<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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.)
1311 MAMARONECK AVENUE, SUITE 210
WHITE PLAINS, NEW YORK 10605
(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 50,993,030
(Title of Each Class) (Number of Shares Outstanding at
November 8, 1999)
<PAGE>
LEARN2.COM, INC.
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PART I FINANCIAL INFORMATION PAGE NO.
<S> <C> <C>
Item 1 Condensed Consolidated Balance Sheets as of September 30, 1999
and December 31, 1998 .................................................... 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 and 1998 .................. 2
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 ............................ 3
Condensed Consolidated Statement of Changes in Stockholders' Equity
for the nine months ended September 30, 1999 ............................. 4
Notes to Condensed Consolidated Financial Statements ..................... 5
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ 11
Item 3 Quantitative and Qualitative Disclosures about Market Risk ............... 20
PART II OTHER INFORMATION
Item 1 Legal Proceedings......................................................... 21
Item 2 Changes in Securities and Use of Proceeds ................................ 21
Item 4 Submission of Matters to a Vote of Security Holders ...................... 21
Item 6 Exhibits and Reports on Form 8-K ......................................... 23
SIGNATURE .......................................................................... 24
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
LEARN2.COM, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited) (restated)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 11,505 $ 24,359
Accounts receivable, net 4,266 4,887
Inventories 2,833 1,909
Other current assets 2,903 1,090
--------- ---------
Total current assets 21,507 32,245
Fixed assets, net 3,911 4,542
Capitalized software, net 15,192 169
Intangible assets, net 3,374 214
Goodwill 9,701 88
Other assets 244 811
--------- ---------
Total assets $ 53,929 $ 38,069
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 1,951 $ 1,965
Accrued expenses and other current liabilities 4,132 2,877
Current portion of deferred revenue 1,862 50
Notes payable 476 738
--------- ---------
Total current liabilities 8,421 5,630
Deferred revenue 816 --
Other 23 48
--------- ---------
Total liabilities 9,260 5,678
Commitments and contingencies (Note 8)
Minority interest in subsidiary 20 --
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 liquidation value) -- 629
Common stock, par value $0.01 per share, 100,000,000 shares authorized;
50,993,030 and 36,136,746 shares issued and
outstanding in 1999 and 1998, respectively 510 361
Additional paid-in-capital 154,497 114,315
Notes receivable from directors (Note 7) (1,687) --
Accumulated deficit (108,671) (82,914)
--------- ---------
Total stockholders' equity 44,649 32,391
--------- ---------
Total liabilities and stockholders' equity $ 53,929 $ 38,069
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE>
LEARN2.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ------------------------------
September 30, September 30, September 30, September 30,
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net revenues $ 5,259 $ 4,576 $ 21,023 $ 13,940
Cost of revenues 1,256 923 5,258 3,103
------------ ------------ ------------ ------------
Gross profit 4,003 3,653 15,765 10,837
------------ ------------ ------------ ------------
Operating expenses:
Research and product development 1,543 1,489 4,253 3,737
Sales and marketing 4,682 1,396 14,696 5,221
General and administrative 1,728 2,536 5,306 6,955
Depreciation and amortization 975 205 2,516 1,450
Restructuring charges 999 -- 3,493 --
Acquired in-process technology -- -- 9,677 --
Other non-recurring costs 2,298 -- 2,575 --
------------ ------------ ------------ ------------
Total operating expenses 12,225 5,626 42,516 17,363
------------ ------------ ------------ ------------
Operating loss (8,222) (1,973) (26,751) (6,526)
Interest and other, net 174 63 (114) 1,323
------------ ------------ ------------ ------------
Loss before income taxes (8,396) (2,036) (26,637) (7,849)
(Benefit) provision for income taxes (283) 14 (1,139) 412
------------ ------------ ------------ ------------
Net loss $ (8,113) $ (2,050) $ (25,498) $ (8,261)
Dividends on Preferred Stock -- (338) -- (338)
Beneficial conversion feature in
association with Preferred Stock -- (5,479) -- (5,479)
------------ ------------ ------------ ------------
Net loss available to common shareholders $ (8,113) $ (7,867) $ (25,498) $ (14,078)
============ ============ ============ ============
Basic and diluted loss per common share $ (0.17) $ (0.26) $ (0.58) $ (0.52)
============ ============ ============ ============
Weighted average basic and diluted shares outstanding 48,748,255 30,246,313 43,888,478 27,217,269
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
<PAGE>
LEARN2.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
September 30, September 30,
1999 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss $(25,498) $ (8,261)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 2,516 1,450
Non-cash compensation expense and interest 29 3,120
Non-cash common stock warrant and option expense 400 --
Minority interest in loss of subsidiary 20 --
Bad debt expense 37 87
Loss on sale of assets 9 172
Restructuring charges 3,493 --
Write off of acquired in-process technology 9,677 37
Other 118 48
Change in operating assets and liabilities (1,637) (1,887)
-------- --------
Net cash used in operating activities (10,836) (5,234)
Cash flows from investing activities:
Capital expenditures, net (2,006) (1,740)
Acquisition costs, net of cash acquired (8) --
