UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-24936
LEARN2.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 75-2480669
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
925 WESTCHESTER AVENUE
WHITE PLAINS, NEW YORK 10604
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 682-4300
Registrant (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
(2) has been subject to such filing requirements for the past 90 days. Yes |X|
No |_|
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $0.01 Par Value 40,401,900
(Title of Each Class) (Number of Shares Outstanding at
August 9, 1999)
<PAGE>
LEARN2.COM, INC.
(Formerly Known as 7th Level, Inc.)
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999
INDEX
PART I FINANCIAL INFORMATION Page No.
--------
Item 1 Condensed Consolidated Balance Sheets as of June 30, 1999
and December 31, 1998 ...................................... 1
Condensed Consolidated Statements of Operations for the
three and six months ended June 30, 1999 and 1998 .......... 2
Condensed Consolidated Statement of Stockholders' Equity
for the six months ended June 30, 1999 ..................... 3
Condensed Consolidated Statements of Cash Flows for the
six months ended June 30, 1999 and 1998 .................... 4
Notes to Condensed Consolidated Financial Statements ....... 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations .................................. 10
Item 3 Quantitative and Qualitative Disclosures about Market Risk . 17
PART II OTHER INFORMATION
Item 2 Changes in Securities and Use of Proceeds .................. 17
Item 4 Submission of Matters to a Vote of Security Holders ........ 18
Item 6 Exhibits and Reports on Form 8-K ........................... 19
SIGNATURE ............................................................ 20
<PAGE>
LEARN2.COM, INC.
(Formerly Known as 7th Level, Inc.)
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
--------- ------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 6,889 $ 11,313
Accounts receivable, net 2,029 174
Other current assets 1,307 367
--------- ---------
Total current assets 10,225 11,854
Fixed assets, net 589 1,478
Capitalized software, net 15,173 --
Intangible assets, net 3,432 7
Goodwill 9,714 --
Other assets 149 80
--------- ---------
Total assets $ 39,282 $ 13,419
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 356 $ 198
Accrued expenses and other current liabilities 3,027 2,513
Current portion of deferred revenue 2,120 50
Notes payable 493 487
--------- ---------
Total current liabilities 5,996 3,248
Deferred revenue 933 --
Other 858 48
--------- ---------
Total liabilities 7,787 3,296
Commitments and contingencies (Note 7)
Stockholders' equity:
Series B Convertible Preferred Stock, par value $0.01
per share, 15,000 shares authorized; 0 and 1,395 shares issued
and outstanding in 1999 and 1998, respectively ($1,395,000
liquidation value) -- 629
Series D Convertible Preferred Stock, par value $0.01
per share, 35,000 shares authorized; 21,661 and 0 shares
issued and outstanding in 1999 and 1998, respectively
($21,661,000 liquidation value) -- --
Common stock, par value $0.01 per share, 100,000,000 shares
authorized; 32,645,066 and 25,307,482 shares issued and
outstanding in 1999 and 1998, respectively 326 252
Additional paid-in-capital 134,034 93,963
Notes receivable from directors (Note 6) (1,687) --
Accumulated deficit (101,178) (84,721)
--------- ---------
Total stockholders' equity 31,495 10,123
--------- ---------
Total liabilities and stockholders' equity $ 39,282 $ 13,419
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE>
LEARN2.COM, INC.
(Formerly Known as 7th Level, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------- ------------------
June 30, June 30, June 30, June 30,
-------- -------- -------- --------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenues $ 2,816 $ 1,100 $ 1,791 $ 502
Cost of revenues 626 216 440 107
------------ ------------ ------------ ------------
Gross profit 2,190 884 1,351 395
------------ ------------ ------------ ------------
Operating expenses:
Research and product development 1,565 1,491 973 667
Sales and marketing 1,746 503 1,231 208
General and administrative 1,718 3,677 971 2,546
Depreciation and amortization 989 1,040 610 475
Restructuring charges 2,493 -- -- --
Acquired in-process technology 9,677 -- -- --
Other non-recurring charges 277 -- 277 --
------------ ------------ ------------ ------------
Total operating expenses 18,465 6,711 4,062 3,896
------------ ------------ ------------ ------------
Operating loss (16,275) (5,827) (2,711) (3,501)
Interest and other, net 76 (1,423) 117 (1,266)
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (16,199) $ (7,250) $ (2,594) $ (4,767)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.53) $ (0.45) $ (.08) $ (0.29)
============ ============ ============ ============
Weighted average shares outstanding 30,715,327 15,954,793 32,641,531 16,575,097
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
LEARN2.COM, INC.
(Formerly Known as 7th Level, Inc.)
