<PAGE>
As filed with the Securities and Exchange Commission on October 6, 2000.
Registration No. 333-
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-----------
GLOBAL KNOWLEDGE, INC.
(Exact name of registrant as specified in its charter)
-----------
13-3860294
Delaware 8200 (I.R.S. Employer
(State or other (Primary Standard Identification No.)
jurisdiction of Industrial
incorporation or Classification Code
organization) Number)
9000 Regency Parkway,
Suite 500
Cary, North Carolina
27511
(919) 461-8600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
-----------
Stacey M. Cannon, Esq.
Vice President and General Counsel
Global Knowledge, Inc.
One Van de Graaff Drive
Burlington, MA 01803
(781) 505-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
-----------
Copies to:
Robert A. Schwed, Esq. Lawrence D. Levin, Esq.
REBOUL, MACMURRAY, HEWITT, KATTEN MUCHIN ZAVIS
MAYNARD & KRISTOL 525 West Monroe Street, Suite 1600
45 Rockefeller Plaza Chicago, Illinois 60661
New York, New York 10111 (312) 902-5200
(212) 841-5700
Approximate Date Of Commencement Of Proposed Sale To The Public: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
-----------
CALCULATION OF REGISTRATION FEE
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--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Proposed
Title of each class of maximum Amount of
securities to be aggregate offering registration
registered price(1) fee
-------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value.................. $201,250,000 $53,130
</TABLE>
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the amount of the registration
fee paid pursuant to Rule 457(o) under the Securities Act of 1933, as
amended.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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--------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 6, 2000
Shares
[LOGO APPEARS HERE]
Global Knowledge, Inc.
Common Stock
--------
Prior to this offering, there has been no public market for our common stock.
The initial public offering price of the common stock is expected to be between
$ and $ per share. We will make application to list our common
stock on The Nasdaq National Market under the symbol "GOGK."
The underwriters have an option to purchase a maximum of additional
shares to cover over-allotments of shares.
Investing in our common stock involves risks. See "Risk Factors" on page 8.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Global
Public Commissions Knowledge
------------ ------------- ------------
<S> <C> <C> <C>
Per Share.................$ .........$ ........$
Total..................$ ...$ ....$ .............
</TABLE>
Delivery of the shares of common stock will be made on or about ,
2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Credit Suisse First Boston Banc of America Securities LLC
U.S. Bancorp Piper Jaffray
The date of this prospectus is , 2000.
<PAGE>
Inside Front Cover/Gatefold
Graphics appearing on the front cover include Global Knowledge logo with "The
Education Integration Company" tagline underneath it.
"www.globalknowledge.com"
Graphics and headings appearing on the gatefold following the inside cover:
A stylized globe will be positioned in the center of the gatefold with four
Sections positioned, one in each corner.
Section A
(picture of instructor presenting to a classroom of students)
"Instructor-led IT training as a public or onsite offering"
(picture of a student with headset receiving training over the Internet)
"Instructor-led live e-Learning available anywhere"
Section B
(picture of OnDemand product screenshot with logo treatment)
"OnDemand - In application performance support software"
(picture of Knowledge Pathways product screenshot with logo treatment)
"Knowledge Pathways - Browser-based software for rapid development and delivery
over the Internet"
Section C
(stylized picture of a student working with content on a web browser)
"Self-Paced e-Learning - Browser-based content delivery"
(stylized picture of a Personal Digital Assistant displaying our content)
"Content available on handheld PDA platform"
(collage of branded texts from within our book series)
"Certification Study Guides and Reference Texts"
Section D
(stylized picture of systems, reports, and representative services)
"Customized Learning Solutions"
(collage of various pictures representing our Program Management Services)
"Program Management Services"
The names of the twenty countries we operate in will be listed in alphabetical
order across the bottom of the gatefold.
Inside back cover
"Strategic Vendor Training Relationships"
"These relationships enable us to offer content to clients on many of the
hardware and software solutions they need to run their businesses."
Logos of our strategic vendor training relationships will be displayed across
the page.
Back cover
Global Knowledge logo with "The Education Integration Company" tagline.
"www.globalknowledge.com"
Three rows listing each of our twenty countries in alphabetical order.
<PAGE>
------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary.................. 2
Risk Factors........................ 8
Special Note Regarding Forward-
Looking Statements................. 15
Use of Proceeds..................... 15
Dividend Policy..................... 15
Capitalization...................... 16
Dilution............................ 17
Selected Consolidated Financial
Data............................... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................ 33
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management......................... 51
Certain Relationships and Related
Transactions...................... 59
Principal Stockholders............. 61
Description of Capital Stock....... 63
Shares Eligible for Future Sale.... 65
Underwriting....................... 67
Notice to Canadian Residents....... 70
Legal Matters...................... 71
Experts............................ 71
Where You Can Find Additional
Information About Us.............. 71
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
------------
You should rely only on the information contained in this document or to
which we have referred you. We have not authorized anyone to provide you with
information that is different. This document may be used only where it is legal
to sell these securities. The information in this document may only be accurate
on the date of this document.
Dealer Prospectus Delivery Obligation
Until , 2000 (25 days after the commencement of this offering),
all dealers that effect transactions in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to unsold allotments or subscriptions.
1
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
This summary does not contain all of the information you should consider before
buying shares in this offering. You should read the entire prospectus
carefully. References in this prospectus to "Global Knowledge," "we," "our" and
"us" refer to Global Knowledge, Inc. and each of our wholly-owned subsidiaries
including Global Knowledge Network, Inc.
Global Knowledge, Inc.
Global Knowledge is the world's largest independent information technology
education integrator. We offer comprehensive training and software solutions,
including assessment, curriculum design, training delivery and program
management. We focus on mission critical networking systems and applications
that manage the flow of voice, data and image through telecommunications and
information systems networks--often referred to as the information technology,
or IT, "convergence" space. We address the compelling need for skilled IT
professionals responsible for designing, implementing and supporting networking
systems within this rapidly changing global infrastructure.
We believe that our solutions uniquely position us to meet the needs of
multi-national corporations. We offer our clients:
. a broad range of vendor-authorized and proprietary content to address
the practical needs of IT professionals;
. full-service integration and program management capabilities to offer
large scale, turn-key solutions;
. multiple delivery formats to maximize flexibility, retention and
individual performance;
. global resources, including instructors, facilities and a scalable e-
Learning infrastructure; and
. a digital content platform coupled with performance enhancement e-
Learning tools and software applications.
We have a strong track record of delivering consistent solutions so that
clients can be assured that their workforces will receive high-quality
training, regardless of delivery format or location. Our clients are primarily
leading technology, Internet infrastructure, and voice and data
telecommunications companies, including AT&T, Cisco, Compaq, Deutsche Telekom,
Ericsson, Korea Telecom, MCI, Nortel Networks, NTT and Sprint.
Our educational solutions are designed to empower companies and their
employees with choice over when, where and how their IT education programs will
be designed and delivered. We collaborate with clients to design tailored
programs that blend e-Learning tools with our instructor-led curricula to
achieve the most effective results for individual learners. We have strategic
training relationships with technology leaders such as Cisco, Microsoft,
Oracle, Compaq, Nortel Networks, Red Hat, Novell, Enterasys and Entrust to
deliver over 500 "vendor-authorized" training courses to IT professionals on
product-specific skills in advanced networking and communications. We
complement those courses with over 200 proprietary courses that focus on
integrating advanced technology concepts into multi-platform IT environments,
as well as prerequisite fundamentals to vendor-authorized courses. We deliver
our training solutions through a flexible combination of instructor-led
training, instructor-led live e-Learning, self-paced e-Learning and printed
study guides. We protect our clients' investment in training with performance
enhancement e-Learning tools and software applications, including OnDemand
Personal Navigator, which guides ERP and CRM application users through
difficult tasks while remaining live in the application, and Knowledge
Pathways, a digital e-Learning platform for content development, assessment and
personalized learning solutions.
2
<PAGE>
Over the past decade, demand for communications bandwidth across worldwide
telecommunications systems has increased dramatically, driving global
telecommunications providers to rapidly upgrade to a comprehensive
infrastructure capable of carrying all information types, including voice, data
and image. This migration to a universal system, commonly referred to as
convergence, has significantly impacted the reach and power of mission critical
enterprise applications supporting electronic commerce, ERP, supply chain
management and CRM. With these applications running over disparate operating
systems in most multinational corporations, those organizations require an
advanced, intelligent network capable of coordinating information over the
convergence infrastructure to accommodate voice, data and image information
components. We believe that this specialized area of internetworking
communications represents one of the highest growth areas in the Internet and
technology sectors.
Due to the strategic imperative to implement and support today's intelligent
networks, demand for skilled internetworking IT professionals is far
outstripping current supply. There is a clear need for quality education
integrators to train IT professionals in high growth convergence technologies,
such as internet infrastructure, telecommunications and data networking.
Although many training providers attempt to address this market, most focus
only on regional markets, offer limited content, or provide training through a
single delivery method, precluding them from serving the complex needs of
large, multi-national corporations. We believe that learners prefer to have
options for when, where and how they learn, and that the demand for various
learning alternatives will be distributed across the full spectrum available in
the marketplace. Accordingly, we believe that a significant market opportunity
exists for education integrators that can offer full-service solutions to meet
the mission critical needs of global organizations and their IT professionals.
Our strategy is to become the leading provider of education integration
services and products to global organizations and their IT professionals. The
key elements of our strategy include:
. exploiting the skills convergence gap by providing the advanced training
required by corporations and their IT professionals in mission critical
internetworking topics;
. pursuing opportunities to provide complete training services throughout
the entire extended enterprise and customer base of the most advanced
technology hardware and software companies;
. leveraging existing client relationships by increasing sales at these
specifically targeted accounts and using the credibility provided by
those relationships in marketing our products to other potential clients
worldwide;
. continuing to provide integrated learning solutions that offer the
greatest level of flexibility to our clients and achieve the highest
level of performance for their IT professionals; and
. leveraging strategic relationships with hardware and software vendors to
offer multi-platform, comprehensive training solutions to
internetworking professionals in the convergence space.
Our mission is to increase the competitiveness of global organizations by
training their IT professionals to maximize the value derived from complex
information systems. Beginning with our acquisition of the Learning Services
division of Digital Equipment Corporation in 1995, we have built the global
resources and infrastructure to manage complete education programs for many of
the world's largest corporations. Through our integrated approach, we provide
solutions to clients in 20 countries and 15 languages on a daily basis.
Our principal executive offices are located at 9000 Regency Parkway, Suite
500 in Cary, North Carolina. Our investor relations officer is located in our
office at One Van de Graaff Drive in Burlington, Massachusetts. The telephone
number is 781-505-2070. Our web site is www.globalknowledge.com. Information
contained in our web site is not part of this prospectus.
"Global Knowledge", "Global Knowledge Network", "PTS Learning Systems",
"OnDemand Personal Navigator", "Knowledge Pathways", "Netgun", "Competence Key"
and "CustomDOC" are some of our trademarks. This prospectus also includes trade
names, trademarks and service marks of other companies and organizations.
3
<PAGE>
The Offering
<TABLE>
<C> <S>
Common stock offered......................... shares
Common stock to be outstanding after the shares
offering....................................
Use of proceeds.............................. To pay outstanding borrowings under our
subordinated notes and our credit facility,
to redeem a portion of our Series A
redeemable convertible preferred stock, and
for general corporate purposes, including
working capital and potential strategic
acquisitions. See "Use of Proceeds."
Proposed Nasdaq National Market symbol....... GOGK
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding on September 30, 2000 and
excludes:
. shares of our common stock issuable upon exercise of
outstanding stock options, at a weighted average exercise price of
$ per share; and
. shares of our common stock reserved for future grants under our
stock plan.
Except where we indicate otherwise, all information in this prospectus
assumes:
. the redemption of $20.0 million of our Series A redeemable convertible
preferred stock;
. the conversion of all shares of our Series A redeemable convertible
preferred stock which are not redeemed and all outstanding shares of our
Series B redeemable convertible preferred stock into shares of
common stock upon the completion of this offering;
. a -for- stock split of our common stock to be effected before the
completion of this offering; and
. no exercise of the underwriters' over-allotment option.
4
<PAGE>
Summary Consolidated Financial Data
(in thousands, except per share data)
The following tables set forth summary financial data for our company. The
calculation of basic and diluted net loss per share and pro forma basic and
diluted net loss per share is described in Note 4(m) to the consolidated
financial statements included elsewhere in this prospectus. We were
incorporated on October 18, 1995 and began operations on December 21, 1995. You
should read this information together with the financial statements and the
notes to those statements appearing elsewhere in this prospectus and the
information under "Selected Consolidated Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
Latest
Period from Six Months Ended Twelve Months
inception to Year Ended December 31, June 30, Ended June
December 31, -------------------------------- ------------------- 30,
1996 1997 1998 1999 1999 2000 2000
------------ --------- --------- -------- -------- -------- -------------
(in thousands except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue............... $120,801 $ 192,880 $ 217,301 $256,720 $116,084 $201,627 $342,263
Cost of revenue....... 96,488 115,267 125,232 148,382 67,007 114,928 196,303
-------- --------- --------- -------- -------- -------- --------
Gross margin.......... 24,313 77,613 92,069 108,338 49,077 86,699 145,960
Operating expenses.... 96,472 168,002 114,383 123,876 54,405 88,392 157,863
-------- --------- --------- -------- -------- -------- --------
Loss from operations.. (72,159) (90,389) (22,314) (15,538) (5,328) (1,693) (11,903)
Interest and other
expense, net......... 2,803 13,105 15,893 16,664 8,576 9,228 17,316
Provision for income
taxes................ -- 1,219 2,100 1,083 468 701 1,316
-------- --------- --------- -------- -------- -------- --------
Net loss.............. $(74,962) $(104,713) $ (40,307) $(33,285) $(14,372) $(11,622) (30,535)
======== ========= ========= ======== ======== ======== ========
Net loss applicable to
common stockholders.. $(76,915) $(107,074) $ (43,007) $(36,517) $(15,722) $(15,020) $(35,815)
Net loss per common
share:
Basic and diluted... $ (3.81) $ (2.52) $ (0.88) $ (0.55) $ (0.27) $ (0.13) $ (0.37)
======== ========= ========= ======== ======== ======== ========
Pro forma basic and
diluted............ $ $
======== ========
Shares used in
computing net loss
per common share:
Basic and diluted... 20,000 42,565 48,772 66,456 57,333 116,041 95,636
======== ========= ========= ======== ======== ======== ========
Pro forma basic and
diluted............
Other Data:
Adjusted EBITDA
(1)................ $(34,151) $ (16,031) $ 10,357 $ 15,332 $ 6,820 $ 16,220 $24,732
Adjusted EBITDA (1)
margin............. (28.3)% (8.3)% 4.8 % 6.0 % 5.9 % 8.0 % 7.2 %
</TABLE>
5
<PAGE>
(1) EBITDA is defined as loss from operations plus depreciation and
amortization. We have adjusted EBITDA for one time charges recorded in
conjunction with restructurings and acquisitions to more accurately reflect
the cash flows generated by our on-going operations. Adjusted EBITDA is
presented herein because we believe that adjusted EBITDA is a measure
commonly used by lenders and certain investors to evaluate a company's
performance. We also believe that adjusted EBITDA data may help to
understand our performance because such data may reflect our ability to
generate cash flows, which is an indicator of our ability to satisfy our
debt service, capital expenditure and working capital requirements. However,
adjusted EBITDA does not represent, and should not be considered as, an
alternative to net income or cash flows from operating activities each as
determined in accordance with generally accepted accounting principles, or
GAAP. Moreover, adjusted EBITDA does not necessarily indicate whether cash
flow will be sufficient for such items as working capital or capital
expenditures, or to react to changes in our industry or to the economy
generally. Adjusted EBITDA margin is computed by dividing adjusted EBITDA by
revenue.
The following table sets forth a reconciliation of EBITDA to adjusted
EBITDA for each period included herein:
<TABLE>
<CAPTION>
Latest
Twelve
Period from Six Months Months
inception to Ended Ended
December 31, Year Ended December 31, June 30, June
------------ ------------------------- -------------- 30,
1996 1997 1998 1999 1999 2000 2000
------------ -------- ------- ------- ------ ------- -------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA.................. $(54,739) $(27,219) $ 5,476 $10,779 $6,820 $13,997 $17,956
Acquisition-related stay
bonuses(1)............. -- 1,300 -- 458 -- 1,273 1,731
Restructuring
charge(2).............. 5,744 7,484 4,881 2,195 -- 950 3,145
Acquired in process
research and
development(3)......... 14,844 2,404 -- 1,900 -- -- 1,900
-------- -------- ------- ------- ------ ------- -------
Adjusted EBITDA....... $(34,151) $(16,031) $10,357 $15,332 $6,820 $16,220 $24,732
======== ======== ======= ======= ====== ======= =======
</TABLE>
--------------------
(1) Reflects the elimination of one time bonuses paid to employees of
acquired businesses for transitioning to Global Knowledge, Inc.
(2) Reflects the elimination of restructuring charges as more fully
described in Note 9 to our consolidated financial statements included
elsewhere in this prospectus.
(3) Reflects the elimination of charges for acquired in process research and
development incurred in connection with acquired businesses.
6
<PAGE>
The following table sets forth our consolidated balance sheet data as of
June 30, 2000:
On an actual basis;
On a pro forma basis to reflect the conversion of all Series A
redeemable convertible preferred stock except for $20.0 million of such
preferred stock that will be redeemed upon completion of this offering, and
all shares of Series B redeemable convertible preferred stock into
shares of common stock, all of which will occur upon the
completion of this offering; and
On a pro forma as adjusted basis to give effect to the sale of the
shares of common stock offered in this prospectus at an
assumed initial public offering price of $ per share, after deducting
underwriting discounts and estimated offering expenses and the use of $20.0
million of the net proceeds to redeem Series A redeemable convertible
preferred stock, $78.4 million plus accrued interest from September 30,
2000 to the closing of this offering to repay subordinated notes to
affiliates of our principal stockholder and $37.0 million plus accrued
interest from September 30, 2000 to the closing of this offering to repay
borrowings under our credit facility. See "Use of Proceeds."
<TABLE>
<CAPTION>
June 30, 2000
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
--------- ------- -----------
(in thousands)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash and cash equivalents.................. $ 6,321 $ 6,321 $
Working capital............................ (68,678) (68,678)
Total assets............................... 253,959 253,959
Total long-term debt, net of current
portion................................... 86,557 86,557
Redeemable convertible preferred stock..... 131,805 20,000
Total stockholders' deficit................ (121,055) (9,250)
</TABLE>
7
<PAGE>
RISK FACTORS
You should carefully consider the following risk factors and all other
information contained in this prospectus before purchasing our common stock.
Investing in our common stock involves a high degree of risk. Risks and
uncertainties, in addition to those we describe below, that we do not presently
know of or that we currently believe are immaterial, may also impair our
business operations. If any of the following risks materialize, our business
could be harmed, the price of our common stock could decline and you may lose
all or part of your investment. See "Special Note Regarding Forward-Looking
Statements."
Risks Associated with our Business and Financial Performance
We expect our quarterly results to fluctuate. If we fail to meet revenue and
earnings estimates, our stock price could decline.
We have in the past experienced fluctuations in our quarterly operating
results and anticipate that these fluctuations will continue and could
intensify in the future due to a variety of factors, including:
. fluctuations in demand for our services, including gain or loss of
specific clients or agreements;
. mix of higher and lower margin products and services;
. frequency and availability of course sessions, including the number of
days in a quarter during which courses can be conducted;
. timing of course development;
. reductions in the prices of services offered by our competitors;
. timing of expansion into new markets;
. fluctuations in demand for IT professionals generally;
. identification of, payments for and integration of acquisitions; and
. geographic breakdown of our revenue and the fluctuations of the
currencies of the countries in which we operate.
You should consider these factors when evaluating past periods, and, due to
the potential for material variations in the effects of these factors, you
should not rely upon results of past periods as an indication of our future
performance. In addition, the long-term viability of our business could be
negatively impacted if the significance of any of these factors were to
increase substantially. Because our operating results may vary significantly
from quarter to quarter as a result of the factors described above, results may
not meet the expectations of securities analysts and investors, and this may
cause our stock price to decline.
Our operating results are subject to seasonal fluctuations that may adversely
impact our business.
Our operating results have historically been subject to seasonal
fluctuations. Generally, revenue and operating income are flat between our
second and third quarter. This seasonality is due in part to our clients'
annual budget and purchasing cycles and weather, holiday and vacation
considerations that affect the number of courses that may be offered in any
period. We expect that these seasonal trends will continue to impact our
revenue.
We have a history of operating losses, and we may not be able to achieve or
maintain profitability, which may have an adverse effect on our business and
results of operations.
Since we began operations in December 1995, we have incurred losses in every
fiscal period. Our accumulated deficit through June 30, 2000 was approximately
$277.8 million. For the year ended December 31,
8
<PAGE>
1999 and the six months ended June 30, 2000, we incurred net losses of $33.3
million and $11.6 million, respectively. In addition, during these same periods
our non-U.S. operations incurred net losses of $10.4 million and $5.0 million,
respectively, including net losses of $9.0 million and $5.7 million,
respectively, suffered by our European operations. If we do not become
profitable within the time frame expected by investors, the market price of our
common stock may be adversely affected. We cannot assure you that we or, in
particular, our non-U.S. operations, will generate sufficient revenues to
achieve profitability. Even if we do achieve profitability, we cannot assure
you that we will be able to sustain or increase profitability in the future.
Our success depends on our ability to keep ahead of changes in technology.
Our success depends, in significant part, on our ability to anticipate and
keep pace with the market introduction of new hardware, software and networking
technologies. The need to respond to technological changes may require us to
make substantial, unanticipated expenditures in order to develop new courses
and acquire equipment to deliver them. We may be unable to anticipate or
respond successfully to technological change due to financial, technological or
other constraints. Our failure to adequately anticipate or respond to changes
in technology could have a material adverse impact on our business and results
of operations and may cause our stock price to decline.
We rely on alliances with hardware and software vendors that may not continue
in the future.
We have focused and expect to continue to focus on the development of
strategic training relationships with key equipment and software providers such
as Cisco, Enterasys and Nortel Networks for the development of content and the
marketing of our products and services. Our success will depend in part on the
success of those entities and our ability to establish successful strategic
training relationships with other entities. Although we have entered into
informal arrangements with several key equipment and software providers, we
have not entered into any long-term agreements with any of these entities and
the relationships are not on an exclusive basis. There is no assurance that
these entities will continue to promote our products and services and will not
compete with us in the future.
We may not be able to successfully enter new markets for our OnDemand software
product.
Until July 2000, OnDemand Personal Navigator, our in-application training
and support software solution for enterprise applications, was exclusively
distributed in the U.S. by SAP America. Through June 30, 2000, substantially
all of our revenue from sales of this product were from users of SAP's software
applications. In July 2000, we settled a dispute with SAP concerning SAP's
development of a software product competitive with OnDemand. Under the
settlement, SAP agreed to pay us $9.6 million in return for our agreement to
continue to provide and maintain OnDemand for users of SAP's software
application through March 2001. Thereafter, we agreed to provide and maintain
OnDemand for users on a case-by-case basis. Although SAP now offers its
competing product, we continue to market and sell OnDemand to users of SAP's
software; however, there can be no assurance that we will be able to compete
effectively with SAP's product. In addition, since SAP, our sole distribution
channel, is no longer marketing OnDemand with its software applications, our
revenues from sales of OnDemand to users of SAP's software applications have
significantly decreased and may continue to do so. Although, we are currently
offering our OnDemand product for use with the enterprise software applications
sold by PeopleSoft and Siebel, we have not yet generated significant revenue
from sales of OnDemand for such applications, and there can be no assurance
that we will successfully penetrate this market.
We may not be able to attract or retain a sufficient number of qualified
instructors and course developers to maintain the quality of our services.
Our future success will depend on our ability to attract and retain highly
skilled instructors and technical personnel to develop our courses and
software. Competition for such personnel is intense. In fact, some major
markets are experiencing labor shortages. In addition, many of our instructors,
particularly in the U.S., are
9
<PAGE>
engaged as independent contractors and, therefore, have the ability to work for
other education providers while they are working for us. While we take steps to
provide incentives to these instructors to remain with us, these incentives may
not be sufficient to assure that such instructors will be available to teach
our courses when we need them.
Our success depends on our ability to meet the needs of the rapidly changing
market.
To reach the widest possible audience, we supplement our instructor-led
training with instructor-led live e-Learning and self-paced e-Learning
offerings. The market for interactive education and training is influenced by
rapidly changing technology, evolving industry standards, changes in customer
needs and frequent introductions of new products by hardware and software
vendors. New methods of providing interactive education in a technology-based
format are being developed and offered in the marketplace, including intranet
and Internet offerings. Many of these new offerings involve new and different
business models. In addition, multimedia and other product functionality
features are being added to educational software. Accordingly, our future
success will depend upon the extent to which we are able to develop and
implement products that address these emerging market requirements on a timely
basis. If we are unsuccessful in addressing the changing needs of the
marketplace due to resource, technological or other constraints or in
anticipating and responding to changes in customers' software technology and
preferences, our business and results of operations could be materially
adversely affected.
Because many learners access our e-Learning solutions over the Internet,
factors adversely affecting the use of the Internet could harm our business.
A number of our learners access our e-Learning solutions over the Internet.
Any factors that adversely affect Internet usage could disrupt the ability of
those learners to access our e-Learning solutions, which would adversely affect
client satisfaction and therefore our business. Factors that could disrupt
Internet usage include slow access, security concerns, network problems or
service disruptions that prevent learners from accessing an Internet server and
delays in, or disputes concerning, the development of industry wide Internet
standards and protocols.
Increased competition may result in decreased demand for our products and
services, which may result in reduced revenue and gross margins and loss of
market share.
The market for IT training solutions is highly fragmented and competitive,
and we expect this competition to increase. We expect that, because of the lack
of significant barriers to entry, new competitors will enter the market in the
future. In addition to increased competition from new companies, established
companies are also entering into the market through acquisitions of smaller
companies that directly compete with us, and we expect this trend to continue.
We may also face competition from publishing companies and vendors of
application software, including those vendors with whom we have formed
strategic training relationships.
Our primary source of direct competition comes from third-party suppliers of
instructor-led IT, business, management and professional skills education and
training, as well as suppliers of computer-based training and e-Learning
solutions. We also face indirect competition from the internal training
departments of our potential clients. Further, we compete with consultants,
value-added resellers and network integrators. We expect that as organizations
increase their dependence on outside suppliers of training, we will face
increasing competition from these other suppliers as education and training
managers more frequently compare training products provided by outside
suppliers.
Growing competition may result in reduced revenue and gross margins and loss
of market share for us, any one of which could have a material adverse effect
on our business and results of operations. Many of our current and potential
competitors have substantially greater financial, technical, sales, marketing
and other resources, and we expect that we will face increased pricing pressure
from competitors as clients demand more value for their training budgets. In
addition, we may be unable to provide products that compare favorably with new
instructor-led techniques or interactive training software.
10
<PAGE>
Demand for our products and services may be especially susceptible to adverse
economic conditions.
Our business and financial performance may be damaged more than most
companies by adverse financial conditions affecting our target clients or by a
general weakening of the economy because some companies may not view training
products and services as critical to the success of their businesses. If these
companies experience disappointing operating results, whether as a result of
adverse economic conditions, competitive issues or other factors, they may
decrease or forego education and training expenditures before limiting their
other expenditures.
Our non-U.S. operations are subject to risks that could negatively impact our
future operating results.
In 1999, 47.2% of our revenue was from sources outside the U.S. We expect
that international operations will continue to account for a significant
portion of our revenue, and we intend to continue to expand our operations
outside of the U.S. These operations are subject to inherent risks, including
difficulties or delays in developing and supporting non-English language
versions of our products and services, political and economic conditions in
various jurisdictions that affect staffing and managing foreign subsidiary
operations, changes in governmental regulation, longer account receivable
payment cycles and potential adverse tax consequences. Any of these factors
could have a material adverse effect on our operations outside of the U.S.,
which could negatively impact our overall business and results of operations.
The success of our non-U.S. operations, in particular those in Europe, is
dependent on the ability of our new management team to work together.
A number of the members of our non-U.S. management team, including Michael
Weilbacher, our Vice President and General Manager of Europe, Middle East and
Africa, have been with us for only a few months. Given their limited experience
working with us and members of our senior management team, it is possible that
we will not build an effective and efficient management team. This failure
could have an adverse effect on our business and results of operations.
Our business is subject to currency fluctuations that could adversely affect
our operating results.
Due to our multinational operations, our operating results are subject to
fluctuations in the exchange rates between the U.S. dollar and the currencies
in which we collect revenue or pay expenses. In particular, the value of the
U.S. dollar against the Euro and related currencies impacts our operating
results. Our expenses are not necessarily incurred in the currency in which
revenue is generated, and, as a result, we are required from time to time to
convert currencies to meet our obligations. These currency conversions are
subject to exchange rate fluctuations, and changes to the value of the Euro and
related currencies relative to other currencies could adversely affect our
business and results of operations.
Our business will not operate efficiently and our results of operations will be
negatively affected if we are unable to manage our growth effectively.
Our failure to properly manage our recent and future growth could have a
material adverse effect on the quality of our products and services, our
ability to retain key personnel and the efficiency of our operations. To manage
the expected growth of our operations and personnel, we will be required to:
. improve existing and implement new operational, financial and management
controls, reporting systems and procedures; and
. hire, integrate, train, motivate and manage employees.
If we fail to address these issues, our results of operations could be
negatively affected.
We may not be successful in our efforts to identify, complete or integrate
acquisitions.
Our failure to manage risks associated with acquisitions could harm our
business. Since our inception, we have completed several acquisitions, and we
anticipate that acquisitions in new or existing markets will
11
<PAGE>
continue to be a key component of our business strategy. We have in the past
not been able to integrate acquired businesses into our company as quickly as
we initially planned. In the future, we may not be able to identify, acquire or
profitably manage additional businesses or integrate successfully any acquired
businesses without substantial expense, delay or other operational or financial
problems. Acquisitions involve a number of risks, including:
. diversion of management's attention;
. difficulty in integrating and absorbing the acquired business, its
employees, corporate culture, managerial systems and processes and
services;
. failure to retain key personnel and employee turnover;
. customer dissatisfaction or performance problems with an acquired
business;
. assumption of unknown liabilities; and
. other unanticipated events or circumstances.
Our business operations could be significantly disrupted if we lose members of
our management team.
Our success depends to a significant degree upon the continued contributions
of our officers, both individually and as a group. Our future performance will
be substantially dependent on our ability to retain and motivate them. The loss
of the services of Duncan Anderson, our President and Chief Executive Officer,
Bruce Ryan, our Executive Vice President and Chief Financial Officer, David
Marini, our Chief Operating Officer, or Arthur Zamkoff, the President of our
Knowledge Products Division, could prevent us from executing our business
strategy, which could adversely affect our business and results of operations.
See "Management--Directors and Executive Officers" for a listing of our
executive officers and other key employees.
Our ability to offer courses may be affected by natural disasters, strikes and
other unpredictable events.
Natural disasters, external labor disruptions and other adverse events may
affect our ability to conduct our business, resulting in loss of revenue. For
instance, we have been adversely affected in the past by severe blizzards and
floods that have, in some cases, reduced the ability of our course participants
to travel to our courses. These natural disasters have also disrupted the
printing and transportation of the printed catalogs used in our direct mail
campaigns. Furthermore, postal strikes have occurred in several of the
countries where we operate which have delayed and reduced delivery of our
direct mail marketing materials. Transportation strikes have also occurred in
several of the countries where we operate, adversely affecting course
attendance. The future occurrence of any of these events could have a material
adverse effect on our business and results of operations and may cause our
stock price to decline.
We may be unable to protect our proprietary rights, and any unauthorized use of
our technology may result in development of products or services that compete
with ours.
Our success depends on our ability to protect our rights in our intellectual
property and trade secrets. We rely upon a combination of copyright, trademark
and trade secret laws, customer license agreements and other methods to protect
our proprietary rights. We also enter into confidentiality agreements with our
employees, consultants and third parties to seek to limit and protect the
distribution of our proprietary information. However, we have not signed
protective agreements in every case, and parties may breach confidentiality
agreements and other protective contracts we have executed. In addition,
unauthorized parties could copy aspects of our products and services and obtain
and use information that we regard as proprietary. Further, the laws of some
countries that we compete in may not protect our intellectual property rights
to the same extent as do the laws of the U.S. We may not become aware of, or
have adequate remedies in the event of, violations of our intellectual
property. We have licensed, and expect that we will continue to license, some
of our intellectual
12
<PAGE>
property rights, including trademarks or copyrighted material, to third
parties. While we attempt to ensure that these licensees maintain the quality
of our brand, they could take actions that might materially and adversely
affect the value of our intellectual property rights or reputation. We also
rely on technologies that we license from third parties. These licenses may not
continue to be available to us on commercially reasonable terms in the future,
if at all. As a result, we may be required to obtain substitute technology of
lower quality or at greater cost. Litigation may be necessary in the future to
enforce our intellectual property rights, to protect trade secrets or to
determine the validity and scope of the proprietary rights of others. This
litigation could result in substantial costs and diversion of our management
and technical resources.
Legal proceedings could adversely affect our business and results of
operations.
We are from time to time involved in various lawsuits and legal proceedings.
In addition, third parties could in the future claim that our current or future
products infringe their intellectual property rights. Although we are currently
not a party to any material legal proceeding, any claim, with or without merit,
could result in costly litigation or require us to modify or cease sales of our
products or services, any of which could have a material adverse effect on our
business and results of operations. Infringement claims could also result in an
injunction prohibiting the sale of our products or the provision of our
services or require us to enter into royalty or licensing agreements, which if
required, may not be available on terms acceptable to us, if at all.
If government regulation increases or changes, our business could be adversely
affected.
Federal, state and international laws and regulations impact our operations
and may limit our ability to obtain authorization to operate in some states or
countries. Many federal, state and international governmental agencies assert
authority to regulate providers of educational programs. Although we believe
that we are generally exempt from such regulation, there can be no assurance
that the federal, state or international regulatory structure will not change.
For example, if we were required to comply with, or found to be in violation
of, a regulatory body's current or future licensing or regulatory requirements,
we could be subject to civil or criminal sanctions, including monetary
penalties. Additionally, we could be required to incur significant on-going
expenses to comply with regulatory requirements or, conceivably, could be
barred from providing educational services in that jurisdiction. If any of
these things occur, they could have a material adverse effect on our business
and results of operations and may cause our stock price to decline.
Risks Associated with this Offering
Entities and individuals affiliated with Welsh, Carson, Anderson & Stowe will
control approximately % of our common stock after this offering and, as a
result, will be able to exercise control over all matters requiring stockholder
approval.
Upon the completion of this offering, entities and individuals affiliated
with the private equity investment firm of Welsh, Carson, Anderson & Stowe, or
WCAS, will beneficially own, in the aggregate, approximately % of our
outstanding common stock. As a result, WCAS will be able to exercise control
over all matters requiring stockholder approval, including the election of
directors and approval of significant corporate transactions, which may have
the effect of delaying or preventing a third party from acquiring control over
us. These transactions may also include those that other stockholders do not
deem to be in their best interests or in which WCAS might otherwise receive a
premium for its shares over prevailing prices.
We have broad discretion to use the offering proceeds, and we intend to use
approximately $98.4 million for payments to affiliates of WCAS.
Of the proceeds from this offering, approximately $78.4 million plus accrued
interest from September 30, 2000 to the completion of the offering will be used
to repay our subordinated notes and $20.0 million will be used to redeem a
portion of our Series A redeemable convertible preferred stock, each held by
affiliates of WCAS. In addition, of the remaining proceeds of this offering, a
portion is not otherwise allocated for specific uses. Our management has broad
discretion to spend the proceeds from this offering in ways with which you may
not agree. The failure of our management to apply these funds effectively could
result in unfavorable returns. This could harm our business and may cause our
stock price to decline.
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<PAGE>
Our securities have no prior market, and we cannot assure you that our stock
price will not decline after the offering.
Before this offering, there has not been a public market for our common
stock and the trading market price of our common stock may decline below the
initial public offering price. The initial public offering price has been
determined by negotiations between us and the representatives of the
underwriters. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. In addition, an active public
market for our common stock may not develop or be sustained after this
offering.
Our stock price may be particularly volatile because of the industry we are in.
The stock market in general has recently experienced extreme price and
volume fluctuations. In particular, the market prices of securities of IT
education provider companies have been extremely volatile and have experienced
fluctuations that have often been unrelated or disproportionate to the
operating performance of those companies. These broad market fluctuations could
adversely affect the price of our common stock.
Future sales of our common stock held by current stockholders may depress our
stock price.
Once a trading market develops for our common stock, many of our
stockholders will have an opportunity to sell their common stock for the first
time. Sales of a substantial number of shares of our common stock by current
stockholders in the public market following this offering could cause the
market price of our common stock to decline. See "Shares Eligible For Future
Sale" for further details regarding the number of shares eligible for public
sale after this offering.
You will suffer immediate and substantial dilution in the value of your shares
if you invest in our common stock.
The initial public offering price of our common stock is substantially
higher than its net tangible book value per share immediately after the
offering. You will suffer immediate and substantial dilution in net tangible
book value per share because your investment will be at a substantially higher
per share price than those of our existing stockholders. The dilution will be
$ per share in the net tangible book value of the common stock from the
initial public offering price. If outstanding options to purchase shares of our
common stock are exercised, you will incur further dilution.
Provisions in our charter documents and Delaware law may make it difficult for
a third party to acquire our company and could depress the price of our common
stock.
Upon the completion of this offering, Delaware law and our second restated
certificate of incorporation and bylaws will contain provisions that could
delay, defer or prevent a change in control of our company or a change in our
management. These provisions could also discourage proxy contests and make it
more difficult for you and other stockholders to elect directors and take other
corporate actions. These provisions of our second restated certificate of
incorporation include:
. authorizing our board of directors to issue additional preferred stock;
. limiting the persons who may call special meetings of stockholders; and
. establishing advance notice requirements for nominations for election to
our board of directors or for proposing matters that can be acted on by
stockholders at stockholder meetings.
We are also subject to certain provisions of Delaware law that could delay,
deter or prevent us from entering into an acquisition, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in a business combination with an interested stockholder unless
specific conditions are met. The existence of these provisions could limit the
price that investors are willing to pay in the future for shares of our common
stock and may deprive you of an opportunity to sell your shares at a premium
over prevailing prices.
14
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that involve risks and
uncertainties. These statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential" or "continue," the negative of
such terms or other comparable terminology. These statements are only
predictions. Actual events or results may differ materially from those
indicated by forward-looking statements. In evaluating these statements, you
should specifically consider various factors, including the risks described
above and in other parts of this prospectus. These factors may cause our actual
results to differ materially from any forward-looking statement. Although we
believe that the expectations reflected in the forward-looking statements are
reasonable, we cannot guarantee future results, levels of activity, performance
or achievements. Moreover, neither we nor any other person assumes
responsibility for updating any of those forward-looking statements after the
date of this prospectus.
USE OF PROCEEDS
We expect to receive net proceeds of approximately $ million from the
sale of shares of common stock, or approximately $ million if the
underwriters exercise their over-allotment option in full, assuming an initial
public offering price of $ per share and after deducting the estimated
underwriting discounts and commissions and offering expenses payable by us.
We plan to use the net proceeds of this offering as follows:
. $78.4 million plus accrued interest from September 30, 2000 to the
closing of this offering to repay subordinated notes which bear interest
at 13% per annum and mature at the earlier of December 2001 and the
closing of an underwritten initial public offering of our common stock
and which are held by affiliates of WCAS, our principal stockholder;
. $37.0 million plus accrued interest from September 30, 2000 to the
closing of this offering to repay outstanding borrowings under our credit
facility, which bear interest at LIBOR (6.87% at June 30, 2000) plus
1.25% per annum and matures on June 30, 2001 and
. $20.0 million to redeem a portion of the outstanding shares of our Series
A redeemable convertible preferred stock which is held by affiliates of
WCAS.
The remaining net proceeds from this offering, $ million, will be used
for general corporate purposes, including working capital and potential
strategic acquisitions. The proceeds received from our subordinated notes and
our credit facility were used to finance acquisitions and ongoing working
capital. We currently have no commitments or agreements to acquire any
businesses and are not involved in any acquisition negotiations. Pending the
uses described above, we intend to invest the net proceeds in interest-bearing,
investment grade securities.
DIVIDEND POLICY
We have never paid any cash dividends on our capital stock. We currently
intend to retain any future earnings to finance the growth and development of
our business and therefore do not anticipate paying any cash dividends in the
foreseeable future. Any future determination to pay cash dividends will be at
the discretion of our board of directors and will be dependent upon our
financial condition, results of operations, capital requirements, general
business conditions and other factors that our board of directors may deem
relevant.
15
<PAGE>
CAPITALIZATION
The following table sets forth our consolidated capitalization as of June
30, 2000:
. On an actual basis;
. On a pro forma basis to reflect the conversion of all Series A redeemable
convertible preferred stock, except for $20.0 million of such preferred
stock which will be redeemed upon completion of this offering, and all
shares of Series B redeemable convertible preferred stock into
shares of common stock, all of which will occur upon the
completion of this offering; and
. On a pro forma as adjusted basis to give effect to the sale of the
shares of common stock offered in this prospectus at an
assumed initial public offering price of $ per share, after
deducting underwriting discounts and estimated offering expenses and the
use of $20.0 million of the net proceeds to redeem Series A redeemable
convertible preferred stock, $78.4 million plus accrued interest from
September 30, 2000 to the closing of this offering to repay subordinated
notes to affiliates of our principal stockholder and $37.0 million plus
accrued interest from September 30, 2000 to the closing of this offering
to repay borrowings under our credit facility. See "Use of Proceeds."
