UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended June 30, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 000-24289
ASYMETRIX LEARNING SYSTEMS, INC.
(Exact name of registrant as specified in its chapter)
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)
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
--------------- ---------------
The number of shares outstanding of the issuer's Common Stock, par value $0.01,
as of June 30, 1999 was 14,104,247 shares.
ASYMETRIX LEARNING SYSTEMS, INC.
FORM 10 -Q
FOR THE QUARTER ENDED JUNE 30, 1999
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1999 and December
31, 1998 3
Condensed Consolidated Statements of Operations for the three months
and six months ended June 30, 1999 and 1998 4
Condensed Consolidated Statements of Cash Flows for the three months
and six months ended June 30, 1999 and 1998 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 2. Changes in Securities and Use of Proceeds 18
Item 3. Defaults upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Securities Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
SIGNATURES 20
EXHIBIT INDEX 21
2
ASYMETRIX LEARNING SYSTEMS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
June 30, December 31,
1999 1998
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents $ 16,245 $ 21,713
Accounts receivable, net of allowance for returns and
doubtful accounts of $861 and $1,397 9,568 7,917
Inventories 302 370
Prepaid royalties and licenses 248 66
Receivables from related companies 74 193
Other current assets 1,219 998
----------- ------------
Total current assets 27,656 31,257
Property and equipment, net 2,521 2,320
Goodwill and other intangible assets, net 9,780 9,917
Other assets 231 128
----------- ------------
Total assets $ 40,188 $ 43,622
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,103 $ 1,494
Accrued liabilities 2,504 1,637
Deferred revenue 1,089 1,401
Other current liabilities 1,457 1,812
----------- ------------
Total current liabilities 7,153 6,344
Other noncurrent liabilities 219 268
----------- ------------
Total liabilities 7,372 6,612
----------- ------------
Stockholders' equity:
Common stock 142 140
Additional paid-in capital 203,524 203,249
Accumulated deficit (169,931) (165,522)
Deferred stock compensation (528) (580)
Accumulated other comprehensive loss (391) (277)
----------- ------------
Total stockholders' equity 32,816 37,010
----------- ------------
Total liabilities and stockholders' equity $ 40,188 $ 43,622
----------- ------------
----------- ------------
See accompanying notes to Condensed Consolidated Financial Statements
3
ASYMETRIX LEARNING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Revenue:
Product revenue:
Online learning products $ 3,280 $ 2,588 $ 6,016 $ 4,893
Other products 288 730 706 2,270
---------- ---------- ---------- ----------
Total product revenue 3,568 3,318 6,722 7,163
Services revenue 4,983 5,054 9,289 9,407
---------- ---------- ---------- ----------
Total revenue 8,551 8,372 16,011 16,570
---------- ---------- ---------- ----------
Cost of revenue:
Product revenue:
Online learning products 225 269 403 478
Other products 122 288 258 577
---------- ---------- ---------- ----------
Total cost of product revenue 347 557 661 1,055
Services revenue 3,491 3,140 6,767 5,992
---------- ---------- ---------- ----------
Total cost of revenue 3,838 3,697 7,428 7,047
---------- ---------- ---------- ----------
Gross margin 4,713 4,675 8,583 9,523
---------- ---------- ---------- ----------
Operating expenses:
Research and development 1,644 1,551 3,158 3,070
Sales and marketing 3,654 3,556 7,180 7,061
General and administrative 1,400 1,443 2,656 2,944
Amortization of goodwill 219 195 438 379
---------- ---------- ---------- ----------
Total operating expenses 6,917 6,745 13,432 13,454
---------- ---------- ---------- ----------
Loss from operations (2,204) (2,070) (4,849) (3,931)
Other income (loss), net 201 15 440 2,166
---------- ---------- ---------- ----------
Net loss $ (2,003) $ (2,055) $ (4,409) $ (1,765)
Accretion of redemption value of redeemable common stock 0 (604) 0 (1,370)
---------- ---------- ---------- ----------
Net loss attributable to common stockholders $ (2,003) $ (2,659) $ (4,409) $ (3,135)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net loss per share, basic and diluted $ (0.14) $ (0.32) $ (0.32) $ (0.41)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Weighted average common shares outstanding, basic and diluted 14,019 8,304 13,993 7,618
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
See accompanying notes to Condensed Consolidated Financial Statements
4
ASYMETRIX LEARNING SYSTEMS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
Six Months Ended
June 30,
----------------------------
1999 1998
---------- ----------
Cash flows from operating activities:
Net loss $ (4,409) $ (1,765)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 1,052 845
Write-off property and equipment - 8
Stock compensation expense 52 203
Equity in income from Infomodelers, Inc. - (2,169)
Changes in assets and liabilities:
Accounts receivable (1,651) (418)
Inventories 68 131
Prepaid royalties and licenses (182) (39)
Receivables from related companies 119 106
Other current assets (223) (769)
Accounts payable 608 (450)
Accrued liabilities 869 493
Deferred revenue (311) (554)
Other current liabilities (353) (490)
---------- ----------
Net cash used in operating activities (4,361) (4,868)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (1,116) (747)
Disposal of investment in Infomodelers, Inc. - 2,373
Disposal (purchase) of other assets (103) 45
---------- ----------
Net cash (used in)/provided by investing activities (1,219) 1,671
---------- ----------
Cash flows from financing activities:
Repayment of notes payable (49) (784)
Proceeds from exercise of stock options 276 177
Net proceeds from initial public offering - 29,331
---------- ----------
Net cash provided by financing activities 227 28,724
---------- ----------
Effect of foreign exchange rate changes (115) (35)
---------- ----------
Net increase(decrease) in cash and cash equivalents (5,468) 25,492
Cash and cash equivalents at beginning of period 21,713 2,541
---------- ----------
Cash and cash equivalents at end of period $ 16,245 $ 28,033
---------- ----------
---------- ----------
See accompanying notes to Condensed Consolidated Financial Statements
5
ASYMETRIX LEARNING SYSTEMS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999 AND 1998
UNAUDITED INTERIM FINANCIAL INFORMATION
The accompanying unaudited condensed consolidated financial statements
of Asymetrix Learning Systems, Inc. ("Asymetrix") include the accounts of
Asymetrix and its wholly-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation. These statements reflect all
normal recurring adjustments which are, in the opinion of management, necessary
for a fair presentation of the financial position and results of operations for
the periods presented. These condensed consolidated financial statements and
notes should be read in conjunction with Asymetrix's audited consolidated
financial statements included in Asymetrix's Annual Report on Form 10-K for the
fiscal year ended December 31, 1998. Certain information and footnote
disclosures normally included in financial statements prepared in conformity
with generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations of the Securities and Exchange Commission.
