Back to GetFilings.com
1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21421
VCAMPUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 54-1290319
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
8251 GREENSBORO DRIVE 22102
SUITE 500 (ZIP CODE)
MCLEAN, VIRGINIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 703-893-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK ($0.01 PAR VALUE PER SHARE)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant based upon the closing price of the Common Stock on March 28,
2000, on the NASDAQ SmallCap Market System was approximately $64,530,696 as of
such date. Shares of Common Stock held by each executive officer and director
and by each person who owns 10% or more of the outstanding Common Stock have
been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status may not be conclusive for other purposes.
As of March 28, 2000, the registrant had outstanding 7,631,181 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2000 Annual Meeting of
Stockholders are incorporated herein by reference into Part III.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2
Statements in this Annual Report on Form 10-K that are not descriptions of
historical facts are forward-looking statements that are subject to risks and
uncertainties. Actual events or results could differ materially from those
currently anticipated due to a number of factors, including those set forth
herein and in the Company's other SEC filings, and including, in particular:
limited operating history in targeted markets and losses and negative operating
cash flows; future capital needs and uncertainty of additional funding;
difficulties in managing rapid growth; risks associated with acquisitions and
integration of acquired operations; competition; developing market, rapid
technological changes and new products; dependence on online distribution;
substantial dependence on courseware and third party courseware providers;
substantial dependence on third party technology; and limited marketing
experience and substantial dependence on third party distribution. All
references to the "Company" or "VCampus" herein shall mean VCampus Corporation
and its subsidiaries: Cognitive Training Associates, Inc., a Texas corporation
("CTA"); Cooper & Associates, Inc., an Illinois corporation, d/b/a Teletutor
("Teletutor"); HTR, Inc., a Delaware corporation ("HTR"); and UOL Leasing, Inc.,
a Delaware corporation.
PART I
ITEM 1. BUSINESS.
VCampus Corporation is a leading e-Learning Application Service Provider
(ASP) that develops, manages and hosts turn-key, web-based learning environments
for corporations, academic institutions and government agencies enabling them to
offer global distance learning solutions to their customers, employees and
students. In addition to training and education, the online distribution network
of VCampus can be employed for a number of enterprise-wide knowledge management
initiatives including Customer Relationship Management (CRM), Enterprise
Resource Planning (ERP) and product-related strategic business plans through a
rapidly-deployed, outsourced, scalable e-Learning solution. The Company's
e-Learning solution enables customers to improve the performance of their
distribution channels, measure and develop their employees' knowledge, skills
and abilities, and increase their customers' satisfaction and loyalty.
As of December 31, 1999, VCampus had over 60 customers delivering over
1,100 courses in information technology, telecommunications, insurance/finance,
management, healthcare, personal development and office skills. The VCampus
solution, which includes the Student Management System, Courseware Construction
Set and Courseware Delivery Engine, has been proven and tested through
successful implementations at customer sites including Graybar Electric, Lucent
Technologies, University of Texas System and U.S. General Services
Administration, where thousands of students have been introduced to e-Learning.
The corporate training marketplace is rapidly evolving to meet the
increasing demand for worker training and re-training in a cost-effective and
convenient manner. Online delivery technology significantly reduces training
costs, including those associated with students' time away from work, and
permits resources to be concentrated directly on the educational process. We are
initially targeting customers in the telecommunications, healthcare, utilities,
information technology and financial services industries, as well as academic
institutions, all of which we believe have relatively large training and
education budgets, significant training needs and receptiveness to new
technology. The U.S. corporate learning market, according to the most recent
annual survey by Training Magazine is estimated at $62.5 billion. The corporate
e-Learning market share is approximately 20% of the total corporate learning
market and is expected to double by 2003, according to a 1999 study by Corporate
University Xchange.
The Company's existing courseware library includes over 1,100 online
courses, of which approximately 300 are available for general distribution and
customer access. These courses are in what the Company believes are high-demand
subject matter areas such as information technology, telecommunications,
compliance/OSHA, business, management and finance. The Company converts
courseware that it believes are proven and popular in diverse subject matter
areas to the Company's interactive online format. Through December 31, 1999, the
Company had delivered over 439,000 course enrollments through its corporate and
academic partnerships.
The Company offers a complete outsourced solution through the VCampus
e-Learning management system that allows for the enrollment, registration,
teaching, tracking, testing, grading and certification of
2
3
distance learners. The Company provides a value-added service that enables its
customers to place third-party courseware, proprietary training courses and/or
accredited courses on an open architecture, remotely-hosted, Internet
distribution platform displaying the customer's graphical "look and feel". The
core element of the VCampus system is found in the Student Management
System -- a sophisticated, activity-tracking tool that manages all aspects of
student and employee progress through an established learning plan.
When an organization's internal courses are combined with the VCampus
off-the-shelf library, offering hundreds of courses in Management Skills,
Information Technology, Telecommunications and Personal Development, the
combined delivery and tracking of courses creates a turn-key solution for those
entities requiring an enterprise-wide learning environment. VCampus offers its
customers a choice: VCampus can convert content for them or it can provide them
with an easy method of converting content themselves through the VCampus
Courseware Construction Set(R). With over 250,000 students enrolled in the
VCampus system, the Company offers a very large content distribution channel for
non-proprietary courseware.
Through its Teletutor and HTR subsidiaries, the Company also offers
courseware through more traditional media, including on-site and classroom
training, diskette, CD-ROM and printed formats. The Company introduced its first
Web-based demonstration course in November 1995, its first revenue-generating
Web-based course in Spring 1996 and the VCampus e-Learning management system in
1997. The Company intends to leverage the courseware and the customer base of
its subsidiaries, as well as the courseware and customers provided by future
partnerships, to facilitate the development of its online training and education
business.
The Company's objectives are to be the leading e-Learning ASP for the
corporate training, academic, and government education market, and to make its
VCampus e-Learning platform the global standard for online delivery of corporate
training and education courseware. See "-- Products and Services -- VCampus."
The Company's strategy to achieve these objectives includes: increasing its
customer base (through targeted marketing, expanding its direct sales force, and
by leveraging the sales channels of strategic partners), developing strong brand
recognition for its products and services, delivering high-demand courseware
(including courseware certified by independent academic institutions) and
upgrading its existing technologies to maintain its position as a leader in
corporate e-Learning. The Company's strategy also includes enhancing the
"sticky-ness" of its customer sites by converting more and more of the
customer's proprietary content for online distribution through the VCampus
platform. The intended result is increased penetration into the enterprise and
enhanced customer loyalty.
Although the Company continues to provide products and services through
delivery methods other than online delivery, in December 1998, the Company
announced plans to divest its non-online businesses in order to focus its
efforts on its core online training business. The Company believes this move is
consistent with its strategy of moving content and customers to an online
training platform from the traditional classroom and Computer Based Training
("CBT") sold through its non-online businesses. In furtherance of this
divestiture strategy, in September 1998 the Company sold Ivy Software, Inc.
("Ivy") while retaining the rights to sell and distribute the online versions of
the Ivy courseware. In December 1998, the Company sold HTR's consulting
division. In June 1999 the Company sold HTR's Knowledgeworks business for $1.5
million in a combination of cash and notes receivable. In December 1999, the
Company decided to retain and further restructure HTR's instructor-led training
business, closing the Atlanta training facility, streamling the operations in
Rockville and Washington DC, and focusing on moving the remaining customer base
to online. The Company has also taken the following actions to provide future
funding for operations:
- In January 2000, the Company secured a $4 million strategic investment
from Mastech Corporation, through Mastech's eVentures business unit, in
exchange for approximately 1,136,000 shares of common stock at $3.62 per
share (which was a 20% premium above the average closing price for a
15-day trailing period.) The Company and Mastech also intend to form a
strategic partnership through which Mastech would promote VCampus as a
platform for hosting corporate virtual campuses to its 1000 global
customers.
- The Company entered into an equity line of credit agreement with
Hambrecht & Quist Guaranty Finance, LLC ("H&QGF") to provide up to $3.0
million of private equity financing through May 31,
3
4
2000. Through March 2000, the Company had drawn down approximately $1.86 million
under this equity line in exchange for a total of 498,229 shares of Series E
Preferred Stock at prices ranging from $2.30 to $11.27 per share. The Company
has the option of making additional draw downs of up to $500,000 every 15
trading days. In March 2000, H&QGF increased the capacity under the equity
line from $3.0 million to $5.0 million and extended its duration through
July 31, 2000 in exchange for a warrant to purchase 43,632 shares of
Series E Preferred Stock. This amendment is subject to getting NASD
approval of the warrant grant, if and to the extent required.
- The Company raised $2.5 million in June 1999 through the issuance of its
9% Secured Subordinated Convertible Debentures due December 15, 2000. All
of such indebtedness has since been converted to common stock at prices
ranging from $2.12 to $5.55 per share.
- The Company raised approximately $1.3 million in April 1999 through a
private placement of 448,297 shares of common stock at $2.93 per share.
INDUSTRY BACKGROUND
Corporate training is a rapidly growing segment of the training and
education market, primarily as a result of the demand for increasing skills
required by employers. As the United States economy continues to shift from a
focus on industry to one focused on information and knowledge, employers seeking
to compete successfully in the marketplace find it necessary to invest more in
the training and education of their employees. The current corporate e-Learning
market share, which is about 20% of the total corporate training market, is
expected to double by 2003, according to a recent survey by Corporate University
Xchange.
Use of Technology in Training and Education
Historically, corporations, training organizations and academic
institutions have provided education through traditional classroom training.
Companies choosing to provide this type of training in-house must devote
managerial and financial resources towards training facilities, instructors,
materials and curriculum management. Companies often choose to use third parties
to provide training services to avoid some of the management and facility issues
but must pay tuition and materials fees. Both in-house and outsourced
traditional classroom approaches result in lost productivity and travel-related
costs while the employee attends and travels to and from the training. Distance
learning methods (satellite-based delivery, mail exchanges, voice mail, CD-ROMs,
diskettes) address space limitations by allowing students to take courses at
remote locations. Web-based delivery, due to its scalability, enables
corporations, training organizations and academic institutions to extend their
reach more cost-effectively than other distance learning methods. In addition,
Web-based delivery offers the ability to rapidly and cost-effectively update
course materials and can provide students a significant degree of time and place
independence.
