10-Q/A 1 a2056052z10-qa.txt FORM 10-Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (MARK ONE) /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 OR / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITIONAL PERIOD FROM TO COMMISSION FILE NUMBER 0-24936 ------------------------------ LEARN2.COM, INC. (Exact Name of Registrant as Specified in its Charter) DELAWARE 75-2480669 (State or other Jurisdiction (I.R.S. Employer Identification No.) of Incorporation or Organization) 1311 MAMARONECK AVENUE, 10605 SUITE 210 (Zip Code) WHITE PLAINS, NEW YORK (Address of Principal Executive Offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (914) 682-4300 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 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 of the registrant's common stock outstanding as of August 7, 2001 was approximately 52,881,618. LEARN2.COM, INC. FORM 10-Q FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001 INDEX

1 PART I. FINANCIAL INFORMATION ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS LEARN2.COM, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)

The accompanying notes are an integral part of these condensed consolidated balance sheets. 2 LEARN2.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements. 3 LEARN2.COM, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (UNAUDITED)

The accompanying notes are an integral part of these condensed consolidated financial statements. 4 LEARN2.COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS Learn2.com, Inc.'s ("Learn2") offerings include engaging online and physical learning and training products and complementary services, commonly referred to as e-learning services. Learn2 markets these services to corporate, government and individual clients and customers. Learn2 believes its mix of products and services provides it with a competitive advantage toward becoming the e-learning service provider of choice to its customers. Learn2 operates its business in two operating segments; Learning Services and Broadcast Messaging. CURRENT DEVELOPMENTS On April 19, 2001, in order to facilitate Learn2's continued growth, Learn2 and E-Stamp Corporation (E-Stamp) entered into a Merger Agreement. Pursuant to the terms of the Merger Agreement, each share of Learn2 common stock will be converted into the right to receive shares of E-Stamp common stock such that the holders of E-Stamp common stock immediately prior to the merger will hold approximately 50.1%, and the former holders of Learn2's common stock (including the holder of Learn2's $10.0 million convertible debenture) (Note 3) will hold approximately 49.9%, of the combined company. The holder of the convertible debenture has agreed that, immediately prior to the completion of the merger, the debenture will be redeemed in exchange for E-Stamp's payment of $1.0 million and the issuance of approximately 26.5 million shares of Learn2's common stock. On April 25, 2001, E-Stamp loaned Learn2 $2.0 million. In connection with this loan, Learn2 issued to E-Stamp a $2 million convertible promissory note that bears interest at 10% per annum. The principal amount of the note is due and payable on April 30, 2002. The note provides that upon the occurrence of specified events of default, E-Stamp may accelerate the maturity date of the note. The merger is subject to customary closing conditions, including approval by the stockholders of E-Stamp and Learn2. On August 2, 2001, Learn2's common stock was delisted from the Nasdaq National Market and began trading on the OTC Bulletin Board. BASIS OF PRESENTATION As of March 31, 2001, Learn2 was in default under the terms of its $10.0 million convertible debenture. As described in Note 3, the holder of Learn2's $10 million convertible debenture could declare the convertible debenture due and payable upon the earlier of the dates described in the waiver. If the merger is not completed and Learn2 is unable to obtain an additional waiver from the holder of the convertible debenture, Learn2 may not have the resources to repay its obligations under the convertible debenture or convertible promissory note. These conditions raise substantial doubt about Learn2's ability to continue as a going concern. As a result, Learn2's audited financial statements for the year ended December 31, 2000 have been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities in the normal course business. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Learn2's plan is to complete the merger in order to overcome this uncertainty. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (normal and recurring in nature) necessary to present fairly the financial position, results of operations and cash flows for the periods presented in conformity with accounting principles generally accepted in the United States applicable to interim periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full fiscal year or for any future period. The accompanying unaudited financial statements should be read in conjunction with the consolidated financial statements and related notes included in Learn2's Annual Report on Form 10-K/A for the year ended December 31, 2000. Certain reclassifications have been made to the prior year's financial statements to conform to the current period presentation. MANAGEMENT USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 5 LEARN2.COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 1--ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. As of March 31, 2001, Learn2 had cash and cash equivalents of approximately $3.4 million and a working capital deficiency of approximately $8.6 million. NOTE 2--CHANGE IN ACCOUNTING PRINCIPLE Effective January 1, 2000, Learn2 adopted SAB No. 101. Learn2's adoption of SAB 101 resulted in a change in method of accounting for cooperative advertising expenses. In accordance with previously existing accounting principles, Learn2 recorded cooperative advertising expenses as a sales and marketing expense. During 2000, as a result of new interpretations of generally accepted accounting principles by the SEC through the issuance of SAB No. 101, Learn2 was required to change the accounting policy for cooperative advertising, to record these expenses as a reduction of gross revenues. The effect of the adoption of SAB No. 101 as of January 1, 2000 for the quarter ended March 31, 2000 was to decrease both revenues and sales and marketing expenses by approximately $1.0 million and thus the adoption of SAB No. 101 resulted in no change to previously reported results of operations, as this was only a reclassification between revenue and sales and marketing expenses. Learn2's revenues and sales and marketing expenses for the quarters ended March 31, 2001 and 2000 reflect this change. NOTE 3--CONVERTIBLE DEBENTURE On March 10, 2000, Learn2 entered into a Securities Purchase Agreement and pursuant thereto it issued a $10.0 million 6% convertible debenture due March 10, 2003. The debenture is convertible at any time at the option of the holder at a conversion price of $0.41 per share (as reset on March 10, 2001). In connection with the reset on March 10, 2001, Learn2 recorded interest expense of $9.0 million as a result of the reduction of the original conversion price from $6.00 to $0.41. The debenture is subject to anti-dilution provisions. Under certain conditions, the debenture automatically converts after one year. The conversion price of the debenture also may be reset to the market value of Learn2's common stock on the second anniversary of the convertible debenture if the price of Learn2's common stock declines below $0.41 on the second anniversary. In addition, the holder was granted a five-year warrant to purchase 337,268 shares of Learn2 common stock exercisable at $7.41 per share. The value of this warrant has been recorded as a debt discount and is being amortized over the life of the related debt. On April 13, 2001, the holder executed a waiver, agreeing not to exercise any of its rights under the debenture to declare an event of default or convert the debenture with certain exceptions as provided in the waiver; with respect to Learn2's failure to register shares of common stock, issuable as a result of the conversion price reset on March 10, 2001, provided that Learn2 filed a registration statement within 30 days after the date the waiver would have expired and such registration statement is declared effective by the Securities and Exchange Commission within 90 days after such date. On April 19, 2001, in connection with the merger, the holder executed a new waiver agreeing not to exercise any of its rights under the debenture to declare an event of default or convert the debenture with certain exceptions as provided in the waiver. Except as set forth in the second succeeding sentence, the new waiver expires upon the earlier of (x) the termination of the merger agreement, (y) September 30, 2001 and (z) the date of the occurrence of an event of default under the $2 million convertible promissory note issued to E-Stamp by Learn2. The dates between April 19, 2001 and the expiration of the new waiver are referred to as the standstill period. However with respect to an event of default caused by Learn2's failure to register shares of common stock, issuable as a result of the conversion price reset on March 10, 2001, the new waiver would not expire and would remain effective if Learn2 files a registration statement within 30 days after the end of the standstill period covering the shares of Learn2 common stock issuable under the debenture following the reset of the conversion price of the debenture and such registration statement is declared effective by the Securities and Exchange Commission within 90 days after the end of the standstill period. Because Learn2 cannot control the cure for events of default under the debenture, Learn2 reclassified the debenture as a current liability as of March 31, 2001. 