Interim results of operations for the three months and six months ended June 30,
1999 are not necessarily indicative of the operating results for the full fiscal
year. Factors that may affect such operating results, include, but are not
limited to, those discussed in "FACTORS THAT MAY AFFECT FUTURE RESULTS OF
OPERATIONS".
INVENTORIES
Inventories consist of the following (in thousands):
JUNE 30, DECEMBER 31,
1999 1998
-------- ------------
Raw materials $237 $247
Finished goods 114 226
Less obsolescence reserve (49) (103)
-------- ------------
$302 $370
-------- ------------
-------- ------------
NET LOSS PER SHARE
Basic earnings per share is computed by dividing the sum of net loss
plus accretion of redemption value of redeemable common stock by the weighted
average number of common shares outstanding during the period. Diluted earnings
per share is computed by dividing the sum of net loss plus accretion of
redemption value of redeemable common stock by the weighted average number of
common and dilutive common equivalent shares outstanding during the period. As
Asymetrix had a net loss attributable to common stockholders in each of the
periods presented, basic and diluted net loss per share is the same.
Excluded from the computation of diluted earnings per share for the
three and six months ended June 30, 1999 are options to acquire approximately
4,247,148 shares of Common Stock with a weighted average exercise price of
$4.87, and for the three and six months ended June 30, 1998 are options to
acquired approximately 3,893,631 shares of Common Stock with a weighted average
exercise price of $4.69 because their effects would be anti-dilutive.
REVENUE RECOGNITION
Asymetrix recognizes revenue in accordance with Statement of Position
97-2, SOFTWARE REVENUE RECOGNITION ("SOP 97-2"), which provides specific
industry guidance and stipulates that revenue recognized from software
arrangements is to be allocated to each element of the arrangement based on the
relative fair values of the elements, such as software products, upgrades,
enhancements, post contract customer support, installation, or training. Under
SOP 97-2, the determination of fair value is based on objective evidence which
is specific to the vendor. If such evidence of fair value for each element of
the arrangement does not exist, all revenue from the
6
arrangement is deferred until such time that evidence of fair value does
exist or until all elements of the arrangement are delivered.
Revenue from sales of software products to end-users, resellers, and
distributors is recognized when the products are delivered provided all the
requirements of SOP 97-2 have been met. Asymetrix's agreements with certain
distributors and resellers permit them to exchange products under certain
circumstances and permit returns from certain resellers subject to specific
limitations. When appropriate, accruals are established for estimated returns
and exchanges. In the case of nonrefundable minimum royalties from an OEM,
reseller or other distributor, provided that no significant obligations of
Asymetrix remain, Asymetrix recognizes revenue when it delivers its product to
the OEM reseller or other distributor. Additional royalties are paid to the
extent that the advances are exceeded and these additional royalties are
recognized upon delivery of the products by the OEM reseller or other
distributor to its customers. Asymetrix recognizes revenue associated with
technical support agreements over the life of the contract.
Asymetrix recognizes revenue under custom development contracts as
services are provided for time and materials contracts or by using the
percentage-of-completion method of accounting, based on the ratio of costs
incurred to the total estimated project cost, for individual fixed-price
contracts. Provisions for any estimated losses on uncompleted contracts are made
in the period in which such losses become evident.
In December 1998, the AICPA issued Statement of Position 98-9,
"MODIFICATION OF SOP 97-2, SOFTWARE REVENUE RECOGNITION, WITH RESPECT TO CERTAIN
TRANSACTIONS" ("SOP 98-9") which amends certain elements of SOP 97-2 and is
effective for fiscal years beginning after March 15, 1999. Asymetrix believes
that the adoption of SOP 98-9 will not have a material effect on results of
operations or financial position.
COMPREHENSIVE INCOME
Asymetrix has adopted the provisions of Statement of Financial
Accounting Standards No. 130, REPORTING COMPREHENSIVE INCOME ("Statement 130").
Statement 130 establishes revenues for reporting and disclosure of comprehensive
income and its components (revenues, expenses, gains, and losses) in a full set
of general-purpose financial statements. The following table sets forth the
components of comprehensive loss for the periods presented below:
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
1999 1998 1999 1998
-------- -------- -------- --------
Net loss $(2,003) $(2,055) $(4,409) $(1,765)
Foreign currency translation adjustment (66) (120) (113) (34)
-------- -------- -------- --------
Total comprehensive loss $(2,069) $(2,175) $(4,522) $(1,799)
-------- -------- -------- --------
-------- -------- -------- --------
NEW ACCOUNTING PRONOUNCEMENTS
In March 1998, the Accounting Standards Executive Committee issued
Statement of Position No. 98-1, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
DEVELOPED OR OBTAINED FOR INTERNAL USE ("SOP 98-1"). SOP 98-1 established
guidance on accounting for the costs incurred related to internal used software.
SOP 98-1 is effective for fiscal years beginning after December 15, 1998.
Asymetrix adopted SOP 98-1 effective January 1, 1999. Adoption of SOP 98-1 did
not have a material impact on the consolidated financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES ("Statement 133"). Statement 133 provides a comprehensive
and consistent standard for the recognition and measurement of derivatives and
hedging activities. Statement 133 is effective for fiscal years beginning after
June 15, 2000. Asymetrix does not expect the adoption of Statement 133 to have a
material impact on its consolidated financial statements.
7
SEGMENT INFORMATION
Asymetrix has adopted the provisions of Statement of Financial
Accounting Standards No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION ("Statement 131"). Statement 131 establishes standards
for the reporting by public business enterprises about operating segments,
products and services, geographic areas, and major customers. The method for
determining what information to report is based on the way that management
organizes the operating segments within Asymetrix for making operating
decisions and assessing financial performance.