This information should be read together with the Selected Consolidated
Financial Data, Management's Discussion and Analysis of Financial Condition and
Results of Operations, our consolidated financial statements and related notes
thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of June 30, 2000
------------------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands,
except share and per share data)
<S> <C> <C> <C>
Cash and Cash
Equivalents $ 6,321
======== === ===
Current Debt:
Revolving credit
facility............. $ 18,200
Term note payable to
bank................. 18,000
Current portion of
capital lease
obligations.......... 2,718
-------- ---
Total current debt.. $ 38,918
======== ===
Long-Term Debt:
Subordinated notes
payable to affiliates
of principal
stockholder, net of
original issue
discount of $1,516... $ 76,947
Long-term portion of
capital lease
obligation........... 9,610
-------- ---
Total long-term
debt............... 86,557
-------- ---
Redeemable Convertible
Preferred Stock, at
redemption value:
Series A--1,000,000
shares authorized;
974,018 shares issued
and outstanding
actual, shares
issued and
outstanding pro forma
and no shares issued
and outstanding pro
forma as adjusted.... 109,571
Series B--6,100,000
shares authorized;
4,295,796 shares
issued and
outstanding actual,
no shares issued and
outstanding pro forma
and pro forma as
adjusted............. 22,234
-------- ---
Total redeemable
convertible preferred
stock................ 131,805
-------- ---
Stockholders' Deficit:
Common Stock, par
value $0.01 per
share; Authorized--
160,000,000 shares;
issued and
outstanding--
shares actual,
shares pro forma and
shares pro
forma as adjusted.... 1,234
Additional paid-in
capital.............. 160,317
Accumulated deficit... (277,813)
Cumulative translation
adjustment........... (4,793)
-------- ---
Total stockholders'
deficit.............. (121,055)
-------- ---
Total capitalization.... $ 97,307
======== ===
</TABLE>
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<PAGE>
DILUTION
If you invest in our common stock, your interest will be diluted by the
difference between the public offering price per share of our common stock and
the pro forma as adjusted net tangible book value per share of our common stock
immediately after this offering. Our pro forma net tangible book value at June
30, 2000 was approximately $ million, or $ per share of common stock. Pro
forma net tangible book value represents the amount of total pro forma tangible
assets less pro forma total liabilities, divided by the pro forma number of
shares of common stock outstanding at June 30, 2000, which gives effect to the
conversion of the Series A redeemable convertible preferred stock, except for
$20.0 million of such preferred stock that will be redeemed upon completion of
this offering, and all Series B redeemable convertible preferred stock into
shares of common stock, all of which will occur upon the completion of
this offering.
After giving effect to our sale of common stock in this offering at an
assumed initial public offering price of $ per share, and our receipt of the
estimated net proceeds from the sale, our pro forma, as adjusted net tangible
book value as of June 30, 2000 would have been approximately $ million, or
$ per share. This represents an immediate increase in pro forma net tangible
book value of $ per share to existing stockholders and an immediate dilution
of $ per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share......... $
Pro forma net tangible book value per share at June 30,
2000................................................... $
Increase per share attributable to new investors........
-------
Pro forma net tangible book value per share after this
offering ..............................................
---
Dilution per share to new investors..................... $
</TABLE>
The following table summarizes, on a pro forma basis as of June 30, 2000,
the differences between existing stockholders and new investors with respect to
the number of shares of common stock purchased from us, the total consideration
paid to us and the average price per share paid by existing stockholders and by
new investors purchasing common stock in this offering, after adjustment for:
. the redemption of $20.0 million of our Series A redeemable convertible
preferred stock;
. the conversion of all other outstanding shares of Series A redeemable
convertible preferred stock and all outstanding shares of Series B
redeemable convertible preferred stock into common stock; and
. our sale of shares of common stock at an assumed initial public
offering price of $ per share, before deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us.
<TABLE>
<CAPTION>
Share Total
Purchased Consideration Average
-------------- -------------- Price
Number Percent Amount Percent Per Share
------ ------- ------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders................... % $ % $
New investors........................... % $ % $
---- --- ----- --- -----
Total................................... 100% $ 100%
==== === ===== ===
</TABLE>
The discussion and tables above assume no exercise of stock options
outstanding as of June 30, 2000. As of September 30, 2000, there were options
outstanding to purchase a total of shares of common stock, with a
weighted average exercise price of $ per share. If holders exercise these
outstanding options, there would be a reduction in dilution of $ per
share. See Note 10 to our consolidated financial statements included elsewhere
in this prospectus.
17
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and notes
to those statements included elsewhere in this prospectus. The consolidated
statement of operations and cash flow data for the years ended December 31,
1997, 1998 and 1999 and the consolidated balance sheet data as of December 31,
1998 and 1999 are derived from our consolidated financial statements, audited
by Arthur Andersen LLP, independent public accountants, which are included
elsewhere in this prospectus. The consolidated statement of operations and cash
flow data for the period from our inception on October 18, 1995 to December 31,
1996 and the consolidated balance sheet data as of December 31, 1996 and 1997
have been derived from our consolidated financial statements, audited by Arthur
Andersen LLP, independent public accountants, not included in this prospectus.
The consolidated statement of operations and cash flow data for the six
months ended June 30, 1999 and 2000 and the consolidated balance sheet data as
of June 30, 2000 are derived from our unaudited consolidated financial
statements, which are included elsewhere in this prospectus. In the opinion of
management, these unaudited interim consolidated financial statements include
all adjustments, consisting of only normal recurring adjustments, necessary for
a fair presentation of our financial position and operating results for these
periods. Operating results for the six months ended June 30, 2000 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2000.
<TABLE>
<CAPTION>
Latest
Twelve
Period from Year Ended Six Months Ended Months
inception to December 31, June 30, Ended
December 31, ----------------------------- ------------------ June 30,
1996(2) 1997 1998 1999 1999 2000 2000
------------ --------- -------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Consolidated Statement
of Operations Data:
Revenue................ $120,801 $ 192,880 $217,301 $256,720 $116,084 $201,627 $342,263
Cost of revenue........ 96,488 115,267 125,232 148,382 67,007 114,928 196,303
-------- --------- -------- -------- -------- -------- --------
Gross margin........... 24,313 77,613 92,069 108,338 49,077 86,699 145,960
-------- --------- -------- -------- -------- -------- --------
Operating expenses:
Sales and marketing.. 15,040 41,698 47,720 62,167 28,413 46,280 80,034
General and
administrative...... 49,192 59,376 38,438 36,916 17,085 24,961 44,792
Product development.. -- 5,220 5,293 2,694 950 6,334 8,078
Restructuring........ 5,744 7,484 4,881 2,195 -- 950 3,145
Acquired in-process
research and
development......... 14,844 2,404 -- 1,900 -- -- 1,900
Amortization of
intangibles......... 11,652 51,820 18,051 18,004 7,957 9,867 19,914
-------- --------- -------- -------- -------- -------- --------
Total operating
expenses.............. 96,472 168,002 114,383 123,876 54,405 88,392 157,863
-------- --------- -------- -------- -------- -------- --------
Loss from operations... (72,159) (90,389) (22,314) (15,538) (5,328) (1,693) (11,903)
Interest and other
expense, net.......... 2,803 13,105 15,893 16,664 8,576 9,228 17,316
-------- --------- -------- -------- -------- -------- --------
Loss before provision
for income taxes...... (74,962) (103,494) (38,207) (32,202) (13,904) (10,921) (29,219)
Provision for income
taxes................. -- 1,219 2,100 1,083 468 701 1,316
-------- --------- -------- -------- -------- -------- --------
Net loss............... (74,962) (104,713) (40,307) (33,285) (14,372) (11,622) (30,535)
Dividend accretion..... 1,233 2,361 2,700 3,232 1,350 3,398 5,280
-------- --------- -------- -------- -------- -------- --------
Net loss applicable to
common stockholders... $(76,195) $(107,074) $(43,007) $(36,517) $(15,722) $(15,020) $(35,815)
======== ========= ======== ======== ======== ======== ========
Net loss per common
share(1):
Basic and diluted.... $ (3.81) $ (2.52) $ (0.88) $ (0.55) $ (0.27) $ (0.13) $ (0.37)
======== ========= ======== ======== ======== ======== ========
Pro forma basic and
diluted............. $ $ $
======== ======== ========
Shares used in
computing net loss
per common share:
Basic and diluted.... 20,000 42,565 48,772 66,456 57,333 116,041 95,636
======== ========= ======== ======== ======== ======== ========
Pro forma basic and
diluted.............
======== ======== ========
</TABLE>
-------------------
(1) The calculation of basic and diluted net loss per share and pro forma basic
and diluted net loss per share is described in Note 4(m) to the
consolidated financial statements included elsewhere in this prospectus.
(2) We were incorporated on October 18, 1995 and began operating on December
21, 1995.
18
<PAGE>
<TABLE>
<CAPTION>
Latest
Six Months Twelve
Period from Year Ended Ended Months
inception to December 31, June 30, Ended
December 31, ---------------------------- ----------------- June 30,
1996 1997 1998 1999 1999 2000 2000
------------ -------- ------- ------- ------- ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Other Data:
Adjusted EBITDA(1)... $(34,151) $(16,031) $10,357 $15,332 $ 6,820 $16,220 $ 24,732
Adjusted EBITDA
margin(1)........... (28.3)% (8.3)% 4.8 % 6.0 % 5.9 % 8.0 % 7.2 %
Cash flows from
operating
activities.......... (2,185) (44,043) (5,861) 5,804 (3,756) 969 10,529
Cash flows from
investing
activities.......... (97,024) (67,065) (11,438) (99,828) (10,330) (17,028) (106,526)
Cash flows from
financing
activities.......... 109,400 116,175 9,542 99,327 11,522 6,994 94,799
</TABLE>
---------------------
(1) EBITDA is defined as loss from operations plus depreciation and
amortization. We have adjusted EBITDA for one time charges recorded in
conjunction with restructurings and acquisitions, to more accurately
reflect the cash flows generated by our on-going operations. Adjusted
EBITDA is presented herein because we believe that adjusted EBITDA is a
measure commonly used by lenders and certain investors to evaluate a
company's performance. We also believe that adjusted EBITDA data may help
to understand our performance because such data may reflect our ability to
generate cash flows, which is an indicator of our ability to satisfy our
debt service, capital expenditure and working capital requirements.
However, adjusted EBITDA does not represent, and should not be considered
as, an alternative to net income or cash flows from operating activities
each as determined in accordance with GAAP. Moreover, adjusted EBITDA does
not necessarily indicate whether cash flow will be sufficient for such
items as working capital or capital expenditures, or to react to changes in
our industry or to the economy generally. Adjusted EBITDA margin is
computed by dividing adjusted EBITDA by revenue.
The following table sets forth a reconciliation of EBITDA to adjusted
EBITDA for each period included herein:
<TABLE>
<CAPTION>
Latest
Six Months Twelve
Period from Ended Months
inception to Year Ended December 31, June 30, Ended
December 31, ------------------------- -------------- June 30,
1996 1997 1998 1999 1999 2000 2000
------------ -------- ------- ------- ------ ------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
EBITDA.................. $(54,739) $(27,219) $ 5,476 $10,779 $6,820 $13,997 $17,956
Acquisition-related stay
bonuses(1)............. -- 1,300 -- 458 -- 1,273 1,731
Restructuring
charge(2).............. 5,744 7,484 4,881 2,195 -- 950 3,145
Acquired in process
research and
development(3) 14,844 2,404 -- 1,900 -- -- 1,900
-------- -------- ------- ------- ------ ------- -------
Adjusted EBITDA....... $(34,151) $(16,031) $10,357 $15,332 $6,820 $16,220 $24,732
======== ======== ======= ======= ====== ======= =======
</TABLE>
---------------------
(1) Reflects the elimination of one time bonuses paid to employees of acquired
businesses for transitioning to Global Knowledge, Inc.
(2) Reflects the elimination of restructuring charges as more fully described
in Note 9 to our consolidated financial statements included elsewhere in
this prospectus.
(3) Reflects the elimination of charges for acquired in process research and
development incurred in connection with acquired businesses.
<TABLE>
<CAPTION>
December 31,
----------------------------------------- June 30,
1996 1997 1998 1999 2000
-------- --------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance
Sheet Data
Cash and cash
equivalents............ $ 10,159 $ 14,582 $ 8,567 $ 14,215 $ 6,321
Working capital
deficit................ (53,230) (63,676) (78,978) (87,932) (68,678)
Total assets........... 103,682 110,606 94,996 233,715 253,959
Long-term debt, net of
current portion........ 45,800 80,283 82,512 90,545 86,557
Redeemable convertible
preferred stock........ 21,233 48,594 51,294 111,100 131,805
Total stockholders'
deficit................ (57,023) (132,097) (166,641) (132,248) (121,055)
</TABLE>
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our consolidated
financial statements and notes to those statements and other financial
information appearing elsewhere in this prospectus. The following discussion
contains forward-looking information that involves risks and uncertainties. Our
actual results could differ materially from those anticipated in the forward-
looking statements as a result of a number of factors, including the risks
discussed in "Risk Factors" and elsewhere in this prospectus.
Overview
We began operations in December 1995 with the acquisition of Digital
Learning Services, or DLS, the training division of Digital Equipment
Corporation, or DEC. Through this acquisition, we acquired a worldwide service
delivery platform in over 30 countries for an instructor-led training business
focused exclusively on DEC and Microsoft platforms. During 1996 and 1997
management focused on the restructuring of the DLS business by consolidating
facilities and eliminating unprofitable operations in several countries. We
also made a strategic decision to focus on providing training in the IT
convergence space. In January 1997, we acquired American Research Group, or
ARG, a leading training company with a mix of proprietary networking courses
and established authorized vendor training relationships with Cisco and Nortel
Networks. From that acquisition, we secured proprietary course development
skills and processes, a sophisticated database marketing capability, an
efficient variable cost delivery structure for training and a strong management
team. Since the ARG acquisition, we have introduced more than 150 new
proprietary networking courses to the U.S. market.
In 1998, we began to offer our broad networking curriculum in Europe, Asia
Pacific and Japan. In 1999, in order to expand our delivery capability, we
acquired several network training companies in Europe that had qualified
instructors focused on Cisco training as well as a training company in China.
In the fourth quarter of 1999 we made two additional significant acquisitions
to enter the enterprise resource planning/customer relationship management, or
ERP/CRM, markets with e-Learning tools, as well as to enhance our leading
position in the Cisco IT training market. These acquisitions included
Professional Training Services, Inc., or PTS, a U.S. based provider of software
and technology-based learning products, and GeoTrain Corporation, an
international Cisco training company with branches in the U.S., Canada, United
Kingdom and Australia. Additionally, in February 2000, we were awarded a major
multi-year contract with Nortel Networks to provide all of its training,
internally and to its customers, for its data and voice operations in North
America.
Today, we are the world's largest independent IT education integrator. We
provide training solutions to clients in 20 countries consisting of more than
500 vendor-authorized courses and more than 200 proprietary courses. We also
offer a suite of performance enhancement e-Learning tools and software
applications that provide personalized just-in-time training and in-application
performance support. Our courses focus on the needs of IT professionals who
work with mission critical network applications and systems that manage the
flow of voice, data and image through the convergence space. Our training
courses can be delivered through a combination of instructor-led training,
instructor-led live e-Learning, self-paced e-Learning and printed study guides.
We generate service revenue through instructor-led training, instructor-led
live e-Learning and custom education offerings and product revenue through the
sale of self-paced e-Learning courses, the sale of software and technology-
based products and printed study guides. Service revenue currently represents
approximately 90% of our total revenue, a majority of which consists of
publicly scheduled instructor-led training using both vendor-authorized and
proprietary courses. Of the revenue derived from publicly scheduled instructor-
led training, we believe that greater than 90% was either initially paid for,
or reimbursed to the learner, by the learner's employer. We anticipate that the
percentage of our revenue generated from instructor-led live e-Learning and
self-paced e-Learning offerings will increase over time consistent with the
market demand for these delivery methods. Service revenue is recognized as the
instructor-led courses are attended, as the training
20
<PAGE>
materials are delivered or as services are provided. Software and technology-
based product revenues are recognized under the residual method whereby annual
software license fees are recognized ratably over the applicable period,
perpetual software license fees are recognized upon delivery and support and
maintenance fees are recognized ratably over the support period.
Cost of revenue consists of the cost of presenting instructor-led training,
instructor-led live e-Learning and self-paced e-Learning courses which include
the cost of instructors, facilities, courseware and related royalties and
logistics. Approximately 70% of our instructors are independent consultants and
many of our instructor-led courses are held in locations that are rented as
needed, such as third party conference centers and hotels. We believe that the
flexible nature of this cost structure is a significant advantage to our
business model because it allows us to economically adjust our service
offerings to changes in customer demand. Cost of revenue also includes the cost
of our software and technology-based products which is comprised of courseware
and related royalties, software duplication and documentation costs. The costs
for these products are not in the aggregate a significant percentage of product
revenue.
Our gross margin was relatively constant in 1998, 1999 and the first six
months of 2000. Our gross margin varies based upon the mix of service and
product revenue. Our gross margin on service revenue will vary based upon a
number of factors, including attendance at instructor-led courses, the mix
between instructor-led and instructor-led live e-Learning courses and the mix
between vendor-based and proprietary courses. Gross margins are higher in our
North American operations due to our large content of vendor-authorized and
proprietary internetworking curriculum, economies of scale resulting from
higher course volumes and because greater than 90% of our self-paced and
software revenue is being generated in North America. Our European and Asian
operations lag behind our North American operations in the deployment of our
proprietary networking courses and software products. Our gross margins will
improve if we are successful in our plans to offer networking courses and to
generate additional software product revenue in Europe and Asia.
Sales and marketing expense includes the cost of our direct marketing,
direct sales force and telemarketing programs. These activities are focused on
providing integrated solutions to our clients, including delivery of vendor-
authorized and proprietary courses, custom services and software and
technology-based products. The primary costs are personnel and related costs,
postage and direct marketing materials, commissions and travel.
General and administrative expense includes personnel and related expenses,
facilities, information systems, legal and professional fees and other expenses
associated with providing the administrative infrastructure necessary to manage
our global business. We expect general and administrative expense to increase
in future periods as we build the infrastructure necessary to support
anticipated growth and to meet the requirements of becoming a public company.
Product development expense includes the cost of developing new courses and
updating existing courses. It also includes the cost of developing software and
technology-based learning products. The primary costs include personnel and
related expenses and the cost of outside subject matter experts. We use these
outside subject matter experts to develop many of our courses and compensate
them through a course development fee, which is included in product development
expense, and royalties which are included in cost of revenue. We expect product
development expenses to increase in future periods as we develop new courses
and develop new software and technology-based products.
Restructuring expense includes the cost of terminated employees and facility
reduction costs. These costs have primarily been incurred in connection with
integrating acquired businesses. As more fully described above, the charge in
1997 relates primarily to restructuring the DLS business and the charges in
1998, 1999 and 2000 relate primarily to restructuring our foreign operations in
an effort to achieve profitability.
We have consummated several acquisitions since our inception in 1995 and
have applied the purchase method of accounting to all of these acquisitions.
For each acquisition, the purchase price was allocated to the assets acquired
based upon the estimated fair market values at the date of acquisition. The
allocations, in some
21
<PAGE>
cases, were based upon independent third party appraisals using standard
valuation techniques and methodologies. The purchase price has been allocated
to tangible and identifiable intangibles with any excess allocated to goodwill.
Purchased intangible assets, including goodwill, aggregated approximately
$240.0 million as of June 30, 2000 and are amortized over their estimated
useful lives, which range from three to 15 years. Based upon intangible assets
as of June 30, 2000, we expect amortization of intangibles to be $9.8 million
for the second half of 2000, $18.1 million in 2001, $16.1 million in 2002 and
approximately $10.0 million annually thereafter.
Interest and other expense, net, includes interest expense on our
outstanding debt obligations, interest income earned on invested funds and
exchange gain or loss on transactions denominated in foreign currencies.
We have incurred a net loss in each period since our inception. Our net loss
has decreased from $104.7 million for 1997 to $40.3 million for 1998, to $33.3
million for 1999 and to $11.6 million for the first six months of 2000.
We believe that operating earnings before depreciation and amortization, or
EBITDA, is a key indicator of our operating performance. It indicates our
ability to generate cash for debt service, capital expenditures and working
capital requirements. We have adjusted EBITDA for one time charges recorded in
conjunction with restructurings and acquisitions, to more accurately reflect
the cash flows generated by our on-going operations. We generated adjusted
EBITDA in the years ended December 31, 1998, 1999 and the six months ended
June 30, 2000 of $10.4 million, $15.3 million and $16.2 million, respectively.
The decrease in our net loss and the increase in adjusted EBITDA reflects the
increase in revenue as we migrated our service offerings to networking
curriculum and made several strategic acquisitions and our efforts to
rationalize our operating expenses.
Results of Operations
The following table sets forth our statement of operations data as
percentages of revenue for the periods indicated.
<TABLE>
<CAPTION>
Six Months
Year Ended Ended June
December 31, 30,
--------------------- -------------
1997 1998 1999 1999 2000
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue........................ 59.8 57.6 57.8 57.7 57.0
----- ----- ----- ----- -----
Gross margin........................... 40.2 42.4 42.2 42.3 43.0
----- ----- ----- ----- -----
Operating expenses:
Sales and marketing.................. 21.6 22.0 24.2 24.5 22.9
General and administrative........... 30.8 17.7 14.4 14.7 12.4
Product development.................. 2.7 2.4 1.0 0.8 3.1
Restructuring........................ 3.9 2.3 0.9 0.0 0.5
Acquired in process research and
development......................... 1.2 0.0 0.7 0.0 0.0
Amortization of intangibles.......... 26.9 8.3 7.0 6.9 4.9
----- ----- ----- ----- -----
Total operating expenses........... 87.1 52.7 48.2 46.9 43.8
----- ----- ----- ----- -----
Loss from operations................... (46.9) (10.3) (6.0) (4.6) (0.8)
Interest and other expense, net........ 6.8 7.3 6.5 7.4 4.6
Loss before provision for income
taxes................................. (53.7) (17.6) (12.5) (12.0) (5.4)
Provision for income taxes............. 0.6 1.0 0.4 0.4 0.4
----- ----- ----- ----- -----
Net loss............................... (54.3)% (18.6)% (12.9)% (12.4)% (5.8)%
===== ===== ===== ===== =====
</TABLE>
22
<PAGE>
Six Months Ended June 30, 2000 and 1999
Revenue increased 73.7% from $116.1 million for the six months ended June
30, 1999 to $201.6 million for the six months ended June 30, 2000.
Approximately 50% of the increase of $85.5 million is attributable to the
acquisitions of PTS and GeoTrain in the fourth quarter of 1999; approximately
25% is due to revenue from the Nortel Networks contract signed in March 2000;
and approximately 25% represents internal growth from our existing services
business. This internal growth of approximately $21.0 million, an 18% increase
over results for the six months ended June 30, 1999, is primarily due to
increases in revenue in the U.S. services business, including instructor-led
live e-Learning as well as increased sales of self-paced e-Learning products.
Cost of revenue increased 71.5% from $67.0 million for the six months ended
June 30, 1999 to $114.9 million for the six months ended June 30, 2000. The
increase of $47.9 million is primarily due to the additional instructors,
course materials, facilities and equipment costs associated with our
acquisitions, along with the growth of our existing services business and self-
paced e-Learning products. Cost of revenue as a percentage of revenue decreased
from 57.7% for the six months ended June 30, 1999 to 57.0% for the six months
ended June 30, 2000, primarily due to increases in revenue from our self-paced
e-Learning products and from the software products acquired from PTS in
November 1999 which have a higher gross margin than our other services and
products. We expect our cost of revenue to decrease as a percentage of revenue
due to the continued growth of our e-Learning business and software products
and improving margins in our international operations.
Sales and marketing expense increased 62.9% from $28.4 million for the six
months ended June 30, 1999 to $46.3 million for the six months ended June 30,
2000. The increase of $17.9 million was primarily due to the addition of sales
personnel associated with our acquisitions of GeoTrain and PTS in the fourth
quarter of 1999, the inclusion of the sales staff associated with our Nortel
Networks contract, as well as growth of our direct sales force. Sales and
marketing expense as a percentage of revenue was 24.5% and 22.9% for the six
months ended June 30, 1999 and 2000, respectively.
General and administrative expense increased 46.1% from $17.1 million for
the six months ended June 30, 1999 to $25.0 million for the six months ended
June 30, 2000. The increase of $7.9 million was primarily due to the addition
of personnel and related costs associated with our acquisitions, as well as
increased expenses for personnel, information systems, legal and professional
fees at the corporate and, to a lesser extent, regional level to augment the
infrastructure necessary to manage our growing business. General and
administrative expense as a percentage of revenue declined from 14.7% to 12.4%
for the six months ended June 30, 1999 and 2000, respectively. The decrease as
a percentage of revenue was primarily due to the operating leverage resulting
from the significant increase in revenue in the comparative periods.
Product development expense increased from $1.0 million for the six months
ended June 30, 1999 to $6.3 million for the six months ended June 30, 2000. The
increase of $5.4 million was primarily due to $3.8 million of product
development expenses incurred in connection with our Nortel Networks contract,
as well as $1.0 million of product development expenses incurred by PTS, which
we acquired in November 1999. Product development expense as a percentage of
revenue was 0.8% and 3.1% for the six months ended June 30, 1999 and 2000,
respectively.
Amortization of intangibles increased 24.0% from $8.0 million for the six
months ended June 30, 1999 to $9.9 million for the six months ended June 30,
2000 as a result of the amortization of intangible assets associated with our
acquisitions of PTS and GeoTrain in the fourth quarter of 1999.
Restructuring expense was $1.0 million for the six months ended June 30,
2000. We did not incur restructuring expenses in the comparable period in 1999.
Restructuring expenses in the six months ended June 30, 2000 were associated
with a plan to eliminate redundant facilities as a result of our acquisition of
GeoTrain.
Other expense increased 7.6% from $8.6 million in the six months ended June
30, 1999 to $9.2 million for the six months ended June 30, 2000. The increase
of $0.7 million was primarily due to higher interest rates on our outstanding
debt.
Net loss decreased 19.1% from $14.4 million for the six months ended June
30, 1999 to $11.6 million for the six months ended June 30, 2000 due to the
reasons discussed above.
23
<PAGE>
Adjusted EBITDA increased 137.8% from $6.8 million for the six months ended
June 30, 1999 to $16.2 million for the six months ended June 30, 2000. The
increase of $9.4 million in adjusted EBITDA was primarily due to the
significant growth in revenue and the increase in gross margin in the
comparable periods as well as our ability to manage our operating expenses to a
level less than revenue growth as discussed above.
Years Ended December 31, 1998 and 1999
Revenue increased 18.1% from $217.3 million for the year ended December 31,
1998 to $256.7 million for the year ended December 31, 1999. Approximately 50%
of the $39.4 million increase was associated with our acquisitions in the
fourth quarter of 1999, and the remainder represented internal growth from our
existing operations. In 1999, we also terminated the operations of six
unprofitable foreign subsidiaries that accounted for $3.1 million of revenue in
1998, which has the effect of understating our internal growth in 1999 from
retained businesses.
Cost of revenue increased 18.5% from $125.2 million for the year ended
December 31, 1998 to $148.4 million for the year ended December 31, 1999. The
increase of $23.2 million was primarily due to additional instructors, course
materials, facilities and equipment costs resulting from the increase in
revenue from our acquisitions in the fourth quarter of 1999 and also included
increased revenue from our existing business units and slightly higher costs of
providing courses in Europe and Japan. Cost of revenue as a percentage of
revenue was 57.6% and 57.8% for the years ended December 31, 1998 and 1999,
respectively.
Sales and marketing expense increased 30.3% from $47.7 million for the year
ended December 31, 1998 to $62.2 million for the year ended December 31, 1999.
The increase of $14.5 million was primarily due to the addition of sales
personnel associated with our acquisitions in the fourth quarter of 1999 and
the continued development of our direct sales force. Sales and marketing
expense as a percentage of revenue was 22.0% and 24.2% for the year ended
December 31, 1998 and 1999, respectively. The increase as a percent of revenue
reflects the further development of the direct sales channel to complement our
direct marketing programs.
General and administrative expense decreased 4.0% from $38.4 million for the
year ended December 31, 1998 to $36.9 million for the year ended December 31,
1999. The decrease of $1.5 million was primarily due to the elimination of
administrative personnel and related costs in Europe and at the corporate
level. As a result of this reduction and an increase in revenue, general and
administrative expense as a percentage of revenue decreased from 17.7% to 14.4%
for the years ended December 31, 1998 and 1999, respectively.
Product development expense decreased from $5.3 million for the year ended
December 31, 1998 to $2.7 million for the year ended December 31, 1999. The
decrease of $2.6 million primarily reflected the consolidation of development
activities. As a result, product development expense decreased as a percentage
of revenue from 2.4% to 1.0% for the years ended December 31, 1998 and 1999,
respectively.
We incurred restructuring expenses of $4.9 million and $2.2 million for the
years ended December 31, 1998 and 1999, respectively. The restructuring
expenses recorded in 1998 consisted of severance costs for approximately 90
employees and facility closing costs associated with a plan to reduce our cost
structure, primarily in Europe. The restructuring expenses recorded in 1999
consisted of severance benefits for approximately 40 employees and facility
reduction costs to rationalize and integrate the businesses acquired in the
fourth quarter of 1999.
We recorded a charge of $1.9 million in the year ended December 31, 1999 for
acquired in-process research and development in connection with our acquisition
of PTS. This represents an allocation of the PTS purchase price to software
projects underway at PTS which had not yet reached technological feasibility
and did not have future alternative uses.
Interest and other expense, net increased 4.9% from $15.9 million for the
year ended December 31, 1998 to $16.7 million for the year ended December 31,
1999. The increase of $0.8 million was primarily due to an increase in interest
expense. Interest expense increased from $14.4 million in the year ended
December 1998 to $15.5 million in the year ended December 31, 1999 due
primarily to increased borrowings to finance acquisitions in 1999.
24
<PAGE>
Net loss decreased 17.4% from $40.3 million for the year ended December 31,
1998 to $33.3 million for the year ended December 31, 1999 due to the reasons
discussed above.
Adjusted EBITDA increased from $10.4 million for the year ended December 31,
1998 to $15.3 million for the year ended December 31, 1999. The increase of
$4.9 million in adjusted EBITDA was primarily due to the growth in revenue and
our management of operating expenses to a level less than revenue growth.
Years Ended December 31, 1997 and 1998
Revenue increased 12.7% from $192.9 million for the year ended December 31,
1997 to $217.3 million for the year ended December 31, 1998. The increase of
$24.4 million was primarily due to growth in our core networking training
business in the U.S., which more than offset the slower growth in the legacy
training courses acquired in the original DLS acquisition.
Cost of revenue increased 8.6% from $115.3 million for the year ended
December 31, 1997 to $125.2 million for the year ended December 31, 1998. The
increase of $9.9 million was primarily due to costs incurred to support the
increase in revenue. Cost of revenue as a percentage of revenue decreased from
59.8% for the year ended December 31, 1997 to 57.6% for the year ended December
31, 1998. The decrease in cost of revenue as a percentage of revenue was
primarily due to higher margins on our networking training business and the
benefits from restructuring programs.
Sales and marketing expense increased 14.4% from $41.7 million for the year
ended December 31, 1997 to $47.7 million for the year ended December 31,1998.
The increase of $6.0 million was primarily due to increases in our use of
direct mail marketing to increase attendance at our publicly scheduled courses
in the U.S. Sales and marketing expense as a percentage of revenue was 21.6%
and 22.0% for the years ended December 31, 1997 and 1998, respectively.
General and administrative expense decreased 35.2% from $59.4 million for
the year ended December 31, 1997 to $38.4 million for the year ended December
31, 1998. The decrease of $21.0 million was the direct result of the
restructuring in the U.S. and Europe in 1997 and 1998 that resulted in the
termination of a significant number of administrative personnel and reduced
payroll, facilities and related costs. As a result of the increase in revenue
and the decrease in expense, general and administrative expense as a percentage
of revenue decreased from 30.8% to 17.7% for the years ended December 31, 1997
and 1998, respectively.
Product development expense increased from $5.2 million for the year ended
December 31, 1997 to $5.3 million for the year ended December 31, 1998. The
increase of $0.1 million was primarily due to an increase in our development of
certification self-study guides. Product development expense as a percentage of
revenue was 2.7% and 2.4% for the years ended December 31, 1997 and 1998,
respectively.
Restructuring expense was $7.5 million and $4.9 million for the years ended
December 31, 1997 and 1998, respectively. Restructuring expenses in 1997
consisted of severance costs for approximately 96 employees and facility
closing costs to reduce our cost structure.
Interest and other expense, net increased 21.3% from $13.1 million for the
year ended December 31, 1997 to $15.9 million for the year ended December 31,
1998. The increase of $2.8 million was primarily due to an increase in interest
expense incurred for increased borrowings to finance our operations.
Net loss decreased 61.5% from $104.7 million for the year ended December 31,
1997 to $40.3 million for the year ended December 31, 1998 due to the reasons
discussed above.
Adjusted EBITDA increased from a loss of $16.0 million for the year ended
December 31, 1997 to $10.4 million for the year ended December 31, 1998. The
increase of $26.4 million in adjusted EBITDA was primarily due to the growth in
revenue and the increase in gross margin in the comparable periods and the
significant decrease in general and administrative expense in 1998 as a result
of our restructuring operations in 1997 and 1998.
25
<PAGE>
Quarterly Results
The following table sets forth unaudited statement of operations data for
each quarter of 1999 and the first two quarters of 2000. This information has
been presented on the same basis as the audited financial statements appearing
elsewhere in this prospectus and, in the opinion of our management, includes
all adjustments, consisting only of normal recurring adjustments, that we
consider necessary to present fairly the unaudited quarterly results. This
information should be read in conjunction with our audited financial statements
and related notes appearing elsewhere in this prospectus. The operating results
for any quarter are not necessarily indicative of results for any future
period.
<TABLE>
<CAPTION>
Three months ended
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $55,457 $60,627 $59,652 $ 80,984 $90,239 $111,388
Cost of revenue......... 33,169 33,838 34,927 46,448 51,782 63,146
------- ------- ------- -------- ------- --------
Gross margin............ 22,288 26,789 24,725 34,536 38,457 48,242
------- ------- ------- -------- ------- --------
Operating expenses:
Sales and marketing... 13,147 15,266 15,000 18,754 22,198 24,082
General and
administrative....... 8,842 8,243 7,974 11,857 11,307 13,654
Product development... 448 502 625 1,119 2,306 4,028
Restructuring......... -- -- -- 2,195 -- 950
Acquired in process
research and
development.......... -- -- -- 1,900 -- --
Amortization of
intangibles.......... 3,969 3,988 4,020 6,027 4,980 4,887
------- ------- ------- -------- ------- --------
Total operating
expenses......... 26,406 27,999 27,619 41,852 40,791 47,601
------- ------- ------- -------- ------- --------
Loss from operations.... (4,118) (1,210) (2,894) (7,316) (2,334) 641
Interest and other
expense, net........... 4,101 4,475 3,311 4,777 4,666 4,562
------- ------- ------- -------- ------- --------
Loss before provision
for income taxes....... (8,219) (5,685) (6,205) (12,093) (7,000) (3,921)
Provision for income
taxes.................. 276 192 209 406 201 500
------- ------- ------- -------- ------- --------
Net loss................ $(8,495) $(5,877) $(6,414) $(12,499) $(7,201) $ (4,421)
======= ======= ======= ======== ======= ========
Percentage of revenue
<CAPTION>
Three months ended
March 31, June 30, Sept. 30, Dec. 31, March 31, June 30,
1999 1999 1999 1999 2000 2000
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue......... 59.8 55.8 58.6 57.4 57.4 56.7
------- ------- ------- -------- ------- --------
Gross margin............ 40.2 44.2 41.4 42.6 42.6 43.3
------- ------- ------- -------- ------- --------
Operating expenses:
Sales and marketing... 23.7 25.2 25.1 23.2 24.6 21.6
General and
administrative....... 15.9 13.6 13.4 14.6 12.5 12.3
Product development... 0.8 0.8 1.0 1.4 2.6 3.6
Restructuring......... 0.0 0.0 0.0 2.7 0.0 0.9
Acquired in process
research and
development.......... 0.0 0.0 0.0 2.3 0.0 0.0
Amortization of
intangibles.......... 7.2 6.6 6.7 7.4 5.5 4.4
------- ------- ------- -------- ------- --------
Total operating
expenses......... 47.6 46.2 46.2 51.6 45.2 42.8
------- ------- ------- -------- ------- --------
Loss from operations.... (7.4) (2.0) (4.8) (9.0) (2.6) 0.5
Interest and other
expense, net........... 7.4 7.4 5.6 5.9 5.2 4.1
------- ------- ------- -------- ------- --------
Loss before provision
for income taxes....... (14.8) (9.4) (10.4) (14.9) (7.8) (3.6)
Provision for income
taxes.................. 0.5 0.3 0.4 0.5 0.2 0.4
------- ------- ------- -------- ------- --------
Net loss................ (15.3)% (9.7)% (10.8)% (15.4)% (8.0)% (4.0)%
======= ======= ======= ======== ======= ========
</TABLE>
26
<PAGE>
Quarterly revenue fluctuations are due to a number of factors including the
timing of acquisitions, the timing of marketing programs and the number of
days during a quarter during which instructor-led training is held.
Accordingly, our business is subject to seasonal fluctuations with fewer
training days available in the third and fourth calendar quarters. The
decrease in revenue in the third quarter of 1999 was primarily due to the
seasonal nature of our business, as well as concerns regarding potential year
2000 problems and the focus of IT professionals on preparing for the year 2000
conversion. The significant increase in revenue, cost of revenue and operating
expenses in the fourth quarter of 1999 reflects the acquisition of GeoTrain
and PTS in October and November 1999, respectively. Our gross margin has
improved from 40.2% in the first quarter of 1999 to 43.3% in the second
quarter of 2000 primarily due to our continued migration to a networking
curriculum and increases in revenue from self-paced e-Learning and software
products which have a higher gross margin than our other services and
products. The increase in the gross margin in the second quarter of 1999 was
primarily due to economies of scale resulting from increased revenue.
Our quarterly operating results may fluctuate in the future due to a number
of factors. See "Risk Factors".
Net Operating Loss Carryforwards
As of December 31, 1999, we had net operating loss carryforwards of $87.6
million in the U.S. and $57.3 million in foreign jurisdictions available to
offset taxable income in future periods. The net operating loss carryforwards
will expire at various dates beginning in 2011, if not utilized. The Tax
Reform Act of 1986 imposes substantial restrictions on the utilization of U.S.
net operating loss carryforwards in the event of significant changes in
ownership interests. Our ability to utilize U.S. net operating loss
carryforwards may be limited if we experience a change in ownership as defined
by the Internal Revenue Code of 1986, or the Code. We do not believe that we
have experienced such an ownership change. There can be no assurance that we
will not experience an ownership change in future periods that would limit our
ability to utilize our U.S. net operating loss carryforwards. The provision
for income taxes in our historical financial statements represents income
taxes paid in states and foreign jurisdictions where we generated taxable
income and had no operating loss carryforwards.
Liquidity and Capital Resources
From inception through June 30, 2000, we have financed our operations
primarily through sales of Series A redeemable convertible preferred stock and
common stock to our principal stockholder totaling $109.6 million and $161.5
million, respectively, and through borrowings from our principal stockholder
of $78.4 million as of June 30, 2000 and from banks and other lending
institutions. As of June 30, 2000, we had $18.2 million outstanding under our
$55.0 million revolving credit facility; $18.0 million outstanding under our
term loan facility and $12.0 million outstanding under capital lease
arrangements. As of June 30, 2000, we had cash of $6.3 million and a working
capital deficit of $68.7 million. We have also had working capital deficits in
most periods since our inception related to our significant operating losses
and have funded such deficits through borrowings from our principal
stockholder and under our bank credit agreement.
Operating activities provided cash of $1.0 million in the six months ended
June 30, 2000 and provided cash of $5.8 million in the year ended December 31,
1999. Cash provided by operations in the six months ended June 30, 2000
consisted primarily of the net loss of $11.6 million offset by $20.7 million
of noncash expenses and the use of $8.1 million for working capital items.
Cash generated by operations in the year ended December 31, 1999 consisted
primarily of the net loss of $33.3 million offset by $37.9 million of noncash
expenses and $1.2 million of changes in working capital items.
Investing activities used cash of $17.0 million and $99.8 million in the
six months ended June 30, 2000 and the year ended December 31, 1999,
respectively. We used $12.1 million and $95.7 million for the acquisition of
businesses and $4.9 million and $4.1 million for the acquisition of property
and equipment in the six months ended June 30, 2000 and the year ended
December 31, 1999, respectively. In addition, we
27
<PAGE>
acquired PTS in the fourth quarter of 1999 by issuing $21.5 million of Series B
redeemable convertible preferred stock, which will be converted into common
stock upon the completion of this offering. It continues to be our business
strategy to seek strategic acquisitions of businesses and products. Due to the
opportunistic nature of our acquisition strategy, we are unable to project the
level of future acquisition activity. We expect capital expenditures to be
approximately $20.0 million in 2001.
