the
termination date shall continue until the earlier of the end of the Continuation
Period or such time as Employee accepts other employment with equal or better
health and dental insurance. Employee's rights under the Company's benefit plans
of general application shall be determined under the provisions of those plans.
(iv) The options granted to Employee pursuant to Section 5(e) (but no
subsequently granted options) shall become fully exercisable on the date of such
termination. Exercisablity of any subsequently granted options shall be in
accordance with the terms of the grant agreement and the 1998 Equity Incentive
Plan or such other plan under which such options were granted.
9. Miscellaneous.
(a) Arbitration. Employee and the Company shall submit to mandatory
binding arbitration in Atlanta, Georgia any controversy or claim arising out of,
or relating to, this Agreement or any breach hereof, provided, however, that the
Company retains its right to, and shall not be prohibited, limited or in any
other way restricted from, seeking or obtaining equitable relief from a court
having jurisdiction over the parties. Such arbitration shall be conducted in
accordance with the commercial
-4-
<PAGE>
arbitration rules of the American Arbitration Association in effect at that
time, and judgment upon the determination or award rendered by the arbitrator
may be entered in any court having jurisdiction thereof.
(b) Severability. If any provision of this Agreement shall be found by
any arbitrator or court of competent jurisdiction to be invalid or
unenforceable, then the parties hereby waive such provision to the extent that
it is found to be invalid or unenforceable and to the extent that to do so would
not deprive one of the parties of the substantial benefit of its bargain. Such
provision shall, to the extent allowable by law and the preceding sentence, be
modified by such arbitrator or court so that it becomes enforceable and, as
modified, shall be enforced as any other provision hereof, all the other
provisions continuing in full force and effect.
(c) Remedies. The Company and Employee acknowledge that the service to
be provided by Employee is of special, unique, unusual, extraordinary and
intellectual character, which gives it peculiar value the loss of which cannot
be reasonably or adequately compensated in damages in an action at law.
Accordingly, Employee hereby consents and agrees that for any breach or
violation by Employee of any of the provisions of this Agreement including,
without limitation, Section 3, a restraining order and/or injunction may be
issued against Employee, in addition to any other rights and remedies the
Company may have, at law or equity, including without limitation the recovery of
money damages.
(d) No Waiver. The failure by either party at any time to require
performance or compliance by the other of any of its obligations or agreements
shall in no way affect the right to require such performance or compliance at
any time thereafter. The waiver by either party of a breach of any provision
hereof shall not be taken or held to be a waiver of any preceding or succeeding
breach of such provision or as a waiver of the provision itself. No waiver of
any kind shall be effective or binding, unless it is in writing and is signed by
the party against whom such waiver is sought to be enforced.
(e) Assignment. This Agreement and all rights hereunder are personal to
Employee and may not be transferred or assigned by Employee at any time. The
Company may assign its rights, together with its obligations hereunder, to any
parent, subsidiary, affiliate or successor, or in connection with the sale,
transfer or other disposition of all or substantially all of its business and
assets, provided, however, that any such assignee assumes the Company's
obligations hereunder.
(f) Withholding. All sums payable to Employee hereunder shall be reduced
by all federal, state, local and other withholding and similar taxes and
payments required by applicable law.
(g) Entire Agreement. This Agreement and the Invention Agreement
constitute the entire and only agreement between the parties relating to
employment of Employee with the Company, and this Agreement and the Invention
Agreement supersede and cancel any and all previous contracts, arrangements or
understandings with respect thereto.
(h) Amendment. This Agreement may be amended, modified, superseded,
canceled, renewed or extended only by an agreement in writing executed by both
parties hereto.
-5-
<PAGE>
(i) Notices. All notices and other communications required or permitted
under this Agreement shall be in writing and hand delivered, sent by telecopier,
sent by certified first class mail, postage prepaid, or sent by nationally
recognized express courier service. Such notices and other communications shall
be effective upon receipt if hand delivered or sent by telecopier, five days
after mailing if sent by U.S. mail, and one day after dispatch if sent by
express courier, to the following addresses, or such other addresses as any
party shall notify the other parties:
If to the Company: Asymetrix Corporation
110-110th Avenue N.E., Suite 700
Bellevue, WA 98004-5840
Telecopier: 206-637-1540
Attention: Chief Executive Officer
If to Employee: ____________________________
____________________________
____________________________
Telecopier: _____________________________
Attention: _____________________________
(j) Binding Nature. This Agreement shall be binding upon, and inure to
the benefit of, the successors and personal representatives of the respective
parties hereto.
(k) Governing Law. This Agreement and the rights and obligations of the
parties hereto shall be construed in accordance with the laws of the State of
Washington, without giving effect to the principles of conflict of laws;
provided, however, that if Employee is relocated to another jurisdiction then
the laws of such jurisdiction shall apply, and in the event of any claim made
following termination the laws of the jurisdiction where Employee was located on
the date of termination shall apply.
[Remainder of page intentionally left blank.]
-6-
<PAGE>
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement as of
the date first above written.
"COMPANY" "EMPLOYEE"
ASYMETRIX LEARNING SYSTEMS, INC.
_____________________________
GORDON ROGERS
By: ___________________________________
Name: __________________________________
Title: _________________________________
-7-
<PAGE>
EXHIBIT A
EMPLOYEE INVENTION, CONFIDENTIALITY,
NONRAIDING AND NONCOMPETITION AGREEMENT
ASYMETRIX LEARNING SYSTEMS, INC. and each of its subsidiary corporations
and I, the undersigned employee, agree as follows.
Asymetrix is in the business of, among other activities, developing and
publishing computer software for creating and managing computer based training
and on-line learning applications as well as providing consulting services and
both customized and standard online learning content.
During the course of my employment and/or engagement as a consultant or
independent contractor I, the undersigned employee of Company ("Employee"),
acknowledge that I have been and will be exposed to and become familiar with
various aspects of software programming, concepts, designs, procedures,
processes and other forms of information proprietary to Company.
In consideration of my employment with Company, including the salary,
fringe benefits and any bonus payments made and to be made to me; and other good
and valuable consideration; I hereby agree on behalf of myself, my heirs,
executors, legal representatives and assigns:
1. Definitions.
For purposes of this Agreement:
(a) "Acquired Entity" means any entity (i) in which Company has acquired a
controlling equity interest, whether by merger, purchase or otherwise or (ii)
all or substantially all of the assets of which have been acquired by the
Company, in either case prior to the date of such acquisition (at which time an
Acquired Entity became a part of Company).
(b) "Company" means Asymetrix Learning Systems, Inc, its controlled
subsidiary corporations and its and their successors and assigns.
(b) "Confidential Information" means any type of information or material
disclosed to or known by me as a consequence of or through my employment or
other retention by Company or an Acquired Entity (including information
conceived, originated, discovered, or developed in whole or in part by me),
which is not generally known by non-Company or non-Acquired Entity personnel and
including but not limited to information which relates to Company or Acquired
Entity research, development, trade secrets, know how, Inventions, technical
data, software, manufacture, purchasing, accounting, engineering, marketing,
merchandising or selling, and information entrusted to Company or an Acquired
Entity, or their principal officers and employees by third parties. INFORMATION
WHICH I CAN SHOW TO BE EITHER GENERALLY KNOWN OR READILY ASCERTAINABLE BY PROPER
MEANS AT OR AFTER THE TIME I FIRST LEARNED OF SUCH INFORMATION, OR GENERAL
INFORMATION OR KNOWLEDGE WHICH I WOULD HAVE LEARNED IN THE COURSE OF SIMILAR
EMPLOYMENT OR WORK ELSEWHERE
-8-
<PAGE>
IN THE TRADE, SHALL NOT BE DEEMED TO BE CONFIDENTIAL INFORMATION.