6 LEARN2.COM, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) NOTE 3--CONVERTIBLE DEBENTURE (CONTINUED) On April 19, 2001, Learn2, E-Stamp and the holder of the debenture entered into a redemption and termination agreement (the "Redemption and Termination Agreement"). Pursuant to the Redemption and Termination Agreement, the holder of the debenture has agreed that, immediately prior to the completion of the merger between Learn2 and E-Stamp, the debenture will be redeemed in exchange for E-Stamp's payment of $1.0 million and the issuance of approximately 26.5 million shares of Learn2's common stock. NOTE 4--SEGMENT INFORMATION Based on the criteria established by SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," Learn2 operates in two principal business segments: Learning Services and Broadcast Messaging Services. SFAS No. 131 establishes standards for the way public business enterprises report information about operating segments. It also establishes standards for related disclosures about products and services, geographic areas, and major customers. Management evaluates the performance of each segment on their respective revenues and gross profits. Learn2 does not allocate corporate overhead costs between the two segments. Management does not believe that allocating these expenses is material in evaluating each segment's performance. The following tables set forth industry segment information for the quarters ended March 31, 2001 and 2000:

7 NOTE 5--LEGAL Learn2 is involved in claims and lawsuits that generally are incidental to its business. Learn2 is contesting vigorously all such matters and believes that their ultimate resolution will not have a material adverse effect on Learn2's consolidated financial position, results of operations or cash flows. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following information should be read in conjunction with the financial statements and the notes thereto and in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations in Learn2's Annual Report on Form 10-K/A for the year ended December 31, 2000. In order to keep our stockholders informed of Learn2's future plans and objectives, this Quarterly Report on Form 10-Q and other reports and statements issued by Learn2 from time-to-time contain, among other things, certain statements concerning Learn2's future plans, objectives, performance, intentions and expectations that are or may be deemed to be "forward-looking statements". For example, the words "believe," "expect," "anticipate," "project" and similar expressions should alert you that this is a forward-looking statement. Forward-looking statements speak only as of the date the statement is made. Learn2's ability to do this has been fostered by the Private Securities Litigation Reform Act of 1995, which provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information so long as those statements are accompanied by meaningful cautionary statements identifying important factors that could cause actual results to differ materially from those discussed in the statement. Although Learn2 believes that its expectations are based on reasonable assumptions, these forward-looking statements are subject to a number of known and unknown risks and uncertainties that could cause Learn2's actual results, performance and achievements to differ materially from those described or implied in the forward-looking statements. These factors include among others, Learn2's ability to complete new products at planned costs and on planned schedules, Learn2's ability to attract and retain strategic partners and consummate business combinations, Learn2's ability to leverage intangible assets, and Learn2's ability to maintain a sufficient level of financing for its business strategy. Additional factors that are beyond Learn2's control and could influence results include market acceptance of Learn2's products and services and adoption of the Internet as a medium of commerce and communication. See the discussion of Learn2's business and a description of the various factors that could affect materially Learn2's ability to achieve the anticipated results described in the forward-looking statements that are included in Item 1 of Learn2's Annual Report on Form 10-K/A for the year ended December 31, 2000. 