Financing activities provided cash of $7.0 million and $99.3 million in the
six months ended June 30, 2000 and the year ended December 31, 1999,
respectively. Cash provided by financing activities in the six months ended
June 30, 2000 consisted primarily of the receipt of $45.7 million from the
issuance of Series A redeemable convertible preferred and common stock to our
principal stockholder, partially offset by $35.8 million of payments to our
bank group. Cash provided by financing activities in the year ended December
31, 1999 consisted primarily of $106.3 million from the issuance of Series A
redeemable convertible preferred stock and common stock to our principal
stockholder, partially offset by $5.0 million of bank loan payments.
We have an $80.0 million credit facility with Bank of America as agent for a
four-bank syndicate which expires on June 30, 2001. Our credit facility
provides for a $25.0 million term loan and a $55.0 million revolving credit
facility, which includes a $1.1 million reserve for letters of credit.
Borrowings are guaranteed by our principal stockholder. Principal payments are
due under the term loan in the quarterly amount of $2.0 million beginning in
June 2000. Borrowings under our credit facility generally bear interest at
LIBOR (6.87% at June 30, 2000) plus 1.25% per annum. Under the terms of our
credit facility, we are required to meet certain financial covenants.
We have issued subordinated notes payable to our principal stockholder in
the amount of $78.4 million, including $17.7 million of deferred interest
through June 30, 2000. The subordinated notes bear interest at 13% per annum
and are due at the earlier of December 31, 2001 and the closing of an
underwritten initial public offering of our common stock. We have the option to
elect to defer interest payments by adding the interest to the principal of the
subordinated notes.
We have entered into capital lease obligations to finance the purchase of
office equipment, and, at June 30, 2000, had $12.3 million outstanding. The
capital leases bear interest at rates ranging from 8% to 13% and payments are
generally due over approximately three to five years.
Upon the completion of this offering, we will redeem $20.0 million of our
Series A redeemable convertible preferred stock held by our principal
stockholder and we will convert all remaining Series A redeemable convertible
preferred stock and all Series B redeemable convertible preferred stock into
shares of common stock. In addition, we will use proceeds from the offering to
repay all indebtedness due to our principal stockholder and to our bank group.
We believe that the net proceeds from this offering, together with our
current cash, cash equivalents and amounts available under our credit facility,
will be sufficient to meet our anticipated cash needs for working capital and
capital expenditures for at least 12 months. Our capital resource needs may
change in future periods based upon changes in operating trends, the
acquisition of additional businesses or the requirements of new contracts. We
are not currently in discussions with acquisition targets but we intend to
continue to evaluate the acquisition of businesses and products that are
consistent with our business plan. If our existing resources, proceeds from
this offering and cash generated from future operations are not sufficient to
meet our capital needs, we may seek to sell additional debt or equity
securities. There can be no assurance that additional financing will be
available or that, if available, it would be available on favorable terms to
us. In addition, the sale of additional debt or equity securities could result
in additional dilution to our stockholders.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. This statement
establishes accounting and reporting standards for
28
<PAGE>
derivative instruments, including derivative instruments embedded in other
contracts, and for hedging activities. It requires an entity to recognize all
derivatives as either assets or liabilities in its balance sheet and measure
those instruments at fair value. Pursuant to SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133, SFAS No. 133 is effective for all quarters of fiscal
years beginning after June 15, 2000. SFAS No. 133 is not expected to have a
material impact on our consolidated financial statements.
In March 2000, the FASB issued interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--An Interpretation of APB Opinion No.
25. The interpretation clarifies the application of APB Opinion No. 25 in
specified events, as defined. The interpretation is effective July 1, 2000, but
covers certain events occurring during the period after December 15, 1998, but
before the effective date. To the extent that events covered by this
interpretation occur during the period after December 31, 1998, but before the
effective date, the effects of applying this interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final interpretation, (a) no adjustments would be made to
the financial statements for periods before the effective date and (b) no
expense would be recognized for any additional compensation cost measured that
is attributable to periods before the effective date. We do not believe that
the adoption of this interpretation would have had any effect on our
consolidated financial statements.
Exchange Rate Risk Disclosure
Foreign revenue accounted for 37.8%, 47.2%, 48.4%, and 53.6% of our total
revenue for the six months ended June 30, 2000 and the years ended December 31,
1997, 1998 and 1999 respectively. The revenue and expenses of our foreign
operations are denominated in local currencies. The financial statements of our
foreign subsidiaries are translated into U.S. dollars based upon exchange rates
during the reporting period. Therefore, changes in foreign exchange rates
affect the U.S. dollar value of translated results of operations of our foreign
subsidiaries. We have not hedged foreign currency exposure but may do so in the
future. Accordingly, our reported results of operations in future periods will
be subject to exchange rate risk.
Market Risk Disclosure
We are exposed to market risk from changes in interest rates primarily
through our borrowing activities. Our ability to finance future acquisitions
may be impacted if we are unable to obtain appropriate financing at acceptable
rates. We do not believe that interest rate risk will be material to our
business.
We had $37.0 million outstanding under our credit facility at September 30,
2000. Borrowings under our credit facility generally bear interest at LIBOR
plus 1.25% per annum. We also have $78.4 million outstanding under subordinated
notes payable to our principal stockholder which bear interest at 13% per
annum. We intend to repay the outstanding balance under our credit facility and
subordinated notes with a portion of the proceeds of this offering.
To date we have not utilized derivative financial instruments or derivative
commodity instruments. We do not expect to employ these or other strategies to
hedge market risk in the foreseeable future. We invest our cash
in money market funds, and plan to invest the proceeds of this offering in high
quality credit instruments, primarily U.S. government obligations and corporate
obligations with contractual maturities of less than one year. These
investments are subject to minimal market risk. We believe the market risks
associated with these financial instruments are immaterial.
Year 2000 Impact
We have not experienced any problems with our computer systems relating to
distinguishing twenty-first century dates from twentieth century dates, which
generally are referred to as year 2000 problems. We are also not aware of any
material year 2000 problems with our clients or vendors. Accordingly, we do not
anticipate incurring material expenses or experiencing any material operational
disruptions as a result of any year 2000 problems.
29
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
(Unaudited)
During the year ended December 31, 1999, we completed the acquisitions of
GeoTrain and PTS. The aggregate purchase price of these transactions consisted
of approximately $90.5 million in cash and the issuance of $21.5 million of
Series B redeemable convertible preferred stock. Each of these acquisitions was
accounted for under the purchase method of accounting for business
combinations. Accordingly, the purchase price was allocated to assets acquired
and liabilities assumed based on their estimated fair market values existing at
the date of acquisition. During the year ended December 31, 1999 and six months
ended June 30, 2000, we completed several other acquisitions which,
individually and in the aggregate, do not meet the definition of significant
acquisitions as defined in the regulations of the Securities and Exchange
Commission, or the Commission, and are not reflected in the accompanying pro
forma combined condensed statement. See Note 3 to our consolidated financial
statements included elsewhere in this prospectus.
The following unaudited pro forma combined condensed financial statement has
been prepared in accordance with generally accepted accounting principles and
gives effect to the transactions described above. The unaudited pro forma
combined condensed statement of operations for the year ended December 31, 1999
combines the historical statements of operations for (i) Global Knowledge for
the year ended December 31, 1999; (ii) GeoTrain for the period from January 1
through its date of acquisition (October 22, 1999); and (iii) PTS for the
period from January 1 through its date of acquisition (November 24, 1999). The
results of GeoTrain and PTS for the periods subsequent to their respective
dates of acquisition have been included in our results of operations.
Accordingly, no pro forma information is required for the six month period
ended June 30, 2000. The unaudited pro forma combined condensed statement of
operations assumes the acquisitions were consummated on January 1, 1999 and
include pro forma adjustments to reflect annual amounts of amortization,
compensation, interest expense and preferred stock dividends, as described in
the notes to the pro forma combined condensed statement of operations. The
unaudited pro forma combined condensed statement of operations does not purport
to be indicative of the results which would have been reported had the
acquisitions been consummated at this date, nor do they purport to be
indicative of the results of operations which may be expected in the future.
This unaudited pro forma combined condensed statement of operations should be
read in conjunction with the audited consolidated financial statements and
notes thereto of us, GeoTrain and PTS included elsewhere in this prospectus.
30
<PAGE>
PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro
Global Pro Forma Forma
Knowledge GeoTrain PTS Adjustments Combined
--------- -------- ------- ----------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Revenue................. $256,720 $42,465 $23,381 $ -- $322,566
Cost of revenue......... 148,382 26,594 8,674 -- 183,650
-------- ------- ------- -------- --------
Gross margin............ 108,338 15,871 14,707 -- 138,916
Operating expenses:
Sales and marketing... 62,167 5,415 4,894 -- 72,476
General and
administrative....... 36,916 10,599 9,324 (3,817)(1) 53,022
Product development... 2,694 -- 1,830 -- 4,524
Restructuring......... 2,195 -- -- -- 2,195
Acquired in-process
research and
development.......... 1,900 -- -- -- 1,900
Amortization of
intangibles.......... 18,004 1,452 -- 10,607 (2) 30,063
-------- ------- ------- -------- --------
Total operating expenses 123,876 17,466 16,048 6,790 164,180
-------- ------- ------- -------- --------
Loss from operations.... (15,538) (1,595) (1,341) (6,790) (25,264)
Interest and other
expense, net........... 16,664 5,068 1,140 7,882 (3) 30,754
Provision for income
taxes.................. 1,083 53 (60) -- (4) 1,076
-------- ------- ------- -------- --------
Net loss................ (33,285) (6,716) (2,421) (14,672) (57,094)
-------- ------- ------- -------- --------
Dividend accretion...... (3,232) -- -- (1,601)(5) (4,833)
-------- ------- ------- -------- --------
Net loss applicable to
common stockholders.... $(36,517) $(6,716) $(2,421) $(16,273) $(61,927)
======== ======= ======= ======== ========
Net loss per common
share:
Pro forma basic and
diluted $ (0.93)
========
Shares used in computing
net loss per common
share:
Pro forma basic and
diluted(6) 66,456
========
</TABLE>
31
<PAGE>
NOTES TO PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
The accompanying unaudited pro forma combined condensed statement of
operations has been prepared by combining our historical results with GeoTrain
and PTS for the year ended December 31, 1999 and reflect the following pro
forma adjustments.
(1) PTS recorded a charge in its historical results for the period from January
1, 1999 through the acquisition date of $3.8 million related to the cash
settlement of options held by executives in connection with the
acquisition. A pro forma adjustment has been made to eliminate the impact
of this charge as it was directly related to the transaction.
(2) Record additional amortization of goodwill and other identified intangible
assets of $10.6 million for the period from January 1, 1999 through the
dates of acquisition of GeoTrain and PTS using estimated lives ranging from
3 years to 15 years. See Note 4(j) of Notes to our consolidated financial
statements included elsewhere in this prospectus.
(3) Record additional interest expense of $7.9 million for the period from
January 1, 1999 through the date of acquisition for assumed borrowings of
$88.7 million to purchase GeoTrain and PTS. The amount of the assumed
borrowing represents cash consideration plus acquisition costs for a total
of $90.5 million paid less cash acquired of $1.8 million. Interest expense
was estimated using our actual weighted average interest rate on our
outstanding debt for the year ended December 31, 1999.
(4) We have not recorded the associated income tax benefit of the above
entries. We have incurred significant operating losses since our inception
and have recorded a full valuation allowance against the associated tax
asset.
(5) Record additional accretion of dividends for the period from January 1,
1999 through the date of acquisition on the shares of Series B redeemable
convertible preferred stock issued to the former owners of PTS, using the
6% dividend rate that accrues on such preferred stock.
(6) We used the same number of shares to compute pro forma basic and diluted
net loss per common share as we used to compute historical basic and
diluted net loss per common share which is more fully described in Note 4
(m) to our consolidated financial statements included elsewhere in this
prospectus. The acquisition of GeoTrain and PTS would not have resulted in
any incremental common shares outstanding during the year ended December
31, 1999.
32
<PAGE>
BUSINESS
General
Global Knowledge is the world's largest independent IT education integrator.
We offer comprehensive training and software solutions, including assessment,
curriculum design, training delivery and program management. We focus on
mission critical networking systems and applications that manage the flow of
voice, data and image through the IT convergence space. We address the
compelling need for skilled IT professionals responsible for designing,
implementing and supporting networking systems within this rapidly changing
global infrastructure. We offer our clients a broad range of vendor-authorized
and proprietary content presented in multiple delivery formats. We leverage our
global resources to offer turn-key, full-service integration and program
management solutions to multi-national corporations.
Our educational solutions are designed to empower companies and their
employees with choice over when, where and how their IT education programs will
be designed and delivered. We collaborate with clients to design tailored
programs that blend e-Learning tools with our instructor-led curricula to
achieve the most effective results for individual learners. We have strategic
training relationships with leading technology companies to deliver over 500
vendor-authorized training courses to IT professionals on product-specific
skills in advanced networking and communications. We complement those courses
with over 200 proprietary courses that focus on integrating advanced technology
concepts into multi-platform IT environments, as well as prerequisite
fundamentals to vendor-authorized courses. We deliver our training solutions
through a flexible combination of instructor-led training, instructor-led live
e-Learning, self-paced e-Learning and printed study guides. We protect our
clients' investment in training with performance enhancement e-Learning tools
and software applications, including OnDemand Personal Navigator, which guides
ERP and CRM application users through difficult tasks while remaining live in
the application, and Knowledge Pathways, a digital e-Learning platform for
content development, assessment and personalized learning solutions.
Our mission is to increase the competitiveness of global organizations by
training their IT professionals to maximize the value derived from complex
information systems. Beginning with our acquisition of the learning services
division of Digital Equipment Corporation in 1995, we have built the global
resources and infrastructure to manage complete education programs for many of
the world's largest corporations. Through our integrated approach, we provide
solutions to clients in 20 countries and 15 languages on a daily basis.
Market Opportunity
The Convergence Market for Integrated Voice, Data and Image
Over the past decade, the volume of high speed data traffic across the
worldwide public telecommunications infrastructure has increased dramatically,
reflecting the increase in facsimile exchange, Internet access, electronic mail
communications, electronic commerce and other types of network data
transmission services. In response to this demand, global telecommunications
providers are upgrading their existing network infrastructure--originally
designed for voice traffic--to simultaneously satisfy all of the communication
needs of users worldwide. The migration to a comprehensive infrastructure
capable of carrying all information types, including data, voice and image,
over a high speed transmission network is commonly referred to as convergence.
Concurrent with the movement to infrastructure convergence, global
organizations have continued to build complex computer networks that facilitate
communication and information management enterprise-wide. Using high speed
digital communications lines and internetworking resources, businesses have
connected customers, suppliers, employees and partners through a variety of
mission critical software applications, including electronic commerce,
enterprise resource applications, supply chain management and customer
relationship
33
<PAGE>
management. Reaching throughout the extended enterprise, these applications are
designed to access, manipulate and exchange information to increase efficiency
and competitiveness throughout the organization. However, achieving this level
of connectivity requires the networking systems to be capable of coordinating
information among a variety of disparate systems, often developed using
different hardware or systems protocols, such as Microsoft, Unix, Red Hat,
Nortel Networks, Sun, Lucent and Cisco.
As a result, today's organizations require an advanced, intelligent network
capable of running these mission critical applications and coordinating them to
accommodate their voice, data and image information components. These networks
are built using advanced hardware from leading technology vendors, including
Cicso, Lucent and Nortel Networks. We believe that this specialized area of
internetworking communications represents one of the highest growth areas in
the Internet and technology sectors. In addition, we believe a significant
constraint on the growth of internetworking hardware vendors is the limited
number of qualified users available to implement and utilize their products.
The Demand for Skilled Information Technology Professionals
Given the mission critical nature of information flowing over today's
intelligent networks, ensuring reliability, speed and integrity of information
flow is a strategic imperative for global organizations. However, finding
skilled professionals capable of designing and supporting intelligent networks
is difficult, with demand for trained IT professionals far outstripping the
current supply, particularly in emerging areas such as Internet infrastructure,
telecommunications and data networking. According to a 1999 CompTIA study,
approximately 57% of companies surveyed reported that they had difficulty in
meeting their needs for trained IT professionals. Based on a 2000 survey by the
Information Technology Association of America, the number of unfilled IT skills
jobs is expected to reach 843,328 this year in the U.S. alone.
Today's IT professionals require advanced knowledge of sophisticated
telecommunications and networking topics, such as bandwidth allocation,
prioritization of network resources, protocol mechanics and security, as well
as working knowledge of multiple types of vendor products and operating systems
that integrate in the networking environment. We believe that a significant
market opportunity exists to train IT professionals in the high growth
convergence space, particularly given the continuously evolving nature of
voice, data and image technologies. These opportunities exist in training
unskilled professionals in new and emerging convergence technologies, in
reskilling professionals working within previously separated technologies, such
as data communications and telephony, and in providing continuous education to
IT professionals addressing dynamic technologies.
Challenges in Educating Information Technology Professionals
Given the importance of the IT professional in today's internetworking
environments, substantial resources must be committed to train and retrain IT
professionals in new technologies. While many businesses have historically used
internal resources to train IT professionals, we believe a growing number of
global organizations are looking to specialized third party education providers
due to a lack of qualified internal trainers, the cost of developing and
maintaining internal training courses in rapidly evolving technologies, and the
desire to reallocate resources to core competencies. In doing so, we believe
that these businesses are seeking full-service solutions to address their
comprehensive education and training needs, including needs assessment,
curriculum design, training delivery and program management.
Despite a significant market opportunity to serve these multinational
corporations, most external training organizations focus only on local or
regional markets, making it impossible to adequately serve the needs of a
global workforce. In addition, many providers do not offer the breadth of
content necessary to address the complex needs of advanced IT professionals in
multinational organizations. Finally, a majority of training providers offer
content through only one delivery method, such as instructor-led training,
interactive live
34
<PAGE>
e-Learning or self-paced e-Learning. We believe that businesses and individuals
prefer to have options for how and when they learn, and that the demand for
various learning options will be distributed across the full spectrum of
alternatives in the marketplace. According to International Data Corporation,
in 1999, training expenditures to outside training providers were approximately
71% on classroom training, 24% on e-Learning and 5% on text-based training.
Having access to these options allows learners to combine delivery methods to
meet their budgetary, scheduling, and technological requirements for any
training subject.
We believe there is a significant market opportunity for an IT education
integrator that can offer:
. course titles that cover a broad range of topics and skill levels, and
are both vendor-neutral and vendor-specific, including topics undergoing
rapid technological change;
. an education program that is planned, built and administered by a full-
service external provider who can manage and tailor the training to the
organization's particular needs;
. education delivered via an integrated program allowing for multiple
delivery formats that deliver the maximum amount of practical
information in the minimum amount of time; and
. training delivered on a global basis.
The Global Knowledge Solution
To meet the needs faced by corporations in an increasingly complex IT
environment, we offer comprehensive training and software solutions that
include needs assessment, curriculum design, training delivery and program
management on a global basis. We focus on training for mission critical
applications, systems and hardware that manage the flow of data through the IT
convergence space. We tailor our solutions to provide our clients with content
focused and relevant to their needs as well as with choice over when, where and
how their IT education programs will be designed and delivered. We believe we
have the following competitive advantages:
Depth and Scale of Vendor-Authorized and Proprietary Content
A key advantage we offer our clients is the comprehensive range of our
content. We believe that by designing curricula with a blend of vendor-
authorized and proprietary courses, we can offer the most effective training
through a functional approach to the multi-platform environments with which IT
professionals are confronted. We currently offer over 500 vendor-authorized
course titles that incorporate licensed courses for specific applications and
hardware vendors, such as Cisco, Oracle, Microsoft, Nortel Networks, Enterasys
and Compaq. We complement these courses with over 200 proprietary course titles
that focus on presenting the most current fundamental, intermediate and
advanced technological theories as well as providing hands-on experience with
multi-vendor hardware and software that is incorporated in complex data, voice
and image networks. In addition, our courses prepare learners to pass three
types of certification tests: vendor-specific, industry recognized third party
and our proprietary tests. To deliver our content, we believe that we have one
of the most highly skilled instructor bases in the IT training industry. Our
instructors are IT professionals possessing both expert knowledge and practical
experience.
Full-Service Integration and Program Management
Our services are structured to offer a full-range, turn-key IT training
solution. Our courseware developers and program managers collaborate with
clients to assess the technical platforms that are integrated on the client's
premises, to determine the type and extent of the client's training needs, and
to tailor our content or design custom content to meet their specific
requirements. We will design an integrated solution that will include on-site
classroom, one-on-one training, instructor led live e-Learning, self-paced e-
Learning and
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performance enhancement software solutions to each client's entire extended
enterprise. We administer enrollment, skills assessment, tracking and
certification through our centralized resources and technological
infrastructure, including our call centers, software applications and Internet
and intranet based resources. We believe that our ability to offer tailored
solutions, a full range of delivery options and total program management,
enables our clients to focus on their core competencies and reduce costs while
achieving better results.
Flexible and Personalized Delivery
We recognize that IT professionals in disparate roles, such as network
engineers and professional consultants, have unique time and geographic
constraints on their ability to participate in training. In addition, we
believe that the nature of learning and performance enhancement requires
training instruction to be tailored to the specific learning preferences of the
individual addressed. Accordingly, we provide clients and their employees with
the ability to choose the most efficient and effective training method from a
variety of delivery methods, including instructor-led training, instructor-led
live e-Learning, self-paced e-Learning, mentoring web sites and printed study
guides. In addition, our software product, OnDemand Personal Navigator, can
provide our clients with an in-application training and support solution for
enterprise software applications such as SAP(R)R/3, PeopleSoft(R) and Siebel(R)
software. Offering open access to these options enables our clients to combine
multiple delivery methods to meet their budgetary, scheduling, and
technological requirements, while empowering individual learners to choose the
specific format in which retention and performance are maximized.
Global Delivery System
We have built the global resources and infrastructure to manage complete
education programs for the world's largest corporations. We operate over 60
education centers in 20 countries, including locations in the U.S., the United
Kingdom, Germany, France, Italy, Japan, Canada, Australia and China. We can
also deliver training programs at over 300 additional sites through the use of
third party conference facilities that are capable of supporting the complex,
high-tech equipment needed to present most of our courses. In addition, through
our e-Learning solutions, we can deliver courses through the Internet to
virtually unlimited numbers of learners at almost any location worldwide.
Further, we offer vendor-authorized and proprietary course titles in as many as
15 languages including English, Chinese, French, German, Italian, Japanese,
Portuguese, Spanish, Dutch, Finnish and Korean. As a result, our multinational
clients can obtain consistent high-quality training for their entire workforce.
We believe that no other IT education company can provide multinational
corporate clients with the breadth and flexibility of our solutions across such
a broad geographic area.
Scalable Development and Delivery Platform
Our learning solutions and their underlying content are designed on an open
standard, scalable architecture. Our instructional design and development
process builds and categorizes content in an object-oriented environment so
that it can be aggregated easily and delivered to anyone using a variety of
technology-based applications. This process sorts courses into chapters and
each chapter into topics that we call reusable learning objects. Each reusable
learning object is further broken down into subtopics that we call reusable
information objects. By generating content through an active database of
interchangable reusable learning objects and reusable information objects, we
can easily roll-out new courses, tailor existing courses to accomplish specific
tasks, or create new custom courses for clients and individual learners. In
addition, through our software application, Knowledge Pathways, we can offer
our clients the ability to create a customized library of reusable learning
objects that enables their employees to use search engine technology to scan a
tailored database for particular topics. All of our new content is developed
using our instructional design development process. In addition, we continue to
rapidly digitize our existing library of courses into reusable learning objects
and reusable information objects.
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Strategy
Our objective is to become the leading provider of education integration
services to global organizations and their IT professionals worldwide. The key
elements of our strategy are:
Exploit the Convergence Skills Gap
We believe that internetworking communications represents one of the highest
growth areas in the Internet and technology sectors. For IT professionals,
these technologies are also some of the most complex and technically demanding
areas of expertise. In addition, the rapid rate of change surrounding
convergence technologies requires a significant and on-going commitment to
continuing education by organizations to remain competitive, and by IT
professionals to remain marketable. Given the mission critical nature of
internetworking systems and the applications they support, we believe that
global organizations will continue to seek out highly trained technicians
capable of planning, designing, implementing and supporting convergence
technologies. We believe that we are uniquely positioned to provide the
advanced training required by corporations and their IT professionals to
develop and support these skills.
Focus on Global Enterprise Relationships
We intend to actively pursue full service education integration
opportunities with the most advanced technology hardware and software
companies, offering the option to provide complete training services throughout
their entire extended enterprise and customer base. Many multi-national
organizations have expanded their use of specialized external education
services providers due to the lack of internal trainers experienced in the
latest technologies, the cost of developing and maintaining organized programs
and content, and corporate reorganizations designed to allocate resources on
core business functions. In February 2000, we became the sole external training
provider for the data and telephony training of Nortel Network's North American
Enterprise Solutions division. Emphasizing our broad range of resources and
established global infrastructure, we intend to focus on large-scale
opportunities similar to Nortel Networks where we will manage the client's
entire IT education program.
Leverage Existing Client Relationships
In 1999, we had relationships with over 300 clients who each purchased over
$100,000 of our products and services. We have established a strong track
record of increasing sales at existing major accounts and expect a significant
portion of our future growth to come from these major clients that we have
specifically targeted. We believe that we have achieved this success because of
the high quality of our product offerings, our ability to deliver a fully
integrated solution on a global basis, and the relationships developed by our
executive officers and sales personnel with key decision-makers within these
organizations. In addition, we believe that those customer relationships
provide us with significant credibility in establishing ourselves as a leader
in our market, and we intend to use those relationships in marketing our
products to other potential clients worldwide.
Continue To Expand Our Integrated Learning Solution
We intend to continue our strategy of providing solutions that offer the
greatest level of flexibility to our clients and achieve the highest levels of
performance for their IT professionals. Currently, learners can participate in
public or on-site instructor-led classroom training, one-on-one training,
instructor-led live e-Learning courses and self-paced e-Learning solutions.
Further, our OnDemand Personal Navigator and Knowledge Pathways software
products provide a continuous source of training reinforcement and performance
support for learners on the job. As the needs and preferences of clients evolve
with changes in technology, we plan to continue to enhance the functionality
and features of our education solutions. For example, we have recently begun to
supplement our e-Learning offerings by offering our learners the opportunity to
receive a portion of our self-paced content directly to their handheld PDA.
This transforms the learner's PDA into a handheld professional reference tool
for both independent training and immediate performance support.
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Strengthen Strategic Vendor Training Relationships
We are strategically positioned to partner with leading IT organizations,
remaining vendor neutral and dedicated to providing the highest quality
training for a broad range of equipment and software products from multiple
vendors. Our largest competitors, such as the internal training departments of
IBM, Oracle and SAP, generally do not emphasize vendor content other than their
own, or non-vendor specific courses oriented to multi-system platforms. We
intend to continue to enter into strategic training relationships with key
technology vendors and currently maintain relationships with Cisco, Compaq,
Enterasys, Intel, Microsoft, Nortel Networks, Oracle, Novel, Entrust and Red
Hat, among others. We believe these relationships provide a number of
competitive advantages, including access to partners' high quality source
training material and direct distribution channels to those vendors' customers.
We intend to expand our existing relationships and to enter into new
relationships to attract the broadest segment of the technical community.
Client Case Studies
Our educational solutions are structured on the premise that:
. the nature of complexity of certain advanced convergence topics requires
interactive collaboration with live instructors and fellow students in
small groups, coupled with hands-on experience through demonstrations and
practice labs using real networking and telecommunications equipment;
. certain individuals will learn more effectively through a small-scale
interactive instructor forum than through independent study;
. many individual learners require the flexibility and personalized pace
provided by self-directed learning solutions, such as web-based e-
Learning programs and technology and non-technology based study guides;
and
. e-Learning solutions expand the reach of training throughout the global
extended enterprise to populations previously unreachable due to
geographic and timing constraints.
The following case studies represent how several of our clients have engaged us
to deploy solutions to meet their mission critical IT education needs.
Client A is a provider of comprehensive telecommunications products and
services through a global network of leading brands and operations throughout
the world.
Challenge: Client A required rapid hands-on training for its new broadband
engineers and the reskilling of its voice engineers in broadband
technology.
Our Solution: In less than 60 days, we designed a custom curriculum including
both vendor-authorized and proprietary content to support the
full breadth of services Client A provides to its customers. We
channeled its engineers through an accelerated, bootcamp style
instructor-led education program that gave them access to and
training on the specific routing and switching hardware it uses
in operating its business. We also provided all of the broadband
training services for IP, ATM, Frame Relay, and xDSL for one of
its divisions, which is responsible for the maintenance of
mission-critical customer transmission infrastructure. Upon
completion of these intensive, equipment-based hands-on
programs, Client A's broadband engineers and voice engineers
were fully prepared to develop and support converged voice/data
solutions.
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Client B is a global provider of high-value e-business technology services.
Challenge: Client B required high-quality training for its consultants
located all over the world in providing Java implementation
services to its customers without taking its consultants out of
the field.
Our Solution: We designed a custom curriculum composed of a series of our
proprietary courses to educate and help certify Client B's
consultants in Java technology. The courses featured both real-
world exercises and hands-on labs. We delivered a curriculum to
its consultants located in 15 countries around the world using
our instructor-led live e-Learning platform over the Internet.
By delivering these courses during non-working hours, our
program delivered a flexible solution for Client B that provided
critical training to its employees without sacrificing valuable
billable consultant time. Upon completion of our program, Client
B's consultants were immediately capable of being deployed to
manage Java implementation services in the field.
Client C is a provider of infrastructure consulting and professional
services to help enterprise clients and service providers make the transition
to network-based e-Business models.
Challenge: Client C required a comprehensive education program designed to
prepare its employees for Cisco and other vendors' certification
tests and to provide ongoing training reinforcement.
Our Solution: We designed a complete education program incorporating both
Cisco-specific content and our own proprietary content to
adequately prepare Client C's workforce for certification.
Through a custom designed web portal managed by us, this
client's employees are able to identify and register for a pre-
determined curriculum consisting of publicly scheduled
instructor-led courses, on-site courses and self-paced e-
learning solutions delivered over the web. We also schedule and
deliver customized Cisco bootcamp programs. In addition, through
Client C's education portal, we can provide customized reporting
on a monthly basis to its management to ensure that its
employees are on their personal development track. Upon
completion of our prescribed curriculum, Client C's employees
are fully prepared for their certification exams.
Client D is a company formed as a joint venture between the Italian
government and six large Italian banks to identify highly-motivated people and
to train them to perform IT job functions in order to develop a more highly-
skilled workforce in southern Italy.
Challenge: Client D required the ability to assess the technological skills
of applicants in order to place such applicants in the training
for the most appropriate job function. It also required an
education training company to provide training to its students
in the most complex advanced job functions in its program
through an e-Learning platform.
Our Solution: Working jointly with Client D's representatives, we developed a
web-based assessment solution that determines the technical
skill level of each applicant, as well as the most appropriate
training for that individual. We also designed an instructor-led
live e-Learning and self-paced e-Learning curriculum to provide
learners with the fundamental knowledge and skills and hands-on
experience needed to perform specific job roles in the IT
industry. Upon completion of our program, these applicants have
the skill sets required in the highly demanding roles of Cisco
Security Manager or Microsoft Database Administrator.
Client E is a leading global supplier of networking solutions and services
that support voice, data and video transmission over wireless and wireline
technologies.
Challenge: Client E required an immediate training program to provide its
IT professionals and development and support personnel with the
skills necessary to allow it to rapidly reposition itself in the
convergence market from a legacy voice equipment manufacturer to
a data networking company.
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Our Solution: Working within Client E's organization, we identified the
critical skills its employees would need to accomplish its goal.
We then planned and deployed the appropriate training to match
skill gaps. Curriculum tracks of approximately eight courses
each were designed to meet these reskilling initiatives. From
that starting point two years ago, our services have expanded
into other curriculum areas including telecommunications
convergence and web technologies. The majority of programs are
provided in instructor-led classroom formats at Client E's major
sites in North America. We also deploy content to Client E over
the web using our e-Learning platform on servers placed behind
its firewall. This has given us the opportunity to reach a
broader audience that previously had limited access to training.
Our Strategic Content Focus
Overview
We focus on the training needs of IT professionals managing information flow
in the convergence space. We offer vendor-authorized courses from many of the
leading technology vendors to provide clients with high quality training on the
key hardware and software components that are part of an integrated networking
system. Our proprietary courses are designed to complement and enhance our
vendor-authorized courses by providing learners with the fundamental knowledge
and skills needed as prerequisites to take vendor-specific courses, by
integrating the skills needed to operate, install and maintain networks that
incorporate multi-vendor hardware and software, and by providing learners with
advanced theoretical principles and skills on managing internetworking systems
in real IT environments. We build job-related training paths by developing a
sequence of course titles that create cohesive programs which impart the skills
and knowledge required by an IT professional to perform key functions
throughout their careers. For instance, in order to train an IT professional to
become proficient in the use of routers, a primary component of a networking
system, a learner would begin with the Global Knowledge proprietary course,
Networking Fundamentals, and would follow up with one of our TCP/IP courses
like Internetworking with TCP/IP. A learner could then progress to vendor-
authorized courses on router configuration and internetworking management.
Finally, after mastering the advanced skills of working with routers, a learner
could take one of our proprietary courses in ATM Internetworking or Network
Security.
Vendor-Authorized Courses and Certifications
We currently offer over 500 vendor-authorized courses that are designed by
hardware or software manufacturers to give a learner hands-on experience with a
vendor's product. The content of these vendor-authorized courses that we offer
is licensed from vendors such as Cisco or Enterasys on a non-exclusive basis.
In addition to providing practical experience in installing, operating and
maintaining this hardware and software, vendor-authorized courses are
structured to provide the necessary skills and information to pass a vendor-
specific certification test. Our vendor-specific courses include:
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Cisco Nortel Networks
Option 11C Installation and
Interconnecting Cisco Network Maintenance
Devices BCM (NPI) Installation, Operation
Cisco Internetwork Design and Maintenance
Cisco Voice over Frame Relay, ATM BCM (NPI) Advanced Voice and Data
and IP Applications
Introduction to Cisco Cable Routers Advanced IP Routing Technology
Building Scalable Cisco Networks Router Implementation
Cisco Network Troubleshooting DMS SuperNode Meridian Digital
Cisco Advanced Configuration of Centrex
Frame Relay Interfaces Universal Edge Intelligent
Building Cisco Multilayer Switching Multisource Access System OA&P
Networks
Cisco Campus ATM Solutions Novell
Managing Cisco Network Security Networking Technologies
Intranetware: Netware 4.112 Install
Enterasys and Configure Workshop
Novell Netware Network Analysis and
Applied ATM Troubleshouting
Smartswitching
Smartswitch Router Configuration Oracle
Oracle 8 Competency Track
Microsoft Introduction to Oracle 8 SQL and
PL/SQL
Designing A Windows 2000 Networking Oracle 8 Database Administration
Infrastructure
Windows 2000 Network & Operating Red Hat
Systems Essentials
Installing and Configuring a Introduction to Red Hat Linux
Microsoft Windows 2000 Network Red Hat Linux Network and Security
Windows 2000 Security Administration
Accelerated Training for MS Windows
We offer a comprehensive sequence of training courses to prepare learners to
pass tests for more than 15 vendor-specific certifications. These include:
Cisco Certifications Nortel Networks Certifications
Cisco Certified Internetworking Nortel Networks Certified Support
Expert Expert
Cisco Certified Network
Professional
Novell Certifications
Cisco Certified Network Associate Certified Novell Engineer
Cisco Certified Design Professional
Cisco Certified Design Associate Oracle Certifications
Oracle8 DBA Certification Boot Camp
Enterasys Certifications
Enterasys Systems Engineer Red Hat(R) Certifications
Red Hat Certified Engineer(TM)
Microsoft Certifications
Microsoft Certified Systems
Engineer
Microsoft Certified Solution
Developer
Proprietary Courses and Certifications
We offer over 200 proprietary courses that focus on presenting the most
current fundamental, intermediate and advanced technological theories, as well
as providing hands-on experience with multiple types of hardware and software
interacting in complex data, voice and image networks. Our content is developed
by and based upon the experience of a broad base of practicing IT professionals
who author new courses to address common issues encountered in the
internetworking environment. We incentivize these subject matter experts to
develop and update courses by paying them a course development fee and
continuing royalty fees. However, we maintain ownership of the content of our
proprietary courses. We also
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offer an array of proprietary professional certifications in various networking
and general IT skills functions. Our proprietary professional certification
program requires completion of a series of our courses and a passing grade on
an examination designed and administered by us. In addition, our proprietary
courses can prepare a learner to pass certain industry recognized third-party
vendor independent certification tests. In some cases, our courses have been
certified by vendor independent certification organizations as meeting or
exceeding the necessary standards to prepare a learner for a particular
certification given by such organization. Some of our proprietary courses
include:
Networking Fundamentals Telecommunications
Understanding Networking Introduction to Voice Over IP
Fundamentals Telecommunications Fundamentals I &
Networking Cabling Systems II
Understanding Networking Protocols Understanding Digital Subscriber
Network Troubleshooting Line XDSL
Converging Voice and Data Networks
LAN/WAN Internetworking IP Over Wireless Broadband
Internetworking with TCP/IP
Frame Relay Internetworking e-Commerce and Web Development
Storage Area Networks Building a Web Site
Host and Network Security Advanced Web Site Design
Designing Security Architectures Web Site Performance Tuning
Virtual Private Networks Internet Law
Web Security
Network Security and Firewall
Administration ATM & High Speed Internetworking
Secure Communications and UPNs ATM Internetworking
Building Broadband Networks
ATM Troubleshooting
Optical Networking
The following is a sample of the proprietary certifications and the third-
party vendor independent certifications that we prepare learners to obtain:
Global Knowledge Proprietary Role- ICSA Network Security
Based Certifications Certifications
Network Security Certifications
ATM Engineer
Broadband Engineer CompTIA Certifications
Data Communications Engineer A+ Certification
Global Knowledge Webmaster i-Net+ Certification
Network+ Certification
Telecommunications Analyst
Telecommunications Data Specialist ICCP TCP/IP Certifications
VoIP Engineer TCP/IP Network Analyst
Web Developer
Windows 2000 Administrator
Windows 2000 Expert
Our Full Service Education Integration Offerings
The breadth of our education integration services provides our clients with
a choice over when, where and how their IT education programs will be designed
and delivered. We offer a full range of services enabling our clients to use
our company as a training center for their employees and customers with respect
to specific skills, or to engage us to manage their entire IT education
program.
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Education Integration Services
Within the service portion of our business, we offer a combination of
instructor-led course events that are available as publicly-scheduled courses
held at our education centers, as private courses scheduled on-site for a
particular client or as live e-Learning courses delivered over the web. We can
customize the content delivered at any of these course events to meet a
particular client's needs.
Instructor-led Training as a Public, On-Site or Live e-Learning Event
Our instructor-led training is learner-focused and incorporates theory and
real-world examples with hands-on practical workshops. When taught in this
format, individual courses have a duration that generally lasts from two to
five days with some of the more complex courses lasting up to 15 days. In
addition, we offer bootcamp style programs to offer certain courses in an
accelerated time frame, allowing clients to minimize the amount of time their
employees are away from the office. Our instructor-led training is delivered
through public or open-enrollment courses, private or on-site courses or over
the web through our live e-Learning platform. For the year ended December 31,
1999 and the six months ended June 30, 2000, revenue from our instructor-led
public course events represented approximately 71% and 67% of our revenue,
respectively. Of such revenue, we believe that over 90% were either initially
paid for, or reimbursed to the learner, by the learner's employer.
Public Course Scheduling. Individual learners seeking training on specific
topics and clients seeking to have specific employees trained by an external
education provider are offered the opportunity to attend classes at any one of
our over 60 training centers located in 20 countries. Our training centers are
designed to accommodate the technical demands of our courses, including being
fully equipped with the complex internetworking equipment such as routers,
switches and network protocol analyzers. As a result, our classrooms operate as
real-world labs where learners gain mission critical skills through building,
operating, repairing and maintaining actual networking equipment. In scheduling
our public courses, we consider client demand and instructor availability to
determine where and when to deliver a particular course. Our typical publicly-
scheduled course ranges in price from $800 to $2,700 per learner, with some of
our accelerated bootcamp courses costing up to $19,000 per learner. For the six
months ending June 30, 2000, the enrollment in our publicly scheduled courses
was over 92,000 IT professionals. During the six months ended June 30, 2000, we
offered more than 8,900 publicly scheduled instructor-led classroom courses.
On-Site Course Scheduling. We offer clients the ability to schedule and
deliver courses on-site at their business locations. Our on-site courses offer
the same content as our public courses; however, by providing a private forum
we facilitate discussion of client-specific, confidential IT issues in classes
comprised solely of the client's IT professionals. On-site courses are an
efficient alternative for many clients because critical IT professionals are
not required to leave their work locations. We typically provide all of the
software, hardware and networking systems required for use in client-site
courses. In scheduling our on-site course events, our program managers work
closely with our clients and instructors to manage the education process and
insure that consistent content is delivered wherever and whenever the client
needs it.