(c) "Inventions" means original works of authorship, discoveries,
concepts, ideas and improvements to existing technology, and all other subject
matter ordinarily comprehended by the term "invention", whether or not
copyrightable or patentable, including, but not limited to, computer programs,
processes, machines, products, compositions of matter, formulae, algorithms, and
techniques, as well as improvements thereof, and expressions thereof, which, in
whole or in part, are conceived, discovered or developed by me, either alone or
with others, and which (i) relate directly to the business of Company or an
Acquired Entity or to Company's or an Acquired Entity's actual or demonstrably
anticipated research or development; or (ii) incorporate, are developed using,
or are otherwise based upon any Confidential Information; or (iii) are made,
conceived, discovered or developed during times other than my own time or with
the use of any Company or Acquired Entity equipment, supplies or facilities,
including Company or Acquired Entity resources or personnel; or (iv) result from
any work performed by me for Company or an Acquired Entity.
2. Records of Inventions and Confidential Information.
I shall promptly, in such form and detail as is prescribed by Company, record
and keep a complete and permanent written record of information relating to the
conception, origination, discovery or development of Confidential Information
and Inventions.
3. Obligations of Employee Regarding Inventions.
(a) I shall disclose to Company promptly and fully and by a written report
completely describing each in detail all of my original works of authorship,
discoveries, concepts, ideas and improvements to existing technology, and all
other subject matter ordinarily comprehended by the term "invention", whether or
not within the definition of Inventions.
(b) With respect to Inventions, and without additional or further
consideration, (i) I shall apply, at Company's request and expense, for United
States and foreign design or letters patent or other legal protection of
intellectual property either in my name or otherwise as Company shall direct;
and (ii) I shall assign (and do hereby assign) to Company all of my rights to
such Inventions, and to applications for United States copyright and foreign
design or letters patent or other legal protection of intellectual property
granted upon such Inventions, and hereby agree that Company and/or its
authorized agent shall have full control over all such applications for patents
or other legal protection of intellectual property, including without limitation
the right to amend or abandon the same; and (iii) I shall sign and deliver
promptly to Company such written instruments, testify in any legal proceedings,
and do such other acts, as may be necessary in the opinion of Company to secure
and maintain for Company exclusive rights in United States and foreign
copyrights, design or letters patent or other legal protection of intellectual
property for all such Inventions; and (iv) I shall waive (and hereby do waive)
any moral rights I have or may have in Inventions.
Except as provided in Section 3(a) above, this Agreement does not apply to an
invention developed prior to my employment with Company or an Acquired Entity or
to an invention for which no equipment, supplies, facility, or Confidential
Information of Company was used and which was developed entirely on my own time,
unless (a) the invention relates (i) directly to the business of
-9-
<PAGE>
Company, or (ii) to Company's actual or demonstrably anticipated research or
development, or (b) the invention results from any work performed by me for the
Company.
(c) With respect to any invention which does not constitute an Invention,
upon the written request of Employee, Company will acknowledge in writing that
Company does not have any interest in such invention as described in the
request.
4. Rights of Company Regarding Inventions.
Company shall have the exclusive right to all Inventions, without additional or
further consideration to me, including but not limited to the right to own,
make, use, sell, have made, rent, lease or lend, copy, prepare derivative works
of, perform or display publicly all Inventions.
5. Confidentiality.
(a) Except as required in my duties to Company, I shall not directly or
indirectly use, disseminate, lecture upon, publish articles concerning, make
known, or otherwise disclose or make available to any person, firm, corporation
or other entity not confidentially bound to Company, any Confidential
Information (including Confidential Information related to Inventions) without
written permission from Company. If I am served with any subpoena or other
compulsory judicial or administrative process calling for production of
Confidential Information, I will immediately notify Company in order that it may
take such action as it deems necessary to protect its interest.
(b) I understand it is Company's policy not to improperly obtain or use
confidential, proprietary or trade secret information that belongs to third
parties (including my former employers and anyone who entrusted confidential,
proprietary or trade secret information to me or my former employers). I shall
never knowingly improperly obtain, attempt to obtain, use, disseminate, disclose
or transfer to Company confidential, proprietary or trade secret information
that belongs to third parties. This paragraph shall not limit my right to use my
general knowledge and experience, whether or not gained while employed by any
third party.
6. Nonraiding of Employees.
I recognize that Company's workforce is a vital part of its business.
Therefore, so long as I am an employee of Company, or am retained by Company as
an independent contractor or consultant, and for twenty-four (24) months after
my employment, independent contractor and/or consulting relationships with
Company terminate (regardless of the reason they terminate), I will not solicit,
directly or indirectly, any employee to leave his or her employment with
Company. For the purposes of this Agreement, the phrase "shall not solicit,
directly or indirectly," includes, without limitation, that I (a) shall not
disclose to any third party the names, backgrounds or qualifications of any
Company employees or otherwise identify them as potential candidates for
employment; and (b) shall not personally or through any other person approach,
recruit or otherwise solicit employees of Company to work for any other
employer.
-10-
<PAGE>
7. Noncompetition.
In consideration of the payment to me of the sum of $200,000, which sum shall be
paid by the Company no later than 30 days following the closing of its initial
public offering, I agree as follows:
(a) Noncompetition While Related to Company. So long as I am an employee
of Company, or am retained by Company as an independent contractor or
consultant, I will not, directly or indirectly, compete with Company in any way.
(b) Noncompetition After Relationships with Company Terminate. After
termination of my employment, independent contractor and/or consulting
relationships with Company, and for the length of time provided in subparagraph
7(f) below, I will not, without the express written consent of the CEO or
President of Company, directly or indirectly, in any geographic area where
Company's software products or services are then marketed, sold or distributed:
(i) publish or propose to publish Competing Software; (ii) provide or propose to
provide Competing Services to or on behalf of any Current Customer; (iii) design
or develop Competing Software; (iv) work for or with, or provide services or
information to, any person or entity that (1) publishes or proposes to publish
Competing Software, or (2) is designing or developing Competing Software or (3)
is providing or proposes to provide Competing Services.
(c) Competing Software. For purposes of this Agreement, Competing
Software means computer software that competes or will compete with any of
Company's then existing or reasonably anticipated software products with which I
have personal involvement in the course of my employment and/or retention as a
consultant or independent contractor by Asymetrix.
(d) Definition of Competing Services. For purposes of this Agreement,
"Competing Services" means consulting or software development services that
compete or will compete with any of Company's then existing or reasonably
anticipated consulting or software development services.
(e) Competing Companies with Multiple Divisions. Companies that (i)
publish or propose to publish Competing Software, or (ii) are designing or
developing Competing Software or (iii) provide or propose to provide Competing
Services are referred to as "Competing Companies." Where a Competing Company has
multiple divisions, business units or product work groups, the noncompetition
provisions of subparagraph 7(b) above shall apply only to those divisions,
business units or product work groups that are involved with Competing Software
or Competing Services, provided that I provide written assurances satisfactory
to Company that the information and work product I provide to other divisions,
business units or product work groups of the competitor will not be shared,
directly or indirectly, with the divisions, business units or product work
groups involved with Competing Software or Competing Services.
(f) Term of Noncompetition. The noncompetition provisions of
subparagraph 7(b) above shall apply for a period equal to the longer of three
years following the date of this Agreement or one year after my relationships
with Company terminate, regardless of the reasons they terminate.
(g) Governing Law. Not withstanding Section 16(c), the Employee
acknowledges that significant additional consideration was paid for this
covenant not to compete with the Company which
-11-
<PAGE>
is based in the State of Washington, and agrees that enforceability of this
paragraph 7 shall be determined in accordance with the laws of the State of
Washington, without regard to the provisions thereof related to choice of laws
or conflict of laws.