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
CONVERTIBLE CONVERTIBLE
COMMON STOCK PREFERRED SERIES B PREFERRED SERIES D ADDITIONAL
--------------------- ---------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL
--------- --------- --------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 25,308 $ 252 1 $ 629 -- $ -- $ 93,963
Common stock issued on conversion of
Series B Preferred Stock 698 7 (1) (629) -- -- 622
Stock issued in connection with
Street Technologies, Inc.
acquisition 4,948 49 -- -- 22 -- 36,439
Series B dividends paid in common
stock 24 1 -- -- -- -- 73
Common stock issued upon exercise of
warrants 375 4 -- -- -- -- --
Common stock issued upon conversion of
notes payable 187 2 -- -- -- -- 571
Warrants and options issued to
non-employees -- -- -- -- -- -- 301
Notes receivable from
directors for the exercise of
stock options -- -- -- -- -- -- --
Common and preferred stock issued under
stock option plan and stock purchase
plan 1,105 11 -- -- -- -- 2,212
Dividends distributed -- -- -- -- -- -- --
Repayment of notes and accounts receivable
from directors from the exercise of
stock options -- -- -- -- -- -- --
Financing costs -- -- -- -- -- -- (147)
Net loss -- -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Balance at June 30, 1999 32,645 $ 326 -- $ -- 22 $ -- $ 134,034
========= ========= ========= ========= ========= ========= =========
<CAPTION>
NOTES
RECEIVABLE
FROM TOTAL
DIRECTORS ACCUMULATED STOCKHOLDERS'
(NOTE 5) DEFICIT EQUITY
----------- ------------ -------------
<S> <C> <C> <C>
Balance at December 31, 1998 $ -- $ (84,721) $ 10,123
Common stock issued on conversion of
Series B Preferred Stock -- -- --
Stock issued in connection with
Street Technologies, Inc.
acquisition -- -- 36,488
Series B dividends paid in common
stock -- (73) 1
Common stock issued upon exercise of
warrants -- -- 4
Common stock issued upon conversion of
notes payable -- -- 573
Warrants and options issued to
non-employees -- -- 301
Notes receivable from
directors for the exercise of
stock options (1,934) -- (1,934)
Common and preferred stock issued under
stock option plan and stock purchase
plan -- -- 2,223
Dividends distributed -- (185) (185)
Repayment of notes and accounts receivable
from directors from the exercise of
stock options 247 -- 247
Financing costs -- -- (147)
Net loss -- (16,199) (16,199)
--------- --------- ---------
Balance at June 30, 1999 $ (1,687) $(101,178) $ 31,495
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
LEARN2.COM, INC.
(Formerly Known as 7th Level, Inc.)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Six Months Six Months
Ended June 30, Ended June 30,
1999 1998
-------------- --------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(16,199) $ (7,250)
Adjustments to reconcile net loss to net cash used in operating
Activities:
Depreciation and amortization 989 1,040
Non-cash compensation expense and interest -- 2,768
Non-cash common stock warrant and option expense 185 --
Gain on sale of assets -- 161
Restructuring charges 2,493 --
Acquired in-process technology 9,677 --
Other 57 --
Change in operating assets and liabilities (1,059) (76)
-------- --------
Net cash used in operating activities (3,857) (3,357)
Cash flows from investing activities:
Capital expenditures, net (781) (29)
Acquisition costs, net of cash acquired (8) --
-------- --------
Net cash used in investing activities (789) (29)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock option and stock
purchase plans 531 646
Net proceeds from issuance of preferred stock -- 5,269
Net proceeds from debt issuance -- 4,515
Proceeds from exercise of warrants 4 21
Dividends distributed (185) (38)
Principal payments under capital lease obligations (128) --
-------- --------
Net cash provided by financing activities 222 10,413
-------- --------
Net (decrease) increase in cash (4,424) 7,027
Cash and cash equivalents, beginning of period 11,313 2,479
Cash and cash equivalents, end of period $ 6,889 $ 9,506
======== ========
Supplemental disclosures of cash flow information--Cash paid for interest $ 7 $ --
======== ========
Schedule of noncash financing activities:
Conversion of notes payable into common stock 573 --
Notes and accounts receivable received upon exercise of stock options 1,687 --
Detail of acquisition:
Fair value of assets acquired $ 39,630 --
Liabilities assumed (3,133) --
Common stock issued (14,845) --
Preferred stock issued (21,644) --
--------
Acquisition costs, net of cash acquired 8 --
Cash acquired in acquisition 774 --
--------
Total acquisition costs $ 782
========
</TABLE>
4
<PAGE>
LEARN2.COM, INC.
(Formerly Known as 7th Level, Inc.)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Basis of Presentation
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to present
fairly the financial position of Learn2.com, Inc. (formerly known as 7th Level,
Inc.) and subsidiaries (the "Company") as of June 30, 1999 and the results of
operations and cash flows for the six month periods ended June 30, 1999 and June
30, 1998. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements of the Company contained
in the Company's Annual Report on Form 10-K/A for the year ended December 31,
1998.
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
disclosures 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. The results
of operations for any interim period are not necessarily indicative of the
results to be expected for the entire year ending December 31, 1999. The
condensed consolidated financial statements for the period ended June 30, 1998
have been restated to reflect the May 1999 acquisition of Panmedia Corporation
("Panmedia"), which was accounted for as a pooling of interests.
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current year presentation.
2. Summary of Significant Accounting Policies
Revenue Recognition
The Company recognizes revenue in accordance with the provisions of
Statement of Position ("SOP") No. 97-2, "Software Revenue Recognition." Revenues
from software license agreements are recognized upon delivery and acceptance of
the software if there are no significant post-delivery and acceptance
obligations, and payment is fixed and determinable. Revenues for post-contract
customer support are recognized ratably over the term of the support period.
Revenues from development and consulting services are recognized in the period
in which services are provided and the revenues are fixed and determinable.
For direct and indirect sales to organizations, the Company recognizes
revenue for the software license at the time of sale. In most instances, the
Company provides web hosting services. The Company recognizes revenue for this
post-contract support ratably over the hosting period, which is generally one
year.