Instructor-Led Live e-Learning over the Web. Instructor-led live e-Learning
refers to a format that allows instructors to present a course live over the
Internet enabling learners to participate from any location. Course materials
developed for and used in our instructor-led classroom training are also used
in our instructor-led live e-Learning courses. Our e-Learning platform consists
of a fully hosted, integrated e-Learning environment, a suite of assessment and
management tools and a range of related professional services. These tools are
delivered live over the Internet--or over an intranet--using two-way voice over
IP technology. This technology allows learners to interact with the instructors
in real-time in a manner similar to a classroom setting. In addition,
instructor's use application sharing technologies to present diagrams and other
visual aids to learners in real-time and can walk students through simulated
problems in the subject matter being taught. We also offer a wide variety of
remote labs designed to simulate practice labs learners use in classroom
training. In these labs, networking equipment is made available remotely via
the Internet enabling the participant to gain the same hands-on experience as
in a classroom setting, while dramatically reducing our logistics costs of
moving equipment to various locations. We offer a growing library of over 70
courses through our instructor-led live e-Learning platform, including both
vendor-authorized and proprietary courses.
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Customized Learning Solutions
For clients that require specialized training, or desire personalized
solutions based on their own content, we will develop and customize a full
curriculum covering the specific topics and applications requested by the
client. Our customized courses are developed by combining one or more of our
reusable learning objects that refer to specific learning objectives within our
courses. By matching different learning objects and customizing output to our
client's style and format guidelines, clients can be offered a learning
solution specific to their business needs and skills requirements. This process
enables clients to integrate their proprietary know-how into their unique
programs, and prevents the re-training of employees in subject matters in which
they are already competent. We also offer clients the opportunity to retain one
of our instructors at their site, by e-mail or over the telephone to provide
one-on-one training to specific employees.
Program Management Services
For clients who require turn-key education solutions, we offer the ability
to manage a client's entire IT education program, including needs assessment,
content development and training delivery to both the client's workforce and
the purchasers of the client's products. We assist our clients by assessing
their particular training needs and recommending training solutions to meet
their goals. We administer course enrollment, skills assessment, tracking and
certification through our centralized resources and technological
infrastructure, including our call centers, software applications and Internet
and intranet based resources. We recently began offering clients a customized
portal available directly on their intranet and desktop. Through this portal,
which can be managed internally by the client or by members of our custom
solutions team, employees review available courses, gather information and can
register on-line for specific courses approved by their employer. In addition,
we offer a centralized billing program that enables employers to pre-pay for
their employees' training, thus reducing any up-front expenditures by the
individual learners.
Education Integration Products
Our education integration products consist of a suite of performance
enhancement e-Learning tools and software. Our products include OnDemand
Personal Navigator, an in-application training and support solution for
enterprise applications, and self-paced e-Learning solutions, which are based
on proprietary and vendor-specific content. In addition, we offer Knowledge
Pathways, an e-Learning infrastructure application used to track, manage and
train employees in the extended enterprise. We also publish text based
reference books and study guides under the Global Knowledge brand. Our products
are designed to provide flexibility to individual learners while maximizing
individual learning and subsequent retention.
OnDemand Personal Navigator
OnDemand provides our clients with an immediate learning solution to train
end-users on-the-job in highly complex, mission critical applications such as
SAP(R) R/3, PeopleSoft(R) and Siebel(R) software. The learner accesses our
product through an icon on their application toolbar at the specific point in
their work when they need help. Upon request, OnDemand either navigates the
learner step-by-step through the successful completion of the task live in the
application, or provides an animated demonstration of the specific learning
topic. Since these enterprise applications are highly customized to each
client's implementation, OnDemand provides an authoring tool in which subject
matter experts can rapidly create custom simulation modes, in-application
learning, and print or web-deployable content via a single authoring
initiative. As of June 30, 2000, approximately 250 corporate clients had
selected OnDemand to meet their training needs for SAP(R) R/3 application
software.
Self-Paced e-Learning
Self-paced e-Learning is an Internet based delivery method that offers the
essence of the classroom experience by including vendor-authorized and
proprietary content, remote hands-on labs and mentoring services. This allows
the learner to study independently and thereby set the time, place and pace of
the learning
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process. In this manner, individuals can create personalized learning paths and
schedules to meet their specific educational and career objectives. Our self-
paced e-Learning is delivered over the Web or a handheld PDA or, if requested
by a client, by CD-ROM. These offerings provide clients who have immediate
training needs instant access to top-quality training as well as a way to
combine e-Learning delivery with other methods such as instructor-led delivery.
Learners may also use the courses to pre-test their capabilities in order to
position themselves properly within the course and to train only in relevant
areas. At the end of the course, students may take a test to measure their
mastery of the course content. As of June 30, 2000, our portfolio of self-paced
e-Learning courses encompassed over 50 titles.
Knowledge Pathways and CustomDOC
Released in early 2000, Knowledge Pathways is a browser-based software suite
that allows clients to develop specific learning solutions for their individual
learners. This product offers clients the opportunity to access our vendor-
authorized or proprietary content and to rapidly create and deploy their own
learning content for subject areas such as business process, custom
applications or soft skills training. Knowledge Pathways is used to determine
the individual learner's training needs through a pre-assessment test based on
the specific subject matters requested by the client. Once the assessment is
complete, the product creates a personalized course for the learner by drawing
specific, relevant content from our digital database to reinforce those subject
areas where the learner requires the most support. CustomDoc is a software
product that enables clients to rapidly create their own customized instructor-
led training manuals. A client licenses CustomDoc for a specific library of
end-user applications such as Microsoft Office or Lotus Notes. As of June 30,
2000, approximately over 600 corporate clients had adopted Knowledge Pathways
or CustomDOC to meet their training needs.
Certification Study Guides and Reference Texts
Through a relationship with Osborne McGraw-Hill and Syngress Media, we offer
over 70 certification guides and reference texts under the brand names Global
Knowledge Certification Press and Global Knowledge Professional Reference. Both
of our branded series cover job functions such as Cisco Certified Network
Associate, Microsoft MCSE, Novel CNE, Citrix CCA and Network+ Certification.
Technology
Our e-Learning solutions are designed using an open standards, scalable
architecture. Our e-Learning platform delivers content using prevailing
Internet technologies such as Java, HTML and XML. This allows our curricula to
be accessible to learners worldwide through standard web-browsers.
Additionally, in order to develop more convenient and effective e-Learning
solutions for our clients, we have entered into strategic relationships with
Centra, with whom we have developed our interactive e-Learning infrastructure,
Mentor Labs, with whom we provide our learners access to remote labs and ibrite
Corporation, which has reformatted our content to be delivered to handheld
PDAs. The key features of the technology that we offer include:
. Authoring Tools. Our technology allows individuals without prior
course development experience the ability to create learning objects for
their own training needs.
. Real-time performance support. Based on the needs of a learner, either
using an application or involved in a training activity, the technology
selects the appropriate learning object and delivers it to the user's
desktop.
. Fully hosted e-Learning platform. We host and centrally manage all
software and content from our servers, reducing our client's investment in
technology infrastructure and expenditures on software installation and
management. Our centrally hosted system allows us to continually update
content and rapidly deploy e-Learning solutions to unlimited numbers of
learners through standard browsers.
. Voice-over IP. Our solutions provide reliable delivery of voice over
the Internet. The timely synchronization of voice and multi-media content
into one unified communication protocol improves the collaborative
experience for the learner and eliminates the cost otherwise associated
with voice link-ups. We can also record events on our servers, including
audio, for future playback and reuse.
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. Tracking and Reporting. We track in our database the activity of our
client's individual learners, including skills assessment and course
performance and completions. Our system tracks an individual learner's
progress and allows the learner to continue their coursework from any
location.
. Testing and Assessment. Many of our systems offer comprehensive
testing and assessment capabilities which can be customized for specific
learning solutions and clients. This technology provides specific learning
solutions based upon test results or an assessment of the individual's
ability to perform critical tasks within complex applications.
Our systems have been designed to provide reliable service to our clients,
with redundancy in areas in which we believe failures are most likely to occur.
We have also implemented both redundant Internet connections and web servers.
We maintain a safe and secure data storage and e-mail environment through
standard networking security measures that include continual anti-virus
scanning and regularly scheduled database backups.
Much of our new course content is organized in a modular format called a
reusable learning object. Our content storage and delivery technology allows us
to break down course offerings and reassemble them according to the needs of
individual clients. This technology seamlessly blends with our diagnostic
capabilities, further allowing us to personalize our courses to the individuals
specific training needs. We believe that by organizing our content in this
manner we can quickly react to the changing demands of our clients.
Clients
We have developed a broad client base serving multi-national companies
around the world, including those based in the U.S., the United Kingdom,
Germany, France, Italy, Japan, Canada, Australia and China. Our clients
generally operate in the communications, computer, systems integration,
electronics, manufacturing, finance, military, aerospace and energy sectors. We
had over 300 clients worldwide that purchased over $100,000 of products and
services in 1999. Most of our clients purchase training on an event basis
rather than through a single contract. No client accounted for more than 5% of
our 1999 revenues. The following is a partial list of our corporate and
governmental clients:
Communications Hardware & Software Manufacturers
ALLTEL 3 Com
AT&T Cisco
Bell Canada/Bell Nexxia Compaq
British Telecom Enterasys
Cable & Wireless IBM
Deutsche Telekom Intel
Ericsson Microsoft
France Telecom Motorola
GTE
Korea Telecom IT & Computer Systems Integration
Lucent Technologies EDS
MCI KPMG
Nortel Networks Price Waterhouse
NTT Data Tokyo Information Systems
SBC
Sprint Government Organizations
Telecom Training
Telefonica National Security Administration
Telekom Austria AG U.S. Airforce
Telstra U.S. Army
US West
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Strategic Vendor Training Relationships
We have entered into relationships with leading hardware and software
vendors, as well as with other technology and service companies, to act as an
authorized training provider for multiple vendors. These relationships help us
to secure the most current content and to provide the broadest array of
products and services to our clients. As an authorized training provider, the
vendor-specific courses that we offer are licensed from vendors on a non-
exclusive basis. However, in some cases, we have developed original content and
sold the curriculum to the vendor, where it is then packaged as a vendor-
authorized course. We believe that, in most cases, the ability to identify this
product-specific content as authorized by its manufacturer improves the
marketability of vendor-specific courses. These alliances also may result in
additional distribution channels through either the vendor bundling our
training with the sale of their product or by gaining access to the sales
channel or customer list of our partners. In return, we further believe that
these alliances provide significant benefits to the vendors by allowing them to
achieve additional market penetration by increasing the base of trained users
for their products.
We have formed strategic relationships with the following vendors:
. Cisco . Microsoft
. Compaq . Novell
. Enterasys . Nortel Networks
. Entrust . Marconi
. IBM . Red Hat
. Intel . Oracle
Sales and Marketing
We believe that we have built a strong brand image and we continue to
promote our integrated learning solutions through the use of a multi-prong
sales strategy, consisting of direct mail and e-mail marketing, a field sales
force, a telemarketing sales force, web sites and web seminars. Our sales and
marketing programs include:
Direct Mail Marketing. We market our instructor-led courses primarily
through direct mail marketing to our proprietary worldwide client
prospecting list of approximately 8 million IT professionals and to rented
mailing lists of IT professionals. Our prospecting list includes
individuals who have attended a prior Global Knowledge course, department
managers and training managers of our corporate clients, people who have
visited our web site, participants in one of our web seminars, contacts at
trade shows and lists of customers provided by vendors with whom we have
strategic training relationships. Direct mail is carefully localized for
both style and content. We regularly identify and target a particular
customer demographic for specific offerings designed to increase customer
traffic and sales. Direct mail is designed to drive traffic to our web site
or to encourage clients to contact our sales staff. In addition to direct
mail marketing, we also send e-mails to prospective clients using the same
techniques developed with direct mail.
Field Sales Force. Our field sales force consists of both national
account managers and regional account managers. Our national account
managers focus on multi-national corporations that generally purchase on-
site and customized training solutions for their entire workforce through a
centralized department or training manager. Our regional account managers
focus on corporations purchasing our solutions within a specific geographic
area. These sales representatives leverage our proprietary database by
primarily contacting department managers and training managers of
corporations whose employees have attended our courses as well as those
managers of customers of vendors with whom we have strategic training
relationships. As part of our marketing to these corporate clients, our
field sales force can offer them the opportunity to participate in various
purchasing programs.
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Members of these programs are offered access to our education solutions at
pre-negotiated prices in return for their commitment to purchase various
anticipated amounts of our education integration services and products. The
sales process for an initial sale to one of these corporate clients often
includes a coordinated effort among a number of groups within our
organization. Our field sales force is supported by our on-site and custom
program managers as well as our other customer support staff in making
presentations to corporate customers with respect to the broad range of
services that we can provide.
Telemarketing Sales Force. Our inbound telemarketing sales force
responds to telephone, e-mail, web site and facsimile orders. Our outbound
telemarketing sales force pursues new sales opportunities and responds to
any inquiries received by our inbound telemarketing sales force. Our
outbound telemarketing sales force focuses on both individuals and
corporate accounts. Depending on the needs of our clients, leads generated
by our outbound sales force may be referred to a national account manager
or regional account manager for follow-up direct contact.
Web sites. We maintain a network of localized web sites that offer
product and service information, online registration of our courses and
access to specific information about our operations throughout the world.
Based on our internal tracking data, we are currently receiving in the
aggregate more than 6 million hits per month on these web sites. In
addition, logging into our localized site, access.globalknowledge.com,
gives individuals access to personalized news, reviews, custom training
calendars, information technology chat rooms, discussion groups and
mentoring.
Public Relations. We regularly release news on large contracts,
acquisitions, partnerships and new product introductions. We also
participate in IT industry trade shows and conferences, offer free web
seminars and advertise in industry trade magazines and periodicals.
Courseware and Software Product Development
Development of Courseware
We identify and develop proprietary courseware by maintaining alliances with
hardware and software vendors, conducting marketing surveys of IT professionals
and our client base and consulting with our instructors and subject matter
experts. Once a topic is identified, a course director is selected. The course
director, typically one of our instructors, uses established instructional
design techniques to compile and format lecture, demonstration and lab
materials. The material is forwarded to our Curriculum Development and Design
Group, which uses a proprietary process that effectively brands the material's
presentation in the Global Knowledge style.
To ensure that our courses meet the needs of the marketplace and provide a
high quality of instruction, we request that each course participant complete
an evaluation of the course content and the instructor. From these evaluations,
we receive timely feedback concerning future content development needs. Our
course titles are updated regularly to incorporate changes in technology and to
improve their educational effectiveness.
Software Product Development
Most of our software products are developed internally by our staff of
approximately 30 programmers and developers. Where applicable, we also purchase
technology, license intellectual property rights, and oversee third-party
development and localization of certain products. Internal development enables
us to maintain technical control over our products. We have created a
substantial body of proprietary tools and methodologies for creating and
enhancing our products and to simplify a product's portability among different
operating systems, microprocessors, or computing devices. Product documentation
is generally created internally.
To best serve the needs of learners around the world, we "localize" many of
our software products to reflect local languages and conventions and to improve
the quality and usability of our software products in international markets.
Localizing a product might require modifying the user interface, altering
dialog boxes, and translating text. Various Global Knowledge products have been
localized into French, German, Chinese, Italian, Spanish and Japanese.
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Instructors
Our instructors are either full-time employees or independent consultants.
At August 31, 2000, we had 438 employee instructors and as part of our variable
cost structure we also had the ability to retain the services of over 900
independent consultants, as needed. Our strategy of hiring instructors as
independent consultants or as full-time employees gives us the flexibility to
obtain the services of both industry experts who want to remain practitioners
in the IT industry and those who want to teach their subject matter on a full-
time basis.
We believe that we have one of the most highly skilled instructor bases in
the IT training industry. Our instructors are IT professionals possessing both
expert knowledge and practical experience. We believe that our instructors are
compensated at levels that are competitive with industry standards. Our
instructors can also receive course development fees and royalty payments by
developing and updating courses.
Our instructor relations department recruits, trains, coaches and manages
our instructor team. We identify new instructor candidates primarily through
referrals from our existing instructors and inquiries to our web site.
Instructor candidates undergo a technical evaluation prior to participating in
our proprietary instructor training program. Instructors are trained in
technical skills, as well as in the most advanced educational theories and
presentation skills. Each new instructor is assigned a mentor and must pass a
rigorous internal preparation program.
Intellectual Property
We regard our course development process and our internally-developed course
titles as proprietary and rely primarily on a combination of statutory and
common law copyright, trademark and trade secret laws, customer licensing
agreements, employee and third-party nondisclosure agreements and other methods
to protect our proprietary rights. In this regard, we have attempted to secure
the registration of our key trademarks and service marks in the U.S. and
internationally, including, but not limited to, Global Knowledge, Global
Knowledge Network, PTS Learning Systems, OnDemand Personal Navigator, Knowledge
Pathways, Netgun, CustomDOC and Competence Key. We have also acquired and
registered many of our domain names with regulatory bodies in an effort to
protect these intellectual property rights. In addition, we have entered into
confidentiality and invention assignment agreements with our employees and
contractors, and nondisclosure agreements with our suppliers and strategic
partners to limit access to and disclosure of our proprietary information.
We have licensed, and expect that we will continue to license, some of our
intellectual property rights, including trademarks or copyrighted material, to
third parties. While we attempt to ensure that these licensees maintain the
quality of our brand, they could take actions that might materially and
adversely affect the value of our intellectual property rights or reputation.
We also rely on technologies that we license from third parties. These licenses
may not continue to be available to us on commercially reasonable terms in the
future, if at all. As a result, we may be required to obtain substitute
technology of lower quality or at greater cost.
Competition
The IT training market is highly fragmented, with low barriers to entry. We
believe that the principal competitive factors affecting our industry are the
depth, breadth and variety of content, the ability to offer complete learning
solutions, flexibility and convenience of service, cost-effectiveness of
solutions offered and the quality and depth of client relationships. Our
primary competitors are:
Internal Training Departments. Internal training departments generally
provide companies with the most control over the method and content of
training, enabling them to tailor the training to their specific needs.
However, we believe that industry trends toward the expanded use of external
training providers will continue. This will occur as a result of the lack of
internal trainers experienced in the latest technologies, the cost of
developing and maintaining internal training courses in rapidly evolving
technologies and the desire to reallocate resources to core competences.
Other Independent Education and Training Providers. We believe that a
majority of the independent training providers are relatively small
organizations that focus on local or regional markets and often provide
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training as one of several services or product lines. We believe that the
breadth of our course offerings combined with our presence in 20 countries
provides us with a competitive advantage over many of the independent
education and training providers. In addition, as the market for e-Learning
has begun to grow, numerous training providers have begun to provide training
over the Internet most often only focused on one delivery method. We believe
that our ability to deliver training through a combination of instructor-led
training, instructor-led live e-Learning, self-paced e-Learning and study
guides depending on the needs of our clients differentiates us from other
independent education training companies that do not offer organizations the
flexibility and quality of these multiple delivery methods.
Computer Hardware and Software Vendors. Many hardware and software vendors
supply training bundled in the prices of their product. Their knowledge of
upcoming developments in their products is likely to be better than that of
other training providers. These competitors, such as IBM, Oracle and SAP,
generally do not emphasize vendor content other than their own, or non-vendor
specific courses oriented to multi-system platform. We believe that by
remaining vendor-neutral, we are able to provide both high quality training
for a broad range of hardware and software products and cross-platform
training solutions.
Some of these competitors offer course titles and programs similar to ours,
but at lower prices. In addition, some competitors have greater financial and
other resources than we do.
Regulatory
Many federal, state and international governmental authorities assert
authority to regulate providers of educational programs. Generally, we are
exempt from these regulations because we do not participate in any federal,
state or international student aid/loan programs. However, federal, state and
international laws and regulations affect our operations and may limit our
ability to obtain authorization to operate in certain jurisdictions. If we were
required to comply with, or found to be in violation of, a jurisdiction's
current or future licensing or regulatory requirements, we could be subject to
civil or criminal sanctions, including monetary penalties, and could be barred
from providing educational services in that jurisdiction.
Employees
As of August 31, 2000, we had 1,769 full-time employees, including 548
employees engaged in sales and marketing, 438 instructors, 362 employees
engaged in general and administrative activities, 196 employees engaged in
course delivery support, 135 employees engaged in product development and 49
staff consultants and project managers. Of our employees, 888 were employed in
the U.S. and 881 were employed outside the U.S. We also employ a number of
part-time employees. We plan to continue to expand our workforce. Our employees
are not represented by any collective bargaining agreement, and we have never
experienced a work stoppage. We believe our employee relations are good. In
certain European countries, we have work counsels, a legal requirement in those
countries, that are similar in function to employee unions.
Facilities
We have sales and education centers in 11 states and the District of
Columbia, and international offices in 19 countries. Our U.S. locations
include: California, Colorado, District of Columbia, Georgia, Illinois,
Massachusetts, Maryland, New Jersey, New York, North Carolina, Pennsylvania and
Texas. Our international locations include: Australia, Austria, China
(including Hong Kong), Canada, France, Germany, Ireland, Italy, Japan, Korea,
Malaysia, Mexico, Netherlands, Singapore, Spain, Sweden, Switzerland, the
United Kingdom and Venezuela. We believe that our existing facilities are
adequate to meet our current needs and that suitable additional or substitute
space will be available on commercially reasonable terms when needed.
Our worldwide corporate headquarters are located at 9000 Regency Parkway,
Suite 500, Cary, N.C. Our lease for such facility expires in October 2007.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal
proceedings that arise in the ordinary course of our business. Currently we are
not a party to any material legal proceedings.
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MANAGEMENT
Directors and Executive Officers
Our directors and executive officers are:
<TABLE>
<CAPTION>
Name Age Principal Positions
---- --- -------------------
<C> <C> <S>
Duncan M. Anderson 49 President and Chief Executive Officer and Director
Bruce J. Ryan 57 Executive Vice President and Chief Financial Officer
and Director
David J. Marini 46 Chief Operating Officer
Arthur Zamkoff 56 President of Knowledge Products Division
Anthony L. Craig (2) 55 Director
Thomas E. McInerney (1) 59 Director
Robert A. Minicucci (1) 48 Chairman of our Board of Directors
William J. Montgoris (2) 53 Director
Sanjay Swani (2) 33 Director
</TABLE>
---------------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Our other key employees are as follows:
<TABLE>
<CAPTION>
Name Age Principal Positions
---- --- -------------------
<C> <C> <S>
Patricia L. Anderson 43 Vice President, Worldwide Human Resources
Lyn L. Benton 49 Vice President, Chief Knowledge Officer
Stephen J. Budosh 43 Vice President, Business Operations
Stacey M. Cannon 45 Vice President, General Counsel and Secretary
Kendall J. Dean 43 Vice President and General Manager, Americas Enterprise
Services
Susan M. Deeney 43 Vice President, Sales and Marketing of Knowledge Products
Division
Brendan P. Duffey 52 Vice President, Outsourcing
Richard G. Kristof 37 Vice President, Worldwide Business Development
Bryan L. Pickett 42 Vice President, Nortel Enterprise Training Services
Gregory J. Roels 37 Vice President, Education Services
Richard C. Small 42 Vice President, Corporate Controller
Donald Spector 43 Vice President, Product Development
Robin Tan 46 Vice President and General Manager, Asia Pacific
William R. Thompson 43 Vice President, Corporate Marketing
Michael J. Weilbacher 50 Vice President and General Manager, EMEA
Robert H. Woodruff 42 Vice President, Self-paced e-Learning
</TABLE>
Set forth below is information about each of our executive officers and
directors.
Duncan M. Anderson has been our President, Chief Executive Officer and a
member of our board of directors since August 1998. In May 1996, Mr. Anderson
joined our company and was responsible for Mergers and Acquisitions and
Business Development. In July 1997, Mr. Anderson was appointed Chief Operating
Officer. For the 17 years prior to joining our company, Mr. Anderson held
various positions with Digital Equipment Corporation, most recently as its
Director of Corporate Alliance and Market Development. Mr. Anderson holds an
M.B.A. from Northeastern University and a B.S. from the University of North
Carolina at Chapel Hill.
Bruce J. Ryan has been our Executive Vice President and Chief Financial
Officer since February 1998 and was appointed a member of our board of
directors in August 1998. For the four years prior to joining our company, Mr.
Ryan was the Executive Vice President and Chief Financial Officer of Amdahl
Corporation. For
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the 25 years prior to joining Amdahl, Mr. Ryan held various financial and
operating positions with Digital Equipment Corporation, most recently as its
Vice President of Industry Marketing. Mr. Ryan holds a B.S./B.A. from Boston
College and an M.B.A. from Suffolk University. He is currently a director of
INRANGE Technologies and Ross Systems, Inc.
David J. Marini has been our Chief Operating Officer since May 2000. For the
eight years prior to joining our company, Mr. Marini held various positions
with Lanier Worldwide, most recently as Executive Vice President and General
Manager of Worldwide Field Operations. For the eight years prior to joining
Lanier, Mr. Marini held various positions with the scientific calculations
division of Harris Corporation. Mr. Marini holds a J.D. from Union University's
Albany Law School and a B.A. with honors from St. John Fisher College. He is a
member of the American Management Association and the Association of World
Trade Clubs.
Arthur J. Zamkoff has been the President of our Knowledge Products Division
since November 1999. From January 1998 to the time he joined our company, Mr.
Zamkoff was the President of PTS, a company subsequently acquired by us. For
the six years prior to joining PTS, Mr. Zamkoff served as Senior Vice President
of Assessment Systems, Inc. For the three years prior to joining ASI, he served
as Senior Vice President and Chief Operations Officer of APPEX through its
subsequent acquisition by Electronic Data Systems Corp. Mr. Zamkoff holds an
M.B.A. and B.S. from Baruch College.
Anthony L. Craig has been a member of our board of directors since December
1995. He has been the executive chairman of Arbinet-Thexchange since December
1999. From December 1995 to August 1998, Mr. Craig served as our President and
Chief Executive Officer. Prior to joining our company, Mr. Craig held various
positions with Digital Equipment Corporation, most recently as a Corporate Vice
President. Prior to joining DEC, Mr. Craig served as a senior vice president
for Oracle Systems Corporation. Mr. Craig holds a B.S. from Dalhousie
University. He is currently a director of Mitel Corporation (Canada), Inc.
Thomas E. McInerney has been a member of our board of directors since
December 1995. He has been a general partner at WCAS since September 1986.
Prior to joining WCAS, Mr. McInerney co-founded and served as President and
Chief Executive Officer of Dama Telecommunications Corp. In addition, he
previously served as Group Vice President--Financial Services of ADP and Senior
Vice President-Operations of the American Stock Exchange. Mr. McInerney
attended the New York University Graduate School of Business Administration and
holds a B.A. from St. John's University. He is currently a director of
Centennial Communications Corp, SpectraSite Holdings Inc., Savvis
Communications Corp., The Bisys Group, Inc. and several privately held
companies.
Robert A. Minicucci has been the chairman of our board of directors since
December 1995. He has been a general partner at WCAS since August 1993. Prior
to joining WCAS, Mr. Minicucci served as Senior Vice President and Chief
Financial Officer of FirstData Corporation from December 1991 to August 1993.
In addition, he previously served as a treasurer of American Express and a
managing director of Shearson Lehman Brothers. Mr. Minicucci holds an M.B.A.
from Harvard Business School and a B.A. from Amherst College. He is currently a
director of Amdocs Limited and several privately held companies.
William J. Montgoris has been a member of our board of directors since
February 2000. From December 1979 to June 1999, he held various positions with
Bear Stearns and Co., including its chief financial officer from May 1987 to
June 1997 and its chief operating officer from June 1993 to June 1999. Mr.
Montgoris holds a B.A. from St. Johns University. He is currently on the board
of trustees of St. John's University and Colby College.
Sanjay Swani has been a member of our board of directors since September
2000. He has been a principal at WCAS since July 1999. Prior to joining WCAS,
Mr. Swani served as a principal of Fox Paine & Company from June 1998 to June
1999. Prior to joining Fox Paine, Mr. Swani served as an associate of Morgan
Stanley Dean Witter & Co. Mr. Swani holds a J.D. from Harvard Law School, an
M.S. from MIT's Sloan School of Management and a B.A. from Princeton
University.
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Set forth below is information about each of our other key employees.
Patricia L. Anderson has been our Vice President, Worldwide Human Resources
since April 2000. From November 1998 to the time she joined our company, Ms.
Anderson was the Vice President, Human Resources and Administration of Prodigy
Communications Corporation. For the two years prior to joining Prodigy,
Ms. Anderson served as President of Logix Concepts, Inc. For the three years
prior to joining Logix, Ms. Anderson was Vice President, Human Resources,
Administration and Facilities of Datalogix International, Inc.
Lyn L. Benton has been our Vice President, Chief Knowledge Officer since
September 1998. From 1994 to the time she joined our company, Ms. Benton was
the Principal of her own consulting firm. Prior to consulting, Ms. Benton was
the Vice President of Finance and Corporate Services and Corporate Controller
of Lotus Development Corporation.
Stephen J. Budosh been our Vice President, Business Operations since
September, 1997. From January 1994 to the time he joined our company, Mr.
Budosh was the Chief Financial Officer of MWI, Inc. For the five years prior to
joining MWI, Mr. Budosh held several financial positions at Black and Decker.
Stacey M. Cannon has been our Vice President, General Counsel and Secretary
since May 1996. From December 1995 to the time she joined our company, Ms.
Cannon practiced law as a consultant to VideoServer, Inc. For the two years
prior to joining VideoServer, Ms. Cannon was Vice President and General Counsel
of Kendall Square Research Corporation.
Kendall J. Dean has been our Vice President and General Manager of Americas
Enterprise Services since June 1999. From June 1996 to the time he joined our
company, Mr. Dean was the Managing Director for South Central U.S. of MCI
Systemhouse. For the two years prior to joining MCI, Mr. Dean was a Principal
at James Martin & Co.
Susan M. Deeney has been our Vice President, Sales and Marketing of
Knowledge Products Division since November 1999. From December 1996 to the time
she joined our company, Ms. Deeney was the Vice President of Sales and
Marketing for PTS, a company subsequently acquired by us. For the 12 years
prior to joining PTS, Ms. Deeney served in various sales and marketing
positions for Dun & Bradstreet.
Brendan P. Duffey has been our Vice President, Outsourcing since September
1999. From February 1999 to September 1999, he was the U.S. Country Manager of
GeoTrain, a company subsequently acquired by us. For the ten years prior to
joining GeoTrain, Mr. Duffey was Chief Executive Officer of Momentum Management
Assoc., a company he founded.
Richard G. Kristof has been our Vice President, Worldwide Business
Development since December 1997. From September 1997 to the time he joined our
company, Mr. Kristof served as Vice President of Business Development for
American Research Group, a company subsequently acquired by us. For the three
years prior to joining ARG, Mr. Kristof was Vice President and Chief Logistics
Officer for National Technology Group.
Bryan L. Pickett has been our Vice President, Nortel Enterprise Training
Services since March 2000. From October 1981 to the time he joined our company,
Mr. Pickett held various positions with Nortel Networks, most recently as its
Vice President of Product Training and Documentation.
Gregory J. Roels has been our Vice President, Education Services since
January 1997. From August 1991 to the time he joined our company, Mr. Roels
held various positions at American Research Group, a company subsequently
acquired by us, most recently as its Chief Operating Officer.
Richard C. Small has been our Vice President, Corporate Controller since
October 1997. From July 1993 to the time he joined our company, Mr. Small was
the Operations Controller of Helix Technology. For the ten years prior to
joining Helix, Mr. Small held various financial management positions with BBN
Corporation.
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Donald Spector has been our Vice President, Product Development since
November 1999. From July 1998 to the time he joined our company, Mr. Spector
was the Vice President of Product Development for PTS, a company subsequently
acquired by us. For the six years prior to joining PTS, Mr. Spector served as
Director of Information Systems for Assessment Systems Incorporated.
Robin Tan has been our Vice President and General Manager, Asia Pacific
since April 1997. From January 1993 to the time he joined our company, Mr. Tan
was Managing Director and President, ASEAN for Electronic Data Systems Corp.
William R. Thompson has been our Vice President, Corporate Marketing since
September 2000. From March 1994 to the time he joined our company, Mr. Thompson
was the Director of Marketing for the Personal Systems Group at IBM. For the
two years prior to joining IBM, Mr. Thompson was the Director of Client
Services for On Target Services.
Michael J. Weilbacher has been our Vice President and General Manager,
Europe, Middle East and Africa, or EMEA, since April 2000. From October 1998 to
the time he joined our company, Mr. Weilbacher was Vice President, EMEA for
Sequent Computers Inc. For the 16 years prior to joining Sequent, Mr.
Weilbacher held various positions at Tandem Computers, most recently as Vice
President Compaq Computer EMEA, Tandem Business Unit.
Robert H. Woodruff has been our Vice President, Self-paced e-Learning since
July 1997. From June 1996 to the time he joined our company, Mr. Woodruff was
the Director of Development for Seer Technologies. For the five years prior to
joining Seer, Mr. Woodruff was the President of MultiDoc Technologies.
Committees of our Board of Directors
Our compensation committee consists of Messrs. Minicucci (chairman) and
McInerney. It reviews and evaluates the salaries and incentive compensation of
our management and key employees and makes recommendations concerning these
matters to our board of directors. Our compensation committee also administers
our stock plan.
Our audit committee consists of Messrs. Montgoris (chairman), Craig and
Swani. It reviews the results and scope of audits and other services provided
by our independent public accountants and reviews our system of internal
accounting and financial controls. Our audit committee also reviews such other
matters with respect to our accounting, auditing and financial reporting
practices and procedures as it may find appropriate or may be brought to its
attention.
Compensation of Directors
Non-employee directors will be reimbursed for their reasonable out-of-pocket
expenses incurred in attending meetings of our board of directors. No director
has received cash compensation for services rendered as a director. Upon
joining our board of directors, Mr. Montgoris received options to purchase
shares of our common stock under our stock plan. Further, in connection with
his severance agreement with our company, Mr. Craig received severance payments
from our company. Each transaction is described under "Certain Relationships
and Related Transactions."
Compensation Committee Interlocks and Insider Participation
Both members of our compensation committee serve as general partners of the
general partner of each of the private equity funds affiliated with WCAS, and
each may be deemed to have a material interest in the matters described under
"Certain Relationships and Related Transactions." None of our executive
officers have served as a director or member of the compensation committee of
any other entity whose executive officers served as a director or member of our
compensation committee.
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<PAGE>
Executive Compensation
The following table sets forth information concerning the compensation paid
by us to our Chief Executive Officer and each of our executive officers who
earned more than $100,000 in salary and bonus during 1999, our last fiscal
year. These individuals are referred to as the named executive officers. The
compensation described in this table does not include medical or other benefits
that are available generally to all of our salaried employees or perquisites
and other personal benefits received that do not exceed the lesser of $50,000
or 10% of the officer's salary as disclosed in this table.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------
Long-Term
Compensation
Awards and
Securities
Name and Principal Other Annual Underlying All Other
Position Salary Bonus Compensation (1) Options (#) Compensation
------------------ -------- -------- ---------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Duncan M. Anderson..... $300,000 $160,000 $8,381 $ 56,502(2)
President and Chief
Executive Officer
Bruce J. Ryan.......... $225,000 $120,000 $3,442 $118,704(3)
Executive Vice
President and Chief
Financial Officer
</TABLE>
---------------------
(1) Compensation in this column reflects contributions made by us to our 401(k)
plan on behalf of each named executive officer.
(2) Amount includes reimbursement of $41,390 for relocation expenses, $11,680
for transportation expenses and $3,432 for health club dues.
(3) Amount reflects reimbursement of relocation expenses.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth, with respect to each of the named executive
officers, information regarding the number and value of securities underlying
unexercised options held by the named executive officers as of December 31,
1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options at
Fiscal Year-End (#) Fiscal Year-End
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Duncan M. Anderson.......... $ $
Bruce J. Ryan............... $ $
</TABLE>
In the table above, the value of unexercised in-the-money options is based
on the difference between the assumed initial public offering price per share
of $ and the exercise price of the options. The options granted to each
executive officer were granted under our stock plan. These options vest as to
25% of the underlying option shares on each of first four anniversaries of the
date of grant. Each option was granted at an exercise price equal to the fair
market value of our common stock, as determined by our board of directors on
the date of grant.
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<PAGE>
Option Grants in Last Fiscal Year
The following table sets forth, with respect to each of the named executive
officers, information concerning stock options and restricted stock granted in
1999.
<TABLE>
<CAPTION>
Potential Realizable
Values at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Exercise Price Appreciation for
Underlying Granted to or Base Option Term ($)(1)
Options Employees in Price Expiration -----------------------
Name Granted (#) Fiscal Year ($/Share) Date 5% 10%
---- ----------- ------------ --------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Duncan M. Anderson......
Bruce J. Ryan...........
</TABLE>
---------------------
(1) In accordance with the rules of the Commission, these amounts assume that
the value of our common stock was $ per share on the date the option was
granted. The potential realizable values under such options are shown based
on assumed rates of annual compound stock price appreciation of 5% and 10%
over the full option term from the date the option was granted. These rates
represent assumed rates of appreciation only. Actual gains, if any, on
stock option exercises will depend upon the future performance of our
common stock.
Employment and Change of Control Arrangements
We are currently not a party to any employment or change of control
agreements with any of our executive officers.
Employee Benefit Plans
Stock Plan
In January 1996, our board of directors and stockholders approved our Stock
Option and Restricted Stock Purchase Plan. The purpose of our stock plan is to
promote the interests of our company and our subsidiaries and the interests of
our stockholders by providing an opportunity to selected employees and officers
of both our company and those of our subsidiaries and to other persons
providing services to us to purchase our common stock. By encouraging such
stock ownership, we seek to attract, retain and motivate our employees and
service providers and to encourage them to devote their best efforts to our
business and financial success. The following summary describes the principal
features of our plan, as it has been amended, and is qualified in its entirety
by reference to the specific provisions of our amended plan, which is filed as
an exhibit to the registration statement of which this prospectus forms a part.
Shares and Options Subject to the Plan. The plan provides for the grant of
options or awards to purchase an aggregate shares of our common stock,
either in the form of incentive stock options intended to meet the requirements
of Section 422 of the Code, or nonqualified stock options or restricted stock
purchase awards. The plan includes provisions for adjustment of the number of
shares of common stock available for grant or award thereunder and in the
number of shares of common stock underlying outstanding options in the event of
any stock splits, stock dividends or other relevant changes in our
capitalization.
Eligibility. Under the plan, employees, including officers, are eligible to
receive grants of incentive stock options structured to qualify under Section
422 of the Code, and nonqualified stock options and restricted stock purchase
awards, both of which are not intended to meet the requirements of Section 422
of the Code. Non-employees are eligible to be granted only nonqualified options
and awards.
Administration. Our board of directors has administered the plan. However,
our board has the right to appoint a committee to administer the plan. This
administering committee must consist of at least two members
56
<PAGE>
of our board. Each member of the committee must be "disinterested persons"
within the meaning of Rule 16b-3 under the Securities Exchange Act of 1934, or
the Exchange Act. All questions of interpretation or application of the plan
are determined by our board of directors or administering committee so
appointed, whose decisions are final and binding upon all participants.
Terms of Options and Awards. Each option or award granted will be evidenced
by a stock option or restricted stock purchase agreement. Our board or its
appointed committee will fix the term and vesting provisions of all options
granted pursuant to the plan. Options granted under the plan generally vest as
to 25% of the option shares on each of the first four anniversaries of the date
of grant and may provide for acceleration of vesting in the event we achieve
specified financial targets.
The exercise price of incentive stock options may not be less than 100% of
the fair market value of the shares of common stock, as determined by our board
or its appointed committee, as the case may be, on the date the option is
granted. The exercise price of nonqualified stock options may not be less than
100% of the fair market value of the shares of common stock on the date the
option is granted. In addition, the aggregate fair market value of the shares
of common stock with respect to which incentive stock options are exercisable
for the first time by an optionee during any calendar year shall not exceed
$100,000. In addition, no incentive stock option shall be granted to an
optionee who owns more than 10% of the total combined voting power of all
classes of stock of our company, unless the exercise price is at least 110% of
the fair market value of the shares of common stock and the exercise period
does not exceed five years.
Restricted stock purchase awards granted under the plan will be in amounts
and at times as determined by our board or its appointed committee. The
purchase price, as well as the vesting provisions, of awards will be determined
by our board or its appointed committee and the purchase price may be equal to,
less than or more than the fair market value of the shares of common stock to
be awarded.
Term of the Stock Plan. The plan will continue in effect until January 2006
unless terminated prior to such date by our board.
401(k) Plan
We have adopted the Global Knowledge Network, Inc. 401(k) Profit Sharing
Plan. All of our full-time employees located in the U.S. are eligible to
participate in the plan. This plan is intended to qualify under Section 401(k)
of the Code so that contributions to this plan by employees, and the investment
earnings thereon, are not taxable to employees until withdrawn. Pursuant to
this plan, employees may elect to reduce their current annual compensation by
up to 15% and have the amount of the reduction contributed to this plan. In
addition, we match the contributions of employees up to the first 3% of their
annual compensation and contribute $.50 for each $1.00 of contribution on the
next 4% of their annual compensation.
Indemnification of Directors and Executive Officers and Limitation on Liability
Our bylaws provide that we shall indemnify our directors, officers and their
agents to the fullest extent permitted by Delaware law. Pursuant to this
provision, we have entered into indemnification agreements with each of our
directors and executive officers. We are also empowered under our bylaws to
purchase insurance on behalf of any director, officer, employee or agent
whether or not we would be required to indemnify this person.