With the advent of the Web, the Company has benefited from the way its
courseware can be managed, delivered and consumed. The use of such technologies
can lower publishing costs and could significantly increase demand. Online
technology makes it possible to combine the best elements of online connectivity
between students and teachers and the interactivity of a CD-ROM. The Company
believes that its online delivery of courseware combines convenience,
affordability, self-pacing, standardized curricula, individualized tailoring of
courses, immediate performance measurement and a high degree of student-teacher
interaction.
The use of the Company's products and services will depend in large part
upon the development of an infrastructure for providing online access and
services. Because global commerce and online exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether such networks will prove to be
viable commercial marketplaces. In particular, such networks are an unproven
medium for education. In the event such networks fail to become a viable
education medium, the Company may not be able to overcome the costs and
difficulties associated with adapting to alternative media, if and when they
become available. If such networks do not become viable commercial marketplaces
or do not develop as a viable medium for education, the Company would be
materially adversely affected. Additionally, such networks have experienced, and
are expected to continue to experience, significant growth in the number of
users and amount of traffic. The infrastructures of such
4
5
networks may not be able to support the demands placed on them by this continued
growth. In addition, such networks could lose their viability due to delays in
the development or adoption of new standards and protocols (for example, the
next-generation Internet Protocol) to handle increased levels of activity,
increased governmental regulation or other factors. The infrastructure or
complementary services necessary to make such networks viable commercial
marketplaces may not be developed. Even if developed, such networks may not
become viable commercial marketplaces for products and services such as those
offered by the Company.
COMPANY STRATEGY
The Company's objectives are to be the leading e-Learning ASP for the
corporate training and education market, and to make its VCampus the global
standard for online delivery of corporate training and academic instruction. The
Company's strategy to achieve these objectives includes expanding its customer
base, developing brand recognition for its products and services, delivering
high-demand courseware (including courseware certified by independent academic
institutions), and upgrading its existing technologies to maintain its position
as a leader in corporate e-Learning.
- Expand Customer Base. The Company intends to continue to develop
relationships with its existing and new business and academic institution
customers to increase the number of enrollments and accelerate awareness
and acceptance of its online content. The Company also intends to
leverage the sales channels of any strategic partners to more quickly
scale its customer base. The Company believes that development of a
VCampus for customers provides it with cross-marketing opportunities. A
VCampus can promote courses from, and/or contain "hot links" to, other
VCampuses. See "-- Customers" and "-- Sales and Marketing."
- Develop Brand Recognition. The Company plans to achieve and maintain
brand recognition through marketing efforts and the creation of a
standards-based user interface, incorporating audio, animation, graphics
and text as appropriate to create a stimulating learning experience. The
Company also intends to enter into arrangements with content providers to
adopt the Company's VCampus as their standard for online courseware
delivery. See "-- Products and Services -- VCampus."
- Deliver High-Demand Courseware. The Company intends to continue to
expand its courseware library primarily through relationships with
content providers. The Company seeks high quality courseware in subject
areas that the Company expects will be in high demand by customers in the
corporate training and education market including business, management,
finance, accounting, technology, and basic technical and developmental
skills. The Company intends to continue to provide courseware certified
by independent academic institutions. See "-- Products and Services."
- Develop Proprietary Technology. The Company intends to maintain its
position as a leader in online courseware delivery technology by
continuing to develop and enhance the features and functionality of its
proprietary technology. See "-- Products and Services -- VCampus."
ACQUISITIONS AND DIVESTITURES
Since 1994, the Company has completed five acquisitions -- HTR, Inc.,
Cooper & Associates, Inc., (d/b/a Teletutor), Ivy Software, Inc., Cognitive
Training Associates, Inc. and the CYBIS Division of Control Data Corporation.
These acquisitions provided the Company with customers and courseware content in
non-online format. The Company does not currently have an agreement, commitment
or understanding with any other potential acquisition candidates. The Company
has followed a strategy of moving content and customers to an online training
platform from the traditional classroom and computer based training. In December
1998, the Company announced plans to divest its non-online businesses in order
to focus its efforts on developing and managing its core online customers and
content.
HTR, Inc. ("HTR") In October 1997, the Company acquired HTR, a corporation
primarily engaged in the business of providing traditional and on-site technical
training, publishing and consulting services for the information technology
("IT") industry. In December 1998, the Company sold the consulting division of
5
6
HTR for $750,000 in cash and notes receivable. The Company sold the HTR
Knowledgeworks legacy business for $1,500,000 in June 1999.
Cooper & Associates, Inc., d/b/a Teletutor ("Teletutor") In April 1997, the
Company acquired Teletutor, which develops, distributes and supports
computer-based training courses for the data and telecommunications industry.
This acquisition provided the Company with additional content that has been
converted into the Company's online format, as well as access to Teletutor's
existing customer base.
Ivy Software, Inc. ("Ivy") In March 1997, the Company acquired Ivy, which
develops and distributes business and accounting textbooks and software for the
academic education market. This acquisition provided the Company with additional
content as well as access to Ivy's existing customers in the academic
marketplace, ranging from community colleges to large universities. In September
1998 the Company sold Ivy back to its original owner, while retaining the right
to distribute the online versions of Ivy Software.
Cognitive Training Associates, Inc. ("CTA") In August 1996, the Company
acquired CTA, which develops and distributes technology-based applications
online via distributed networks for educational institutions, corporations and
government agencies. CTA customers can access these applications from remote
locations using the Internet or their organization's intranets. This acquisition
provided the Company with an established customer base and additional content,
particularly in the electrical, medical and scientific equipment subject areas.
CYBIS. In 1994, the Company acquired the CYBIS division of Control Data,
together with a perpetual nonexclusive license for the CYBIS courseware, which
consisted primarily of courses in language arts, mathematics, social studies,
science, business and a variety of technical subjects. The Company's ability to
distribute a portion of the CYBIS courseware is limited by the terms of its
license. The Company is responsible for the CYBIS computer-based education and
training portion of certain CYBIS contracts to which Control Data is a party, as
well as support and other services under such contracts. The Company believes
that Web-based courseware developed from the CYBIS courseware, to the extent not
restricted by the terms of its license, may contribute to revenues in the
future.
Any acquisition is accompanied by such risks as, among other things, the
difficulties in assimilating the operations and personnel of acquired companies,
potential disruption to the Company's ongoing business, difficulties of
incorporating acquired technology into the Company's products and additional
expense associated with amortization of acquired intangible assets. Particular
acquisitions may not ultimately provide the benefits originally anticipated by
the Company's management.
As consideration for future acquisitions, the Company intends to use
various combinations of Common Stock, cash and notes. The Company may also use
Preferred Stock as all or part of the consideration for one or more potential
acquisitions. Paying for any future acquisitions with equity securities or cash
could result in potential dilution to the value of the Company's Common Stock,
could require the Company to raise additional financing, which may not be
available on terms favorable to the Company and/or could have an adverse effect
on the Company's liquidity. The Company may use a line of credit or incur other
indebtedness, if available, to help fund acquisitions. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." In pursuing this strategy, the
Company may not be able to identify attractive targets and make successful
acquisitions in the future on commercially reasonable terms, or that it will be
successful in overcoming these risks. The Company does not anticipate
implementing any acquisition strategy at this time.
PRODUCTS AND SERVICES
The Company offers its online courseware primarily through its proprietary
virtual campus product, or VCampus(R), an online courseware delivery system and
environment that facilitates development, management and administration of
training and education over the Internet and corporate intranets. Through its
HTR and Teletutor subsidiaries, the Company also offers courseware through more
traditional media, including on-site and classroom training, diskette, CD-ROM
and printed formats, although the Company divested a large portion of these
non-online businesses during 1999.
6
7
VCampus(R)
The Company's VCampus is a centrally served delivery and tracking system
accessible by virtually any Internet-ready PC. Generally, students enroll in the
Company's courses online through a VCampus, but have the option to enroll in
person, by telephone or through the mail. Enrolled students can then access the
courseware online, typically through a PC connected to the Internet or a
corporate intranet. Once a student has completed the course, he or she will
receive credit or certification, if appropriate. As of December 31, 1999, the
Company had over 60 VCampuses in operation with its corporate and academic
institution partners.
The VCampus environment is customizable and designed for ease of
administration and access to students, instructors and training administrators.
In addition, by using any combination of courses from the Company's courseware
library and the customer's own internal training libraries, customers can offer
a variety of distance learning options. The VCampus includes the following
components:
Registrar: In the "Registrar" function students can sign up for
courses and modify their student profile. Administrators can add new course
offerings, admit students, enroll students into course offerings, modify
the course offerings, search student records and administer much of the
VCampus functionality.
Classrooms: In the "Classrooms" function students can enter their
registered courses or check their grades for any course for which they are
registered. Administrators and instructors may also access courses and have
the capability to view student grades.
Faculty: Students can use the "Faculty" function to contact VCampus
instructors.
Information: Using the "Information" function administrators can post
news, announcements and answers to frequently asked questions to keep
students informed about their training options.
Commons: In the optional "Commons" function students can access games
and socialize with other students.
The VCampus supports a wide variety of tools and utilities supplied by
third parties, such as Netscape Navigator/Communicator, Microsoft Internet
Explorer, Macromedia Shockwave, Geo Emblaze, etc. In addition, the Company has
developed the following proprietary software tools that facilitate the
functionality of the VCampus:
VCampus Courseware Delivery Engine. This product was designed and
built to serve as an integrated, Web-based courseware construction and
courseware delivery tool. First delivered in August 1997, the product is
currently at the release level 2.16 and has been used to build and deliver
the Company's courseware library of over 1,100 online courses as of
December 31, 1999. By incorporating features developed for the Company's
earlier version of the tool, the VCampus Courseware Delivery Engine
provides a simple, easy-to-use environment for instructors and students
that is capable of assessing, recommending, tracking and testing students
as they complete a course. The product also enables courseware developers
to easily construct, deliver and track a highly interactive and media-rich
online course.
For the instructor, the VCampus Courseware Delivery Engine provides
real-time editing of the course introduction, the syllabus, help items and
reference items. Students can visit the "Gradebook" functionality of the product
to get a real-time view of how they are doing in a course. The courseware
developer has access to a complete suite of Web-based tools necessary to
construct and deliver a highly interactive, online course. The "PointPage"
functionality of the product provides a choice of methods for displaying
content. To make PointPage even more powerful, the "Activity Studio" enables
non-programmers to construct and include into their PointPage, multimedia-rich
(animation, sound and student interactivity) activities by answering a few
simple questions. Courseware developers can also take advantage of the testing
system, which includes many advanced features such as question randomization and
pooling. Additionally, courseware developers can choose to link selected test
questions and PointPages to learning objectives, which allows a courseware
developer to group content and assess a student's progress based on performance.
