UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

 

Commission file number 0-21421

 

VCAMPUS CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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  ý   No  o

 

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

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 126-2 of the Act) Yes  o  No  ý

 

The aggregate market value of the common stock held by non-affiliates of the registrant based upon the closing price of the Common Stock on June 30, 2002, on the Nasdaq SmallCap Market System was approximately $4,468,611 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 26, 2003, the registrant had outstanding 1,581,307 shares of Common Stock.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the Company’s Proxy Statement for the 2003 Annual Meeting of Stockholders are incorporated herein by reference into Part III.

 

 

NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

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; 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 (or the “Company”)  is a leading provider of outsourced e-learning solutions. The Company manages and hosts Internet-based learning environments for corporations, government agencies, institutions of higher education, and associations. The Company’s services cover a broad range of e-learning programs, from enrollment and payment to course development and delivery, as well as tracking of students’ progress and reporting of results.

 

Through its proprietary software the Company provides customers with comprehensive solutions on an outsourced, or hosted, basis.  The Company believes that its outsourced hosting approach to web-based e-learning services provides significant business advantages to its customers. The Company charges customers a relatively low upfront fee to establish a customized virtual campus, or “vcampus”, and then charges customers on either a subscription or usage basis for the service on an ongoing basis.  The Company believes this model creates a consistent revenue stream, as well as a “backlog” of revenue for the Company.  The Company believes that these factors, particularly when combined with the relatively high switching costs customers incur to change e-Learning service providers, provide a solid revenue base for the Company.  The Company believes its market strengths to be:

 

•                  a rapid, non-time-consuming implementation, achieved in a matter of days;

•                  minimal upfront investment required for the service;

•                  ready-to-go library of over 7,200 online courses;

•                  consistent delivery of high-quality courseware;

•                  proven system performance and scalability;

•                  delivery of content from virtually any source; and

•                  system compliance with industry standards (SCORM (Shareable Content Object Reference Model), Section 508 (of the Federal Rehabilitation Act), AICC (Aviation Industry Computer-based Training Committee – established standards of interoperability) and SOAP (Simple Object Access Protocol).

 

VCampus believes that it holds several key advantages in the e-learning marketplace:

 

Diverse customer list. VCampus has a diverse set of customers, including relationships with the Company that have extended for as many as six years. VCampus’ customer base is noteworthy for representing a wide range of sectors, including corporations, government agencies, institutes of higher education, professional associations and retail-oriented training sites.

 

Diversified business base. VCampus serves customers from a wide variety of market sectors – including corporations, associations, government agencies, and institutes of higher education. As such, the Company is able to provide its customers with a unique ability to participate in communities of learning. The VCampus platform enables VCampus customers to share content, thereby creating

 

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cross-sale opportunities from customer to customer. Several VCampus customers successfully sell their content to other VCampus customers simply by offering their content on the advanced Vcampus platform.

 

Open technology. The VCampus technology affords customers a number of advantages in terms of its ability to rapidly and cost-effectively implement a comprehensive and secure e-learning and training environment.  The Company’s content-neutral, open architecture platform allows for access to a wide range of aggregated content, the ability to quickly add new functionality, leverage new technology and to support a vast number of users. The Company’s recently introduced web services capabilities enable customers to easily integrate VCampus technology with other existing systems (including enterprise resource planning systems and human resource information systems).

 

Expansive library of content aggregated from leading sources. Using VCampus’s proprietary course development technology, known as its Course Construction Set, a customer’s own training materials may be combined with the Company’s off-the-shelf, third-party content library consisting of thousands of courses, on subjects including management skills, information technology, telecommunications and personal development, to design a comprehensive training curriculum.  The Company’s existing content library, marketed as ContentMattersä, includes over 2,500 publicly-available online courses from approximately 25 leading providers, including SkillSoft, NETg, Element K, American Media, Dearborn Financial Publishing, NIIT and Crisp Learning. The Company also has agreements to distribute some courseware that has been developed by its customers, such as the New York Institute of Finance, to other VCampus customers. VCampus’ wholly-owned library of telecommunications and desktop publishing courses are marketed under the Teletutor and VCampus brand names.

 

Extensive experience. The Company has delivered over 2.6 million courses over the past seven years.  Currently the Company has over 740,000 enrolled users.  The Company has operated in the e-learning space for more than seven years. VCampus maintains solid, long-term relationships with established customers and benefits from a highly experienced and knowledgeable management team.

