<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q/A
(MARK ONE)
<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
</TABLE>
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
COMMISSION FILE NUMBER 0-24936
------------------------
LEARN2.COM, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
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)
</TABLE>
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.
<TABLE>
<S> <C>
Common Stock, $0.01 Par Value 50,993,030
(Title of Each Class) (Number of Shares Outstanding at
November 8, 1999)
</TABLE>
The condensed consolidated financial statements included herein have been
restated for the change in accounting for the acquisition of the ViaGrafix
Corporation. See Note 2 of the condensed consolidated financial statements for a
detailed explanation of the changes.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
LEARN2.COM, INC.
FORM 10-Q/A
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C> <C>
PART I FINANCIAL INFORMATION
Item 1 Condensed Consolidated Balance Sheets as of September 30,
1999 (Restated) and December 31, 1998 (Restated)............ 1
Condensed Consolidated Statements of Operations for the
three and nine months ended September 30, 1999 (Restated)
and 1998 (Restated)......................................... 2
Condensed Consolidated Statements of Cash Flows for the nine
months ended September 30, 1999 (Restated) and 1998
(Restated).................................................. 3
Condensed Consolidated Statement of Changes in Stockholders'
Equity for the nine months ended September 30, 1999
(Restated).................................................. 5
Notes to Condensed Consolidated Financial Statements
(Restated).................................................. 6
Item 2 Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 3 Quantitative and Qualitative Disclosures about Market
Risk........................................................ 24
PART II OTHER INFORMATION
Item 1 Legal Proceedings........................................... 25
Item 2 Changes in Securities and Use of Proceeds................... 25
Item 4 Submission of Matters to a Vote of Security Holders......... 25
Item 6 Exhibits and Reports on Form 8-K............................ 26
SIGNATURE........................................................... 27
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated 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-SEE NOTE 2)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 11,505 $ 11,313
Accounts receivable, net.................................. 3,435 174
Inventories............................................... 833 --
Other current assets...................................... 2,633 367
--------- --------
Total current assets.................................. 18,406 11,854
Fixed assets, net........................................... 4,126 1,478
Capitalized software, net................................... 16,892 --
Intangible assets, net...................................... 15,674 7
Goodwill.................................................... 24,431 --
Other assets................................................ 244 80
--------- --------
Total assets.......................................... $ 79,773 $ 13,419
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,951 $ 198
Accrued expenses and other current liabilities............ 4,607 2,513
Current portion of deferred revenue....................... 1,862 50
Notes payable............................................. 476 487
--------- --------
Total current liabilities............................. 8,896 3,248
Deferred revenue............................................ 816 --
Other....................................................... 23 48
--------- --------
Total liabilities..................................... 9,735 3,296
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 25,307,482 shares
issued and outstanding in 1999 and 1998, respectively... 510 252
Additional paid-in capital................................ 191,534 93,963
Notes receivable from directors (Note 7).................. (1,687) --
Accumulated deficit....................................... (120,339) (84,721)
--------- --------
Total stockholders' equity............................ 70,018 10,123
--------- --------
Total liabilities and stockholders' equity............ $ 79,773 $ 13,419
========= ========
</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
------------- ------------- ------------- -------------
(AS RESTATED-SEE NOTE 2) (AS RESTATED-SEE NOTE 2)
<S> <C> <C> <C> <C>
Net revenues.............................. $ 3,403 $ 559 $ 6,219 $ 1,659
Cost of revenues.......................... 521 122 1,147 338
-------- ------- -------- --------
Gross profit.............................. 2,882 437 5,072 1,321
Operating expenses:
Research and product development........ 926 685 2,491 2,176
Sales and marketing..................... 3,500 370 5,246 873
General and administrative.............. 595 931 2,312 4,608
Depreciation and amortization........... 833 439 1,822 1,479
Restructuring charges................... 999 -- 3,493 --