7
8
VCampus Curriculum/Group Manager. This product facilitates the
grouping of students with similar education needs and abilities to
appropriate groups of courses within a VCampus. This can improve overall
system efficiency and facilitate interaction among students. The result of
this intersection of student groups and course groups is a specific student
"Training Plan". The Training Plan is designed to guide students to courses
that match the student's ability. Additionally, the Training Plan can
evaluate a student's performance in each course against minimum standards
established by the VCampus administrator for test scores and attendance.
The Curriculum/Group Manager was released during the first quarter of 1998.
VCampus Batch/Mass Enrollment Tools. This series of tools facilitates
the enrollment of large groups into the VCampus and/or courses without
student involvement. Companies with a large population of students can use
this tool to import demographic data from legacy enterprise resource
planning or human resources systems, thus streamlining the implementation
process. This functionality was first made available in July 1998 and was
substantially enhanced in January 1999.
Existing Courseware Library
The Company's existing courseware library includes over 1,100 online
courses, of which approximately 300 are available for general distribution.
These courses are in what the Company believes to be high-demand subject matter
areas such as information technology, telecommunications, compliance/OSHA,
business, management and finance. Although the Company does not provide
accreditation or certification itself, a number of its current courses provide
either accreditation or certification through its content providers. The current
library was built from a combination of acquisitions, the Company's own
development efforts and relationships with leading content providers such as
NETg, Infosource, Vital Learning, Crisp Publications Inc. and American Media
Inc. Conversion of courseware into the Company's online format typically takes
approximately 45 days, although conversion time varies depending on any number
of factors, including the size and format of the original courseware content.
Traditional Delivery
The Company provides products and services through delivery methods other
than online delivery in order to expand its customer base and courseware library
for online delivery. For example, through its HTR and Teletutor subsidiaries,
the Company offers courseware through more traditional media, including on-site
and classroom training, as well as CD-ROM and printed formats. During 1999, the
Company began implementing its plan to divest its non-online businesses, with
the exception of Teletutor, in order to focus its efforts on managing its core
online customers and content. In December 1999, the Company decided to retain
and further restructure HTR's instructor-led training business, closing the
Atlanta training facility, streamling the operations in Rockville and Washington
DC, and focusing on moving the remaining customer base to online.
HTR's strategy is to deliver a total solution for corporate IT training
through its suite of products and services, which includes traditional and
on-site training, and courseware. HTR seeks to provide a "Knowledge Transfer" to
its customers through flexible and customizable courseware titles for
client/server systems. IT training is delivered by instructors at HTR's offices
located in the U.S., as well as at customer locations, and is provided through
both pre-scheduled, open enrollment classes and on-demand corporate training
sessions. HTR also provides customized training to meet a customer's specific
needs by tailoring existing titles for developing an entirely new course.
Teletutor's strategy is to focus its products and services primarily on the
data and telecommunications industry. Teletutor develops, distributes and
supports courseware, primarily in CBT formats, to the telecommunications
industry. As of December 31, 1999, the Company had converted 23 Teletutor
courses into its online format.
8
9
CUSTOMERS
The Company's primary target market is the corporate training and education
market. The Company focuses its sales and marketing efforts on Fortune 1,000
companies and is initially targeting customers in the telecommunications,
healthcare, utilities, IT and financial services industries, as well as academic
institutions, all of which the Company believes have relatively large training
and education budgets, significant training needs and receptiveness to new
technology. In 1999 one customer, State Farm, accounted for approximately 11.6%
of the Company's revenues. The Company currently anticipates that future
revenues may be derived from sales to a limited number of customers.
Accordingly, the cancellation or deferral of a small number of contracts could
have a material adverse effect on the Company.
Business Customers
As of December 31, 1999, the Company had approximately 55 online corporate
business customers, including: All-Phase Electrical Supply Company; A.T.
Kearney, Inc; Baan Company; Bell South Telecommunications, Inc.; Cable and
Wireless, Inc.; Dearborn Financial Publishing, Inc.; Graybar Electric Co. Inc.;
Global One Communications, Inc.; Kelly Scientific Resources; Lucent
Technologies, Inc.; and Sheet Metal and Air Conditioning National Contractors'
Association. The Company plans to establish relationships with additional
business customers and strategic partners, in particular those that offer access
to large numbers of users (including the prospective customer's employees or
end-users), vendors and resellers, as well as significant amounts of courseware
content. The Company's business customers generally agree to market and promote
the Company's products and services, and to share with the Company the net
revenues generated from access and other fees charged to such customer's
end-users.
Academic Institution Customers
As of December 31, 1999, the Company had 6 online academic institution
customers, including: AIMS Community College; George Mason University;
Northeastern University; Park College; Swindon College, England; and the
University of Texas System. The Company plans to establish relationships with
additional academic institution customers, in particular those that have
significant enrollments, offer broad curricula and provide the Company with the
opportunity to publish online courseware developed by such institutions. The
Company's agreements with these academic institutions generally provide the
Company with exclusive rights, or limit the institution's right to develop
and/or distribute the online courseware subject to the agreements. The academic
institutions market these courses in the same manner as their existing,
traditional course offerings, including through direct mail, course catalogs,
print advertising and through the Web.
SALES AND MARKETING
The Company's primary marketing goals are to create a strong brand identity
as a leading training and educational courseware publisher for corporations and
academic institutions, and to establish its core technology, the VCampus
e-Learning platform, as the global standard for corporate training and education
needs.
In addition to its direct sales efforts, the Company markets its products
and services through a variety of means, including the Web, public relations,
trade shows, direct mail, trade publications, customers, resellers and strategic
partners. The Company cross-markets through customers' VCampuses to promote its
products and services and to attract students. The Company believes that forming
strategic marketing alliances with partners who will sell, promote and market
the Company's products and services will be important for rapid market
penetration.
The Company changed its business focus in 1993 and began divesting its
non-online businesses in 1999, and therefore has limited marketing experience in
its current industry. The Company's direct marketing and sales staff does not
have significant experience marketing in the sales of education products using
Web-based delivery systems. There can be no assurance that the Company will be
able to attract resellers or customers that will be able to market the Company's
products effectively and will be qualified to provide timely and cost-effective
customer and end-user support and service. In addition, certain of the Company's
resellers and
9
10
customers may compete with one another and the Company, and the Company may also
be required to manage conflicts among its resellers and customers. For example,
certain of the Company's content providers have required the Company to refrain
from linking its products with competing products. The Company may be adversely
affected by pricing pressure or other adverse consequences of competition or
conflict among or with its resellers and customers, or in the event any reseller
or customer fails to adequately penetrate its market segment. The inability to
recruit, manage or retain important resellers or customers would materially
adversely affect the Company.
COMPETITION
The market for educational and training products and services is highly
competitive and the Company expects that competition will continue to intensify.
Although the Company believes that it was the first to offer Web-based,
interactive, on-demand courseware, there are no substantial barriers to entry in
the online education and training market. A number of companies, including
SmartForce, Learn2.com, Inc., Click2learn.com, DigitalThink, Inc., Centra
Software, Inc. and ZDU, have recently entered this market and the Company
expects this trend to continue to accelerate. In addition to traditional
classroom and distance learning providers, other institutions such as Apollo
Group, Inc. (through University of Phoenix) offer their own accredited courses
online or in an email-based format. They, and many other education providers,
use some of the Company's methods, including email, bulletin boards, electronic
conferencing and CD-ROMs, as well as satellite communications, and audio and
video tapes. The Company also expects to encounter significant competition in
connection with its efforts to establish its VCampus as the standard learning
environment and format in the industry.
The Company believes that competition in the developing market for online
training and education will be based upon various factors, including: quality,
breadth and depth of courseware; marketing and third party relationships;
quality, flexibility and reliability of delivery system; and, to a lesser
degree, pricing. In addition, the Company believes that its products and tools
make the Company's courseware affordable, convenient, easy to use and
administer, and provide the Company with a competitive edge in attracting
additional customers. Most of the Company's competitors, as well as a number of
potential new competitors (including the Company's customers and partners), have
significantly greater financial, technical and marketing resources than the
Company. The Company will require financing to compete effectively in this
rapidly evolving market. In addition, any of these competitors may be able to
respond more quickly than the Company to new or emerging technologies, and to
devote greater resources to the development, promotion and sale of their
services. A number of the Company's current customers and partners have also
established relationships with certain of the Company's competitors, and future
customers and partners may establish similar relationships. In addition, the
Company's partners could use information obtained from the Company to gain an
additional competitive advantage over the Company. The Company's competitors may
develop products and services that are superior to those of the Company or that
achieve greater market acceptance than the Company's products and services.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any government
agency, other than regulations applicable to businesses generally, and there are
currently few laws or regulations directly applicable to access to or commerce
on online networks. Due to the increasing popularity and use of online networks,
it is possible that a number of laws and regulations may be adopted with respect
to online networks, covering issues such as user privacy, pricing, taxation
and/or the characteristics and quality of products and services. The adoption of
any such laws or regulations may decrease the growth of online networks, which
could in turn decrease the demand for the Company's products and increase the
Company's cost of doing business or otherwise have an adverse effect on the
Company. Moreover, the applicability to online networks of existing laws
governing issues such as property ownership, sales taxes, libel and personal
privacy is uncertain. Furthermore, as a publisher of educational materials, the
Company could be subject to accreditation or other governmental regulations. Any
new legislation or regulation applicable to online networks, the Company or its
products or services could have a material adverse effect on the Company.
10
11
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company or the Internet access providers with
which it has a relationship and be subsequently distributed to others, there is
a potential that claims will be made against the Company for copyright or
trademark infringement or based on other legal theories. Such claims have been
brought against online services in the past. Although the Company carries
general liability insurance, the Company's insurance may not cover claims of
this type, or may not be adequate to cover all liability that may be imposed.
Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on the Company.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its copyrights, trademarks, trade dress, trade secrets
and similar intellectual property as critical to its success, and the Company
relies upon federal statutory, as well as common law copyright and trademark
law, trade secret protection and confidentiality and/or license agreements with
its employees, customers, partners and others to protect its proprietary rights.
The Company owns registered trademarks in the United States for HTR, the HTR
logo, Teletutor, The Chalkboard, VCampus and "What you think ... is our
business." Additionally, the Company has applied for registration in the United
States for certain of its other trademarks, including VCampus(TM).com, Virtual
Campus, Test Wizard, PointPage, Courseware Construction Set, Registrar
Architect, Test Architect, Thought Leaders, and "Take It Online".