 

Flexibility. The Company’s technology and implementation process is flexible to respond to diverse customer needs. The Company offers rapid implementation on a content-neutral platform that allows access to both off-the-shelf and proprietary courseware. The Company offers customization of its products and services for each customer, as well as rapid incorporation of new technologies. The Company’s technology and services are designed to be scaleable on demand to meet customer needs.

 

Comprehensive Solution. VCampus offers a completely hosted solution, accessible by virtually any web browser. The VCampus solution includes a leading edge Learning Management System, Course Construction Set ™ and Courseware Delivery Engine. The technology and service have been proven and tested through successful implementations for scores of customers, where thousands of students have experienced VCampus-based e-Learning for up to seven years.

 

Industry Background

 

The Company believes the market for e-learning, with a 2002 market size of approximately $10.3 billion in the U.S. according to Brandon-Hall, is continuing to grow, in spite of the “dot com” crash and the current downturn in the economy.  Both IDC and Brandon-Hall expect an increase in corporate and government e-learning spending in 2003 and beyond, with IDC predicting a compound average growth rate (CAGR) of 36.7 percent between 2001 and 2006.  Management believes this steady increase provides the Company with significant opportunity for growth.  Additionally, the Company expects significant industry growth in content revenues.

 

IDC updated its projections for the corporate e-learning market worldwide in January 2003 in its study entitled “Market Analysis:  Begin Act II:  Worldwide and U.S Corporate e-learning Forecast 2002-2006.”  This study predicts the market will grow from $6.6 billion in 2002 to $23.7 billion in 2006.  The US market represents the largest national e-learning market for vendors and IDC predicts it will grow 36.5% over the next five years.  IDC reports that corporate e-learning remains one of the fastest growing markets it tracks and presents vendors with the opportunity for financial success.

 

Overall findings by multiple organizations show an increase in the e-learning market in 2002, with an increase again in 2003 and beyond.  A study by Brandon-Hall, entitled “The Growth of e-learning in 2002:  Profile of Industries and Departments,” found that of the 112 responses from corporate users, 89 percent said at least one department within their organization had started using or expanded its use of e-learning since the beginning of the year.  Additionally, 94 percent of the respondents said they plan to expand the use of e-learning in at least one area of their company in 2003.

 

In spite of the economic downturn and the slow recovery of corporate training budgets, e-learning continues to gain share against its mainstay education and training counterparts.  Buyers in 2001 and 2002 became more educated about e-learning as a solution and a process.  Purchasers in this dynamic market are more educated than the earliest adopters of e-learning.  The Company believes corporate buyers will drive longer sales cycles, rigorous sets of requirements in requests for proposals (RFPs), and will be

 

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focused on addressing business needs.  Additionally, the Company has observed that sales cycles have lengthened in both the government and commercial markets, averaging between 8 and 12 months.

 

Company Strategy

 

The Company’s mission is to be the leading service provider of integrated e-learning solutions by helping customers improve their performance and achieve their goals. The Company’s strategies to achieve this objective include continuing to: focus on high-revenue opportunities, develop strategic relationships, develop strategic content, provide superior customer service, and develop new and upgrade existing technologies. The Company’s strategy also includes increasing revenue from each customer by converting more of each customer’s proprietary content to online distribution through the VCampus platform.  The Company also intends to grow the cross-selling of content between various customers. The intended result is increased penetration and enhanced customer loyalty.

 

Focus on High-Revenue Opportunities

 

VCampus is focused on finding and developing new opportunities for significant revenue based on three factors. The Company seeks sales opportunities in which: 1. training is for a large audience  (e.g., employee base of government institution or corporation or students of distance education school); 2. training is required  (e.g., mandatory for employees, required certification, academic degree); and 3. training is paid for by a third party, not by the student (e.g., paid directly by employer or through tuition assistance programs).

 

The Company believes that the highest-growth segment of the e-learning market is the service of online distance education programs for institutions of higher education. Although the Company maintains customers in this segment, management believes the Company’s technology needs to become more competitive for this segment. Consequently, the Company is currently developing upgraded technology designed to attract and maintain higher education customers. Additionally, the Company is working to develop significant new customer relationships with institutions of higher education offering significant distance learning programs online.

