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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
COMMISSION FILE NUMBER 000-24289
CLICK2LEARN.COM, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 91-1276003
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
110-110TH AVENUE NE, BELLEVUE, WASHINGTON 98004
(Address of principal executive offices) (Zip Code)
(425) 462-0501
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE PER SHARE
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. [_]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 15, 2000 was $161,193,711.
The number of shares outstanding of the registrant's common stock as of March
15, 2000 was 16,666,473.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement to be delivered to shareholders in
connection with the Annual Meeting of Shareholders to be held are incorporated
by reference into Part III.
CLICK2LEARN.COM, INC.
FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1999
INDEX
PART I
Item 1. Business................................................................................................. 3
Item 2. Properties............................................................................................... 13
Item 3. Legal Proceedings........................................................................................ 13
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 14
Item 4a. Executive Officers....................................................................................... 14
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters..................................... 17
Item 6. Selected Financial Data.................................................................................. 19
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.................... 20
Item 7a. Quantitative and Qualitative Disclosures about Market Risk............................................... 30
Item 8. Financial Statements and Supplementary Data.............................................................. 31
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures.................... 53
PART III
Item 10. Directors and Executive Officers of the Registrant....................................................... 53
Item 11. Executive Compensation................................................................................... 53
Item 12. Security Ownership of Certain Beneficial Owners and Management........................................... 53
Item 13. Certain Relationships and Related Transactions........................................................... 53
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 53
Signatures......................................................................................................... 56
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PART I
EXCEPT FOR HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES
ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934. SUCH
FORWARD-LOOKING STATEMENTS INVOLVE RISKS AND UNCERTAINTIES, INCLUDING, AMONG
OTHER THINGS, STATEMENTS REGARDING CLICK2LEARN.COM'S ANTICIPATED COSTS AND
EXPENSES AND REVENUE MIX. SUCH FORWARD-LOOKING STATEMENTS INCLUDE, AMONG OTHERS,
THOSE STATEMENTS INCLUDING THE WORDS "EXPECTS", "ANTICIPATES", "INTENDS",
"BELIEVES" AND SIMILAR LANGUAGE. CLICK2LEARN.COM'S 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 SHOULD CAREFULLY REVIEW THE RISKS DESCRIBED IN OTHER
DOCUMENTS CLICK2LEARN.COM FILES FROM TIME TO TIME WITH THE SECURITIES AND
EXCHANGE COMMISSION, INCLUDING THE QUARTERLY REPORTS ON FORM 10-Q THAT
CLICK2LEARN.COM WILL FILE IN 2000. 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. CLICK2LEARN.COM UNDERTAKES 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
Click2learn.com, inc. ("click2learn"), formerly known as Asymetrix
Learning Systems, Inc., provides e-learning solutions designed to help
organizations more effectively capture, organize, manage, disseminate and use
knowledge as a competitive advantage. Click2learn conducts two primary lines of
business related to e-learning:
- the click2learn.com network, an Internet based-application
service solution for the delivery and management of e-learning
over the Internet, including the click2learn.com e-learning
portal, an e-commerce site for the purchase of web-delivered
learning as well as more traditional forms of learning such as
books, video tapes, CD-ROMs and instructor-led training, and a
free system to allow subscribers to author and publish e-learning
content; and
- a comprehensive enterprise e-learning solution designed for
implementation on a customer's own internal information systems.
To support these solutions, click2learn also offers its customers a range of
authoring solutions for the capture of knowledge and the creation of e-learning
courses as well as a comprehensive array of professional services including
strategic consulting, e-learning development, training and support.
The click2learn.com network is a network of learning web sites based on
click2learn's web site at www.click2learn.com that are hosted and operated by
click2learn for its customers. The click2learn.com network includes: (1) private
corporate e-learning sites supported on an application service provider basis
for internal use by the organizations' employees; (2) public co-branded
e-learning sites established in connection with corporate web sites or Internet
portals where users can purchase both e-learning content for delivery over the
Internet, traditional learning materials in tangible formats, and seats in
instructor-led training courses; and (3) the click2learn.com e-learning portal,
a click2learn branded public e-commerce site where users can purchase both
e-learning content for delivery over the Internet, traditional learning
materials in tangible formats, and seats in instructor-led training courses. The
web sites on the click2learn.com network are based on a standard template that
is configured to include the look and feel of click2learn's customers' internal
or external web sites, appearing to the end user as the integrated "learning
channel" for these sites.
One of the most unique features of click2learn's solution is a
"server-side" authoring tool, called CLICK2LEARN.AUTHOR-TM-, and a similar
publishing tool, called CLICK2LEARN.PUBLISHER-TM- , that users can access
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with only a standard web browser to create brand new, interactive web-based
courseware, and to upload existing knowledge objects such as Microsoft Word or
PowerPoint files. Most public and private web sites on the click2learn.com
network also include these authoring and publishing tools with which their users
can create their own e-learning courses and publish them throughout the
click2learn.com network. Both the owner of the click2learn.com network site
where the course was published and the individual author can earn royalties if
such courses are purchased anywhere on the click2learn.com network, as can the
owners of the click2learn.com network sites through which such courses are sold.
Click2learn's enterprise e-learning solution includes Ingenium-TM-, a
learning management and skills assessment system to enable customers to deploy
and manage all aspects of their learning needs and to assess the skills and
learning needs of their employees. The Ingenium system supports the management
and delivery of multiple types of learning activities within an organization
including instructor-led training, training delivered on CD-ROM or e-learning
courses delivered over an organization's intranet. The Ingenium system also
allows an organization to closely match and track all employees' readiness to
perform their job functions based on the analysis of the skills required to
accomplish any tasks, and the analysis of the training an employee has completed
as compared to that required for the job. Ingenium's skill inventory also allows
an enterprise to locate employees with a particular skill--for example, someone
fluent in Japanese--by doing a quick search of the Ingenium database.
Click2learn's professional services related to both the click2learn.com
network and its enterprise e-learning solution include consulting on
e-learning initiatives, custom development of e-learning content, systems and
content integration, and training. The custom development group uses a
collaborative, application service provider (ASP) approach to developing
content that allows click2learn to rapidly create multiple hours of web-based
courseware in a relatively short development cycle. Click2learn also offers
ToolBook II Instructor-TM- and ToolBook II Assistant-TM-, products to enable
customers to easily create and deploy e-learning courses in conjunction with
either the click2learn.com network or its enterprise e-learning solution, or
on a stand-alone basis. Click2learn's combination of technology and services
enable organizations to establish and maintain an e-learning solution that is
tailored to their unique needs.
Click2learn was originally incorporated as Asymetrix Corporation in the
State of Washington in 1984. Prior to focusing on the e-learning market,
click2learn developed and marketed a wide range of software products. As a
result of click2learn's decision to focus on e-learning, between October 1996
and July 1998, click2learn divested several product lines and made a number of
acquisitions to strengthen its position in the market, and changed its name to
Asymetrix Learning Systems, Inc. Click2learn also focused its research and
development efforts on products for e-learning and began developing a
professional services organization through internal growth and acquisition. In
connection with its initial public offering in June 1998, click2learn
reincorporated as a Delaware corporation through a merger with a Delaware
subsidiary. In July 1999, click2learn announced the launch of the
click2learn.com network and in November 1999, formally changed its name to
click2learn.com, inc. to reflect the long-term strategic importance of the
click2learn.com network and its application service provider business.
PRODUCTS AND SERVICES
Click2learn offers a solutions-based approach to e-learning for
business and professionals, with implementation strategies to address each
customer's unique needs. Click2learn provides its customers with needs analysis
and consulting, e-learning authoring and management products, custom e-learning
content development, a wide variety of e-learning content published by third
parties, e-learning hosting services and e-learning systems integration
services.
The click2learn e-learning solution includes the following products and
services:
THE CLICK2LEARN.COM NETWORK
THE CLICK2LEARN.COM E-LEARNING PORTAL. The e-learning portal at
www.click2learn.com provides the underlying technology platform for all of the
web sites in the click2learn.com network. At the e-learning portal, click2learn
has aggregated an extensive catalog of learning materials from third party
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publishers in a wide variety of formats including e-learning courses delivered
over the Internet, learning materials in tangible formats such as video tapes,
books, CD-ROMS and spaces in instructor-led training courses. As of March 15,
2000, click2learn had signed contracts with publishers to offer approximately
7,000 Internet-deliverable e-learning and tangible media titles at the
click2learn.com e-learning portal. The learning titles cover a wide variety of
technical, professional and business subject areas such as information
technology systems, including certification courses, end user software
applications, and finance and career development. Click2learn acts as an
aggregator of third party content and does not currently own any of the
content sold through the click2learn.com network. Click2learn has established
relationships with the following publishers to offer their titles through the
click2learn.com e-learning portal:
ActiveEducation KnowHowZone OTSI
Applied Learning Systems Knowledge Quest Productivity Point Intl
Catapult KT Solutions Richard Chang Associates
Competence Software Learn2.com SkillSoft
ComputerPREP LearnKey Skills Online
Crisp Publications Macmillan Publications Triad Healthcare Technologies
CyberStateU.com Maxim Training TRO Learning, Inc.
DiscoverWare NETg University Access
FirstNet Learning netSyndicate Velocity Business Publishing
InfoSource, Inc. NIIT Vital Learning
Infotec Onlinelearningguide.com Vivid Concepts
Intellexis International Onyx Interactive youachieve.com
Jossey-Bass Publishers
The prices charged by click2learn for learning titles varies depending
on the title and the number of licensed users, and whether the learning titles
are purchased individually or in bundled "productivity packs." Purchases through
the e-learning portal are made via credit card using standard e-commerce and
Internet security technology. Click2learn generally pays publishers of
commercially-available learning titles a portion of their list prices for titles
sold through the e-learning portal, as well as through any other sites on the
click2learn.com network. Click2learn does not maintain an inventory of tangible
materials and places an order with the publisher when tangible materials (hard
goods) are purchased through the e-learning portal or other sites on the
click2learn.com network. The publisher or its fulfillment firm then ships the
materials directly to the customer. Click2learn assumes all customer credit
risk.