The Company recognizes revenue for the sale to resellers during the year
as product is delivered and payment is made. In most instances, the Company
provides web hosting services and therefore recognizes revenue for this
post-contract support ratably over the hosting period.
5
<PAGE>
Revenue from web site design and implementation services for corporate
clients is recognized based on either time and materials charges incurred during
the period, the acheivement of project milestones as defined by customer
contracts or percentage of completion for fixed fee contracts.
Advertising revenues on both banner and sponsorship contracts are
recognized ratably over the period in which the advertisement is displayed,
provided that no significant Company obligations remain at the end of a period
and collection of the resulting receivable is probable. Company obligations
typically include guarantees of minimum number of "impressions," or times that
an advertisement appears in pages viewed by users of the Company's online
properties. To the extent minimum guaranteed impressions are not met, the
Company defers recognition of the corresponding revenues until the remaining
guaranteed impression levels are achieved. Payments received from advertisers
prior to displaying their website advertisements are recorded as deferred
revenue and are recognized ratably as the advertisements are displayed.
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," SFAS 86
requires the capitalization of certain software development costs once
technological feasibility is established. The capitalized cost is then amortized
on a straight-line basis over the estimated product life, or on the ratio of
current revenues to total projected product revenues, whichever is greater.
3. Recent Developments and Business Combinations
On July 14, 1999, the Company changed its name from 7th Level, Inc. to
Learn2.com, Inc. The change was made in order to create a single brand and to
more closely align the Company's identity with its product offerings.
ViaGrafix Acquisition
In June 1999, the Company announced it would acquire ViaGrafix
Corporation. Under the terms of the agreement, the Company will issue
approximately 10.7 million shares of common stock. This represents 1.846 shares
for each share of ViaGrafix common stock outstanding. The acquisition which is
expected to be accounted for as a pooling-of-interests and is expected to close
in the third quarter of 1999, subject to various conditions.
Panmedia Acquisition
In May 1999, the Company merged with Panmedia Corporation ("Panmedia").
The Company exchanged 1,543,860 shares of common stock for all the outstanding
common shares of Panmedia. The merger was accounted for as a
pooling-of-interests, and, accordingly, the accompanying financial statements
and footnotes have been restated to include the operations of Panmedia for all
periods presented. During the three months and the six months ended June 30,
1999 and 1998, Panmedia's net revenue was $269,000, $136,000, $631,000 and
$566,000, respectively. During the three months and the six months ended June
30, 1999 and 1998, Panmedia's net income was $46,000, $58,000, $17,000 and
$302,000, respectively.
6
<PAGE>
Street Technologies
In February 1999, the Company acquired all of the outstanding stock of
Street Technologies, Inc., a privately held company, and renamed the subsidiary
7th Street.com, Inc. The Company began marketing and developing training
solutions delivered over intranets and the Internet. To consummate the
transaction, the Company issued 4,948,182 shares of common stock and 21,644
shares of Series D 8% Preferred Stock (the "Series D Stock") with an aggregate
liquidation preference of $21.6 million. On July 29, 1999, the Series D Stock
automatically converted into 7,214,666 shares of common stock, the day after
stockholder approval of the conversion. The total value of the transaction was
approximately $40.4 million including $3.1 million of assumed liabilities, which
consisted primarily of deferred revenue. The transaction was accounted for using
the purchase method of accounting. The results of Street Technologies, Inc.
subsequent to the acquisition are included in the Company's condensed
consolidated statement of operations.
The aggregate purchase price consisted of the following (in thousands):
Description Amount
- ----------- -------
Common stock .......................................... $14,845
Preferred stock ....................................... 21,644
-------
Subtotal ............................................ 36,489
Assumed liabilities ................................... 3,133
Acquisition costs ..................................... 782
-------
Total ............................................... $40,404
=======
The purchase price was allocated to the net assets acquired based upon
their fair values. The fair values were determined by an independent appraisal.
The appraisal incorporated proven valuation procedures and techniques. The
purchase price has been allocated as follows (in thousands):
Description Amount
- ----------- -------
Current assets ............................................... $ 1,763
Fixed assets ................................................. 343
Other assets ................................................. 490
Capitalized software ......................................... 14,717
Intangible assets ............................................ 3,519
Acquired in-process technology (written-off) ................. 9,677
Goodwill ..................................................... 9,895
-------
Total ...................................................... $40,404
=======
7
<PAGE>
The acquired in-process technology has been expensed as a charge against
operations and is included in the accompanying condensed consolidated statement
of operations for the six months ended June 30, 1999. The amount allocated to
acquired in-process technology relates to projects that had not yet reached
technological feasibility and that, until completion of development, had no
alternative future use. These projects require substantial development and
testing prior to reaching technological feasibility. However, these projects may
not reach technological feasibility and may not develop into products that may
be sold by the Company. The acquired in-process technology has required, and may
require substantial development by the Company. The intangible assets are being
amortized over seven to twenty years. The Company recorded approximately
$427,000 and $630,000 in amortization expense relating to these intangible
assets during the three and six months ended June 30, 1999, respectively.
The accompanying condensed consolidated statement of operations for the
six months ended June 30, 1999 includes charges of approximately $9.7 million
associated with the write-off of acquired in-process technology and
approximately $2.5 million associated with a restructuring charge which includes
the write-off of redundant assets, excess office space and employee severance.
The following unaudited pro forma information has been prepared assuming that
this acquisition had taken place at the beginning of the period; it is not
necessarily indicative of results that may occur in the future.
