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FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

For the fiscal year ended December 31, 2001

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from            to                     

Commission File Number 000-24289

CLICK2LEARN, INC.

110-110th Avenue NE, Bellevue, Washington 98004

(425) 462-0501

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  X           No     

      Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.     o

      The aggregate market value of common stock held by non-affiliates of the registrant as of March 1, 2002 was $54,964,496.

      The number of shares outstanding of the registrant’s common stock as of March 1, 2002 was 24,250,697.

DOCUMENTS INCORPORATED BY REFERENCE

      Portions of the definitive Proxy Statement to be delivered to stockholders in connection with the Annual Meeting of Stockholders to be held on May 29, 2002 are incorporated by reference into Part III.

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CLICK2LEARN, INC.

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2001

INDEX

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PART I

      This Annual Report and the documents incorporated herein by reference include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in this Annual Report or in any document incorporated by reference are forward-looking. Such forward-looking statements involve risks and uncertainties, including, among other things, statements regarding our anticipated costs and expenses and revenue mix. Such forward-looking statements include, among others, those statements including the words “expect”, “anticipate”, “intend”, “believe” and similar language. Our actual results may differ significantly from those projected in the forward-looking statements. Factors that might cause or contribute to such differences include, but are not limited to those discussed in the section “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors That May Affect Future Results of Operations.” You are cautioned not to place undue reliance on the forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We undertake no obligation to publicly release any revisions to the forward-looking statements or reflect events or circumstances after the date of this document.

Item 1.     Business

Overview and History

      We are a leading developer and provider of enterprise e-Learning solutions for businesses, government agencies and educational institutions. We design, develop, market, license and support an integrated suite of e-Learning software products and related services that allow our customers to cost-effectively create, personalize and manage the delivery of educational content across their extended enterprise of employees, suppliers, distributors and customers. We recently introduced our new Aspen Enterprise Learning Platform (“Aspen”), a suite of software products that unifies collaborative content development, personalized content delivery and comprehensive learning management in an integrated system designed to be open, flexible and scalable. We also offer a range of professional services to support our e-Learning software products.

      Our e-Learning solutions focus on the needs of organizations that realize the ability to provide relevant and up-to-date knowledge when and where it is needed throughout the extended enterprise is critical to their overall success. We provide our e-Learning solutions to customers across a broad range of industries including financial services, accounting, healthcare, insurance, technology, manufacturing, telecommunications, transportation, utilities, government and education.

      We were originally incorporated as Asymetrix Corporation in the State of Washington in 1984 and developed and marketed a wide range of software products. In 1995, we focused our business on the e-Learning market and we released our first authoring tool focused specifically on the creation of e-Learning content. We created our first learning management system in 1997 and our first web-based collaborative content development system in 1999. As a result of our decision to focus on e-Learning, we divested several product lines and made a number of acquisitions to strengthen our position in this market, and we changed our name to Asymetrix Learning Systems, Inc. In connection with our initial public offering in June 1998, we reincorporated as a Delaware corporation and in 2001, we changed our name to Click2learn, Inc.

      In 2001, as part of our ongoing focus on the Aspen platform, we acquired IntelliPrep Technologies, Incorporated (“IntelliPrep”) and made the decision to discontinue investing in our e-Learning Network, our hosted application service platform. We intend to migrate our e-Learning Network customers to Aspen as their existing contracts expire. We also decided to limit our services offerings to those directly related to the Aspen platform and our ToolBook II product line. As a result, in January 2002 we sold the majority of

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Products and Services

      We offer the following products and services:

      Aspen Enterprise Learning Platform. Aspen is a suite of three software products, each of which can be implemented on a stand-alone basis or in any combination. The Aspen product suite unifies collaborative content development, personalized content delivery and comprehensive learning management in an integrated system designed to be open, flexible, modular, and scalable. Each product in the Aspen suite is designed to offer comprehensive support for industry standards such as SCORM, AICC, and IMS Packaging specifications, and to work together with other standards-compliant e-Learning products. The open architecture of Aspen and a well-defined software development kit make it possible for developers to integrate Aspen with other enterprise applications such as systems for enterprise resource planning, supply chain and customer relationship management, human resources, e-commerce and financial management. We offer Aspen as a behind-the-firewall solution for implementation on our customers’ information systems or hosted at our data center. Aspen can be licensed on a perpetual or subscription basis.