-------- --------
Net cash used in investing activities (2,014) (1,740)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock option and stock
purchase plans 450 682
Net proceeds from issuance of Preferred Stock -- 5,269
Net proceeds from debt issuance -- 4,311
Repayments of debt (148) (3,995)
Proceeds from exercise of warrants -- 81
Proceeds from ViaGrafix initial public offering of common stock -- 19,574
Dividends distributed (186) (42)
Principal payments under capital lease obligations (120) --
-------- --------
Net cash (used in) provided by financing activities (4) 25,880
-------- --------
Net (decrease) increase in cash (12,854) 18,907
Cash and cash equivalents, beginning of period 24,359 2,697
-------- --------
Cash and cash equivalents, end of period $ 11,505 $ 21,603
======== ========
Supplemental disclosures of cash flow information:
Cash paid for interest $ 21 $ --
======== ========
</TABLE>
3
<PAGE>
LEARN2.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<S> <C> <C>
Schedule of noncash financing activities:
Conversion of notes payable into common stock 573 --
Notes received from directors upon exercise of stock options 1,687 --
Detail of Street Technologies 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>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE>
LEARN2.COM, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(unaudited)
<TABLE>
<CAPTION>
Convertible Convertible
Common Stock Common Stock Preferred Preferred
Total Shares Total Amount Conv Pfd Ser A Series B Series D
------------ ------------ -------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 36,137 361 -- 629 --
Common stock issued on conversion
of Series B Preferred Stock 698 7 -- (629) --
Common stock issued on conversion
of Series D Preferred Stock 7,220 72 -- -- --
Common stock issued in connection with
Street Technologies, Inc. acquisition 4,948 49 -- -- --
Series B dividends paid in common stock 24 1 -- -- --
Common stock issued on exercise of warrants 375 4 -- -- --
Common stock issued upon conversion of
notes payable 187 2 -- -- --
Warrants and options issued to non-employees -- -- -- -- --
Notes and accounts receivable from directors
from the exercise of stock options -- -- -- -- --
Repayment of notes and accounts receivable
from directors from the exercise of stock options -- -- -- -- --
Common stock issued under Stock Option Plan
and Stock Purchase Plan 1,633 16 -- -- --
Purchase and cancellation of common stock (229) (2) -- -- --
Amortization of unearned compensation -- -- -- -- --
Series D Preferred Stock issued under
Stock Option Plan -- -- -- -- --
Dividend distribution -- -- -- -- --
Financing costs -- -- -- -- --
Net loss -- -- -- -- --
------ ----- --- --- ---
Balance at September 30, 1999 (unaudited) 50,993 $ 510 $-- $ -- $--
====== ===== === === ===
<CAPTION>
Cumulative Unrealized Notes & A/R
Unearned translation Gain (loss) on from
APIC Compensation Adjustment Investments Directors
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1998 114,419 (104) -- -- --
Common stock issued on conversion
of Series B Preferred Stock 622 -- -- -- --
Common stock issued on conversion
of Series D Preferred Stock (72) -- -- -- --
Stock issued in connection with
Street Technologies, Inc. acquisition 36,439 -- -- -- --
Series B dividends paid in common stock 73 -- -- -- --
Common stock issued on exercise of warrants -- -- -- -- --
Common stock issued upon conversion of
notes payable 571 -- -- -- --
Warrants and options issued to non-employees 400 -- -- -- --
Notes and accounts receivable from directors
from the exercise of stock options -- -- -- -- (1,934)
Repayment of notes and accounts receivable
from directors from the exercise of stock options -- -- -- -- 247
Common stock issued under Stock Option Plan
and stock Purchase Plan 3,058 -- -- -- --
Purchase and cancellation of common stock (806) -- -- -- --
Amortization of unearned compensation -- 26 -- -- --
Series D Preferred Stock issued under
Stock Option Plan 18 -- -- -- --
Dividend distribution -- -- -- -- --
Financing costs (147) -- -- -- --
Net loss -- -- -- -- --
------- ----- --- --- -------
Balance at September 30, 1999 (unaudited) 154,575 $ (78) $-- $-- $(1,687)
======= ===== ==== ==== ========
<CAPTION>
Equity
Accum Deficit Treasury Shs Total
<S> <C> <C> <C>
Balance at December 31, 1998 (82,914) -- 32,391
Common stock issued on conversion
of Series B Preferred Stock -- -- --
Common stock issued on conversion
of Series D Preferred Stock -- -- --
Common stock issued in connection with
Street Technologies, Inc. acquisition -- -- 36,488
Series B dividends paid in common stock (73) -- 1
Common stock issued on exercise of warrants -- -- 4
Common stock issued upon conversion of
notes payable -- -- 573
Warrants and options issued to non-employees -- -- 400
Notes and accounts receivable from directors
from the exercise of stock options -- -- (1,934)
Repayment of notes and accounts receivable
from directors from the exercise of stock options -- -- 247
Common stock issued under Stock Option Plan
and Stock Purchase Plan -- -- 3,074
Purchase and cancellation of common stock -- -- (808)
Amortization of unearned compensation -- -- 26
Series D Preferred Stock issued under
Stock Option Plan -- -- 18
Dividend distribution (186) -- (186)
Financing costs -- -- (147)
Net loss (25,498) -- (25,498)
------- --- -------
Balance at September 30, 1999 (unaudited) $(108,671) $-- $ 44,649
========= === ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
LEARN2.COM,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 its subsidiaries (the "Company") as of September 30, 1999
and the results of operations and cash flows for the nine month periods ended
September 30, 1999 and September 30, 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.