Asymetrix's chief operating decision-maker is considered to be
Asymetrix's Chief Executive Officer ("CEO"). The CEO reviews financial
information on a consolidated basis with disaggregated information about
revenues by product categories and geographic region for purposes of making
operating decisions and assessing financial performance. The product
categories reviewed by the CEO are on-line learning products and other
products. These categories are identical to those in the accompanying
consolidated statements of operations. The consolidated financial information
reviewed by the CEO does not include information regarding profitability of
Asymetrix's different products or services. Therefore, Asymetrix operates in
a single operating segment, on-line learning.
Revenue and long-lived asset information regarding operations in the
United States and International - primarily Europe is as follows (in
thousands):
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------------- -------------------
1999 1998 1999 1998
-------- -------- -------- --------
Revenue:
Domestic $6,771 $6,946 $12,675 $13,237
International - primarily Europe 1,780 1,426 3,336 3,333
-------- -------- -------- --------
$8,551 $8,372 $16,011 $16,570
JUNE 30,
--------------------
1999 1998
-------- --------
Long-lived assets:
Domestic operations $12,222 $12,704
International operations - primarily Europe 78 54
-------- --------
$12,300 $12,758
No single customer accounted for greater than 10% of total revenues in
any period presented.
SUBSEQUENT EVENTS
In July 1999, Asymetrix acquired Pixelmedia Visual Communications, Inc.
("Pixelmedia"), an online learning production company based in British Columbia,
Canada. Asymetrix issued approximately 100,000 shares of Common Stock in
connection with the acquisition and assumed liabilities of approximately
$400,000. It is anticipated that the acquisition will be accounted for using the
purchase method of accounting and will be amortized over a 15 year period.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF THE FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF ASYMETRIX SHOULD BE READ IN CONJUNCTION WITH ASYMETRIX'S
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES THERETO
INCLUDED ELSEWHERE IN THIS REPORT. THIS REPORT CONTAINS FORWARD-LOOKING
STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. ASYMETRIX'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
Asymetrix's comprehensive learning solution consists of an open,
standards-based, Internet-centric technology platform as well as a variety of
professional learning services for the online learning market. Asymetrix's
technology platform includes authoring products which enable customers to
create online learning applications and learning management systems which
enable customers to deploy and manage such applications, automate
instructor-led training, logistics and tracking of individual and group
competencies. Asymetrix's professional services include a wide range of
consulting, integration and custom development services focused on the online
learning market as well as training and customer support.
From September 1997 through June 1998, Asymetrix acquired eight
companies and issued an aggregate of 3,457,504 shares of common stock. All of
these acquisitions were accounted for using the purchase method of
accounting. Accordingly, Asymetrix's historical consolidated financial
statements do not include results of operations, financial position or cash
flows of these entities prior to their respective dates of acquisition. In
connection with all of its acquisitions from July 1997 through September
1998, Asymetrix has recorded an aggregate of approximately $10.2 million in
goodwill, of which approximately $1.5 million will be amortized on a
straight-line basis over a five-year life and approximately $8.7 million will
be amortized over a fifteen-year life. If Asymetrix were to incur additional
charges for acquired in-process research and development and amortization of
goodwill with respect to any future acquisitions, Asymetrix's business,
operating results and financial condition could be materially and adversely
affected. In July 1998, Asymetrix acquired Meliora Systems Inc. ("Meliora"),
an online learning product and consulting company, which has been accounted
for under the pooling of interests method. Asymetrix issued 268,000 shares of
common stock in exchange for all outstanding shares of Meliora. The
consolidated financial statements of Asymetrix have been restated to give
effect to the combination as if the companies had been combined since their
inception.
As part of its strategy to focus on the online enterprise learning
market, Asymetrix divested product lines and technologies that were unrelated
to this market. In October 1996, Asymetrix completed the spin-off of its
Database Tools Division to Infomodelers, Inc. ("Infomodelers") and
distributed a controlling interest in Infomodelers to its stockholders. In
March 1998, Asymetrix sold substantially all of its remaining interest in
Infomodelers to Vulcan Ventures, Inc. for an aggregate purchase price of
approximately $2.4 million in cash, which price included approximately $2.0
million for shares of Infomodelers Series A Preferred Stock and approximately
$390,000 for shares of Infomodelers common stock.
In July 1997, Asymetrix established SuperCede, Inc. ("SuperCede"), a
subsidiary, and transferred the assets of its Internet Development Tools
Division and SuperCede products to SuperCede. Following an investment by Vulcan
Ventures, Inc. and certain related transactions, 50% of SuperCede was owned by
Asymetrix. However, Asymetrix held Series B Preferred Stock which was
subordinate to the Series A Preferred stock held by Vulcan Ventures. All of the
assets of SuperCede were subsequently acquired by Instantiations, Inc. in
January 1999 and SuperCede was dissolved. Because the total consideration
received in the transaction was less than the liquidation preference of the
Series A Preferred Stock, Asymetrix received no portion of that consideration
and believes that it will receive no future value from its SuperCede interest.
Asymetrix's historical financial statements do not consolidate the results of
operations, financial position or cash flows of Infomodelers subsequent to
October 1996 or of SuperCede subsequent to September 1997.
Asymetrix incurred net losses of $13.7 million in 1997, $5.2 million in
1998 and a net loss of $4.4 million in the six months ended June 30, 1999, and
has yet to achieve operating income or net income under its online learning
business model. Asymetrix's limited operating history under this business model,
and the emerging nature
9
of the market for online enterprise learning among other factors, make
prediction of Asymetrix's future operating results difficult. Although
Asymetrix has experienced revenue growth in certain recent periods there can
be no assurance that such growth rates are sustainable or indicative of
actual growth rates that Asymetrix may experience and, therefore, they should
not be considered indicative of future operating results. In addition,
Asymetrix intends to continue to invest in various aspects of its online
learning business. As a result, Asymetrix expects to continue to incur
operating losses at least through 1999. There can be no assurance that
Asymetrix will achieve profitability or, if profitability is achieved, that
it will be sustained.