Pro Forma
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three months ended Six months ended
------------------ ----------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenue $ 1,791 $ 2,592 $ 2,791 $ 3,331
(Loss) income
from operations (2,711) 1,510 (16,987) (1,643)
Net (loss) income (2,594) 1,517 (16,834) (1,624)
(Loss) income per share $ (.08) $ .07 $ (.53) $ (.08)
</TABLE>
4. Loss Per Common Share
Basic and diluted loss per share was determined by dividing the net loss
by the weighted average common shares outstanding during the period. Common
stock equivalents are excluded from the loss per share calculation, as their
effect would be anti-dilutive.
5. Conversion of 7% Convertible Notes Payable
The Company's 7% Convertible Notes Payable (the "Notes") were due and
payable on February 11, 1999. To induce the holders to convert the Notes into
common stock, the Company on February 10, 1999 agreed with the holders of the
Notes to amend the Notes to provide that the conversion price should be reduced
to a price equal to 80% of the then current market price of the common stock.
During February 1999, the Company issued 186,982 shares of common stock in
exchange for approximately $458,000 of the Notes. The difference between the
stated conversion price and the actual conversion price was approximately
$115,000 and is included as interest expense in the accompanying condensed
consolidated statement of operations.
8
<PAGE>
6. Stockholders' Equity
In the first quarter of 1999, three members of the Board of Directors
exercised their options to purchase an aggregate of 960,000 shares of Common
Stock for an aggregate exercise price of $1,934,000. The outstanding balance of
$1,687,000 is included as notes and accounts receivable from directors in the
stockholders' equity section of the condensed consolidated balance sheet. Under
the terms of the promissory notes, interest accrues at a rate of 6% per annum
payable quarterly, or at the option of the holders, will accrue at a rate of 7%
per annum payable upon the maturity of the loan. The notes mature at various
dates in 2004.
As of June 30, 1999, all shares of the Company's Series B Convertible
Preferred Stock had been converted into shares of Common Stock.
7. Commitments And Contingencies
The Company is involved in various claims and lawsuits that are generally
incidental to its business. The Company is vigorously contesting all such
matters and believes that their ultimate resolution will not have a material
adverse effect on the Company's consolidated financial position, results of
operations or cash flows.
8. Restructuring Charges
During the six months ended June 30, 1999, the Company recorded a charge
of approximately $2.5 million of incurred direct costs primarily related to the
merger with Street Technologies, Inc. and the Company's reorganization plans to
integrate the operations of Street Technologies, Inc. and the Company. The
charges were comprised of the following: $1.4 million to write-off redundant
assets, $493,000 excess office space and other costs, and $600,000 in employee
severance costs.
The following table summarizes the activity in the accruals during the
period ended June 30, 1999. The balance of the restructuring accrual at June 30,
1999 is included in other accrued expenses and liabilities on the condensed
consolidated balance sheet and is anticipated to be paid within the next three
years.
(in thousands)
<TABLE>
<CAPTION>
Balance at
Restructuring Non-cash June 30,
Charges Charges Payments 1999
------- ------- -------- ----
<S> <C> <C> <C> <C>
Write-off of redundant assets $ 1,400 $(1,385) $ (15) $ --
Office space and other costs 493 86 (164) 415
Employee severance costs 600 (34) (537) 29
------- ------- ------- -------
Total $ 2,493 $(1,333) $ (716) $ 444
======= ======= ======= =======
</TABLE>
9
<PAGE>
9. Industry Segments
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS No. 131). SFAS No. 131 superseded SFAS
No. 14, "Financial Reporting for Segments of a Business Enterprise". SFAS No.
131 establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. SFAS No. 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
In the initial year of application, comparative information for earlier years
must be restated. Management has determined that it does not have any separately
reportable business segments.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following information should be read in conjunction with the financial
statements and the notes thereto and in conjunction with Management's Discussion
and Analysis of Financial Condition and Results of Operations in the Company's
Annual Report on Form 10-K/A for the year ended December 31, 1998.
In order to keep our stockholders informed of the Company's future plans
and objectives, this Quarterly Report on Form 10-Q and other reports and
statements issued by the Company and our officers from time-to-time contain,
among other things, certain statements concerning the Company's future plans,
objectives, performance, intentions and expectations that are or may be deemed
to be "forward-looking statements". When we use the words "believe," "expect,"
"anticipate," "project" and similar expressions, this should alert you that this
is a forward-looking statement. Forward-looking statements speak only as of the
date the statement is made. The Company's ability to do this has been fostered
by the Private Securities Litigation Reform Act of 1995, which provides a "safe
harbor" for forward-looking statements to encourage companies to provide
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying important factors that could cause
actual results to differ materially from those discussed in the statement.
Although the Company believes that its expectations are based on
reasonable assumptions, these forward-looking statements are subject to a number
of known and unknown risks and uncertainties that could cause the Company's
actual results, performance and achievements to differ materially from those
described or implied in the forward-looking statements. These factors include
among others, the Company's ability to complete new products at planned costs
and on planned schedules, the Company's ability to attract and retain strategic
partners and consummate acquisitions, the Company's ability to leverage
intangible assets in its technology, and the Company's ability to maintain a
sufficient level of financing for its business strategy. Additional factors that
are beyond the Company's control and could influence results include market
acceptance of the Company's products and services and adoption of the Internet
as a medium of commerce and communications. See the discussion of the Company's
business and a description of the various factors that could materially affect
the ability of the Company to achieve the anticipated results described in the
forward-looking statement which are included in Item 1 of the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998.