These financial statements should be read in conjunction with the
supplementary consolidated financial statements and related notes included in
the Company's Current Report on Form 8-K, which was filed with the
Securities and Exchange Commission ("SEC") on November 12, 1999. The Company
consummated acquisitions of the following companies, as of the dates
indicated, in business combinations that were accounted for as poolings-of-
interests: ViaGrafix Corporation ("ViaGrafix"), August 1999 and Panmedia
Corporation ("Panmedia"), May 1999. The condensed consolidated financial
statements and the accompanying notes reflect the Company's financial
position and the results of operations as if the acquired entities were
wholly-owned subsidiaries of the Company since inception.
Components of the consolidated results of operations of the Company and
of ViaGrafix and Panmedia prior to their acquisitions by the Company are as
follows (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
1999 1998 1999 1998
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
NET REVENUES
Learn2.com ...... $ 1,848 $ 251 $ 3,676 $ 785
ViaGrafix ....... 3,411 4,017 16,715 12,281
Panmedia ........ -- 308 632 874
-------- -------- -------- --------
Total ........... $ 5,259 $ 4,576 $ 21,023 $ 13,940
======== ======== ======== ========
NET INCOME (LOSS)
Learn2.com ...... $ (5,851) $ (2,271) $(21,992) $ (9,823)
ViaGrafix ....... (2,262) 157 (3,523) 1,196
Panmedia ........ -- 64 17 366
-------- -------- -------- --------
Total ........... $ (8,113) $ (2,050) $(25,498) $ (8,261)
======== ======== ======== ========
</TABLE>
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current period presentation.
5
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION
The Company recognizes revenue in accordance with the provisions of
Statement of Position 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.
Revenue from physical product sales are recognized on all products at
the time of delivery. Computer software training videos and interactive
CD-ROM software training products can be returned within 60 days or, for
certain retailers, under a stock return policy. The Company records an
estimate of the amount, when significant, of returns expected in the next 60
days or under each stock return policy at the time of the initial delivery of
the products. The Company sells its CAD software with no obligations beyond
the delivery date of the software. The Company's price for its products is
fixed at the date of sale, and the sale is not contingent upon resale of the
products or affected by damage or theft of the products.
For direct and indirect sales of streamed learning content, the Company
recognizes revenue at the time of transaction. 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 related to reseller obligations as
payments are received.
Revenue from website design and implementation services for corporate
clients is recognized based on either time and materials charges incurred
during the period, the achievement of project milestones as defined by
customer contracts or percentage of completion for fixed fee contracts.
6
<PAGE>
Advertising revenues on both banner and sponsorship contracts are
recognized ratably over the period in which the advertisement is displayed,
provided that no significant obligations of the Company remain at the end of
a period and collection of the resulting receivable is probable. The
Company's 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. BUSINESS COMBINATIONS
VIAGRAFIX ACQUISITION
In August 1999, the Company merged with ViaGrafix. Under the terms of
the agreement, the Company issued approximately 10.7 million shares of its
common stock. This represents 1.846 shares for each share of ViaGrafix common
stock outstanding. The total value of the transaction was approximately $40.5
million and was accounted for as a pooling-of-interests. The consolidated
financial statements include expenses of approximately $2.3 million relating
to transaction costs incurred with this transaction. These costs include
investment banking fees and financial advisory fees of approximately $600,000
and other merger related fees totaling $1.7 million consisting of
professional services and other related costs. These costs were recorded as
other non-recurring costs in the third quarter of 1999. Accordingly, the
accompanying financial statements and footnotes have been restated to include
the operations of ViaGrafix for all periods presented.