Acquired in-process technology.......... 15,100 -- 24,777 --
Other non-recurring costs............... -- -- 277 --
-------- ------- -------- --------
Total operating expenses............ 21,953 2,425 40,418 9,136
-------- ------- -------- --------
Operating loss...................... (19,071) (1,988) (35,346) (7,815)
Interest and other, net................... 89 219 13 1,642
-------- ------- -------- --------
Net loss.................................. $(19,160) $(2,207) $(35,359) $ (9,457)
Beneficial conversion feature in
association with Preferred Stock........ -- (5,479) -- (5,479)
-------- ------- -------- --------
Net loss available to common
shareholders............................ $(19,160) $(7,686) $(35,359) $(14,936)
======== ======= ======== ========
Basic and diluted loss per common share... $ (0.45) $ (0.40) $ (1.02) $ (0.88)
======== ======= ======== ========
Weighted average basic and diluted shares
outstanding............................. 42,476 19,006 34,659 16,983
======== ======= ======== ========
</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, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(RESTATED) (RESTATED)
<S> <C> <C>
Cash flows from operating activities:
Net loss................................................. $(35,359) $(9,457)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 1,822 1,479
Non-cash compensation expense and interest............... 7 3,096
Non-cash common stock warrant and expense................ 400 --
Minority interest in loss of subsidiary.................. (14) --
Bad debt expense......................................... 37 --
Gain on sale of assets................................... 9 --
Restructuring charges.................................... 3,493 --
Non-recurring charges.................................... 277 --
Write-off of acquired in-process technology.............. 24,777 --
Other.................................................... 117 172
Change in operating assets and liabilities............... (1,256) (278)
-------- -------
Net cash used in operating activities.................... (5,690) (4,988)
Cash flows from investing activities:
Capital expenditures, net................................ (1,479) (122)
Proceeds from sale of assets............................. -- 50
Cash acquired, net of acquisition costs.................. 6,516 --
-------- -------
Net cash provided by (used in) investing activities...... 5,037 (72)
Cash flows from financing activities:
Proceeds from issuance of common stock under stock option
and stock purchase plans............................... 1,330 682
Net proceeds from issuance of Preferred Stock............ -- 5,269
Net proceeds from debt issuance.......................... -- 4,311
Repayments of debt....................................... (45) (146)
Proceeds from exercise of warrants....................... -- 28
Dividends distributed.................................... (186) (42)
Principal payments under capital lease obligations....... (120) --
Other.................................................... (134) --
-------- -------
Net cash provided by financing activities................ 845 10,102
-------- -------
Net increase in cash..................................... 192 5,042
Cash and cash equivalents, beginning of period............. 11,313 2,479
-------- -------
Cash and cash equivalents, end of period................... $ 11,505 $ 7,521
======== =======
Supplemental disclosures of cash flow information:
Cash paid for interest................................... 21 --
======== =======
</TABLE>
3
<PAGE>
LEARN2.COM, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------ ------------------
(RESTATED) (RESTATED)
<S> <C> <C>
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 Street Technologies, Inc. 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 $ --
======== =======
Detail of ViaGrafix Corporation acquisition:
Fair value of assets acquired............................ $ 51,509 $ --
Liabilities assumed...................................... (1,257) --
Common stock issued...................................... (56,776) --
-------- -------
Cash acquired, net of acquisition costs.................. (6,524) --
Cash acquired in acquisition............................. 9,566 --
-------- -------
Total acquisition costs................................ $ 3,042 $ --
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE>
LEARN2.COM, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
(UNAUDITED)
(RESTATED)
<TABLE>
<CAPTION>
NOTES
CONVERTIBLE CONVERTIBLE RECEIVABLE
COMMON STOCK COMMON STOCK PREFERRED PREFERRED ADDITIONAL FROM ACCUMULATED
TOTAL SHARES TOTAL AMOUNT SERIES B SERIES D CAPITAL DIRECTORS DEFICIT
-------------- -------------- ----------- ----------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1998................... 25,307 $252 $ 629 $ -- $ 93,963 $ -- $ (84,721)
Common Stock issued on
conversion of Series B
Preferred Stock........ 698 7 (629) -- 622 -- --
Common Stock issued on
conversion of Series D
Preferred Stock........ 7,220 72 -- -- (72) -- --
Common Stock issued in
connection with Street
Technologies, Inc.