The click2learn e-learning portal also includes the unique
CLICK2LEARN.PUBLISHER and CLICK2LEARN.AUTHOR publishing and authoring
tools which are available free to registered users of the e-learning portal.
These tools enable subject matter experts to easily develop courses and to
publish those courses as well as existing spreadsheets, documents or
presentations (referred to as knowledge objects) to the e-learning portal's
master catalog, where they are available to be included in the catalogs of any
other site throughout the click2learn.com network. If a course or knowledge
object is purchased anywhere on the click2learn.com network, the author can
receive a royalty on click2learn's revenue from the sale, as can the owners of
the sites from which the course or knowledge object was published and through
which the course or knowledge object was purchased.
CORPORATE E-LEARNING SITES. Click2learn also hosts and operates
corporate e-learning sites that link to the e-learning portal at which an
organization provides learning titles for use within the organization. Corporate
e-learning sites are configured to match the look and feel of customers'
internal intranets to provide the appearance of an integrated learning channel.
Corporate e-learning sites include CLICK2LEARN.MANAGER-TM-, which provides basic
site management and administration functionality. Click2learn branding on these
sites is maintained by the inclusion of the "Powered by click2learn.com" logo.
Corporate e-learning sites generally offer a catalog determined by the customer
that includes a selection of off-the-shelf titles from the master catalog at the
e-learning portal together with custom courses specific to the customers'
internal operations or procedures. Custom courses offered on a corporate
e-learning site may be developed by the customers' internal training development
organization
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using either commercially-available tools (such as click2learn's ToolBook II
Instructor or Assistant) or the free authoring and publishing tools
(CLICK2LEARN.AUTHOR and CLICK2LEARN.PUBLISHER), or by click2learn's professional
services organization, which can also integrate a customer's existing training
content with the e-learning site.
Click2learn generally charges its customers a fee for the initial
set-up and configuration of a corporate e-learning site and also charges monthly
hosting fees based on the amount of storage required for any private e-learning
content hosted on the corporate e-learning site that is not created with the
free authoring and publishing tools. There is no hosting fee for e-learning
courses from the master catalog available on the e-learning portal or for
private e-learning courses created with the free CLICK2LEARN.AUTHOR authoring
tool. Click2learn is paid for all purchases through the corporate e-learning
site of learning titles from the click2learn.com master catalog. Billing
accounts can be established for different segments of the customers' businesses
such as departments or divisions, or other segments as determined by the
customers. Click2learn also offers a variety of advanced learning management
tools on an application service provider basis for additional fees. These
additional tools allow training administrators to assign particular courses or
curricula to employees or groups of employees and to track the progress and
performance of individuals or groups of employees.
CO-BRANDED INTERNET PORTALS AND PUBLIC SITES. Click2learn also hosts
and operates e-learning sites based on the e-learning portal for other Internet
portals or for corporate customers that desire to sell learning content to their
customers. Click2learn believes these sites are attractive to other Internet
portal sites because they offer a means not only to increase the number of users
of such sites but also as a means to generate revenue from those users and to
keep them visiting the site for longer periods of time. Click2learn believes
these sites are also attractive to corporate customers who see the opportunity
to provide training and certification to customers, suppliers, resellers and
other business partners.
Like the corporate e-learning sites, these co-branded e-learning sites
are configured to match the look and feel of customers' Internet portal sites or
public web sites and provide the appearance of an integrated learning channel,
with click2learn branding maintained by the inclusion of the "Powered by
click2learn.com" logo. Co-branded public e-learning sites also generally offer a
catalog determined by the customer that includes a selection of titles from the
master catalog at the click2learn.com e-learning portal and private courses
specific to the interests of their customers or business partners. Most
co-branded e-learning sites also include the free authoring and publishing
tools. If the Internet portal or corporate customer elects to allow its users to
make e-learning courses developed with the free authoring and publishing tools
available throughout the click2learn.com network, both the individual author and
the Internet portal or corporate customer can earn royalties on any purchases of
those courses through the e-learning portal or any other sites on the
click2learn.com network.
Click2learn,generally, does not charge a fee for hosting content
from the e-learning portal on co-branded e-learning sites but may charge fees
for hosting. In addition, click2learn will receive the revenue for any sales
of learning content made though the click2learn.com network. Click2learn will
then pay a portion of that revenue to the publisher (and in some cases the
author) of the learning content and to the owner of the co-branded e-learning
site where a purchase is made. Click2learn will also pay the owner of a
co-branded e-learning site if content published to the click2learn.com
network from that site is purchased through another site on the
click2learn.com network.
CLICK2LEARN PRODUCTS
INGENIUM. Ingenium is a skills and competency-based learning management
system designed to manage all facets of learning, and is the centerpiece of
click2learn's enterprise learning management solution for both e-learning and
instructor-led training. Through its AICC compliant interface and content
adapter technology, Ingenium manages the assignment, scoring and tracking of
e-learning content from SmartForce and NETg, as well as e-learning created
using click2learn's ToolBook II Instructor or Assistant, or authoring tools
from Macromedia and QuestionMark. Ingenium also manages the resources and
logistics involved in delivering instructor-led training, such as scheduling
classrooms and instructors and managing attendance. Ingenium offers tools to
help organizations maximize their return on investment such as the Qualified
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Employee Finder tool, which searches for employees who have a particular set of
skills, such as fluency in a foreign language; the Organizational Health tool,
which measures skills and skill deficiencies at an organizational level;
Learning Maps, which prescribe available learning based on a job or
organizational requirements; and robust and user-friendly reporting
capabilities. The administrative module is priced by the number of concurrent
users. The list price for this component varies from $16,995 for up to five
concurrent users to $94,995 for up to 100 concurrent users. Pricing for the
browser-based student and manager components is based on the total number of
users. List prices for this component range from $9,495 for 1,000 users to
$39,495 for 15,000 users. Pricing for larger implementations is negotiated on a
case by case basis.
A number of complementary products are available to extend the
functionality of Ingenium. Ingenium Messenger Express automatically delivers
email messages such as confirmations and notices to Ingenium users. DUIT is a
data update and import tool that permits the synchronization of employee and
training records with corporate information systems. Pricing for Ingenium
Messenger Express is a flat fee of $14,995 per Ingenium implementation. DUIT is
licensed on a per copy basis, with a list price of $4,995 per copy.
TOOLBOOK II INSTRUCTOR. ToolBook II Instructor is a multimedia
development system for creating sophisticated e-learning applications. With
ToolBook II Instructor, authors can create e-learning applications in a
Microsoft Windows environment and deliver them over the Internet or an intranet
natively, without plug-ins, in HTML, DHTML and Java format. ToolBook II courses
can also be delivered in a Windows environment via a LAN or CD-ROM. Interactive
question objects and other objects designed explicitly for e-learning provides
the interactivity that is required for effective learning. ToolBook II
Instructor is easy to use and includes the powerful OpenScript scripting
language that allows courseware developers instructional design flexibility.
ToolBook II Instructor includes a "publish to click2learn.com" feature which
allows users to submit courses created with the product for publication to their
corporate e-learning site where they are available for internal training or to
the click2learn.com network where the author could potentially earn royalties on
sales of the course. The list price for ToolBook II Instructor is $2,495.
TOOLBOOK II ASSISTANT. ToolBook II Assistant is an easy-to-use
e-learning authoring product, designed for content experts rather than
professional application developers. Without knowing HTML, DHTML, Java or
OpenScript, subject matter experts can use ToolBook II Assistant to publish
web-based interactive courseware in an intuitive, drag and drop environment.
ToolBook II Assistant automates much of the process of developing e-learning
applications, through the use of a large catalog of ready-made objects and
templates to help authors become immediately productive. The ToolBook II
Assistant catalog and interface can be modified using ToolBook II Instructor
to create a product that is customized for a particular organization, look
and feel, or instructional design. ToolBook II Assistant also allows for
delivery natively over the Internet or an intranet or in a Windows
environment, and includes the "publish to click2learn.com" feature that
allows users to submit courses for publication to a corporate e-learning site
or the click2learn.com network. The list price for ToolBook II Assistant is
$1,495.
CLICK2LEARN SERVICES
CONSULTING. Click2learn offers a broad range of consulting services
related to its customers' learning needs. Consulting activities include advising
clients on performance assessments, training needs, technical capabilities,
organizational development, training program development, including corporate
and virtual universities, and consulting with respect to specific projects. The
consulting organization also provides seminars in learning theory and
integrative learning, trends in knowledge management, needs and performance
analysis, project management and technology-based learning for public and
private groups.
CUSTOM APPLICATIONS DEVELOPMENT. Click2learn's award-winning
development services group offers a full range of customized services for the
design and production of e-learning content and performance support
applications. The custom development staff includes experienced professionals
with
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a wide spectrum of development skills, including needs assessment, content and
audience analysis, instructional design, graphic and animation development,
OpenScript, Java and C++ programming, application localization, testing, and
deployment support. The custom development group uses a Rapid E-learning
Development System, called REDS, to deliver large amounts of e-learning content
in short time cycles. Using an ASP model for collaborative development, the REDS
process allows instructional designers to develop on one centralized database
using pre-programmed templates and navigational functions. This allows
programmers and graphic artists to focus on specialized tasks as opposed to
every screen in a finished application.
SYSTEMS INTEGRATION. Click2learn provides the services necessary to set
up and integrate content with web sites on the click2learn.com network and to
set up and integrate Ingenium and its other e-learning products with its
customers' network environments site. Systems integration services
include e-learning site design and set-up or product installation; design of
user profiles, lesson structures, organizational structures, user interface
customizations; integration with databases, email and web servers; and
installation of courses, implementation of self-registration mechanisms,
template building, client administration, and student orientation.
TRAINING SERVICES. Click2learn offers training that helps organizations
become more self-reliant in the area of e-learning. Training includes courses in
the use of click2learn's learning management systems, e-learning development
products, web application development and instructional design. Click2learn has
training centers at its offices in Bellevue, Washington; Needham, Massachusetts;
Fort Worth, Texas; and Des Plaines, Illinois. Training is also available through
authorized training partners throughout the United States and other countries.