PANMEDIA ACQUISITION
In May 1999, the Company merged with Panmedia. The Company exchanged
1,543,860 shares of common stock for all the outstanding common shares of
Panmedia. The total value of the transaction was $9.7 million and the merger
was accounted for as a pooling-of-interests. Accordingly, the accompanying
financial statements and footnotes have been restated to include the
operations of Panmedia for all periods presented.
7
<PAGE>
STREET TECHNOLOGIES ACQUISITION
In February 1999, the Company acquired all of the outstanding stock
of Street Technologies, Inc., a privately held company, and renamed the
subsidiary to Learn2, 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 Preferred Stock")
with an aggregate liquidation preference of $21.6 million. On July 29, 1999,
the Series D Preferred Stock was 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
<TABLE>
AMOUNT
-------
<S> <C>
Common stock ........................... $14,845
Preferred stock ........................ 21,644
Subtotal .......................... 36,489
Assumed liabilities .................... 3,133
Acquisition costs ...................... 782
-------
Total ............................. $40,404
=======
</TABLE>
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
<TABLE>
<S> <C>
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
=======
</TABLE>
8
<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 nine months ended September 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 required 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 $1.1 million in amortization expense relating to these intangible
assets during the three and nine months ended September 30, 1999, respectively.
The accompanying condensed consolidated statement of operations for the nine
months ended September 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.
<TABLE>
<CAPTION>
PRO FORMA
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Revenue ..................... $ 5,259 $ 5,598 $ 21,354 $ 17,193
(Loss) income from operations (8,222) (2,620) (27,538) (2,989)
Net (loss) income ........... (8,113) (8,469) (26,208) (9,054)
Loss per share .............. $ (0.16) $ (0.20) $ (0.52) $ (0.23)
</TABLE>
ETRACKS.COM ACQUISITION
On July 31, 1998 ViaGrafix acquired certain assets of eTracks.com,
Inc., a privately held company that provides interactive email broadcast
services for businesses that rely on web-based commerce and transactions and
operates eTracks.com, an online community, for approximately $682,000. The
transaction was financed with existing cash and was accounted for as a
purchase. The purchase price and related direct expenses associated with the
acquisition have been allocated based on the fair value of the assets
purchased. The results of operations for this acquisition have been included
in the Company's consolidated results of operations since the acquisition
date. Pro forma operating results are not presented, as they would not differ
materially from actual results for 1998. In January 1999, common shares equal
to 5% ownership in eTracks.com were issued to a key employee of eTracks.com.
The value per share of the issued shares equaled the fair value per share
paid in July 1998.
4. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
1999 1998
------------- ------------
<S> <C> <C>
Finished goods .......... $1,804 $ 996
Raw materials ........... 1,029 913
------ ------
Total ........ $2,833 $1,909
====== ======
</TABLE>
9
<PAGE>
5. 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.
6. 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. As of September 30, 1999, the remaining
balance of $27,000 has not been paid to the one remaining holder.
7. 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. Directors issued promissory
notes totaling $1,687,000, which is included as notes 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.
8. COMMITMENTS AND CONTINGENCIES
LEGAL CONTINGENCIES
On May 22, 1998 a lawsuit was filed in the United States District
Court for the Northern District of Texas by Jonathan L. Gordon, brought as a
putative class action against ViaGrafix and certain of its officers and
directors claiming violations of the Securities Act of 1933 for alleged
misrepresentations and omissions in the Prospectus issued in connection with
ViaGrafix's initial public offering made in March 1998. Mr. Gordon and
certain others have sought designation as lead plaintiffs in the action. The
Company believes the lawsuit is without merit and its response is not yet
due.
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.
9. RESTRUCTURING CHARGES
During the first quarter, the Company recorded a charge of
approximately $2.5 million of incurred direct costs related primarily to the
acquisition of 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.
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During the third quarter, the Company recorded a charge of approximately
$999,000 related to the merger with ViaGrafix of which, $791,000 was related
to employee salary and severance, $40,000 write off of assets and $169,000 of
excess office space and other costs.
The following table summarizes the activity in the accruals during the
period ended September 30, 1999. The balance of the restructuring accrual at
September 30, 1999 is included in accrued expenses and current 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 CASH SEPTEMBER 30,
CHARGES CHARGES PAYMENTS 1999
------------- -------- -------- -------------
<S> <C> <C> <C> <C>
Write-off of redundant assets .......... $ 1,440 $(1,385) $ (15) $ 40
Excess office space and other costs .... 662 86 (164) 584
Employee salary and severance costs .... 1,391 (34) (537) 820
------- ------- ------- -------
Total .................................. $ 3,493 $(1,333) $ (716) $ 1,444
======= ======== ======== =======
</TABLE>
10. INDUSTRY SEGMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") 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 report on Form 8-K which was filed with the
Securities and Exchange Commission ("SEC") on November 12, 1999.