acquisition............ 4,948 49 -- -- 36,439 -- --
Preferred Series B
dividends paid in
common stock........... 24 2 -- -- 72 -- (73)
Common Stock issued on
exercise of warrants... 375 4 -- -- -- -- --
Common Stock issued upon
conversion of notes
payable................ 187 2 -- -- 571 -- --
Warrants 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.... 1,548 15 -- -- 2,999 -- --
Common Stock issued in
connection with
ViaGrafix Corp
acquisition............ 10,686 107 -- -- 56,669 -- --
Series D Preferred Stock
issued under Stock
Option Plan............ -- -- -- -- 18 -- --
Dividend distribution.... -- -- -- -- -- -- (186)
Financing costs.......... -- -- -- -- (147) -- --
Net loss................. -- -- -- -- -- -- (35,359)
------ ---- ----- ---- -------- ------- ---------
Balance at September 30,
1999 (unaudited)....... 50,993 $510 $ -- $ -- $191,534 $(1,687) $(120,339)
====== ==== ===== ==== ======== ======= =========
<CAPTION>
EQUITY
TOTAL
--------
<S> <C>
Balance at December 31,
1998................... $ 10,123
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
Preferred Series B
dividends paid in
common stock........... 1
Common Stock issued on
exercise of warrants... 4
Common Stock issued upon
conversion of notes
payable................ 573
Warrants 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.... 3,014
Common Stock issued in
connection with
ViaGrafix Corp
acquisition............ 56,776
Series D Preferred Stock
issued under Stock
Option Plan............ 18
Dividend distribution.... (186)
Financing costs.......... (147)
Net loss................. (35,359)
--------
Balance at September 30,
1999 (unaudited)....... $ 70,018
========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<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 report on Form S-4/A which was filed with the Securities and
Exchange Commission ("SEC") on July 19, 1999 that reflects our acquisition of
Panmedia Corporation ("Panmedia") as a pooling. These financial statements
should be read in conjunction with the consolidated financial statements and
related notes included in the Company's report that reflects Panmedia as a
pooling. Form S-4/A which was filed with the Securities and Exchange Commission
("SEC") on July 19, 1999. The condensed consolidated financial statements and
the accompanying notes reflect the Company's financial position and the results
of operations as if Panmedia was a wholly-owned subsidiary of the Company since
inception.
Components of the consolidated results of operations of the Company and
Panmedia prior to the acquisition 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............................................ $ 3,403 $ 251 $ 5,587 $ 785
Panmedia.............................................. -- 308 632 874
-------- -------- -------- -------
Total................................................. $ 3,403 $ 559 $ 6,219 $ 1,659
======== ======== ======== =======
NET INCOME (LOSS)
Learn2.com............................................ $(19,160) $ (2,271) $(35,376) $(9,823)
Panmedia.............................................. -- 64 17 366
-------- -------- -------- -------
Total................................................. $(19,160) $ (2,207) $(35,359) $(9,457)
======== ======== ======== =======
</TABLE>
Certain amounts in the prior periods' condensed consolidated financial
statements have been reclassified for comparative purposes to conform to the
current period presentation.
The condensed consolidated financial statements included herein have been
restated for the change in accounting from the pooling-of-interests to the
purchase method of accounting for the acquisition of ViaGrafix Corporation
("ViaGrafix") (Note 2). See Note 2 of the consolidated financial statements for
a detailed explanation of the changes.
6
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTATEMENT
On August 23, 1999, we acquired all of the outstanding common stock of
ViaGrafix Corporation, a publicly traded company. ViaGrafix develops, produces
and markets technology based training products and computer aided design (CAD)
software, and provides e-mail broadcast solutions. The transaction was accounted
for as a pooling of interests.
Since the acquisition of ViaGrafix, the management of the Company has been
exploring and evaluating various business strategies relating to eTracks.com, a
subsidiary of ViaGrafix. The Company has reached the conclusion that to maximize
shareholder value and develop eTracks.com, it will seek outside investment which
could lead to the sale of all or part of the business.
As a result of this decision, the pooling-of-interests method of accounting
is no longer available for the ViaGrafix business combination. Therefore, we are
restating our supplementary financial statements to reflect the transaction as a
purchase method business combination.
The adjustments to change the method of accounting for the merger increased
net assets by approximately $25.4 million primarily related to the increase in
intangible assets and goodwill related to the ViaGrafix acquisition on
September 30, 1999 and decreased net assets by approximately $22.3 million at
December 31, 1998. For the three and nine months ended September 30, 1999, these
adjustments decreased revenues by approximately $1.9 million and $14.8 million,
respectively and increased net loss available to common shareholders by
approximately $11.0 million and $9.9 million, respectively. For the three and
nine months ended September 30, 1998, these adjustments decreased revenues by
approximately $4.0 million and $12.3 million, respectively and increased the net
loss available to common shareholders by approximately $181,000 for the three
months ended September 30, 1998 and decreased by $858,000 for the nine months
ended September 30, 1998.
The restatement to the purchase method of accounting does not affect the
Company's operating revenues, cash flows, or the fundamental financial strength
of the Company and does not change the economic value of the transaction to the
Company. Rather, the Company has recorded intangible assets, including goodwill,
and a corresponding increase in equity. The restatement does not affect the
accounting for the Panmedia merger as a pooling-of-interests. The impact of such
restatement on the Company's condensed consolidated statement of operations and
balance sheet is as follows.