10
<PAGE>
OVERVIEW
On July 14, 1999, we changed our Company's name from 7th Level, Inc. to
Learn2.com, Inc. We made the change in order to create a single brand and to
more closely align our corporate identity with our product offerings.
Learn2.com, Inc. was founded in 1993 with the goal of becoming a leading
developer and publisher of interactive entertainment and educational products as
well as a creator of state of the art tools and technologies. In 1998, our
research and development activities were focused primarily on developing and
enhancing our Agent7-TM technology. We recognized that appropriate applications
of this technology were in the delivery of learning, training and enhanced
communications. To strengthen our position in the marketplace, we searched for a
viable and complementary partner with the appropriate technological assets,
distribution channel and management expertise and abandoned our interactive
entertainment business.
On February 16, 1999, we acquired all of the outstanding stock of Street
Technologies, Inc, a privately held company, and changed the name of Street
Technologies to 7th Street.com, Inc. 7th Street.com markets and develops
technology based training solutions delivered over intranets and the Internet.
The total value of the transaction was approximately $40.4 million including
$3.1 million of assumed liabilities, which were primarily deferred revenue, and
was accounted for using the purchase method of accounting. Accordingly, the
assets and liabilities were recorded based upon their fair values at the date of
acquisition. We recorded approximately $13.4 million in goodwill and other
intangible assets, which are being amortized, on a straight-line basis over
periods of seven to twenty years and wrote-off approximately $9.7 million of
acquired in-process technology.
On May 13, 1999, we acquired all of the outstanding stock of Panmedia
Corporation, a privately held company. Panmedia produces a website which offers
a wide spectrum of step by step instructions on skills, activities, and tasks.
The total value of the transaction was approximately $9.7 million.
As set forth on Note 3, our reported results of operations for all periods
prior to February 16, 1999 do not reflect the results of Street Technologies.
Consequently, the results prior to February 16, 1999 and our balance sheet at
December 31, 1998 are not reflective of our operations and financial position as
presently constituted. The results of operations for the three and six months
ended June 30, 1999 and 1998 have been updated to reflect the acquisition of
Panmedia on May 13, 1999. This acquisition was accounted for as a pooling of
interests and therefore reflects the consolidation of Panmedia from its
inception.
In June 1999, we announced we would acquire ViaGrafix Corporation. Under
the terms of the merger agreement, we will issue approximately 10.7 million
shares of common stock. This represents 1.846 shares for each share of ViaGrafix
common stock outstanding. The acquisition, which is expected to be accounted for
as a pooling-of-interests and is expected to close in the third quarter of 1999,
is subject to various conditions including shareholder approval of Learn2.com
and ViaGrafix.
We plan to significantly increase our research and product development and
sales and marketing operations to help attain our goal of becoming the world's
leading provider of Internet and network delivered learning and training
products and services. We may be unable to
11
<PAGE>
adjust spending quickly enough to offset any unexpected revenue shortfall. If we
have a shortfall in revenues in relation to expenses, or if our expenses exceed
our revenues, then our business, results of operations and financial condition
would be materially and adversely affected. We expect to incur losses on a
quarterly and annual basis for the foreseeable future.
RESULTS OF OPERATIONS
Three Months Ended June 30, 1999 and 1998 and Six Months Ended June 30, 1999 and
June 1998
Revenues
Revenues increased 258.6% from $502,000 to $1.8 million for the three
months ended June 30, 1999 primarily resulting from the addition of 7th
Street.com's revenues from the period subsequent to the merger date to
Learn2.com's revenues. In 1999, approximately 65% of total revenues was related
to 7th Street.com, 15% attributed to the operations of Learn2.com and 20% to the
operations of Panmedia. Our 1998 revenues were derived primarily from
advertising and website design while our 1999 revenues were derived primarily
from technology licenses, content sales, advertising and website design.
Revenues increased $1.7 million from $1.1 million to $2.8 million for the
six months ended June 30, 1999 primarily resulting from the addition of 7th
Street.com's revenues from the period subsequent to the merger date to
Learn2.com's revenues. In 1999, approximately 59% of total revenues was related
to 7th Street.com, 18% attributed to the operations of Learn2.com and 23% to the
operations of Panmedia. Our 1998 revenues were derived primarily from royalties,
advertising and website design while our 1999 revenues were derived primarily
from technology licenses, content sales, advertising and website design.
Cost of Revenues
Cost of revenues for the three months ended June 30, 1999 was $440,000 or
24.6% of net revenues compared to $107,000 or 21.4% of revenues for the three
months ended June 30, 1998. The increase in 1999 as a percentage of net revenues
is primarily due to the change in the composition of revenues.
Cost of revenues for the six months ended June 30, 1999 was $626,000 or
22.3% of net revenues compared to $216,000 or 19.7% of revenues for the six
months ended June 30, 1998. The increase in 1999 as a percentage of net revenues
is primarily due to the change in the composition of revenues.
Research and Product Development Expenses
Research and product development expenses were $973,000 and $667,000 for
the three months ended June 30, 1999 and 1998, respectively. Research and
product development costs increased $306,000 or 45.9% in 1999 and reflects our
headcount and related cost structure as a result of our merger with 7th
Street.com.
Research and product development expenses were $1.6 million and $1.5
million for the six months ended June 30, 1999 and 1998, respectively. Research
and product development costs increased $100,000 or 6.7% in 1999 and reflects
our headcount and related cost structure as a result of our merger with 7th
Street.com.