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
11
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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.
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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 Learn2, Inc. Street Technologies, Inc. marketed and
developed 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 produced a website which
offers a wide spectrum of step by step instructions on skills, activities,
and tasks. We exchanged 1,543,860 shares of our common stock for all of
Panmedia's outstanding shares. The total value of the transaction was
approximately $9.7 million and was accounted for as a pooling-of-interests.
The consolidated financial statements and footnotes for the three and nine
months ended September 30, 1999 and 1998 and the accompanying notes reflect
our financial position and the results of operations as if Panmedia was a
wholly-owned subsidiary since inception. During June 1999, we recorded a
one-time charge of $277,000 for acquisition-related costs. These costs
consisted of legal and accounting fees, and certain other expenses directly
related to the acquisition.
On August 23, 1999, we acquired ViaGrafix, a publicly traded company.
ViaGrafix develops, produces and markets technology based training products.
We exchanged approximately 10.7 million shares of common stock for all of
ViaGrafix's outstanding common stock. The total value of the transaction was
approximately $40.5 million and was accounted for as a pooling-of-interests.
The consolidated financial statements include expenses of
approximately $2.3 million relating to transaction costs incurred with this
transaction. These costs include investment banking fees and financial
advisory fees of approximately $600,000 and other merger related fees
totaling $1.7 million consisting of professional services and other related
costs. These costs were recorded as non-recurring expenses in the third
quarter of 1999.
The consolidated financial statements and the accompanying notes reflect
our financial position and results of operations as if ViaGrafix was a
wholly-owned subsidiary of the Company since inception.
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, Inc. Consequently, the results prior to February 16, 1999 and
our condensed consolidated balance sheet at December 31, 1998 are not
reflective of our operations and financial position as presently constituted.
We plan to significantly increase our operating expenses to increase
our research and product development and sales and marketing operations to
help attain our goal of becoming the world's leading provider of engaging
learning content. We may be unable to 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.
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THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998 AND NINE MONTHS ENDED SEPTEMBER
30, 1999 AND 1998
Our reported results of operations for all periods prior to February
16, 1999 do not reflect the results of Street Technologies, Inc.
Consequently, the results prior to February 16, 1999 and our condensed
consolidated balance sheet at December 31, 1998 are not reflective of our
operations and financial position as presently constituted.
REVENUES
Revenues increased $700,000 or 14.9% from $4.6 million to $5.3 million
for the three months ended September 30, 1999 compared to the three months
ended September 30, 1998. Revenues for the three months ended September 30,
1999 related primarily to physical product sales, broadcast messaging
services, sales of streamed learning content delivered over the Internet, and
related technology licensing fees, web development services, advertising, and
maintenance. In the quarter ended September 30, 1998, revenues consisted
primarily of physical product sales, broadcast messaging services, web
development services, and royalties related to our entertainment business.
The increase is primarily attributable to the following: a $1.1 million
increase related to sales of streamed learning content delivered over the
Internet, and technology licensing fees; a $600,000 increase in broadcast
messaging revenues, partially offset by a $600,000 decrease in physical
product sales related to lower sales volume, and a $400,000 increase in sales
returns in 1999 compared to 1998.
Revenues increased $7.1 million or 51% from $13.9 million to $21.0
million for the nine months ended September 30, 1999. Revenues for the nine
months ended September 30, 1999 related primarily to physical product sales,
broadcast messaging services, sales of streamed learning content delivered
over the Internet, and related technology licensing fees and maintenance web
development services. In the nine months ended September 30, 1998 revenues
related primarily to physical product sales, broadcast messaging services,
and royalties on licensed technologies related to our entertainment business.
The increase of $7.1 million is primarily attributable to the following: a
$3.0 million increase in streamed content related to streamed learning
content delivered over the Internet and related technology licensing fees,
sales of $3.9 million to a major Internet reseller during the first half of
the year, $2.3 million of sales related to our broadcast messaging business,
partially offset by a decrease of $1.8 million in physical product sales due
to lower sales volume and a decrease of $300,000 in revenues from our
entertainment business.
COST OF REVENUES
Cost of revenues for the three months ended September 30, 1999 was $1.3
million or 25% of net revenues compared to $923,000 or 20% of net revenues for
the three months ended September 30, 1998. Cost of revenues for the nine months
ended September 30, 1999 was $5.3 million or 25% of net revenues compared to
$3.1 million or 22% of net revenues for the nine months ended September 30,
1998. The increase in cost of revenues as a percentage of net sales for both
the third quarter of 1999 as well as the nine-months ended September 30, 1999
was primarily due to the mix of product sales in the quarter and in the first
nine months of 1999.