The effects of the restatement on the condensed consolidated balance sheets
at September 30, 1999 and December 31, 1998 and the condensed consolidated
statements of operations for the three and nine months ended September 30, 1999
and 1998 are as follows:
7
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTATEMENT (CONTINUED)
Condensed Consolidated Balance Sheets (in thousands):
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999 AS OF DECEMBER 31, 1998
------------------------- -------------------------
AS AS
PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED
----------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................... $ 11,505 $ 11,505 $ 24,359 $ 11,313
Accounts receivable, net....................... 4,266 3,435 4,887 174
Inventories.................................... 2,833 833 1,909 --
Other current assets........................... 2,903 2,633 1,090 367
--------- --------- -------- --------
Total current assets......................... 21,507 18,406 32,245 11,854
Fixed assets, net................................ 3,911 4,126 4,542 1,478
Capitalized software, net........................ 15,192 16,892 169 --
Intangible assets, net........................... 3,374 15,674 214 7
Goodwill......................................... 9,701 24,431 88 --
Other assets..................................... 244 244 811 80
--------- --------- -------- --------
Total assets................................. $ 53,929 $ 79,773 $ 38,069 $ 13,419
========= ========= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable............................... $ 1,951 $ 1,951 $ 1,965 $ 198
Accrued expenses and other current
liabilities.................................. 4,132 4,607 2,877 2,513
Current portion of deferred revenue............ 1,862 1,862 50 50
Notes payable.................................. 476 476 738 487
--------- --------- -------- --------
Total current liabilities.................... 8,421 8,896 5,630 3,248
Deferred revenue................................. 816 816 --
Other............................................ 23 23 48 48
--------- --------- -------- --------
Total liabilities............................ 9,260 9,735 5,678 3,296
Minority interest in subsidiary.................. 20 20 --
Commitments and contingencies
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)........................... -- -- 629 629
Common stock, par value $0.01 per share,
100,000,000 shares authorized; 50,993,030 and
25,307,482 shares issued and outstanding in
1999 and 1998, respectively.................. 510 510 361 252
Additional paid-in capital..................... 154,575 191,534 114,315 93,963
Notes receivable from directors................ (1,687) (1,687) -- --
Unearned compensation.......................... (78) -- -- --
Accumulated deficit............................ (108,671) (120,339) (82,914) (84,721)
--------- --------- -------- --------
Total stockholders' equity................... 44,649 70,018 32,391 10,123
--------- --------- -------- --------
Total liabilities and stockholders' equity... $ 53,929 $ 79,773 $ 38,069 $ 13,419
========= ========= ======== ========
</TABLE>
8
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
2. RESTATEMENT (CONTINUED)
Condensed Consolidated Statements of Operations (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS NINE MONTHS NINE MONTHS
ENDED ENDED ENDED ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998 SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
--------------------- --------------------- --------------------- ---------------------
AS AS AS AS
PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS PREVIOUSLY AS
REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED REPORTED RESTATED
---------- -------- ---------- -------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues.................... $ 5,259 $ 3,403 $ 4,576 $ 559 $ 21,023 $ 6,219 $ 13,940 $ 1,659
Cost of revenues................ 1,256 521 923 122 5,258 1,147 3,103 338
------- -------- ------- ------- -------- -------- -------- --------
Gross profit.................... 4,003 2,882 3,653 437 15,765 5,072 10,837 1,321
Operating expenses:
Research and product
development................. 1,543 926 1,489 685 4,253 2,491 3,737 2,176
Sales and marketing........... 4,682 3,500 1,396 370 14,696 5,246 5,221 873
General and administrative.... 1,728 595 2,536 931 5,306 2,312 6,955 4,608
Depreciation and
amortization................ 975 833 205 439 2,516 1,822 1,450 1,479
Restructuring charges......... 999 999 -- -- 3,493 3,493 -- --
Acquired in-process
technology.................. -- 15,100 -- -- 9,677 24,777 -- --
Non-recurring costs........... 2,298 -- -- -- 2,575 277 -- --
------- -------- ------- ------- -------- -------- -------- --------
Total operating
expenses................ 12,225 21,953 5,626 2,425 42,516 40,418 17,363 9,136
Operating loss............ (8,222) (19,071) (1,973) (1,988) (26,751) (35,346) (6,526) (7,815)
Interest and other, net......... 174 89 63 219 (114) 13 1,323 1,642
------- -------- ------- ------- -------- -------- -------- --------
Loss before income taxes........ (8,396) (19,160) (2,036) (2,207) (26,637) (35,359) (7,849) (9,457)
(Benefit) provision for income
taxes......................... (283) -- 14 -- (1,139) -- 412 --
------- -------- ------- ------- -------- -------- -------- --------
Net loss........................ (8,113) (19,160) (2,050) (2,207) (25,498) (35,359) (8,261) (9,457)
Dividends on Preferred Stock.... -- -- (338) -- -- -- (338) --
Beneficial conversion feature in
association with Preferred
Stock......................... -- -- (5,479) (5,479) -- -- (5,479) (5,479)
------- -------- ------- ------- -------- -------- -------- --------
Net loss available to common
shareholders.................. $(8,113) $(19,160) $(7,867) $(7,686) $(25,498) $(35,359) $(14,078) $(14,936)
======= ======== ======= ======= ======== ======== ======== ========
Basic and diluted loss per
common share.................. $ (0.17) $ (0.45) $ (0.26) $ (0.40) $ (0.58) $ (1.02) $ (0.52) $ (0.88)
======= ======== ======= ======= ======== ======== ======== ========
Weighted average basic and
diluted shares outstanding.... 48,748 42,476 30,246 19,006 43,888 34,659 27,217 16,983
======= ======== ======= ======= ======== ======== ======== ========
</TABLE>
9
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
3. 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.