In July of 1999, Asymetrix announced click2learn.com, an innovative new
Internet learning portal providing professional education and training, that
leverages its authoring and management enterprise technologies in an
outsourced model. By providing a business-to-business and consumer learning
portal, along with enterprise services that include strategic consulting,
learning management products, online learning authoring products, systems
integration, custom content, and off-the-shelf content, Asymetrix strives to
become a single-source provider with the capacity to meet any organization's
training and learning needs. The site is expected to formally launch early in
the fourth quarter of 1999, therefore no significant revenue from
click2learn.com is expected in 1999. Asymetrix will incur incremental marketing
and site development expenses associated with the portal during the remainder
of 1999.
RESULTS OF OPERATIONS
The following table presents Asymetrix's results of operations as a
percentage of total revenue for the periods indicated.
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- --------------------
1999 1998 1999 1998
------ ------ ------ ------
% % % %
------ ------ ------ ------
Revenue:
Product revenue:
Online learning products 39 31 38 30
Other products 3 9 4 14
------ ------ ------ ------
Total product revenue 42 40 42 43
Services revenue 58 60 58 57
------ ------ ------ ------
Total revenue 100 100 100 100
Cost of revenue:
Product revenue:
Online learning products 3 3 3 3
Other products 1 3 2 3
------ ------ ------ ------
Total cost of product revenue 4 6 4 6
Services revenue 41 38 42 36
------ ------ ------ ------
Total cost of revenue 45 44 46 43
Gross margin 55 56 54 57
Operating expenses:
Research and development 19 19 20 19
Sales and marketing 43 42 45 43
General and administrative 16 17 17 18
Amortization of goodwill 3 2 3 2
------ ------ ------ ------
Total operating expenses 81 81 84 81
------ ------ ------ ------
Loss from operations (26) (25) (30) (24)
Other income(loss), net 3 0 3 13
------ ------ ------ ------
Net loss (23) (25) (28) (11)
------ ------ ------ ------
------ ------ ------ ------
THREE AND SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE AND SIX MONTHS ENDED
JUNE 30, 1998
REVENUE. Total revenue increased 2% from $8.4 million in the three
months ended June 30, 1998 to $8.6 million in the three months ended June 30,
1999. Total revenue decreased 3% from $16.6 million in the six months ended
June 30, 1998 to $16.0 million in the six months ended June 30, 1999.
10
Online learning product revenue increased 27% from $2.6 million in
the three months ended June 30, 1998 to $3.3 million in the three months
ended June 30, 1999. Online learning product revenue increased 23% from $4.9
million in the six months ended June 30, 1998 to $6.0 million in the six
months ended June 30, 1999. The increase in online learning product revenue
was due primarily to increased demand for Asymetrix's online learning
products as a result of Asymetrix's focus on the online learning market.
Other product revenue decreased 61% from $730,000 in the three months ended
June 30, 1998 to $288,000 in the three months ended June 30, 1999. Other
product revenue decreased 69% from $2.3 million in the six months ended June
30, 1998 to $706,000 in the six months ended June 30, 1999. Other product
revenue consists of revenue from Asymetrix's products which are not targeted
at the online learning market many of which have been discontinued or
divested over the past years. Total product revenue increased 8% from $3.3
million in the three months ended June 30, 1998 to $3.6 million in the three
months ended June 30, 1999, reflecting the increase in online learning
product revenue. Total product revenue decreased 6% from $7.2 million in the
six months ended June 30, 1998 to $6.7 million in the six months ended June
30, 1999, reflecting the decrease in other product revenue. As a result of
Asymetrix's strategy to focus on the online learning market, Asymetrix
anticipates that future growth in product sales, if any, will be attributable
to its online learning products and that its other product revenue will
continue to decrease in the future.
Services revenue decreased 1% from $5.1 million in the three months
ended June 30, 1998 to $5.0 million in the three months ended June 30, 1999.
Services revenue decreased 1% from $9.4 million in the six months ended June
30, 1998 to $9.3 million in the six months ended June 30, 1999.
COST OF REVENUE. Cost of product revenue includes costs of media,
manuals and distribution costs. Gross margin from Asymetrix's online learning
products is generally higher than that of its other products because these
products are typically sold by Asymetrix's direct sales force, as compared
with other products sold through indirect channels, such as OEMs and
resellers. Cost 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.
Total cost of revenue increased 3% from $3.7 million in the three
months ended June 30, 1998 to $3.8 million in the three months ended June 30,
1999. Total cost of revenue increased 5% from $7.0 million in the six months
ended June 30, 1998 to $7.4 million in the six months ended June 30, 1999.
Cost of online learning products revenue decreased 16% from $269,000
in the three months ended June 30, 1998 to $225,000 in the three months ended
June 30, 1999. Cost of online learning products revenue decreased 16% from
$478,000 in the six months ended June 30, 1998 to $403,000 in the six months
ended June 30, 1999. The decrease was due primarily to lower per unit costs.
Cost of other products revenue decreased 58% from $288,000 in the three
months ended June 30, 1998 to $122,000 in the three months ended June 30,
1999. Cost of other products revenue decreased 55% from $577,000 in the six
months ended June 30, 1998 to $258,000 in the six months ended June 30, 1999.
The decline was due to decreased sales of Asymetrix's other products. Total
cost of product revenue decreased 38% from $557,000 in the three months ended
June 30, 1998 to $347,000 in the three months ended June 30, 1999. Total cost
of product revenue decreased 37% from $1.1 million in the six months ended
June 30, 1998 to $661,000 in the six months ended June 30, 1999.
Total products gross margin increased from 83% in the three months
ended June 30, 1998 to 90% in the three months ended June 30, 1999. Total
products gross margin increased from 85% in the six months ended June 30,
1998 to 90% in the six months ended June 30, 1999.
Cost of services revenue increased 11% from $3.1 million in the
three months ended June 30, 1998 to $3.5 million in the three months ended
June 30, 1999. Cost of services revenue increased 13% from $6.0 million in
the six months ended June 30, 1998 to $6.8 million in the six months ended
June 30, 1999. The increase was due primarily to increased personnel costs
associated with over capacity.