      The Aspen suite includes the following three products, which are generally licensed based on the number of individual users of the particular product:

	•	Aspen Content Development Server (“Aspen CDS”). Aspen CDS enables customers to collaboratively create standards-compliant learning content in the form of reusable learning objects. Aspen CDS is designed to provide the instructional design, workflow, collaboration and management capabilities that enable a distributed team of subject matter experts, instructional designers and software developers to rapidly and cost-effectively develop engaging and flexible e-Learning courses. Courses created with Aspen CDS are designed to integrate with other standards-compliant learning management systems.
	•	Aspen Learning Experience Server (“Aspen LXS”). Aspen LXS is designed to provide an individual learner with a personalized learning experience that promotes rapid learning and knowledge exchange through adaptive delivery, collaboration tools, guided study paths, knowledge exchange tools and personalized feedback options. For example, Aspen LXS can adapt courses to the needs of individual learners by providing a guided path through the learning objects within a course. Aspen LXS includes features designed to increase learning effectiveness by annotating and highlighting relevant content, allowing the learner to access communities of experts for assistance with difficult subject matter and share knowledge, insights and experience with other learners.
	•	Aspen Learning Management Server (“Aspen LMS”). Aspen LMS is designed to allow organizations to manage learning resources from a central location and provide managers throughout the organization with access to those resources. Aspen LMS manages e-Learning, instructor-led training and other types of learning through a single interface, enabling organizations to efficiently use learning resources from a variety of sources, including custom content created with Aspen CDS and other standards-compliant content authoring programs, as well as commercially available content offerings. Aspen LMS also includes tools to analyze learning performance and capture data about the learning process at the learning-object level, providing organizations with the ability to quickly increase the effectiveness of their learning resources.

      ToolBook II Products. In addition to Aspen CDS, we offer our ToolBook II Instructor and ToolBook II Assistant e-Learning content creation products targeted at small teams or individual authors that do not require the collaborative capabilities and learning object functionality of Aspen CDS. These products enable our customers to create their own media-rich interactive e-Learning content for deployment on the Aspen platform, other standards-compliant e-Learning delivery systems or CD-ROM. ToolBook II Instructor is a multimedia development system for creating sophisticated e-Learning applications that is targeted at professional software developers. ToolBook II Assistant is designed to be an

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      Professional Services. We complement our Aspen and ToolBook II product offerings with a range of professional services to enable our customers to develop, implement, evaluate and maintain their e-Learning solutions. Our professional services offerings include:

	•	Strategic Consulting. We assist our customers in evaluating their e-Learning needs, using e-Learning to increase effectiveness or add value to current offerings, developing e-Learning business models, defining a solution that best meets their e-Learning needs and providing on-going consulting on the effectiveness of their solution and return on investment.
	•	Systems Integration. We provide the services necessary to implement and customize our customers’ e-Learning solutions and to integrate Aspen with our customers’ content, information systems and enterprise applications.
	•	Training and Technical Support. We offer training that helps organizations become more self-reliant in the use of our products and in e-Learning generally, and we offer technical support and maintenance packages for our products.

      A significant portion of our professional services business in 2001 consisted of developing custom e-Learning content. Although we sold the majority of our custom content development business to NIIT in January 2002, we will continue to provide custom content development services to the Washington National Guard at least through 2002.

Customers

      We provide our e-Learning products and services to customers across a broad range of industries including financial services, accounting, health care, insurance, computer hardware and software, manufacturing, networking, telecommunications, government and education. The following is a partial list of our significant customers in 2001:

      The Washington National Guard accounted for 17.5% of our total consolidated revenues and 38.6% of our Content Services revenues during 2001. See Management’s Discussion and Analysis at page 12 for a description of Content Services revenues and our other revenue categories. Although the Washington National Guard will continue to be a significant customer in 2002, we anticipate it will account for a smaller percentage of our total consolidated revenues for 2002. However, with the sale of the custom

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Competition

      The e-Learning market is a new market that is quickly evolving and subject to rapid technological change. The market is also highly fragmented, with no single competitor holding a dominant market position. Because there are no significant barriers to entry in this market, we expect a number of new competitors to enter this market in the future. We face competition from a variety of companies in different segments of the e-Learning market. The Aspen platform faces competition from vendors of other learning or content management systems, such as Saba and Docent, and other companies, including existing enterprise software vendors, may enter the e-Learning market in the future. Our ToolBook II products face competition from other web authoring products.