RESEARCH AND PRODUCT DEVELOPMENT EXPENSES
Research and product development expenses were $1.5 million for both
the three months ended September 30, 1999 and September 30, 1998. Research
and product development expenses were $4.3 million and $3.7 million for the
nine months ended September 30, 1999 and 1998, respectively. In 1999 and 1998,
research and development related to technology, web, and training course
development. In 1999, research and development reflects our commitment to
expand the number of information technology training courses offered as well
as to continue efforts on Internet delivery of training along with research
and product development expenditures incurred to expand and enhance our email
broadcast services. We believe that significant investment in research and
product development is required to remain competitive in our markets and
therefore, we expect research and product development expenses to continue
to increase in future periods.
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<PAGE>
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased $3.3 million or 235% from
$1.4 million to $4.7 million for the three months ended September 30, 1999
compared to the three months ended September 30, 1998. The overall increase
of $3.3 million was attributable to costs associated with increasing our
sales and marketing staff to focus on direct and indirect licensing and sales
to corporations, $2.3 million; cooperative and print media advertising,
$200,000; and branding the new name of Learn2.com, Inc., $800,000. We
expect our advertising expenses for cooperative and branding to remain high
in a continued effort to achieve growth in sales and brand awareness.
Sales and marketing expenses increased $9.5 million or 181% from $5.2
million to $14.7 million for the nine months ended September 30, 1999
compared to the nine months ended September 30, 1998. The overall increase of
$9.5 million was attributable to increasing our sales and marketing staff to
focus on direct and indirect licensing and sales to corporations, $5.0
million; cooperative and print media advertising, $3.1 million; other product
related advertising, $600,000; and branding the new name of Learn2.com, Inc.,
$800,000. We expect our advertising and branding to remain high in a continued
effort to achieve growth in sales and brand awareness.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1.7 million and $2.5 million
for the three months ended September 30, 1999 and 1998, respectively. The
decrease of $800,000 or 32% for the three months ended September 30, 1999 is
related to lower headcount and related cost structure of the newly merged
companies.
General and administrative expenses were $5.3 million and $7.0 million
for the nine months ended September 30, 1999 and 1998, respectively. The
decrease of $1.7 million or 24% was related to the following: 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 our 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 Entertainment, Inc. The remainder of the balance
of general and administrative expenses represents the new cost structure of
the newly merged companies.
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<PAGE>
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses were $975,000 and $205,000 for
the three months ended September 30, 1999 and 1998, respectively.
Depreciation and amortization expenses increased $770,000 or 376% for the
three months ended September 30, 1999. The 1999 expenses included $297,000 of
depreciation on fixed assets, $255,000 of amortization of computer software
and $423,000 of amortization on goodwill, software and intangible assets which
related to the Street Technologies, Inc. acquisition. The 1998 expenses related
primarily to depreciation and amortization on fixed assets.
Depreciation and amortization expenses were $2.5 million and $1.5 million
for the nine months ended September 30, 1999 and 1998, respectively.
Depreciation and amortization expenses increased $1.0 million or 74% for the
nine months ended September 30, 1999. The 1999 expenses included approximately
$936,000 of depreciation on fixed assets, $522,000 of amortization of computer
software and $1.1 million of amortization on goodwill, software and intangible
assets which related to the Street Technologies, Inc. acquisition. The 1998
expenses related primarily to depreciation and amortization on fixed and
intangible assets.
RESTRUCTURING CHARGES
Restructuring charges for the three months ended September 30, 1999
related to our merger with ViaGrafix were approximately $999,000 and were
comprised of the following: $40,000 related to the write-off of redundant
assets, $168,000 excess office space and other costs, and $791,000 in
employee severance costs.
Restructuring charges for the nine months ended September 30, 1999 were
approximately $3.5 million and were related to our business combinations with
Street Technologies, Inc. and ViaGrafix. The charges were comprised of the
following: $1.4 million related to the write-off of redundant assets, $661,000
excess office space and other costs, and $1.4 million in employee severance
costs.
ACQUIRED IN-PROCESS TECHNOLOGY
In connection with our acquisition of Street Technologies, Inc., 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 transaction will
continue to require substantial additional development.
NON-RECURRING COSTS
During the second quarter of 1999, we completed our merger with
Panmedia 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.
During the third quarter, we completed our merger with ViaGrafix
through the issuance of approximately 10.7 million shares of our common
stock. We recorded a non-recurring charge of approximately $2.3 million for
transaction costs associated with the merger.