PLACEMENT SERVICES. Click2learn offers placements of qualified
professionals with expertise in e-learning content development and related
fields. These professionals are placed on a temporary or permanent basis.
TECHNICAL SUPPORT AND MAINTENANCE. Click2learn offers a variety of
optional technical support and maintenance packages for its software products
and for members of the click2learn.com network. Generally, such packages include
access to support engineers and technical information, software maintenance
releases and upgrades of existing products if made available.
CUSTOMERS
Click2learn provides its 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
customers which purchased products or services from click2learn in 1999:
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FINANCIAL SERVICES/INSURANCE TECHNOLOGY/TELECOMMUNICATIONS
- ---------------------------- -----------------------------
Bank of America ADP
Chase Manhattan Bank Compaq
Ernst & Young Dell
First USA EDS
Fidelity Investments GTE Internetworking
GE Capital Hewlett-Packard
Liberty Mutual ICO Global Communications
New York Life Lucent Technologies
New York Stock Exchange (NYSE) MCI WorldCom
PaineWebber Microsoft
PriceWaterhouseCoopers Nortel Networks
Prudential Novartis Pharmaceuticals
Wells Fargo Bank Raytheon
Southwestern Bell
MANUFACTURING/OTHER Symantec
- --------------------
Boeing GOVERNMENT/EDUCATION
Duracell --------------------
HBO NYU Online
Sherwin-Williams Tufts University
Starwood Hotels and Resorts U.S. Air Force
Subaru U.S. Navy
Talbots
No single customer accounted for 10% or more of click2learn's total
consolidated revenues in any of the last three fiscal years.
COMPETITION
The e-learning market is a very new market that is highly fragmented
and very competitive. No single competitor holds a dominant market share.
Because there are no significant barriers to entry in its market, click2learn
expects a number of new competitors to enter this market in the future. The
click2learn.com network faces competition from other similar e-learning portal
sites that either aggregate off-the-shelf content or aggregate their own
content, such as those operated by SmartForce and others. Click2learn's
e-learning authoring products face competition from developers of general
purpose multimedia authoring tools, its learning management systems face
competition from vendors of other management systems, such as Saba and Docent,
and its professional services business faces competition from many small,
regional online learning and technology-based training service businesses as
well as large professional consulting firms and in-house training departments.
Click2learn believes there currently is no single competitor that
offers a comprehensive e-learning solution including corporate e-learning sites,
co-branded e-learning sites, an e-learning portal, e-learning authoring
products, enterprise learning management systems and professional services.
Click2learn believes that its solution including aggregated content, authoring
and publishing, and management systems delivered both over the Internet as an
application service provider and as an enterprise learning solution for
installation and operation on a customer's internal information systems provides
it with a competitive advantage.
Click2learn believes that the principal competitive factors affecting
the market for e-learning include:
- the scope and variety of e-learning content available at the
e-learning portal or through the click2learn.com network;
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- the features of the e-learning portal, the click2learn.com
network and its enterprise products such as management
functionality, scalability, and ability to integrate with other
e-learning products;
- the scope and quality of professional services offered, and the
expertise and technical knowledge of its employees;
- the functionality, ease of use, quality and performance of its
e-learning solutions;
- pricing;
- customer service and support;
- the effectiveness of sales and marketing efforts; and
- company reputation.
Although click2learn believes that its solutions currently compete
favorably with respect to all these factors, click2learn may not be able to
maintain its competitive position against current and potential competitors,
especially those with significantly greater financial, marketing, technical and
other resources. Several of click2learn's competitors have longer operating
histories and significantly greater financial, technical, marketing and other
resources than click2learn, and several large companies have announced an
intention to enter the e-learning market. These companies may be able to respond
more quickly than click2learn to new or changing opportunities, technologies,
standards or customer requirements. In addition, if such competitors were to
offer a complete e-learning solution, click2learn's competitive position could
be adversely affected.
SALES AND MARKETING
Click2learn markets its e-learning solutions primarily through its
direct sales force. As of December 31, 1999, click2learn's sales, marketing and
support organizations consisted of 65 employees based at its corporate
headquarters in Bellevue, Washington and at other locations in Arizona,
California, Georgia, Illinois, Kansas, Maryland, Massachusetts, New Hampshire,
New Jersey, New York, Ohio, South Carolina, Texas, Virginia and the United
Kingdom. Click2learn intends to add additional field sales representatives
during 2000. The direct sales organization is currently divided into two groups,
one of which is focused on selling enterprise e-learning solutions consisting
primarily of the Ingenium system and related services and integration but also
including the click2learn.com network, and the other of which is focused
entirely on selling corporate e-learning sites. The direct sales organization
includes a telesales force that focuses on sales of the ToolBook II authoring
products, and handles smaller orders and assists with lead generation. The
direct sales organization also includes sales engineers who answer technical
questions and assist customers with product installation and implementation.
Click2learn also has a business development team focused on obtaining content
for the click2learn.com network and establishing public co-branded e-learning
sites. The click2learn direct sales force accounted for 51%, 83% and 91% of
total revenue in 1997, 1998 and 1999 respectively, reflecting the shift in
click2learn's sales and distribution strategy to primarily a direct sales
approach.
International revenue based on the origin of the customer accounted for
27%, 12% and 16% of click2learn's total revenue for 1997, 1998 and 1999,
respectively. Click2learn believes that the e-learning market is in the early
stages of development outside the United States, but that business in other
countries, particularly in Japan and Europe, are beginning to undertake
e-learning initiatives. With respect to the e-learning portal and
click2learn.com network, click2learn intends to pursue international markets
primarily through joint ventures with companies based in the various countries.
Click2learn.com is currently pursuing joint venture opportunities in several
European countries as well as Japan.
Click2learn conducts a variety of marketing programs to promote the
click2learn.com network and its other products and services, including direct
mail, advertising, seminars, trade shows, public relations and distribution of
literature. Click2learn and Bill Communications, the publisher of TRAINING
magazine, jointly sponsor an annual e-learning conference. The first such
conference, named "Online Learning `98" was held in Anaheim in September 1998.
"Online Learning `99" was held in Los Angeles in October 1999, and it was at
this event that click2learn announced the e-learning portal and the
click2learn.com network. "Online Learning 2000" will be held in Denver in
September 2000. Click2learn also participates as an exhibitor and speaker at
technology-based training trade shows and
10
maintains an area on www.click2learn.com where potential customers can obtain
information about click2learn and its products and services.
TECHNOLOGY, RESEARCH AND DEVELOPMENT
Click2learn believes that its long-standing focus on research has
attracted qualified engineering and other technical personnel and has
contributed to its core technology capabilities. Click2learn research and
development groups are located in Bellevue, Washington, where the focus is on
development of the e-learning portal and the ToolBook family of e-learning
authoring products; Rochester, New York where the focus is on development of the
Ingenium system; and Nashua, New Hampshire, where the focus is on the
development of underlying technology for the publishing and authoring solutions.
Research and development expenses were $8.4 million, $6.1 million and $7.4
million in 1997, 1998 and 1999, respectively and represented 33%, 18% and 21% of
total revenue for those respective periods. Click2learn expects to continue to
commit significant resources to research and development in the future, in
particular with respect to the click2learn.com network.
Key features of click2learn's technology platform include:
- SUPPORT OF OPEN INTERNET STANDARDS. Click2learn's development
efforts for the click2learn.com network support open and de facto
standards including HTML, DHTML, Java, ActiveX, AICC, Netscape
and Microsoft browsers and streaming technologies. This focus,
together with click2learn's experience with rapidly changing
technologies such as multimedia management, facilitates the
incorporation of internally or externally developed advanced
technologies.
- ENTERPRISE-CLASS ARCHITECTURE. The technologies incorporated in
Ingenium support integrated management solutions that are
designed to scale from one server to multiple servers while
maintaining centralized administration to support a large number
of concurrent users.
- SCALABLE AUTHORING. Click2learn's ToolBook II authoring products
incorporate an object-oriented core code base and user interface
technology that provide the power and flexibility required by
professional developers, as well as the ease of use needed to
support training professionals who have little or no computer
programming or authoring experience. Using click2learn's
objected-oriented scripting language known as OpenScript, custom
templates and objects can be created in ToolBook II Instructor
and exported to ToolBook II Assistant. Learning applications
created in ToolBook II Assistant can be modified or enhanced in
ToolBook II Instructor. Both products contain a "publish to
click2learn.com" feature to allow content created with the
products to easily be published to the click2learn.com network.
Click2learn's success will depend on its ability to continue to enhance
features and functionality available to the click2learn.com network and in its
current product line and to develop and introduce new products or offer new
services that keep pace with competitive product and service offerings, new
technologies and industry standards, and diverse and changing customer
requirements. Although click2learn believes it is well positioned to do so, it
may not be able to develop and market new enhancements to the click2learn.com
network or future products or services on a timely and cost effective basis. In
the past, click2learn has experienced delays in the development, introduction
and marketing of new products and services, and may experience similar delays in
the future. In addition, click2learn's business could be adversely affected if
it is unable to respond to technological changes in a timely and cost-effective
manner.
PROPRIETARY RIGHTS
Click2learn relies on a combination of copyrights, trademarks, trade
secret laws, restrictions on disclosure and other methods to protect its
intellectual property and trade secrets. Click2learn also enters into
confidentiality agreements with its employees and consultants, and controls
access to its proprietary
11
information. Click2learn is also pursuing patent protection on certain aspects
of the click2learn.com network, however, there can be no assurance that any
patents will be issued or that they will provide click2learn with a competitive
advantage. Furthermore, despite click2learn's precautions, it may be possible
for unauthorized parties to copy or otherwise obtain or use click2learn's
intellectual property or trade secrets without authorization. In addition, other
companies may independently develop equivalent technology or intellectual
property. The misappropriation or infringement of its technology could have a
significant negative impact on click2learn's business. In the future,
click2learn may become involved in litigation related to its own intellectual
property or the intellectual property of others, which could result in
substantial costs and diversion of management and technical resources, either of
which could have a significant negative impact on click2learn's business.