8 CURRENT DEVELOPMENTS On April 19, 2001, in order to facilitate Learn2's continued growth, Learn2 and E-Stamp entered into a Merger Agreement. Pursuant to the terms of the Merger Agreement, each share of Learn2 common stock will be converted into the right to receive shares of E-Stamp common stock such that the holders of E-Stamp common stock immediately prior to the merger will hold approximately 50.1%, and the former holders of Learn2's common stock (including the holder of Learn2's $10.0 million convertible debenture) will hold approximately 49.9%, of the combined company. The holder of the convertible debenture has agreed that, immediately prior to the completion of the merger, the debenture will be redeemed in exchange for E-Stamp's payment of $1.0 million and the issuance of approximately 26.5 million shares of Learn2's common stock. On April 25, 2001, E-Stamp loaned Learn2 $2.0 million. In connection with this loan, Learn2 issued to E-Stamp a $2 million convertible promissory note that bears interest at 10% per annum. The principal amount of the note, is due and payable on April 30, 2002. The note provides that upon the occurrence of specified events of default, E-Stamp may accelerate the maturity date of the note. The merger is subject to customary closing conditions, including approval by the stockholders of E-Stamp and Learn2. In July 2001, ViaGrafix Corporation, a wholly-owned subsidiary of Learn2, entered into a letter of intent to sell Etracks.com, Inc. to the president of Etracks for a purchase price of $2.5 million. Under the terms of the letter of intent, at the closing of the transaction, $1.0 million of the purchase price would be paid in cash and $1.5 million would be paid pursuant to the issuance of a senior secured promissory note. The letter of intent will expire on November 16, 2001. If the contemplated transaction is not completed, Etracks.com, Inc. will continue to operate its historical business as a subsidiary of ViaGrafix. On August 2, 2001, Learn2's common stock was delisted from the Nasdaq National Market and began trading on the OTC Bulletin board. The delisting of Learn2's common stock from the Nasdaq National market is an event of default under Learn2's $10 million convertible debenture. The holder of Learn2's $10 million convertible debenture agreed to waive its rights under the convertible debenture until the earlier of the termination of the merger agreement, September 30, 2001 and an event of default under the convertible promissory note. If the merger is not completed and Learn2 is unable to obtain an additional waiver from the holder of the convertible debenture, Learn2 is unable to obtain an additional waiver from the holder of the convertible debenture, Learn2 may not have the resources to repay its obligations under the convertible debenture or the convertible promissory note. As a result of the event of default under the convertible debenture, Learn2's auditors have revised their opinion regarding the Company's financial statements for the year ended December 31, 2000 and expressed substantial doubt as to Learn2's ability to continue as a going concern. Because Learn2 cannot control the cure of default under the debenture, Learn2 reclassified the debenture as a current liability as of March 31, 2001. OVERVIEW Learn2's offerings include engaging online and physical learning and training products and complementary services, commonly referred to as e-learning services. Learn2 markets these services to corporate, government and individual clients and customers. Learn2 believes its mix of products and services provides Learn2 with a competitive advantage toward becoming the e-learning service provider of choice to its customers. Learn2's products provide an engaging learning experience to corporate and individual customers through interactive multimedia and animated tutorials and courseware. Learn2's corporate and government customers have access to these high quality tutorials and additional features such as reporting and administration through www.Learn2University.com. Additionally, through www.Learn2.com, visitors can access Learn2's content that includes tips and step-by-step instructions on a broad spectrum of skills, activities and tasks, as well as the multimedia tutorials. Learn2's e-learning products are also available on CD-ROM and video and can be purchased from Learn2's Website and major retailers nationwide. Through Learn2's subsidiary, eTracks, Learn2 provides permission e-mail marketing and tracking services to customers that have "opt-in" e-mail customer lists. eTracks' services include e-mail creation, delivery, tracking and response analysis for a high volume of client e-mail accounts in a short period of time. Learn2 also has developed a proprietary member database of over 500,000 Internet users who have "opted-in" to receive promotional e-mails. eTrack's clients can supplement their internally developed customer lists with this member database. In addition, during 2000 and prior, through periodic e-mails, eTracks marketed various electronics and other products to its members. The demand for permission e-mail marketing and tracking services has increased over the past few years and we expect that the demand will continue to grow for the foreseeable future. As reported by eMarketer in the June 2001 