 

Develop Strategic Relationships

 

Based on success with  past and current relationships with several customers, the Company targets organizations that provide the opportunity for mutual benefit from a multi-faceted relationship. Typically, target partners provide classroom-based training to a wide audience but have not yet incorporated online training into their training model. VCampus enables organizations to add online learning quickly, efficiently and inexpensively. Collaboration opportunities include online delivery of content the customer converts, conversion and online delivery of courses by the Company and development of courses for online delivery which would be owned, at least partially, by the Company.

 

Develop Strategic Content

 

The Company invests in the development of courses deemed strategic in nature to attract customers with strong revenue prospects. Typically, these courses are developed in collaboration with a recognized subject matter expert. Content considered for co-development must lend itself a large, reachable audience and offer the audience a powerful reason to attend the course (e.g., compliance with laws, certification, Continuing Professional Education credits (CPEs) or Continuing Education Units (CEUs)). Examples of strategically-developed courses at VCampus include Information Security and several HIPPA (Health Insurance Portability and Accountability Act) courses. Courses so developed may be owned, at least partially, by the Company.

 

Provide Superior Customer Service

 

VCampus’ core customer service principle is to deliver uniquely superior service through creative, committed and well-trained employees who work as a team.  The Company utilizes TeamCare^SM, a service methodology grounded upon developing relationships between key players from both VCampus and each customer.  The partnership includes an executive member, a project manager, an account manager and the customer care center. Each member of the team has a defined series of roles and responsibilities for monitoring and supporting the health and growth of the customer relationship. Furthermore, the team is responsible for continuous review of the customer’s content needs, introduction of existing and new VCampus services, recommendation of suitable additional content, identification of the potential need for custom courseware development, pedagogy and instructional design and the recommendation of platform configurations for customer-specific business processes.

 

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Develop and Upgrade 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. VCampus’s system is designed to accommodate users on both low and high bandwidth connections, enabling the Company to serve a wide range of end users without requiring a large investment on their part. Additionally, the VCampus system is a completely outsourced system; no investment in software or hardware is required of customers or students (other than access to the Internet via a web browser).

 

During 2002, VCampus announced the Launch of VNexus™, a next generation platform making VCampus the first e-learning company to launch a fully SOAP-compliant Learning Management platform with superior web services capabilities. By standardizing on the SOAP protocol, VNexus employs XML, a recognized universal standard, to communicate with an organization’s information technology infrastructure. XML provides inherent flexibility because it can operate across any operating system or platform, thereby reducing possible barriers to integration. Recognizing that some organizations have not standardized on XML, VCampus also offers other communication formats with VNexus.

 

VCampus plans to release major upgrades of its technology during 2003 as well. The Company believes these upgrades will lower the cost of course delivery, increase the scalability and reliability of the system and improve the ease of use for both learners and content courseware authors. The Company plans major platform upgrades designed to dramatically increase the technology’s applicability to the higher education distance learning market.

 

Products and Services

 

VCampus offers a wide range of products and services, the majority of which center around a virtual campus or “vcampus.” The vcampus mimics the functions of a university campus on the Internet – handling student admissions, registrations, course delivery, grading and tracking. Customers are able to choose from the Company’s extensive off-the-shelf library, convert existing courses to an online format, or use courses provided by another vendor, all for use within their vcampus.

 

The Company’s technology allows customers to use a variety of content on an open, internet-based architecture, on an outsourced hosting basis. The system displays each customer’s graphical “look and feel.”  Management believes this open architecture makes VCampus’ hosted technology more flexible than that of many of its competitors.

 

The Company’s vcampus is a centrally-hosted e-Learning delivery and tracking system accessible by virtually any Internet-ready PC. Students generally enroll in the Company’s courses online through a VCampus, but have the option to enroll in person, by telephone or through the mail. Customers also have the ability to register students in bulk. Once registered,  students can access the courseware online, typically through a PC connected to the Internet or through a corporate intranet or extranet. When a student has completed the course, he or she will receive credit or certification, if appropriate. The VCampus technology is a proven system, having served approximately 2.6 million courses since introduction.