Click2learn also licenses technology from others for use in the
click2learn.com network and in some of its products, and will continue to do so
in the future. In these license agreements, the licensors have generally agreed
to assume all liability for any claim that their technology infringes any patent
or other proprietary right. Nevertheless, any litigation or dispute related to
licensed technology could result in an injunction on click2learn's continued use
of the technology or in royalty obligations for which the licensor has not
agreed to assume liability or for which the licensor does not have adequate
resources to cover the liability it agreed to assume. In such a situation,
click2learn might not be able to obtain a license to the technology at issue or
to other similar technology on commercially reasonable terms or at all. The
inability to obtain or continue to use licensed technology could result in
product delays or reduced functionality of existing products, and could have a
significant negative effect on click2learn's business.
Click2learn uses the following trademarks or registered trademarks in
the conduct of its business: OPENSCRIPT and TOOLBOOK are registered trademarks,
and CLICK2LEARN, CLICK2LEARN.COM, TOOLBOOK II ASSISTANT, TOOLBOOK II INSTRUCTOR,
INGENIUM, NEURON and WEB 3D are trademarks. Applications for registration of
CLICK2LEARN and CLICK2LEARN.COM are currently pending with the U.S. Patent and
Trademark Office as well as in certain foreign countries.
EMPLOYEES
As of December 31, 1999, click2learn had 319 full-time employees,
including 78 in research and development, 65 in sales, marketing and support,
128 in professional services and technical support and 48 in operations and
administration. Click2learn has never had a work stoppage and none of its
employees are represented under collective bargaining agreements. Click2learn
considers its relations with its employees to be good. Click2learn believes that
its future success will depend in part on its continued ability to attract,
integrate, retain and motivate highly qualified sales, technical, professional
services and managerial personnel. Competition for qualified personnel is
intense, and click2learn may not be successful in attracting, integrating,
retaining and motivating a sufficient number of qualified personnel.
ITEM 2. PROPERTIES
Click2learn does not own any of the physical properties where it
conducts its business. Click2learn's primary business is conducted in the
following leased office space:
- Bellevue, Washington: approximately 35,293 square feet of leased
office space, expiring in October 2003, which is click2learn's
principal administrative, sales, marketing and research and
development facility.
- Rochester, New York: approximately 6,392 square feet of leased
office space, expiring in April, 2000, which is the primary
facility for Ingenium research and development and related sales
and administration.
12
- Nashua, New Hampshire: approximately 6,749 square feet of leased
office space, expiring in December, 2000, which is primarily a
research and development facility.
- Needham, Massachusetts: approximately 19,960 square feet of
leased office space, expiring in September 2001, which is
primarily a professional services facility.
- Fort Worth, Texas: approximately 11,500 square feet of leased
office space, expiring in May 2003, which is primarily a
professional services facility.
- Des Plaines, Illinois: approximately 5,005 square feet of leased
office space, expiring in February 2002, which is primarily a
professional services facility.
- Atlanta, Georgia: approximately 3,490 square feet of leased
office space, expiring in June 2002, which is primarily a
professional services facility.
- Richmond, British Columbia: approximately 2,057 square feet of
leased office space, expiring in November 2002, which is
primarily a web development facility.
- Halifax, Nova Scotia: approximately 3,133 square feet of leased
office space, expiring in February 2005, which is primarily a
professional services facility.
- London, England: approximately 2,046 square feet of leased office
space, expiring in June 2004, which is click2learn's European
headquarters and sales office.
Click2learn believes that its current facilities will be adequate to
meet its needs, or that alternate leased space will be available to meet its
needs, for the foreseeable future. Click2learn also has employees in Arizona,
California, Kansas, Louisiana, Maryland, Minnesota, New Jersey, New York, Ohio,
and Virginia.
ITEM 3. LEGAL PROCEEDINGS
From time to time, click2learn is involved in legal proceedings and
litigation arising in the ordinary course of its business. As of March 15, 2000,
click2learn is not a party to any litigation or other legal proceeding that, in
the opinion of management, could have a material adverse effect on its business,
operating results and financial condition, except as described below.
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 click2learn's ToolBook and Multimedia ToolBook products
infringe a patent owned by him and is seeking unspecified damages.
Click2learn has received an opinion from its 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. An adverse outcome in this litigation could have a
material adverse effect on click2learn's business, operating results and
financial condition.
Although management believes that click2learn does not infringe this
patent and that the patent is invalid, and although click2learn intends to
defend this action vigorously, the results of litigation can never be predicted
with certainty. Moreover, the costs of defending the action, regardless of
outcome, could have significant negative effect on click2learn's business.
Litigating this claim could be time-consuming and distract management personnel,
and if click2learn is unsuccessful in its defense, it may be required to develop
non-infringing technology or enter into royalty or licensing agreements. Such
royalty or licensing agreements, if required, might not be available on
commercially reasonable terms, or at all. If click2learn was unsuccessful in
its defense of this action, then the inability to develop non-infringing
technology or obtain a license on commercially reasonable terms could have a
material adverse effect on click2learn's business, operating results and
financial condition.
13
PROEDUCATION INTERNATIONAL, INC. V. ASYMETRIX CORP. ET AL, cause No.
1999-32584 District Court, 125th Judicial District, Harris County, Texas. This
lawsuit was filed in July 1999 and alleged that click2learn conspired with
several other named defendants to misappropriate certain intellectual property
of the plaintiff and engaged in other tortuous activities to the detriment of
the plaintiff. Click2learn and the plaintiff settled this lawsuit in December
1999. As a part of such settlement the plaintiff released click2learn and
its subsidiaries from any and all claims arising out of the allegations in the
suit. The terms of the settlement agreement are confidential, but the settlement
did not have a material impact on click2learn's business, operating results or
financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS.
A Special Meeting of the Stockholders of click2learn was held on
November 23, 1999 at 110 - 110th Avenue NE, Bellevue, Washington. The meeting
was held pursuant to a Notice of Special Meeting of Stockholders mailed to the
stockholders on November 10, 1999. The only proposal submitted to the
stockholders and approved at the special meeting was a proposal to change the
corporate name from "Asymetrix Learning Systems, Inc." to "click2learn.com,
inc." The number of votes cast for, cast against or abstaining from this
proposal, both in person and by proxy, and broker non-votes was as follows:
Votes For 9,583,190
Votes Against 6,509
Abstaining 4,491
Broker Non-votes 0
14
Item 4a. Executive Officers
The following table sets forth certain information regarding the
executive officers of click21earn as of March 15, 2000:
Name Age Position
- ---- --- --------
Kevin M. Oakes 36 President and Chief Executive Officer
Joseph DiNucci 57 Executive Vice President
Steven Martino 41 Senior Vice President and Chief Operating Officer
John M. Kellum 49 Vice President and Chief Technology Officer
John D. Atherly 41 Vice President, Finance and Administration and Chief Financial Officer
Steven Esau 37 Vice President, General Counsel and Corporate Secretary
Bert Kolde 44 Chairman of the Board and Director
James A. Billmaier 44 Vice Chairman and Director
Mr. Oakes was named President and Chief Executive Officer in
January 2000. Mr. Oakes has served as President since he joined click21earn
in September 1997. Prior to that time, Mr. Oakes was the President of each of
Oakes Interactive, Acorn Associates and TopShelf Multimedia (the Oakes
Companies) which he founded in March 1993, January 1996 and March 1997,
respectively, and each of which click21earn acquired in September 1997. Prior
to forming the Oakes Companies, Mr. Oakes was a Senior Account Representative
for The Minnesota Mutual Life Insurance Company.
Mr. DiNucci has served as Executive Vice President
since July 1999 and as a Director since May 1999. Mr. DiNucci joined
click21earn in October 1998 as Senior Vice President, Worldwide Sales. Prior
to joining click21earn, Mr. DiNucci was the Vice President of Business
Development for E.piphany, Inc., which markets enterprise relationship
management systems, where he recruited the initial sales force and first
customers. Previously, Mr. DiNucci spent five years at Silicon Graphics, a
graphics workstation company, as Vice President of Marketing. Prior to that
Mr. DiNucci was the Senior Vice President and General Manager of MIPS
Computer Systems, where he ran the systems business. Prior to MIPS, Mr.
DiNucci spent seventeen years at Digital Equipment Company, where he held a
variety of positions, including general manager of DEC's workstation
business. Mr. DiNucci is a director of Rand Technologies in Toronto, and
Realax in Frankfurt.
Mr. Martino was named Senior Vice President and Chief
Operating Officer in January 2000. Mr. Martino has held a number of executive
positions with click21earn since he joined click21earn in September 1995. He
has served at various times as Vice President, Marketing; Vice President,
Strategic Relationships; Vice President, Sales, and Vice President and
General Manager, Professional Services. From 1990 to September 1995, Mr.
Martino was with Sun Microsystems, most recently as the Senior Director of
Marketing for SunSoft. Prior to that time, he was a Senior Manager at Price
Waterhouse, and held various sales and marketing positions at Xerox
Corporation.
Mr. Kellum was named Vice President and Chief Technology Officer in
January 2000. Prior to that, he served as Vice President and General Manager,
Online Learning Products since November 1995, and prior to that was Senior
Director of Business Development since he joined click21earn in September
1995. From May 1993 to September 1995, he served as Director of
15
Technology and Business Development at SunSoft. From 1987 to May 1993, he
served as Director of Engineering at Intergraph Corporation, a graphics
workstation company. Prior to that time, he served as Director of Operating
Systems at Fairchild Research Center and as a Senior Research Scientist at
Honeywell Research Center.
Mr. Atherly has served as Vice President, Finance and Administration and
Chief Financial Officer of click21earn since February 1995, and prior to that
was Director of Finance and Operations, Treasurer and Secretary from February
1993 until February 1995. Mr. Atherly held various other positions since he
joined click21earn in June 1990, including controller from February 1991
until February 1993. Prior to joining click21earn, Mr. Atherly was a Finance
and Operations Manager at MicroDisk Services, a software manufacturing
services company.