12
<PAGE>
Sales and Marketing Expenses
Sales and marketing expenses were approximately $1.2 million and $208,000
for the three months ended June 30, 1999 and 1998, respectively. Sales and
marketing expenses increased $992,000 or 477.1% for the three months ended June
30, 1999 primarily due to the addition of 7th Street.com sales and marketing
staff.
Sales and marketing expenses were approximately $1.7 million and $503,000
for the six months ended June 30, 1999 and 1998, respectively. Sales and
marketing expenses increased $1.2 million or 238.1% for the six months ended
June 30, 1999 primarily due to the addition of 7th Street.com sales and
marketing staff.
General and Administrative Expenses
General and administrative expenses were $971,000 and $2.5 million for the
three months ended June 30, 1999 and 1998, respectively. General and
administrative expenses decreased $1.5 million or 61.2% for the three months
ended June 30, 1999. General and administrative expenses for the quarter ended
June 30, 1998 included approximately $1.4 million in non-cash compensation
related to stock granted to the Company's Chairman and Vice Chairman and
approximately $44,000 in charges for certain stock options and stock warrants
granted to consultants. Excluding the one-time expenses, general and
administrative expenses decreased approximately 9.8% between the two periods.
The remaining decrease resulted from changes in headcount and related cost
structure as a result of our merger with 7th Street.com.
General and administrative expenses were $1.7 million and $3.7 million for
the six months ended June 30, 1999 and 1998, respectively. General and
administrative expenses decreased $2.0 million or 54.1% for the six months ended
June 30, 1999. One time charges were recognized in the first half of 1998
totaling $1.8 million, which included approximately (i) $1.4 million in non-cash
compensation related to stock granted to the Company's Chairman and Vice
Chairman, (ii) $44,000 in charges for certain stock options and stock warrants
granted to consultants and (iii) $400,000 related to professional fees
associated with the terminated merger with Pulse. Excluding the one-time
expenses, general and administrative expenses decreased approximately 10.5%
between the two periods. The remaining decrease resulted from changes in
headcount and related cost structure as a result of our merger with 7th
Street.com.
Depreciation and Amortization
Depreciation and amortization expenses were $610,000 and $475,000 for the
three months ended June 30, 1999 and 1998, respectively. Depreciation and
amortization expenses increased $135,000 or 28.4% for the three months ended
June 30, 1999. The 1999 expenses included $81,000 of depreciation on fixed
assets, $102,000 of amortization of computer software and $427,000 of
amortization on goodwill and intangible assets related to the 7th Street.com
merger. The 1998 expenses related primarily to depreciation and amortization on
fixed assets.
Depreciation and amortization expenses were $989,000 and $1.0 million for
the six months ended June 30, 1999 and 1998, respectively. Depreciation and
amortization expenses decreased $11,000 or 1.1% for the six months ended June
30, 1999 primarily due to lower fixed assets in 1999 as a result of the
write-off of approximately $1,400,000 of fixed assets. The 1999 expenses
included $216,000 of depreciation on fixed assets, $142,000 of amortization of
computer software and $630,000 of amortization on goodwill and intangible assets
related to the 7th Street.com merger. The 1998 expenses related primarily to
depreciation and amortization on fixed assets.
Restructuring Charges
Restructuring charges related to our merger with 7th Street.com. were
approximately $2.5 million for the six months ended June 30, 1999. The charges
were comprised of the following: $1.4 million to the write-off of redundant
assets, $493,000 excess office space and other costs, and $600,000 in employee
severance costs.
13
<PAGE>
Acquired In-Process Technology
In connection with our merger with 7th Street.com, we allocated $9.7
million of the purchase price to acquired in-process technology. Accordingly,
these costs were expensed as of the acquisition date. The amount allocated to
acquired in-process technology relates to projects that had not yet reached
technological feasibility and that, until completion of development, had no
alternative future use. The technologies acquired in this merger will continue
to require substantial additional development.
Non-Recurring Costs
During the second quarter of 1999, we completed our merger with Panmedia
Corporation through the issuance of 1,543,860 shares of our common stock. We
recorded a non-recurring charge of $277,000 for transaction costs associated
with the merger.
Interest and Other Expenses, net
Interest and other expenses, net was $117,000 of income compared to $1.3
million of expense for the three months ended June 30, 1999 and 1998,
respectively. Interest and other expenses, net decreased $1.4 million. Interest
and other expenses, net in 1999 consisted primarily of interest income while in
1998 interest and other expenses consisted primarily of $1.4 million related to
the amortization of debt issuance costs and accretion of debt discount following
our May 1998 financing transactions.
Interest and other expenses, net was $76,000 of income compared to $1.4
million of expense for the six months ended June 30, 1999 and 1998,
respectively. Interest and other expenses, net decreased $1.5 million. Interest
and other expenses, net in 1999 consisted primarily of interest income while in
1998 interest and other expenses, net consisted primarily of $1.4 million
related to the amortization of debt issuance costs and accretion of debt
discount following the May 1998 financing transactions.
Net Loss
The net loss for the three months ended June 30, 1999 was $2.6 million or
$.08 per basic and diluted common share, compared to $4.8 million or $0.29 per
basic and diluted common share for the three months ended June 30, 1998. The net
loss was attributable to the factors discussed above.