The Company has had certain trademark applications denied, and may have
more denied in the future. The Company will continue to evaluate the
registration of additional marks as appropriate. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or services or to obtain and use information
that the Company regards as proprietary. In addition, the laws of some foreign
countries do not protect proprietary rights to as great an extent as do the laws
of the United States. Litigation may be necessary to protect the Company's
proprietary rights. Any such litigation may be time-consuming and costly (even
if successful), cause product release delays, require the Company to redesign
its products or services, or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect on the
Company. Such royalty or licensing agreements, if required, may not be available
on terms acceptable to the Company or at all. The Company's means of protecting
its proprietary rights may prove inadequate and the Company's competitors may
independently develop similar technology or duplicate the Company's products or
services or design around intellectual property rights of the Company. In
addition, distributing the Company's products through online networks makes the
Company's software more susceptible than other software to unauthorized copying
and use. For example, online delivery of the Company's courseware makes it
difficult to ensure compliance by the Company with contractual restrictions, if
any, as to the parties who may access such courseware. The Company cannot
prevent users from downloading electronically certain of its courseware content,
which could adversely affect the Company's ability to collect payment from users
that obtain copies from the Company's existing or past customers. If, as a
result of changing legal interpretations of liability for unauthorized use of
the Company's software or otherwise, users were to become less sensitive to
avoiding copyright infringement, the Company would be materially adversely
affected.
EMPLOYEES
As of December 31, 1999, the Company had 93 employees, including 88
full-time employees and 5 part-time employees, consisting of 39 full-time
employees in general business operations, 22 full-time employees in sales and
marketing, 12 full-time and 5 part-time employees in product development, and 15
employees in general and administrative. None of the Company's employees are
represented by a union and there have been no work stoppages. The Company
believes that its employee relations are good.
The Company's performance is substantially dependent on the performance of
its executive officers and key employees. The loss of the services of any of its
executive officers or other key employees could have a material adverse effect
on the Company. The Company maintains key man life insurance in the amount of
$1,000,000 on Narasimhan P. Kannan, Chairman of the Board of Directors and Chief
Executive Officer, and has employment agreements with certain of its executive
officers. However, neither such insurance nor such
11
12
agreements necessarily fully compensate the Company for, or preclude the loss of
the services of the relevant personnel. The Company anticipates that future
growth, if any, will require it to identify, recruit, hire, compensate train and
retain a substantial number of new, technical, managerial, sales and marketing
personnel. Competition for qualified personnel is intense, and the Company may
be unable to attract, assimilate and retain such personnel. The loss of the
services of key personnel, or the inability to attract and retain additional
qualified personnel, could have a material adverse effect on the Company.
ITEM 2. PROPERTIES.
A current summary showing the operating properties of the Company, all of
which are leased, is shown below:
LEASE
AREA EXPIRATION MONTHLY
LOCATION PRINCIPAL USE (SQUARE FEET) DATE RENT
-------- ------------- ------------- ---------- --------
Reston, VA........................ Executive offices and 16,701 February 2010 $ 37,925*
principal administration,
technical marketing and
sales operations
Waxahachie, TX.................... CTA offices 5,000 July 2001 2,000
Rockville, MD..................... HTR Executive office 6,222 January 2006 11,936
Washington, DC.................... HTR Branch office 2,253 July 2002 5,539
- ---------------
* Subject to 3% annual increases
During the second half of 1998 and the first quarter of 1999, as a result
of reorganization plans, the Company closed one of its McLean executive office
facilities and moved primarily all of Teletutor's product fulfillment operations
to its remaining executive offices facility in Virginia. Also, the Company
closed its training facilities in Los Angeles, CA, Baltimore, MD, Waltham, MA,
McLean, VA and Atlanta, GA.
The Company believes that its existing office space is sufficient to
accommodate its current needs and that suitable additional space will be
available on commercially reasonable terms to accommodate any expansion needs in
2000 should it become necessary.
ITEM 3. LEGAL PROCEEDINGS.
In November 1999, an arbitrator found the Company liable to Sage
Interactive for approximately $360,000 arising out of an alleged contract
between Sage Interactive and the Company. The Company settled this dispute for
$360,000 in March 2000. Although the Company is not currently involved in any
other material pending legal proceedings, the Company could be subject to legal
proceedings and claims in the ordinary course of its business or otherwise,
including claims relating to license agreements, royalties or claims of alleged
infringement of the trademarks and other intellectual property rights of third
parties by the Company and its licensees.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1999.
12
13
EXECUTIVE OFFICERS
As of March 30, 2000, the executive officers of the Company were as
follows:
NAME AGE POSITIONS
---- --- ---------
Narasimhan P. Kannan........ 51 Chairman of the Board of Directors and Chief Executive Officer
Michael W. Anderson......... 45 Chief Operating Officer
Farzin Arsanjani............ 35 Executive Vice President
Michael A. Schwien.......... 44 Acting Chief Financial Officer and Secretary
Kamyar Kaviani.............. 37 Executive Vice President
Narasimhan P. "Nat" Kannan has served as Chief Executive Officer and
Chairman of the Board of Directors of the Company since he founded the Company
in 1984. Prior to founding the Company, he co-founded Ganesa Group, Inc., a
developer of interactive graphics and modeling software, in 1981. Prior thereto,
he served as a consultant to Booz Allen and Hamilton, Inc., the MITRE
Corporation, The Ministry of Industry of the French Government, the Brookhaven
and Lawrence Livermore National Laboratories, the White House Domestic Policy
Committee on Energy, and Control Data Corporation. He serves on the board of
directors of TV on the Web, Inc. He holds a B.S. in Engineering from the Indian
Institute of Technology in Madras, India, and he performed advanced graduate
work in business and engineering at Dartmouth College.
Michael W. Anderson was appointed the Company's Chief Operating Officer in
November 1998 after serving as the Company's Vice President of Technology and
Operations since March 1996. From 1994 to 1996, Mr. Anderson was a marketing
research consultant at O'Donnell & Associates, Inc. From 1990 to 1994 he served
as Vice President and Director of Marketing Operations at HarperCollins College
Publishers. From 1977 to 1990 he was employed by Scott, Foresman & Company, most
recently as Vice President of Marketing Operations. Mr. Anderson holds a B.A. in
English and Mathematics from the University of Texas.
Farzin Arsanjani joined the Company as an Executive Vice President upon the
Company's acquisition of HTR in October 1997. Prior to such acquisition, Mr.
Arsanjani co-founded HTR in 1987 and has served as its Vice Chairman and
President since that time. Mr. Arsanjani holds a B.S. in Electrical Engineering
from the University of Maryland.
Kamyar Kaviani joined the Company as Executive Vice President upon the
Company's acquisition of HTR in October 1997. Prior to such acquisition, Mr.
Kaviani co-founded HTR in 1987 and has served as its Chairman and Chief
Executive Officer since that time. Mr. Kaviani holds a B.A. in Economics from
the University of Maryland.
Michael A. Schwien joined the Company as Controller in May 1998 and was
named acting Chief Financial Officer in June 1999. From 1993 to May 1998, Mr.
Schwien worked for BDM Technologies, Inc. most recently as Director of Business
Operations. From 1988 to 1993, he worked for ICF Kaiser International as
Supervisor of Corporate Accounting. Prior to working for ICF Kaiser
International he was a staff auditor with Deloitte & Touche. Mr. Schwien holds a
B.S. in Business Administration from the University of Colorado and is a
Certified Public Accountant.
13
14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) Price Range of Common Stock
Our common stock is currently listed on the Nasdaq SmallCap Market under
the symbol "VCMP." For each full fiscal quarter since the beginning of 1998, the
high and low bid quotations for our common stock, as reported by Nasdaq, were as
follows:
HIGH LOW
------ -----
1998
First quarter............................................. $16.50 $7.75
Second quarter............................................ $13.25 $3.88
Third quarter............................................. $ 8.00 $4.00
Fourth quarter............................................ $ 9.13 $1.94
1999
First quarter............................................. $ 5.87 $2.62
Second quarter............................................ $ 8.31 $2.62
Third quarter............................................. $ 8.00 $3.00
Fourth quarter............................................ $ 4.00 $2.18
The foregoing bid quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
Since the Company's IPO in late 1996, the public market for the Company's
Common Stock has been characterized by low and/or erratic trading volume, often
resulting in price volatility. There can be no assurance that there will be an
active public market for the Company's Common Stock in the future. The market
price of the Common Stock could be subject to significant fluctuations in
response to future announcements concerning the Company or its partners or
competitors, the introduction of new products or changes in product pricing
policies by the Company or its competitors, proprietary rights or other
litigation, changes in analysts' earning estimates, general conditions in the
online distribution market, developments in the financial markets and other
factors. In addition, the stock market has, from time to time, experienced
extreme price and volume fluctuations that have particularly affected the market
prices for technology companies and which have often been unrelated to the
operating performance of the affected companies. Broad market fluctuations of
this type may adversely affect the future market price of the Common Stock. See
"Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Liquidity and Capital Resources."
From October 1, 1999 to December 31, 1999, the Company issued the following
unregistered securities:
(1) 57,757 shares of common stock were issued to certain accredited
holders of the Company's common stock pursuant to the terms of their
subscription agreements.
(2) 56,576 shares of common stock were issued as a dividend to the
holders of the Company's Series D Preferred Stock.
(3) 379,437 shares of Series E Preferred Stock were issued to
Hambrecht & Quist Guaranty Finance LLC (H&QGF) at a price per share ranging
from $2.17 to $2.42 pursuant to the terms of the Company's equity line with
H&QGF. The resale of the shares of common stock issuable upon conversion of
the Series E Preferred Stock is covered by an effective registration
statement on Form S-1 (333-83885). The Series E Preferred Stock converts on
a one-for-one basis into common stock at any time at the election of the
holder.
(4) Three-year warrants to purchase an aggregate of 55,000 shares of
common stock with an exercise price of $2.75 per share were issued to two
accredited investors in exchange for their agreement to convert
approximately $500,000 of convertible debentures into common stock prior to
December 31, 1999.
14
15
The sales of the above securities were deemed to be exempt from
registration under Section 4(2) of the Securities Act of 1933, as amended (the
"Act") in reliance upon the Act, or Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering. Recipients of the
securities in each such transaction represented their intentions to acquire such
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
instruments issued in such transactions. All recipients had adequate access to
information about the Company.