Mr. Esau has served as General Counsel of click21earn since
October 1995 and also as a Vice President and Secretary of click21earn since
January 1997. Prior to that time, Mr. Esau was the Director of Legal Affairs
from February 1995 until October 1995, and before that he was counsel to
click21earn since joining click21earn in February 1994. From 1988 until
February 1994, he was in private law practice, first with Stoel Rives LLP in
Seattle and then with his own law firm, where he focused on advising software
and technology startup companies.
Mr. Kolde was appointed Chairman of the Board of click21earn in
July 1997, and has been a director since click21earn was founded in December
1984. Mr. Kolde served as Executive Vice President of click21earn from
December 1984 until April 1993, and thereafter as President until November
1994. Mr. Kolde is Vice Chairman of Trail Blazers Inc., Football Northwest
LLC, First & Goal Inc. and Oregon Arena Corporation and a Vice President of
Vulcan Ventures, Inc. Mr. Kolde serves as a director of MetaCreations Corp.
and Beyond.com Corp. Prior to joining click21earn, Mr. Kolde was the Vice
President of Management Reporting of Seafirst Corporation.
Mr. Billmaier was appointed Vice Chairman in January 2000.
Mr. Billmaier is currently President and CEO of Broadband Partners. Mr.
Billmaier served as Chief Executive Officer and a director of click21earn
since July 1995 and served as President from July 1995 until September 1997.
From January 1994 until July 1995 he was the Vice President and General
Manager of the Network Software Products Business of Sun Microsystems, Inc.
From February 1992 until January 1994 he was Vice President of Marketing and
Business Development for SunSoft, Sun Microsystems' software business
division. Prior to joining Sun Microsystems, Mr. Billmaier served as the Vice
President of Software Marketing and Business Development at MIPS
Technologies, Inc., a developer of computer microprocessors, and before that
he was responsible for UNIX workstation products and strategies at Digital
Equipment Corporation.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Prior to the initial public offering of its common stock on June 12,
1998, there was no public market for click2learn's common stock. Since the
initial public offering, click2learn's 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 since the initial public offering.
FISCAL QUARTER HIGH LOW
- --------------------------------------------------------------------------------------
1998
Second Quarter (beginning June 12, 1998) $11.06 $8.88
Third Quarter 11.00 6.00
Fourth Quarter 6.88 2.94
1999
First Quarter $ 6.47 $3.66
Second Quarter 5.47 3.75
Third Quarter 11.63 3.94
Fourth Quarter 13.88 6.38
As of March 15, 2000, there were 229 holders of record of click2learn's
common stock. Because many of the shares of click2learn's stock are held by
brokers and other institutions on behalf of stockholders, click2learn is unable
to estimate the actual number of stockholders represented by these record
holders. Click2learn has never declared or paid any cash dividends on its common
stock. Click2learn currently intends to retain any future earnings to finance
future growth and, thus, does 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 click2learn common
stock has been highly volatile since the initial public offering. Factors such
as fluctuations in click2learn's operating results, announcements of
technological innovations or new products by click2learn or its competitors,
analysts' reports and projections and general market conditions may have a
significant effect on the market price of click2learn's 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 click2learn could
result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on click2learn's business,
operating results and financial condition.
RECENT SALES OF UNREGISTERED SECURITIES
On October 6, 1999, click2learn sold 6,000 shares of Series A
Convertible Preferred Stock (the "Series A Stock") to Marshall Capital
Management, Inc., an affiliate of Credit Suisse First Boston, and sold 4,000
shares of Series A Stock to Vulcan Ventures, Inc. for an aggregate purchase
price of $10,000,000 in cash. In connection with the purchase of the Series A
Stock, click2learn also issued Marshall Capital Management, Inc. and Vulcan
Ventures, Inc. warrants for the purchase of 580,646 and 387,096 shares,
respectively, of common stock at an exercise price of $9.30 per share.
Click2learn also issued warrants for the purchase of 30,000 shares of common
stock on the same terms and conditions to Alpine Capital Partners, Inc. as a
finders fee for the transaction. The sale of shares and warrants was made
pursuant to Rule 506 of Regulation D and/or Section 4(2) under the Securities
Act of 1933 as amended ("the Act") and was therefore exempt under the Act. The
shares and warrants were sold only to accredited investors, there was no general
solicitation or advertising in connection with the sale of the shares and
warrants, and click2learn exercised reasonable care to assure that the
purchasers were not
17
underwriters with the meaning of Section 2(11) of the Act. The proceeds will
be used for working capital requirements.
The terms of the Series A Stock provided that it would automatically
convert into shares of common stock (conversion shares) at such time as a
registration statement on Form S-3 covering the resale of the conversion shares
and the shares issuable on exercise of the warrants was declared effective by
the SEC. On November 1, 1999, the Series A Stock held by Marshall Capital
Management, Inc. converted into 774,193 shares of common stock, and the Series A
Stock held by Vulcan Ventures, Inc. converted into 516,120 shares of common
stock. The conversion price at which the Series A Stock was converted into
common stock was $7.75, and was determined accordance with the Series A Stock
terms.
The warrants are exercisable at any time prior to 5:00 p.m. Eastern
time on October 6, 2004 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 base,
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.
USE OF PROCEEDS
In connection with click2learn's initial public offering, it registered
for public sale 3,000,000 shares of common stock, all of which were sold by
click2learn. The Registration Statement on Form S-1 (Registration No.
333-49037), as amended, was declared effective by the Securities and Exchange
Commission on June 11, 1998. NationsBanc Montgomery Securities LLC was the
managing underwriter of the IPO. The IPO commenced on June 12, 1998, and
terminated following the sale of all of the securities registered under the
Registration Statement, plus an additional 25,000 shares pursuant to the
exercise of the underwriters' over-allotment option. The common stock was
offered and sold to the public at $11.00 per share, for aggregate consideration
of $33,275,000, of which click2learn received net proceeds of $29,331,000.
From the effective date of the Registration Statement through December
31, 1999, click2learn has incurred an estimated $3,944,000 in expenses for
click2learn's account in connection with the issuance and distribution of the
common stock, including underwriting discounts and commissions of $2,329,250 and
other expenses of $1,614,750. No finders' fees or expenses were paid to or for
the underwriters. None of these payments were made, directly or indirectly, to:
(1) directors or officers of click2learn, or their associates; (2) persons
owning ten percent or more of any class of equity securities of click2learn; or
(3) affiliates of click2learn.
From the effective date of the Registration Statement through December
31, 1999, click2learn has applied the offering proceeds to working capital
requirements. None of these payments were made outside of normal operating
expenses, directly or indirectly, to: (1) directors or officers of click2learn,
or their associates; (2) persons owning ten percent or more of any class of
equity securities of click2learn; or (3) affiliates of click2learn. To date,
click2learn believes that it has used the offering proceeds in a manner
consistent with the use of proceeds described in the Registration Statement.
18
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
YEARS ENDED DECEMBER 31,
1995 1996 1997 1998 1999
-------------------------------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA :
Revenue:
Product revenue:
Online learning products $889 $3,716 $8,036 $ 10,828 $12,897
Other products 16,238 11,165 10,426 4,365 1,309
-------------------------------------------------------------
Total product revenue 17,127 14,881 18,462 15,193 14,206
Services revenue 2,579 3,600 7,243 18,159 20,527
-------------------------------------------------------------
Total revenue 19,706 18,481 25,705 33,352 34,733
-------------------------------------------------------------
Cost of revenue:
Product revenue:
Online learning products 98 198 608 947 882
Other products 3,343 2,946 2,127 1,038 751
-------------------------------------------------------------
Total cost of product revenue 3,441 3,144 2,735 1,985 1,633
Services revenue 1,757 2,549 4,635 12,432 14,444
-------------------------------------------------------------
Total cost of revenue 5,198 5,693 7,370 14,417 16,077
-------------------------------------------------------------
Gross margin 14,508 12,788 18,335 18,935 18,656
-------------------------------------------------------------
Operating expenses:
Research and development 13,610 12,375 8,423 6,113 7,425
Sales and marketing 12,399 15,636 14,704 14,149 15,977
General and administrative 4,182 4,535 4,491 5,767 5,227
Amortization of goodwill - - 119 825 888
Loss on impairment of assets - 2,787 - - -
Restructuring charges 3,318 1,104 - - -
Acquired in-process research and development - - 4,064 - -
-------------------------------------------------------------
Total operating expenses 33,509 36,437 31,801 26,854 29,517
-------------------------------------------------------------
Loss from operations (19,001) (23,649) (13,466) (7,919) (10,861)
Other income(expense) (667) (348) (228) 2,760 856
-------------------------------------------------------------
Net loss $(19,668) $(23,997) $(13,694) $ (5,159) $(10,005)
Accretion of redemption value of redeemable common stock - - - (1,370) -
Non cash dividend associated with preferred stock - - - - (2,754)
-------------------------------------------------------------
Net loss attributable to common stockholders $(19,668) $ (23,997) $(13,694) $ (6,529) $(12,759)
=============================================================
Net loss per share, basic and diluted $(6.36) $ (3.90) $ (2.17) $(.62) $(.87)
=============================================================
Weighted average common shares outstanding, basic and diluted 3,093 6,158 6,306 10,599 14,626
=============================================================
BALANCE SHEET DATA:
Cash and cash equivalents $3,583 $3,788 $2,541 $21,713 $19,481
Working capital (deficit) 25,373 9,569 (66) 24,913 27,818
Total assets 35,673 19,122 22,169 43,622 49,406
Long-term obligations 70 24 425 268 92
Stockholders' equity 29,862 12,097 8,958 37,010 41,355
(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.
19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CLICK2LEARN SHOULD BE READ IN CONJUNCTION WITH "SELECTED
CONSOLIDATED FINANCIAL DATA" AND CLICK2LEARN'S CONSOLIDATED FINANCIAL STATEMENTS
AND RELATED NOTES THERETO INCLUDED ELSEWHERE IN THIS REPORT. THIS REPORT
CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES.