      The principal competitive factors affecting the market for e-Learning include:

	•	the features and functionality of e-Learning solutions;
	•	scalability and the ability to integrate with a variety of content and other e-Learning and enterprise software products;
	•	the scope and quality of professional services offered;
	•	pricing;
	•	customer service and support;
	•	reputation and financial position of the provider; and
	•	the effectiveness of sales and marketing efforts.

      Although we believe our solutions compete favorably with respect to all these factors, we may not be able to maintain a competitive position against current and potential competitors.

Sales and Marketing

      As of December 31, 2001, our combined sales and marketing organization consisted of 98 employees based at our corporate headquarters in Bellevue, Washington and at other locations throughout the United States, Canada and the United Kingdom. We sell our solutions primarily through a direct sales force consisting of field sales representatives focused on selling larger Aspen implementations and related services. We also have inside sales representatives focused on selling the ToolBook II authoring products and smaller Aspen licenses. Our sales organization also includes sales engineers who provide technical expertise, architect the technical aspects of our e-Learning solutions, assist in proposal preparation and provide ongoing sales support. We expect to add to our direct sales force in the future.

      Although in the past we have not used resellers significantly in marketing our e-Learning solutions other than the ToolBook II products, during 2001 we expanded our distribution through key strategic partnerships. We signed an agreement with Accenture LLP to enable them to market Aspen to their clients and we have established several new reseller relationships to bring the Aspen platform to a number of additional markets in Europe, Asia and the Pacific Rim. Sales to resellers accounted for 7% of total revenues in 2001, and may increase in future years. We expect to appoint additional resellers for the Aspen platform and ToolBook II products in the future.

      International revenue, based on the origin of the customer, accounted for 16%, 6% and 13% of our total revenue for 1999, 2000 and 2001, respectively. We believe that the e-Learning market is still in the early stages of development outside the United States, but that businesses in many other regions of the world are beginning to undertake e-Learning initiatives. We intend to continue to expand internationally by

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      We conduct a variety of marketing programs to promote our e-Learning solutions, including advertising in national business and technology magazines and trade publications, major trade shows, direct mail and e-mail campaigns, public seminars, web-based seminars, and public relations activities focused on company news and successful applications of our e-Learning solutions. In cooperation with the publisher of Training and Online Learning magazines, we are founding sponsors of the largest e-Learning conference in the industry. The next conference will be held in September 2002 in Anaheim, California. We also participate as an exhibitor and speaker at numerous training and e-Learning trade shows and we maintain an area on our web site where potential customers can obtain information about e-Learning and our solutions.

Research and Development

      We believe our long-standing focus on technology has attracted qualified engineering and other technical personnel and has contributed to our core technology capabilities. In May 2001, we significantly enhanced our engineering team with the acquisition of IntelliPrep, which brought a number of engineers who had previously held senior positions within Microsoft Corporation’s engineering organization. Our principal research and development groups are located in Bellevue, Washington and Rochester, New York. Research and development expenses were $7.4 million, $9.5 million and $8.9 million in 1999, 2000 and 2001, respectively and represented 21%, 22% and 20% of total revenue in those periods.

      We believe our future success will depend on our ability to continue to enhance our e-Learning solutions to keep pace with competitive product and service offerings, new technologies and industry standards, and diverse and changing customer requirements. As a result, we actively participate in a number of standards bodies and are taking an active role in defining standards for the e-Learning industry. We expect to continue to commit significant resources to research and development of our e-Learning solutions in the future.

Proprietary Rights

      Our e-Learning solutions are based on technology that is primarily internally developed, although some portions are licensed from third parties. We rely on a combination of copyrights, trademarks, trade secret laws, restrictions on disclosure and other methods to protect our intellectual property. We also enter confidentiality agreements with our employees and consultants, and control access to our proprietary information. Despite our precautions, however, unauthorized parties may copy or otherwise obtain or use our intellectual property and other companies may independently develop equivalent technology or intellectual property.

      We use the following trademarks in the conduct of our business: CLICK2LEARN, ASPEN, TOOLBOOK II ASSISTANT and TOOLBOOK II INSTRUCTOR.

Employees

      As of December 31, 2001, we had 356 full-time employees, including 73 in research and development, 98 in sales and marketing and technical support, 138 in professional services and 47 in operations and administration. None of our employees are represented by a labor union. We have not experienced any work stoppages and we consider our relations with our employees to be good. In connection with the sale of the majority of our custom content development business to NIIT in January 2002, 52 of our employees became employees of NIIT or were terminated.