Services gross margin decreased from 38% in the three months ended
June 30, 1998 to 30% in the three months ended June 30, 1999. Services gross
margin decreased from 36% in the six months ended June 30, 1998 to 27% in the
six months ended June 30, 1999. Asymetrix anticipates that cost of services
revenue will increase in
11
absolute dollars if 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 were $1.6 million in the three months ended June 30, 1998 and the
three months ended June 30, 1999. Research and development expenses as a
percentage of total revenue was unchanged at 19% in the three months ended
June 30, 1998 and in the three months ended June 30, 1999. Research and
development expenses as a percentage of total revenue increased from 19% in
the six months ended June 30, 1998 to 20% in the six months ended June 30,
1999. Asymetrix expects research and development expenses to increase in
absolute dollars in the future.
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 were $3.6
million in the three months ended June 30, 1998 and $3.7 million in the three
months ended June 30,1999. Sales and marketing expenses as a percentage of
total revenue increased from 42% in the three months ended June 30, 1998 to
43% in the three months ended June 30, 1999. Sales and marketing expenses as
a percentage of total revenue increased from 43% in the six months ended June
30, 1998 to 45% in the six months ended June 30, 1999. Asymetrix expects that
sales and marketing expenses will increase in absolute dollars in the future
as Asymetrix continues to increase its sales and marketing efforts in the
online learning market.
GENERAL AND ADMINISTRATIVE. General and administrative expenses
consist primarily of salaries and other personnel-related expenses for
Asymetrix's administrative, executive and finance personnel as well as
outside legal and audit costs. General and administrative expenses were
unchanged at $1.4 million for the three months ended June 30, 1998 and for
the three months ended June 30, 1999. General and administrative expenses
decreased 10% from $2.9 million for the six months ended June 30, 1998 to
$2.7 million for the six months ended June 30, 1999. General and
administrative expenses as a percentage of total revenue decreased from 17%
to 16% in the three months ended June 30, 1999 compared to the three months
ended June 30, 1998. General and administrative expenses as a percentage of
total revenue decreased from 18% to 17% in the six months ended June 30, 1998
compared to the six months ended June 30, 1999. Asymetrix expects that
general and administrative expenses will increase in absolute dollars in the
future as Asymetrix incurs additional costs (including directors' and
officers' liability insurance, investor relations programs and increased
professional fees) related to being a public company.
AMORTIZATION OF GOODWILL
Amortization of goodwill expense relates to the amortization of
excess purchase price over net assets from acquired companies recorded under
the purchase method of accounting. For the three months ended June 30, 1998,
Asymetrix recognized $195,000 of amortization of goodwill and for the three
months ended June 30, 1999, recognized $219,000 of amortization of goodwill.
For the six months ended June 30, 1998, Asymetrix recognized $379,000 of
amortization of goodwill and for the six months ended June 30, 1999,
recognized $438,000 of amortization of goodwill. The acquisition of
Pixelmedia in July of 1999 is expected to generate approximately $15,000 of
additional amortization of goodwill expense per quarter for the next 15 years.
OTHER INCOME (EXPENSE)
Asymetrix recorded no other expense in the three months ended June 30,
1998 and in the three months ended June 30, 1999. Asymetrix recorded no other
expense in the six months ended June 30, 1998 and in the six months ended June
30, 1999. Other interest income, net was $15,000 in the three months ended June
30, 1998 and $201,000 in the three months ended June 30, 1999. Other interest
income, net was $15,000 in the six months ended June 30, 1998 and $440,000 in
the six months ended June 30, 1999. The increase was due to interest earned on
Asymetrix's higher cash and cash equivalents balance as a result of its initial
public offering. Equity in income (losses) from Infomodelers was $2.2 million in
the six months ended June 30, 1998, representing Asymetrix's equity in the net
income (losses) from Infomodelers in such periods, and $0 in the three months
ended June 30,
12
1999. Equity in income (losses) from Infomodelers in 1998 resulted from the
sale by Infomodelers of substantially all of its assets to Visio Corporation.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, Asymetrix had cash and cash equivalents totaling
$16.2 million, a decrease of $5.5 million from December 31, 1998. The
decrease in cash and cash equivalents was due primarily to $4.4 million used
in operating activities and $1.2 million used in investing activities. At
June 30, 1999, the principal source of liquidity for Asymetrix was $20.5
million in working capital.
Asymetrix 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. Asymetrix's long-term liquidity will be affected by
numerous factors, including acquisitions of businesses or technologies,
demand for Asymetrix's online learning products and services, the extent to
which such online learning products and services achieve market acceptance,
the timing of and extent to which Asymetrix 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, Asymetrix from time to time
evaluates potential acquisitions of businesses, products or technologies that
complement Asymetrix's business. To the extent that resources are
insufficient to fund Asymetrix's activities, Asymetrix may need to raise
additional funds. There can be no assurance that such additional funding, if
needed, will be available on terms attractive to Asymetrix, or at all. If
adequate funds are not available on acceptable terms, Asymetrix 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 Asymetrix's business, operating
results and financial condition.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are
coded to accept only two digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. These date code
fields will need to distinguish 21st century dates from 20th century dates
and, as a result, many companies' software and computer systems may need to
be upgraded or replaced in order to comply with such "year 2000" requirements.
Asymetrix has designed and tested the most current versions of its
products to be year 2000 compliant. However, some of Asymetrix's customers
may be using older versions of its products that are not year 2000 compliant.
Asymetrix has been encouraging its customers to upgrade to current product
versions, and Asymetrix has been required by certain of its customers to
warrant that the current versions of its products and custom development
applications are year 2000 compliant. Although Asymetrix believes the current
versions of its products are year 2000 compliant, the current product
versions may contain undetected errors or defects associated with year 2000
date functions. These undetected date functions may result in material costs
to Asymetrix, as well as claims against Asymetrix for breach of its
warranties of year 2000 compliance. Furthermore, although Asymetrix has not
made any express representations or warranties with respect to year 2000
compliance of older versions of its products and has included clauses
disclaiming any implied warranties and limiting its liability for product
defects in the agreements under which those older versions were licensed to
customers, Asymetrix may still face claims or litigation based on older
versions of its products. Asymetrix is aware of a growing number of lawsuits
against other software vendors related to year 2000 compliance, including
lawsuits based on those companies charging their customers for new versions
of their products that are year 2000 compliant rather than providing such
versions for free. Because of the unprecedented nature of such litigation,
Asymetrix is uncertain of the extent to which it may be affected. If
Asymetrix is affected by such litigation, it could have a material adverse
effect on Asymetrix's business, operating results and financial condition.