CLICK2LEARN'S ACTUAL RESULTS MAY DIFFER SIGNIFICANTLY FROM THE RESULTS DISCUSSED
IN THE FORWARD-LOOKING STATEMENTS. FACTORS THAT MAY CAUSE SUCH A DIFFERENCE
INCLUDE, BUT ARE NOT LIMITED TO, THOSE DISCUSSED IN "FACTORS THAT MAY AFFECT
FUTURE RESULTS OF OPERATIONS."
OVERVIEW
Click2learn was originally incorporated as Asymetrix Corporation in
1984 by Paul Allen, the co-founder of Microsoft Corporation. Prior to
focusing on the e-learning market, click2learn developed and marketed a wide
range of software products. As a result of click2learn's decision to focus on
e-learning, between October 1996 and July 1998, click2learn divested several
product lines and made a number of acquisitions to strengthen its position in
the e-learning market. Click2learn focused its research and development
efforts on products for e-learning and began developing a professional
services organization through internal growth and acquisition. Today
click2learn provides full service e-learning solutions to businesses,
government and educational institutions throughout the world.
In July 1999, click2learn announced the development of the
click2learn.com network, a powerful and full-featured outsourced platform for
e-learning. The click2learn.com network gives organizations instant access to
thousands of leading third party courses and an ability to distribute their own
custom courses through the use of click2learn's browser-based authoring and
publishing tools. The click2learn.com network supports custom-configured
e-learning sites, delivered through the application service provider (ASP)
model, providing organizations secure sites for proprietary internal training.
The click2learn.com network supports e-commerce transactions, allowing customers
to extend their value proposition by enabling electronic storefronts or partner
sites to sell their training. In addition, browser-based learning management
tools are provided to manage the training at all custom-configured sites.
Learner access to the network can be attained through corporate e-learning
sites, co-branded Internet portals or directly through the click2learn.com
e-learning portal.
In addition to an outsourced solution, click2learn
provides internal e-learning implementations. The click2learn enterprise
e-learning initiatives include the Ingenium learning management solution, and
e-learning authoring products, featuring the ToolBook II Instructor and
ToolBook II Assistant authoring tools. Each solution is augmented by one of
the industry's largest professional services groups, including custom content
development, strategic consulting and integration services.
Revenues are derived from four categories: software licenses, course
sales, professional services and click2learn.com network site fees and
royalties. Revenue from software licenses generally are recognized upon
shipment of products from click2learn's warehouse. Products that fall under
this category are the Ingenium learning management system and the ToolBook II
line of authoring products. Revenues from course sales generally are spread
over the life of the contract for course usage. For example, if a 12-month
contract for a bundle of courses is bought for $100,000, this revenue will be
recognized evenly over the 12 months. Professional service revenues are
generally associated with fixed price contracts or time and material
contracts. For fixed price contracts, revenues are recognized based on the
percentage-of-completion method. Revenues from time and material contracts
are earned as the work is performed based on the agreed upon rates.
Click2learn.com network site fees or royalties are determined by contracts
with lengths of 1 to 3 years and vary depending on the functionality provided
or the commerce conducted through the site. Functionality fees are generally
recognized evenly over the life of the contract, and royalties are
recognized as earned.
20
Cost of software license or product revenue includes costs of media,
manuals and distribution costs. Gross margin from click2learn's online learning
products is generally higher than that of its other products because these
products are typically sold by click2learn's direct sales force, as compared
with other products sold through indirect channels, such as OEMs and resellers.
Costs of content revenue consist of royalties paid to the developers of the
courses. Costs of services revenue consists primarily of personnel-related costs
in providing consulting, maintenance and training to customers. Gross margin on
product revenue is higher than gross margin on services revenue, reflecting the
lower materials, packaging and other costs of software compared with the
relatively high personnel costs associated with providing professional services.
Click2learn incurred net losses of $13.7 million, $5.2 million and
$10.0 million in 1997, 1998 and 1999 respectively, and has yet to achieve
operating income or net income under its new online learning business model.
Click2learn's limited operating history under this new business model and the
emerging nature of the market for e-learning, among other factors, make
prediction of click2learn's future operating results difficult. Despite the
establishment of the click2learn.com network, which is based on an unproven
business model, we expect to continue to derive the majority of our revenues
from our enterprise e-learning products and services for at least the next 12
months.
Although click2learn has experienced revenue growth in certain recent
periods and although the financial statements herein also reflect revenue growth
in certain periods there can be no assurance that such growth rates are
sustainable or indicative of actual growth rates that click2learn may experience
and, therefore, they should not be considered indicative of future operating
results. In addition, click2learn intends to continue to invest in the
click2learn.com network, its professional services business, and research and
development, among other things. As a result, click2learn expects to continue to
incur annual operating losses at least through 2000. There can be no assurance
that click2learn will achieve profitability or, if profitability is achieved,
that it will be sustained.
RESULTS OF OPERATIONS
The following table presents click2learn's results of operations as a
percentage of total revenue for the periods indicated.
STATEMENT OF OPERATIONS DATA: 1997 1998 1999
--------- --------- ---------
Revenue:
Product revenue:
Online learning products 31.3% 32.5% 37.1%
Other products 40.5 13.1 3.8
--------- --------- ---------
Total product revenue 71.8 45.6 40.9
Services revenue 28.2 54.4 59.1
--------- --------- ---------
Total revenue 100.0 100.0 100.0
--------- --------- ---------
Cost of revenue:
Product revenue:
Online learning products 2.4 2.8 2.5
Other products 8.3 3.1 2.2
--------- --------- ---------
Total cost of product revenue 10.7 6.0 4.7
Services revenue 18.0 37.3 41.6
--------- --------- ---------
Total cost of revenue 28.7 43.2 46.3
--------- --------- ---------
Gross margin 71.3 56.8 53.7
--------- --------- ---------
Operating expenses:
Research and development 32.8 18.3 21.4
Sales and marketing 57.1 42.4 46.0
General and administrative 17.5 17.3 15.0
Amortization of goodwill 0.5 2.5 2.6
Loss on impairment of assets - - -
Restructuring charges - - -
21
Acquired in-process research and development 15.8 - -
--------- --------- ---------
Total operating expenses 123.7 80.5 85.0
--------- --------- ---------
Loss from operations (52.4) (23.7) (31.3)
--------- --------- ---------
Other income (expense):
Other income (expense) (0.1) (0.1) 0.1
Interest income from principal stockholder 1.7 - -
Other interest income, net - 1.8 2.4
Equity in income (losses) from Infomodelers, Inc. (2.5) 6.5 -
--------- --------- ---------
Total other income (expense) (0.9) 8.2 2.5
--------- --------- ---------
Net loss (53.3)% (15.5)% (28.8)%
========= ========= =========
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE. Total revenue increased 4% from $33.4 million in 1998 to $34.7
million in 1999. This increase was due primarily to growing demand for
click2learn's solutions offset by a 70% decline in non e-learning, other
product revenues. Future growth in revenues, if any, is expected to originate
primarily from the click2learn.com network initiative launched during the
fourth quarter of 1999 and continued enhancements to existing enterprise
e-learning solutions.
Online learning product revenue increased 19% from $10.8 million in
1998 to $12.9 million in 1999. Offsetting this growth, other product revenue
decreased 70% from $4.4 million in 1998 to $1.3 million in 1999. Other product
revenue consists of revenue from click2learn's products which were not targeted
at the e-learning market, all of which have been discontinued. Total product
revenue decreased 6% from $15.2 million in 1998 to $14.2 million in 1999.
Services revenue increased 13% from $18.2 million in 1998 to $20.5
million in 1999. Click2learn has experienced an increased number of professional
services engagements which are billed on a fixed price basis and intends to
pursue such engagements in the future. See "Factors That May Affect Future
Operating Results-Customer Requirements and Fixed Price Engagements."
COST OF REVENUE. Total cost of revenue increased 12% from $14.4 million
in 1998 to $16.1 million in 1999. Total cost of product revenue decreased 18%
from $2.0 million in 1998 to $1.6 million in 1999. Cost of online learning
product revenue decreased 7% from $947,000 in 1998 to $882,000 in 1999, due
primarily to increased sales of click2learn's higher margin online learning
management system products. Cost of other product revenue decreased 28% from
$1.0 million in 1998 to $751,000 in 1999. This decrease was due primarily to
decreased sales of click2learn's other products. Total product gross margin
increased as a percentage of product revenue from 87% in 1998 to 89% in 1999.
Cost of services revenue increased 16% from $12.4 million in 1998 to
$14.4 million in 1999. This increase was due primarily to increased
professional services projects in 1999. Services gross margin as a percentage
of services revenue decreased from 32% in 1998 to 30% in 1999 due to lower
services personnel utilization in the first half of 1999. Click2learn
anticipates that cost of services revenue will increase in absolute dollars
as it adds additional professional services personnel. To the extent services
revenue increases relative to product sales revenue as a percentage of total
revenue, overall gross margins would decline.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses include
expenses associated with the development of new products and new product
versions and consist primarily of salaries, depreciation of development
equipment, supplies and overhead allocations. Research and development
expenses increased 21% from $6.1 million in 1998 to $7.4 million in 1999.
This increase was due to incremental spending to develop the click2learn.com
network technology platform. Research and development expenses as a
percentage of total revenue increased from 18% in 1998 to 21% in 1999.
Click2learn expects research and development expenses to increase in absolute
dollars in the future.