8. Disclosure of Proposed Employment.
Before I undertake or agree to undertake any other employment, consultancy or
independent contractor relationship, with or for a Competing Company, I shall
give Company reasonable advance notice of the name of the Competing Company and
the general nature of the proposed employment, consultancy or independent
contractor relationship. My duty to give notice and disclose under this
paragraph shall apply during my employment or retention as an employee,
independent contractor or consultant by Company, and during the period of time
the noncompetition provisions of subparagraph 7(b) above are in effect.
9. Ownership of Records.
Upon termination of my employment, independent contractor or consulting
relationship(s) with Company, or earlier if Company requests, I will deliver to
and leave with Company any and all objects, materials, devices, or substances
(including without limitation all documents, records, notebooks, recordings,
drawings, prototypes, models, schematic diagrams, computer programs (regardless
of the media on which they are stored) and similar repositories or objects)
which describe, depict, contain, constitute, reflect or record Confidential
Information, and all copies thereof, then in my possession or under my control,
whether or not prepared by me.
10. Saving Provision.
I agree that the terms of this Agreement, including the duration, scope and
geographic extent of the nonraiding and noncompetition provisions, is fair and
reasonably necessary to protect Company's client relationships, employee
relationships, goodwill, Confidential Information and other protectable
interests in light of all of the facts and circumstances of my relationship with
Company. In the event a court declines to enforce any of the terms of this
Agreement they shall be deemed to be modified to restrict me to the maximum
extent that the court finds enforceable.
11. Injunctive Relief.
I acknowledge that the breach or threatened breach of this Agreement would cause
irreparable injury to Company that could not be adequately compensated by money
damages. Accordingly, Company may obtain a restraining order and/or injunction
prohibiting my breach or threatened breach of this Agreement, in addition to any
other legal or equitable remedies that may be available. I acknowledge that, if
my employment or other relationships with Company end, my experience and
capabilities are such that I can obtain employment in business activities that
do not violate this Agreement, and that an injunction to enforce this Agreement
will not prevent me from earning a reasonable livelihood.
-12-
<PAGE>
12. No Guarantee of Employment.
This Agreement may not be construed as an employment agreement, as a guarantee
of continued employment, or as a limitation upon Company's discretion with
respect to the termination of my employment, it being understood that my
employment is terminable at will by either myself or Company.
13. Consent to Notification.
I consent to Company giving notification to third parties of the existence and
terms of this Agreement.
14. Legal Expense.
In any dispute between us arising out of or relating to this Agreement or our
employment relationship, the prevailing party shall be entitled to recover from
the other party reasonable sums as attorneys' fees and expenses, including
expert witness fees, at trial and on appeal.
15. Waiver of Breach.
The waiver of any breach of this Agreement or failure to enforce any provision
of this Agreement shall not waive any later breach.
16. Miscellaneous.
(a) This Agreement may be modified, supplemented and/or amended only by a
writing that both the Company and I sign. This Agreement, as it may be so
amended, together with any Employment Agreement (if I have executed an
Employment Agreement with the Company), are the complete and final expression of
my agreement with Company on the subjects covered, and shall control over any
other statement, representation or agreement on these subjects.
(b) The headings of the sections and paragraphs of this Agreement are
inserted for convenience only and shall not control or affect the meaning or
construction of any of its provisions.
(c) Except for the Company's rights under paragraph 7, the rights and
obligations under this Agreement shall be governed by the internal laws of the
state in which I will be based while providing services to Company, without
regard to the provisions thereof related to choice of laws or conflict of laws.
If I am based in more than one state during the term of this Agreement then "the
state in which I will be based while providing services to Company" shall mean
the state in which I was based at the earlier of (i) the time the claim in issue
hereunder arose or (ii) termination of my employment with Company.
(d) Venue and jurisdiction of any lawsuit involving this Agreement (except
for any lawsuit under paragraph 7) or my employment shall exist exclusively in
the county and state in which I will be based while providing services to
Company. Venue and jurisdiction of any lawsuit under paragraph 7 shall exist
exclusively in state and federal courts in King County, Washington regardless of
the county and state in which I will be based while providing services to
Company, unless injunctive relief is
-13-
<PAGE>
sought by Company and, in Company's judgment, may not be effective unless
obtained in some other venue; provided, however, that injunctive relief shall
not be available in any venue if such relief would not be available under the
laws of the State of Washington.
(e) My obligations under this Agreement supplement and do not supersede or
limit other obligations I have to Company or other rights or remedies available
to Company, including without limitation under the Trade Secrets Acts of any
applicable jurisdiction.
(f) The existence of any claim or cause of action by myself against
Company shall not constitute a defense to the enforcement of this Agreement or
excuse performance of the obligations I have assumed hereunder.
(g) In case any one or more of the provisions contained in this Agreement
shall, for any reason, be held to be totally invalid, illegal or unenforceable
in any respect, such invalidity, illegality or unenforceability shall not affect
any other provisions of this Agreement, but this Agreement shall be construed as
if such invalid, illegal or unenforceable provision had never been contained
herein.
(h) This Agreement shall survive the termination of my relationship with
Company, however caused.
IN WITNESS WHEREOF, the Company and Employee have executed this Agreement as of
the date first above written.
"COMPANY" "EMPLOYEE"
ASYMETRIX LEARNING SYSTEMS,INC.
/s/ Gordon Rogers
___________________________________
GORDON ROGERS
By: ____________________________________
Name: __________________________________
Title: ___________________________________
-14-
<PAGE>
EXHIBIT 10.02
ASYMETRIX LEARNING SYSTEMS, INC.
SERVICE AGREEMENT
This Service Agreement ("Agreement") is made and entered into as of July
27, 1998 (the "Effective Date") by and between Asymetrix Learning Systems, Inc.
("Asymetrix"), a Delaware corporation, and Vulcan Northwest, Inc. d/b/a Advanced
Placement Excellence (APEX) ("Client"), a Washington corporation. In
consideration of the covenants and conditions hereinafter set forth, Asymetrix
and Client agree as follows:
1. Definitions.
For purposes of this Agreement the following definitions shall apply:
(a) "Client" means APEX and its successors and assigns, and includes
without limitation its officers, employees, directors, shareholders, agents, and
representatives.
(b) "Developments" means original works of authorship and documentation
that Asymetrix develops alone or with others, if the Development results from
any services Asymetrix provided to Client under this Agreement or involves the
use or assistance of Client's facilities, materials, or personnel. Developments
shall not include Client Confidential Information, as described more fully at
Section 3 of this Agreement.
2. Services, Delivery and Payment Terms.
(a) Asymetrix shall provide publication (authoring) services for Client in
accordance with the terms and conditions of this Agreement and various Exhibits
that are attached from time to time (i.e., Exhibit A, Exhibit B) and on the
price, delivery dates, terms, and specifications described in the Exhibits.
Asymetrix shall pay all expenses incident to providing services under this
Agreement, unless stated otherwise in the Exhibits. Client's only payment
obligation is to Asymetrix. If there is a conflict between this Agreement and an
Exhibit with regard to terms involving price, delivery, dates, terms, and
specifications described for a particular project in an Exhibit, the Exhibit
shall control. All other terms of this Agreement, including terms regarding
Ownership of Developments under Section 3 of this Agreement, shall control over
any Exhibit terms.
(b) Asymetrix shall invoice Client for the performance of services
hereunder in the amounts and at the times specified in the Exhibits. All
payments or reimbursements to be made by Client hereunder shall be paid in full
within 30 days of Asymetrix's invoice date. Client shall have no right to offset
amounts owed for any Asymetrix products or services against disputed amounts
owed for any services hereunder. Payment shall be in United States dollars in
Bellevue, Washington. Client shall pay Asymetrix a finance charge of 1.5% per
month on all past due amounts.