In addition, our second restated certificate of incorporation to be
effective upon consummation of this offering provides that our directors will
not be personally liable to us or our stockholders for monetary damages for any
breach of fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omission not in good faith or which involve intentional
misconduct or a knowing violation of law;
57
<PAGE>
. for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the Delaware General
Corporation Law; or
. for any transaction from which the director derives an improper personal
benefit.
Our second restated certificate of incorporation also provides that if,
after the approval by our stockholders of our second restated certificate of
incorporation, Delaware law is amended to authorize corporate action further
eliminating or limiting the personal liability of directors, then the liability
of our directors shall be eliminated or limited to the fullest extent permitted
by Delaware law. This provision does not affect a director's responsibilities
under any other law, including the federal securities laws or state or federal
environmental laws.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following is a description of relationships and transactions, to which
we have been a party, in which amounts involved exceeds $60,000 and in which
any director, executive officer or holder of more than 5% of our capital stock
had or will have a direct or indirect material interest, other than our
compensation arrangements with our directors and named executive officers that
are described under "Management."
In December 1995, we issued an aggregate shares of common stock and
200,000 shares of Series A redeemable convertible preferred stock to various
individuals and entities affiliated with WCAS for an aggregate purchase price
of $20.0 million and $20.0 million, respectively. Among the investors were
Messrs. McInerney and Minicucci, each members of our boards of directors, and
Welsh, Carson, Anderson & Stowe VII, L.P., a holder of more than 5% of our
capital stock. Messrs. McInerney and Minicucci are general partners of the
general partner of each of the private equity funds affiliated with WCAS that
invested in our company.
In January 1997, we issued shares of common stock and 175,000 shares of
Series A redeemable convertible preferred stock to various individuals and
entities affiliated with WCAS for an aggregate purchase price of approximately
$21.7 million and $17.5 million, respectively. Among the investors were Messrs.
McInerney and Minicucci and Welsh, Carson, Anderson & Stowe VII, L.P.
In January 1997, we issued a subordinated note to WCAS Capital Partners II,
L.P., a private equity fund affiliated with WCAS, for an aggregate principal
amount of $60.0 million at a 10% discount. This note originally accrued
interest at a rate of 10% per annum to be paid semi-annually. In accordance
with our agreement with the lender, we have deferred some of the interest
payments until the note matures which occurs at the earlier of December 2001
and the closing of an underwritten initial public of our common stock. In
return for such deferment, we agreed to increase the interest rate to 13% per
annum and add the unpaid interest to the outstanding principal of the note.
Further, in September 1997 and December 1997, we issued an aggregate of shares
of our common stock to the lender in lieu of making interest payments on this
note in cash.
In September 1997, we issued shares of common stock and 75,000 shares
of Series A redeemable convertible preferred stock to various individuals and
entities affiliated with WCAS for an aggregate purchase price of approximately
$3.8 million and $7.5 million, respectively. Among the investors were Messrs.
McInerney and Minicucci and Welsh, Carson, Anderson & Stowe VII, L.P.
In December 1997, we issued shares of common stock to various
individuals and entities affiliated with WCAS for an aggregate purchase price
of $5.0 million. Among the investors were Messrs. McInerney and Minicucci and
Welsh, Carson, Anderson & Stowe VII, L.P.
In May 1998, we issued shares of common stock to various individuals and
entities affiliated with WCAS for an aggregate purchase price of $1.0 million.
Among the investors were Messrs. McInerney and Minicucci and Welsh, Carson,
Anderson & Stowe VII, L.P.
In December 1998, we issued shares of common stock to various
individuals and entities affiliated with WCAS for an aggregate purchase price
of approximately $3.0 million. Among the investors were Messrs. McInerney and
Minicucci and Welsh, Carson, Anderson & Stowe VII. L.P.
In January 1999, we issued shares of common stock to various
individuals and entities affiliated with WCAS for an aggregate purchase price
of $10.0 million. Among the investors were Messrs. McInerney and Minicucci and
Welsh, Carson Anderson & Stowe VII, L.P.
In March 1999, we issued shares of common stock to Welsh, Carson,
Anderson & Stowe VII, L.P. for an aggregate purchase price of $3.0 million.
In April 1999, we issued shares of common stock to various individuals
and entities affiliated with WCAS for an aggregate purchase price of
approximately $5.0 million. Among the investors were Messrs. McInerney and
Minicucci and Welsh, Carson, Anderson & Stowe VII, L.P.
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<PAGE>
In August 1999, we issued shares of common stock and 19,230 shares of
Series A redeemable convertible preferred stock to various individuals and
entities affiliated with WCAS for an aggregate purchase price of approximately
$3.1 million and $1.9 million, respectively. Among the investors were Messrs.
McInerney and Minicucci and Welsh, Carson, Anderson & Stowe VII, L.P.
In October 1999, we issued shares of common stock and 211,530 shares of
Series A redeemable convertible preferred stock to various individuals and
entities affiliated with WCAS for an aggregate purchase price of approximately
$33.9 million and $21.1 million, respectively. Among the investors were Messrs.
McInerney and Minicucci, Mr. Swani, a member of our board of directors and a
principal of WCAS, and Welsh, Carson, Anderson & Stowe VIII, L.P., a holder of
more than 5% of our capital stock. Messrs. McInerney and Minicucci are each
general partners of the general partner Welsh, Carson, Anderson & Stowe VIII,
LP.
In November 1999, in connection with our purchase of PTS, we paid
approximately $8.0 million and issued 4,295,796 shares of Series B redeemable
convertible preferred stock to various investors. Among the investors were
Arthur Zamkoff, one of our executive officers, and Mr. Zamkoff's wife.
In November 1999, we issued shares of common stock and 120,188 shares
of Series A redeemable convertible preferred stock to various individuals and
entities affiliated with WCAS for an aggregate purchase price of approximately
$19.1 million and $12.2 million, respectively. Among the investors were Messrs.
McInerney, Minicucci and Swani and Welsh, Carson, Anderson & Stowe VIII, L.P.
In March 2000, we issued shares of common stock and 173,070 shares of
Series A redeemable convertible preferred stock to various individuals and
entities affiliated with WCAS for an aggregate purchase price of approximately
$27.7 million and $17.3 million, respectively. Among the investors were Messrs.
McInerney, Minicucci and Swani, Welsh, Carson, Anderson & Stowe VII, L.P. and
Welsh, Carson, Anderson & Stowe VIII, L.P.
In March 2000, William Montgoris, a member of our board of directors,
received options to purchase shares of common stock under our stock plan at
an exercise price equal to $ per share.
Anthony Craig, a member of our board of directors, was our Chief Executive
Officer from December 1995 to August 1998. In accordance with our agreement
with Mr. Craig at the time of his resignation, we made severance payments to
Mr. Craig in the aggregate amount of $425,000 from August 1998 to December 1999
and have allowed his options to purchase shares of common stock to remain
exercisable through the original termination date.
David Marini, one of our executive officers, received a $70,000 signing
bonus when he joined us in August 2000. He earns a base salary of $275,000 with
a target bonus of $135,000 in fiscal 2000. In May 2000 and August 2000, Mr.
Marini was granted options to purchase and shares of common stock,
respectively, under our stock plan at exercise prices equal to $ and $ ,
per share respectively.
Arthur Zamkoff received $576,981 and he and his wife received an aggregate
63,991 shares of Series B redeemable convertible preferred stock for their
common stock in PTS in connection with our purchase of that company. He earns a
base salary of $230,000 with a target bonus of $172,500 in fiscal 2000. In
November 1999 and July 2000, Mr. Zamkoff was granted options to purchase
and shares of common stock, respectively, under our stock plan at exercise
prices equal to $ and $ , per share respectively.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table contains information about the beneficial ownership of
our common stock before and after our initial public offering for:
. each person who beneficially owns more than five percent of our common
stock;
. each of our directors;
. the named executive officers; and
.all directors and executive officers as a group.
Beneficial ownership is determined in accordance with the rules of the
Commission and generally includes voting or investment power with respect to
securities. Except as indicated by footnote, and subject to community property
laws where applicable, the persons named in the table below have sole voting
and investment power with respect to all shares of common stock shown as
beneficially owned by them. The percentage of beneficial ownership is based on
shares of common stock outstanding as of , 2000, as adjusted to
reflect the conversion of outstanding shares of preferred stock upon the
closing of this offering and shares of common stock outstanding after
completion of this offering. The number of shares of common stock outstanding
used in calculating the percentage ownership for each person listed includes
the shares of common stock underlying options held by that person that are
exercisable within 60 days of , 2000, but excludes shares of common stock
underlying options held by any other person. This table assumes no exercise of
the underwriters over-allotment option. Of the shares subject to the over-
allotment option, up to shares may be sold by us, up to shares may be
sold by affiliates of WCAS and up to shares may be sold by former
stockholders of PTS.
<TABLE>
<CAPTION>
Percentage of
Shares
Number of Outstanding
Shares -----------------
Beneficially Before After
Name of Beneficial Owner(1) Owned Offering Offering
--------------------------- ------------ -------- --------
<S> <C> <C> <C>
Welsh, Carson, Anderson & Stowe (2)............ % %
Duncan M. Anderson (3).........................
Bruce J. Ryan (4)..............................
Anthony J. Craig (5)...........................
Thomas E. McInerney (6)........................
Robert A. Minicucci (7)........................
William J. Montgoris (8).......................
Sanjay Swani (9)...............................
All executive officers and directors as a group
(9 persons) (10)..............................
</TABLE>
---------------------
* represents beneficial ownership of less than 1%.
(1) Unless otherwise indicated, the address for each person or entity named
above is c/o Global Knowledge Inc., 9000 Regency Parkway, Suite 500, Cary,
N.C. 27511.
(2) Includes shares held by Welsh, Carson, Anderson & Stowe VIII, L.P.,
shares held by Welsh, Carson, Anderson & Stowe VII, L.P., shares
held by WCAS Information Partners, L.P., shares held by WCAS Capital
Partners II, L.P. and an aggregate shares held by various individuals
affiliated with WCAS. The address for each of these entities is 320 Park
Avenue, New York, New York 10022.
(3) Includes shares subject to options exercisable within 60 days of
, 2000.
(4) Includes shares subject to options exercisable within 60 days of
, 2000.
(5) All shares subject to options exercisable within 60 days of , 2000.
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<PAGE>
(6) Includes shares held by Welsh, Carson, Anderson & Stowe VII, L.P.,
shares held by Welsh, Carson, Anderson & Stowe VIII, L.P.,
shares held by WCAS Information Partners, L.P. and shares held by
WCAS Capital Partners II, L.P. Mr. McInerney serves as a general partner
of the general partner of each of these private equity funds. Also
includes shares held in trust for Mr. McInerney's family.
(7) Includes shares held by Welsh, Carson, Anderson & Stowe VII, L.P.,
shares held by Welsh, Carson, Anderson & Stowe VIII, L.P.,
shares held by WCAS Information Partners, L.P. and shares held by
WCAS Capital Partners II, L.P. Mr. Minicucci serves as a general partner
of the general partner of each of these private equity funds.
(8) Includes shares held by Welsh, Carson, Anderson & Stowe VII, L.P.,
shares held by Welsh, Carson, Anderson & Stowe VIII, L.P.,
shares held by WCAS Information Partners, L.P. and shares held by
WCAS Capital Partners II, L.P. Mr. Swani serves as a principal at WCAS.
(9) Includes shares subject to options exercisable within 60 days of
, 2000.
(10) Includes shares subject to options exercisable within 60 days of
, 2000.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately prior to the closing of this offering and effective upon the
filing of our second restated certificate of incorporation, our authorized
capital stock will consist of 200.0 million shares of common stock, $0.01 par
value per share, and 10.0 million shares of preferred stock, $0.01 par value
per share. As of , 2000, after giving effect to the redemption of a
portion of our Series A redeemable convertible preferred stock and the
conversion of all other outstanding shares of each series of our preferred
stock into common stock upon the closing of this offering, there were
outstanding shares of common stock held of record by 102 stockholders.
Common Stock
The holders of common stock are entitled to one vote per share on all
matters to be voted on by the stockholders. Subject to preferences that may be
applicable to any outstanding shares of preferred stock, holders of common
stock are entitled to receive ratably such dividends as may be declared by our
board of directors out of funds legally available therefor. In the event of our
liquidation, dissolution or winding down, holders of common stock are entitled
to share ratably in all assets remaining after payment of liabilities and the
liquidation preferences of any outstanding shares of preferred stock. Holders
of common stock have no preemptive, conversion, subscription or other rights.
There are no redemption or sinking fund provisions applicable to our common
stock. All outstanding shares of common stock are, and all shares of common
stock to be outstanding upon completion of this offering will be, fully paid
and nonassessable.
Preferred Stock
Under our second restated certificate of incorporation, our board has the
authority, without further action by stockholders, to issue up to
shares of preferred stock in one or more series and to fix the rights,
preferences, privileges, qualifications and restrictions granted to or imposed
upon such preferred stock, including dividend rights, conversion rights, voting
rights, rights and terms of redemption, liquidation preference and sinking fund
terms, any or all of which may be greater than the rights of our common stock.
The issuance of preferred stock could adversely affect the voting power of
holders of common stock and reduce the likelihood that such holders will
receive dividend payments and payments upon liquidation. The issuance could
have the effect of decreasing the market price of our common stock. The
issuance of preferred stock could have the effect of delaying, deterring or
preventing a change in control of our company. We have no present plans to
issue any shares of preferred stock.
Registration Rights
After this offering, the holders of shares of common stock will be
entitled to various rights with respect to the registration of such shares
under the Securities Act of 1933, or the Securities Act, pursuant to the
Registration Rights Agreement, dated as of December 21, 1995 with affiliates of
WCAS. In addition, the holders of shares of common stock will be
entitled to various rights with respect to the registration of such shares
under the Securities Act pursuant to the Rights Agreement dated as of November
24, 1999 with former stockholders of PTS. Under the terms of the these
agreements, if we propose to register any of our securities under the
Securities Act, either for our own account or for the account of other security
holders exercising registration rights, the holders are entitled to notice of
the registrations and are entitled, subject to limitations, to include shares
in the registration.
Under the terms of the Registration Rights Agreement, the holders
representing not less than one half of the restricted stock (as defined in that
agreement) then outstanding may require us to file a registration statement
under the Securities Act with respect to their shares on two occasions. Under
the terms of the Rights Agreement, beginning six months after the completion of
this offering, the holders representing at least one quarter of the restricted
shares (as defined in that agreement) then outstanding may also require us to
file a registration statement with respect to their shares on one occasion;
provided that the aggregate offering price to the public for the shares is at
least $5,000,000, before underwriting fees, expenses, commissions and
discounts. We are required to use our best efforts to complete each demand
registration.
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<PAGE>
Further, the holders under each of these agreements may require us to
register their shares on Form S-3 when such form becomes available to us.
Generally, we are required to bear all registration expenses incurred in
connection with any registrations under either agreement, other than any
underwriting discounts and selling commissions. These rights are subject to
conditions and limitations, among them, the right of the underwriters of an
offering to limit the number of shares included in a registration. Pursuant to
lock-up agreements with the underwriters of this offering, certain of the
holders entitled to these various registration rights have agreed to waive such
rights for 180 days following the date of this prospectus.
Anti-Takeover Measures
Delaware Law
We are subject to the provisions of Section 203 of the Delaware General
Corporate Law. In general, Section 203 prohibits a public Delaware corporation
from engaging in a "business combination" with an "interested stockholder" for
a period of three years after the date of the transaction in which the person
became an interested stockholder, unless the business combination is approved
by the board of directors and/or stockholders of the corporation in a
prescribed manner. A "business combination" includes mergers, asset sales or
other transactions resulting in a financial benefit to the stockholder. An
"interested stockholder" is a person who, together with affiliates and
associates, owns (or within three years, did own) 15% or more of the
corporation's voting stock. This statute could have the effect of delaying,
deferring or preventing a change in our control.
Charter and Bylaw Provisions
Our second restated certificate of incorporation, to be effective upon
consummation of the offering, specifies that the authorized number of directors
may be changed only by resolution of the board of directors and does not
include a provision for cumulative voting for directors. Under cumulative
voting, a minority stockholder holding a sufficient percentage of a class of
shares may be able to ensure the election of one or more directors. In
addition, our bylaws limit the ability of our stockholders to call a special
meeting of stockholders. These and other provisions contained in our second
restated certificate of incorporation and bylaws could delay or discourage
certain types of transactions involving an actual or potential change in
control of us (including transactions in which stockholders might otherwise
receive a premium for their shares over then current prices) and may limit the
ability of stockholders to remove current management or approve transactions
that stockholders may deem to be in their best interests and, therefore, could
adversely affect the price of our common stock.
The Nasdaq Stock Market's National Market
We will apply to list our common stock on the Nasdaq National Market under
the trading symbol "GOGK."
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is .
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no market for our common stock, and
we cannot assure you that a significant public market for our common stock will
develop or be sustained after this offering. As described below, no shares
currently outstanding will be available for sale immediately after this
offering due to certain contractual restrictions on resale. Sales of
substantial amounts of our common stock in the public market after the
restrictions lapse could adversely affect the prevailing market price and our
ability to raise equity capital in the future.
Upon completion of this offering, we will have outstanding shares of
common stock, assuming no exercise of the underwriters' over-allotment option
and no exercise of outstanding options. Of these shares, only the shares sold
in this offering will be freely tradable and transferable without restriction
under the Securities Act unless purchased by our affiliates.
The remaining shares of common stock held by existing stockholders
are restricted securities. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
described below under Rules 144, 144(k) or 701 promulgated under the Securities
Act. Of these restricted shares, assuming no exercise of the underwriter's
over-allotment option, shares will be available for resale in the public
market in reliance on Rule 144 and Rule 701 beginning 90 days following the
closing of this offering. However, of these shares are subject to lock-up
agreements. Assuming no exercise of the underwriters over-allotment option, the
remaining shares become eligible for resale in the public market at
various dates thereafter, of which shares are subject to lock-up
agreements.
Lock-Up Agreements. Certain of our stockholders and option holders have
agreed not to transfer or dispose of, directly or indirectly, any shares of our
common stock or any securities convertible into or exercisable or exchangeable
for shares of our common stock, for a period of 180 days after the date of this
prospectus, without the prior written consent of Credit Suisse First Boston
Corporation.
Rule 144. In general, under Rule 144, beginning 90 days after the date of
this prospectus, a person who has beneficially owned restricted securities for
at least one year would be entitled to sell within any three-month period a
number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding which
will equal approximately shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to manner-of-sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k). A person who is not deemed to have been one of our affiliates
at any time during the 90 days preceding a sale, and who has beneficially owned
the shares proposed to be sold for at least two years, is entitled to sell such
shares without complying with the manner of sale, public information, volume
limitation or notice provisions of Rule 144 discussed above.
Rule 701. In general, under Rule 701, any of our employees, consultants or
advisors who purchases or receives shares from us in connection with a
compensatory stock purchase plan or option plan or other written agreement will
be eligible to resell their shares beginning 90 days after the date of this
prospectus. Non-affiliates will be able to sell their shares subject only to
the manner-of-sale provisions of Rule 144. Affiliates will be able to sell
their shares without compliance with the holding period requirements of Rule
144.
65
<PAGE>
Registration Rights. Upon completion of this offering, the holders of shares
of our common stock will be entitled to rights with respect to the registration
of their shares under the Securities Act. See "Description of Capital Stock--
Registration Rights." Pursuant to lock-up agreements with the underwriters of
this offering, certain of the holders entitled to registration rights agreed to
waive such rights for 180 days following the date of this prospectus. Except
for shares purchased by affiliates, registration of their shares under the
Securities Act would result in such shares becoming freely tradable without
restriction under the Securities Act immediately upon the effectiveness of the
registration.
Stock Options. After this offering, we intend to file a registration
statement under the Securities Act covering approximately shares for sale
upon the exercise of outstanding stock options or shares reserved for future
issuance pursuant to our stock plan. The registration statement is expected to
be filed and become effective as soon as practicable after the closing of this
offering.
66
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the underwriting
agreement dated , 2000, we have agreed to sell to the underwriters named
below, for whom Credit Suisse First Boston Corporation, Banc of America
Securities LLC and U.S. Bancorp Piper Jaffray Inc. are acting as
representatives, the following respective numbers of shares of common stock:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
----------- ---------
<S> <C>
Credit Suisse First Boston Corporation..........................
Banc of America Securities LLC..................................
U.S. Bancorp Piper Jaffray Inc. ................................
---
Total.......................................................
===
</TABLE>
The underwriting agreement provides that the underwriters are obligated to
purchase all the shares of common stock in this offering if any are purchased,
other than those shares covered by the over-allotment option described below.
The underwriting agreement also provides that, if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offering of common stock may be terminated.
We and the selling stockholders have granted to the underwriters a 30-day
option to purchase on a pro rata basis up to additional shares from us and
an aggregate of additional shares from the selling stockholders at the
initial public offering price less the underwriting discounts and commissions.
The option may be exercised only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at
the public offering price on the cover page of this prospectus and to selling
group members at that price less a concession of $ per share. The
underwriters and selling group members may allow a discount of $ per share
on sales to other broker/dealers. After the initial public offering, the public
offering price and concession and discount to broker/dealers may be changed by
the representatives.
The following table summarizes the compensation and estimated expenses we
and the selling stockholders will pay.
<TABLE>
<CAPTION>
Per Share Total
----------------------------- -----------------------------
Without With Without With
Over-Allotment Over-Allotment Over-Allotment Over-Allotment
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Underwriting discounts
and commissions paid by
us..................... $ $ $ $
Expenses payable by us.. $ $ $ $
Underwriting discounts
and commissions paid by
selling stockholders... $ $ $ $
Expenses payable by the
selling stockholders $ $ $ $
</TABLE>
The underwriters have informed us that discretionary sales of the shares of
common stock being offered will not be made.
We intend to use $ of the net proceeds from the sale of the common
stock to repay indebtedness owed by us to Bank of America. Banc of America
Securities LLC, one of the underwriters of this offering, is an indirect,
wholly-owned subsidiary of Bank of America.
67
<PAGE>
Accordingly, the offering is being made in compliance with the requirements of
Rule 2710(c)(8) of the National Association of Securities Dealers, Inc. Conduct
Rules. This rule provides generally that if more than 10% of the net proceeds
from the sale of stock, not including underwriting compensation, is paid to the
underwriters or their affiliates, the initial public offering price of the
stock may not be higher than that recommended by a "qualified independent
underwriter" meeting certain standards. Accordingly, Credit Suisse First Boston
Corporation is assuming the responsibilities of acting as the qualified
independent underwriter in pricing the offering and conducting due diligence.
The initial public offering price of the shares of common stock is no higher
than the price recommended by Credit Suisse First Boston Corporation.
We have agreed that we will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, or file with the Commission a
registration statement under the Securities Act relating to, any shares of our
common stock or securities convertible into or exchangeable or exercisable for
any shares of our common stock, or publicly disclose the intention to make any
such offer, sale, pledge, disposition or filing, without the prior written
consent of Credit Suisse First Boston Corporation for a period of 180 days
after the date of this prospectus except issuances pursuant to the exercise of
employee stock options outstanding on the date of this prospectus.
Our officers and directors and some of our stockholders and optionholders
have agreed that they will not offer, sell, contract to sell, pledge or
otherwise dispose of, directly or indirectly, any shares of our common stock or
securities convertible into or exchangeable or exercisable for any shares of
our common stock, enter into a transaction which would have the same effect, or
enter into any swap, hedge or other arrangement that transfers, in whole or in
part, any of the economic consequences of ownership of our common stock,
whether any of these transactions are to be settled by delivery of our common
stock or other securities, in cash or otherwise, or publicly disclose the
intention to make any offer, sale, pledge of dispositions, or to enter into any
transaction, swap, hedge or other arrangement, without, in each case, the prior
written consent of Credit Suisse First Boston Corporation for a period of 180
days after the date of this prospectus.
The underwriters have reserved for sale, at the initial public offering
price, up to shares of the common stock for employees, directors and other
persons associated with us who have expressed an interest in purchasing common
stock in the offering. The number of shares available for sale to the general
public in this offering will be reduced to the extent those persons purchase
reserved shares. Any reserved shares not so purchased will be offered by the
underwriters to the general public on the same terms as the other shares.
We and the selling stockholders have agreed to indemnify the underwriters
against liabilities under the Securities Act, or contribute to payments which
the underwriters may be required to make in that respect.
We will apply to list the shares of common stock on The Nasdaq Stock
Market's National Market, under the symbol "GOGK."
Prior to this offering, there has been no public market for our common
stock. The initial public offering price was determined by negotiation between
us and the representatives. The principal factors considered in determining the
public offering price included:
. the information set forth in this prospectus and otherwise available to
the representatives;
. the history of, and the prospects for, Global Knowledge and the industry
in which it competes;
. an assessment of our management;
. the prospects for, and the timing of, future earnings of Global
Knowledge;
. the present state of Global Knowledge's development and its current
financial condition;
. the general condition of the securities markets at the time of the
offering;
. the recent market prices of, and the demand for, publicly-traded common
stock of companies in businesses similar to those of Global Knowledge;
and
. market conditions for initial public offerings.
68
<PAGE>
In connection with the offering, the underwriters may engage in stabilizing
transactions, over-allotment transactions, syndicate covering transactions and
penalty bids in accordance with Regulation M under the Exchange Act.
. Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
. Over-allotment involves sales by the underwriters of shares in excess of
the number of shares the underwriters are obligated to purchase, which
creates a syndicate short position. The short position may be either a
covered short positions or a naked short position. In a covered short
position, the number of shares over-alloted by the underwriters is not
greater than the number of shares that they may purchase in the over-
allotment option. In a naked short position, the number of shares
involved is greater than the number of shares in the over-allotment
option. The underwriters may close out any short position by either
exercising the over-allotment option and/or purchasing shares in the open
market.
. Syndicate covering transactions involve purchases of the common stock in
the open market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of shares to
close out the short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market as
compared to the price at which they may purchase shares through the over-
allotment option. If the underwriters sell more shares than could be
covered by the over-allotment option, a naked short position, the
position can only be closed out by buying shares in the open market. A
naked short positions is more likely to be created if the underwriters
are concerned that there could be downward pressure on the price of the
shares in the open market after pricing that could adversely affect
investors who purchase in the offering.
. Penalty bids permit the representatives to reclaim a selling concession
from a syndicate member when the common stock originally sold by that
syndicate member is purchased in a stabilizing transaction or in a
syndicate covering transaction to cover syndicate short positions.
These stabilizing transactions, syndicate covering transactions and penalty
bids may have the effect of raising or maintaining the market price of our
common stock or preventing or retarding a decline in the market price of the
common stock. As a result, the price of the common stock may be higher than the
price that might otherwise exist in the open market. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
A prospectus in electronic format may be made available on the web sites
maintained by one or more of the underwriters participating in this offering.
The representatives may agree to allocate a number of shares to underwriters
for sale to their online brokerage account holders. Internet distributions will
be allocated by the underwriters that will make internet distributions on the
same basis as other allocations.
69
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the common stock in Canada is being made only on a
private placement basis exempt from the requirement that we prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of common stock are effected. Accordingly, any resale of the common
stock in Canada must be made in accordance with applicable securities laws
which will vary depending on the relevant jurisdiction, and which may require
resales to be made in accordance with available statutory exemptions or
pursuant to a discretionary exemption granted by the applicable Canadian
securities regulatory authority. Purchasers are advised to seek legal advice
prior to any resale of the common stock.
Representations of Purchasers
Each purchaser of common stock in Canada who receives a purchase
confirmation will be deemed to represent to us and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities law to purchase such common stock without the
benefit of a prospectus qualified under such securities laws, (ii) where
required by law, that such purchaser is purchasing as principal and not as
agent, and (iii) such purchaser has reviewed the text above under "Resale
Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Ontario securities law. As a result, Ontario purchasers must rely on other
remedies that may be available, including common law rights of action for
damages or rescission or rights of action under the civil liability provisions
of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein may be located outside of Canada and, as a result, it may not be
possible for Canadian purchasers to effect service of process within Canada
upon the issuer or such persons. All or a substantial portion of the assets of
the issuer and such persons may be located outside of Canada and, as a result,
it may not be possible to satisfy a judgment against the issuer or such persons
in Canada or to enforce a judgment obtained in Canada courts against such
issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of common stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities commission a report within ten days of the sale of any
common stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from us. Only one such report
must be filed in respect of common stock acquired on the same date and under
the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of common stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the common
stock in their particular circumstances and with respect to the eligibility of
the common stock for investment by the purchaser under relevant Canadian
legislation.
70
<PAGE>
LEGAL MATTERS
Reboul, MacMurray, Hewitt, Maynard & Kristol will pass upon the validity of
the shares of our common stock offered by this prospectus and certain other
legal matters. Katten Muchin Zavis will pass upon certain legal matters for the
underwriters. Several members of Reboul, MacMurray, Hewitt, Maynard & Kristol
have an indirect interest in an aggregate shares of our common stock.
EXPERTS
The consolidated financial statements and financial statement schedule of
Global Knowledge, Inc. and subsidiaries as of December 31, 1999 and 1998 and
for each of the three years in the period ended December 31, 1999 and the
consolidated financial statements of Professional Training Services, Inc. and
subsidiaries as of September 30, 1999 and 1998 and for each of the three years
in the period ended September 30, 1999, which are included in this prospectus
and elsewhere in this registration statement, have been audited by Arthur
Andersen LLP, independent public accountants, as indicated in their reports
with respect thereto, and are included in reliance upon the authority of said
firm as experts in giving said reports.
The consolidated financial statements of GeoTrain Corporation and
subsidiaries as of December 31, 1999 and 1998 and for each of the three years
in the period ended December 31, 1999 which are included in this prospectus and
elsewhere in this registration statement, have been audited by ,
independent public accountants, as indicated in their report with respect
thereto, and are included in reliance upon the authority of said firm as
experts in giving said reports.
WHERE YOU CAN FIND ADDITIONAL INFORMATION ABOUT US
We have filed with the Commission a registration statement on Form S-1 under
the Securities Act, with respect to the common stock offered by this
prospectus. As permitted by the rules and regulations of the Commission, this
prospectus, which is a part of the registration statement, omits certain
information, exhibits, schedules and undertakings set forth in the registration
statement. For further information pertaining to our company and the common
stock offered hereby, reference is made to such registration statement and the
exhibits and schedules thereto. Statements contained in this prospectus as to
the contents or provisions of any contract or other document filed as an
exhibit referred to herein are not necessarily complete, and in each instance
reference is made to the copy of such contract or other document filed as an
exhibit to the registration statement, each such statement being qualified in
all respects by such reference. A copy of the registration statement may be
inspected without charge at the office of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549, and at the Commission's regional offices located
at the Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New
York 10048. Copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. For further information, please call the Commission at 1-800-SEC-
0330. In addition, registration statements and certain other filings made with
the commission through its Electronic Data Gathering, Analysis and Retrieval
system, including our registration statement and all exhibits and amendments to
our registration statements, are publicly available through the Commission's
Website at http://www.sec.gov.
As a result of this offering we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the
Commission.
71
<PAGE>
GLOBAL KNOWLEDGE, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS OF
GLOBAL KNOWLEDGE, INC AND SUBSIDIARIES:
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999 and June
30, 2000 (unaudited)................................................... F-3
Consolidated Statements of Operations for the Years Ended December 31,
1997, 1998 and 1999 and for the Six Months Ended June 30, 1999 and 2000
(unaudited)............................................................ F-4
Consolidated Statements of Changes in Redeemable Convertible Preferred
Stock and Stockholders' Deficit for the Years Ended December 31, 1997,
1998 and 1999 and for the Six Months Ended June 30, 2000 (unaudited)... F-5
Consolidated Statements of Cash Flows for the Years Ended December 31,
1997, 1998 and 1999 and for the Six Months Ended June 30, 1999 and 2000
(unaudited)............................................................ F-6
Notes to Consolidated Financial Statements.............................. F-7
FINANCIAL STATEMENTS OF COMPLETED ACQUISITIONS
(INCLUDED PURSUANT TO REGULATION S-X, RULE 3-05):
GEOTRAIN CORPORATION AND SUBSIDIARIES:
Independent Auditor's Report.............................................. F-24
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1997 and 1998 and
September 30, 1999 (unaudited)......................................... F-25
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998 and for the Nine Months Ended September 30, 1998
and 1999 (unaudited)................................................... F-26
Consolidated Statements of Changes in Stockholders' Equity for the Years
Ended December 31, 1996, 1997 and 1998................................. F-27
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998 and for the Nine Months Ended September 30, 1998
and 1999 (unaudited)................................................... F-28
Notes to Consolidated Financial Statements.............................. F-29
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES:
Report of Independent Public Accountants.................................. F-42
Consolidated Financial Statements:
Consolidated Balance Sheets as of September 30, 1998 and 1999........... F-43
Consolidated Statements of Operations for the Years Ended September 30,
1997, 1998 and 1999.................................................... F-44
Consolidated Statements of Changes in Stockholders' Equity (Deficit) for
the Years Ended September 30, 1997, 1998 and 1999...................... F-45
Consolidated Statements of Cash Flows for the Years Ended September 30,
1997, 1998 and 1999.................................................... F-46
Notes to Consolidated Financial Statements.............................. F-47
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Global Knowledge, Inc.:
We have audited the accompanying consolidated balance sheets of Global
Knowledge, Inc. (a Delaware corporation) and subsidiaries as of December 31,
1998 and 1999 and the related consolidated statements of operations, redeemable
convertible preferred stock and stockholders' deficit, and cash flows for each
of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Global Knowledge, Inc. and
subsidiaries as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted
in the United States.
Boston, Massachusetts
July 27, 2000
F-2
<PAGE>
GLOBAL KNOWLEDGE, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
December 31, Pro Forma
-------------------- June 30, June 30,
1998 1999 2000 2000
--------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents........ $ 8,567 $ 14,215 $ 6,321
Accounts receivable, less
reserves for uncollectable
accounts of $1,404, $4,076 and
$4,913 in 1998, 1999 and 2000,
respectively.................... 32,543 48,991 66,307
Prepaid expenses and other
current assets.................. 7,743 13,180 15,346
--------- --------- ---------
Total current assets......... 48,853 76,386 87,974
Property and Equipment, less
accumulated depreciation and
amortization...................... 11,612 22,679 39,670
Intangible Assets, less accumulated
amortization...................... 33,521 132,638 124,022
Other Assets....................... 1,010 2,012 2,293
--------- --------- ---------
$ 94,996 $ 233,715 $ 253,959
========= ========= =========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
DEFICIT
Current Liabilities:
Revolving line of credit......... $ 54,000 $ 54,000 $ 18,200
Current portion of term note
payable to a bank............... 5,000 6,000 18,000
Accounts payable................. 11,619 23,676 23,129
Accrued expenses................. 45,192 54,513 63,010
Current portion of capital lease
obligations..................... 201 3,656 2,718
Deferred revenue and customer
advances........................ 11,819 22,473 31,595
--------- --------- ---------
Total current liabilities.... 127,831 164,318 156,652
Subordinated Notes Payable to
Affiliates of Principal
Stockholder....................... 62,109 71,758 76,947
Long-Term Portion of Term Note
Payable to a Bank................. 20,000 14,000 --
Long-Term Portion of Capital Lease
Obligations....................... 403 4,787 9,610
--------- --------- ---------
Total liabilities............ 210,343 254,863 243,209
--------- --------- ---------
Commitments and Contingencies (Note
5)
Redeemable Convertible Preferred
Stock, par value $1.00 per share,
at redemption value:
Series A--
Authorized--1,000,000 shares
Issued and outstanding--
450,000, 800,948, and 974,018,
shares at December 31, 1998
and 1999, and June 30, 2000,
respectively, and shares
at June 30, 2000 pro forma.... 51,294 89,514 109,571
Series B--
Authorized--6,100,000 shares
Issued and outstanding--
4,295,796 at December 31, 1999
and June 30, 2000 and no
shares at June 30, 2000 pro
forma......................... -- 21,586 22,234
--------- --------- ---------
Total redeemable convertible
preferred stock............. 51,294 111,100 131,805
--------- --------- ---------
Stockholders' Deficit:
Common stock, par value $0.01 per
share--
Authorized--160,000,000 shares
Issued and outstanding--
51,835,730, 101,909,836,
123,357,633 and
shares at December 31, 1998
and 1999, June 30, 2000 and
June 30, 2000 pro forma,
respectively.................. 518 1,019 1,234
Additional paid-in capital....... 61,447 132,135 160,317
Accumulated deficit.............. (226,276) (262,793) (277,813)
Cumulative translation
adjustment...................... (2,330) (2,609) (4,793)
--------- --------- ---------
Total stockholders' deficit.. (166,641) (132,248) (121,055)
--------- --------- ---------
$ 94,996 $ 233,715 $ 253,959
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
GLOBAL KNOWLEDGE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- ------------------
1997 1998 1999 1999 2000
--------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue.................... $ 192,880 $217,301 $256,720 $116,084 $201,627
Cost of Revenue............ 115,267 125,232 148,382 67,007 114,928
--------- -------- -------- -------- --------
Gross margin........... 77,613 92,069 108,338 49,077 86,699
--------- -------- -------- -------- --------
Operating Expenses:
Sales and marketing...... 41,698 47,720 62,167 28,413 46,280
General and
administrative.......... 59,376 38,438 36,916 17,085 24,961
Product development...... 5,220 5,293 2,694 950 6,334
Restructuring............ 7,484 4,881 2,195 -- 950
Acquired in-process
research and
development............. 2,404 -- 1,900 -- --
Amortization of
intangibles............. 51,820 18,051 18,004 7,957 9,867
--------- -------- -------- -------- --------
Total operating
expenses.............. 168,002 114,383 123,876 54,405 88,392
--------- -------- -------- -------- --------
Loss from Operations....... (90,389) (22,314) (15,538) (5,328) (1,693)
Interest Expense........... (11,826) (14,409) (15,529) (7,556) (7,947)
Interest Income............ 114 290 332 172 196
Other Expenses............. (1,393) (1,774) (1,467) (1,192) (1,477)
--------- -------- -------- -------- --------
Loss before provision
for income taxes...... (103,494) (38,207) (32,202) (13,904) (10,921)
Provision for Income
Taxes..................... 1,219 2,100 1,083 468 701
--------- -------- -------- -------- --------
Net loss............... (104,713) (40,307) (33,285) (14,372) (11,622)
Accretion of Preferred
Stock Dividend............ 2,361 2,700 3,232 1,350 3,398
--------- -------- -------- -------- --------
Net Loss Applicable to
Common Stockholders....... $(107,074) $(43,007) $(36,517) $(15,722) $(15,020)
========= ======== ======== ======== ========
Net Loss Per Common Share:
Basic and diluted........ $ (2.52) $ (0.88) $ (0.55) $ (0.27) $ (0.13)
========= ======== ======== ======== ========
Pro forma basic and
diluted................. $ $
======== ========
Shares Used to Compute Net
Loss Per Common Share:
Basic and diluted........ 42,565 48,772 66,456 57,333 116,041
========= ======== ======== ======== ========
Pro forma basic and
diluted.................
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
GLOBAL KNOWLEDGE, INC.