Asymetrix is not currently a party to any such litigation.
With respect to Asymetrix's internal information technology systems,
Asymetrix's year 2000 internal readiness program primarily covers the
following activities: (1) taking inventory of hardware and software systems,
(2) determining those systems' level of year 2000 compliance, (3) assessing
the business and customer satisfaction risks associated with those systems,
(4) creating action plans to address known risks, (5) executing and
monitoring its action plans, and (6) contingency planning.
13
At this time Asymetrix has substantially completed its review of its
most mission critical information technology systems including finance, order
processing, customer service, project management, and sales management, and
believes that those systems are substantially year 2000 compliant. Asymetrix is
currently reviewing and addressing year 2000 issues in its second tier
information technology systems, including its network servers, network software
and widely used software applications. Asymetrix expects that it will
substantially complete its year 2000 readiness preparations with respect to its
second tier systems and network hardware and software systems by third quarter
1999. Asymetrix expects to continue implementation and testing of year 2000
compliance activities throughout calendar 1999. Asymetrix has no current plans
to perform an assessment of imbedded technology outside of its information
technology systems, and believes that the failure of any such imbedded
technology to be year 2000 compliant will not have a material effect on
Asymetrix's business. Asymetrix has no current plan to retain any outside
consultants to assist in its year 2000 compliance activities.
Asymetrix has not sent detailed questionnaires to vendors and
service providers to certify year 2000 readiness, but Asymetrix has obtained
or relied upon published assurances of year 2000 compliance in relation to
purchases of new information technology systems and Asymetrix has conducted
and is continuing to conduct its own internal year 2000 analysis. While
Asymetrix has no plans to broadly survey its vendors and service providers
for year 2000 compliance, Asymetrix does intend to obtain and review the year
2000 readiness statements of its significant vendors who are required to file
proxy statements and annual and quarterly reports with the SEC in order to
help determine their level of year 2000 compliance. Asymetrix does not rely
on products and services provided by any single vendor in the conduct of its
business, and believes that even if the ability of one of its suppliers to
provide goods or services was negatively impacted by a year 2000 problem,
alternative sources would be available to supply such goods and services on
commercially reasonable terms.
Asymetrix has not sent and does not currently plan to send
questionnaires to its customers to independently verify its customers' level
of year 2000 compliance. However, most of Asymetrix's significant customers
are large business enterprises and government agencies which Asymetrix
believes are devoting significant resources to ensuring their own internal
year 2000 compliance. Most of Asymetrix's significant customers are also
required to file proxy statements and annual and quarterly reports with the
SEC disclosing their own year 2000 readiness, and Asymetrix intends to obtain
and review such disclosure for its significant customers to help determine
their level of year 2000 compliance. Moreover, Asymetrix has received and
responded to a large number of detailed year 2000 questionnaires from its
customers as a part of their own year 2000 compliance programs. Asymetrix
believes that its customers' or potential customers' year 2000 compliance
efforts have affected their purchasing patterns as these companies or
agencies expend significant resources and focus personnel on ensuring their
own internal year 2000 compliance. Devoting resources and personnel to year
2000 compliance may result in reduced funds available to purchase other
products or services and may delay the implementation of new information
technology systems such as those offered by Asymetrix, either of which could
have a material adverse effect on Asymetrix's business, operating results and
financial condition.
Asymetrix estimates that the total cost of evaluating and addressing
its year 2000 issues will be approximately $100,000. Asymetrix has spent
$9,500 and $19,000 in the three and six months ending June 30, 1999 and to
date, $57,000 in connection with evaluating and addressing year 2000 issues.
Such expenditures represented 6% of Asymetrix's total information technology
budget. All funds used for evaluating and addressing year 2000 issues are
from Asymetrix's information technology budget and no additional budget
dollars were allocated specifically to address year 2000 compliance. As a
result, resources devoted to year 2000 compliance are not available for other
information technology systems or projects.
Although Asymetrix does not believe that it will incur any material
costs or experience material disruptions in its business associated with
preparing its internal systems for the year 2000, Asymetrix may experience
serious unanticipated negative consequences and material costs caused by
undetected errors or defects in the technology used in its internal systems,
which are composed of third party software, third party hardware and
internally developed software, or in the internal systems of its vendors or
customers. The most reasonably likely worst case scenarios would include: (1)
loss or corruption of data contained in Asymetrix's internal information
systems, (2) hardware failure, (3) the failure of infrastructure services
provided by government agencies and other third parties (e.g., electricity,
phone service, water transport, internet services, etc.); and (4) the failure
of the internal systems of Asymetrix's vendors or customers, resulting in
problems with providing services or making payments to Asymetrix. Asymetrix
is in the early phases of contingency planning at this time and expects to
undertake more in depth contingency planning following the completion of its
analysis and correction of its internal year 2000 issues.
14
Asymetrix expects its contingency plans to include, among other things,
manual work-arounds for software and hardware failures, as well as
substitution of systems or vendors, if necessary.
FACTORS THAT MAY AFFECT FUTURE RESULTS OF OPERATIONS
LIMITED OPERATING HISTORY IN ONLINE LEARNING MARKET. Asymetrix was
incorporated in December 1984. Until early 1995, Asymetrix was engaged in
various technology and development activities and in the development and
marketing of multimedia authoring products, database and Internet tools,
World Wide Web publishing products and other ancillary products, most of
which are not included as part of Asymetrix's online enterprise learning
solution. Starting in 1995, Asymetrix recapitalized and redirected its focus
to the development and marketing of authoring products and a learning
management system designed to capitalize on the advantages of the Internet as
a means of delivering technology-based training applications. Since 1995,
Asymetrix has also introduced a variety of professional services.