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 a 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.
10
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. BUSINESS COMBINATIONS
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.
VIAGRAFIX ACQUISITION
In August 1999, the Company acquired all the outstanding stock of ViaGrafix,
a publicly traded company. 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 $61.1 million including $1.3 million of
assumed liabilities, which consisted primarily of accounts payable and accrued
expenses and other current liabilities. The transaction was accounted for using
the purchase method of accounting. The results of ViaGrafix subsequent to the
acquisition are included in the Company's condensed consolidated statements of
operations.
The aggregate purchase price consisted of the following (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Common stock................................................ $56,776
Assumed liabilities......................................... 1,257
Acquisition costs........................................... 3,042
-------
Total....................................................... $61,075
=======
</TABLE>
Under the purchase method of accounting, the assets and liabilities were
recorded based upon their fair values at the date of acquisition. We recorded
approximately $14.7 million in goodwill and $14.1 million other intangible
assets, which are being amortized on a straight-line basis over periods of five
to twenty years and wrote-off approximately $15.1 million of acquired in-process
technology.
The purchase price was allocated to the net assets acquired based upon their
fair values. The fair values were determined by an independent appraisal which
incorporated proven valuation procedures and techniques.
11
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. BUSINESS COMBINATIONS (CONTINUED)
The purchase price has been allocated as follows:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<S> <C>
Current assets.............................................. $13,077
Fixed assets................................................ 3,407
Other assets................................................ 693
Capitalized software........................................ 1,768
Acquired in-process technology (written-off)................ 15,100
Intangible assets........................................... 12,300
Goodwill.................................................... 14,730
-------
Total....................................................... $61,075
=======
</TABLE>
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 three 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 five to twenty years. The Company recorded approximately $200,000
in amortization expense relating to these intangible assets during the three
months ended September 30, 1999. The accompanying condensed consolidated
statement of operations for the three and nine months ended September 30, 1999
includes charges of approximately $15.1 million associated with the write-off of
acquired in-process technology and approximately $999,000 (see Note 9),
associated with a restructuring charge which includes the write-off of redundant
assets, excess office space and employee severance.
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.
12
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. BUSINESS COMBINATIONS (CONTINUED)
The aggregate purchase price consisted of the following (in thousands):
<TABLE>
<CAPTION>
DESCRIPTION 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):
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
- ----------- --------
<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>
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 the acquisitions of ViaGrafix and Street Technologies, Inc. had taken place
at the beginning of the respective periods
13
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
4. BUSINESS COMBINATIONS (CONTINUED)
presented. The pro forma financial information is not necessarily indicative of
the combined results that may occur in the future.
<TABLE>
<CAPTION>
PRO FORMA
-------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
----------------------------- -----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
------------- ------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue....................... $ 5,259 $ 5,598 $ 21,354 $17,193
Loss from operations.......... (8,589) (3,257) (29,157) (4,878)
Net loss...................... (8,480) (9,106) (27,827) (10,943)
Loss per share................ $ (0.17) $ (0.22) $ (0.55) $ (0.27)
</TABLE>
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 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 September 30, 1999, all shares of the Company's Series B Convertible
Preferred Stock had been converted into shares of common stock.
14
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
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 other 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 primarily related 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.