CONSOLIDATED STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' DEFICIT
for the Years Ended December 31, 1997, 1998 and 1999 and for the six months
ended June 30, 2000 (unaudited)
(in thousands, except share and per share amounts)
<TABLE>
<CAPTION>
Redeemable Convertible Preferred
Stock
-------------------------------------
Total
Series A Series B Common Stock Additional Cumulative Stockholders'
----------------- ------------------- --------------------- Paid-in Translation Accumulated Equity
Shares $1.00 Par Shares $1.00 Par Shares $0.01 Par Capital Adjustment Deficit (Deficit)
------- --------- --------- --------- ----------- --------- ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1996............ 200,000 $ 21,233 -- $ -- 20,000,000 $ 200 $ 19,800 $ (828) $ (76,195) $ (57,023)
Options
exercised....... -- -- -- -- 26,250 -- 26 -- -- 26
Issuance of
common stock in
conjunction with
issuance of
notes payable... -- -- -- -- 4,166,000 42 4,124 -- -- 4,166
Sale of
preferred and
common stock.... 250,000 25,000 -- -- 23,750,000 237 29,763 -- -- 30,000
Issuance of
common stock in
lieu of
interest........ -- -- -- -- 350,000 4 696 -- -- 700
Preferred stock
dividend
accreted........ -- 2,361 -- -- -- -- -- -- (2,361) (2,361)
Change in
cumulative
translation
adjustment...... -- -- -- -- -- -- -- (2,892) -- (2,892)
Net loss........ -- -- -- -- -- -- -- -- (104,713) (104,713)
Comprehensive
net loss for the
year ended
December 31,
1997............ -- -- -- -- -- -- -- -- -- --
------- -------- --------- ------- ----------- ------ -------- ------- --------- ---------
Balance,
December 31,
1997............ 450,000 48,594 -- -- 48,292,250 483 54,409 (3,720) (183,269) (132,097)
Options
exercised....... -- -- -- -- 14,313 -- 14 -- -- 14
Conversion of
note payable to
common stock.... -- -- -- -- 3,000,000 30 5,970 -- -- 6,000
Sale of common
stock........... -- -- -- -- 500,000 5 995 -- -- 1,000
Issuance of
common stock for
services........ -- -- -- -- 29,167 -- 59 -- -- 59
Preferred stock
dividend
accreted........ -- 2,700 -- -- -- -- -- -- (2,700) (2,700)
Change in
cumulative
translation
adjustment...... -- -- -- -- -- -- -- 1,390 -- 1,390
Net loss........ -- -- -- -- -- -- -- -- (40,307) (40,307)
Comprehensive
net loss for the
year ended
December 31,
1998............ -- -- -- -- -- -- -- -- -- --
------- -------- --------- ------- ----------- ------ -------- ------- --------- ---------
Balance,
December 31,
1998............ 450,000 51,294 -- -- 51,835,730 518 61,447 (2,330) (226,276) (166,641)
Sale of
preferred
stock........... 350,948 35,095 -- -- -- -- -- -- -- --
Sale of common
stock........... -- -- -- -- 50,041,856 501 70,654 -- -- 71,155
Issuance of
preferred stock
for acquisition
of a business... -- -- 4,295,796 21,479 -- -- -- -- -- --
Options
exercised....... -- -- -- -- 32,250 -- 34 -- -- 34
Preferred stock
dividend
accreted........ -- 3,125 -- 107 -- -- -- -- (3,232) (3,232)
Change in
cumulative
translation
adjustment...... -- -- -- -- -- -- -- (279) -- (279)
Net loss........ -- -- -- -- -- -- -- -- (33,285) (33,285)
Comprehensive
net loss for the
year ended
December 31,
1999............ -- -- -- -- -- -- -- -- -- --
------- -------- --------- ------- ----------- ------ -------- ------- --------- ---------
Balance,
December 31,
1999............ 800,948 89,514 4,295,796 21,586 101,909,836 1,019 132,135 (2,609) (262,793) (132,248)
Sale of
preferred
stock........... 173,070 17,307 -- -- -- -- -- -- -- --
Sale of common
stock........... -- -- -- -- 20,979,547 210 27,483 -- -- 27,693
Options
exercised....... -- -- -- -- 468,250 5 699 -- -- 704
Preferred stock
dividend
accreted........ -- 2,750 -- 648 -- -- -- -- (3,398) (3,398)
Change in
cumulative
translation
adjustment...... -- -- -- -- -- -- -- (2,184) -- (2,184)
Net loss........ -- -- -- -- -- -- -- -- (11,622) (11,622)
Comprehensive
net loss for the
period ended
June 30, 2000... -- -- -- -- -- -- -- -- -- --
------- -------- --------- ------- ----------- ------ -------- ------- --------- ---------
Balance, June
30, 2000
(unaudited)..... 974,018 $109,571 4,295,796 $22,234 123,357,633 $1,234 $160,317 $(4,793) $(277,813) $(121,055)
======= ======== ========= ======= =========== ====== ======== ======= ========= =========
Pro forma
conversion of
redeemable
preferred stock
to
common stock.... -- -- -- -- -- -- -- -- -- --
------- -------- --------- ------- ----------- ------ -------- ------- --------- ---------
Balance, June
30, 2000, pro
forma
(unaudited)..... -- -- -- -- -- -- -- -- -- --
======= ======== ========= ======= =========== ====== ======== ======= ========= =========
<CAPTION>
Other
Comprehensive
Loss
-------------
<S> <C>
Balance,
December 31,
1996............ $ (75,790)
Options
exercised....... --
Issuance of
common stock in
conjunction with
issuance of
notes payable... --
Sale of
preferred and
common stock.... --
Issuance of
common stock in
lieu of
interest........ --
Preferred stock
dividend
accreted........ --
Change in
cumulative
translation
adjustment...... (2,892)
Net loss........ (104,713)
-------------
Comprehensive
net loss for the
year ended
December 31,
1997............ (107,605)
-------------
Balance,
December 31,
1997............ (183,395)
Options
exercised....... --
Conversion of
note payable to
common stock.... --
Sale of common
stock........... --
Issuance of
common stock for
services........ --
Preferred stock
dividend
accreted........ --
Change in
cumulative
translation
adjustment...... 1,390
Net loss........ (40,307)
-------------
Comprehensive
net loss for the
year ended
December 31,
1998............ (38,917)
-------------
Balance,
December 31,
1998............ (222,312)
Sale of
preferred
stock........... --
Sale of common
stock........... --
Issuance of
preferred stock
for acquisition
of a business... --
Options
exercised....... --
Preferred stock
dividend
accreted........ --
Change in
cumulative
translation
adjustment...... (279)
Net loss........ (33,285)
-------------
Comprehensive
net loss for the
year ended
December 31,
1999............ (33,564)
-------------
Balance,
December 31,
1999............ (255,876)
Sale of
preferred
stock........... --
Sale of common
stock........... --
Options
exercised....... --
Preferred stock
dividend
accreted........ --
Change in
cumulative
translation
adjustment...... (2,184)
Net loss........ (11,622)
-------------
Comprehensive
net loss for the
period ended
June 30, 2000... (13,806)
-------------
Balance, June
30, 2000
(unaudited)..... $(269,682)
=============
Pro forma
conversion of
redeemable
preferred stock
to
common stock.... --
-------------
Balance, June
30, 2000, pro
forma
(unaudited)..... --
=============
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GLOBAL KNOWLEDGE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- ------------------
1997 1998 1999 1999 2000
--------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net loss................... $(104,713) $(40,307) $(33,285) $(14,372) $(11,622)
Adjustments to reconcile
net loss to net cash
provided by (used in)
operating activities--
Depreciation and
amortization............. 63,170 27,790 26,317 12,148 15,690
Accretion of note
discount................. 649 730 822 399 449
Issuance of common stock
in lieu of interest...... 700 -- -- -- --
Charge for acquired in-
process research and
development.............. 2,404 -- 1,900 -- --
Interest expense on notes
payable to affiliates of
principal stockholders... -- 6,000 8,828 4,377 4,593
Change in assets and
liabilities, net of
effects of acquisitions--
Accounts receivable...... 1,507 (6,184) (2,779) (5,672) (18,883)
Prepaid expenses and
other assets............ (3,203) 837 (2,539) (1,625) (2,945)
Accounts payable......... (13,083) (4,889) 4,333 6,039 (1,529)
Deferred revenue and
customer advances....... 475 358 2,970 71 8,634
Accrued expenses......... 8,051 9,804 (763) (5,121) 6,582
--------- -------- -------- -------- --------
Net cash provided by
(used in) operating
activities............. (44,043) (5,861) 5,804 (3,756) 969
--------- -------- -------- -------- --------
Cash Flows from Investing
Activities:
Acquisitions of businesses,
net of cash acquired...... (59,619) (7,964) (95,745) (7,536) (12,109)
Additions to property and
equipment................. (7,446) (3,474) (4,083) (2,794) (4,919)
--------- -------- -------- -------- --------
Net cash used in
investing activities... (67,065) (11,438) (99,828) (10,330) (17,028)
--------- -------- -------- -------- --------
Cash Flows from Financing
Activities:
Principal payments under
capital leases............ -- (572) (1,957) (978) (2,910)
Proceeds from notes payable
to affiliate of principal
stockholder,
net of discount........... 56,483 -- -- -- --
Net proceeds (payments) on
borrowings from a bank.... 45,500 9,100 (5,000) (2,500) (35,800)
Repayments of notes payable
to affiliates of principal
stockholder............... (45,000) -- -- -- --
Proceeds from sale of
redeemable convertible
preferred stock, net of
issuance costs............ 25,000 -- 35,095 -- 17,307
Proceeds from sale of
common stock and option
exercises................. 34,192 1,014 71,189 15,000 28,397
--------- -------- -------- -------- --------
Net cash provided by
financing activities... 116,175 9,542 99,327 11,522 6,994
--------- -------- -------- -------- --------
Effect of Exchange Rate
Changes on Cash............ (644) 1,742 345 2,092 1,171
--------- -------- -------- -------- --------
Net Increase (Decrease) in
Cash and Cash Equivalents.. 4,423 (6,015) 5,648 (472) (7,894)
Cash and Cash Equivalents,
beginning of period........ 10,159 14,582 8,567 8,567 14,215
--------- -------- -------- -------- --------
Cash and Cash Equivalents,
end of period.............. $ 14,582 $ 8,567 $ 14,215 $ 8,095 $ 6,321
========= ======== ======== ======== ========
Supplemental Disclosure of
Cash Flow Information:
Cash paid for interest..... $ 7,460 $ 5,293 $ 5,663 $ 2,631 $ 2,215
========= ======== ======== ======== ========
Cash paid for income
taxes..................... $ 177 $ 1,051 $ 2,366 $ 1,157 $ 563
========= ======== ======== ======== ========
Supplemental Disclosure of
Noncash Activity:
Property and equipment
acquired under capital
leases.................... $ -- $ 729 $ 7,075 $ 125 $ 6,886
========= ======== ======== ======== ========
In connection with the
acquisition of businesses,
the following noncash
transactions occurred--
Fair value of assets
acquired................. $ 66,516 $ 9,456 $148,276 $ 9,357 $ 13,359
========= ======== ======== ======== ========
Liabilities assumed....... (5,123) (1,367) (20,410) (1,256) (1,250)
========= ======== ======== ======== ========
Less cash acquired........ (1,774) (125) (2,642) (565) --
========= ======== ======== ======== ========
Less preferred stock
issued................... -- -- (21,479) -- --
========= ======== ======== ======== ========
Contingent consideration.. -- -- (8,000) -- --
========= ======== ======== ======== ========
Cash paid, net of cash
acquired................. $ 59,619 $ 7,964 $ 95,745 $ 7,536 $ 12,109
========= ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(including data related to unaudited periods)
(1) NATURE OF OPERATIONS
Global Knowledge Inc. (the Company; formerly GKN Holdings, Inc.) is the
world's largest independent information technology education integrator
offering comprehensive training and software solutions, including assessment,
curriculum design, training delivery and program management. The Company
focuses on mission critical networking systems and applications that manage the
flow of voice, data and image through telecommunications and information
systems networks, while addressing the compelling need for skilled IT
professionals responsible for designing, implementing and supporting networking
systems within this rapidly changing global infrastructure.
The Company's clients are primarily leading technology, internet
infrastructure, and voice and data telecommunications companies, including
AT&T, Cisco, Compaq, Deutsche Telekom, Ericsson, Korea Telecom, MCI, Nortel
Networks, NTT and Sprint.
(2) PRO FORMA INFORMATION
The Company filed a registration statement with the Securities and Exchange
Commission (SEC) to permit the Company to sell shares of its common stock to
the public. The completion of the Company's initial public offering is subject
to review and approval of the registration statement by the SEC and the
purchase of the shares offered for sale. In conjunction with the consummation
of the initial public offering, the Company intends to redeem $20.0 million of
Series A redeemable convertible preferred stock, convert all remaining shares
of Series A redeemable preferred stock into common stock at the initial public
offering price and convert all outstanding shares of Series B redeemable
convertible preferred stock into common stock at 80% of the initial public
offering price. The unaudited pro forma balance sheet and statements of changes
in stockholders' deficit are presented to give effect to the redemption of
$20.0 million of Series A redeemable convertible preferred stock and the
conversion of all other Series A and B redeemable convertible preferred stock
into common stock, all of which will occur upon the consummation of the initial
public offering.
(3) ACQUISITIONS
The Company has consummated a number of acquisitions during the years ended
December 31, 1997, 1998 and 1999, and for the six months ended June 30, 2000.
The purchase price, net of cash acquired, for these acquisitions is as follows
(in thousands):
<TABLE>
<CAPTION>
Purchase
Price(a)
--------
<S> <C>
1997
American Research Group Inc..................................... $ 59,619
========
1998
ICON............................................................ $ 7,661
Other........................................................... 303
--------
$ 7,964
========
1999
Professional Training Services, Inc............................. $ 59,016
GeoTrain Corporation............................................ 51,139
VMX Group....................................................... 6,402
Institute ERIS.................................................. 4,353
Other........................................................... 4,314
--------
$125,224
========
2000
Nortel Networks' North American Enterprise Solutions business
(NEST)(b)...................................................... $ 12,109
========
</TABLE>
F-7
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(a) All of the above acquisitions were paid for in cash with the exception of
PTS, which included contingent consideration of $8.0 million and the
issuance of 4,295,819 shares of Series B redeemable convertible preferred
stock which was valued at its liquidation value of $21.5 million.
(b) In connection with the Company's entering into a multi-year contract with
Nortel Networks to provide training to its employees and customers in North
America, the Company acquired certain assets and assumed certain
liabilities of NEST. In accordance with Accounting Principles Board Opinion
No. 16, this transaction has been accounted for as an acquisition of a
business.
In connection with these acquisitions, certain key employees are entitled to
up to $2.6 million of bonus payments as an incentive to remain with the
Company. These bonuses are payable throughout fiscal year 2000. The bonuses
will be charged to operations over the period earned. The Company charged $0.5
and $1.3 million of such bonuses to operations for the year ended December 31,
1999 and for the six months ended June 30, 2000, respectively.
The above acquisitions have been accounted for using the purchase method of
accounting for business combinations and the results of operations of the
acquired companies have been included in the accompanying consolidated
financial statements from each acquired entity's respective date of
acquisition. For each acquisition, the purchase price was allocated to assets
acquired and liabilities assumed based on estimated fair market values existing
at the date of acquisition. The allocations, in certain cases, were based upon
independent third-party appraisals using standard valuation techniques and
methodologies. Acquired identified intangible assets include covenants not-to-
compete, acquired know-how, tradenames, existing product technology, assembled
work force, customer lists, in-process research and development, as well as the
estimated value of the Cisco relationship associated with the GeoTrain
acquisition. The portion of the purchase price allocated to acquired in-process
research and development is related to projects that had not yet reached
technological feasibility and did not have a future alternative use. These
amounts were charged to expense as of the acquisition date. The excess of the
purchase price over the estimated fair market value of net tangible and
identified intangible assets acquired is reflected as goodwill and is included
in intangible assets in the accompanying consolidated balance sheets.
The aggregate purchase price of the acquisitions was allocated as follows
(in thousands):
<TABLE>
<CAPTION>
December 31,
------------------------- June 30,
1997 1998 1999 2000
------- ------ -------- --------
<S> <C> <C> <C> <C>
Inventory and other current assets... $ 7,889 $ 912 $ 21,040 $ 120
Property and equipment............... 2,606 625 8,702 11,950
Covenant not-to-compete.............. 2,238 151 23 --
Acquired know-how.................... 29,303 3,781 7,111 --
Goodwill............................. 22,076 3,987 62,964 1,289
Cisco relationship................... -- -- 12,740 --
Tradenames........................... -- -- 14,900 --
In-process research and development.. 2,404 -- 1,900 --
Existing product technology.......... -- -- 11,300 --
Assembled workforce.................. -- -- 2,170 --
Customer lists....................... -- -- 3,800 --
Liabilities assumed.................. (5,123) (1,367) (18,784) (1,250)
------- ------ -------- -------
Purchase price..................... $61,393 $8,089 $127,866 $12,109
======= ====== ======== =======
</TABLE>
F-8
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
Had each of these acquisitions been consummated on January 1, 1998, the
unaudited pro forma revenue and net loss for the Company for the years ended
December 31, 1998, 1999 and the six months ended June 30, 2000 would have been
as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
December 31,
------------------ June 30,
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Pro forma revenue.......................... $343,442 $384,725 $211,687
Pro forma net loss applicable to common
stockholders.............................. (67,902) (33,617) (15,598)
Pro forma net loss per common share........ (1.39) (0.51) (0.13)
</TABLE>
(4) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All material intercompany balances and
transactions have been eliminated in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expense during
the reporting period. Actual results could differ from those estimates.
(c) Unaudited Interim Information
The financial information as of June 30, 2000 and for the six months ended
June 30, 1999 and 2000 is unaudited. In the opinion of management, such
information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of such periods.
The interim results are not necessarily indicative of results to be expected
for the year ending December 31, 2000.
(d) Cash and Cash Equivalents
Cash equivalents primarily represent overnight investments in money market
funds that are convertible to a known amount of cash and carry an insignificant
market risk.
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method. The cost of maintenance and repairs is charged to
operations as incurred and significant renewals and betterments are
capitalized.
F-9
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
Property and equipment consisted of the following at December 31, 1998 and
1999 and June 30, 2000 (in thousands):
<TABLE>
<CAPTION>
Estimated December 31,
Useful --------------- June 30,
Lives 1998 1999 2000
------------- ------- ------- --------
<S> <C> <C> <C> <C>
Computers and office equipment...... 2-5 years $25,685 $39,409 $60,099
Leasehold improvements.............. life of lease 6,012 7,739 8,431
Furniture and fixtures.............. 3-5 years 4,415 6,706 6,389
------- ------- -------
36,112 53,854 74,919
Less--Accumulated depreciation...... 24,500 31,175 35,249
------- ------- -------
$11,612 $22,679 39,670
======= ======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999
was $11.3, $9.8 and $8.4 million, respectively and $4.2 and $5.8 million for
the six months ended June 30, 1999 and 2000, respectively. Depreciation expense
is included in operating expenses in the accompanying statements of operations.
(f) Capitalized Software Development Costs
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed. The
Company capitalizes software development costs subsequent to the establishment
of technological feasibility and until the product is available for general
release. Costs incurred prior to the establishment of technology feasibility
are charged to product development expense. The Company defines technological
feasibility as the completion of a working model. Software development costs
are amortized over the expected useful life of two years. The Company began to
capitalize software development costs in the fourth quarter of 1999 subsequent
to the acquisition of PTS, and has capitalized $0.3 million as of June 30,
2000. The Company continually evaluates whether events or circumstances have
occurred that indicate that the remaining useful life of the capitalized
software development costs should be revised or that the remaining balance of
such assets may not be recoverable. Management believes that no revisions to
the remaining useful life or write-downs of capitalized software development
costs are required.
(g) Internal Use Software
The Company adopted Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use, effective
January 1, 1999. The Company capitalized $1.5 million of internal use software
development and implementation costs as of June 30, 2000. These costs are being
amortized over 2-3 years, the expected useful life of the software.
(h) Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries are
translated into U.S. dollars in accordance with SFAS No. 52, Foreign Currency
Translation. The functional currencies of the various subsidiaries are the
respective local currencies. Accordingly, the Company's foreign subsidiaries
translate assets and liabilities at the year-end exchange rates, while income
and expense accounts are translated using a weighted average exchange rate
during the period. Resulting translation adjustments are reflected as a
separate component of stockholders' deficit. The losses resulting from foreign
currency transactions were $0.4, $0.9 and
F-10
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
$1.6 million for the years ended December 31, 1997, 1998 and 1999,
respectively, and $0.9 and $1.1 million for the six months ended June 30, 1999
and 2000, respectively. These amounts are included in other expenses in the
accompanying consolidated statements of operations.
(i) Revenue Recognition
Revenue associated with lecture/lab training courses is recognized in the
period in which the training is provided. Revenue associated with the sale of
self-study learning programs is recognized in the period in which the products
are shipped. Revenue associated with consulting and project management services
is recognized in the period in which the service is delivered and the work is
performed. Software product revenue is recognized under the residual method in
accordance with SOP 97-2 and 98-9 whereby annual software license fees are
recognized ratably over the annual license period, perpetual license fees are
recognized upon delivery and support and maintenance fees are recognized
ratably over the support period. Amounts received in advance of revenue
recognition are recorded as deferred revenue in the accompanying consolidated
balance sheets.
(j) Intangible Assets
Intangible assets are carried at cost less accumulated amortization, which
is provided on a straight-line basis over the economic lives of the respective
assets. Intangible assets at December 31, 1998 and 1999 and June 30, 2000 were
made up of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------
Estimated June 30,
Useful Life 1998 1999 2000
------------ -------- -------- --------
<S> <C> <C> <C> <C>
Goodwill........................... 10-15 years $ 48,865 $112,396 $113,632
Cisco relationship................. 10 years -- 12,740 12,740
Tradenames......................... 10 years -- 14,900 14,900
Covenant not-to-compete............ 3 years 15,861 11,118 10,584
Know-how........................... 3 years 48,012 66,634 66,370
Assembled workforce................ 3 years -- 2,170 2,170
Customer list...................... 3 years 1,120 3,800 3,800
-------- -------- --------
113,858 223,758 224,196
Less--Accumulated amortization..... 80,337 91,120 100,174
-------- -------- --------
$ 33,521 $132,638 $124,022
======== ======== ========
</TABLE>
(k) Income Taxes
The Company provides for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. SFAS No. 109 recognizes tax assets and liabilities
for the cumulative effect of all temporary differences between financial
statement carrying amounts and the tax basis of assets and liabilities and are
measured using the enacted tax rates and laws that are currently in effect.
(l) Impairment of Long-Lived Assets
The Company follows SFAS No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement
requires that long-lived assets be reviewed for impairment whenever events or
changes in circumstances indicate that the assets' carrying amounts may not be
recoverable. In performing the review for recoverability, if future
undiscounted cash flows from the use and ultimate disposition of the assets are
less than their carrying values, an impairment loss is recognized. Impairment
losses are to be measured based on the fair value of the asset. At December 31,
1997, the Company determined that the assets acquired in connection with the
purchase of the learning services division of Digital Equipment
F-11
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
Corporation in December 1995 were impaired based on an undiscounted cash flow
analysis. Thus, an impairment charge of $25.6 million was recorded in the year
ended December 31, 1997 to write down the assets associated with this
acquisition to fair value. This charge has been included in amortization of
intangibles in the accompanying consolidated statements of operations. No such
adjustments were necessary for the fiscal years ended December 31, 1998 and
1999, and the six months ended June 30, 2000.
(m) Net Loss Per Share and Pro Forma Net Loss per Share
Basic net loss per share is computed by dividing net loss available to
common stockholders by the weighted number of common shares outstanding for all
periods presented. Diluted net loss per share reflects the dilutive effect of
shares under option plans and convertible preferred stock. Potentially dilutive
shares outstanding during the periods presented have been excluded from diluted
net loss per share because their effect would be anti-dilutive.
Pro forma basic and diluted net loss per common share is calculated by
dividing net loss available to common stockholders after adding back accreted
preferred stock dividends and interest expense on debt to be repaid from the
proceeds of the Company's proposed initial public offering by the pro forma
weighted average number of common shares outstanding, which includes the number
of shares of common stock issuable upon conversion of the Series A and B
redeemable preferred stock into common stock upon the closing of the offering,
as if such conversion occurred at the date of original issuance, and the number
of shares of common stock to be issued in the offering to generate the funds
necessary to redeem $20.0 million of redeemable convertible preferred stock and
to repay $ of debt, all of which will occur upon closing of the offering.
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
----------------------------- ------------------
1997 1998 1999 1999 2000
--------- -------- -------- -------- --------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Historical--
Net loss applicable to
common stockholders....... $(107,074) $(43,007) $(36,517) $(15,722) $(15,020)
========= ======== ======== ======== ========
Weighted average common
shares outstanding........ 42,565 48,772 66,456 57,333 116,041
========= ======== ======== ======== ========
Basic and diluted net loss
per common share.......... $ (2.52) $ (0.88) $ (0.55) $ (0.27) $ (0.13)
========= ======== ======== ======== ========
Shares under stock option
plans excluded in
calculation of diluted
earnings per share due to
antidilutive effects...... 2,263 2,622 6,072 3,368 7,320
========= ======== ======== ======== ========
Convertible preferred stock
excluded in calculation of
diluted earnings per share
due to antidilutive
effects................... -- -- 4,296 -- 4,296
========= ======== ======== ======== ========
Pro forma (unaudited)--
Net loss applicable to
common stockholders....... $(36,517) $(15,020)
Preferred stock dividend
accretion.................
Interest expense related to
debt repayment............
-------- --------
Adjusted net loss.......... $ $
======== ========
Shares used in computing
historical basic and
diluted net loss per
common share.............. 42,565 48,772 66,456 57,333 116,041
Common shares sold to
redeem Series A redeemable
convertible preferred
stock.....................
Common shares sold to
liquidate certain
outstanding debt..........
Weighted average number of
shares assumed upon
conversion of redeemable
convertible preferred
stock.....................
Shares used in computing
pro forma basic and
diluted net loss per
common share..............
Pro forma basic and diluted
net loss per common
share.....................
</TABLE>
F-12
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(n) Comprehensive Income (loss)
Comprehensive income (loss) is defined as the change in net assets of a
business enterprise during a period from transactions generated from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Accumulated
comprehensive loss included in the accompanying balance sheets consists of
cumulative translation adjustments.
(o) Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, notes payable, capital lease obligations and accounts
payable are carried at cost or carrying value. These amounts were not
materially different from their fair values. The Company uses a discounted cash
flow methodology to calculate the fair value of the notes payable and capital
lease obligations.
(p) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. It
requires that an entity recognize all derivatives as either assets or
liabilities in the balance sheet and measure those instruments at fair value.
Pursuant to SFAS No. 137, Accounting for Derivative Instruments and Hedging
Activities--Deferral of the Effective Date of FASB No. 133, SFAS No. 133 is
effective in fiscal year 2001. SFAS No. 133 is not expected to have a material
impact on the Company's financial condition or results of operations.
In December 1999, SEC issued Staff Accounting Bulletin No. 101 ("SAB 101"),
Revenue Recognition in Financial Statements, which provides guidance on the
recognition, presentation and disclosure of revenue in financial statements
filed with the SEC. The Company recognizes revenue in accordance with this
pronouncement.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation--An Interpretation of APB Opinion No.
25. The interpretation clarifies the application of APB Opinion No. 25 in
specified events, as defined. The interpretation is effective July 1, 2000, but
covers certain events occurring during the period after December 15, 1998, but
before the effective date. To the extent that events covered by this
interpretation occur during the period after December 15, 1998, but before the
effective date, the effects of applying this interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final interpretation, (a) no adjustments would be made to
the financial statements for periods before the effective date and (b) no
expense would be recognized for any additional compensation cost measured that
is attributable to periods before the effective date. The Company does not
believe that the adoption of this interpretation will have any effect on the
accompanying financial statements.
F-13
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(5) COMMITMENTS AND CONTINGENCIES
(a) Operating Leases
The Company is obligated under various long-term operating leases relating
to buildings, office equipment and automobiles. The terms of these leases range
from one to 15 years, expiring at various dates through 2008. Minimum lease
commitments for future periods are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
2000......................................................... $20,817
2001......................................................... 15,285
2002......................................................... 10,530
2003......................................................... 7,824
2004......................................................... 4,950
Thereafter................................................... 7,777
-------
Total minimum lease commitments............................ $67,183
=======
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, the Company's total
rent expense for operating leases was $14.8, $16.9 and $16.4 million,
respectively.
(b) Capital Leases
The Company leases office equipment under lease agreements that qualify for
capitalized treatment under SFAS No. 13, Accounting for Leases. These
agreements have interest rates ranging from 8% to 13% and expire at various
times through 2003.
Future minimum lease payments for assets under capital lease obligations at
December 31, 1999 is as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
2000.......................................................... $4,233
2001.......................................................... 3,469
2002.......................................................... 1,599
2003.......................................................... 92
------
Total minimum lease payments................................ 9,393
Less--Amounts representing interest............................. (950)
------
Present value of net minimum lease payments................... 8,443
Less--Current portion........................................... 3,656
------
Long-term obligation.......................................... $4,787
======
</TABLE>
(c) Litigation
The Company is subject to various legal proceedings that arise in the
ordinary course of business. Management believes that the amount of ultimate
liability with respect to these actions will not be material to the financial
position or results of operations of the Company.
F-14
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(6) BORROWINGS
At December 31, 1998 and 1999 and June 30, 2000, the Company's borrowings
consist of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------- June 30,
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Subordinated 13% note payable to an affiliate of
principal stockholder, Welsh, Carson, Andersen &
Stowe Capital Partners II (WCAS CP)................ $ 62,109 $ 71,758 $ 76,947
Bank of America revolving line of credit............ 54,000 54,000 18,200
Bank of America term loan--short-term............... 5,000 6,000 18,000
Bank of America term loan--long-term................ 20,000 14,000 --
-------- -------- --------
Total............................................. $141,109 $145,758 $113,147
======== ======== ========
</TABLE>
The Company has an $80.0 million credit agreement (the Credit Agreement)
with Bank of America as agent for a four-bank syndicate, as amended. The Credit
Agreement provides for a $25.0 million term loan and a $55.0 million revolving
credit facility, which includes a $1.1 million reserve for letters of credit.
Principal payments are due under the term loan in equal quarterly installments
of $2.0 million beginning in June 2000 and a lump sum payment on the expiration
date of June 30, 2001. The borrowings under the Credit Agreement in currencies
other than the U.S. dollar cannot exceed $10.0 million. Mandatory repayments of
outstanding principal balances are required if the Company achieves certain
cash flow objectives. In addition, the Company is required to maintain certain
financial ratios. Borrowings bear interest at LIBOR (6.87% at June 30, 2000)
plus 1.25%, which is payable quarterly. Letters of credit are charged an annual
fee calculated as a percentage of the face value of the credit and are due upon
issuance of the credit. At December 31, 1999 and June 30, 2000 the Company was
in compliance with all of its amended debt covenants. The borrowings are
guaranteed by entities and individuals affiliated with Welsh, Carson, Andersen
& Stowe, the Company's principal stockholder.
The Company has issued subordinated notes payable to WCAS CP, an affiliate
of the Company's principal stockholder. The subordinated notes are due on the
earlier of December 31, 2001 or upon the closing of an underwritten initial
public offering of the Company's common stock. Borrowings bear interest at 13%.
In conjunction with the issuance of the subordinated notes, the Company issued
4,166,000 shares of common stock to WCAS CP. The Company allocated $4,166,000
of the proceeds to the common stock based on the relative fair values of the
common stock and the notes at the date of issuance. The effective interest
rate, including the effect of the note discount, at December 31, 1999 and June
30, 2000 was 14.8% and 14.2%, respectively. Interest payments are due
semiannually on January 1 and July 1. The Company has the option to elect to
defer interest payments by adding the interest amount due to the principal of
the subordinated notes. As of December 31, 1998 and 1999 and June 30, 2000, the
Company had deferred approximately $4.1 million, $13.0 million and $17.7
million, respectively, of interest. The Company is amortizing the note discount
over the term of the obligation using the effective interest method and, at
December 31, 1998 and 1999 and June 30, 2000, the unamortized discount was
approximately $2.8 million, $1.9 million and $1.5 million, respectively.
F-15
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(7) POSTRETIREMENT BENEFITS
(a) 401(k) Plans
The Company sponsors three 401(k) plans that permit U.S. employees to make
contributions by salary reduction. All U.S. employees, except the former
employees of GeoTrain and PTS, were eligible to enroll in the Global Knowledge,
Inc. 401(k) Plan (the Global Knowledge Plan) on the first day after completing
three months of service. The Company makes a matching contribution of 100% for
contributions up to 3% and then matches 50% for the next 4% of eligible pay.
Participants are immediately vested in all contributions and earnings thereon.
Participants in the Global Knowledge Plan may contribute up to 15% of eligible
pay, up to $10,000, on a pretax basis. The former employees of GeoTrain were
eligible to enroll in the Geotrain 401(k) Plan on their date of hire.
Participants in this plan may contribute up to 3% of eligible pay. The Company
makes a matching contribution of 50% up to $1,000 per participant. The former
employees of PTS were eligible to enroll in the PTS 401(k) Plan on their date
of hire. The Company makes a matching contribution of 10% for contributions up
to 6% of eligible pay.
For the years ended December 31, 1997, 1998 and 1999, the Company's matching
contributions amounted to approximately $704,000, $356,000 and $634,000,
respectively. The Company may, but is not obligated to, make an additional
contribution in proportion to an employee's eligible earnings compared to the
eligible earnings of other participating employees. There were no such
contributions for the years ended December 31, 1997, 1998 and 1999.
(b) Defined-Benefit Plans for Non-U.S. Employees
The Company sponsors a defined-benefit postretirement plan covering certain
non-U.S. employees. The plan provides for payment of retirement benefits
commencing at the age of 60. After meeting certain qualifications, an employee
acquires a vested right to future benefits. The benefits payable under the plan
are generally determined on the basis of an employee's length of service and
earnings. Annual contributions to the plan are sufficient to satisfy legal
funding requirements.
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." SFAS No. 132 standardizes the
disclosure requirements for pensions and other postretirement benefits.
<TABLE>
<CAPTION>
December
31,
------------
1998 1999
----- -----
(in
thousands)
------------
<S> <C> <C>
Period Pension Costs
Service cost--benefits earned during the period................ $ 162 $ 194
Interest cost on projected benefit obligation.................. 26 23
Expected return on plan assets................................. (17) (9)
Amortization of prior service cost............................. -- (7)
Amortization of transition obligation.......................... 25 12
Amortization of net gain or loss............................... (12) 7
----- -----
Net period pension cost........................................ $ 184 $ 220
===== =====
</TABLE>
F-16
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
<TABLE>
<CAPTION>
December 31,
--------------
1998 1999
------ ------
(in
thousands)
<S> <C> <C>
Changes in Benefit Obligation
Projected benefit obligation at beginning of year........... $ 864 $1,106
Service cost--benefits earned during the period............. 162 194
Interest cost on projected benefit obligation............... 26 23
Benefits paid............................................... (187) (93)
Actuarial (gain) loss....................................... 99 (77)
Prior service costs......................................... -- (336)
Exchange rate changes....................................... 142 67
------ ------
Projected benefit obligations at end of year................ $1,106 $ 884
====== ======
Change in Plan Assets
Fair value of plan assets at beginning of year.............. 505 465
Actual return on plan assets................................ 29 (29)
Employer contributions...................................... 59 31
Benefits paid............................................... (187) (93)
Exchange rate changes....................................... 59 34
------ ------
Fair value of plan assets at end of year.................... $ 465 $ 408
====== ======
Funded Status
Plan assets less than projected benefit obligation.......... (641) (476)
Unrecognized net transition obligation...................... 252 266
Unrecognized prior service costs............................ -- (395)
Unrecognized net actuarial loss............................. 245 219
------ ------
Net amount recognized....................................... $ (144) $ (386)
====== ======
Amounts recognized in the balance sheet consist of
Accrued pension liability................................... (307) (476)
Intangible asset............................................ 163 90
------ ------
Net amount recognized....................................... $ (144) $ (386)
====== ======
Weighted Average Assumptions
Discount rate............................................... 2.5% 3.0%
Rate of compensation increase............................... 2.0% 2.0%
Expected rate of return on assets........................... 2.5% 1.5%
</TABLE>
(c) Defined-Contribution Plans for Non-U.S. Employees
The Company sponsors certain defined-contribution postretirement plans
covering non-U.S. employees. The Company either makes a matching contribution
or makes the entire contribution, based on eligible pay. For the years ended
December 31, 1998, and 1999, the Company's total contribution under these plans
was approximately $1,076,000 and $861,000, respectively.
The Company also makes mandatory contributions to government plans in
certain countries. The aggregate contribution for the year ended December 31,
1999 was $1.4 million. There were no contributions made in 1997 or 1998.
F-17
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(8) INCOME TAXES
For the years ended December 31, 1997, 1998 and 1999, the Company provided
$1.2, $2.1 and $1.1 million, respectively, for income taxes. As of December 31,
1999, the Company had net operating loss carryforwards of $87.6 million in the
United States and $57.3 million in foreign jurisdictions available to offset
taxable income in future periods. The U.S. and foreign net operating loss
carryforwards will expire at various dates beginning in 2011 and 2002,
respectively, if not utilized. The Tax Reform Act of 1986 imposes substantial
restrictions on the utilization of U.S. net operating loss carryforwards in the
event of a significant change in ownership interests. The Company's ability to
utilize U.S. new operating loss carryforwards may be limited if the Company
were to experience a change in ownership as defined by the Internal Revenue
Code. The Company does not believe that there has been an ownership change as
defined in the Internal Revenue Code. There can be no assurance that there will
not be an ownership change in future periods that would limit its ability to
utilize the U.S. net operating loss carryforwards. The provision for income
taxes represents income taxes paid in states and foreign jurisdictions where
the Company generated taxable income and had no operating loss carryforwards.
For the year ended December 31, 1997, 1998 and 1999, loss before provision
for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
-----------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Domestic.................................... $ (77,941) $(22,327) $(22,049)
Foreign..................................... (25,553) (15,880) (10,153)
--------- -------- --------
Total..................................... $(103,494) $(38,207) $(32,202)
========= ======== ========
</TABLE>
For the years ended December 31, 1997, 1998 and 1999, the provision for
income taxes was comprised of the following (in thousands):
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current tax provision--
U.S. Federal....................................... $ -- $ -- $ --
State.............................................. -- 86 70
Foreign............................................ 1,219 2,014 1,013
------ ------ ------
1,219 2,100 1,083
Deferred tax provision--
U.S. Federal....................................... -- -- --
State.............................................. -- -- --
Foreign............................................ -- -- --
------ ------ ------
-- -- --
------ ------ ------
Total provision for income taxes................. $1,219 $2,100 $1,083
====== ====== ======
</TABLE>
F-18
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
The following is a reconciliation of the provision for income taxes computed
by applying the U.S. federal statutory rate to the loss before income taxes to
the reported provision for income taxes (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Income tax benefit at the statutory rate... $(35,188) $(12,990) $(10,949)
Permanent differences...................... 96 126 1,351
Change in valuation allowance.............. 26,590 7,725 6,042
Foreign tax rate differential.............. 9,907 7,413 4,482
Other...................................... (186) (174) 157
-------- -------- --------
Provision for income taxes............. $ 1,219 $ 2,100 $ 1,083
======== ======== ========
</TABLE>
Under SFAS No. 109, Accounting for Income Taxes, deferred income tax assets
and liabilities arise from carryforwards and from temporary differences between
the tax basis of assets and liabilities and the book basis of such assets and
liabilities as reported in the financial statements. A valuation allowance may
be provided with respect to certain deferred tax assets to reduce the deferred
tax asset to a level that, more likely than not, would be realized. The net
deferred tax asset reflects management's estimates of the amount that will be
realized from the future profitability that can be predicted with reasonable
certainty. The Company has provided a valuation allowance for its entire
deferred tax asset due to its history of net operating losses.
The following is a summary of the tax effect of carryforwards and temporary
differences that give rise to deferred tax assets as of December 31, 1998 and
1999 (in thousands):
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Deferred tax assets--
Reserves and accruals.................................. $ 4,915 $ 4,757
Depreciation and amortization.......................... 27,005 29,930
Net operating loss carryforwards....................... 26,109 29,784
Other.................................................. 343 1,787
------- -------
Gross deferred tax assets............................ 58,372 66,258
Valuation allowance.................................. (58,372) (66,258)
------- -------
Net deferred tax asset............................... -- --
======= =======
</TABLE>
(9) RESTRUCTURING
In 1997, the Company recorded a charge of $7.5 million, which consisted of
severance costs for approximately 96 employees and facility closing costs to
reduce the Company's cost structure, offset by approximately $0.6 million of
excess accruals from the prior year restructuring plan.
In 1998, the Company recorded a charge of $4.9 million, which consisted of
severance costs for approximately 90 employees and facility closing costs
associated with a plan to reduce the Company's cost structure, primarily in
Europe, offset by approximately $0.9 million of excess accruals from the prior
year restructuring plan.
In 1999, the Company recorded a charge of approximately $2.2 million, which
consisted of severance costs for approximately 40 employees and facility
reduction costs to rationalize and integrate the businesses acquired in the
fourth quarter of 1999, offset by approximately $0.9 million of excess accruals
from prior year restructuring plans.
F-19
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
In June 2000, the Company recorded a charge of $1.0 million to eliminate
redundant facilities as a result of the acquisition of GeoTrain.
(10) REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
(a) Capital Stock
The authorized capital stock of the Company consists of 7,100,000 shares of
redeemable convertible preferred stock and 160,000,000 shares of $0.01 par
value common stock as of June 30, 2000.
(b) Series A Redeemable Convertible Preferred Stock
The Company has authorized 1,000,000 shares of Series A redeemable
convertible preferred stock (Series A) with a par value of $1.00 per share. At
December 31, 1998 and 1999 and June 30, 2000, 450,000, 800,948 and 974,018
shares of Series A, respectively, were issued and outstanding. The Series A
accrues dividends at a rate of $6.00 per share per year payable upon
declaration by the Board of Directors. Dividends will accrue cumulatively
regardless of declaration. Mandatory redemption of the Series A shares is
required on January 1, 2006 at a redemption price of $100 per share plus any
accrued but unpaid dividends. Total accrued dividends as of June 30, 2000 were
$12.9 million. On October 5, 2000 the terms of the Series A were amended to
provide for the redemption of $20.0 million of Series A and the conversion of
the remaining shares into common stock at the initial public offering price in
the Company's proposed initial public offering if consummated prior to May 1,
2001.
In the event of the liquidation or dissolution of the Company, holders of
the Series A have preference in the event of the liquidation or dissolution of
the Company in an amount equal to $100 per share plus any accrued and unpaid
dividends. If there are not sufficient funds to pay out this amount, holders of
the Series A will share in the remaining assets of the Company. The Company may
not create or authorize any additional class of stock that ranks senior to or
on par with the Series A unless authorized by a two-thirds vote of the holders
of the Series A.
(c) Series B Redeemable Convertible Preferred Stock
The Company has authorized 6,100,000 shares of Series B redeemable
convertible preferred stock (Series B) with a par value of $1.00 per share. At
December 31, 1999 and June 30, 2000, 4,295,796 shares of Series B were issued
and outstanding. The Series B accrues dividends at a rate of 6% per annum
payable upon declaration by the Board of Directors. Dividends will accrue
cumulatively regardless of declaration. The Series B shares are mandatorily
redeemable at $5.00 per share plus accrued dividends at the rate of 50% on the
second and 50% on the third anniversary date of the issuance.