Accordingly, Asymetrix has only a limited operating history upon which to
base an evaluation of its current business and prospects. Asymetrix's
prospects must be considered in light of the risks and uncertainties
encountered by companies in the early stage of development, particularly
companies in new and rapidly evolving markets such as online enterprise
learning and by companies engaged in a business transition from developing
and marketing software products to offering an integrated product and
services solution. Such risks include, but are not limited to the demand for
technology-based training and online enterprise learning applications; the
management of both internal and acquisition-based growth; demand for
Asymetrix's products and services; the ability of Asymetrix to meet the needs
of sophisticated corporate customers; and competition. To address these
risks, Asymetrix must, among other things, successfully introduce new
products and services; achieve commercial acceptance of its new products and
services; continue to expand its professional services business; successfully
identify, acquire and integrate acquired businesses; respond to competitive
developments; attract, integrate, retain and motivate qualified personnel;
and address new or evolving technologies and standards. Asymetrix may not be
successful in addressing such risks and the failure to do so could have a
material adverse effect on Asymetrix's business, operating results and
financial condition.
Asymetrix has recently announced its click2learn.com learning portal
web site. Broad and timely acceptance of this web site is important to the
future success of the Asymetrix business and is subject to a number of
significant risks: education and instruction over the Internet and on the
World Wide Web is a new market; Asymetrix has not previously hosted, operated
and managed an e-commerce web site; Asymetrix will need to enter into
distribution relationships with high traffic web sites as well as with
creators of learning content; and Asymetrix will need to attract user traffic
to this web site. If this new click2learn.com web site is not successful, the
business of Asymetrix could be materially harmed.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. Asymetrix'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 Asymetrix's control. Factors that may adversely
affect Asymetrix's quarterly operating results include the demand for
technology-based training in general and demand for online enterprise
learning solutions in particular; 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 inability
of Asymetrix to meet its own or client project milestones or to meet client
expectations; the effect of year 2000 issues on the purchasing decisions of
customers and potential customers; market acceptance of Asymetrix's or
competitors' products and services; the ability of Asymetrix to develop and
market new or enhanced products and services in a timely manner and market
acceptance of such products and services; the timing of revenue recognition;
charges related to acquisitions; competitive conditions; technological
changes; personnel changes; general economic conditions; economic conditions
specific to the technology-based training and online learning markets; market
acceptance of the click2learn.com web site; the ability of Asymetrix to derive
revenues from the click2learn.com web site; and the ability to attract users
and content providers to the click2learn.com web site.
With its emphasis on providing an online enterprise learning
solution, Asymetrix is targeting its selling and marketing efforts towards
customers with the potential need for enterprise-wide solutions. Because the
implementation of its solutions may require an enterprise-wide decision by
prospective customers, Asymetrix may be required to provide a significant
level of education to prospective customers regarding Asymetrix's solutions
before a sale is completed. Therefore, Asymetrix believes that the period
between initial contact and the sale of Asymetrix's solutions could be
lengthy, and the implementation cycle could lengthen because of increases in
the size and complexity of customer implementations. Uncertainty of timing
with respect to sales or implementations could have a material adverse effect
on Asymetrix's business and operations and cause Asymetrix's operating
results to vary significantly from quarter to quarter. Therefore, Asymetrix's
operating results for any particular quarterly period may not be indicative
of future operating results.
MANAGEMENT OF GROWTH; DEPENDENCE ON KEY PERSONNEL. Asymetrix's
future success will be highly dependent on the performance of its senior
management team and other key employees and on Asymetrix's ability to
attract, integrate, motivate and retain additional highly skilled technical,
sales and marketing and professional services personnel. There is intense
competition for such personnel in the areas of Asymetrix's activities.
Asymetrix does not have employment agreements with most of its executives or
other key employees. In addition, Asymetrix does not maintain key person life
insurance for any of its officers or key employees. The loss of the services
of any of Asymetrix's senior management team or other key employees or the
failure of Asymetrix to attract, integrate,
15
motivate and retain additional key employees, including professional services
personnel, could have a material adverse effect on Asymetrix's business,
operating results and financial condition.
CUSTOMER REQUIREMENTS; FIXED PRICE ENGAGEMENTS. The online learning
market is a developing market characterized by complex and varied customer
expectations and requirements, a lack of technical standards and frequent
introductions and announcements of new products and services. Because
Asymetrix's online learning solution is targeted at customers with
enterprise-wide deployments in an emerging market, customers and potential
customers may have a greater sensitivity to product integration,
interoperability and defects than customers in the market for software
products generally. In addition, these customers may have evolving and
rapidly changing requirements for their online enterprise learning needs,
which Asymetrix must address satisfactorily. Many of Asymetrix's professional
services engagements require Asymetrix to develop learning applications to
suit unique customer requirements. Asymetrix's failure or inability to meet a
customer's expectations or requirements in the performance of its services
could potentially damage Asymetrix's reputation or result in a claim for
substantial damages against Asymetrix, regardless of Asymetrix's
responsibility for such failure. In addition, most such professional services
engagements are billed on a fixed-price basis. Asymetrix's failure to
estimate accurately the resources and time required for an engagement, to
manage client expectations effectively regarding the scope of services to be
delivered for the estimated fees or to complete fixed-price engagements
within budget, on time and to clients' satisfaction would expose Asymetrix to
risks associated with cost overruns and may expose Asymetrix, in certain
cases, to penalties, any of which could have a material adverse effect on
Asymetrix's business, operating results and financial condition.
DEVELOPING MARKET. The market for online enterprise learning is a
new and emerging market. Although technology-based training applications have
been available for several years, they currently account for only a small
portion of the overall training market. The failure of technology-based
training, and online learning in particular, to gain wide market acceptance
within the time frame anticipated by Asymetrix could have a material adverse
effect on Asymetrix's business, operating results and financial condition.
Asymetrix's success depends on the continued adoption of the Internet and
intranets as means of communication, particularly for corporate training and
education. Even if the Internet and intranets are widely adopted, the
adoption of these networks for corporate training and education, particularly
by companies that have relied on traditional means of training their
personnel, will require broad acceptance of new training methods. In
addition, companies that have already invested substantial resources in other
methods of corporate training and education may be reluctant to adopt a new
strategy that may limit or compete with their existing investments.