<PAGE>
3. Ownership of Developments.
The parties agree that Client shall supply to Asymetrix, for Asymetrix'
inclusion and integration into the Developments created under this Agreement,
information which is proprietary and confidential to Apex (the "Client
Confidential Information"). Client shall mark all such materials provided to
Asymetrix under this Agreement, in whatever form, as "Confidential". Asymetrix
shall be supplied Client Confidential Information for the sole purpose of
incorporating said information into the Developments, for Client sole and
exclusive use.
Asymetrix shall not be granted any right, title or interest of any kind in the
Client Confidential Information or in any of the intellectual property
represented or embodied therein. Asymetrix shall not be allowed to make any use
of any of the Client Confidential Information in any form, in whole or in part,
for any purpose, and Asymetrix shall redact any and all of the Client
Confidential Information from the Developments prior to Asymetrix' reuse of the
Developments as otherwise allowed under this Agreement and under paragraph 4 of
Exhibit A hereto."
Client agrees that the Developments and all work provided by Asymetrix hereunder
shall be owned by Asymetrix. Asymetrix may use the Developments and all work
provided hereunder for its own business purposes, such as in future versions of
documentation for Asymetrix software. Client hereby irrevocably assigns to
Asymetrix, it successors and assigns, all rights, title and interest in the
Developments, services, and work provided by Asymetrix hereunder and any
intellectual property rights therein throughout the world. To the extent Client
may acquire any proprietary rights in the Developments and work provided
hereunder, including without limitation any moral rights, which are not by law
permitted to be assigned, Client hereby waives such rights.
4. Independent Contractor.
Asymetrix is an independent contractor and neither Asymetrix are employees of
Client. Asymetrix shall not be subject to Client's control or direction over the
performance of their services. Client shall be concerned only with the results
accomplished. Asymetrix shall be free to provide services to third parties while
this Agreement is in effect so long as they continue to properly discharge their
obligations and duties under this Agreement Asymetrix acknowledges that the
unemployment compensation and workers' compensation laws of the state of
Washington cover many independent contracts, including possibly this Agreement,
where the essence of the independent contract is the provision of personal
services. To ensure that Asymetrix has discharged its obligations under those
laws, Asymetrix will pay to the state of Washington appropriate unemployment
compensation and workers' compensation taxes with respect to the services
provided by the Worker(s).
5. Term and Termination.
This Agreement shall remain in effect until the earlier of (i) the completion of
Asymetrix's services and the acceptance by Client of any deliverable
Developments or (ii) the expiration date set forth on the Exhibits. In the event
of termination prior to completion of deliverables specified on the Exhibits,
Asymetrix shall be paid pro rata for acceptable services actually provided
through the date of such termination. Sections 3, 4, and 6 shall survive
termination of this Agreement.
2
<PAGE>
6. Limitation of Liability
NEITHER PARTY SHALL, UNDER ANY CIRCUMSTANCES, BE LIABLE TO THE OTHER PARTY FOR
ANY CONSEQUENTIAL, INCIDENTAL, SPECIAL, PUNITIVE OR EXEMPLARY DAMAGES, OR
DAMAGES BASED ON LOST PROFITS, BUSINESS OPPORTUNITIES OR GOODWILL. EVEN IF SUCH
PARTY HAS BEEN APPRISED OF THE LIKELIHOOD OF SUCH DAMAGES OCCURRING. EXCEPT IN
RESPECT OF LIABILITY WHICH IS BY LAW INCAPABLE OF EXCLUSION, IN NO EVENT SHALL
ASYMETRIX'S LIABILITY (WHETHER BASED ON AN ACTION OR CLAIM IN CONTRACT, TORT OR
OTHERWISE) TO CLIENT ARISING OUT OF OR RELATING TO ANY SERVICES HEREUNDER EXCEED
THE AMOUNT ACTUALLY PAID BY CLIENT TO ASYMETRIX FOR SUCH SERVICES.
EXCEPT AS EXPRESSLY SET FORTH HEREIN, ASYMETRIX AND CLIENT MAKE NO WARRANTIES,
EITHER EXPRESS OR IMPLIED, AND EXPRESSLY DISCLAIM ANY IMPLIED WARRANTIES,
INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE.
7. Miscellaneous.
(a) Entire Agreement. This Agreement constitutes the entire agreement
between the parties, and supersedes and cancels any and all other arrangements
between the parties relating to the subject matter hereof. This Agreement may be
amended, altered or modified only by an instrument in writing signed by the
parties.
(b) Disputes. In any action or proceeding arising out of or in
connection with this Agreement the prevailing party will be entitled to recover
all reasonable costs and attorney's fees, with or without suit and on appeal.
(c) Governing Law. The rights and obligations under this Agreement shall
in all respects be governed by the laws of the state of Washington and venue in
any legal action shall exist exclusively in state or federal courts in
Washington.
(d) Independent Agreement. The benefits provided hereunder are
independent and unrelated to any payments, benefits, rights or interests of
Asymetrix in any other agreements or arrangements between Client and Asymetrix.
(e) Severability. If any one or more of the provisions contained in this
Agreement shall for any reason be held to be excessively broad as to time,
duration, scope, activity or subject, it shall be construed, by limiting and
reducing it, so as to be enforceable to the extent compatible with the
applicable law as it shall then appear.
(f) Illegality. In case any one or more of the provisions contained in
this Agreement shall, for any reason, be held to be totally invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provisions of this Agreement, but this Agreement
shall be construed as if such invalid, illegal or unenforceable provision had
never been contained herein.
3
<PAGE>
(g) Assignment. This Agreement may be assigned by Asymetrix and shall be
binding upon and inure to the benefit of successors, assigns and personal
representatives. Client may assign this Agreement with prior written approval of
Asymetrix.
4
<PAGE>
ASYMETRIX LEARNING SYSTEMS, INC.: ____________________________________
By ____________________________________
Name __________________________________
Title _________________________________
CLIENT: VULCAN NORTHWEST, INC.
By ____________________________________
Name __________________________________
Title _________________________________
5
<PAGE>
EXHIBIT A
July 24, 1998
Asymetrix Learning Systems, Inc.
Proposal for APEX/Librarian project
Introduction:
With this document, Asymetrix Learning Systems, Inc. proposes to provide
documentation in support of the version of Asymetrix Librarian that APEX will
employ to deliver advanced placement courses to students via the Internet.
Choosing Asymetrix offers APEX several advantages:
1. Betty Houser--the person who wrote the Asymetrix Librarian User Guide, will
write all documentation. This means that APEX will have the benefit of a
writer who already knows the product in detail. Having Betty write the
documentation will allow APEX to meet its aggressive schedule goals.
Contracting outside Asymetrix would almost certainly increase both the time
required to complete the project and the overall cost.
2. Asymetrix will reuse existing documentation as far as possible. For
instance, Asymetrix will be able to provide a modified version of the
existing Librarian Help system to meet APEX needs, rather than writing an
entire Help system from scratch. This, too, will shorten the writing time
required and reduce overall costs as compared to a non-Asymetrix writer.
3. Asymetrix writers have easy access to the engineers developing the APEX
version of Librarian. This means that Betty Houser will be able to develop
documentation in parallel with the overall progress of the project.
4. Finally, approximately 25% of the documentation that Asymetrix writes for
APEX will be reused in later Asymetrix releases of Librarian. Asymetrix
will not charge APEX for these materials. Specifically, Asymetrix plans to
reuse materials on submitting assignments.
Project Description:
Write, edit, and produce 15 pp. (approx.) printable guide in Adobe PDF format to
serve as a companion to the APEX Orientation Course. The aim of the guide is to
introduce students to the APEX environment and help them use the system
successfully for the purpose of taking Advanced Placement courses online.