edition of The e-mail Marketing Report, total e-mail marketing spending in the US in 2000 was just over $1 billion, including $496 million on e-mail ads, up from $422 million in 1999. According to eMarketer, by year-end 2003, US businesses and other organizations will spend almost $4.6 billion, inlcluding $2.2 billion on e-mail advertising expenditures. As a result, Learn2 expects that the demand will continue to grow for the foreseeable future. We believe that eTracks' technology enables more robust and useful tracking capabilities than its competitors'. Learn2's goal is to become the world's leading provider of engaging e-learning products and services. To achieve this goal, Learn2 expects to focus on our four primary objectives: creating a trusted brand, developing and owning creative and engaging content, leveraging our patented state-of-the-art technologies and offering services to meet the needs of Learn2's clients. 9 X RESULTS OF OPERATIONS Revenues and gross profits for the quarter ended March 31,2001 increased over the quarter ended March 31,2000 as a result of volume increases in corporate training revenue and revenue associated with Learn2's custom business. Operating expenses decreased to $6.0 million from $9.6 million in the first quarter of 2000.The decrease in expenses is attributable primarily to cost reduction efforts implemented in May of 2000 and January of 2001.Net loss increased to $10.9 from $5.9 million for the quarter ended March 31,2000. The first quarter net loss included the additional interest expense of $9.0 million recorded as a result of the beneficial conversion price reset from $6.00 to $0.41 on the $10.0 million convertible debenture. Excluding the effect of the additional interest expense, the loss for the quarter was $1.9 million. The following table sets forth industry segment information for the three months ended March 31, 2001 and 2000:

LEARNING SERVICES Learning Services revenues consist primarily of learning products and services sold or distributed through the Internet and of physical products sold through traditional retail channels. Cost of revenues consists of the expenses associated with the production and shipment of Learn2's physical products. In addition, it includes related costs to develop custom courses for specific customers. Net revenues for Learning Services increased approximately 17.2% to $4.9 million for the quarter ended March 31,2001 from $4.2 million for the quarter ended March 31, 2000.For the quarter ended March 31, 2001, net revenues were composed of corporate learning products, technologies and services sold, licensed or distributed through the Internet of approximately $3.6 million or 73.5% of revenues, consumer learning products sold through traditional retail channels and on-line of $1.2 million or 24.5% of revenues, and other revenue of $80,000 or 2.0% of revenues. For the quarter ended March 31,2000,these revenues were composed of corporate learning products, technologies and services sold, licensed or distributed through the Internet of approximately $1.9 million or 45.2% of revenues, consumer learning products sold through traditional retail channels and on-line of $1.6 million or 38.1%, software sales related to our CAD product line, which was sold in March 2000,of $400,000 or 9.6% of revenues and other revenue of $300,000 or 7.1% of revenues. Learning Services gross profit was approximately 75.2% of net revenues for the quarter ended March 31, 2001 compared to 74.0% of net revenues for the quarter ended March 31, 2000.The change in gross profit was the result of the differences in the composition of revenues as noted above. BROADCAST MESSAGING SERVICES Broadcast Messaging Services consists primarily of permission e-mail marketing and tracking services and e-commerce. Cost of revenues consists of the expenses associated with the delivery of permission e-mail and tracking services, including Internet access and personnel related costs incurred to operate our marketing and tracking services and cost of merchandise sold through our e-commerce operations. Net revenues for the Broadcast Messaging Services decreased approximately 49.3% to $645,000 for the quarter ended March 31, 2001, compared to $1.3 million for the quarter ended March 31, 2000. Broadcast Messaging Services gross profit was 93.6% of net revenues for the quarter ended March 31, 2001 compared to 46.2% of net revenues for the quarter ended March 31, 2000. The increase in gross profit was result of a change in the composition of revenues. 