(b) Approximate Number of Equity Security Holders
As of March 27, 2000, the number of record holders of the Company's Common
Stock was 128 and the Company believes that the number of beneficial owners was
approximately 1,065.
(c) Dividends
The Company has never paid a cash dividend on its Common Stock and
anticipates that for the foreseeable future any earnings will be retained for
use in its business and, accordingly, does not anticipate the payment of cash
dividends. Future dividends, if any, will depend on, among other things, our
results of operations, capital requirements, restrictions in loan agreements and
on such other factors as our Board of Directors, in its discretion, may consider
relevant.
ITEM 6. SELECTED FINANCIAL DATA.
The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere herein. The consolidated statement of operations data set
forth below with respect to the years ended December 31, 1997, 1998 and 1999 and
the consolidated balance sheet data as of December 31, 1998 and 1999 are derived
from, and are referenced to, the audited consolidated financial statements of
the Company included elsewhere in this Annual Report on Form 10-K. The
consolidated statement of operations data set forth below with respect to the
years ended December 31, 1995 and 1996 and the consolidated balance sheet data
as of December 31, 1995, 1996 and 1997 are derived from financial statements not
included in this Annual Report on Form 10-K.
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues:
Online tuition revenues...................... $ 56 $ 119 $ 1,662 $ 1,549 $ 3,835
Virtual campus software revenues............. 2,718 112 216
Online development and other revenues........ 76 399 1,631 926 977
Product sales revenues....................... 2,330 3,348 1,222
Other service revenues....................... 416 424 718 2,445 305
Instructor-led training revenues............. 1,086 6,303 4,992
------- ------- -------- -------- -------
Total net revenues............................. 548 942 10,145 14,683 11,547
Costs and expenses:
Cost of revenues............................. 82 129 1,849 8,869 5,749
Sales and marketing.......................... 933 1,593 4,439 5,304 4,286
Product development and operations........... 588 1,548 4,926 6,102 2,241
General and administrative................... 927 2,477 2,387 3,783 2,633
Depreciation and amortization................ 309 144 1,012 3,347 2,956
Acquired in-process research, development and
content................................... -- -- 11,100 -- --
15
16
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997 1998 1999
------- ------- -------- -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Compensation expense in connection with the
acquisition of HTR, Inc................... -- -- 690 -- 1,089
Reorganization and other non-recurring
charges................................... -- -- 340 5,585 360
------- ------- -------- -------- -------
Total costs and expenses....................... 2,839 5,891 26,743 32,990 19,314
Loss from operations........................... (2,291) (4,949) (16,599) (18,307) (7,767)
Other income (expense):
Gain (loss) on sale of subsidiaries.......... -- -- -- (907) 1
Other income (expense)....................... 126 304 125 -- --
Interest income (expense).................... (75) 4 329 (597) (721)
------- ------- -------- -------- -------
Net loss....................................... $(2,240) $(4,641) $(16,145) $(19,811) $(8,487)
======= ======= ======== ======== =======
Dividends to preferred stockholders............ (175) (331) -- (358) (448)
------- ------- -------- -------- -------
Net loss attributable to common stockholders... $(2,415) $(4,972) $(16,145) $(20,169) $(8,935)
======= ======= ======== ======== =======
Net loss per share............................. $ (3.13) $ (4.98) $ (4.91) $ (5.27) $ (1.91)
======= ======= ======== ======== =======
Net loss per share -- assuming dilution........ $ (3.13) $ (4.98) $ (4.91) $ (5.27) $ (1.91)
======= ======= ======== ======== =======
DECEMBER 31,
---------------------------------------------------
1995 1996 1997 1998 1999
------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital (deficit).................... $(1,402) $ 14,833 $ (3,789) $ (4,631) $ (5,155)
Total assets................................. 613 17,489 26,465 14,871 10,668
Total liabilities............................ 1,887 1,287 13,054 9,051 8,646
Accumulated deficit.......................... (6,742) (11,383) (27,528) (47,697) (56,632)
Total stockholders' equity................... (1,274) 16,202 13,411 5,820 2,022
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
From time to time, as used herein, the term "Company" shall mean VCampus
Corporation and its subsidiaries: Cognitive Training Associates, Inc., a Texas
corporation; Cooper & Associates, Inc., an Illinois corporation, d/b/a
Teletutor; HTR, Inc., a Delaware corporation; and UOL Leasing, Inc., a Delaware
corporation.
The following presentation of management's discussion and analysis of the
Company's consolidated financial condition and results of operation should be
read in conjunction with the Company's consolidated financial statements,
accompanying notes thereto and other financial information appearing elsewhere
in this report.
OVERVIEW
The Company develops, manages and hosts Internet-based training and
education for corporations, government agencies and academic institutions. The
Company offers its online courseware primarily through its proprietary virtual
campus product, or VCampus(TM), a full-service, centrally-hosted, scalable
distance education platform. It allows for the registration, enrollment,
teaching, testing, grading and certification of distance learners. Through its
HTR and Teletutor subsidiaries, the Company also offers courseware through more
traditional media, including on-site and classroom training, diskette, CD-ROM
and printed formats. During 1999, the Company began implementing its plan to
divest its non-online businesses, with the exception of Teletutor and the
instructor-led division of HTR, in order to focus its efforts on managing its
core online customers and content.
The Company was formed in 1984 as IMSATT Corporation, a multimedia research
and development company. In 1991, the Company acquired from Control Data certain
rights to resell the CYBIS online
16
17
courseware, which consisted primarily of courses in language arts, mathematics,
social studies, science, business and a variety of technical subjects. In 1993,
the Company modified its business focus to capitalize on market opportunities
for online education resulting from technological advances relating to the
Internet. Subsequently, the Company raised additional financing and focused its
development efforts on migrating its technology to the Web in preparation for
the launch of its first Web-based course in November 1995. Under the current
business model, UOL's revenues are derived from five primary sources:
- online tuition revenues;
- product sales revenues;
- development revenues;
- other service revenues; and
- instructor-led training revenues.
Online tuition revenues are generated primarily from online tuition derived
from corporate and academic customers. Product sales revenues are derived from
the sale of computer-based training ("CBT") courses that are delivered through
traditional CBT format (e.g. CD-ROM). Development revenues consist primarily of
fees paid to the Company for developing and converting courseware. Other service
revenues consist primarily of monthly fees generated by the licensing and
maintenance of the CYBIS courseware under the contract with the U.S. Army.
Instructor-led training revenues are generated from on-site and classroom
training fees. During 1998 the Company announced a new strategy to move away
from licensing the VCampus software towards the sales of online courseware
subscriptions. While prior to 1997 licensing and support revenues have
represented a substantial majority of the Company's revenues, the Company
believes that online revenues and product sales will become the primary sources
of its revenues in the future.
ACQUISITIONS AND DIVESTITURES
Since 1994, the Company has completed five acquisitions -- HTR Inc., Cooper
& Associates, Inc. (d/b/a Teletutor), Ivy Software, Inc., Cognitive Training
Associates, Inc. and the CYBIS Division of Control Data Corporation. Each of
these acquisitions was accounted for as a purchase, and accordingly, the
operating results of each acquired company are included in the Company's
financial statements from the effective date of each respective acquisition.
These acquisitions provided the Company with customers and courseware content in
non-online format. The Company does not currently have an agreement, commitment
or understanding with any other potential acquisition candidates. The Company
has followed a strategy of moving content and customers to an online training
platform from the traditional classroom and CBT based training sold through its
non-online business. During 1999, the Company began implementing its plan to
divest its non-online businesses, with the exception of Teletutor, in order to
focus its efforts on managing its core online customers and content. In December
1999, the Company decided to retain and further restructure HTR's instructor-led
training business, closing the Atlanta training facility, streamling the
operations in Rockville and Washington DC, and focusing on moving the remaining
customer base to online.
In October 1997, the Company acquired HTR, Inc. ("HTR") a corporation
primarily engaged in the business of providing traditional and on-site technical
training, publishing and consulting services for the information technology
("IT") industry. The Company acquired HTR for common stock, warrants and options
totaling 620,000 shares, and the assumption of approximately $3,500,000 of debt
and cash and notes payable aggregating approximately $600,000. The executive
officers of HTR were to receive bonuses no later than December 31, 1998 in the
total amount of $690,000 granted in conjunction with the signing of three-year
employment agreements. As of June 29, 1998, the executive officers of HTR agreed
to convert approximately $420,000 of their sign-on bonuses and $320,000 of
acquisition-related indebtedness into 134,447 shares of the Company's Series D
convertible Preferred Stock. In addition, the Company created a stock option
pool of 180,000 shares of Common Stock and an incentive bonus pool with a
potential payout not to exceed approximately $3,300,000 for three years,
contingent upon the financial performance of HTR. In December 1998, the Company
sold HTR's consulting division for $750,000 in cash and notes receivable. The
note bears interest at 5% and is payable in eight equal quarterly installments
beginning March 31, 1999 through
17
18
December 31, 2000. As a result of the sale, the Company recorded a loss on the
sale of subsidiary of $525,472 (or $0.14 per share) for the year ended December
31, 1998. In December 1998, as a result of the Company's plans to divest the
remaining non-online businesses, the Company revalued the remaining assets of
HTR's non-online businesses. As a result, the Company wrote off $3,669,598 (or
$0.96 per share) of goodwill related to these businesses for the year ended
December 31, 1998. In June 1999, the Company sold the HTR Knowledgeworks legacy
business for $1,500,000. In December 1999, the Company decided to retain and
restructure HTR's non-online (instructor-led training) business.
In April 1997, the Company acquired Cooper & Associates, Inc., d/b/a
Teletutor ("Teletutor"), which develops, distributes and supports computer-based
training courses for the data and telecommunications industry. This acquisition
provided the Company with additional content that has been converted into the
Company's online format, as well as access to Teletutor's existing customer
base. The Company paid $3,000,000 in cash and $2,000,000 in promissory notes to
be paid ratably on the first, second and third anniversary dates of the
acquisition. In December 1997, the Company's management, in accordance with its
impairment policy for long-lived assets, determined that the employee workforce
asset had been impaired as of December 31, 1997 due to planned workforce
reductions, and as such, wrote off approximately $250,000 of the carrying amount
of the asset. During 1998, goodwill was reduced to zero and the remaining
intangible assets were reduced ratably by approximately $329,000 due to a
purchase price adjustment related to the acquisition. During 1998, the Company
paid the first installment of $666,667 in cash on the note balance. In December
1998, the Company and the former stockholders of Teletutor restructured the
terms of the note as follows: the Company issued 105,000 shares of Common Stock
and three-year warrants to purchase 55,000 shares of its Common Stock at an
exercise price of $6.00 per share; the Company executed a new non-interest
bearing promissory note for $826,666, payable in installments between March 15,
1999 and April 15, 2000. As a result, the Company recorded $145,208 as loss on
debt restructuring for the excess of the fair market value of the Common Stock,
warrants and new promissory note over the carrying amount of the original
promissory note. The loss in debt restructuring is included in reorganization
and non-recurring expenses in the 1998 statement of operations.