The net loss for the six months ended June 30, 1999 was $16.2 million or
$0.53 per basic and diluted common share, compared to $7.3 million or $0.45 per
basic and diluted common share for the six months ended June 30, 1998. The net
loss was attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $4.4 million during the first six
months of the year to $6.9 million at June 30, 1999. Operating activities net of
$719,000 of payments relating to restructuring costs accrued during the period
ended March 31, 1999 and acquisition costs related to the Panmedia acquisition
of $277,000, used $2.9 million of cash in the first six months of 1999. The
primary factor related to the use of cash from operating activities was the net
loss of $16.2 million. The net loss was substantially offset by non-cash charges
of $13.4 million (principally $989,000 of depreciation and amortization,
$185,000 non-cash warrant expense, $2.5 million of restructuring charges, and
$9.7 million for the write-off of acquired in-process technology).
14
<PAGE>
The principal factors in the cash used in investing activities of $789,000
were capital expenditures of $781,000 and offset by the cash acquired in our
merger with 7th Street.com of $774,000 reduced by acquisition costs of $782,000.
Financing activities provided $222,000 of cash. This was primarily due to
the exercise of common stock options and warrants totaling $531,000 offset by
dividends paid to Stockholders of $185,000 and payments on existing capital
leases totaling $128,000.
In the normal course of business, we evaluate potential acquisitions,
joint ventures and strategic alliances that may complement our business. While
we have no present commitments or agreements with respect to any material
business combinations, other than the ViaGrafix merger, we may in the future
consummate transactions that may require us to issue additional capital stock
and this issuance may be significant.
To date, we continue to use cash and operate at a loss. Our ability to
achieve positive cash flow depends upon a variety of factors, including the
timely introduction and market success of our products, the costs of developing,
producing and marketing these products, adoption of the Internet as a medium of
commerce and communications, and various other factors, some of which may be
beyond our control. Management believes that with the acquisition of ViaGrafix,
existing cash and investments will be sufficient to meet our operating
requirements for approximately the next twelve months; however, if we are unable
to consummate the ViaGrafix transaction, which is expected to close in the third
quarter of 1999, our business, results of operations and financial condition and
liquidity could be materially and adversely affected. If we require additional
capital, we would seek financing through public or private sources, although
we may not be able to obtain such financing.
YEAR 2000
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field and cannot distinguish
twenty-first century dates from twentieth century dates. To function properly,
these date-code fields must distinguish twenty-first century dates from
twentieth century dates and, as a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with such "Year
2000" requirements.
STATE OF READINESS. We are dependent on the operation of numerous systems
that may be adversely affected by the Year 2000 problem, including:
- Internal systems.
- Equipment, software and content supplied to us by third-party vendors that
may not be Year 2000 compliant, including outside providers of web-hosting
and Internet access services on which we are currently dependent.
In addition, our future business depends on the successful operation of the
Internet following the commencement of the Year 2000. If the Internet is
inaccessible for an appreciable period of time, or if customers and users are
unable to access our site, our business and revenues could be materially
adversely affected. We are also subject to external forces that might generally
affect industry and commerce, such as telecommunications, utilities or
transportation companies Year 2000
15
<PAGE>
compliance failures, related service interruptions and the economic impact that
such failures have on our customers and advertisers.
YEAR 2000 COMPLIANCE ASSESSMENT PLANS. Unlike other businesses, we do not
have an installed base of legacy systems dating back many years. Nonetheless, in
order to reduce the risks of the Year 2000 compliance problem, we have
undertaken a two-phase process of analyzing the impact of the Year 2000 problem.
First, we have completed a formal assessment of our primary internal
systems. Based on such assessment and its knowledge of the specific software and
systems, we currently believe that our systems are Year 2000 compliant in all
material respects or can readily be brought into compliance with the application
of corrective software modifications. In many cases, we expect these
modifications to be provided by the vendors of the computer and software
products we have installed. We have not incurred material costs to date in this
informal phase of the assessment process, and currently do not believe that the
cost of additional actions will have a material effect on our results of
operations or financial condition.
Second, we are in the process of performing a formal assessment of both
our internal systems and the vendor-supplied items and services we employ to
determine how the Year 2000 problem will affect all aspects of our operations.
We are in the final stages of completing this second phase of our assessment.
The formal process involves assessment of the following systems:
- Hardware systems, including servers and systems used for data storage.
- Software systems, including applications, development tools and
proprietary code.
- Infrastructure systems, including routers, hubs and networks.
- Facility systems, including general building functions, security, HVAC and
related operations.
- The systems of our business partners, including content providers and
ISPs.
We are going to conduct our formal assessment of Year 2000 compliance by
gathering information on each aspect of our systems, reviewing each component or
application for date usage, and examining date representations. As to our
systems, the preliminary results of this formal assessment are consistent with
the results of our informal assessment. With respect to vendor-supplied items
and services, we are conducting a review of product compliance information on
such items and services available online, in vendor literature and through trade
group information resources, contacting our vendors for compliance information,
and maintaining documentation of assessments that have been performed by such
vendors or outside sources.
Each department is involved in this formal assessment process. Once
complete, the formal assessment will lead to the creation of a formal
re-mediation and contingency plan for achieving Year 2000 compliance. We do not
anticipate, however, undertaking a formal assessment of the Year 2000 compliance
of the Internet or our underlying telecommunications infrastructure, and will
therefore be unable to predict the impact of Year 2000 issues that might affect
the broader Internet business community, including ours.