During the third quarter, following the acquisition of ViaGrafix, the
Company recorded a charge of approximately $999,000 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 nine
month 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>
NON- BALANCE AT
RESTRUCTURING 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
15
<PAGE>
LEARN2.COM,INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
10. INDUSTRY SEGMENTS (CONTINUED)
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.
16
<PAGE>
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 S-4/A which was filed with the Securities and Exchange Commission
("SEC") on July 19, 1999.
In order to keep our stockholders informed of the Company's future plans and
objectives, this Quarterly Report on Form 10-Q/A 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 statements which are included in Item 1 of the Company's Annual
Report on Form 10-K/A for the year ended December 31, 1998.
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 content 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.
17
<PAGE>
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 all of the outstanding common stock of
ViaGrafix Corporation, a publicly traded company. ViaGrafix develops, produces
and markets technology based training products and computer aided design (CAD)
software, and provides e-mail broadcast solutions. The transaction was accounted
for as a pooling of interests.
Since the acquisition of ViaGrafix, the management of the Company has been
exploring and evaluating various business strategies relating to eTracks.com, a
subsidiary of ViaGrafix. The Company has reached the conclusion that to maximize
shareholder value and develop eTracks.com, it will seek outside investment which
could lead to the sale of all or part of the business.
As a result of this decision, the pooling-of-interests method of accounting
is no longer available for the ViaGrafix business combination. Therefore, we are
restating our supplementary financial statements to reflect the transaction as a
purchase method business combination.
The total value of the transaction was approximately $61.0 million including
$1.3 million of assumed liabilities, which consisted primarily of accounts
payable and other accrued liabilities. Under the purchase method of accounting,
the assets and liabilities were recorded based upon their fair values at the
date of acquisition. We recorded approximately $14.7 million in goodwill and
$14.1 million other intangible assets, which are being amortized on a
straight-line basis over periods of five to twenty years and wrote-off
approximately $15.1 million of acquired in-process technology.
The adjustments to change the method of accounting for the merger increased
net assets by approximately $25.4 million at September 30, 1999. For the three
and nine months ended September 30, 1999, these adjustments decreased revenues
by approximately $1.9 million and $14.8 million, respectively and increased the
net loss available to common shareholders by approximately $11.0 million and
$9.9 million, respectively. For the three and nine months ended September 30,
1998, these adjustments decreased revenues by approximately $4.0 million and
$12.3 million, respectively and decreased the net loss available to common
shareholders by approximately $181,000 for the three months ended September 30,
1998 and an increase of $858,000 for the nine months ended September 30, 1998,
respectively.
The restatement to purchase accounting does not affect Company's ongoing
operating revenues, cash flows, or the fundamental financial strength of the
Company and does not change the economic value of the transaction to the
Company. Rather, the Company has recorded intangible assets, including goodwill,
and a corresponding increase in equity. The restatement does not affect the
accounting for the Panmedia merger as a pooling-of-interests.
The condensed consolidated financial statements included herein have been
restated for the change in accounting from the pooling-of-interests to the
purchase method of accounting for the acquisition of ViaGrafix. See Note 2 of
the consolidated financial statements for a detailed explanation of the changes.
18
<PAGE>
As set forth in Note 4, our reported results of operations for all periods
prior to August 23, 1999 do not reflect the results of ViaGrafix and prior to
February 16, 1999 do not reflect the results of Street Technologies, Inc.
Consequently, the results prior to these dates 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 continue to 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.
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 August 23, 1999
do not reflect the results of ViaGrafix and prior to February 16, 1999 do not
reflect the results of Street Technologies, Inc. Consequently, the results prior
to these dates 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 $2.8 million or 466.7% from $600,000 to $3.4 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
included physical product sales and broadcast messaging services and other
revenues from ViaGrafix for the five-week period ended September 30, 1999,
totaling $1.9 million. Excluding this amount, revenues increased $900,000 from
$600,000 to $900,000 for the three months ended September 30, 1999 compared to
the three months ended September 30, 1998. The remaining revenue consisted
primarily of 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 web development services, and royalties related to our
entertainment business.
Revenues increased $4.5 million or 264.7% from $1.7 million to $6.2 million
for the nine months ended September 30, 1999. Revenues for the nine months ended
September 30, 1999 included physical product sales and broadcast messaging
services from the ViaGrafix acquisition for the period the five-week period
ended September 30, 1999, totaling $1.9 million. Excluding this amount, revenues
increased $2.6 million for the nine months ended September 30, 1999 compared to
the nine months ended September 30, 1998. The remaining revenues for the nine
months ended September 30, 1999 primarily related to sales of streamed learning
content delivered over the Internet, and related technology licensing fees and
maintenance and web development services. In the nine months ended
September 30, 1998 revenues related primarily to royalties on licensed
technologies related to our entertainment business.