Provide online Help system in HTML for the student program. To do this,
Asymetrix will modify the existing Librarian HTML Help system, add discussion of
new features, adjust terminology to be consistent with APEX standards, and add
ten screens to describe the APEX activity types.
6
<PAGE>
Project Schedule:
Asymetrix delivers first draft of Guide and Help: August 14, 1998
APEX provides technical review of first draft: August 21, 1998
Asymetrix delivers final Guide and Help: August 31, 1998
Publications service cost breakdown:
Writing, editorial, and production services to be provided at the rate of @
$75.00/hr. or $15,000.00, whichever is less.
7
<PAGE>
EXHIBIT 10.03
EIGHTH AMENDMENT TO LEASE
THIS EIGHTH AMENDMENT TO LEASE ("Amendment") is made as of October 16,
1998, by and between 110 ATRIUM PLACE ASSOCIATES, LLC, a California limited
liability company ("Lessor"), and ASYMETRIX LEARNING SYSTEMS, INC. (formerly
Asymetrix Corporation), a Delaware corporation ("Lessee").
Recitals
A. Pursuant to the terms of the written Lease Agreement dated May 24,
1991 (the "Original Lease") between Dean Witter Realty Income Partnership II,
L.P., a Delaware limited partnership ("Original Lessor") and Lessee, Original
Lessor leased to Lessee, and Lessee leased from Original Lessor approximately
25,626 rentable square feet of office space identified as Suite 717 on the 7th
floor of the building known as 110 Atrium Place located at 110 - 110th Avenue
N.E., Bellevue, Washington (the "Building"). Original Lessor and Lessee entered
into a First Amendment to Lease dated April 16, 1992 (the "First Amendment") by
which Lessee leased additional space on the 7th floor of the Building,
consisting of approximately 6,641 rentable square feet, known as Suites 705 and
710; a Second Amendment to Lease dated as of May 20, 1992 (the "Second
Amendment") by which Lessee leased additional space on the 3rd floor of the
Building, consisting of approximately 1,887 rentable square feet, known as Suite
300; a Third Amendment to Lease dated as of September 29, 1992 (the "Third
Amendment") by which Lessee leased additional space on the 6th floor of the
Building, consisting of approximately 3,017 rentable square feet, known as Suite
690; a Fourth Amendment to Lease dated as of August 27, 1993 (the "Fourth
Amendment") by which Lessee leased additional space on (i) the 5th floor of the
Building, consisting of approximately 8,125 rentable square feet (later measured
to be 8,247 rentable square feet), (ii) the 4th floor of the Building consisting
of approximately 9,373 rentable square feet, known as Suite 490, (iii) the 3rd
floor of the Building consisting of approximately 4,352 rentable square feet,
known as Suite 390, and (iv) the 3rd floor of the Building consisting of
approximately 7,689 rentable square feet, known as Suites 301 and 303; a Fifth
Amendment to Lease dated as of April 29, 1995 (the "Fifth Amendment") by which
Lessee returned to Lessor approximately 3,017 rentable square feet on the sixth
floor of the Building; a Sixth Amendment to Lease dated as of January 26, 1996
(the "Sixth Amendment"); a Seventh Amendment to Lease dated March 31, 1996 (the
"Seventh Amendment"); and a Conditional Partial Lease Termination Agreement
dated as of August 15, 1998 (the "Termination Agreement") by which Lessor and
Lessee terminated the Lease with respect to approximately 3,971 rentable square
feet of space on the 3rd floor of the Building. The Original Lease, as amended
by the First Amendment, the Second Amendment, the Third Amendment, the Fourth
Amendment, the Fifth Amendment, the Sixth Amendment, the Seventh Amendment and
Termination Agreement is hereinafter referred to as the "Lease." Consequently,
in accordance with the Lease, and prior to this
1
<PAGE>
Eighth Amendment, Lessor leases to Lessee, and Lessee leases from Lessor, a
total of approximately 59,844 rentable square feet of office space (the
"Premises") in the Building.
B. Lessor is successor in interest to Original Lessor.
C. The term of the Lease is scheduled to expire (i) on October 31, 1998
for approximately 25,690 rentable square feet (and Lessee will not be extending
the Term of the Lease with respect to such space), and (ii) on October 31, 1999
for the remaining approximately 34,154 rentable square feet (and Lessee will be
extending the Term of the Lease with respect to such space, less the 1,887
rentable square feet in the Third [3rd] Floor Space described below), all as
more particularly described in Paragraph 1 of the Seventh Amendment, as amended
by the Termination Agreement.
D. Lessor and Lessee desire to extend the Term of the Lease for
approximately 32,267 rentable square feet to be sixty (60) full calendar months
following November 1, 1998 (the "Extension Term Commencement Date"), and to make
other changes in the Lease, all as hereinafter provided.
E. Lessor and Lessee further desire to amend the Lease to accomplish the
following:
(a) Commencing upon the Extension Term Commencement Date Lessee shall
occupy and pay rent on:
(i) the entire seventh (7th) floor of the Building (the "Seventh [7th]
Floor Space") containing approximately 32,267 rentable square feet (and
containing approximately 29,334 usable square feet),
(ii) a portion of the sixth (6th) floor of the Building (the "Initial
Sixth [6th] Floor Space") containing approximately 980 rentable square
feet (and containing approximately 875 usable square feet), and
(iii) a portion of the fourth (4th) floor of the Building (the "Fourth
[4th] Floor Space") containing approximately 9,373 rentable square feet
(and containing approximately 8,369 usable square feet) (but Lessee shall
pay rent only on 2,046 rentable square feet of the Fourth [4th] Floor
Space).
(b) When certain space on a portion of the sixth (6th) floor of the
Building (the "Additional Sixth [6th] Floor Space") containing
approximately 2,046 rentable square feet (and containing approximately
1,827 usable square feet) becomes available, as provided herein, Lessee
shall also lease the Additional Sixth (6th) Floor Space. Once Lessee
occupies the Additional Sixth (6th) Floor Space, Lessee shall vacate the
Fourth (4th) Floor Space as provided herein; and thereafter (i) the Initial
Sixth (6th) Floor Space and the Additional Sixth (6th) Floor Space shall be
referred to as the Sixth (6th) Floor Space, and (ii) the Sixth (6th) Floor
2
<PAGE>
Space shall contain approximately 3,026 rentable square feet (and
approximately 2,702 usable square feet).
(c) The approximate configuration and location of the Seventh (7th) Floor
Space is shown on Exhibit A-1 attached hereto. The approximate
configuration and location of the Initial Sixth (6th) Floor Space is shown
on Exhibit A-2 attached hereto. The approximate configuration and location
of the Additional Sixth (6th) Floor Space is shown on Exhibit A-3 attached
hereto. The approximate configuration and location of the Fourth (4th)
Floor Space is shown on Exhibit A-4 attached hereto. The approximate
configuration and location of the Third (3rd) Floor Space is shown on
Exhibit A-5 attached hereto.
NOW THEREFORE, in consideration of the foregoing recitals and the mutual
agreements of the parties herein, Lessor and Lessee agree as follows:
1. Lease Terms. All capitalized terms not defined herein shall have the
same meaning set forth in the Lease.
2. Lease of Premises.
(a) Commencing November 1, 1998, and continuing through the Term (as
extended herein), Lessor leases to Lessee and Lessee leases from Lessor,
(i) the Seventh (7th) Floor Space, (ii) the Initial Sixth (6th) Floor
Space, and (iii) the Fourth (4th) Floor Space (subject to termination of
the Fourth [4th] Floor Space, as hereinafter provided).