 

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 supports a wide variety of tools and utilities supplied by third parties, such as Netscape Navigator/Communicator, Microsoft Internet Explorer, Macromedia Shockwave and Flash, Real Networks Streaming, and other browser-based plug-ins.  In addition, the Company has developed the following proprietary software tools that facilitate the functionality of the VCampus:

 

The Courseware Delivery Engine — a proven system for presenting the total e-learning experience. This product was designed and built to serve as an integrated, Web-based courseware construction and delivery tool. First delivered in August 1997, the product has been used to build and deliver the Company’s courseware library of more than 7,200 online courses as of December 31, 2002. The VCampus Courseware Delivery Engine provides a simple, easy-to-use environment for instructors and students capable of assessing, tracking and testing students as they complete a course.

 

The Course Construction Set — is designed to be simple to use yet rich in possibilities and performance. The courseware developer has access to a complete suite of Web-based tools necessary to construct and deliver highly interactive, online courses. The “PointPage” functionality of the product provides a choice of methods for displaying content. The “Activity Studio” enables non-programmers to construct and include 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

 

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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.

 

The Curriculum Group Manager — allows training managers to create an enterprise-wide individualized training program by facilitating the grouping of students with similar education needs and abilities to appropriate groups of courses within a VCampus. The result is a specific student “Training Plan” 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 standards established for test scores and attendance.

 

Batch/Mass Enrollment Tools — facilitate the enrollment of large groups into the vcampus and/or courses. Organizations 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.

 

To provide a complete learning experience for customers, the Company also provides threaded discussions (VDiscussion), live virtual meetings (VMeeting), online surveys (VSurvey), platform administrator training, Course Construction Set training, e-Learning consulting on strategy and overall programs, custom courseware development and integration with other systems through VNexus.

 

Existing Courseware Library

 

The Company currently offers approximately 7,200 courses real-time on its e-learning system and has the rights to offer an additional 2,600 which can be promptly added in response to customer requests.  The Company’s 2,500 publicly-available courses are marketed under the name ContentMatters^TM. The Company’s courseware strategy involves the provision of the following three components:  (1) strategically-developed courses from VCampus; (2) COTS, or commercial off-the-shelf, courses from a variety of leading third-party course vendors; and (3) custom courseware development for the proprietary training needs of the Company’s customers.

 

Strategically Developed Courses

 

The Company invests in the development of courses which management deems strategic in nature to attract customers with strong revenue prospects. Typically, this type of course is developed in partnership with a leading expert in the field. Content considered for co-development must target a large, reachable audience and offer the audience some compelling reason to attend the course (e.g., compliance with laws, certification, CPEs or CEUs). Examples of strategically-developed courses include Information Security and several HIPPA courses. Courses so developed may be owned, at least partially, by the Company.

 

COTS Library

 

The Company currently offers approximately 2,500 online courses real-time on its e-learning system and has the rights to offer an additional 2,600 which can be promptly added in response to customer requests.  The current library was built from a combination of acquisitions, the Company’s own development efforts and relationships with leading content providers such as SmartForce, NETg, NIIT, Infosource, Vital Learning, Crisp Publications Inc., Marcom, Aztec Software and American Media Inc.  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.

 

Custom Library

 

The Company’s existing custom courseware library includes approximately 4,700 online courses built by VCampus corporate, higher education and government customers for their own proprietary use.  The Company believes these courses provide more long-term revenue potential than commercial off-the-shelf courses, which are beginning to become commoditized and might continue to become so over time.  The Company believes the growth of this custom library is evidence of customer satisfaction with the Company’s authoring and delivery products.

 

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Customers

 

The Company’s primary target markets are the government, corporate training and higher education distance learning markets. As a result of the telecommunications market “melt-down,” the Company experienced high customer turnover due to its heavy exposure to telecommunications customers. Since 2001, Management has intentionally broadened the customer base of the Company to reduce the vulnerability to a downturn in any one particular market. The Company’s online tuition revenues were balanced fairly equally among the three segments in 2002. In 2002, two customers, Park University and the U.S. Department of Veterans Affairs accounted for approximately 31% and 11% of the Company’s revenues, respectively.  The Company currently anticipates that future revenues may be derived from sales to a limited number of customers. Accordingly, the cancellation, non-renewal or deferral of a small number of contracts could have a material adverse effect on the Company.

 

Sales and Marketing

 

The Company’s primary marketing goals are to identify and attract organizations that offer large potential relationships with the Company. VCampus is targeting industries and organizations that require mandatory training, reach a large potential audience and are well served by the Company’s e-Learning solutions. Primary markets include the federal government, the healthcare, insurance, financial services/banking, pharmaceuticals and manufacturing industries, and institutes of higher education offering extensive adult distance learning.