2001 revenue consisted primarily of broadcast messaging revenue which has higher gross margins compared to 2000 revenue which also consisted of product revenues which have lower gross margins. OPERATING EXPENSES RESEARCH AND PRODUCT DEVELOPMENT EXPENSES Research and product development expenses were approximately $697,000 for the quarter ended March 31, 2001 compared to $2.1 million for the quarter ended March 31, 2000. Research and product development expenses relate to the development and enhancement of Learn2's technologies, content, Website and product design. The decrease in expenses is attributable primarily to cost reduction efforts implemented in May 2000 and January 2001. Learn2 believes that investment in research and development is required to remain competitive. Therefore, Learn2 anticipates continued spending for research and development in future periods. 10 SALES AND MARKETING EXPENSES Sales and marketing expenses were approximately $2.1 million for the quarter ended March 31, 2001, compared to $3.5 million for the quarter ended March 31, 2000. Sales and marketing expenses consist primarily of salaries, commissions, advertising, trade show expenses and costs of marketing materials. The decrease in expenses is attributable primarily to cost reductions efforts implemented in May 2000 and January 2001. Sales and marketing expenses may increase in future periods in our continued effort to achieve growth in revenue and introduce new products. GENERAL AND ADMINISTRATIVE EXPENSES General and administrative expenses were approximately $1.6 million for the quarter ended March 31, 2001, compared to $2.5 million for the quarter ended March 31, 2000. General and administrative expenses consist primarily of personnel related costs, occupancy costs and professional service fees. The decrease in expenses is attributable primarily to cost reduction efforts implemented in May of 2000 and January of 2001 DEPRECIATION AND AMORTIZATION Depreciation and amortization expenses were approximately $1.2 million for the quarter ended March 31, 2001 and $1.4 million for the quarter ended March 31, 2000. The 2001 expenses included approximately $337,000 of depreciation on fixed assets, $191,000 of amortization of capitalized content development and $670,000 of amortization of goodwill, intangible assets, and capitalized software related to acquisitions. The 2000 expenses included approximately $230,000 of depreciation on fixed assets, and $1.2 million of amortization of goodwill, intangible assets, and capitalized software related to acquisitions. The decrease in amortization of goodwill and other intangibles is attributable to the decrease in the carrying values of those assets that were written down at December 31, 2000. NON-RECURRING CHARGES Non-recurring charges for the quarter ended March 31, 2001 were approximately $380,000 and were related to severance costs associated with a workforce reduction in January 2001. INTEREST AND OTHER, NET Interest and other, net was approximately $221,000 of expense compared to $113,000 of income for the quarters ended March 31, 2001 and 2000, respectively. Interest expense primarily related to the $10.0 million convertible debenture issued on March 10, 2000. BENEFICIAL CONVERSION FEATURE In connection with the reset of the conversion price on the $10.0 million convertible debenture, on March 10, 2001, Learn2 recorded additional interest expense of $9.0 million as a result of the reduction of the original conversion price from $6.00 to $0.41. NET LOSS The net loss was approximately $10.9 million for the quarter ended March 31, 2001, compared to $5.8 million for the quarter ended March 31, 2000 and was attributable to the factors discussed above. Excluding the effect of the additional interest expense of $9.0 million recorded as a result of the reset on the $10.0 million convertible debenture, the loss for the quarter was $1.9 million or $0.04 per share. 11 LIQUIDITY AND CAPITAL RESOURCES Since inception, Learn2 has financed its operations primarily through private placements of equity and debt securities and public offerings of Learn2's common stock. On April 19, 2001, Learn2 reached an agreement to merge with E-Stamp Corporation. Assuming satisfaction of certain conditions, including receipt of the requisite stockholder approval, the merger is expected to be consummated in the third quarter of 2001. Completion of the merger is expected to enhance Learn2's ability to finance its growth as cash flow and capital markets access of the combined companies will be greater than prior to the merger. Net cash used in operating activities was approximately $923,000 for the first quarter of 2001. Cash used in operating activities resulted primarily from our net loss, an overall decrease in operating assets and liabilities, offset by increases in non-cash charges. Net cash used in investing activities was approximately $410,000 for the first quarter of 2001. Cash used in investing activities consisted primarily of capitalized content development costs and capital expenditures partially offset by proceeds from the sales of assets. As of March 31, 2001, Learn2 had $3.4 million in cash and cash equivalents and a working capital deficiency of approximately $8.7 