22
SALES AND MARKETING. Sales and marketing expenses consist primarily of
sales and marketing personnel costs, including sales commissions, travel,
advertising, public relations, seminars, trade shows and other marketing
literature and overhead allocations. Sales and marketing expenses increased 13%
from $14.1 million in 1998 to $16.0 million in 1999. Sales and marketing
expenses as a percentage of total revenue increased from 42% in 1998 to 46% in
1999. The increases were due primarily to marketing expenses relating to the
launch of the click2learn.com network during the fourth quarter of 1999 and an
increase in the number of field sales representatives. Click2learn expects that
sales and marketing expenses will increase in absolute dollars in the future as
click2learn continues to grow its sales and marketing efforts in the e-learning
market.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of salaries and other personnel-related expenses for click2learn's
administrative, executive and finance personnel as well as outside legal and
audit costs. General and administrative expenses decreased 9% from $5.8 million
in 1998 to $5.2 million in 1999. This decrease was due primarily to increased
synergies at acquired companies. General and administrative expenses as a
percentage of total revenue decreased from 17% in 1998 to 15% in 1999.
Click2learn expects that general and administrative expenses will increase in
absolute dollars in the future as click2learn pursues the e-learning market.
AMORTIZATION OF GOODWILL. Amortization of goodwill expense relates to
the amortization of excess purchase price over the fair value of identifiable
tangible and intangible assets acquired in acquisitions recorded using the
purchase method of accounting. Amortization of goodwill increased from $825,000
in 1998 to $888,000 in 1999 due to the acquisition of Pixelmedia Visual
Communications, Inc. ("Pixelmedia"), an e-learning developer located in
Richmond, British Columbia, in July 1999 and as a result of a full year's
amortization being taken on acquisitions made in 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Click2learn recognized no
cost of acquired in-process research and development in 1998 or 1999.
OTHER INCOME (EXPENSE). Interest income on cash and cash equivalents in
1998 was $609,000 as compared to $855,000 in 1999. Equity in income from
Infomodelers was $2.2 million in 1998 and $0 in 1999. Equity in income
(losses) from Infomodelers in 1998 resulted from the sale by Infomodelers of
substantially all of its assets to Visio Corporation. Because click2learn
sold substantially all of its interest in Infomodelers in March 1998,
click2learn did not record equity in income (losses) from Infomodelers in
1999.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE. Total revenue increased 30% from $25.7 million in 1997 to
$33.4 million in 1998. Online learning product revenue increased 35% from
$8.0 million in 1997 to $10.8 million in 1998. This increase was due
primarily to increased demand for click2learn's online learning products as a
result of click2learn's focus on the online learning market. Other product
revenue decreased 58% from $10.4 million in 1997 to $4.4 million in 1998.
Other product revenue consists of revenue from click2learn's products which
are not targeted at the online learning market. These products include
SuperCede products (prior to its spin-off in September 1997), 3D F/X, Digital
Video Producer, ToolBook, Multimedia ToolBook, IconAuthor, CBT Express, Web
3D and other non-online learning products. Included in other product revenue
in 1997 was approximately $2.0 million from sales of SuperCede products.
Total product revenue decreased 21% from $18.5 million in 1997 to $15.2
million in 1998, reflecting the decrease in other product revenue. Services
revenue increased 151% from $7.2 million 1997 to $18.2 million in 1998 due
primarily to the expansion of click2learn's professional services business.
23
COST OF REVENUE. Total cost of revenue increased 96% from $7.4 million
in 1997 to $14.4 million in 1998. Total cost of product revenue decreased 27%
from $2.7 million in 1997 to $2.0 million 1998. Cost of online learning product
revenue increased 56% from $608,000 in 1997 to $947,000 in 1998, due primarily
to increased sales of click2learn's online learning products. Cost of other
product revenue decreased 51% from $2.1 million in 1997 to $1.0 million in 1998.
This decrease was due primarily to decreased sales of click2learn's other
products. Cost of other product revenue attributable to sales of SuperCede
products was $273,000 in 1997. Total product gross margin as a percentage of
product revenue increased to 87% in 1998 from 85% in 1997.
Cost of services revenue increased 168% from $4.6 million in 1997 to
$12.4 million 1998. This increase was due primarily to increased professional
service projects in 1998. Services gross margin as a percentage of services
revenue decreased from 36% in 1997 to 32% in 1998 due to lower services
personnel utilization.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses decreased
27% from $8.4 million in 1997 to $6.1 million in 1998. This decrease was due
primarily to the spin off of SuperCede. Research and development expenses as a
percentage of total revenue decreased from 33% in 1997 to 18% in 1998 as a
result of the spin-off of SuperCede and higher total revenues. Research and
development expenses related to SuperCede were $2.6 million in 1997.
SALES AND MARKETING. Sales and marketing expenses decreased 4% from
$14.7 million in 1997 to $14.1 million in 1998. Sales and marketing expenses as
a percentage of total revenue decreased from 57% in 1997 to 42% in 1998. The
decreases were due primarily to sales and marketing expenses relating to
SuperCede products in 1997. Sales and marketing expenses related to SuperCede
were $2.5 million in 1997.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
increased 28% from $4.5 million in 1997 to $5.8 million in 1998. This increase
was due primarily to increased overhead due to click2learn's increased size as
well as costs of being a public company. General and administrative expenses as
a percentage of total revenue were unchanged at 17%. General and administrative
expenses related to SuperCede were $653,000 in 1997.
AMORTIZATION OF GOODWILL. Amortization of goodwill increased from
$119,000 in 1997 to $825,000 in 1998. Click2learn began acquiring other
companies in the latter half of 1997, therefore, the increase is due to a full
year of amortization reflected in 1998.
ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT. Click2learn recognized no
cost of acquired in-process research and development in 1998. In 1997,
click2learn recognized the cost of acquired in-process research and
development totaling $4.1 million. This amount represented in-process
research and development acquired by click2learn in connection with Aimtech
Corporation ("Aimtech") of $3.6 million and $484,000 resulting from one other
acquisition.
OTHER INCOME (EXPENSE). Interest income from the principal
stockholder was $436,000 and $0 in 1997 and 1998, respectively, and was
related to interest payments to click2learn on a note receivable from
click2learn's principal stockholder. This note receivable was repaid in full
in October 1997. Other interest income, net was $8,000 and $609,000 in 1997
and 1998, respectively. Interest income in 1998 was derived primarily from
interest earned on proceeds from click2learn's initial public offering.
Equity in income (losses) from Infomodelers was $(634,000) and $2.2 million
in 1997 and 1998, respectively, representing click2learn's equity in the net
income (losses) from Infomodelers in such periods. Equity in income (losses)
from Infomodelers in 1998 resulted from the sale by Infomodelers of
substantially all of its assets to Visio Corporation.
24
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, click2learn had cash and cash equivalents
totaling $19.5 million, a decrease of $2.2 million from December 31, 1998. The
decrease in cash was due primarily to uses of cash for operating expenses. At
December 31, 1999, the principal source of liquidity for click2learn was $27.8
million of working capital.
Click2learn has had negative cash flows from operating activities to
date. Net cash used by operating activities was $7.4 million, $10.7 million,
and $13.1 million in 1997, 1998 and 1999, respectively. In 1997, net cash
used in operating activities was primarily the result of net losses, which
include a non-cash expense of $4.1 million for acquired in-process research
and development. Net cash used in operating activities in 1998 and 1999 was
also primarily due to net losses.
Net cash provided by (used in) investing activities was $(713,000),
$1.2 million and $(2.5) million in 1997, 1998 and 1999, respectively. Net cash
used in investing activities in 1997 was primarily the result of capital
expenditures and acquisition-related costs. Net cash provided by investing
activities in 1998 was primarily due to proceeds received from the sale of
click2learn's investment in Infomodelers. In 1999, net cash used in investing
activities was primarily the result of capital expenditures for computer
equipment, purchased software, office equipment, furniture and fixtures. As of
December 31, 1999, click2learn had no material commitments for capital
expenditures and click2learn also had commitments under non-cancelable
operating leases with terms in excess of one year of $5.4 million through
2003.
Cash provided by financing activities was $7.1 million, $28.8 million
and $13.5 million in 1997, 1998 and 1999 respectively, resulting primarily
from payments received on the note receivable from principal stockholder in
1997, click2learn's initial public offering in 1998 and private placements of
common and preferred stock in 1999 with Go2Net, Marshall Capital Management
and Vulcan Ventures. Cash used for payments on long-term debt was $398,000,
$592,000, and $120,000 in 1997, 1998 and 1999, respectively.
Click2learn anticipates that its cash and cash equivalents will be
sufficient to meet its working capital needs and capital expenditures for at
least the next 12 months. Click2learn's long-term liquidity will be affected by
numerous factors, including acquisitions of businesses or technologies, demand
for click2learn's online learning products and services, the extent to which
such online learning products and services achieve market acceptance, the timing
and extent to which click2learn invests in new technology, the expenses of sales
and marketing and new product development, the extent to which competitors are
successful in developing their own products and services and increasing their
own market share, the level and timing of revenues and other factors. In
addition, click2learn from time to time evaluates potential acquisitions of
businesses, products or technologies that complement click2learn's business. To
the extent that resources are insufficient to fund click2learn's activities,
click2learn may need to raise additional funds. Such additional funding, if
needed, may not be available on terms attractive to click2learn, or at all. If
adequate funds are not available on acceptable terms, click2learn may be unable
to expand its business, develop or enhance its products and services, take
advantage of future opportunities or respond to competitive pressures, any of
which could have a material adverse effect on click2learn's business, operating
results and financial condition.
YEAR 2000 COMPLIANCE
25
Click2learn spent approximately $80,000 in connection with
evaluating and remediating year 2000 issues. Such expenditures represented
approximately 6% of click2learn's total information technology budget. To
date, click2learn has not experienced any material year 2000 related problems
with its software or third party software or computer systems.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
CLICK2LEARN HAS A LIMITED OPERATING HISTORY IN ITS CURRENT MARKETS.
Until early 1995, click2learn was engaged in various research and development
activities and in developing and marketing multimedia authoring products,
database and Internet tools, web publishing products and other ancillary
products, most of which click2learn does not currently sell. Starting in 1995,
click2learn began to focus its development and marketing efforts on products and
services for the enterprise learning market. Click2learn announced the
click2learn.com network in July 1999, and has not previously hosted, operated
and managed e-commerce web sites. Accordingly, click2learn has a limited
operating history on which to evaluate its current business and prospects.