 

In addition to 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 believes that forming strategic marketing alliances with parties who will sell, promote and market the Company’s products and services will be important for growth.

 

Competition

 

The market for online educational and training products and services is highly competitive and will likely intensify. Although VCampus believes it was the first company to offer Web-based, interactive, on-demand content, there are no substantial barriers to entry in the online education and training market. Competition in the developing market for online training and education is based upon various factors, including quality, breadth and depth of content, marketing and third party relationships, quality, flexibility, reliability of delivery system and pricing.

 

A number of companies, including SkillSoft, Click2learn, DigitalThink, Saba and Docent compete in this market, as well as many others. In addition to traditional classroom and distance learning providers, other institutions such as Apollo Group (through University of Phoenix Online) offer their own accredited courses online or in an e-mail-based format. They, and many other education providers, use some of the Company’s methods, including e-mail, bulletin boards, threaded discussion and electronic conferencing, as well as other delivery methods such as satellite communications and audio and videotapes.

 

Management believes that it is becoming increasingly apparent that e-learning providers must not only remain technologically advanced but also, more importantly, offer “complete” solutions. This “complete solution” approach includes offering customers access to a large library of high quality, off-the-shelf courses; the ability to produce customized courses quickly and effectively; and value-added features that allow flexibility and scalability, thereby maintaining the learner as the number one proponent. Additionally, successful e-learning solutions must be affordable, convenient and easy to use and administer.

 

Although there is a broad range of approaches to the e-learning marketplace, most can be generally categorized as follows, though several companies are active in more than one segment:

 

ASP Hosted Services: Provide consolidated access to learning and training from multiple sources by aggregating, hosting and distributing content.

Examples:  VCampus, GeoLearning, Docent, Saba, Click2learn and KnowledgePlanet.

 

Technology, Software, Learning Management System (LMS): Provide specific software tools and infrastructure to companies that typically implement technology and applications behind a corporate firewall.  These are usually sold under a one-time, non-annuity license/maintenance model.

Examples: Saba, Docent, WBT Systems, Pathlore and Plateau Systems.

 

Content: Create the e-learning courses used to train corporate employees. Content typically falls into one of the three generic categories: information technology, soft skills and customized content.  Leading content providers often provide support services in conjunction with their content.

Examples:  SkillSoft, DigitalThink, Element K, ExecuTrain, Learning Tree International and New Horizons.

 

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Professional Services and Consulting: Provide consulting, implementation and support services, contract content development and distribution.

Examples:  Intellinex, DigitalThink and Collegis.

 

Most of the Company’s competitors 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 generally applicable to businesses, and there are currently few laws or regulations directly applicable to access or to 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 intellectual 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.

 

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 The e-Learning Solution Provider, Teletutor, The Chalkboard, VCampus, the VCampus logo, VCampus.com, Take It Online, Point Page, and Course Construction Set.  Additionally, the Company has applied for registration in the United States for certain of its other trademarks, including ContentMatters.

 

Employees

 

As of December 31, 2002, the Company had 48 employees, consisting of 12 full-time employees in general business operations, 15 full-time employees in sales and marketing, 13 full-time employees in product development, and eight full-time employees in general and administrative. None of the Company’s employees is represented by a union and there have been no work stoppages.  The Company believes that its employee relations are good.

 

Risks and Uncertainties

 

This report contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed in this report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this report and in any documents incorporated in this report by reference.

 

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We have incurred losses and anticipate future losses.  We have incurred significant losses since our inception in 1984, including net losses attributable to common stockholders of $14.0 million, $6.6 million and $7.1 for the years ended December 31, 2000, 2001 and 2002. As of December 31, 2002, we had an accumulated deficit of $84.2 million, stockholders’ equity of $1.6 million and a working capital deficit of $0.8 million.  We expect losses from operations to continue until our online revenue stream matures. For these and other reasons, we cannot assure you that we will ever operate profitably.

 

We may not be able to meet our business objective.  Our key objective is to be the leading service provider of integrated e-learning solutions. Pursuing this objective may significantly strain our administrative, operational and financial resources. We cannot assure you that we will have the operational, financial and other resources to the extent required to meet our online business objective.