million. As of March 31, 2001, Learn2's commitments consisted primarily of obligations under operating leases. Learn2 has no material commitments for capital expenditures. On March 10, 2000, Learn2 entered into a Securities Purchase Agreement and pursuant thereto it issued a $10 million 6% convertible debenture due March 10, 2003. The debenture is convertible at any time at the option of the holder at a conversion price of $0.41 per share, as reset on March 10, 2001. In connection with the reset on March 10, 2001, Learn2 recorded interest expense of $9 million as a result of the reduction of the original conversion price from $6.00 to $0.41. The debenture is subject to anti-dilution provisions. The conversion price of the debenture also may be reset to the market value of Learn2's common stock on the second anniversary of the convertible debenture if the price of Learn2's common stock declines below $0.41 on the second anniversary. In addition, the holder was granted a five-year warrant to purchase 337,268 shares of Learn2 common stock exercisable at $7.41 per share. The value of this warrant has been recorded as a debt discount and is being amortized over the life of the related debt. On April 13, 2001, the holder executed a waiver, agreeing not to exercise any of its rights under the debenture to declare an event of default or convert the debenture with certain exceptions as provided in the waiver; with respect to Learn2's failure to register shares of common stock, issuable as a result of the conversion price reset on March 10, 2001, provided that Learn2 filed a registration statement within 30 days after the date the waiver would have expired and such registration statement is declared effective by the Securities and Exchange Commission within 90 days after such date. On April 19, 2001, in connection with the merger, the holder executed a new waiver agreeing not to exercise any of its rights under the debenture to declare an event of default or convert the debenture with certain exceptions as provided in the waiver. Except as set forth in the second succeeding sentence, the new waiver expires upon the earlier of (x) the termination of the merger agreement, (y) September 30, 2001 and (z) the date of the occurrence of an event of default under the $2 million convertible promissory note issued to E-Stamp by Learn2. The dates between April 19, 2001 and the expiration of the new waiver are referred to as the standstill period. However with respect to an event of default caused by Learn2's failure to register shares of common stock, issuable as a result of the conversion price reset on March 10, 2001, the new waiver would not expire and would remain effective if Learn2 files a registration statement within 30 days after the end of the standstill period covering the shares of Learn2 common stock issuable under the debenture following the reset of the conversion price of the debenture and such registration statement is declared effective by the Securities and Exchange Commission within 90 days after the end of the standstill period. Because Learn2 cannot control the cure for events of default under the debenture, Learn2 reclassified the debenture as a current liability as of March 31, 2001. On August 2, 2001, Learn2's common stock was delisted from the Nasdaq National Market and began trading on the OTC Bulletin Board. The delisting of Learn2's common stock from the Nasdaq National Market is an event of default under the convertible debenture. The holder of the convertible debenture could declare the convertible debenture due and payable upon the earlier of the dates described in the waiver, including the earlier of the termination of the merger agreement and September 30, 2001. If the merger is not completed and Learn2 is unable to obtain an additional waiver from the holder of the convertible debenture, Learn2 may not have the resources to repay its obligations under the convertible debenture or the convertible promissory note. Learn2's auditors have revised their opinion regarding the Company's financial statements for the year ended December 31, 2000 and expressed substantial doubt as to Learn2's ability to continue as a going concern. 