(b) Commencing upon the date (the "Additional Sixth [6th] Floor
Commencement Date") Lessor delivers possession of the Additional Sixth
(6th) Floor Space to Lessee, and continuing through the Term (as extended
herein), Lessor hereby leases to Lessee, and Lessee leases from Lessor, the
Additional Sixth (6th) Floor Space. Lessee understands and agrees that the
Additional Sixth (6th) Floor Space is currently leased by another tenant
(the "Existing Tenant") pursuant to a lease expiring December 31, 1998.
Lessor agrees to deliver possession of the Additional Sixth (6th) Floor
Space to Lessee when Lessor obtains possession thereof from the Existing
Tenant. If the Existing Tenant holds over in the Additional Sixth (6th)
Floor Space beyond the expiration of its lease, Lessor agrees to use its
good faith efforts to regain possession of the Additional Sixth (6th) Floor
Space from the Existing Tenant and deliver possession of the Additional
Sixth (6th) Floor Space to Lessee.
(c) On the Additional Sixth (6th) Floor Commencement Date: (x) the
Lease shall partially terminate with respect to the Fourth (4th) Floor
Space, (y) Lessee shall vacate the Fourth (4th) Floor Space, and (z) Lessee
shall have no obligation accruing under the Lease with respect to the
Fourth (4th) Floor Space following the date Lessee vacates the Fourth (4th)
Floor Space.
3
<PAGE>
(d) From and after the Additional Sixth (6th) Floor Commencement Date
the Premises shall consist of the following spaces in the Building:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Approximate Applicable Commencement
Space Rentable Area Date
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Seventh (7th)
Floor Space 32,267 square feet 11/01/98
- ----------------------------------------------------------------------------------------
Initial Sixth (6th)
Floor Space 980 square feet 11/01/98
- ----------------------------------------------------------------------------------------
Additional Sixth (6th) Additional Sixth (6th) Floor
Floor Space 2,046 square feet Space Commencement Date
- ----------------------------------------------------------------------------------------
</TABLE>
3. Extension of Term. The Term of the Lease is hereby extended to be
sixty (60) full calendar months following the Extension Term Commencement Date,
subject to the provisions of the Early Termination Right contained in Paragraph
8 below.
4. Condition of Spaces. Lessee shall take the Fourth (4th) Floor Space,
the Initial Sixth (6th) Floor Space and the Seventh (7th) Floor Space in their
existing "AS IS" condition on the Extension Term Commencement Date. Lessee shall
take the Additional Sixth (6th) Floor Space in its existing "AS IS" condition on
the Additional Sixth (6th) Floor Space Commencement Date.
5. Alterations and Allowance. Lessee shall have the right to make
Alterations in accordance with the provisions of Section 11 of the Original
Lease, (i) in the Seventh (7th) Floor Space and the Initial Sixth (6th) Floor
Space for a period of up to twelve (12) months following the Extension Term
Commencement Date, and (ii) in the Additional Sixth (6th) Floor Space for a
period of up to six (6) months following the Additional Sixth (6th) Floor
Commencement Date. Upon completion of the Alterations in each of the respective
spaces, Lessor shall pay to Lessee a construction allowance (the "Allowance")
equal to $5.00 per usable square foot of area in the Seventh (7th) Floor Space
and in the Sixth (6th) Floor Space to reimburse Lessee for Lessee's hard and
soft costs and expenses incurred by Lessee in designing, space planning,
construction drawings, permitting and constructing the Alterations. Such
Allowance shall be payable by Lessor to Lessee for the Seventh (7th) Floor Space
and the Initial Sixth (6th) Floor Space within thirty (30) days after Lessee (a)
completes such Alterations in such spaces and (b) submits to Lessor a written
request for reimbursement for the costs of such Alterations, together with lien
waivers from the general contractor and all subcontractor and suppliers showing
that the costs of such Alterations have been paid in full with respect to the
Seventh (7th) Floor Space and the Initial Sixth (6th) Floor Space ("Lessee's
Initial Allowance Request"), provided the actions described in (a) and (b) of
this sentence are performed within twelve (12) months following the Extension
Term Commencement Date. Such Allowance shall be payable by Lessor to Lessee for
the Additional Sixth (6th) Floor Space within thirty (30) days after Lessee (a)
completes such Alterations in such space and (b) submits to Lessor a written
request for reimbursement for the costs of such Alterations, together with lien
waivers from the general contractor and all subcontractor and suppliers showing
that the costs of such Alterations have been paid in full with respect to the
Additional Sixth
4
<PAGE>
(6th) Floor Space ("Lessee's Additional Allowance Request"), provided the
actions described in (a) and (b) of this sentence are performed within six (6)
months following the Additional Sixth (6th) Floor Commencement Date. If Lessee
does not complete the Alterations and submit the written request for
reimbursement for the respective spaces within the times specified above, then
Lessee shall lose the right to the Allowance for any such space. If Lessor does
not pay the portion of the Allowance contained in Lessee's Initial Allowance
Request within thirty (30) days after Lessee delivers Lessee's Initial Allowance
Request (containing all the documentation required therein) to Lessor, then the
unpaid past due balance of the Allowance shall bear interest at the rate
contained in Section 25 (c) of the Original Lease commencing upon the date
Lessee delivered Lessee's Initial Allowance Request to Lessor until paid in
full. If Lessor does not pay the portion of the Allowance contained in Lessee's
Additional Allowance Request within thirty (30) days after Lessee delivers
Lessee's Additional Allowance Request (containing all the documentation required
therein) to Lessor, then the unpaid past due balance of the Allowance shall bear
interest at the rate contained in Section 25 (c) of the Original Lease
commencing upon the date Lessee delivered Lessee's Additional Allowance Request
to Lessor until paid in full.
6. Give Back of Space. On the Extension Term Commencement Date the Lease
shall partially terminate with respect to approximately 1,887 rentable square
feet of space located on the third (3rd) floor of the Building and known as
Suite 300 (the "Third [3rd] Floor Space"), which Third (3rd) Floor Space was
initially leased pursuant to the terms of the Second Amendment, and the term for
which Third (3rd) Floor Space, prior to this Eighth Amendment, would otherwise
expire on October 31, 1999. With respect to the Third (3rd) Floor Space Lessor
and Lessee shall have no liability for any obligations accruing under the Lease
subsequent to the later of (i) October 31, 1998, or (ii) the date Lessee
actually vacates the Third (3rd) Floor Space.
7. Monthly Base Rent for Premises.
(a) Commencing upon (i) the Extension Term Commencement Date, and
continuing through the Term (as extended herein) Lessee shall pay to Lessor
the following monthly Base Rent for the combined Seventh (7th) Floor Space
and the Initial Sixth (6th) Floor Space:
<TABLE>
<CAPTION>
Months Following Annual Base Rent
the Extension Term Per Rentable Base Rent
Commencement Date: Square Foot: per Month:
------------------- ---------------- ----------
<S> <C> <C>
01 - 12: $23.00 per sf $63,723.42
13 - 24: $23.75 per sf $65,801.35
25 - 36 $24.75 per sf $68,571.94
37 - 48: $25.75 per sf $71,342.52
49 - 60: $26.50 per sf $73,420.46
</TABLE>
5
<PAGE>
(b) Commencing upon Additional Sixth (6th) Floor Commencement Date, and
continuing through the Term (as extended herein) Lessee shall pay to Lessor
the following monthly Base Rent for the Additional Sixth (6th) Floor Space:
<TABLE>
<CAPTION>
Months Following Annual Base Rent
the Extension Term Per Rentable Base Rent
Commencement Date: Square Foot: per Month:
------------------- ---------------- ----------
<S> <C> <C>
01 - 12: $23.00 per sf $3,921.50
13 - 24: $23.75 per sf $4,049.38
25 - 36 $24.75 per sf $4,219.88
37 - 48: $25.75 per sf $4,390.38
49 - 60: $26.50 per sf $4,518.25
</TABLE>
(c) Commencing upon the Extension Term Commencement Date and continuing
until the later of (i) the Additional Sixth (6th) Floor Commencement Date,
or (ii) the date Lessee actually vacates the Fourth (4th) Floor Space,
Lessee shall pay to Lessor $3,921.50 per month as monthly Base Rent for the
Fourth (4th) Floor Space.