INTEREST AND OTHER, NET
Interest and other net was $174,000 compared to $63,000 for the three
months ended September 30, 1999 and 1998, respectively. Interest and other,
net increased $111,000. Interest and other, net in 1999 consisted primarily
of interest expense as well as a charge related to the settlement of a
lawsuit, offset by of interest income. In 1998 interest and other, net
consisted primarily of amortization of debt issuance costs and accretion of
debt discount following the May 1998 financing transactions, offset by
interest income.
Interest and other net was $114,000 of income compared to $1.3 million
of expense of expense for the nine months ended September 30, 1999 and 1998,
respectively. Interest and other net in 1999 consisted primarily of interest
income, offset by a charge relating to the settlement of a lawsuit, and loss
on conversion of notes payable of 1998 interest and other, net consisted
primarily of amortization of debt issuance costs and accretion of debt
discount following the May 1998 financing transactions offset by interest
income.
16
<PAGE>
NET LOSS
The net loss for the three months ended September 30, 1999 was $8.1
million or $ (0.17) per basic and diluted common share, compared to $7.9
million or $(0.26) per basic and diluted common share for the three months
ended September 30, 1998. The results for the three months ended September
30, 1999 include a non-recurring charge of $2.3 million incurred in
connection with the August 1999 acquisition of ViaGrafix along with the
factors discussed above.
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<PAGE>
The net loss for the nine months ended September 30, 1999 was $25.5
million or $(0.58) per basic and diluted common share, compared to $14.1
million or $(0.52) per basic and diluted common share for the nine months
ended September 30, 1998. The results for the nine months ended September 30,
1999 include a non-recurring charge of $2.6 million incurred in connection
with the May 1999 acquisition of Panmedia and the August 1999 acquisition of
ViaGrafix, write-off of $9.7 million of acquired in-process technology
acquired in the Street Technologies, Inc. acquisition, amortization of
acquired technology and goodwill relating to the Street Technologies, Inc.
acquisition of $1.1 million and the $3.5 million restructuring charge as a
result of the Street Technologies, Inc. and ViaGrafix acquisitions. Excluding
these charges, our net loss was $8.7 million or $(0.20) per basic and diluted
common share. The net loss was attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased $12.9 million during the first nine
months of the year to $11.5 million at September 30, 1999. Operating activities
used $10.8 million of cash in the first nine months of 1999. The primary factor
related to the use of cash from operating activities was the net loss of $25.5
million. The net loss was substantially offset by non-cash charges of
$16.1 million (principally $2.5 million of depreciation and amortization,
$400,000 non-cash warrant expense, $3.5 million of restructuring charges, and
$9.7 million for the write-off of acquired in-process technology).
The principal factor in the cash used in investing activities of $2.0
million were from capital expenditures.
In December 1998, ViaGrafix purchased land in Pryor, Oklahoma for
expansion of its facilities for $115,000, and to accommodate the seller,
agreed to finance $103,500 of the purchase price at 5% interest until June 1,
1999. The loan was repaid in the second quarter of 1999. We do not have any
other significant commitments for capital expenditures. We anticipate that we
will continue to expand our facilities and purchase equipment as needed to
support our product research and development, production of our products,
sales and marketing, product support, and administrative staff.
Financing activities used $4,000 of cash. This was primarily due to
proceeds from the issuance of common stock under stock option and purchase plans
totaling $450,000, offset by dividends paid to Stockholders of $186,000,
repayments of debt of $148,000, payments on existing capital leases totaling
$120,000.
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, 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. Similar to other Internet companies, we are making a
substantial investment in our business and may need to raise additional
funds. If adequate funds are not available on acceptable terms, we may not be
able to realize our business plan.
18
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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 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 our 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, cash flows 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 conducting 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.
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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.
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.
We could encounter some Year 2000 defects in the products and services
it produces and markets. If Year 2000 defects are encountered, we could be
liable for substantial legal claims and litigation, and the adverse publicity
could have a material adverse effect on the future sales of our products and
services, even after any Year 2000 defects are resolved. However, any
material adverse effect on our financial position and results of operations
and cash flows cannot be currently estimated.
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, cash flows 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.
We believe our largest risk regarding the Year 2000 issue is from legal
claims and litigation. We expect that there will be a large number of lawsuits
filed over Year 2000 issues in the United States because of the great publicity
of the Year 2000 issue. Even small Year 2000 problems encountered could result
in substantial legal claims, lawsuits, and class action lawsuits against us,
which in turn could have a material adverse effect on our results of operations,
cash flow and financial position.
RECENTLY ISSUED ACCOUNTING PRINCIPLES
Not applicable.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Learn2.com, Inc.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS.
The Company is involved in certain 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 financial position, results of
operation or cash flows.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
In August of 1999, the Company acquired all of the outstanding stock of
ViaGrafix Corporation. Pursuant to the Agreement and Plan of Merger, the Company
issued approximately 10.7 million shares of Common Stock. The resale of these
shares has been registered on a Registration Statement on Amendment No. 1 to
Form S-4 filed with the Securities and Exchange Commission on July 19, 1999.