12 On April 19, 2001, Learn2, E-Stamp and the holder of debenture entered into a redemption and termination agreement. Pursuant to the redemption and termination agreement, the holder of the debenture has agreed that, immediately prior to the completion of the merger between Learn2 and E-Stamp, the debenture will be redeemed in exchange of E-Stamp's payment of $1.0 million, which will be accounted for as part of the purchase price, and the issuance of approximately 26.5 million shares of Learn2's common stock based on a conversion price of $0.41 per share plus accrued interest. As of March 31, 2001, one customer represented approximately 14.8% of accounts receivable. This customer represents a disproportionate percentage of March 31, 2001 accounts receivable as it relates to a software license sale in 2000. Since the acquisition of ViaGrafix Corporation in August 1999, the management of Learn2 has been exploring and evaluating various business strategies relating to Etracks, a subsidiary of ViaGrafix. In February 2000, the management of Learn2 reached the conclusion that to maximize shareholder value and develop the on-going operations of Etracks, and to focus on the core business of e-learning, that it would seek an outside investment which could lead to the sale of all or part of the business. As a result, over the last eighteen months, Learn2 has explored various strategic alternatives. During the first quarter of 2001, the Learn2 board of directors authorized the sale of Etracks for a purchase price in excess of $2.0 million in cash. In July 2001, ViaGrafix entered into a letter of intent to sell Etracks to Etracks'current president for a purchase price of $2.5 million. Under the terms of the letter of intent, at the closing of the transaction, $1.0 million of the purchase price would be paid in cash and $1.5 million would be paid pursuant to the issuance of a senior secured promissory note. The letter of intent will expire on November 16, 2001. If the contemplated transaction is not completed, tracks will continue to operate its historical business. In Fiscal year 2000, Etracks accounted for 19.5% of Learn2's revenues and 11.6% of Learn2's revenues for the three months ended March 31, 2001. Learn2 believes that the sale of Etracks will not have a material impact on Learn2's results of operations. To date, Learn2 has used cash and has operated at a loss. In addition, Learn2 has been operating its business on the basis that the merger will be completed. Learn2 has also incurred substantial costs in connection with the merger. Learn2's transaction costs incurred in connection with the merger are estimated to be approximately $1.2 million to $1.7 million, depending upon whether the merger is completed. Learn2 believes that if the merger is completed the combined company will have sufficient resources for its operating requirements and sufficient resources to realize the combined company's Business plan. However, Learn2's ability to achieve positive cash flow depends upon a variety of factors, including the timely introduction and market success of our products, the costs of developing, producing and marketing these products, adoption of the Internet as a medium of commerce and delivery of services, general economic conditions and various other factors, some of which may be beyond our control. Many of our costs are fixed and are based on anticipated revenue levels. We may be unable to adjust spending quickly enough to offset any unexpected revenue shortfall. If we have a shortfall in revenues in relation to expenses, or if expenses continue to exceed revenues, then our results of operations and financial condition would be affected adversely and we may need to raise additional funds. In the event that the proposed merger with E-Stamp is not consummated, and we need to raise additional funds we cannot be certain that we will be successful nor can we predict the terms under which such funds would be available. If additional funds are not available we may not be able to meet our on-going expenses unless we change our business plan, sell non-strategic assets, curtail expenditures, and/or employ other strategies as are required in these circumstances. NEW ACCOUNTING PRONOUNCEMENTS Learn2 continually assesses the effects of recently issued accounting standards. The impact of all recently adopted and issued accounting standards has been disclosed in the condensed consolidated financial statements included herein. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. Learn2 is involved in certain other claims and lawsuits that generally are incidental to its business. Learn2 is vigorously contesting all such matters and believes that their ultimate resolution will not have a material adverse effect on Learn2's financial position, results of operations or cash flows. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (b) Reports on Form 8-K The following report on form 8-K was filed during the quarter. Learn2 filed a Current Report on Form 8-K dated April 26, 2001 with the Securities and Exchange Commission. Pursuant to the Merger Agreement, Learn2 will merge with and into E-Stamp Corporation subject to certain conditions including the approval by the stockholders of E-Stamp and Learn2. 13 LEARN2.COM, INC. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LEARN2.COM, INC. Date: August 10, 2001 By: /s/ MARC E. LANDY ------------------------------- Marc E. Landy EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL OFFICER AND SECRETARY (PRINCIPAL FINANCIAL OFFICER) 14

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