Risks click2learn faces under its new business models include, but are
not limited to, the demand for technology-based training and e-learning
applications, demand for e-learning products and services, broad and timely
acceptance of the click2learn.com network, competition and those other risks
described in this section. To address these risks, click2learn must, among other
things:
- successfully introduce and build the click2learn.com e-learning
network and attract user traffic to the e-learning network;
- establish corporate e-learning sites for its customers and
generate revenues from such customers;
- continue to establish relationships with leading providers of
learning content to sell that content through the click2learn.com
network;
- continue to establish co-branded e-learning sites for Internet
portals and corporate customers for the use of click2learn.com as
the "learning channel" for their web sites;
26
- respond to competitive developments;
- attract, integrate, retain and motivate qualified personnel;
- successfully introduce new products and services; and
- address and establish new technologies and technology standards.
Although click2learn intends to derive revenue from the click2learn.com
network, the pricing, expense and revenue model for the click2learn.com network
has not been broadly tested in the marketplace. If the pricing, expense and
revenue model is not acceptable to users, customers, content providers or
advertisers, the click2learn.com network may not be commercially successful.
This would seriously harm click2learn's business, particularly if it experiences
a decline in the growth of revenues from its enterprise e-learning products and
services. Click2learn expects to continue to derive the majority of its revenues
over at least the next 12 months from its enterprise e-learning products, rather
than the click2learn.com network.
CLICK2LEARN'S OPERATING RESULTS COULD VARY SIGNIFICANTLY FROM QUARTER
TO QUARTER. Click2learn's quarterly operating results have varied significantly
in the past and are expected to fluctuate significantly in the future as a
result of a variety of factors, many of which are outside click2learn's control.
Factors that may adversely affect click2learn's quarterly operating results
include:
- the demand for technology-based training and demand for
e-learning solutions;
- the size and timing of product orders and the timing and
execution of professional services engagements;
- the mix of revenue from products and services;
- the mix of products sold;
- the ability to meet client project milestones;
- market acceptance of click2learn's or its competitors' products
and services;
- click2learn's ability to develop and market new or enhanced
products and services in a timely manner and the market
acceptance of these products and services;
- timing of revenues and expenses relating to the click2learn.com
network; and
- the timing of revenue recognition.
Click2learn's future revenues are difficult to predict and click2learn
may not be able to adjust spending in response to revenue shortfalls.
Click2learn's limited operating history under its current business model,
including the click2learn.com network, possible acquisitions and the emerging
nature of the market make prediction of future revenue and expenses difficult.
Expense levels are based, in part, on expectations as to future revenue and to a
large extent are fixed in the short term. If click2learn is not able to predict
future revenue accurately, it may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall.
CLICK2LEARN IS IN A DEVELOPING MARKET. The e-learning market is in the
early stages of development. Corporate training and education has historically
been conducted primarily through classroom instruction and has traditionally
been performed by a company's internal personnel. Many companies have invested
heavily in their current training solutions. Although technology-based training
applications have been available for several years, they currently account for
only a small portion of the overall training market. Accordingly, the future
success of click2learn will depend upon, among other factors, the extent to
which companies adopt technology-based solutions and use the Internet in
connection with their training activities and the extent to which companies
utilize the services or purchase products of third-party providers, and more
particularly whether companies adopt solutions delivered over the Internet on an
application service provider basis, including private e-learning sites hosted by
third parties such as those on the click2learn.com network. Many companies that
have already invested substantial resources in traditional methods of corporate
training may be reluctant to adopt a new strategy that may limit or compete with
their existing investments. Even if companies implement technology-based
training or e-learning solutions, they may still choose to design, develop,
deliver or manage all or a part of their education and training internally. If
technology-based learning and the use of the Internet for learning do not become
widespread, or if companies do not use the products and services
27
of third parties to develop, deliver or manage their training needs, then
click2learn's products and services, including the click2learn.com network, may
not achieve commercial success.
CLICK2LEARN DEPENDS ON INCREASING USE OF THE INTERNET. The
click2learn.com network depends on the increased acceptance and use of the
Internet, both generally and as a means for the purchase and delivery of
learning content. Rapid growth in the use of the Internet is a recent
phenomenon. As a result, acceptance and use may not continue to develop at
historical rates and a sufficiently broad base of business customers or
consumers may not adopt or continue to use the Internet, particularly for
training and education. Demand and market acceptance for recently introduced
services and products over the Internet are subject to a high level of
uncertainty, and there exist few proven services and products.
Click2learn's business would be seriously harmed if:
- use of the Internet and other online services does not continue
to increase or increases more slowly than expected;
- the technology underlying the Internet and other online services
does not effectively support any expansion that may occur;
- the Internet and other online services do not create a viable
commercial marketplace, reducing the need for our services;
- the necessary communication and computer network technology for
the Internet does not continue to develop; or
- governmental regulation of the Internet increases.
INTERNET SECURITY RISKS. A significant barrier to the widespread use
of the Internet for applications such as training and education is the secure
transmission of confidential information over public networks. Advances in
computer capabilities, new discoveries in the field of cryptography or other
events or developments could result in compromises or breaches of
click2learn's security systems or those of other web sites. If any
well-publicized security breach were to occur, the Internet may not become
widely accepted for commerce and communications. Anyone who circumvents
click2learn's security measures could misappropriate proprietary information
or cause interruptions in our services or operations.
The Internet is a public network, and data is sent over this network
from many sources. In the past, computer viruses, software programs that disable
or impair computers, have been distributed and have rapidly spread over the
Internet. Computer viruses could be introduced into our systems or those of our
customers or content providers, which could disrupt the click2learn.com network
or make it inaccessible to users. We may be required to expend significant
capital and other resources to protect against the threat of security breaches
or to alleviate problems caused by breaches. To the extent that our activities
may involve the storage and transmission of proprietary information, such as
personal information or credit card numbers, security breaches could expose us
to a risk of loss or litigation and possible liability.
POSSIBILITY OF PERFORMANCE PROBLEMS. The click2learn.com network has
only been recently introduced. If the volume of traffic or content on the
click2learn.com network increases, the network may experience slower response
times or other problems. In addition, both click2learn and users depend on
Internet service providers, telecommunications companies and the efficient
operation of their computer networks and other computer equipment for the
operation of and access to the click2learn.com network. Each of these has
experienced significant outages in the past and could experience outages,
delays and other difficulties due to system failures unrelated to
click2learn's systems. Any delays in response time or performance problems
could cause users of the click2learn.com network to perceive this service as
not functioning properly and therefore not use the click2learn.com network
for their training needs.
COMPETITION. The e-learning market is highly fragmented and
competitive, rapidly evolving and subject to rapid technological change, with no
single competitor accounting for a dominant market share. Because of the lack of
significant barriers to entry in its market, click2learn expects that new
competitors
28
will enter this market in the future. Click2learn's competitors vary in size and
scope and the breadth of products and services offered. Click2learn faces
competition from:
- other web sites focused on learning and education, such as
headlight.com, fatbrain.com and smartforce.com, with respect to
the click2learn.com network, as well developers or resellers of
training content who make their content available over the
Internet;
- developers of multimedia authoring tools with respect to its
authoring and authoring support products;
- other developers of enterprise learning management systems, such
as Saba and Docent, as well as publishers of e-learning courses
that sell management systems with their titles with respect to
its learning management systems;
- many small, regional e-learning and technology-based training
services businesses; and
- large professional consulting firms and in-house training
departments, with respect to all aspects of its enterprise
learning solutions.
Several of click2learn's current and potential competitors have longer
operating histories and significantly greater financial, technical, marketing
and other resources and therefore may be able to respond more quickly to new or
changing opportunities, technologies, standards and customer requirements. Many
of these competitors also have broader and more established distribution
channels that may be used to establish strategic alliances or deliver competing
products or services directly to customers. If these competitors were to bundle
competing products or services with the products and services of their strategic
partners, the demand for click2learn's products and services might be
substantially reduced and its ability to market and sell products and services
successfully may be substantially diminished. In addition, the existence or
announcement of strategic relationships involving click2learn's competitors
could adversely affect its ability to attract and retain customers.
DEPENDENCE ON THIRD PARTY RELATIONSHIPS. Click2learn must pursue
distribution relationships with Internet web sites in an effort to attract
traffic to the click2learn.com network, including the click2learn.com e-learning
portal. There is intense competition for placements on certain of these sites,
and click2learn may not be able to enter into relationships with certain of
these sites on commercially reasonable terms, or at all. Even if click2learn
enters into distribution relationships with these web sites, they themselves may
not attract significant numbers of users to the click2learn.com network.
Therefore, click2learn may not receive significant additional users from these
relationships. Moreover, click2learn may have to pay fees to establish certain
of these relationships or issue securities to companies that operate these web
sites, even if click2learn.com does not receive additional users as a result.
Click2learn uses licensed third party technology in its products and in
the click2learn.com network and it licenses content from third parties for the
click2learn.com network. Click2learn may not be able to continue to license
technology or content from third parties. Future licenses to this technology and
content may not be available to click2learn on commercially reasonable terms or
at all. The loss of or inability to obtain or maintain any of these technology
or content licenses could result in delays in introduction of new products or
could force click2learn to discontinue permitting access to portions of the
click2learn.com network until equivalent technology or content, if available, is
identified, licensed and integrated. Furthermore, although it has taken steps to
protect itself in the relevant license agreements, click2learn may be subjected
to legal claims related to licensed technology or content based on defamation,
negligence, product liability, infringement of intellectual property or other
legal theories.
CUSTOMER REQUIREMENTS AND FIXED PRICE ENGAGEMENTS. Click2learn could
face liability from customers if it does not meet their expectations. Many of
click2learn's professional services engagements require it to develop e-learning
applications to suit unique customer requirements. The failure or inability to
meet a customer's expectations or requirements in the performance of services
could injure click2learn's business reputation or result in a claim for damages,
regardless of click2learn's responsibility for the failure. Click2learn attempts
to limit contractually its liability for damages arising from product defects,
negligent acts, errors, mistakes or omissions in rendering professional
services. However, these contractual protections are n