8. Option for Early Termination of Lease. Provided that Asymetrix
Learning Systems, Inc. has not assigned this Lease or sublet any or all of the
Premises (it being intended that all rights pursuant to this provision are and
shall be personal to Asymetrix Learning Systems, Inc. and shall not be
transferable or exercisable for the benefit of any assignee of the Lease, or any
sublessee of any portion of the Premises), and provided that Lessee is not in
default under this Lease at the time of exercise or at any time thereafter until
the effective date of termination, Lessee shall have the one-time option to
terminate this Lease effective October 31, 2001 ("Early Termination Date") after
giving written notice to Lessor of Lessee's exercise of such termination option
no later than October 31, 2000 and paying to Lessor, no later than August 31,
2001, as an "Early Termination Fee" an amount equal to the sum of (i) the
unamortized portion of the Allowance, and brokerage commissions both amortized
straight line, with an interest rate of ten percent (10%) per annum, over sixty
(60) months following the Extension Term Commencement Date (ii) two (2) months
of Base Rent following the Early Termination Date, and (iii) the Effective Rent
Differential (defined as the difference in the average rent paid through the
Termination Date versus the average effective rent payable over the entire sixty
(60) months following the Extension Term Commencement Date. Lessee shall have
such option to terminate only if such option is exercised precisely in the
manner provided herein. Upon timely and proper exercise of such option, this
Lease shall terminate on the Termination Date as specified in this Termination
provision, and Lessee shall surrender the Premises to Lessor, on or before the
Termination Date in accordance with the provisions of the Lease.
6
<PAGE>
9. Right Of First Offer.
(a) Provided that Asymetrix Learning Systems, Inc. has not assigned
this Lease or sublet any or all of the Premises (it being intended that
all rights pursuant to this provision are and shall be personal to
Asymetrix Learning Systems, Inc. and shall not be transferable or
exercisable for the benefit of any assignee of the Lease, or any
sublessee of any portion of the Premises), and provided Lessee is not
in default under this Lease at the time of the exercise of any such
right or at any time thereafter until delivery of possession of the
space to Lessee, and subject to any and all rights of other tenants in
the Building with respect to such space (including renewal and
extension rights and rights of first offer, first negotiation, first
refusal or other expansion rights) existing as of the date of this
Eighth Amendment, Lessee shall have a one-time right of first offer to
lease the following space in the Building: Any space on the Sixth (6th)
floor of the Building.
(b) Such right of first offer (i) may only be exercised with respect
to vacant space or space which has been previously leased and as to
which an existing tenant of the Building has elected not to extend its
lease or re-lease such space and (ii) may only be exercised with
respect to all of the space being offered by Lessor. If any space
qualifying for such right of first offer becomes available, Lessor
shall offer to lease such space to Lessee at the same Base Rent in
effect from time-to-time under the Lease following the Extension Term
Commencement Date and on the same terms under which Lessee is leasing
the Seventh (7th) Floor Space; provided, however, notwithstanding the
provisions under which Lessee is leasing the Seventh (7th) Floor Space,
Lessor shall not be obligated to contribute any Allowance for any right
of first offer space if less than eighteen (18) months remain in the
Term between the commencement date for the applicable right of first
offer space and either the Early Termination Date, or the Expiration
Date, as the case may be. Lessee shall have ten (10) Business Days
following receipt of Lessor's offer with respect to any such space
offered by Lessor under within which to notify Lessor in writing of its
intention to lease such space, and such notice, if given by Lessee,
shall constitute an acceptance of Lessor's terms for the lease of such
space. If Lessee exercises such right of first offer, the space to be
leased by Lessee shall be leased on the same terms and conditions as
are contained in this Lease, and the parties shall execute an amendment
to this Lease to include such space in the Premises and otherwise to
provide for the leasing of such space on such terms. If Lessee fails so
to exercise Lessee's right of first offer within such ten (10) Business
Day period, Lessor may thereafter lease such space to other prospective
tenants; provided, however, if Lessor proposes to lease such space at
an effective rent that is less than ninety percent (90%) of the
effective rent proposed to Lessee, or upon other terms which are
materially more favorable to the prospective tenant, Lessor shall first
re-offer such space to Lessee at such lower rent and/or more favorable
terms in accordance with the provisions of this paragraph.
(c) If Lessee does not lease the specific right of first offer space
from Lessor when it is first offered to Lessee by Lessor or when it is
re-offered to Lessee because the economic terms first offered to Lessee
have materially changed, as described in the last sentence of paragraph
(b) above, then this right of first offer shall terminate with respect
to the specific space offered by Lessor to Lessee (but not with respect
to any other space
7
<PAGE>
on the sixth [6th] floor of the Building, which shall remain subject to the
provisions of this Section unless previously offered to Lessee), and Lessee
shall have no further rights to lease the specific right of first offer space
after it has been offered to Lessee.
10. Base Year. Effective upon the Extension Term Commencement Date (a)
Section 9 is amended to substitute calendar year 1998 (the "Base Year") for
calendar year 1991, and (b) the following is added as a new provision (k) to
Section 9 of the Lease:
"(k) Limitation on Lessee's Obligation to Pay Increases in Operating
Costs.
Notwithstanding any other provision contained herein to the contrary,
Lessor agrees that commencing with the first calendar year following the
Base Year, Lessee shall not be obligated to pay for increases in Operating
Costs for the applicable calendar year (other than increases that are
attributable to [a] changes in Lessee's Share from time to time, and [b]
"Uncontrollable Expenses") that exceed an amount equal to eight percent
(8%) of the Actual Operating Costs for the preceding calendar year.
For the purpose of this Subsection (k) the term "Uncontrollable
Expenses" is hereby defined to consist of (i) all utilities, (ii) all
premiums for insurance coverage, including, without limitation, worker's
compensation premiums, (iii) all Taxes, including, without limitation,
sales taxes on personal property and payroll taxes, (iv) non-recurring
maintenance and repairs, and (v) costs of complying with governmental
requirements."
11. Limitation on Increases in Parking Rates. Commencing upon the
Extension Term Commencement Date and continuing throughout the Term, Lessee
shall pay the then current market parking rate at the Building for the parking
stalls Lessee is entitled to use under the Lease, subject to the following
limitations: (a) Lessor shall be entitled to increase the parking rate charged
to Lessee for each parking stall only on an anniversary date of the Extension
Term Commencement Date, and (b) Lessee shall not be obligated to pay for
increases in the parking rate (if any) that exceed an amount equal to five
percent (5%) (excluding taxes) of the parking rate Lessee was obligated to pay
immediately prior to the applicable anniversary of the Extension Term
Commencement Date. The parties hereby agree that for the purposes of this
Agreement on the Extension Term Commencement Date the market parking rate at the
Building shall not exceed $75.00 per parking stall.
12. Effective upon the full execution of this Eighth Amendment Section 30
of the Lease is amended and restated to read in its entirety as follows:
30. Sale by Lessor and No Personal Liability. The term "Lessor," as
used in this Lease, shall mean only the owner or owners of the Building at
the time in question. In the event of a sale or conveyance by Lessor of the
Building, and provided that any such transferee assumes in writing the
obligations of Lessor under this Lease (subject to the limitation of
liability set
8
<PAGE>
forth in this Section), the same shall operate to release Lessor from any
future liability for any covenants or conditions, express or implied, to be
performed under this Lease in favor of Lessee after the date of such
conveyance, and in such event Lessee agrees to look solely to the
responsibility of the successor in interest of Lessor in and to this Lease.