COST OF REVENUES
Cost of revenues for the three months ended September 30, 1999 was $500,000
or 15.3% of net revenues compared to $100,000 or 21.8% of net revenues for the
three months ended September 30, 1998. Cost of revenues for the nine months
ended September 30, 1999 was $1.1 million or 18.4% of net revenues compared to
$300,000 or 20.4% of net revenues for the nine months ended September 30, 1998.
The decrease in cost of revenues as a percentage of net sales for both the third
quarter of 1999 as well as the
19
<PAGE>
nine-months ended September 30, 1999 was primarily due to a change in the mix of
sales in the quarter and in the first nine months of 1999 as compared to 1998.
RESEARCH AND PRODUCT DEVELOPMENT EXPENSES
Research and product development expenses were $900,000 for the three months
ended September 30, 1999 as compared to $700,000 for the three months ended
September 30, 1998. Research and product development expenses were $2.5 million
for the nine months ended September 30, 1999 as compared to $2.2 million for the
nine months ended September 30, 1998. Research and product development relates
to technology, web, and training course development. We believe that significant
investment in research and product development is required to remain competitive
in our markets and therefore, we expect such research and product development
expenses to continue to increase in future periods.
SALES AND MARKETING EXPENSES
Sales and marketing expenses increased $3.1 million or 775% from $400,000 to
$3.5 million for the three months ended September 30, 1999 compared to the three
months ended September 30, 1998. The overall increase of $3.1 million was
attributable to costs associated with increasing our sales and marketing staff
to focus on direct and indirect licensing and sales to corporations,
$1.8 million; cooperative, print, and other product related advertising,
$500,000; and branding the new name of Learn2.com, Inc., $800,000. We expect our
advertising expenses to remain high in a continued effort to achieve growth in
sales and brand awareness.
Sales and marketing expenses increased $4.3 million or 477.8% from $900,000
to $5.2 million for the nine months ended September 30, 1999 compared to the
nine months ended September 30, 1998. The overall increase of $4.3 million was
attributable to increasing our sales and marketing staff to focus on direct and
indirect licensing and sales to corporations, $3.0 million; cooperative, print
media, and other product related advertising, $500,000; and branding the new
name of Learn2.com, Inc., $800,000. We expect our advertising expenses to remain
high in a continued effort to achieve growth in sales and brand awareness.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $600,000 and $900,000 for the three
months ended September 30, 1999 and 1998, respectively. The decrease of
approximately $300,000 or 33.3% for the three months ended September 30, 1999 is
related to the cost structure of the newly merged companies.
General and administrative expenses were $2.3 million and $4.6 million for
the nine months ended September 30, 1999 and 1998, respectively. The decrease of
$2.3 million or 50.0% was primarily 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 remaining $500,000 is related to the cost structure of
the newly merged companies.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses were $800,000 and $400,000 for the
three months ended September 30, 1999 and 1998, respectively. Depreciation and
amortization expenses increased $400,000 or 100% for the three months ended
September 30, 1999. The 1999 expenses included $55,000 of depreciation on fixed
assets, $155,000 of amortization of computer software, $423,000 of amortization
on goodwill, software and intangible assets which related to the Street
Technologies, Inc. acquisition, and $200,000 of
20
<PAGE>
amortization on goodwill and other intangible assets related to the ViaGrafix
acquisition. The 1998 expenses related primarily to depreciation and
amortization on fixed assets.
Depreciation and amortization expenses were $1.8 million and $1.5 million
for the nine months ended September 30, 1999 and 1998, respectively.
Depreciation and amortization expenses increased $300,000 or 20% for the nine
months ended September 30, 1999. The 1999 expenses included approximately
$111,000 of depreciation on fixed assets, $422,000 of amortization of computer
software, $1.1 million of amortization on goodwill, software and intangible
assets which related to the Street Technologies, Inc. acquisition, and $200,000
of amortization on goodwill and other intangible assets which related to the
ViaGrafix 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 acquisitions of Street Technologies, Inc. and
ViaGrafix, we allocated $9.7 million and $15.1 million, respectively, of the
purchase prices 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. We
recorded a non-recurring charge of $277,000 for transaction costs associated
with the merger.