Item 2.     Properties

      Our corporate headquarters and executive offices are located in Bellevue, Washington in approximately 35,293 square feet of leased office space, with the lease term expiring in October 2003. We also

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Item 3.     Legal Proceedings

      From time to time, we are involved in legal proceedings and litigation arising in the ordinary course of business. We are not a party to any litigation or other legal proceeding that, in the opinion of management, could have a material adverse effect on our business, operating results and financial condition, except as described below.

      ComVest Venture Partners, L.P. v. Click2learn, Inc., Supreme Court of the State of New York, County of New York, No. 01604817. On October 10, 2001, ComVest Venture Partners, L.P. (“ComVest”) filed suit against us alleging that we breached our obligations under a term sheet to allow them to purchase shares of our common stock and warrants for the purchase of additional shares. On November 12, 2001, the parties executed a settlement agreement and the suit was formally discontinued by stipulation on December 20, 2001.

      Richard B. Grant v. Asymetrix Corporation, No. CV-96-3635 HLH, Central District of California. On May 21, 1996, Richard B. Grant filed a complaint alleging that our ToolBook and Multimedia ToolBook products infringe a patent owned by him and seeking unspecified damages. We have received an opinion from patent counsel that the products do not infringe this patent and that the patent is invalid. This action is still in the discovery stage, and it is not yet possible to assess the likelihood of its outcome. Currently discovery in the case has been stayed pending the court’s ruling on the interpretation of the patent claims. Although we believe that we do not infringe this patent and that the patent is invalid, and although we intend to defend this action vigorously, the results of litigation can never be predicted with certainty. An adverse outcome in this litigation could have a material adverse effect on our business, operating results and financial condition. Moreover, the costs of defending the action, regardless of outcome, could be time-consuming, distract management personnel and have a negative effect on our business.

Item 4.     Submission of Matters to a Vote of Securities Holders

      Not applicable.

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PART II

Item 5.     Market for Registrant’s Common Stock and Related Stockholder Matters

      Since the initial public offering, our common stock has been listed on the Nasdaq National Market, originally under the symbol ASYM and currently under the symbol CLKS. The following table sets forth the high and low sales prices per share for each fiscal quarter during 2000 and 2001.

      As of March 1, 2002, there were 219 holders of record of our common stock. Because brokers and other institutions hold many of the shares on behalf of stockholders, we are unable to estimate the actual number of stockholders represented by these record holders. We have never declared or paid any cash dividends on our common stock. We currently intend to retain any future earnings to finance growth and, thus, we do not anticipate paying any cash dividends in the foreseeable future.

      The stock market from time to time has experienced significant price and volume fluctuations. In addition, the market price of our common stock has been highly volatile since our initial public offering. Factors such as fluctuations in our operating results, announcements of technological innovations or introductions of new products by us or our competitors, analysts’ reports and projections and general market conditions may have a significant effect on the market price of our common stock. In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted against such a company. The institution of such litigation against us could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business.

Recent Sales of Unregistered Securities

      In a private placement transaction closing on November 20, 2001 and December 10, 2001, we sold 3,680,000 shares of our common stock to several accredited investors for an aggregate purchase price of $9.2 million in cash. In connection with the purchase of the common stock, we issued the investors warrants for the purchase of an additional 1,840,000 shares of common stock at an exercise price of $4.00 per share.

      Jefferies & Company, Inc. (“Jefferies”) acted as placement agent in connection with a portion of the private placement closings on November 20, 2001 and December 10, 2001 and was paid commissions of $456,750. Jefferies was also issued warrants for the purchase of 64,200 common shares on November 20, 2001 and for the purchase of 28,200 common shares on December 10, 2001, both at an exercise price of $2.50 per share.

      ComVest acted as placement agent in connection with a portion of the private placement closing on November 20, 2001 and was paid commissions of $70,000. ComVest was also issued warrants for the purchase of 12,000 common shares on November 20, 2001, at an exercise price of $2.50 per share. ComVest was also an investor in the November 20, 2001 private placement closing and purchased stock

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      Commonwealth Associates, L.P. (“Commonwealth”) acted as placement agent in connection with a portion of the private placement closing on November 20, 2001 and was paid commissions of $105,000. Commonwealth was also issued warrants for the purchase of 18,000 common shares on December 10, 2001, at an exercise price of $2.50 per share.