This Lease shall not be affected by any such sale, and Lessee agrees to
attorn to the purchaser or assignee. Notwithstanding any other term or
provision of this Lease, the liability of Lessor for its obligations under
this Lease is limited solely to Lessor's interest in the Building as the
same may from time to time be encumbered, and no personal liability shall
at any time be asserted or enforceable against any other assets of Lessor
or against Lessor's partners or members or its or their respective
partners, shareholders, members, directors, officers or managers on account
of any of Lessor's obligations or actions under this Lease.
13. Brokers. Lessee warrants and represents to Lessor that in the
negotiating or making of this Amendment neither Lessee nor anyone acting on
Lessee's behalf has dealt with any real estate broker or finder who might be
entitled to a fee or commission for this Amendment other than Leibsohn & Company
(the "Broker"). Lessor shall pay the fee or commission of the Broker in
accordance with Lessor's separate written agreement with the Broker, if any.
Lessee agrees to indemnify and hold Lessor harmless from any claim or claims,
including costs, expenses and attorney's fees incurred by Lessor, asserted by
any broker or finder for a fee or commission other than the foregoing Broker,
based upon any dealings with or statements made by Lessee or its
representatives.
14. Authority. Each of the persons executing this Amendment on behalf of
Lessee warrants and represents that Lessee is a duly organized and validly
existing entity, that Lessee has full right and authority to enter into this
Lease and that the persons signing on behalf of Lessee are authorized to do so
and have the power to bind Lessee to this Lease.
15. Signage. Provided that Asymetrix Learning Systems, Inc. leases and
occupies at least 32,000 rentable square feet in the Building (it being intended
that all rights pursuant to this provision are and shall be personal to
Asymetrix Learning Systems, Inc. and shall not be transferable or exercisable
for the benefit of any assignee of the Lease, or any sublessee of any portion of
the Premises), and provided that Lessee is not in default under this Lease,
Lessee shall have the right to place a lighted sign ("Lessee's Sign")
identifying Lessee on the exterior cross-member at the seventh (7th) floor of
the Building in the location shown on Exhibit B attached hereto. The lighting
for Lessee's Sign shall be consistent with lighting at comparable class A
buildings in downtown Bellevue, Washington area built after 1988; provided,
however, in no instance shall Lessee's Sign be neon. The electricity for
Lessee's Sign shall be separately metered, at Lessee's sole cost and expense,
and Lessee shall pay, when due, the electricity charges for Lessee's Sign.
Lessee's Sign shall be (a) subject to Lessor's prior written approval of the
size, location, material, color, method of attachment to the Building, and all
other aspects of Lessee's Sign, which approval shall not be unreasonably
withheld, and (b) subject to all applicable ordinances, regulations and the
prior approval of all applicable governmental
9
<PAGE>
authorities, (c) shall only be installed after Lessee obtains all necessary
permits and approvals from the applicable authorities, and (d) shall be
installed and maintained in a first class condition at Lessee's sole cost and
expense (including, without limitation, the cost of obtaining all permits and
other governmental approval). Throughout the Term of the Lease Lessee shall not
make any change or changes to Lessee's Sign without the prior written consent of
Lessor. Within fifteen (15) days after the expiration or termination of this
Lease Lessee agrees, at Lessee's sole cost and expense, to remove Lessee's Sign
from the exterior of the Building and to repair any damage to the exterior of
the Building caused by the installation or removal of Lessee's Sign. If Lessee
fails to remove Lessee's Sign from the exterior of the Building, and to repair
any damage to the exterior of the Building, within fifteen (15) days after the
expiration or termination of this Lease, then Lessor shall have the right to do
so at Lessee's expense, and Lessee agrees to pay to Lessor the costs of such
removal and repair within thirty (30) days after Lessor invoices Lessee
therefor. Lessee will be liable for any damages or repairs incurred or required
as a result of its installation, use, repair, maintenance or removal of Lessee's
Sign and agrees to indemnify and hold harmless Lessor from any liability, loss,
damage, cost or expense, including reasonable attorneys' fees, arising
therefrom.
16. Ratification of Lease. The Lease, as modified by this Amendment,
remains in full force and effect, and Lessor and Lessee hereby ratify the same.
This Amendment shall be binding upon and inure to the benefit of the parties and
their respective successors and assigns. All references to the Lease in any
document shall be deemed to mean the Lease as amended by this Eighth Amendment.
IN WITNESS WHEREOF, Lessor and Lessee have entered into and executed this
Eighth Amendment as of date of this Eighth Amendment.
Lessor: Lessee:
110 ATRIUM PLACE ASSOCIATES, LLC ASYMETRIX LEARNING
SYSTEMS, INC.,
a California limited liability company a Delaware corporation
By: Opportunity Capital Partners III, LLC
a California limited liability company
By: ________________________ By: ____________________________
Name: Name: ____________________________
Title: Manager Title: ____________________________
10
<PAGE>
CORPORATE ACKNOWLEDGMENT
STATE OF )
) ss.
COUNTY OF )
THIS IS TO CERTIFY that on this _________ day of ____________________,
199____, before me, the undersigned, a notary public in and for the state of
___________________________________, duly commissioned and sworn, personally
appeared ___________________________________________________________________
to me known to be the ______________________________________________________
respectively, of __________________________________________________________,
the corporation that executed the within and foregoing instrument, and
acknowledged the said instrument to be the free and voluntary act and deed of
said corporation for the uses and purposes therein mentioned, and on oath stated
that they were authorized to execute said instrument, and that the seal affixed,
if any, is the corporate seal of said corporation.
WITNESS my hand and official seal the day and year in this certificate
first above written.
Signature _______________________________________________
Printed Name ____________________________________________
Notary public in and for the state of __________________,
residing at _____________________________________________
My appointment expires __________________________________
11
<PAGE>
EXHIBIT 21.01
Asymetrix Subsidiaries
Asymetrix Learning Systems, Ltd.
Asymetrix GmbH
Asymetrix SARL
Socha Computing, Inc.
Aimtech Corporation
Communication Strategies, Inc.
Meliora Systems, Inc.
<PAGE>
EXHIBIT 23.01
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Asymetrix Learning Systems, Inc.
We consent to incorporation by reference in the registration statement on Form
S-8 (No.333-68413) of Asymetrix Learning Systems, Inc. of our reports dated
February 1, 1999, relating to the consolidated balance sheets of Asymetrix
Learning Systems, Inc. and subsidiaries as of December 31, 1997 and 1998, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1998, and related financial statement schedule, which reports appear in the 1998
Annual Report on Form 10-K of Asymetrix Learning Systems, Inc.
KPMG LLP
Seattle, Washington
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 21,713
<SECURITIES> 0
<RECEIVABLES> 9,324
<ALLOWANCES> 999
<INVENTORY> 370
<CURRENT-ASSETS> 31,257
<PP&E> 7,642
<DEPRECIATION> 5,322
<TOTAL-ASSETS> 43,622
<CURRENT-LIABILITIES> 6,344
<BONDS> 0
0
0
<COMMON> 140
<OTHER-SE> 36,870
<TOTAL-LIABILITY-AND-EQUITY> 43,622
<SALES> 15,193
<TOTAL-REVENUES> 33,352
<CGS> 1,985
<TOTAL-COSTS> 14,417
<OTHER-EXPENSES> 26,854
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 743
<INCOME-PRETAX> (5,159)
<INCOME-TAX> 0
<INCOME-CONTINUING> (5,159)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,159)
<EPS-PRIMARY> (.62)
<EPS-DILUTED> (.62)
</TABLE>