16
<PAGE>
RESULTS OF COMPLIANCE EFFORTS TO DATE. Based on the completed informal
assessment and progress on the formal assessment, we currently believe that our
internal systems are or can readily be made Year 2000 compliant in all material
respects. However, it is possible that these current internal systems contain
undetected errors or defects with Year 2000 date functions. In addition,
although we do not anticipate problems, vendor-supplied items and services could
contain undetected errors or defects which, if not corrected, could result in
serious unanticipated negative consequences, including significant downtime for
one or more of our media properties.
COSTS OF YEAR 2000 COMPLIANCE. Although we are not aware of any material
operational issues or costs associated with preparing our internal systems for
the Year 2000, and although we have not incurred material costs to date with
respect to the Year 2000 compliance of these internal systems, the occurrence of
any of the following events could materially and adversely affect our business,
results of operations and financial condition:
- Errors and defects are detected after the formal assessment process is
complete.
- Third-party equipment, software or content fails to operate properly with
regard to the Year 2000.
- Web advertisers expend significant resources to correct their current
systems for Year 2000 compliance, resulting in reduced funds available for
web advertising or sponsorship of web services.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
Not applicable
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In May 1999, we acquired all of the outstanding stock of Panmedia
Corporation. Pursuant to the Agreement and Plan of Merger, we issued 1,543,860
shares of Common Stock.
In May of 1999, we entered into an Employment Agreement, employing Jason
Roberts as an Executive Vice President of the Company. As an inducement to enter
into this agreement, the Board of Directors granted to Mr. Roberts an option to
purchase 300,000 shares of Common Stock exercisable at a price equal to $6.25
per share.
As part of the merger with Panmedia Corporation, options to purchase an
additional 300,000 shares of our common stock excercisable at a price equal to
$6.25 per share were granted to certain employees of Panmedia as an inducement
to retain the services of these employees.
17
<PAGE>
We believe that the issuance of the common stock qualifies as a
transaction by an issuer not involving a public offering within the meaning of
Section 4(2) of the Securities Act of 1933, as amended, based on the manner of
offering which was a negotiated sale to two "accredited investors", as defined
in Rule 501 of Regulation D under the Securities Act, without general
solicitation, and the purchasers' financial status, investment experience and
investment intent, as represented to us.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our Annual Meeting of Stockholders was held on July 28, 1999. The results of the
voting were as follows:
Proposal 1: Election of Directors of the Company
- ---------------------------------------------------
Votes
Nominee Votes For Withheld
- ---------------------------------------------------
- ---------------------------------------------------
Donald Schupak 36,561,919 297,319
- ---------------------------------------------------
Stephen P. Gott 36,640,537 218,701
- ---------------------------------------------------
Robert Alan Ezrin 36,561,654 297,584
- ---------------------------------------------------
Merv Adelson 36,546,554 312,684
- ---------------------------------------------------
James A. Cannavino 36,475,072 402,166
- ---------------------------------------------------
Jason R. Roberts 36,641,397 217,841
- ---------------------------------------------------
- ---------------------------------------------------
Proposal 2: Approval of the issuance of (i) 7,220,323 shares of the Company's
Common stock upon conversion of the Company's currently outstanding shares
of Series D Preferred Stock and (ii) 1,635,355 shares of Common Stock upon
the exercise of stock options and warrants which are currently
excercisable for shares of Series D Preferred Stock.
Votes For: 17,420,139
Votes Against: 553,914
Votes Abstaining: 161,202
Proposal 3: Approval of the Company's 1999 Stock Option Plan
Votes For: 24,230,926
Votes Against: 773,511
Votes Abstaining: 153,748
Proposal 4: Approval to amend the Company's Amended and Restated Incentive Stock
Option Plan to conform with the terms and conditions of the Company's 1999
Stock Option Plan.
Votes For: 24,725,255
Votes Against: 727,925
Votes Abstaining: 157,544
18
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 -- Financial data schedule
(b) Reports on Form 8-K
Registrant filed a Current Report on Form 8-K/A on April 16, 1999. This
Form 8-K/A was filed as an amendment to the current report on Form 8-K, dated
February 16, 1999, in connection with the Company's acquisition of all the
common stock of Street Technologies, Inc.
Registrant filed a Current Report on Form 8-K, dated May 13, 1999.
Pursuant to the terms of the Agreement and Plan of Merger, dated as of May 13,
1999, 7th Level Acquisition Corporation, a wholly-owned subsidiary of the
Company merged with and into Panmedia Corporation.
Registrant filed a current report on Form 8-K, dated June 1, 1999.
Pursuant to the terms of the Agreement and Plan of Merger, dated as of June 1,
1999, 7th Level Merger Corporation, a wholly-owned subsidiary of the registrant
will merge with and into ViaGrafix Corporation subject to certain conditions
including stockholder approval of the registrant and ViaGrafix.
Registrant filed a Current Report on Form 8-K/A on June 30, 1999. This
Form 8-K/A was filed as an amendment to the Current Report on Form 8-K, dated
May 13, 1999, in connection with the Company's acquisition of all of the common
stock of Panmedia Corporation.
19
<PAGE>
LEARN2.COM, INC.
(Formerly Known as 7th Level, Inc.)
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LEARN2.COM, INC.
Date: August 16, 1999 By: /s/ MARC E. LANDY
--------------------------------
Marc E. Landy
Vice President, Chief Financial Officer and Secretary
(Principal Financial Officer)
20
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