COMPETITION. The online 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, Asymetrix expects that a
number of new competitors will enter this market in the future, and a number
of large companies have announced an intention to enter the market for online
learning and technology-based training. Increased competition could result in
pricing pressures, reduced margins or the failure of Asymetrix's products and
services to achieve or maintain market acceptance, any of which could have a
material adverse effect on Asymetrix's business, operating results and
financial condition. Furthermore, several of Asymetrix's current and
potential competitors have longer operating histories and significantly
greater financial, technical, marketing and other resources than Asymetrix
and therefore may be able to respond more quickly than Asymetrix to new or
changing opportunities, technologies, standards and customer requirements. As
a result of the foregoing and other factors, there can be no assurance that
Asymetrix will compete effectively with current or future competitors or that
competitive pressures faced by Asymetrix will not have a material adverse
effect on Asymetrix's business, operating results and financial condition.
GENERAL ECONOMIC CONDITIONS. Asymetrix's revenue is subject to
fluctuation as a result of general economic conditions. A significant portion
of Asymetrix's revenue is derived from the sale of products and services to
Fortune 1000 companies, educational organizations and government agencies,
which historically have adjusted their expenditures for education and
training during economic downturns. Should the economy weaken in any future
period, these organizations may not increase or may reduce their expenditures
on education and training generally, and on technology-based training and
online learning in particular, which could have an adverse effect on
Asymetrix's business, operating results and financial condition.
VOLATILITY OF STOCK PRICE. The stock market from time to time has
experienced significant price and volume fluctuations. In addition, the
market price of Asymetrix common stock has been highly volatile since the
initial
16
public offering. Factors such as fluctuations in Asymetrix's operating
results, announcements of technological innovations or new products by
Asymetrix or its competitors, analysts' reports and projections and general
market conditions may have a significant effect on the market price of
Asymetrix'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 Asymetrix could result in substantial costs and a
diversion of management's attention and resources, which could have a
material adverse effect on Asymetrix's business, operating results and
financial condition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Asymetrix holds its assets primarily in cash and cash equivalents,
such as short-term marketable debt securities, money market funds and other
cash equivalents. Asymetrix minimizes its risk by investing in financial
instruments with a maturity of three months or less. Asymetrix does not use
derivative financial instruments.
17
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In connection with Asymetrix's initial public offering, it
registered for public sale 3,000,000 shares of common stock, all of which
were sold by Asymetrix. 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 Asymetrix received net proceeds of
$29,331,000.
From the effective date of the Registration Statement through June
30, 1999, Asymetrix has incurred an estimated $3,944,000 in expenses 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 Asymetrix, or their associates; (2) persons
owning ten percent or more of any class of equity securities of Asymetrix; or
(3) affiliates of Asymetrix.
From the effective date of the Registration Statement through June
30, 1999, Asymetrix has applied approximately $13.1 million of the offering
proceeds to working capital requirements. None of these payments were made,
directly or indirectly, to: (1) directors or officers of Asymetrix, or their
associates; (2) persons owning ten percent or more of any class of equity
securities of Asymetrix; or (3) affiliates of Asymetrix. To date, Asymetrix
believes that it has used the offering proceeds in a manner consistent with
the use of proceeds described in the Registration Statement. The remaining
$16.2 million of the offering proceeds is invested in short-term marketable
debt securities, money market funds and other cash equivalents.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
The 1999 Annual Meeting of the Stockholders of Asymetrix was held on
May 25, 1999 at 110 - 110th Avenue NE, Bellevue, Washington. The meeting was
held pursuant to a Notice of Annual Meeting of Stockholders mailed to the
stockholders on April 22, 1999. Four proposals were submitted to the
stockholders and approved at the annual meeting, as follows:
PROPOSAL 1: Election of Sally Narodick and Joseph DiNucci as Class I
directors to serve until the annual meeting of the stockholders to be held in
2002. The number of votes cast for or withheld from each nominee, both in person
and by proxy, was as follows:
SALLY NARODICK JOSEPH DINUCCI
-------------- --------------
Votes For 10,608,690 10,607,117
Votes Withheld 19,904 21,477
18
The following table sets forth the name of each director elected at
the meeting, and the name of each other director whose term of office as a
director continued after the meeting
TERM
DIRECTOR NAME EXPIRES
------------- -------
DIRECTORS ELECTED:
------------------
Sally Narodick 2002
Joseph DiNucci 2002
CONTINUING DIRECTORS:
---------------------
Kevin Oakes 2000
Shelley Harrison, Ph.D. 2000
Ronald S. Posner 2000
Bert Kolde 2001
James A. Billmaier 2001
PROPOSAL 2: An amendment of Asymetrix's 1998 Equity Incentive Plan
to increase the number of shares of common stock reserved for issuance
thereunder from 1,500,000 shares to 2,500,000 shares. The number of votes
cast for, cast against or abstaining from Proposal 2, both in person and by
proxy, and broker non-votes was as follows:
Votes For 8,120,405
Votes Against 1,308,662
Abstaining 19,841
Broker Non-votes 1,179,686
PROPOSAL 3: Approval of the adoption by Asymetrix of the 1999 Employee
Stock Purchase Plan and the reservation for issuance thereunder of up to 450,000
shares of common stock during each calendar year that the 1999 Employee Stock
Purchase Plan remains in effect. The number of votes cast for, cast against or
abstaining from Proposal 3, both in person and by proxy, and broker non-votes
was as follows:
Votes For 8,674,599
Votes Against 759,998
Abstaining 14,311
Broker Non-votes 1,179,686
PROPOSAL 4: Ratification of the appointment of KPMG LLP as Asymetrix's
independent accountants to perform the audit of Asymetrix's financial statements
for 1999. The number of votes cast for, cast against or abstaining from Proposal
2, both in person and by proxy, was as follows:
Votes For 10,613,482
Votes Against 6,750
Abstaining 8,362
Item 5. Other Information
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
10.1 Asymetrix's 1998 Equity Incentive Plan
10.2 Asymetrix's 1999 Employee Stock Purchase Plan
27 Financial Data Schedule
19
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the three months
ended June 30, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ASYMETRIX LEARNING SYSTEMS, INC.
August 16, 1999 /s/ John D. Atherly
- ---------------------------- --------------------------------------------
Date John D. Atherly
Vice President, Finance and Administration
and Chief Financial Officer
(Duly Authorized Officer and Chief Accounting
Officer)
20
EXHIBIT INDEX
10.1 Asymetrix's 1998 Equity Incentive Plan
10.2 Asymetrix's 1999 Employee Stock Purchase Plan
27 Financial Data Schedule
21