In March 1997, the Company acquired Ivy Software, Inc. ("Ivy") which
develops and distributes business and accounting textbook and software for the
academic education market. This acquisition provided the Company with additional
content as well as access to Ivy's existing customers in the academic
marketplace, ranging from community colleges to large universities. The Company
acquired Ivy in exchange for $314,000 in cash and potential future payments not
to exceed approximately $862,000. In September 1998 the Company sold Ivy back to
its original owner for $250,000 in cash and a note receivable for $196,000. The
note bears interest at 6% and is payable in quarterly installments through
September 2005. As a result of the sale, the Company recorded a loss on the sale
of subsidiary of $381,954, or $0.10 per share, during the third quarter of 1998.
The Company's obligation to make the remaining potential future payments of
approximately $300,000 related to the acquisition was terminated upon the sale.
The Company retains the right to distribute the online versions of Ivy Software.
In August 1996, the Company acquired Cognitive Training Associates, Inc.
("CTA") which develops and distributes technology-based applications online via
distributed networks for educational institutions, corporations and government
agencies. CTA customers can access these applications from remote locations
using the Internet or their organization's intranets. This acquisition provided
the Company with an established customer base and additional content,
particularly in the electrical, medical and scientific equipment subject areas.
The Company acquired CTA in exchange for 42,487 shares of the Company's Common
Stock.
In 1994, the Company acquired the CYBIS division of Control Data, together
with a perpetual nonexclusive license for the CYBIS courseware, which consisted
primarily of courses in language arts, mathematics, social studies, science,
business and a variety of technical subjects. The Company's ability to
distribute a portion of the CYBIS courseware is limited by the terms of its
license. The Company is responsible for the CYBIS computer-based education and
training portion of certain CYBIS contracts to which Control Data is a party, as
well as support and other services under such contracts. The Company believes
that Web-based courseware developed from the CYBIS courseware, to the extent not
restricted by
18
19
the terms of its license, may contribute to revenues in the future. The Company
acquired CYBIS in exchange for $150,000 in cash and $544,000 in notes.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total net revenues for the periods indicated:
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------ ------
STATEMENT OF OPERATIONS DATA:
Revenues:
Online tuition revenues................................ 16.4% 10.6% 33.2%
Virtual campus software revenues....................... 26.8 0.8 1.9
Online Development and other revenues.................. 16.1 6.3 8.5
Product sales revenues................................. 22.9 22.8 10.6
Other service revenues................................. 7.1 16.6 2.6
Instructor-led training revenues....................... 10.7 42.9 43.2
------ ------ ------
Total net revenues............................. 100.0 100.0 100.0
Costs and expenses:
Cost of revenues....................................... 18.2 60.4 49.8
Sales and marketing.................................... 43.7 36.1 37.1
Product development and operations..................... 48.6 41.6 19.4
General and administrative............................. 23.5 25.8 22.8
Depreciation and amortization.......................... 10.0 22.8 25.6
Reorganization and other non-recurring charges......... 119.6 38.0 12.6
------ ------ ------
Total costs and expenses....................... 263.6 224.7 167.3
------ ------ ------
Loss from operations..................................... (163.6) (124.7) (67.3)
Other income (expense):
Other income (expense)................................. 1.2 (6.2) --
Interest income (expense).............................. 3.2 (4.1) (6.2)
------ ------ ------
Net loss................................................. (159.2)% (135.0)% (73.5)%
====== ====== ======
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Summary
The Company incurred a net loss of $8,934,909 (or $1.91 per share) in 1999
as compared to a net loss of $20,169,155 (or $5.27 per share) in 1998. Excluding
certain non-recurring items in both years, the Company incurred a net loss of
$7,487,115 (or $1.60 per share) in 1999 as compared to a net loss of $13,676,515
(or $3.57 per share) in 1998. Non-recurring items for 1999 amounted to
$1,447,794 (or $0.31 per share) and included $1,089,240 of bonuses payable to
the former executives of HTR pursuant to their employment agreements, $360,000
of costs related to a settlement with Sage Interactive, a former partner, and
$1,446 of gain related to the sale of Knowledgeworks. Non-recurring items for
1998 amounted to $6,492,640 (or $1.70 per share) and included $1,770,408 of
costs incurred pursuant to a management reorganization plan, $3,669,598 of
goodwill impairment related to the planned divestiture of certain non-online
businesses, losses of $907,426 related to the sale of Ivy and HTR's consulting
division, and a loss on debt restructuring of $145,208.
Total revenues in 1999 were $11,547,439 as compared to $14,683,112 for
1998. The decrease in revenues was primarily due to the sale of HTR's consulting
line of business in December 1998, the sale of Knowledgeworks in June 1999, the
transition of some Teletutor customers from CD-Rom to online, and the closing of
several HTR training facilities in the latter part of 1998, and in 1999. The
decrease was partially offset by increases in online tuition revenues,
VCampus(TM) software revenues and development and other
19
20
revenue. Online tuition revenues increased from $1,548,950 in 1998 to $3,834,617
in 1999 primarily due to increased course usage by some of the Company's older
customers, the addition of new customers, and the transition of some Teletutor
customers to online delivery. Excluding the non-recurring items described above,
total costs and expenses were $17,864,951 in 1999 as compared to costs of
$27,404,598 for 1998. The decrease was due primarily to the sale of Ivy, and
HTR's consulting and Knowledgeworks businesses in September 1998, December 1998,
and June 1999, respectively, as well as the closing of several HTR training
facilities in the latter part of 1998, and in 1999 as a result of certain
management reorganization plans.
Net Revenues
Total net revenues decreased 21.4% from $14,683,112 in 1998 to $11,547,439
in 1999. Online tuition revenues increased from 1,548,950 (10.5% of net
revenues) in 1998 to $3,834,617 (33.2% of net revenues) in 1999. The increase
was primarily due to increased course usage by some of the Company's older
customers, the addition of new customers, and the transition of some Teletutor
customers to online delivery. Virtual campus software revenues increased from
$112,253 (0.8% of net revenues) for 1998 to $216,341 (1.9% of net revenues) for
1999. The increase is primarily due to the addition of new customers. Online
development and other revenues increased slightly from $925,751 (6.3% of net
revenues) in 1998 to $977,295 (8.5% of net revenues) in 1999. Development
revenues were primarily related to courseware conversion between the Company and
its customers in both years. Product sales revenues decreased from $3,347,777
(22.8% of net revenues) in 1998 to $1,222,389 (10.6% of net revenues) in 1999.
The decrease was primarily due to the sale of Knowledgeworks in June 1999, and
the transition of some Teletutor customers from CD-Rom to online usage. Other
service revenues decreased from $2,444,719 (16.6% of net revenues) in 1998 to
$305,046 (2.6% of net revenues) in 1999. The decrease was due primarily to the
sale of HTR's consulting division in December 1998. Instructor-led training
revenues decreased from $6,303,662 (42.9% of net revenues) in 1998 to $4,991,751
(43.2% of net revenues) in 1999. The decrease was due primarily to the closing
of several HTR training facilities in the latter part of 1998, and in 1999 as a
result of certain management reorganization plans.
Cost of Revenues
Total cost of revenues decreased 35.2% from $8,868,351 (60.4% of net
revenues) in 1998 to $5,748,745 (49.8% of net revenues) in 1999. The decrease
was due primarily to the closing of two instructor-led training facilities at
the end of the second quarter of 1998, the sale of HTR's consulting business at
the end of the fourth quarter of 1998, the sale of Knowledgeworks in June, 1999
and the increase in higher gross margin online tuition revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased 19.2% from
$5,304,394 (36.1% of net revenues) in 1998 to $4,285,989 (37.1% of net revenues)
in 1999. Sales and marketing expenses consist primarily of costs related to
personnel, sales commissions, travel, market research, advertising and marketing
materials. The decrease was due primarily to cost controls initiated at the end
of the first quarter of 1998 as a result of management reorganization plans
partially offset by increased marketing efforts in the latter part of 1999.
Product Development. Product development expenses decreased 63.3% to from
$6,102,265 (41.6% of net revenues) in 1998 to $2,241,283 (19.4% of net revenues)
in 1999. Product development and operations expenses consist primarily of
certain costs associated with the design, programming, testing, documenting and
support of the Company's new and existing courseware and software. The decrease
was due primarily to cost controls initiated at the end of the first quarter of
1998 as a result of management reorganization plans, and the write-off during
the first quarter of 1998 of approximately $694,000 related to previously
capitalized content acquisition and development costs.
General and Administrative. General and administrative expenses decreased
30.4% from $3,782,844 (25.8% of net revenues) in 1998 to $2,632,937 (22.8% of
net revenues) in 1999. General and administrative expenses consist primarily of
personnel costs, facilities and related costs, as well as legal, accounting and
other
20
21
costs. The decrease was due primarily to approximately $1,075,000 of bad debt
expense in the first quarter of 1998, and to a lesser extent, cost controls
initiated at the end of the first quarter of 1998 as a result of management
reorganization plans.
Depreciation and Amortization. Depreciation and amortization expense
decreased 11.7% from $3,346,744 (22.8% of net revenues) in 1998 to $2,955,997
(25.6% of net revenues) in 1999. The decrease was due primarily to the reduction
in goodwill and other intangibles following the sale of Ivy at the end of the
third quarter of 1998, the sale of HTR's consulting business at the end of the
fourth quarter of 1998, the sale of Knowledgeworks at the end of the second
quarter of 1999 and the write-down of goodwill related to the non-online
businesses at the end of the fourth quarter of 1998 as a result of the Company's
plan to divest these assets in 1999.
Compensation expense in connection with the acquisition of HTR,
Inc. During 1999, the Company recognized compensation expense of approximately
$1,089,000 related to bonuses to be paid to the HTR executives pursuant to their
employment agreements.
Reorganization and Other Non-Recurring Charges. During 1998, the Company
implemented a plan to reduce its workforce and close certain office facilities.