Additionally, there were options of ViaGrafix Corporation that were convertible
into shares of common stock of ViaGrafix Corporation. Pursuant to the merger
agreement, each ViaGrafix Corporation stock option will be exercisable at the
conversion ratio of 1.846 shares of Common Stock in accordance with the terms of
ViaGrafix Corporation's option plan.
In August of 1999, the Company entered into an Employment Agreement,
employing Michael A. Webster as Chief Executive Officer of ViaGrafix Corporation
and a Director of the Company. As an inducement to enter into this agreement,
the Board of Directors granted to Mr. Webster an option to purchase 900,000
shares of Common Stock exercisable at a price equal to $3.3125 per share.
In August of 1999, the Company entered into an Employment Agreement,
employing Robert E. Webster as Vice President of ViaGrafix Corporation. As an
inducement to enter into this agreement, the Board of Directors granted to Mr.
Webster an option to purchase 750,000 shares of Common Stock exercisable at a
price equal to $3.3125 per share.
In August of 1999, the Company entered into an Employment Agreement,
employing Robert C. Moore, Jr. as President and Chief Operating Officer of
ViaGrafix Corporation. As an inducement to enter into this agreement, the Board
of Directors granted to Mr. Webster an option to purchase 275,000 shares of
Common Stock exercisable at a price equal to $3.3125 per share.
In August of 1999, the Board of Directors approved the grant of a warrant
to purchase 300,000 shares of Common Stock at $3.09375 per share to Archery
Capital, LLC or its affiliates in connection with the execution of a consulting
agreement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
A Special Meeting of the Company's stockholders was held on August 23,
1999 to vote on the proposed merger of the Company and ViaGrafix Corporation,
including the related issuance of shares of the Common Stock. A total of
26,286,493 votes were cast for the merger, 155,832 votes were cast against the
merger and 83,675 votes abstained.
Our Annual Meeting of Stockholders was held on July 28, 1999. The
results of the voting were as follows:
<TABLE>
<CAPTION>
Proposal 1: Election of Directors of the Company
- ------------------------------------------------------------------------------
Votes
Nominee Votes For Withheld
- ------------------------------------------------------------------------------
<S> <C> <C>
Donald Schupak 36,561,919 297,319
- ------------------------------------------------------------------------------
Stephen P. Gott 36,640,537 218,701
- ------------------------------------------------------------------------------
Robert Alan Errin 36,561,654 297,584
- ------------------------------------------------------------------------------
Merv Adelson 36,546,554 312,684
- ------------------------------------------------------------------------------
James A. Cannavino 36,475,072 402,166
- ------------------------------------------------------------------------------
21
<PAGE>
- ------------------------------------------------------------------------------
Jason A. Roberts 36,641,397 217,841
- ------------------------------------------------------------------------------
</TABLE>
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 exercisable 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
22
<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, dated July 19, 1999. This
Form 8-K was filed announcing the name change of the Company from 7th Level,
Inc. to Learn2.com, Inc.
Registrant filed a Current Report on Form 8-K, dated July 23, 1999. This
Form 8-K was filed in connection with Company's acquisition of ViaGrafix
Corporation.
Registrant filed a Current Report on Form 8-K, dated August 24, 1999. This
Form 8-K was filed in connection with Company's acquisition of ViaGrafix
Corporation.
23
<PAGE>
LEARN2.COM, 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: November 15, 1999 By: /s/ MARC E. LANDY
---------------------------
Marc E. Landy
Vice President, Chief Financial Officer
and Secretary
(Principal Financial Officer)
24
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998
<CASH> 11,505 24,359
<SECURITIES> 0 0
<RECEIVABLES> 4,266 4,887
<ALLOWANCES> 0 0
<INVENTORY> 2,833 1,909
<CURRENT-ASSETS> 21,507 32,245
<PP&E> 3,911 4,542
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 53,929 38,069
<CURRENT-LIABILITIES> 8,421 5,630
<BONDS> 0 0
0 0
0 629
<COMMON> 510 359
<OTHER-SE> 152,810 114,317
<TOTAL-LIABILITY-AND-EQUITY> 53,929 38,069
<SALES> 21,023 13,940
<TOTAL-REVENUES> 0 0
<CGS> 5,258 3,103
<TOTAL-COSTS> 47,774 20,466
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (114) 1,323
<INCOME-PRETAX> (26,637) (7,849)
<INCOME-TAX> (1,139) 412
<INCOME-CONTINUING> (25,498) (8,261)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (25,498) (14,078)
<EPS-BASIC> (.58) (.52)
<EPS-DILUTED> (.58) (.52)
</TABLE>