The Series B is convertible at the option of the holder into common stock on
a one-for-one basis, adjustable for certain dilutive events, as defined. All
outstanding shares of the Series B are automatically converted into common
stock upon the closing of the sale of shares of common stock in a public
offering in which the Company obtains proceeds of at least $30.0 million. The
number of shares of common stock issuable upon conversion is determined by
multiplying the Series B per share conversion value by the number of shares of
Series B outstanding and dividing by the dollar amount, equal to 80% of the
initial public offering price per share in the qualified offering. In the event
the Series B is converted into common stock in connection with an initial
public offering, the 20% discount would represent a contingent beneficial
conversion feature which would be recorded as a preferred stock dividend for
the period in which the initial public offering is completed.
F-20
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(d) Stock Option Plan
On January 1, 1996, the Company adopted its Stock Option and Restricted
Stock Purchase Plan (the Plan), which provides for the grant of incentive stock
options (ISOs), nonqualified stock options (NQSOs) and restricted stock awards
(Awards) to employees, officers and directors of the Company. Prices, vesting
provisions and terms of all ISOs, NQSOs and Awards are set by the Board of
Directors.
The maximum shares of common stock reserved for issuance pursuant to the
Plan is 11.4 million shares. The shares are subject to adjustment by the Board
of Directors in the event of defined transactions affecting the Company's
equity. Options granted under the Plan generally vest ratably over four years.
Options granted, exercised and forfeited under the Plan are as follows:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
Shares per Share
---------- ----------------
<S> <C> <C>
Outstanding at December 31, 1996................ 1,751,000 $1.00
Granted....................................... 1,030,500 1.22
Exercised..................................... (26,250) 1.00
Forfeited..................................... (492,250) 1.00
----------
Outstanding at December 31, 1997................ 2,263,000 1.09
Granted....................................... 1,396,500 2.00
Exercised..................................... (14,313) 1.00
Forfeited..................................... (1,023,687) 1.12
----------
Outstanding at December 31, 1998................ 2,621,500 1.56
Granted....................................... 3,732,000 2.00
Exercised..................................... (32,250) 1.04
Forfeited..................................... (249,500) 1.80
----------
Outstanding at December 31, 1999................ 6,071,750 1.82
Granted....................................... 1,980,500 2.00
Exercised..................................... (468,250) 1.50
Forfeited..................................... (264,125) 1.81
----------
Outstanding at June 30, 2000.................... 7,319,875 1.89
==========
</TABLE>
There were 3.6 million shares available for future grant under the Plan at
June 30, 2000.
Subsequent to June 30, 2000, the Company granted options to purchase 213,000
shares of common stock at $2.25 per share and options to purchase 2,233,000
shares of common stock at $2.50 per share.
F-21
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
The following table summarizes stock options outstanding and exercisable at
June 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------- ------------------------
Weighted Average Remaining Weighted Average
Exercise price Shares Exercise Price Life (Years) Shares Exercise Price
-------------- --------- ---------------- ------------ ------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 790,000 $1.00 5.9 426,626 $1.00
2.00 6,529,875 2.00 9.1 491,375 2.00
--------- -------
7,319,875 1.89 918,001 1.54
========= =======
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25, Accounting
for Stock Issued to Employees, in accounting for the Plan. Accordingly, no
compensation cost has been recognized. Had compensation cost for the Plan been
determined consistent with the provisions of SFAS No. 123, Accounting for
Stock-Based Compensation, the Company's net loss would not have been materially
different from that reported in the accompanying consolidated statements of
operations. The Company's net loss and loss per common share would have been
increased to the pro forma amounts below (in thousands, except per share data):
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1997 1998 1999
--------- -------- --------
<S> <C> <C> <C>
Net loss applicable to common stockholders, as
reported...................................... $(107,074) $(43,007) $(36,517)
Net loss applicable to common stockholders, pro
forma......................................... (107,227) (43,255) (37,167)
Basic and diluted net loss per common share, as
reported...................................... (2.52) (0.88) (0.55)
Basic and diluted net loss per common share,
pro forma for the effect of SFAS No. 123...... (2.52) (0.89) (0.56)
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rate.............................. 6.0% 6.0% 6.0%
Expected dividend yield.............................. -- -- --
Expected lives....................................... 7 years 7 years 7 years
Expected volatility.................................. -- -- --
Weighted average fair value of options granted....... $0.41 $0.68 $0.68
</TABLE>
(11) ACCRUED EXPENSES
Accrued expenses consist of the following (in thousands):
<TABLE>
<CAPTION>
June
December 31, 30,
--------------- -------
1998 1999 2000
------- ------- -------
<S> <C> <C> <C>
Employee compensation and related benefits............. $ 6,028 $ 9,392 $10,748
Interest............................................... 5,653 4,844 5,609
Restructuring.......................................... 4,520 3,169 2,466
Amounts due to former PTS shareholders................. -- 8,000 8,000
Other.................................................. 28,991 29,108 36,187
------- ------- -------
$45,192 $54,513 $63,010
======= ======= =======
</TABLE>
F-22
<PAGE>
GLOBAL KNOWLEDGE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(12) SEGMENT INFORMATION
The Company complies with the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company identifies its
operating segments based on business activities and management responsibility.
Management believes that the Company operates in one segment: providing
services and products for the training of IT professionals.
Geographic information for the years ended December 31, 1997, 1998 and 1999
and for the six months ended June 30, 1999 and 2000 is as follows (in
thousands):
<TABLE>
<CAPTION>
Six Months Ended
Year Ended December 31, June 30,
-------------------------- -----------------
Revenues 1997 1998 1999 1999 2000
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
North America................... $ 95,472 $117,528 $142,814 $ 62,803 $135,503
Europe.......................... 67,055 72,929 80,590 39,504 44,720
Asia and Japan.................. 30,353 26,844 33,316 13,777 21,404
-------- -------- -------- -------- --------
$192,880 $217,301 $256,720 $116,084 $201,627
======== ======== ======== ======== ========
</TABLE>
(13) OTHER EVENTS
In July 2000, the Company settled a dispute with SAP AG, which acted as the
Company's exclusive distributor in the U.S. for a certain software product.
Under the settlement, SAP agreed to pay $9.6 million to the Company in return
for the Company's agreement to continue to provide and maintain the software
product for users of SAP's software application through March 2001. Thereafter,
the Company will provide maintenance and support for the product on a case-by-
case basis. The Company will recognize the $9.6 million as revenue ratably
through March 2001.
F-23
<PAGE>
INDEPENDENT AUDITOR'S REPORT
F-24
<PAGE>
GEOTRAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of U.S. dollars, except share data)
<TABLE>
<CAPTION>
December 31,
------------------ September 30,
1997 1998 1999
-------- -------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash....................................... $ 1,037 $ 623 $ 1,233
Accounts receivable, net of allowance for
doubtful accounts of $264, $186 and $218
in 1997, 1998 and 1999, respectively...... 3,603 4,498 5,210
Inventory.................................. 365 797 317
Prepaid expenses and deposits.............. 796 1,610 2,364
Other current assets ...................... 255 426 101
-------- -------- --------
Total current assets................... 6,056 7,954 9,225
Property and Equipment, net.................. 4,134 5,675 5,564
Deferred Financing Costs, net................ 2,574 2,370 --
Goodwill and Intangible Assets, net.......... 16,669 13,594 13,289
-------- -------- --------
$ 29,433 $ 29,593 $ 28,078
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current Liabilities:
Accounts payable and accrued liabilities... $ 4,864 $ 4,518 $ 5,786
Accrued salaries and benefits.............. 1,007 859 1,564
Taxes payable.............................. 306 114 --
Deferred revenue........................... 1,167 2,136 2,580
Current portion of capital lease
obligations............................... 332 557 274
Current portion of long-term debt.......... 354 22,487 25,698
-------- -------- --------
Total current liabilities.............. 8,030 30,671 35,902
Long-term Debt, net of current portion....... 20,476 433 --
Capital Lease Obligations, net of current
portion..................................... 467 407 389
-------- -------- --------
Total liabilities...................... 28,973 31,511 36,291
Commitments (Note 11)
Redeemable preferred stock--
Authorized--Unlimited number...............
Issued and outstanding--5,318,848 shares as
of
December 31, 1997 and 5,653,816 shares as
of December 31, 1998 and September 30,
1999...................................... 10,097 10,952 10,952
Stockholders' Equity (Deficiency):
Common stock, no par value--
Authorized--Unlimited number..............
Issued and outstanding--5,387,869,
5,798,727 and 5,804,976 shares as of
December 31, 1997, 1998 and September 30,
1999, respectively....................... 416 619 623
Additional paid in capital................. 2,183 4,231 4,231
Accumulated other comprehensive loss....... (402) (78) (443)
Accumulated deficit........................ (11,834) (17,642) (23,576)
-------- -------- --------
Total stockholders' equity
(deficiency).......................... (9,637) (12,870) (19,165)
-------- -------- --------
$ 29,433 $ 29,593 $ 28,078
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE>
GEOTRAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Nine months
ended September
Year ended December 31, 30,
-------------------------- ----------------
1996 1997 1998 1998 1999
------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues......................... $20,336 $ 34,782 $41,907 $29,324 $39,647
Cost of Revenues................. 14,116 21,771 23,326 17,328 24,489
------- -------- ------- ------- -------
Gross profit................. 6,220 13,011 18,581 11,996 15,158
Operating expenses:
General and administrative..... 4,431 12,708 12,171 9,716 13,172
Selling and marketing.......... 863 3,361 4,472 3,216 4,789
Goodwill amortization.......... 338 1,619 1,788 1,329 1,090
Impairment loss................ -- 3,976 -- -- --
------- -------- ------- ------- -------
Total operating expenses..... 5,632 21,664 18,431 14,261 19,051
------- -------- ------- ------- -------
Operating income (loss)...... 588 (8,653) 150 (2,265) (3,893)
Interest and finance costs..... 177 3,168 5,903 1,737 2,041
------- -------- ------- ------- -------
Income (loss) before income
taxes....................... 411 (11,821) (5,753) (4,002) (5,934)
Provision for Income Taxes....... (26) 61 55 94 --
------- -------- ------- ------- -------
Net income (loss)............ $ 385 $(11,882) $(5,808) $(4,096) $(5,934)
======= ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
GEOTRAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
(in thousands of U.S. dollars, except share data)
<TABLE>
<CAPTION>
Redeemable Accumulated Retained
Preferred Stock Common stock Additional Other Earnings Other
------------------- ------------------- Paid-in Comprehensive (Accumulated Conmprehensive
Outstanding Amount Outstanding Amount Capital Income Deficit) Total Income (Loss)
----------- ------- ----------- ------- ---------- ------------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
December 31,
1995........... -- $ -- -- $ -- $ 3,103 $ 19 $ -- $ 3,122 19
Common stock
issued for
cash, net of
approximately
$400 in
offering
costs.......... -- -- 1,880,488 5,120 -- -- -- 5,120 --
Common stock
issued to MDA
in exchange for
the net assets
of PSC at
historical
cost........... -- -- 2,906,484 3,440 (3,440) -- -- -- --
Translation
adjustment..... -- -- -- -- -- (354) -- (354) (354)
Stock
compensation
expense........ -- -- 30,306 122 -- -- -- 122
Net income...... -- -- -- -- 337 -- 48 385 385
--------
Comprehensive income.. -- -- -- -- -- -- -- -- 31
--------- ------- --------- ------- ------- ----- -------- -------- --------
Balance,
December 31,
1996........... -- -- 4,817,278 8,682 -- (335) 48 8,395 50
Recapitalization
to create
redeemable
preferred stock.. 4,817,278 8,660 -- (8,660) -- -- -- (8,660) --
Issued common
and preferred
stock for
cash........... 182,330 522 182,330 48 -- -- -- 48 --
Issued common
and preferred
stock for
debt........... 319,240 915 388,261 276 2,183 -- -- 2,459 --
Stock
compensation
expense........ -- -- -- 70 -- -- -- 70 --
Translation
adjustment..... -- -- -- -- -- (67) -- (67) (67)
Net loss........ -- -- -- -- -- -- (11,882) (11,882) (11,882)
--------
Comprehensive
loss........... -- -- -- -- -- -- -- -- (11,949)
--------- ------- --------- ------- ------- ----- -------- -------- --------
Balance,
December 31,
1997........... 5,318,848 10,097 5,387,869 416 2,183 (402) (11,834) (9,637) (11,899)
Issuance of
common stock in
conjunction
with issuance
of debt........ 334,968 855 410,858 266 2,048 -- -- 2,314 --
Stock
Compensation
expense........ -- -- -- (63) -- -- (63) --
Translation
adjustment..... -- -- -- -- -- 324 -- 324 324
Net loss........ -- -- -- -- -- -- (5,808) (5,808) (5,808)
--------
Comprehensive
loss........... -- -- -- -- -- -- -- -- (5,484)
--------- ------- --------- ------- ------- ----- -------- -------- --------
Balance,
December 31,
1998........... 5,653,816 10,952 5,798,727 619 4,231 (78) (17,642) (12,870) (17,383)
Issuance of
common stock
for cash....... -- -- 6,249 4 -- -- -- 4 --
Translation
adjustment..... -- -- -- -- -- (365) -- (365) (365)
Net loss........ -- -- -- -- -- -- (5,934) (5,934) (5,934)
--------
Comprehensive
loss........... -- -- -- -- -- -- -- -- (6,299)
--------- ------- --------- ------- ------- ----- -------- -------- --------
Balance September 30,
1999 (unaudited).. 5,653,816 $10,952 5,804,976 $ 623 $ 4,231 $(443) $(23,576) $(19,165) $(23,682)
========= ======= ========= ======= ======= ===== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
GEOTRAIN CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of U.S. dollars)
<TABLE>
<CAPTION>
Nine months
ended September
Year ended December 31, 30,
-------------------------- ----------------
1996 1997 1998 1998 1999
------- -------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating
Activities:
Net income (loss)............... $ 385 $(11,882) $(5,808) $(4,096) $(5,934)
Adjustments to reconcile net
income (loss) to net cash
provided by (used in) operating
activities--
Depreciation and amortization.. 1,017 4,202 7,334 4,121 4,829
Impairment loss................ -- 3,976 -- -- --
Deferred compensation
expenses...................... 22 92 (63) (47) 23
Changes in net assets and
liabilities, net of effects
from acquisitions--
Accounts receivable........... (1,656) 2,659 (895) (836) (685)
Inventory..................... -- (325) (432) (432) 480
Prepaid expenses and
deposits..................... (136) (159) (814) (814) (754)
Other current assets.......... (15) (110) (171) -- (13)
Accounts payable and accrued
liabilities.................. 473 1,698 (346) (2,098) 2,009
Accrued salaries and
benefits..................... 354 (484) (148) -- 711
Taxes payable................. 26 230 (192) -- (171)
Deferred revenue.............. 229 (121) 969 469 589
------- -------- ------- ------- -------
Net cash provided by (used
in) operating activities.... 699 (224) (566) (3,733) 1,084
Cash Flows from Investing
Activities:
Purchase of property and
equipment...................... (943) (1,666) (2,324) (2,049) (1,656)
Acquisitions, net of cash
acquired....................... -- (19,800) -- -- --
Payments to MDA for net assets
of PSC......................... (4,292) -- -- -- --
------- -------- ------- ------- -------
Net cash used in investing
activities.................. (5,235) (21,466) (2,324) (2,049) (1,656)
Cash Flows from Financing
Activities:
(Repayment) Proceeds of long-
term debt...................... -- -- (713) (312) (9)
Repayment of capital lease...... -- -- (632) (572) (378)
Proceeds from long-term debt.... (289) 20,830 4,145 2,135 1,930
Proceeds from issuance of
preferred and common stock..... 5,120 570 -- 3,169 4
(Decrease) increase in related
party payable.................. 1,064 (561) -- -- --
------- -------- ------- ------- -------
Net cash provided by
financing activities........ 5,895 20,839 2,800 4,420 1,547
Effects of Exchange Rates on
Cash............................ 294 67 (324) 325 (365)
------- -------- ------- ------- -------
Net increase (decrease) in
cash........................ 1,653 (784) (414) (1,037) 610
Cash, beginning of year.......... 168 1,821 1,037 1,037 623
------- -------- ------- ------- -------
Cash, end of year................ $ 1,821 $ 1,037 $ 623 $ -- $ 1,233
======= ======== ======= ======= =======
Supplementary Cash Flow
Information:
Cash paid for taxes............. $ -- $ 194 $ 134 $ -- $ --
======= ======== ======= ======= =======
Cash paid for interest.......... $ -- $ 1,202 $ 1,644 $ 968 $ 1,410
======= ======== ======= ======= =======
Noncash activities--
Property and equipment
acquisitions through capital
leases........................ $ -- $ 789 $ 736 $ 445 $ 78
======= ======== ======= ======= =======
Recapitalization of
stockholders' equity issuing
preferred stock............... $ -- $ 8,660 $ -- $ -- $ --
======= ======== ======= ======= =======
Issuance of common stock for
assets of predecessor
company....................... $ 3,440 $ -- $ -- $ -- $ --
======= ======== ======= ======= =======
Issuance of common and
preferred stock for debt...... $ -- $ 3,374 $ 3,169 $ -- $ --
======= ======== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
(1) BACKGROUND OF THE COMPANY AND BASIS OF PRESENTATION
GeoTrain Corporation (the Company) was incorporated in Ontario, Canada on
October 4, 1996. The Company offers training classes on Internetworking
computer hardware and software to corporate and public customers and provides
consulting services on Internetworking technology. The majority of the
Company's revenue is derived from its operations in North America with its
remaining revenues generated from its wholly-owned subsidiaries in Australia
and the United Kingdom.
In October 1999, all of the outstanding stock of the Company was acquired by
Global Knowledge, Inc. for approximately $51,139 in cash.
(2) SIGNIFICANT ACCOUNTING POLICIES
These financial statements are the representation of management and have
been prepared in accordance with generally accepted accounting principles in
the United States. Significant accounting policies followed by the Company are
summarized below:
(a) Going Concern
These consolidated financial statements have been prepared on the going-
concern basis in accordance with generally accepted accounting principles. At
December 31, 1998, the Company was in breach of its current ratio financial
covenant contained in its bank loan and subordinated debt agreements and had a
net capital deficiency.
The going-concern basis of presentation assumes that the Company will be
able to realize its assets and discharge its liabilities in the normal course
of business. The uncertainties that currently exist surrounding the Company's
ability to fund its operations cast doubt on the appropriateness of the going-
concern assumption. These consolidated financial statements do not give effect
to any adjustments that would be necessary should the Company be unable to
continue as a going concern and, therefore, be required to realize its assets
and discharge its liabilities and commitments at amounts different from those
reported in the financial statements.
(b) Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries located in the United States, Australia and
the United Kingdom. All significant intercompany accounts and transactions have
been eliminated in consolidation.
(c) Unaudited Interim Information
The financial information as of September 30, 1999 and for the nine months
ended September 30, 1998 and 1999 is unaudited. In the opinion of management,
such information contains all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of such period.
The interim results are not necessarily indicative of results to be expected
for the year ending December 31, 1999.
(d) Inventory
Inventory consists of materials used in training courses and is valued at
the lower of cost or replacement value.
F-29
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
(e) Property and Equipment
Property and equipment are stated at cost. Depreciation is provided using
the straight-line method over the estimated useful lives of the assets.
Equipment held under capital leases and leasehold improvements are amortized
using the straight-line method over the lesser of the lease period or estimated
useful life of the asset. Depreciation is calculated over the following
periods:
<TABLE>
<CAPTION>
Asset Period
----- ------
<S> <C>
Lab equipment............ 2-3 years
Computer hardware........ 40 months
Computer systems......... 2 years
Computer software........ 1 year
Office furniture and
equipment............... 5 years
Leasehold improvements... Lesser of lease period or estimated useful life
</TABLE>
(f) Goodwill and Intangible Assets
The Company has allocated to intangible assets and goodwill the excess of
the purchase price over net assets of companies acquired in purchase
transactions. Other intangible assets are recorded at cost and amortized on the
straight-line basis over 2 to 10 years. Goodwill is recorded at cost and is
amortized on the straight-line basis over 15 to 20 years (see Note 3).
(g) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. This statement requires that long-
lived assets and certain identifiable intangibles be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount
of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired, the impairment to be recognized is measured by the
amount by which the carrying amount of the assets exceed the fair value of the
assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to dispose.
(h) Revenue Recognition
Training revenue is recognized when the related course has been completed.
Course fees that are prepaid by customers are recorded as deferred revenue.
Consulting revenue is recognized as services are provided.
(i) Deferred Financing Costs
The cost of obtaining financing is deferred and amortized on the straight-
line basis over the term of the financing. The amortization of these charges is
included in interest and finance costs.
(j) Income Taxes
The Company accounts for income taxes by the asset and liability method
under SFAS No. 109, Accounting For Income Taxes. Under this method, deferred
tax assets and liabilities are recognized for the
F-30
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
future tax consequences attributable to 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 income in the period that
includes the enactment date. Valuation allowances are established when
necessary to reduce deferred tax assets to the amounts expected to be realized.
(k) Foreign Currency Translation
The functional currency of the Company's foreign operations is the local
currency. The reporting currency for the Company is the U.S. dollar. All
monetary and nonmonetary assets and liabilities are translated at the current
rate at the end of the period; revenues and expenses are translated at average
exchange rates in effect during the period. Gains or losses arising from the
translation of the foreign operations' financial statements are included in the
accompanying consolidated balance sheets as part of accumulated other
comprehensive income (loss).
(l) Stock Option Plan
The Company has a stock-based compensation plan, which is described in Note
6 and 7. The Company accounts for the fair value of its grants under the plan
in accordance with SFAS No. 123, Accounting for Stock-Based Compensation.
(m) Comprehensive Income
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive
Income. This statement establishes rules for the reporting of comprehensive
income and foreign currency translation adjustments and is presented in the
consolidated statements of redeemable preferred stock and stockholders' equity
(deficiency). The adoption of this statement had no impact on total
shareholders' equity. Prior-year financial statements have been reclassified to
conform to this statement.
(n) Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles generally accepted requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent liabilities at the date of the
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
(o) Concentration of Business Risk
The majority of the Company's operations are derived from its training
classes offered on one particular supplier of internetworking hardware and
software (the training partner). Revenues from this training partner comprised
approximately 49%, 15%, and 5% of total revenues in 1996, 1997 and 1998,
respectively. The Company maintains an annual nonexclusive agreement as its
training partner for this supplier in the United States, Canada, United Kingdom
and Australia. The Company's current agreement with this training partner
expires July 31, 2000. Management is of the opinion that the agreement will be
renewed.
F-31
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
(p) Fair Value of Financial Investments
The Company's financial investments include cash, accounts receivable,
accounts payable, capital lease obligations and long-term debt and are carried
at cost or carrying value. These amounts were not materially different from
their fair values. The Company uses a discounted cash flow methodology to
calculate the fair value of the capital lease obligations and long-term debt.
(3) BUSINESS ACQUISITIONS
Effective April 11, 1997 and September 30, 1997, the Company acquired the
assets and liabilities of Protocol in the United States and ASK in Australia,
respectively. These acquisitions have been accounted for under the purchase
method of accounting. The results of operations from these companies have been
included in the Company's consolidated financial statements from the effective
dates of acquisition.
The purchases of Protocol and ASK were completed through cash payments of
approximately $16,000 and $2,600, respectively. Acquisition costs totaled
$1,200. The excess of the purchase price of $17,353 and $3,038 over the fair
value of the net assets of Protocol and ASK, respectively, has been allocated
to goodwill and intangible assets. The components of goodwill and intangibles
are as follows:
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Work-force in place........................ $ 1,394 $ 1,394 $ 1,394
Customer list.............................. 750 750 750
Tradename and licenses..................... 13,374 13,374 13,374
Goodwill................................... 6,422 6,422 6,422
------- ------- -------
Total intangible assets and goodwill from
acquisitions.............................. 21,940 21,940 21,940
Less impairment loss....................... (3,976) (3,976) (3,976)
Less accumulated amortization.............. (1,295) (4,370) (4,675)
------- ------- -------
$16,669 $13,594 $13,289
======= ======= =======
</TABLE>
In accordance with SFAS No. 121, the Company recorded a noncash impairment
loss of approximately $3,976 in the fourth quarter of 1997 to reflect the
write-down of the unamortized tradename asset resulting from the purchase of
Protocol. The impairment loss stems from the Company's training partner
requirement that only one tradename be used, resulting in the Company's
decision to abandon the Protocol tradename. As a result, the Company does not
expect to recover the value of the tradename.
F-32
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
(4) PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1997 and 1998 and September 30, 1999
consisted of the following:
<TABLE>
<CAPTION>
December 31,
-------------- September 30,
1997 1998 1999
------ ------- -------------
<S> <C> <C> <C>
Land............................................ $ -- $ 80 $ 129
Lab equipment................................... 3,610 6,524 5,646
Computer hardware............................... 1,075 1,248 1,494
Computer systems and software................... 472 650 874
Office furniture and equipment.................. 2,165 1,056 2,878
Leasehold improvements.......................... 452 1,001 1,270
------ ------- -------
7,774 10,559 12,291
Accumulated depreciation........................ 3,640 4,884 6,727
------ ------- -------
Net book value................................ $4,134 $ 5,675 $ 5,564
====== ======= =======
</TABLE>
Depreciation expense was $502, $2,907 and $1,836 for the years ended
December 31, 1996, 1997 and 1998, respectively, and $1,329 and $1,842 for the
nine month period ended September 30, 1998 and 1999, respectively.
(5) LONG-TERM DEBT
Long-term debt at December 31, 1997, 1998 and at September 30, 1999
consisted of the following:
<TABLE>
<CAPTION>
December 31,
--------------- September 30,
1997 1998 1999
------- ------- -------------
<S> <C> <C> <C>
Line of credit (see description below)....... $ -- $ 1,305 $ 1,760
Bank demand loan, interest at bank prime plus
1.0%, payable in monthly principal amounts
of $5 plus interest, due February 2000,
secured by a general security agreement..... 153 86 65
Bank demand loan, interest at bank prime plus
1.0%, payable in monthly principal amounts
of $10 plus interest, due May 2000, secured
by a general security agreement............. 276 144 46
Bank demand loan, interest at bank prime plus
1.0%, payable in monthly principal amounts
of $15 plus interest, due October 2000,
secured by a general security agreement..... 502 297 182
Note payable (see description below)......... 670 230 --
Subordinated debt (see Note 6)............... 19,229 20,858 23,645
------- ------- -------
20,830 22,920 25,698
Less--Current portion of long-term debt...... 354 22,487 25,698
------- ------- -------
Long-term debt............................. $20,476 $ 433 $ --
======= ======= =======
</TABLE>
F-33
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
Line of Credit
At December 31, 1998, the Company had a line of credit facility with a
Canadian chartered bank. The terms of this line of credit provide for revolving
borrowings of up to $3,500 Canadian dollars ($2,287 in U.S. dollars) for
operating and working capital requirements. Borrowings under this line of
credit pay interest at a variable rate based on the bank prime rate plus 0.5%.
The amount available for borrowing at any time under this facility is based on
a margin formula related to accounts receivable and other bank covenants.
The note payable was issued in connection with the acquisition of ASK during
1997 (see Note 3). The amount is due on January 1, 2000 with the amount
becoming immediately due in the quarter following an initial public offering.
The amount payable is not interest-bearing unless the Company is in default of
repayment, in which case interest will accrue at 10%, compounded daily.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ended December 31,
1999......................................................... $22,487
2000......................................................... 433
-------
$22,920
=======
</TABLE>
Letter of Credit
As of December 31, 1998 and September 30, 2000, there were outstanding
letters of credit totaling approximately $500 and $610, respectively. The
letters of credit were with a Canadian chartered bank and reflects fair value.
(6) SUBORDINATED DEBT
The Company financed the acquisition of Protocol Interface by entering into
subordinated debt lending agreements on April 11, 1997 with a syndicate
comprised of an institutional lender that holds $10,745 of the debt and certain
of the Company's shareholders that hold $4,255 of the debt. The subordinated
debt has an aggregate principal amount of $15,000, bears interest at a fixed
annual rate of 10.88% and, together with the Make-Whole Premium defined below,
is repayable on the earlier of an initial public offering of the Company's
stock, a change in control of the Company, or October 11, 1999.
The subordinated debt is secured by a lien on all assets of the Company. It
includes covenants related to the maintenance of certain financial ratios and
restricts the Company's ability to incur additional debt, encumber its
property, make capital expenditures, make certain investments, incur certain
contingent obligations or declare or pay dividends or other distributions.
In the event that the subordinated debt is discharged prior to October 31,
1999, the Company must pay penalty interest (the Make-Whole Premium). The Make-
Whole Premium is calculated as the difference between: (i) the sum of the
present values of the principal amount being prepaid and each amount of
interest that would have been payable on such principal amount being prepaid
and (ii) the amount being prepaid. The present value is computed at a discount
rate equal to the lesser of 10.88% or the most recent yield to maturity on
actively traded Government of Canada Securities having a maturity comparable to
the period between the prepayment date and loan maturity date. As of December
31, 1998, the Make-Whole Premium was $620.
F-34
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
As consideration for the issuance of the $15,000 subordinated debt, holders
are entitled to receive from existing shareholders of the Company 15% of all
issued and outstanding voting and nonvoting shares of the Company on a fully
diluted basis and have an option to acquire, at December 31, 1998, 145,165
common shares from treasury, increasing to 215,611 common shares if the
debenture is not paid until October 1999. The benefit to the Company of this
contribution of equity by existing shareholders, valued at $2,871, has been
recorded as a debt issue cost and is being amortized until October 11, 1999. In
addition, the Company paid a $922 financing fee to the subordinated debt
holders and this amount has been recorded as a debt issue cost and is being
amortized until October 11, 1999.
On October 21, 1997, the Company issued subordinated debt to certain
shareholders of the Company for consideration equal to $4,339 to finance the
acquisition of ASK. The subordinated debt bears interest at 12%, with interest
and principal due the earlier of (i) October 21, 1999, (ii) the sale of
substantially all of the assets or shares of the Company, (iii) a business
combination of the Company with another entity, or (iv) the redemption or
issuance by the Company of shares, except in connection with a reorganization
prior to an initial public offering.
As consideration for the issuance of the $4,339 of debentures, the debenture
holders received 388,261 common shares and 319,240 redeemable preferred shares
in 1997, and 106,432 common shares and 86,127 redeemable preferred shares in
1998. The debenture holders have an option for 346,897 common shares and
276,392 redeemable preferred shares if the debt is not repaid until October 21,
1999. The shares issued and share options have been recorded as deferred debt
issue costs, valued at $2,133, and are being amortized until October 1999.
On June 30, 1998, the Company issued subordinated debt to certain
shareholders of the Company for consideration equal to $2,593. The subordinated
debenture bears interest at 12%, with interest and principal due the earlier of
(i) October 11, 1999, (ii) the sale of substantially all of the assets or
shares of the Company, (iii) a business combination of the Company with another
entity, or (iv) the redemption or issuance by the Company of shares, except in
connection with a reorganization prior to an initial public offering.
As consideration for the issuance of the $2,593 debentures, the debenture
holders received 304,426 common shares and 248,841 redeemable preferred shares
and an option for 90,582 common shares and 71,152 redeemable preferred shares
if the debt is not repaid until October 11, 1999. The shares issued and share
options have been recorded as deferred debt issue costs, valued at $1,073, and
are being amortized until October 31, 1999.
Cost and accumulated amortization of debt issue costs as of September 30,
1999 are as follows:
<TABLE>
<CAPTION>
Accumulated Net
Cost Amortization Book Value
------ ------------ ----------
<S> <C> <C> <C>
Financing fee............................... $ 922 $ 906 $ 16
Deferred debt issue costs................... 6,077 6,077 --
------ ------ -----
$6,999 $6,983 $ 16
====== ====== =====
</TABLE>
The unamortized debt issue costs are included in other current assets in the
accompanying consolidated balance sheets.
F-35
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
(7) REDEEMABLE PREFERRED STOCK
The Class A preferred voting stock is convertible by the holder into Class B
preferred nonvoting stock on a one-to-one basis. The Class A preferred voting
stock entitles the holder to receive, if and when declared by the Board of
Directors, noncumulative dividends at a rate of 3% per annum on the redemption
price per share. The stock is redeemable at $2.76 per share or convertible into
such common nonvoting stock as would be required to satisfy the redemption
amount upon occurrence of the Triggering Event, which is defined as the earlier
of a change in control, the sale of the assets of the Company, or an initial
public offering.
The Class B preferred nonvoting stock is convertible by the holder into
Class A preferred voting stock on a one-to-one basis. The Class B preferred
nonvoting stock entitled the holder to receive, if and when declared by the
Board of Directors, noncumulative dividends at a rate of 3% per annum on the
redemption price per share. The stock is redeemable at $2.76 per share or
convertible into such common nonvoting stock as would be required to satisfy
the redemption amount upon occurrence of the Triggering Event, as defined
above.
The Class A preferred voting stock and the Class B preferred nonvoting stock
contain a liquidation preference whereby the holders of these stocks are
entitled to receive from the assets of the Company, in equal proportion, a sum
equivalent to their aggregate redemption amount.
The 4,727,549 Class A preferred voting shares and the 926,267 Class B
preferred nonvoting shares, totaling 5,653,816 shares, have been grouped
together as redeemable preferred stock.
On April 11, 1997, all of the 3,891,011 issued and outstanding common shares
were exchanged for an equal number of Class A preferred voting shares and an
equal number of common nonvoting shares. All of the 926,267 issued and
outstanding shares of the Class A preferred nonvoting stock were exchanged for
an equal number of Class B preferred nonvoting shares and an equal number of
common nonvoting shares.
(8) 1996 EMPLOYEE INVENTIVE STOCK OPTION PLAN
On October 31, 1996, the Company established an Employee Incentive Share
Option Plan (the 1996 Plan) for Directors and other employees of the Company
and its subsidiaries.
The 1996 Plan provides that the Board of Directors of the Company may grant
options to purchase common shares on such terms as the Board may determine,
within the limitations of the 1996 Plan. The aggregate number of common shares
reserved for issuance under the Plan will not exceed 956,442 common shares. The
exercise price for options issued under the Plan is the fair market value of
the common shares on the date on which the option is granted. An option will be
exercisable for a maximum period of three years from the date of vesting,
subject to earlier termination if the employee ceases to be an employee.
All of the options granted under the 1996 Plan, except for the options
granted to Directors, which vest as described below, vest as to 30% of the
optioned shares upon the closing of an initial public offering of the Company's
shares (an Offering), and subsequently vest as to the remaining 70% in equal
portions on each of the first, second and third anniversary dates of the
Offering. After the third anniversary of the vesting date, all entitlement to
the vested but unexercised options granted on that date terminates. All
employee options will terminate if the Company does not complete an initial
public offering by November 30, 1998.
As the Company did not complete an initial public offering on November 30,
1998, all options were terminated on that date.
F-36
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
The following table summarizes the activity for the Plan:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
Shares per Share
-------- ----------------
<S> <C> <C>
Outstanding at December 31, 1995.................. -- $--
Granted......................................... 577,442 5.06
Exercised....................................... -- --
Forfeited....................................... -- --
--------
Outstanding at December 31, 1996.................. 577,442 5.06
Granted......................................... 460,500 5.06
Exercised....................................... -- --
Forfeited....................................... (222,000) 5.06
--------
Outstanding at December 31, 1997.................. 815,942 5.06
Granted......................................... 128,750 5.18
Exercised....................................... -- --
Forfeited....................................... (944,692) 5.18
--------
Outstanding at December 31, 1998.................. -- --
Granted......................................... -- --
Exercised....................................... -- --
Forfeited....................................... -- --
--------
Outstanding at September 30, 1999................. -- $--
========
</TABLE>
Compensation costs that have been charged against income for the 1996 Plan
are approximately $22, $73 and $90 for the years ended December 31, 1996, 1997
and 1998, respectively.
(9) 1998 EMPLOYEE INCENTIVE STOCK OPTION PLAN
On August 7, 1998, the Company established an Employee Incentive Stock
Option Plan (the 1998 Plan) for Directors and other employees of the Company
and its subsidiaries.
The 1998 Plan provides that the Board of Directors of the Company may grant
options to purchase common shares on such terms as the Board may determine,
within the limitations of the 1998 Plan. The aggregate number of common shares
reserved for issuance under the Plan will not exceed 956,442 common shares. The
exercise price for options issued under the Plan is the fair market value of
the common shares on the date on which the option is granted. An option will be
exercisable for a maximum period of three years from the date of vesting,
subject to earlier termination if the employee ceases to be an employee.
All of the options granted under the Plan thus far vest in equal portions on
each of the first, second and third anniversary dates of the later of October
31, 1996 and the hire date of the employee, director or advisor. After the
third anniversary of the vesting date, all entitlement to the vested, but
unexercised, options granted on that date terminates.
F-37
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
The following table summarizes the activity for the Plan:
<TABLE>
<CAPTION>
Weighted Average
Exercise Price
Shares per Share
-------- ----------------
<S> <C> <C>
Outstanding at December 31, 1997.................. -- $ --
Granted......................................... 953,817 0.65
Exercised....................................... -- --
Forfeited....................................... (143,500) 0.65
--------
Outstanding at December 31, 1998.................. 810,317 0.65
Granted......................................... 332,000 0.68
Exercised....................................... (152,344) 0.68
Forfeited....................................... -- --
-------- -----
Outstanding at September 30, 1999................. 989,973 0.68
======== =====
</TABLE>
The exercise price for all outstanding options is USD $0.68 per share. The
weighted average remaining contractual life for all outstanding options is six
and a half years. The fair value of each option was estimated on the date of
grant using the Black-Scholes option pricing model with the following
assumptions used for grants in 1998: dividend yield of 0%, expected volatility
of 0%, risk-free interest rate of approximately 7% and expected life of five
years. The weighted average fair value of options granted for the year ended
December 31, 1998 was $0.06 per share. There are 222,846 options exercisable as
of December 31, 1998.
Compensation costs (recoveries) that have been charged against income for
the plan are approximately $49 and $(41) for December 31, 1997 and 1998,
respectively.
(10) INCOME TAXES
The Company computes its income taxes in accordance with the provisions of
SFAS No. 109. The significant components of the provision for income taxes for
the years ended December 31 include the following:
<TABLE>
<CAPTION>
December 31,
-----------------
1996 1997 1998
---- ----- -----
<S> <C> <C> <C>
Current--
Canada.................................................. -- $ 71 $ 189
U.S. Federal............................................ 26 251 29
U.S. State.............................................. -- 59 6
---- ----- -----
26 381 224
Deferred (reduction)--
Canada.................................................. -- (10) (169)
U.S. Federal............................................ -- (251) --
U.S. State.............................................. -- (59) --
---- ----- -----
(320) (169)
---- ----- -----
Total income tax expense.............................. $ 26 $ 61 $ 55
==== ===== =====
</TABLE>
F-38
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
Income taxes differ from the amounts computed by applying the Canadian
federal and provincial income tax rate of 44.6% at December 31, 1998 to income
(loss) before income taxes for the years ended December 31 as a result of the
following:
<TABLE>
<CAPTION>
December 31,
----------------------
1996 1997 1998
---- ------- -------
<S> <C> <C> <C>
Income Tax Provision at Canadian Statutory rates... $ 33 $(5,272) $(2,565)
U.S. federal tax rate differences.................. (8) 302 229
U.S. state income taxes, net of U.S. federal income
tax benefit....................................... 3 -- 6
Permanent differences.............................. -- 46 931
Change in valuation allowance...................... -- 4,924 1,434
Canadian minimum tax............................... (2) 61 20
---- ------- -------
Total.......................................... $ 26 $ 61 $ 55
==== ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
components of the deferred tax assets and liabilities include the following at
December 31, 1997 and 1998:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets--
Deferred rent........................................... $ 70 $ 60
Accrued expenses........................................ 391 241
Allowance for doubtful accounts......................... 112 47
Tax basis of goodwill in excess of book................. 2,560 835
Net operating loss carryforwards........................ 2,716 2,061
Tax basis of property and equipment in excess of book... 64 43
Intercompany royalty.................................... 1,091 1,687
Minimum taxes........................................... -- 20
------- -------
Gross deferred tax assets............................. 7,004 4,994
Valuation allowance....................................... (6,644) (4,006)
------- -------
Deferred tax asset after valuation allowance............ 360 988
Deferred tax liabilities--
Short-term contracts.................................... -- (819)
State taxes............................................. (40) --
------- -------
(40) (819)
------- -------
Net deferred tax asset................................ $ 320 $ 169
======= =======
</TABLE>
At December 31, 1997 and 1998 the Company has income tax losses of
approximately $6,090 and $5,039, respectively, which are available to reduce
income taxes payable and which begin to expire in 2001.
F-39
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousands of U.S. dollars, except share and per share data)
(11) LEASE COMMITMENTS
The Company is obligated under various capital leases for lab equipment that
expire at various dates through 2003. At December 31, 1997 and 1998 and
September 30, 1999, the gross amount of equipment and related accumulated
amortization recorded under capital leases were as follows:
<TABLE>
<CAPTION>
December
31,
------------
September 30,
1997 1998 2000
---- ------ -------------
<S> <C> <C> <C>
Lab equipment.................................... $723 $1,499 $1,577
Less accumulated amortization.................... (219) (622) (921)
---- ------ ------
$504 $ 877 $ 656
==== ====== ======
</TABLE>
Future minimum lease payments under non-cancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Lease Operating Leases
------------- ----------------
<S> <C> <C>
Year ending December 31,
1999...................................... $ 706 $ 2,925
2000...................................... 316 2,577
2001...................................... 103 1,970
2002...................................... -- 1,783
2003...................................... -- 1,441
Thereafter................................ -- 61
------ -------
1,125 10,757
Less amount representing interest........... 161 --
------ -------
Principal due on capital lease
obligation............................. $ 964 $10,757
====== =======
Principal Due on Capital Lease Obligation is
as follows--
1999...................................... $ 557
2000...................................... 307
2001...................................... 100
------
$ 964
======
</TABLE>
Rent expense for non-cancelable operating leases was $1,301, $1,550 and
$1,429, for the years ended December 31, 1996, 1997 and 1998.