The plan resulted in (i) the termination of approximately 85 employees primarily
from the product development and administrative areas and (ii) the closure of
the Company's training facilities located in Los Angeles, and Baltimore, and an
executive office in McLean, Virginia. As a result, the Company recorded a
restructuring charge of approximately $1,770,000. The restructuring charge
included approximately $1,494,000 for employee severance and termination costs
and approximately $276,000 primarily for expenses related to facilities lease
cancellations and write down of assets no longer in use. During 1998, the
Company paid approximately $1,224,000 in costs under the restructuring accrual.
In November 1999, an arbitrator found the Company liable to Sage Interactive for
approximately $360,000 arising out of an alleged contract between Sage
Interactive and the Company. The Company is attempting to settle this dispute
for less than the awarded amount. The Company has accrued for the amount of the
award as of December 31, 1999. The expense is included in reorganization and
other non-recurring charges in the 1999 statement of operations.
Interest and Other Income (Expense). Net interest expense increased 20.8%
from $597,139 in 1998 to $721,423 in 1999. Interest expense was primarily
incurred in connection with the Company's borrowings on its lines of credit
facility and term loans. See "Liquidity and Capital Resources." Interest expense
increased in 1999, primarily due to non-cash expense related to the issuance of
warrants to the holders of the Company's Secured Subordinated Convertible
Debentures as an inducement to convert a portion of their notes to common stock
in December 1999.
Gain (loss) on Sale of Subsidiaries. During 1998 the Company announced
plans to divest its non-online businesses in order to focus its efforts on its
core online training business. The Company believes this move is consistent with
its strategy of moving content and customers to an online training platform from
the traditional classroom training sold through its non-online businesses. As
such, in September 1998, the Company sold Ivy back to its original owner. As a
result of this sale, the Company recorded a loss on the sale of subsidiary of
$381,954 (or $0.10 per share) during the third quarter of 1998. In December
1998, the Company sold HTR's consulting division. As a result of this sale, the
Company recorded a loss on the sale of subsidiary of $525,472 (or $0.14 per
share) for the year ended December 31, 1998. In June 1999, the Company sold
HTR's Knowledgeworks business and recorded a gain of $1,446 upon the sale.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Summary
The Company incurred a net loss of $20,169,155 (or $5.27 per share) in 1998
as compared to a net loss of $16,144,763 (or $4.91 per share) in 1997. Excluding
certain non-recurring items in both years, the Company incurred a net loss of
$13,676,515 (or $3.57 per share) in 1998 as compared to a net loss of $4,014,419
(or $1.22 per share) in 1997. Non-recurring items for 1998 amounted to
$6,492,640 (or $1.70 per share) and included $1,770,408 of costs incurred
pursuant to a management reorganization plan, $3,669,598 goodwill impairment
related to the planned divestiture of certain non-online businesses, losses of
$907,426 related to
21
22
the sale of Ivy and HTR's consulting division, and a loss on debt restructuring
of $145,208. Non-recurring items for 1997 totaled $12,130,344 (or $3.69 per
share) and included acquired in-process research and development costs of
$2,700,000 and $8,400,000 related to the acquisition of Teletutor and HTR,
respectively, $690,000 of compensation expense related to the acquisition of HTR
and $340,344 pursuant to a management reorganization plan. Total revenues in
1998 were $14,683,112 as compared to $10,144,500 for 1997. The increase in
revenues was due primarily to the acquisitions of Ivy, Teletutor and HTR and was
partially offset by decreases in VCampus software revenues and development and
other revenue. Online tuition revenues decreased from $1,662,058 in 1997 to
$1,548,950 in 1998 primarily due to the Company's change in method for
recognizing revenue for its VCampus software systems and prepaid online tuition
fees upon adoption of the AICPA Statement of Position 97-2, "Software Revenue
Recognition, ("SOP 97-2"). VCampus software revenues decreased from $2,718,000
in 1997 to $112,253 primarily due to the Company's new marketing strategy of
moving away from licensing the VCampus software towards sales of online
courseware subscriptions. Development and other revenues decreased in 1998 as
compared to 1997 primarily due to an agreement with one customer in 1997 that
provided funding for the development of a custom VCampus in exchange for a share
of future net revenues derived from the operation of such campus and warrants to
purchase Common Stock of the Company. Excluding this one customer from 1997,
development and other revenues decreased slightly from 1997 to 1998. Excluding
the non-recurring items described above, total costs and expenses were
$27,404,598 in 1998 as compared to costs of $14,612,719 for 1997. The increase
was due primarily to the addition of Ivy, Teletutor and HTR costs and expenses
as well as increased operating costs related to the expansion of operations
prior to workforce reductions and the closing of certain office facilities
implemented during 1998 as a result of certain management reorganization plans.
Net Revenues
Total net revenues increased 45% from $10,144,500 in 1997 to $14,683,112 in
1998. Online tuition revenues decreased from $1,662,058 (16.4% of net revenues)
in 1997 to $1,548,950 (10.6% of net revenues) in 1998. While the Company
delivered approximately 95,000 courses online, a six-fold increase over 1997's
approximately 15,000, online tuition revenues decreased due to the Company's
adoption of SOP 97-2 as of January 1, 1998, which requires the Company to
recognize revenue ratably over the length of the service period. Virtual campus
software revenues decreased from $2,718,000 (26.8% of net revenues) for 1997 to
$112,253 (0.8% of net revenues) for 1998. The decrease is primarily due to the
Company's new marketing strategy of moving away from licensing the VCampus
software towards sales of online courseware subscriptions. Product sales
revenues increased in absolute terms from $2,330,029 (22.9% of net revenues) in
1997 to $3,347,777 (22.8% of net revenues) in 1998. The increase was due
primarily to the acquisition of the Ivy, Teletutor and HTR product lines.
Development and other revenues decreased from $1,631,233 (16.1% of net revenues)
in 1997 to $925,751 (6.3% of net revenues) in 1998 primarily due to an agreement
with one customer in 1997 that provided funding for the development of a custom
VCampus in exchange for a share of future net revenues derived from the
operation of such campus and warrants to purchase Common Stock of the Company.
Excluding this one customer from 1997, development and other revenues decreased
slightly from 1997 to 1998. Development revenues were primarily related to
courseware conversion between the Company and its customers in both years. Other
service revenues increased from $717,546 (7.1% of net revenues) in 1997 to
$2,444,719 (16.6% of net revenues) in 1998. The increase was due primarily to
the acquisition of HTR in October 1997. Instructor-led training revenues
increased from $1,085,634 (10.7% of net revenues) in 1997 to $6,303,662 (42.9%
of net revenues) in 1998. The increase was due primarily to the acquisition of
HTR in October 1997.
Cost of Revenues
Total cost of revenues increased from $1,849,287 (18.2% of net revenues) in
1997 to $8,868,351 (60.4% of net revenues) in 1998. Total cost of revenues
increased in absolute dollars due primarily to the acquisitions of Ivy,
Teletutor and HTR. As a percentage of net revenues, cost of revenues increased,
due primarily to the addition of instructor-led training revenues, which have
higher direct costs than the Company's other sources of revenues. The Company
believes that in the future, once the remaining non-online businesses are sold,
cost of revenues will decrease in absolute dollars, and will decrease as a
percentage of total net revenues.
22
23
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased in absolute
terms from $4,438,717 (43.7% of net revenues) in 1997 to $5,304,394 (36.1% of
net revenues) in 1998. Sales and marketing expenses consist primarily of costs
related to personnel, sales commissions, travel, market research, advertising
and marketing materials. Sales and marketing expenses increased in absolute
dollars due primarily to the addition of Ivy, Teletutor and HTR, but decreased
as a percentage of revenues because of the greater increase in revenues. The
Company expects sales and marketing expense to increase substantially in the
future as the Company expands its sales and marketing efforts.
Product Development and Operations. Product development and operations
expenses increased in absolute terms from $4,925,956 (48.6% of net revenues) in
1997 to $6,102,265 (41.6% of net revenues) in 1998. Product development and
operations expenses consist primarily of certain costs associated with the
design, programming, testing, documenting and support of the Company's new and
existing courseware and software. Product development and operations expenses
increased in absolute dollars due primarily to the acquisition of Teletutor and
HTR. In addition, the Company wrote-off approximately $694,000 related to
certain content acquisition and development costs. As a percentage of net
revenues, product development and operations expenses decreased in 1998 as
compared to 1997 due primarily to increased revenues and workforce reductions
implemented during 1998 as a result of management reorganization plans and
because of 1997 efforts to build the Company's courseware library.
General and Administrative. Excluding $1,300,000 of bad debt expense
recognized in the first quarter of 1998 for certain uncollectible accounts
receivable, general and administrative expenses increased from $2,387,172 (23.5%
of net revenues) in 1997 to $2,482,844 (17.0% of net revenues) in 1998. General
and administrative expenses consist primarily of personnel costs, facilities and
related costs, as well as legal, accounting and other costs. General and
administrative expenses increased in absolute dollars due primarily to the
acquisition of Ivy, Teletutor and HTR. As a percentage of revenues, general and
administrative costs decreased in 1998 as compared to 1997 due primarily to
increased revenues and workforce reductions during 1998 as a result of
management reorganization plans.
Depreciation and Amortization. Depreciation and amortization expense
increased from $1,011,587 (10.0% of net revenues) in 1997 to $3,346,744 (22.8%
of net revenues) in 1998. Depreciation expense increased due primarily to
additional purchases of computer equipment and other assets in 1997 to support
product development, technical operations and personnel needs as well as the
acquisitions of Ivy, Teletutor and HTR. Amortization expense increased due
primarily to the acquisitions of Ivy, Teletutor and HTR, and amortization of
capitalized software and acquired content costs.
Reorganization Costs. During 1998, the Company implemented a plan to
reduce its workforce and close certain office facilities. The plan resulted in
(i) the termination of approximately 85 employees primarily from the product
development and administrative areas and (ii) the closure of the Company's
training facilities located in Los Angeles, and Baltimore, and an executive
office in McLean, Virginia. As a result, the Company recorded a restructuring
charge of approximately $1,770,000. The restructuring charge included
approximately $1,494,000 for employee severance and termination costs and
approximately $276,000 primarily for expenses related to facilities lease
cancellations and write down of assets no longer in use. During 1998, the
Company paid approximately $1,224,000 in costs under the restructuring accrual.
Included in accounts payable and accrued expenses at December 31, 1998 is
approximately $546,000 primarily representing future severance payments.