INTEREST AND OTHER, NET
Interest and other net was approximately $100,000 of expense compared to
$200,000 of expense for the three months ended September 30, 1999 and 1998,
respectively. 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 approximately $13,000 of expense compared to
$1.6 million 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 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.
21
<PAGE>
NET LOSS
The net loss for the three months ended September 30, 1999 was $19.2 million
or $(0.45) per basic and diluted common share, compared to $7.7 million or
$(0.40) 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 restructuring charge of $999,000 incurred in connection with the
acquisition of ViaGrafix, the write-off of $15.1 million of acquired in-process
technology acquired in the ViaGrafix acquisition, and amortization of intangible
assets and goodwill relating to the ViaGrafix acquisition totaling approximately
$200,000. Excluding these charges, our net loss was $2.9 million or $(0.07) per
basic and diluted common share. The net loss was attributable to the factors
discussed above.
The net loss for the nine months ended September 30, 1999 was $35.4 million
or $(1.02) per basic and diluted common share, compared to $14.9 million or
$(0.88) 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 $277,000 incurred in connection with the
acquisition of Panmedia. Also included were the following costs related to the
Street Technologies and ViaGrafix acquisitions: the write-off of $24.8 million
of acquired in-process technology, amortization of intangible assets of $1.3
million and $3.5 million of restructuring charges Excluding these charges, our
net loss was $5.5 million or $(0.16) per basic and diluted common share. The net
loss was attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents increased $192,000 during the first nine months of
the year to $11.5 million at September 30, 1999.
Operating activities used $5.7 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 $35.4 million. The net loss was substantially comprised of
non-cash charges of $30.5 million (principally $1.8 million of depreciation and
amortization, $400,000 non-cash warrant expense, $3.5 million of restructuring
charges, and $24.8 million for the write-off of acquired in-process technology).
The principal factor in the cash provided by in investing activities of
$5.0 million was cash acquired in the ViaGrafix acquisition of $9.6 million
reduced by acquisition costs of $3.0 million. This increase was partially offset
by $1.5 million in capital expenditures. 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 provided $845,000 of cash. This was primarily due to
proceeds from the issuance of common stock under stock option and purchase plans
totaling $1.3 million, offset by dividends paid to Stockholders of $186,000,
repayments of debt of $45,000, 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.
22
<PAGE>
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
23
<PAGE>
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.
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.
24
<PAGE>
LEARN2.COM, INC.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
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 certain other 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 grants of warrants to
purchase 600,000 shares of Common Stock at prices ranging from $3.00 to $5.00
per share in connection with certain consulting agreements.
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.
25
<PAGE>
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
<TABLE>
<CAPTION>
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 Ezrin...................................... 36,561,654 297,584
Merv Adelson........................................... 36,546,554 312,684
James A. Cannavino..................................... 36,475,072 402,166
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.
<TABLE>
<S> <C>
Votes For:.................................................. 17,420,139
Votes Against:.............................................. 553,914
Votes Abstaining:........................................... 161,202
</TABLE>
Proposal 3: Approval of the Company's 1999 Stock Option Plan.
<TABLE>
<S> <C>
Votes For:.................................................. 24,230,926
Votes Against:.............................................. 773,511
Votes Abstaining:........................................... 153,748
</TABLE>
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.
<TABLE>
<S> <C>
Votes For:.................................................. 24,725,255
Votes Against:.............................................. 727,925
Votes Abstaining:........................................... 157,544
</TABLE>
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.
26
<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: February 21, 2000 By: /s/ MARC E. LANDY
-----------------------------------------
Marc E. Landy
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND SECRETARY
(PRINCIPAL FINANCIAL OFFICER)
27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<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 11,313
<SECURITIES> 0 0
<RECEIVABLES> 3,435 174
<ALLOWANCES> 0 0
<INVENTORY> 833 0
<CURRENT-ASSETS> 18,406 11,854
<PP&E> 4,126 1,478
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 79,773 13,419
<CURRENT-LIABILITIES> 8,896 3,248
<BONDS> 0 0
0 0
0 629
<COMMON> 510 252
<OTHER-SE> 189,847 93,963
<TOTAL-LIABILITY-AND-EQUITY> 79,773 13,419
<SALES> 6,219 1,659
<TOTAL-REVENUES> 0 0
<CGS> 1,147 338
<TOTAL-COSTS> 41,565 9,474
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (13) (1,642)
<INCOME-PRETAX> 0 0
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (35,359) (14,936)
<EPS-BASIC> (1.02) (0.88)
<EPS-DILUTED> (1.02) (0.88)
</TABLE>