      The sale of shares and warrants was made only to accredited investors pursuant to Rule 506 of Regulation D under the Securities Act of 1933 as amended (“the Act”) and was therefore exempt under the Act. The shares sold in the private placement and issuable upon exercise of the warrants were subsequently registered for resale pursuant to a Registration Statement on Form S-3. The proceeds have and will be used for working capital requirements.

      The warrants are exercisable at any time prior to their expiration dates in whole or in part upon the payment of the exercise price for the number of shares with respect to which the warrants are being exercised. In addition, the warrants may be exercised on a net exercise basis, pursuant to which the exercise price for an exercise of warrants is paid by the cancellation of a portion of the shares being exercised having a fair market value equal to the exercise price for all the shares being exercised. However, a net exercise may only be made if there is not an effective registration statement in place on the date of such exercise covering the resale of the warrant shares. The terms of the warrants are summarized in the following table:

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(a)	Historical information was restated to reflect the combination of Click2learn and Meliora in 1998, accounted for as a pooling-of-interests.
(b)	Historical results of operations are not necessarily indicative of future results. Refer to the “Factors that May Affect Future Results of Operations” under Item 7: “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for the discussion of factors which may impact future results.

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      The following discussion of our financial condition and results of operations should be read in conjunction with “Selected Consolidated Financial Data” and our Consolidated Financial Statements and related Notes thereto included elsewhere in this Report.

Overview

      We are a leading developer and provider of enterprise e-Learning software products and services for companies, government agencies and educational institutions. We design, develop, market, license and support an integrated suite of e-Learning software products and related services that allow our customers to cost-effectively create, personalize and manage the delivery of educational content. In the third quarter of 2001, we introduced our new Aspen platform that unifies collaborative content development, personalized content delivery and comprehensive learning management in an integrated system designed to be open, flexible and scalable. We provide our e-Learning products and services to customers across a broad range of industries including financial services, accounting, healthcare, insurance, technology, manufacturing, telecommunications, transportation, utilities, government and education.

      We group revenues around the primary components of our solutions: Platforms, Content Services and Tools.

      Platforms revenues include software licenses, subscription and hosting fees, implementation, customization, training and support related to the Aspen platform, our Ingenium learning management system, the precursor product to the Aspen Learning Management Server, and our e-Learning Network, an Internet e-Learning ASP offering that is not material to our current business.

      Content Services revenues are derived from the creation of custom e-Learning courses, consulting, fees for licensing, implementing and hosting our Rapid e-Learning Development System (“ReDS”) and sales of third party off-the-shelf content. ReDS is a collaborative development system that was licensed in connection with custom content development engagements and is no longer offered.

      Tools revenues primarily include software licenses, technical support and training related to our ToolBook II line of products.

      We recognize revenues for software licenses upon shipment; for technical support, subscription licenses and hosting evenly over the life of the contract; and for services such as content development and implementation based on the percentage of completion method or on a time and materials basis. We recognize non-refundable royalty advances paid by resellers or distributors upon execution of the agreement and shipment of the master copy of the software. To the extent royalties exceed the advances they are recognized as earned based on regular reports from such resellers or distributors.

      Costs related to revenues consist of media, manuals, royalties, packaging and distribution for software licenses and primarily salaries and overhead for service related offerings. Costs of revenues for the Platforms and Tools categories are similar due to a relatively high mix of software licenses versus services with costs averaging 15% to 25% of related revenue. Contrasting the mix for Platforms and Tools, Content Services consist primarily of relatively high personnel costs associated with providing professional services compared to the lower materials, packaging and other costs of software.

Critical Accounting Policies and Estimates

      Our critical accounting policies and estimates are as follows:

	•	Revenue recognition
	•	Estimating allowances for sales returns and the allowance for doubtful accounts
	•	Valuation of long-lived assets and goodwill

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      Revenue recognition. We report our revenue in three categories Tools, Content Services, and Platforms. Tools include software licenses and technical support and training for ToolBook II and other products. Content Services includes custom development of e-Learning courses, consulting, licensing and fees for ReDS, and royalties from resale of third party content. Platforms includes software licenses, subscription and hosting fees, implementation, and training and support for the Aspen platform as well as Ingenium and the e-Learning Network.