Interest and Other Income (Expense). Net interest income was $328,800 in
1997 and net interest expense was $597,139 in 1998. Interest income was derived
primarily from investing funds raised in the Company's private and public
securities offerings during 1996. Other income of $125,000 in 1997 was derived
from the sale of an investment in a joint venture (an asset acquired in
connection with the acquisition of HTR).
Loss on Sale of Subsidiaries. During 1998 the Company announced plans to
divest its non-online businesses in order to focus its efforts on its core
online training business. The Company believes this move is
23
24
consistent with its strategy of moving content and customers to an online
training platform from the traditional classroom training sold through its
non-online businesses. As such, in September 1998, the Company sold Ivy back to
its original owner. As a result of this sale, the Company recorded a loss on the
sale of subsidiary of $381,954 (or $0.10 per share) during the third quarter of
1998. In December 1998, the Company sold HTR's consulting division. As a result
of this sale, the Company recorded a loss on the sale of subsidiary of $525,472
(or $0.14 per share) for the year ended December 31, 1998.
YEAR 2000
The Company has not experienced any material negative effects from the Year
2000 problem and it does not believe that any Year 2000 issues that have yet to
surface will materially adversely affect its business. The Company estimates
that it spent less than approximately $100,000 to implement its Year 2000
compliance program.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had $204,555 in cash and cash
equivalents. Since its inception, the Company has financed its operating cash
flow needs primarily through offerings of equity and debt securities and, to a
lesser extent, borrowings. Cash utilized in operating activities was $2,670,523
for the year ended December 31, 1999 and $9,500,483 for the year ended December
31, 1998. Use of cash was primarily attributable to the net loss recorded.
Cash utilized in investing activities was $60,514 for the year ended
December 31, 1999 as compared to $1,398,793 for the year ended December 31,
1998. The use of cash for investing activities in 1998 was primarily
attributable to purchases of equipment, software development costs that were
capitalized, and in 1998, approximately $356,000 paid to the former shareholder
of Ivy pursuant to the acquisition agreement. The use of cash for investing
activities during 1998 primarily represented purchases of equipment and
investments in software and courseware development.
Cash provided by financing activities was $2,599,299 for the year ended
December 31, 1999 as compared to $8,529,979 provided by financing activities for
the year ended December 31, 1998.
The Company expects negative cash flow from operations to continue for at
least the next six months until the online revenue stream matures. The Company
recognizes that it will need to raise additional funding to meet its working
capital requirements, retire existing debt and fund anticipated ongoing
operating losses. Since the beginning of 1999, the Company has taken the
following actions to provide future funding for operations:
- In February 1999, the Company raised approximately $1,050,000 through a
private placement of 282,500 shares of its Common Stock at $4.00 per
share. In connection with this transaction, the Company also issued
warrants, exercisable over 3 years at $3.00 per share, for the purchase
of 70,625 shares of Common Stock.
- In April 1999, the Company raised approximately $1.3 million through a
private placement of 448,297 shares of common stock at a price of $2.9375
per share.
- In June 1999, the Company sold the HTR Knowledgeworks legacy business for
$1.5 million in a combination of cash and notes receivable.
- In June 1999, the Company raised $2.5 million through the issuance of its
9% Secured Subordinated Convertible Debentures due December 15, 2000. All
of this indebtedness has been converted to common stock at prices ranging
from $2.12 to $5.55 per share.
- In June 1999, the Company entered into an equity line of credit agreement
with H&QGF to provide up to $3.0 million of private equity financing
through May 31, 2000. Through March 2000, the Company had drawn down
approximately $1.86 million under this equity line. In March 2000, H&QGF
agreed to increase the capacity under this equity line from $3 million to
$5 million and to extend the term through July 31, 2000 in exchange for
warrants to purchase 43,632 shares of Series E Preferred Stock.
24
25
This amendment is conditioned upon getting NASD approval, if required, for the
warrant grant. The Company has the option of making additional draw downs of up
to $500,000 every 15 business days through July 31, 2000.
- In January 2000, the Company secured a $4 million strategic investment
from Mastech Corporation, through Mastech's eVentures business unit, in
exchange for approximately 1,136,000 shares of common stock at $3.62 per
share (which was a 20% premium above the average closing price for a
15-day trailing period). The Company and Mastech also intend to form a
strategic partnership through which Mastech would promote VCampus as a
platform for hosting corporate virtual campuses to its 1000 global
customers.
If the Company does not address its funding needs, it will be materially
adversely affected. The Company's future capital requirements will depend on
many factors, including, but not limited to, acceptance of and demand for its
products and services, the types of arrangements that the Company may enter into
with customers and partners, and the extent to which the Company invests in new
technology and research and development projects.
As of December 31, 1999, the Company had net operating loss carryforwards
of approximately $38,033,000 for federal income tax purposes, which will expire
at various dates through 2019. The Company's ability to utilize all of its net
operating loss and credit carryforwards may be limited by changes in ownership.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
25
26
PART III
Certain information required by Part III is omitted from this report
because the Registrant intends to file a definitive proxy statement for its 2000
Annual Meeting of Stockholders (the "Proxy Statement") within 120 days after the
end of its fiscal year pursuant to Regulation 14A promulgated under the
Securities Exchange Act of 1934, as amended, and the information included
therein is incorporated herein by reference to the extent provided below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 of Form 10-K concerning the
Registrant's executive officers is set forth under the heading "Executive
Officers" located at the end of Part I of this Form 10-K.
The other information required by Item 10 of Form 10-K concerning the
Registrant's directors is incorporated by reference to the information under the
heading "Proposal No. 1 -- Election of Directors" and "Other
Information -- Section 16(a) Beneficial Ownership Reporting Compliance" in the
Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 of Form 10-K is incorporated by
reference to the information under the heading "Proposal No. 1 -- Election of
Directors -- Information Concerning the Board of Directors and Its Committees",
"Other Information -- Executive Compensation", "-- Compensation of Directors",
"-- Report of the Compensation Committee on Executive Compensation",
"-- Compensation Committee Interlocks and Insider Participation" and
"-- Performance Graph" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 of Form 10-K is incorporated by
reference to the information under the heading "Other Information -- Principal
Stockholders" in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 of Form 10-K is incorporated by
reference to the information under the heading "Other Information -- Certain
Transactions" in the Proxy Statement.
26
27
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following Financial Statements, Financial Statement Schedules and
Exhibits are filed as part of this report:
(1) Financial Statements.
See Index to Consolidated Financial Statements on page F-1.
(2) Financial Statement Schedules.
The following financial statement schedule is filed with this
report:
Schedule II -- Valuation and Qualifying Account and Reserve
All other financial statement schedules for which provision is
made in Regulation S-X are omitted because they are not required
under the related instructions, are inapplicable, or the required
information is given in the financial statements, including the
notes thereto and, therefore, have been omitted.
(3) Exhibits.
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1(a) Amended and Restated Certificate of Incorporation, as
currently in Effect
3.2(a) Amended and Restated Bylaws, as currently in effect
4.1(a) Form of Common Stock certificate
10.15(a) Form of Online Educational Services Distribution Agreement
10.16(a) Form of University Master Agreement for Online Education
Services
10.17(a) Form of Online Educational Services Agreement
10.18(a) Form of Inner Circle Online Educational Services Development
and Distribution Agreement
10.23(e) Employment Agreement, dated April 30, 1997, with James R.
Cooper
10.24(e) Employment Agreement, dated January 1, 1997, with Michael W.
Anderson
10.25(e) Employment Agreement, dated October 31, 1997, with Kamyar
Kaviani
10.26(e) Employment Agreement, dated October 31, 1997, with Farzin
Arsanjani
10.27(e) Employment Agreement, dated October 31, 1997, with Daniel J.
Callahan, IV
10.29(f) First Union loan amendment documents dated March 31, 1998.
10.30(f) Series C Preferred Stock and Warrant Purchase Agreement.
10.31(f) Registration Rights Agreement, dated March 31, 1998.
10.32(g) Series D Preferred Stock Purchase Agreement, dated June 29,
1998.
10.33(g) Amended and Restated Registration Rights Agreement, dated
June 29, 1998
10.34(g) Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock dated June 26, 1998
10.35(g) Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock dated June 25, 1998.
10.36(h) Loan and Security Agreement dated August 14, 1998 with
Imperial Bank
10.37(h) Warrant to Purchase Stock dated August 14, 1998 issued to
Imperial Bank.
10.38(h) Loan Agreement dated August 14, 1998 with Sand Hill Capital,
LLC
27
28
EXHIBIT NO. DESCRIPTION
----------- -----------
10.39(h) Warrant to Purchase Stock dated August 14, 1998 issued to
Sand Hill Capital, LLC.
10.40(i) Form of Subscription Agreement for the $1.05 million Spencer
Trask Financing.
10.41(j) Private Equity Line of Credit Agreement dated May 4, 1999
with Hambrecht & Quist Guaranty Finance, LLC
10.42(j) Certificate of Designations, Preferences and Rights of
Series E Convertible Preferred Stock.
10.43(j) Convertible Debenture and Warrants Purchase Agreement dated
June 4, 1999 with Excalibur Limited Partnership and BH
Capital Investments, L.P. relating to the $2.5 million
10.44(j) Form of Convertible Debenture for the $2.5 million
convertible debenture financing in June 1999.
10.45(k) Asset Purchase Agreement relating to the sale of the
Knowledgeworks division of HTR effective on June 30, 1999.
10.46(k) Receivables factoring agreements, as amended, with Bankers
Capital
10.47(l) Stock Purchase Agreement dated as of January 11, 2000 by and
among the Registrant and Mastech Corporation
10.48(l) Registration Rights Agreement dated as of January 11, 2000
by and among the Registrant and Mastech Corporation
10.49(l) Warrant issued to Mastech Corporation, dated as of January
11, 2000
23.1 Consent of Ernst & Young, LLP, Independent Auditors
- ---------------
* Confidential treatment requested.
(a) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 333-12135).
(e) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.
(f) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(g) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(h) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.
(i) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.
(j) Incorporated by reference to the corresponding appendix filed with the
Registrant's preliminary proxy materials on Schedule 14A dated July 16, 1999
for its 1999 annual meeting of stockholders.
(k) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Registration Statement on Form S-1 (No. 333-83885) filed with
the SEC on July 27, 1999, as amended.
(l) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's current Report on Form 8-K filed January 13, 2000.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter
of the fiscal year ended December 31, 1999.
28
29
VCAMPUS CORPORATION (FORMERLY UOL PUBLIS