F-40
<PAGE>
GEOTRAIN CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(including data related to unaudited periods)
(in thousand of U.S. dollarss, except share and per share data)
(12) EMPLOYEE BENEFIT PLAN
The Company has adopted a defined contribution plan for the benefits of its
employees who meet eligibility requirements. The Company makes matching
contributions for qualified employees at a ratio of 5% or 6% of annual salary,
based on the employees' country of employment.
The amounts expensed by the Company are as follows:
<TABLE>
<S> <C>
Period ended:
December 31, 1996.................................................. $187
December 31, 1997.................................................. 171
December 31, 1998.................................................. 150
</TABLE>
(13) UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The year 2000 issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information
using year 2000 is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. The effects of the year 2000 issue may be experienced before, on or after
January 1, 2000 and, if not addressed, the impact on operations and financial
reporting may range from minor errors to significant systems failure which
could affect the Company's ability to conduct normal business operations. It is
not possible to be certain that all aspects of the year 2000 issue affecting
the Company, including those related to the efforts of customers, suppliers or
other third parties, will be fully resolved.
(14) COMPARATIVE FIGURES
Certain 1997 comparative figures have been reclassified to conform with the
financial statement presentation adopted for 1998.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Professional Training Services, Inc.:
We have audited the accompanying consolidated balance sheets of Professional
Training Services, Inc. (a Pennsylvania corporation) and subsidiaries as of
September 30, 1998 and 1999 and the related consolidated statements of
operations, shareholders' equity (deficit) and cash flows for each of the three
years in the period ended September 30, 1999. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Professional Training
Services, Inc. and subsidiaries as of September 30, 1998 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended September 30, 1999 in conformity with accounting principles
generally accepted in the United States.
Boston, Massachusetts
July 28, 2000
F-42
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30,
----------------
1998 1999
------- -------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................................. $ 850 $ 197
Accounts receivable, net of allowance for doubtful accounts
of $332 and $340 in 1998 and 1999, respectively........... 5,271 6,528
Inventories................................................ 72 103
Prepaid expenses........................................... 141 207
Deferred income taxes...................................... 627 1,396
------- -------
Total current assets..................................... 6,961 8,431
------- -------
Property, Plant and Equipment, net........................... 1,486 1,772
------- -------
Capitalized Software Development Costs, net.................. 2,315 1,971
------- -------
Other Assets:
Goodwill, net.............................................. 365 219
Debt issuance costs, net................................... 160 120
Deposits and other......................................... 324 323
------- -------
Total other assets....................................... 849 662
------- -------
$11,611 $12,836
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Line of credit............................................. $ 1,800 $ 50
Current portion of long-term debt.......................... 79 75
Current portion of capital lease obligations............... 374 519
Accounts payable........................................... 1,168 723
Accrued expenses........................................... 1,972 2,857
Deferred revenue........................................... 3,436 3,652
------- -------
Total current liabilities................................ 8,829 7,876
------- -------
Long-term portion of capital lease obligations............... 487 587
Long-term debt............................................... 2,936 3,117
Deferred Income Taxes........................................ 145 152
Commitments (Note 10)
Shareholders' Equity (Deficit):
Convertible preferred stock, no par value--
Authorized--2,000,000 shares
Issued and outstanding 1,673,640 shares (liquidation value
of $2,460 at September 30, 1999)......................... 2,000 2,000
Common stock, $0.01 par value--
Authorized--12,000,000 shares
Issued and outstanding--7,905,751 shares.................. 79 79
Redeemable warrants........................................ 1,376 1,376
Additional paid-in capital................................. 2,104 2,104
Accumulated deficit........................................ (6,341) (4,439)
Accumulated other comprehensive loss....................... (4) (16)
------- -------
Total shareholders' equity (deficit)..................... (786) 1,104
------- -------
$11,611 $12,836
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year ended September
30,
-----------------------
1997 1998 1999
------- ------ ------
<S> <C> <C> <C>
Revenues............................................... 15,026 21,233 27,044
------- ------ ------
Operating Expenses:
Cost of revenues..................................... 8,320 9,547 9,316
Sales and marketing.................................. 3,950 5,435 5,663
General and administrative........................... 2,530 3,508 5,693
Product development.................................. 429 1,193 1,803
Acquired in-process research and development......... 4,457 -- --
------- ------ ------
Total operating expenses........................... 19,686 19,683 22,475
------- ------ ------
Operating income (loss)............................ (4,660) 1,550 4,569
Interest Expense....................................... 185 1,086 1,129
Interest Income........................................ (10) (17) (12)
Other Expenses......................................... -- 72 --
------- ------ ------
Income (loss) before income taxes.................... (4,835) 409 3,452
Provision for Income Taxes............................. (125) 317 1,550
------- ------ ------
Net income (loss).................................... $(4,710) $ 92 $1,902
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
(in thousands, except share data)
<TABLE>
<CAPTION>
Convertible
Preferred Stock Common Stock Additional Currency Total Other
---------------- ---------------- Redeemable Paid-in Accumulated Translation Stockholders' Comprehensive
Shares Amount Shares Amount Warrants Capital Deficit Adjustment Equity Income (Loss)
--------- ------ --------- ------ ---------- ---------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance,
September 30,
1996............. 1,673,640 $2,000 7,320,000 $73 $ -- $ 985 $(1,723) $-- $ 1,335 $(1,723)
Issuance of
common stock in
connection with
the acquisition
of
Qualifications
Technologies,
Inc............. -- -- 585,751 6 -- 1,119 -- -- 1,125 --
Issuance of
warrants in
connection with
long-term debt.. -- -- -- 967 -- -- 967 --
Net loss........ -- -- -- -- -- (4,710) -- (4,710) (4,710)
-------
Comprehensive
loss............ -- -- -- -- -- -- -- -- -- (4,710)
--------- ------ --------- --- ------ ------ ------- ---- ------- -------
Balance,
September 30,
1997............. 1,673,640 2,000 7,905,751 79 967 2,104 (6,433) -- (1,283) (6,433)
Issuance of
warrants in
connection with
long-term debt.. -- -- -- -- 409 -- -- -- 409 --
Currency
translation
adjustment...... -- -- -- -- -- -- -- (4) (4) (4)
Net income...... -- -- -- -- -- -- 92 -- 92 92
-------
Comprehensive
income.......... -- -- -- -- -- -- -- -- -- 88
--------- ------ --------- --- ------ ------ ------- ---- ------- -------
Balance,
September 30,
1998............. 1,673,640 2,000 7,905,751 79 1,376 2,104 (6,341) (4) (786) (6,345)
Currency
translation
adjustment...... -- -- -- -- -- -- -- (12) (12) (12)
Net income...... -- -- -- -- -- -- 1,902 -- 1,902 1,902
-------
Comprehensive
income.......... -- -- -- -- -- -- -- -- -- 1,890
--------- ------ --------- --- ------ ------ ------- ---- ------- -------
Balance,
September 30,
1999............. 1,673,640 $2,000 7,905,751 $79 $1,376 $2,104 $(4,439) $(16) $ 1,104 $(4,455)
========= ====== ========= === ====== ====== ======= ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Year ended September
30,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss).................................. $(4,710) $ 92 $ 1,902
Adjustments to reconcile net income (loss) to net
cash provided by operating activities--
Amortization of original issue discount........... -- 231 251
Depreciation and amortization..................... 1,655 2,099 2,325
Loss on disposal of property and equipment........ -- 72 --
Acquired in-process research and development...... 4,457 -- --
Deferred income tax benefit....................... (330) (152) (762)
(Increase) decrease in--
Accounts receivable.............................. 26 (1,884) (1,257)
Inventories...................................... (34) 55 (31)
Prepaid expenses................................. (446) 74 (66)
Deposits and other............................... (65) (100) (1)
Increase (decrease) in--
Accounts payable................................. (97) 365 (445)
Accrued expenses................................. 425 592 885
Deferred revenue................................. 685 739 216
------- ------- -------
Net cash provided by operating activities....... 1,566 2,183 3,017
------- ------- -------
Cash Flows from Investing Activities:
Purchases of property plant and equipment.......... (67) (187) (755)
Capitalized software development costs............. (1,461) (1,241) (1,114)
Refund from escrow................................. -- -- 119
Net cash paid for business acquisitions............ (3,714) -- --
------- ------- -------
Net cash used in investing activities........... (5,242) (1,428) (1,750)
------- ------- -------
Cash Flows from Financing Activities:
Net borrowings (repayments) on line of credit...... 600 (300) (1,750)
Repayments of long-term debt....................... (419) (544) (170)
Proceeds of long-term debt, net of issuance costs.. 3,825 -- --
------- ------- -------
Net cash provided by (used in) financing
activities..................................... 4,006 (844) (1,920)
------- ------- -------
Net Increase (Decrease) in Cash and Cash
Equivalents........................................ 330 (89) (653)
Cash and Cash Equivalents, beginning of year........ 609 939 850
------- ------- -------
Cash and Cash Equivalents, end of year.............. $ 939 $ 850 $ 197
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data)
(1) BACKGROUND
Professional Training Services, Inc. and subsidiaries (the Company) is a
provider of information technology training and development software that
focuses on increasing learning retention for users of enterprise wide systems.
The Company offers classroom training, course materials and professional
services for a complete, integrated and flexible solution to introducing new
information technology.
The Company was founded in 1986 and is headquartered in King of Prussia,
Pennsylvania. The Company has training facilities in King of Prussia and New
York, sales offices in England and Germany and a software development operation
in Hungary.
In November of 1999, all of the Company's stock was acquired by Global
Knowledge, Inc. for approximately $39,000 in cash and $21,479 in preferred
stock.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Principles of Consolidation
The accompanying financial statements include the accounts of Professional
Training Services, Inc. and its subsidiaries. All material intercompany
balances and transactions have been eliminated.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Revenue Recognition
The Company recognizes revenue on training services when the services are
rendered. Software and technology-based product revenues are recognized under
the residual method in accordance with SOP 97-2 and 98-9 whereby annual
software license fees are recognized ratably over the annual license period,
perpetual license fees are recognized upon delivery and support and maintenance
fees are recognized ratably over the support period. Amounts received in
advance of revenue recognition are recorded as deferred revenue in the
accompanying consolidated balance sheets.
(d) Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market mutual funds and
are stated at cost, which approximates fair value.
(e) Inventories
Inventories consist of training materials and supplies and are valued at the
lower of cost or market. Cost is determined using the first-in, first-out
method.
F-47
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except and share and per share data)
(f) Property and Equipment
Property and equipment are carried at cost. Property and equipment
capitalized under capital leases are recorded at the present value of the
minimum lease payments due over the lease term. The Company provides
depreciation and amortization using principally the straight-line method for
financial reporting purposes over the following estimated lives:
<TABLE>
<S> <C>
Computer equipment and purchased software.. 2 to 5 years
Office and training equipment.............. 10 years
Leasehold improvements and equipment held
under capital leases...................... Lesser of lease term or 5 years
</TABLE>
(g) Capitalized Software Development Costs
The Company capitalizes software development costs in accordance with
Statement of Financial Accounting Standards (SFAS) No. 86, Accounting for the
Costs of Computer Software to be Sold, Leased or Otherwise Marketed. The
Company capitalizes software development costs subsequent to the establishment
of technological feasibility and until the product is available for general
release. Costs incurred prior to the establishment of technology feasibility
are charged to product development expense. Software development costs are
amortized over the expected useful life of the product of two to five years.
The Company continually evaluates whether events or circumstances have occurred
that indicate that the remaining useful life of the capitalized software
development costs should be revised or that the remaining balance of such
assets may not be recoverable. As of September 30, 1999, management believes
that no revisions to the remaining useful life or write-downs of capitalized
software development costs are required.
(h) Debt Issuance Costs
Costs incurred to obtain long-term debt have been capitalized and are being
amortized on a straight-line basis over the expected term of the loans, which
is five years (see Note 7).
(i) Income Taxes
The Company follows SFAS No. 109, Accounting for Income Taxes. Under SFAS
No. 109, the liability method is used in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between the financial reporting and tax bases of assets and
liabilities and are measured using enacted tax rates that are expected to be in
effect when the differences reverse.
(j) Foreign Currency Translation
The accounts of the international subsidiaries are translated in accordance
with SFAS No. 52, Foreign Currency Translation, which requires that assets and
liabilities of international operations be translated using the exchange rate
in effect at the balance sheet date. The results of operations are translated
at average exchange rates during the year. The effects of exchange rate
fluctuations in translating assets and liabilities of international operations
into U.S. dollars are accumulated and reflected as a cumulative currency
translation adjustment in the consolidated statements of shareholders' equity
(deficit). Transaction gains or losses are included in net income. There were
no material transaction gains or losses for the years presented.
F-48
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
(k) Impairment of Long-Lived Assets
The Company has adopted SFAS No. 121, Accounting for Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires that
long-lived assets and certain identifiable intangibles to be held and used by
the Company be reviewed for possible impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. If changes in circumstances indicate that the carrying amount of
an asset that an entity expects to hold and use may not be recoverable, future
cash flows expected to result from the use of the asset and its disposition
must be estimated. If the undiscounted value of the future cash flows is less
than the carrying amount of the asset, an impairment will be recognized. The
Company believes that there are no material impairment losses as of September
30, 1999.
(l) Comprehensive Income (Loss)
Comprehensive income (loss) is defined as the change in net assets of a
business enterprise during a period from transactions generated from nonowner
sources. It includes all changes in equity during a period except those
resulting from investments by owners and distributions to owners. Other
comprehensive income consists of cumulative currency translation adjustment in
the accompanying balance sheet.
(m) Segment Information
The Company complies with the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. The Company identifies its
operating segments based on business activities and management responsibility.
Management believes that the Company operates in one segment.
(n) Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable, line of credit, capital lease
obligations and long-term debt, and are carried at cost or carrying value.
These amounts were not materially different from their fair values. The Company
uses a discounted cash flows methodology to calculate the fair value of the
long-term debt and capital leases.
(o) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No.
133 establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives), and for hedging activities. As
issued, SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 1999, with earlier application encouraged. In May
1999, the FASB delayed the effective date of SFAS No. 133 for one year, to
fiscal years beginning after June 15, 2000. The Company does not currently nor
does it intend in the future to issue derivative instruments and therefore does
not expect that the adoption of SFAS No. 133 will have any impact on its
financial position or results of operations.
(3) BUSINESS ACQUISITION
Prior to September 30, 1997, the Company was obligated and paid royalties
under a license agreement with Qualifications Technologies, Inc. (QTI) for
technology utilized in certain of the Company's software products. For the year
ended September 30, 1997, the Company charged to expense $241 under this
agreement. On September 30, 1997, the Company acquired all of the outstanding
common stock of QTI and the rights to QTI technology for $5,585. The QTI
acquisition was accounted for under the purchase method of accounting.
F-49
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
The purchase price consisted of $3,590 in cash, 585,751 shares of the
Company's common stock recorded at its fair value of $1,125, $696 in prepaid
royalty fees previously paid to QTI under the license agreement and $174 in
transaction costs. The excess of the purchase price over the estimated fair
value of the net assets acquired of $5,540 was allocated to goodwill of $465,
acquired software of $618 and acquired in-process research and development of
$4,457. Acquired in-process research and development represents the value of
QTI development projects underway at the time of the acquisition, for which
technological feasibility had not been achieved. Accordingly, the acquired in-
process research and development was charged to expense at the time of the
acquisition. The goodwill and acquired software are being amortized over their
estimated economic lives of ten and four years, respectively. The purchase
price also includes an earnout provision which was amended during fiscal 1998.
The amended earn-out provides for additional payments of up to $1,410, if
certain milestones are achieved. The milestones are based on the development of
certain technologies and the revenues from certain products, as defined. Upon
the acquisition by Global Knowledge, Inc. in November 1999, the Company paid
the earn-out provision of $1,410. The Company also entered into employment
agreements with four QTI employees, three of whom were QTI shareholders.
(4) SUPPLEMENTAL CASH FLOWS INFORMATION
For the years ended September 30, 1997, 1998 and 1999, the Company paid
interest of $183, $767 and $885, paid income taxes of $108, $273 and $1,714 and
financed equipment purchases with capital leases of $398, $785 and $871
respectively.
(5) PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
September 30,
----------------
1998 1999
------- -------
<S> <C> <C>
Equipment held under capital leases........................ $ 1,883 $ 1,728
Computer equipment and purchased software.................. 561 917
Office and training equipment.............................. 407 598
Leasehold improvements..................................... 53 50
------- -------
2,904 3,293
Less--Accumulated depreciation and amortization............ (1,418) (1,521)
------- -------
$ 1,486 $ 1,772
======= =======
</TABLE>
Depreciation and amortization expense on property and equipment for the
years ended September 30, 1997, 1998 and 1999 was $519, $543 and $642,
respectively.
(6) CAPITALIZED SOFTWARE DEVELOPMENT COSTS
<TABLE>
<CAPTION>
September 30,
----------------
1998 1999
------- -------
<S> <C> <C>
Capitalized software development costs..................... $ 3,029 $ 2,779
Acquired software.......................................... 618 618
Less--Accumulated amortization............................. (1,332) (1,426)
------- -------
$ 2,315 $ 1,971
======= =======
</TABLE>
For the years ended September 30, 1997, 1998 and 1999, the Company
capitalized $1,461, $1,241 and $1,114 of software development costs and
recorded $1,136, $1,474 and $1,458 of amortization expense, respectively. On
September 30, 1997, the Company capitalized software valued at $618 acquired
from QTI (see Note 3).
F-50
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
(7) DEBT
<TABLE>
<CAPTION>
September 30,
--------------
1998 1999
------ ------
<S> <C> <C>
Term loan with finance companies, net of unamortized
original issue discount of $1,145 and $894............... $2,855 $3,106
Line of credit............................................ 1,800 50
Notes payable to bank..................................... 161 86
Current portion of capital lease obligations.............. 861 1,106
------ ------
5,677 4,348
Less--Current portion..................................... (2,253) (644)
------ ------
$3,424 $3,704
====== ======
</TABLE>
In order to finance the acquisition of QTI (see Note 3), the Company
borrowed $4,000 under a term loan agreement (the Term Loan) on September 30,
1997. The Term Loan is due September 30, 2002. The Term Loan bears interest at
a stated rate of 13.25% per year, which is payable monthly, and is secured by a
secondary lien on all assets of the Company and common stock held by certain
shareholders.
In connection with the Term Loan, the Company issued warrants to the lenders
to purchase 370,620 shares of common stock at an exercise price of $.01 per
share. These warrants are redeemable by the lenders at their estimated fair
market value for a 60-day period beginning after the maturity of the Term Loan.
If certain portions of the Term Loan are not prepaid by the Company by
September 30, 2000, 2001 or 2002, the Company will issue warrants to purchase
additional shares of common stock at $.01 per share in the amount of 1.00%,
1.00% and 2.25%, respectively, of the Company's fully diluted common shares
outstanding. The estimated aggregate fair value of the warrants issued to the
lenders on September 30, 1997 and the additional warrants expected to be issued
was $967 and was recorded as original issue discount. During fiscal 1998,
management determined the number of warrants to be issued in future periods was
greater than originally estimated. Accordingly, the Company recorded additional
original issue discount for the estimated fair value of these warrants of $409.
The original issue discount will be amortized to interest expense over the
estimated life of the Term Loan, which is five years. Interest expense on the
term loan was $781 for fiscal 1999, including amortization of the original
issue discount of $251.
In September 1995, the Company issued a $225 note to a bank with interest at
8.75% per year. In November 1995, the Company issued a second note in the
amount of $148 to the same bank with interest at 8.375% per year. The remaining
principal payments are due in monthly installments of $4 and $2, respectively,
with the final payment due in October 2000 and December 2000, respectively.
Interest expense on these notes for the years ended September 30, 1997, 1998
and 1999 was $23, $17 and $12, respectively.
F-51
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
Long-term debt at September 30, 1999 matures as follows:
<TABLE>
<S> <C>
Year Ending September 30,
2000............................................................ $ 75
2001............................................................ 11
2002............................................................ 4,000
-------
4,086
Less--Unamortized discount...................................... (894)
-------
$ 3,192
=======
</TABLE>
The Company has a line of credit agreement with a bank. The Company can
borrow up to the lesser of $2,500 or 70% of its eligible accounts receivable
less than 91 days old. The line bears interest at the bank's prime rate (8.50%
and 8.25% at September 30, 1998 and 1999, respectively) plus 0.50%. The line of
credit agreement requires the Company to maintain a minimum amount of annual
net income. The agreement was terminated in November 1999 upon the acquisition
of the Company by Global Knowledge, Inc.
The highest outstanding balance on the line during the years ended September
30, 1998 and 1999 was $2,500 and $2,000, respectively, and the weighted average
interest rate on outstanding borrowings during fiscal 1998 and 1999 was 8.67%
and 8.36%, respectively. As of September 30, 1999, the outstanding balance of
the line of credit was $50. The line is secured by substantially all of the
assets of the Company. Interest expense on the line for the years ended
September 30, 1997, 1998 and 1999 was $118, $195 and $92, respectively.
The Company has several capital leases for equipment with terms ranging from
2 to 5 years. The implicit interest rates under these leases range from 8.25%
to 13.87% per year. Interest expense on the capital leases for the years ended
September 30, 1997, 1998 and 1999 was $43, $69 and $73, respectively.
Future minimum lease payments for assets under capital lease obligations at
September 30, 1999 are as follows:
<TABLE>
<S> <C>
Year Ending September 30,
2000............................................................. $ 642
2001............................................................. 380
2002............................................................. 162
2003............................................................. 122
2004............................................................. 6
------
Total minimum lease payments................................... 1,312
Less--Amounts representing interest................................ (206)
------
Present value of net minimum lease payments...................... 1,106
Less--Current portion.............................................. (519)
------
Long-term portion of capital lease obligations................... $ 587
======
</TABLE>
F-52
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
(8) ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
September 30,
-----------------
1998 1999
------ ------
<S> <C> <C> <C>
Employee compensation and related benefits................. $ 678 $ 800
Taxes...................................................... 111 950
Other...................................................... 943 836
------ ------
$1,732 $2,586
====== ======
</TABLE>
(9) INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
September 30,
-------------------
1997 1998 1999
----- ---- ------
<S> <C> <C> <C>
Federal--
Current............................................... $ 141 $363 $1,769
Deferred.............................................. (264) (129) (591)
----- ---- ------
(123) 234 1,178
State--
Current............................................... 64 106 544
Deferred.............................................. (50) (23) (172)
----- ---- ------
14 83 372
Valuation reserve....................................... (16) -- --
----- ---- ------
$(125) $317 $1,550
===== ==== ======
</TABLE>
The tax effect of significant temporary differences is as follows:
<TABLE>
<CAPTION>
September
30,
-------------
1998 1999
----- ------
<S> <C> <C>
Gross deferred tax assets--
Book/tax timing
differences for revenue
recognition.............. $ 551 $1,190
Accruals and reserves not
currently deductible for
tax...................... 153 206
Other..................... 6 --
----- ------
710 1,396
Gross deferred tax
liabilities--
Depreciation and
amortization of property
and equipment............ (75) (75)
Conversion from cash basis
to accrual basis of
accounting............... (153) (77)
----- ------
(228) (152)
----- ------
Net deferred income tax
asset.................. $ 482 $1,244
===== ======
</TABLE>
F-53
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
The federal statutory income tax rate is reconciled to the effective tax
rate as follows:
<TABLE>
<CAPTION>
September 30,
------------------
1997 1998 1999
----- ---- ----
<S> <C> <C> <C>
Federal statutory rate................................... (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit............... (6.1) 6.1 7.2
Expenses not deductible for tax purposes................. 37.1 19.7 2.8
Change in valuation reserve.............................. 0.4 -- 0.9
Foreign operating losses not benefited................... -- 17.7 --
----- ---- ----
(2.6)% 77.5% 44.9%
===== ==== ====
</TABLE>
(10) COMMITMENTS
(a) Operating Leases
The Company leases office and training facilities and equipment under
noncancellable operating leases. Rent expense for the years ended September 30,
1997, 1998 and 1999 was $898, $1,036 and $1,328, respectively. Future minimum
rental commitments under these operating leases are as follows:
<TABLE>
<S> <C>
September 30,
2000................................................................ $1,030
2001................................................................ 644
2002................................................................ 599
2003................................................................ 435
2004................................................................ 415
Thereafter.......................................................... 216
------
$3,339
======
</TABLE>
(b) Employment Agreements
The Company has three-year employment agreements with five employees of the
former QTI. The minimum annual compensation under these agreements is $435 for
fiscal 1999 and 2000, based on currency exchange rates as of September 30,
1999.
(c) Litigation
The Company is subject to various legal proceedings that arise in the
ordinary course of business. Based on discussion with the Company's legal
counsel, management believes that the amount of ultimate liability with respect
to these actions will not be material to the financial position or results of
operations of the Company.
(11) SERIES A CONVERTIBLE PREFERRED STOCK
On November 1, 1994, the Company sold 1,673,040 shares of Series A
convertible preferred stock (Preferred Stock) for $2,000. The Preferred Stock
is convertible at the holder's option, or automatically in the event the
Company sells its common stock in an initial public offering. The shares are
convertible into one share of common stock for each share of Preferred Stock.
Each share of Preferred Stock is entitled to vote and
F-54
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
participate in dividends declared to common shareholders, if any. The preferred
shareholders also have preference in liquidation and certain antidilution
rights. The liquidation value of the Preferred Stock is the greater of a fixed
amount as defined in the Preferred Stock Purchase Agreement plus all declared
but unpaid dividends on the Preferred Stock or the amount that would have been
payable had the Preferred Stock been converted into common stock immediately
prior to the liquidation.
(12) OPTIONS
On February 1, 1995, the Company adopted the 1995 Equity Compensation Plan
(the Plan). The Compensation Committee of the Board of Directors administers
the Plan and awards grants under the Plan at its sole discretion. The Plan
reserves up to 1,600,000 shares of common stock for issuance in connection with
the exercise and/ or grant of incentive and nonqualified stock options, stock
appreciation rights and shares of common stock to employees, officers,
directors and consultants.
Stock option activity for the three years ended September 30, 1999 is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
Price
Price per Per
Shares Share Share
--------- ----------- --------
<S> <C> <C> <C>
Outstanding, September 30, 1996............. 349,910 $ .90 $ .90
Granted................................... 343,800 1.35 1.35
Terminated................................ (65,200) 0.90--1.35 1.23
--------- ----------- -----
Outstanding, September 30, 1997............. 628,510 $0.90--1.35 $1.11
Granted................................... 390,600 1.92 1.92
Terminated................................ (91,100) 0.90--1.92 1.13
--------- ----------- -----
Outstanding, September 30, 1998............. 928,010 $0.90--1.92 $1.45
Granted................................... 115,600 2.00 2.00
Terminated................................ (39,700) 0.90--2.00 1.57
--------- ----------- -----
Outstanding, September 30, 1999............. 1,003,910 $0.90--2.00 $1.51
========= =========== =====
Options exercisable, September 30, 1999..... 241,955 $0.90--1.92 $1.24
========= =========== =====
</TABLE>
All options have a ten-year life. Options granted in fiscal 1997 vest as
follows: 150,000 options vest 17% immediately, 17% after one year and 33% per
year thereafter and 193,800 vest 50% after two years and 25% per year
thereafter. Options granted in fiscal 1998 vest as follows: 271,000 vest 25%
per year and 119,600 vest 50% after two years and 25% per year thereafter.
Options granted in fiscal 1999 vest as follows: 115,600 vest 50% after two
years and 25% per year thereafter.
The Company accounts for its plan under Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees. In 1995, the
Financial Accounting Standards Board issued SFAS No. 123, Accounting for Stock-
Based Compensation. SFAS No. 123 established a fair value based method of
accounting for stock-based compensation plans. SFAS No. 123 requires that an
employer's financial statements include certain disclosures about stock-based
employee compensation arrangements regardless of the method used to account for
the plan. Had the Company recognized compensation cost for its plan consistent
with the provisions of SFAS No. 123, net income (loss) would have been
$(4,718), $80 and $1,837 for fiscal 1997, 1998 and 1999, respectively.
F-55
<PAGE>
PROFESSIONAL TRAINING SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(in thousands, except share and per share data)
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model, with a weighted average risk-free
interest rate of 6.6%, 5.9% and 4.5% for fiscal 1997, 1998 and 1999,
respectively, no expected dividend yield and an expected life of seven years.
The weighted average fair value of each option granted during fiscal 1997, 1998
and 1999 was $0.50, $0.65 and $0.54, respectively.
(13) SHAREHOLDERS' AGREEMENTS
The Company has agreements with its common and preferred shareholders
whereby first the Company and then certain shareholders have the right of first
refusal to purchase the shares of any shareholder who wishes to sell shares of
the Company's capital stock.
(14) EMPLOYEE BENEFIT PLAN
The Company has a Section 401(k) retirement savings plan (the Plan). The
Plan allows employees to contribute up to 15% of their annual compensation,
subject to statutory limitations. The Plan provides for discretionary Company
matching and profit-sharing contributions. Company matching contributions to
the Plan were approximately $0, $20 and $38 in fiscal 1997, 1998 and 1999,
respectively.
F-56
<PAGE>
[GLOBAL KNOWLEDGE LOGO]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the Registrants expenses in connection with
the issuance and distribution of the securities being registered. Except for
the Securities and Exchange Commission ("SEC") Registration Fee and the
National Association of Securities Dealers, Inc. ("NASD") Filing Fee, the
amounts listed below are estimates:
<TABLE>
<S> <C>
SEC Registration Fee............................................. $53,130
NASD Filing Fee.................................................. 20,625
Nasdaq Listing Fees.............................................. *
Legal Fees and Expenses.......................................... *
Blue Sky Fees and Expenses....................................... *
Accounting Fees and Expenses..................................... *
Printing and Engraving........................................... *
Transfer Agent and Register Fees and Expenses.................... *
Miscellaneous.................................................... *
-------
Total........................................................ $ *
=======
</TABLE>
---------------------
*To be filed by amendment.
Item 14. Indemnification of Directors and Officers
The Company's Second Amended and Restated Certificate of Incorporation (the
"Restated Certificate") provides that the Company shall indemnify to the
fullest extent authorized by the Delaware General Corporation Law ("DGCL"),
each person who is involved in any litigation or other proceeding because such
person is or was a director or officer of the Company or is or was serving as
an officer or director of another entity at the request of the Company, against
all expense, loss or liability reasonably incurred or suffered in connection
therewith. The Restated Certificate provides that the right to indemnification
includes the right to be paid expenses incurred in defending any proceeding in
advance of its final disposition; provided, however, that such advance payment
will only be made upon delivery to the Company of an undertaking, by or on
behalf of the director or officer, to repay all amounts so advanced if it is
ultimately determined that such director is not entitled to indemnification. If
the Company does not pay a proper claim for indemnification in full within 60
days after a written claim for such indemnification is received by the Company,
the Restated Certificate and the Company's Bylaws authorize the claimant to
bring an action against the Company and prescribe what constitutes a defense to
such action.
Section 145 of the DGCL permits a corporation to indemnify any director or
officer of the corporation against expenses (including attorneys fees),
judgments, fines and amounts paid in settlement actually and reasonably
incurred in connection with any action, suit or proceeding brought by reason of
the fact that such person is or was a director or officer of the corporation if
they acted in good faith and reasonably believed they were acting in the best
interests of the corporation, and, with respect to any criminal action or
proceeding, if he or she had no reason to believe his or her conduct was
unlawful. In a derivative action, (i.e., one brought by or on behalf of the
corporation), indemnification may be made only for expenses, actually and
reasonably incurred by any director or officer in connection with the defense
or settlement of such an action or suit, if such person acted in good faith and
in a manner that he reasonably believed to be in, or not opposed to, the best
interests of the corporation, except that no indemnification shall be made if
such person shall have been adjudged to be liable to the corporation, unless
and only to the extent that the court in which the action or suit was brought
shall determine that the defendant is fairly and reasonably entitled to
indemnity for such expenses despite such adjudication of liability.
II-1
<PAGE>
Pursuant to Section 102(b)(7) of the DGCL, the Restated Certificate
eliminates the liability of a director to the corporation or its stockholders
for monetary damages for such breach of fiduciary duty as a director, except
for liabilities arising (i) from any breach of the directors duty of loyalty to
the corporation or its stockholders, (ii) from acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under Section 174 of the DGCL, or (iv) from any transaction from which
the director derived an improper personal benefit.
The Company has obtained primary and excess insurance policies insuring the
directors and officers of the Company against certain liabilities that they may
incur in their capacity as directors and officers. Under such policies, the
insurers, on behalf of the Company, may also pay amounts for which the Company
has granted indemnification to the directors or officers.
Additionally, reference is made to the Underwriting Agreement filed as
Exhibit 1.1 hereto, which provides for indemnification by the Underwriters of
the Company, its directors and officers who sign the Registration Statement and
persons who control the Company, under certain circumstances.
Item 15. Recent Sales of Unregistered Securities
Since inception, the Company has sold and issued the following securities
that were not registered under the Securities Act of 1933, as amended (the
"Securities Act"):
1. In December 1995, the Company issued an aggregate shares of
common stock and 200,000 shares of Series A redeemable convertible
preferred stock to various individuals and entities affiliated with Welsh,
Carson, Anderson & Stowe ("WCAS") for an aggregate purchase price of
$20,000,000 and $20,000,000, respectively.
2. In January 1997, the Company issued shares of common stock and
175,000 shares of Series A redeemable convertible preferred stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $21,666,000 and $17,500,000, respectively.
3. In September 1997 and December 1997, the Company issued an aggregate
shares of our common stock to an affiliate of WCAS in lieu of making
interest payments on our subordinated note in cash.
4. In September 1997, the Company issued shares of common stock
and 75,000 shares of Series A redeemable convertible preferred stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $3,750,000 and $7,500,000, respectively.
5. In July 1998, the Company issued shares of common stock to DRF
Equity Partnership (Rein & Co.) as payment for services rendered to the
Company relating to the recruitment of potential candidates to serve as
chief financial officer of the Company.
6. In December 1997 the Company issued shares of common stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $5,000,000.
7. In May 1998, the Company issued shares of common stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $1,000,000.
8. In December 1998, the Company issued shares of common stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $3,000,018.
9. In January, 1999 the Company issued shares of common stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $10,000,000.
10. In March 1999, the Company issued shares of common stock to Welsh,
Carson, Anderson & Stowe VII, L.P. for an aggregate purchase price of
$3,000,000.
11. In April 1999, the Company issued shares of common stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $5,000,006.
II-2
<PAGE>
12. In August 1999, the Company issued shares of common stock and
19,230 shares of Series A redeemable convertible preferred stock to various
individuals and entities affiliated with WCAS for an aggregate purchase
price of $3,077,000 and $1,9230,000, respectively.
13. In October 1999, the Company issued shares of common stock and
211,530 shares of Series A redeemable convertible preferred stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $33,847,000 and $21,153,000, respectively.
14. In November 1999, in connection with the Company's purchase of
Professional Training Services, Inc., it issued 4,295,796 shares of Series
B redeemable convertible preferred stock to various investors.
15. In November 1999, the Company issued shares of common stock
and 120,188 shares of Series A redeemable convertible preferred stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $19,062,000 and $12,188,000, respectively.
16. In March 2000, the Company issued shares of common stock and
173,070 shares of Series A redeemable convertible preferred stock to
various individuals and entities affiliated with WCAS for an aggregate
purchase price of $27,693,000 and $17,307,000, respectively.
17. During the period between January 1996 and October 2000, the Company
granted either incentive stock options or non-qualified stock options to
employees, officers, directors and other individuals eligible to
participate in the Company's stock option plan covering an aggregate of
shares of the Company's common stock. Pursuant to these grants, the
Company has issued shares of common stock upon the exercise thereof.
The sale and issuance of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act, or Regulation D promulgated thereunder, or Rule 701 promulgated
under Section 3(b) of the Securities Act, as transactions by an issuer not
involving a public offering or transactions pursuant to compensatory benefit
plans and contracts relating to compensation as provided under such Rule 701.
The recipients of securities in each such transaction represented their
intention to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates and instruments issued in such
transactions. All recipients had adequate access, through their relationships
with the Company, to information about the Registrant.
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Registrant as
amended.
3.2* Form of Registrants Second Amended and Restated Certificate of
Incorporation to be effective upon the consummation of this
offering.
3.3 By Laws of Registrant.
3.4* Form of Registrants Amended and Restated By-Laws to be effective
upon the consummation of this offering.
4.1* Specimen certificate for shares of Common Stock.
4.2 Registration Rights Agreement, dated as of December 21, 1995,
among Registrant and the investors named therein.
4.3 Rights Agreement, dated as of November 24, 1999, among Registrant,
Global Knowledge Network, Inc. and the stockholders identified on
Schedule I thereto.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<S> <C>
5.1* Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with respect to the legality of
securities being registered.
10.1 Global Knowledge, Inc. and its Subsidiaries Stock Option and Restricted Stock Purchase
Plan, as amended.
10.2 Form of Stock Option Agreement pursuant to the Stock Option and Restricted Stock
Purchase Plan.
10.3* Form of Indemnification Agreement.
11.1 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP, independent accountants.
23.2* Consent of , independent accountants.
23.3* Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see Exhibit 5.1).
24.1 Power of Attorney (see Signature Page).
27.1 Financial Data Schedule.
</TABLE>
---------------------
*To be filed by amendment.
Item 17. Undertakings
(a) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 14-
Indemnification of Directors and Officers above, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(b) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) The undersigned Registrant hereby undertakes to provide to the
underwriter at the closing specified in the underwriting agreements,
certificates in such denominations and registered in such names as required by
the underwriter to permit prompt delivery to each purchaser.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned thereunto duly authorized, on October 6, 2000.
Global Knowledge, Inc.
/s/ Duncan M. Anderson
By: _________________________________
Duncan M. Anderson
President and Chief Executive
Officer
POWER OF ATTORNEY AND SIGNATURES
We the undersigned officers and directors of Global Knowledge, Inc., hereby
severally constitute and appoint Duncan M. Anderson and Bruce J. Ryan, and each
of them singly (with full power to each of them to act alone), our true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution in each of them for him and in his name, place and stead, and in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement (or any other Registration
Statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933), and to file the same, with all
exhibits thereto and other documents in connection therewith, with the
Securities and Exchange Commission, granting 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 or necessary to be done in and about the
premises, as full 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 or his substitute or substitutes may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, the following
persons in the following capacities signed this Registration Statement on the
dates indicated.
<TABLE>
<CAPTION>
Signatures Title Date
---------- ----- ----
<S> <C> <C>
/s/ Duncan M. Anderson President and Chief October 6, 2000
____________________________________ Executive Officer, Director
Duncan M. Anderson (Principal executive
officer)
/s/ Bruce J. Ryan Executive Vice President and October 6, 2000
____________________________________ Chief Financial Officer,
Bruce J. Ryan Director (Principal
financial and accounting
officer)
/s/ Anthony L. Craig Director October 6, 2000
____________________________________
Anthony L. Craig
/s/ Thomas E. McInerney Director October 6, 2000
____________________________________
Thomas E. McInerney
/s/ Robert A. Minicucci Director October 6, 2000
____________________________________
Robert A. Minicucci
/s/ William J. Montgoris Director October 6, 2000
____________________________________
William J. Montgoris
/s/ Sanjay Swani Director October 6, 2000
____________________________________
Sanjay Swani
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1* Form of Underwriting Agreement.
3.1 Amended and Restated Certificate of Incorporation of Registrant as
amended.
3.2* Form of Registrants Second Amended and Restated Certificate of
Incorporation to be effective upon the consummation of this
offering.
3.3 By Laws of Registrant.
3.4* Form of Registrants Amended and Restated By-Laws to be effective
upon the consummation of this offering.
4.1* Specimen certificate for shares of Common Stock.
4.2 Registration Rights Agreement, dated as of December 21, 1995,
among Registrant and the investors named therein.
4.3 Rights Agreement, dated as of November 24, 1999, among Registrant,
Global Knowledge Network, Inc. and the stockholders identified on
Schedule I thereto.
5.1* Opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol, with
respect to the legality of securities being registered.
10.1 Global Knowledge, Inc. and its Subsidiaries Stock Option and
Restricted Stock Purchase Plan, as amended.
10.2 Form of Stock Option Agreement pursuant to the Stock Option and
Restricted Stock Purchase Plan.
10.3* Form of Indemnification Agreement.
11.1 Statement Regarding Computation of Per Share Earnings.
21.1 Subsidiaries of the Company.
23.1 Consent of Arthur Andersen LLP, independent accountants.
23.2* Consent of , independent accountants.
23.3* Consent of Reboul, MacMurray, Hewitt, Maynard & Kristol (see
Exhibit 5.1).
24.1 Power of Attorney (see Signature Page).
27.1 Financial Data Schedule.
</TABLE>
---------------------
*To be filed by amendment.