 

We will need to raise additional capital.  If we are not able to generate sufficient cash for ongoing operations, we will need to raise additional funds through public or private sale of our equity or debt securities or from other sources for the following purposes:

 

• to build our core online business;

 

• to fund our operating expenses; and

 

• to maintain compliance with Nasdaq listing requirements.

 

We cannot assure you that additional funds will be available if and when we need them, or that if funds are available, they will be on terms favorable to us and our stockholders. If we are unable to obtain sufficient funds or if adequate funds are not available on terms acceptable to us, we may be unable to meet our business objectives. A lack of sufficient funds could also prevent us from taking advantage of important opportunities or being able to respond to competitive conditions. Any of these results could have a material adverse effect on our business, financial condition and results of operations.

 

Our need to raise additional funds could also directly and adversely affect your investment in our common stock in another way. When a company raises funds by issuing shares of stock, the percentage ownership of the existing stockholders of that company is reduced, or diluted. If we raise funds in the future by issuing additional shares of stock, you may experience significant dilution in the value of your shares. Additionally, certain types of equity securities that we have issued in the past and may issue in the future do have and could have rights, preferences or privileges senior to your rights as a holder of our common stock.

 

We face uncertainties and risks relating to our Nasdaq SmallCap Market listing.  Our common stock is currently listed on the Nasdaq SmallCap Market. Nasdaq has certain requirements that a company must meet in order to remain listed on the Nasdaq SmallCap Market. In February 2002, Nasdaq notified us that we were not in compliance with the minimum bid price requirement for continued listing on the Nasdaq SmallCap Market.  In June 2002, we implemented a 1-for-10 reverse stock split in an effort to regain compliance with the minimum bid price requirement.  After effecting the reverse stock split, Nasdaq notified us that we had regained compliance with the minimum bid price requirement.  On March 26, 2003, 2003, the closing bid price of our common stock was $3.24 per share.  Nevertheless, we may be unable to maintain our bid price above the minimum bid price requirement required for continued listing on the Nasdaq SmallCap Market.  In addition, if we continue to experience losses from our operations or if we are unable to raise additional funds as needed, we may not be able to maintain compliance with the minimum $2.5 stockholders’ equity requirement for continued listing on the Nasdaq SmallCap Market. At December 31, 2002, our stockholders’ equity was $1.65 million and $2.52 million on a pro forma basis as of December 31, 2002 after giving effect to the Series G financing completed in the first quarter of 2003.

 

The Nasdaq SmallCap Market and the Nasdaq Over-the-Counter Bulletin Board are significantly less active markets than the Nasdaq National Market. You could find it more difficult to dispose of your shares of our common stock than if our common stock were listed on the Nasdaq National Market.

 

If our common stock were delisted from the Nasdaq SmallCap Market, it could be more difficult for us to obtain other sources of financing in the future. Moreover, if our common stock were delisted from the Nasdaq SmallCap Market, our stock could be subject to what are known as the “penny stock” rules. The “penny stock” rules place additional requirements on broker-dealers who sell or make a market in such securities. Consequently, if we were removed from the Nasdaq SmallCap Market, the ability or willingness of broker-dealers to sell or make a market in our common stock could decline. As a result, your ability to resell your shares, and the price at which you could sell your shares, of our common stock could be adversely affected.  At December 31, 2002, the Company had total equity of $1,647,805, which is below the minimum Nasdaq SmallCap Market listing requirement of $2,500,000.

 

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If our common stock were delisted from the Nasdaq SmallCap Market, it could be more difficult for us to retain existing and obtain new customers. The ability to continue and form new strategic relationships may be negatively impacted. As a result, delisting could result in a negatively impact our customer base and revenue.

 

The large number of our shares eligible for future sale could have an adverse impact on the market price of our common stock. A large number of shares of common stock already outstanding, along with shares issuable upon exercise of options or warrants or conversion of preferred stock and convertible notes, is eligible for resale, which may adversely affect the market price of our common stock.  As of December 31, 2002, we had 1,573,904 shares of common stock outstanding, an additional 1,877,749 shares were issuable upon conversion of outstanding preferred stock, another 64,285 shares were issuable upon conversion of convertible notes and another 1,408,776 shares upon exercise of outstanding warrants and options. Substantially all of the shares subject to outstanding warrants and options will, when issued upon exercise, be available for immediate resale in the public market pursuant to currently effective registration statements under the Securities Act of 1933, as amended, or pursuant to Rule 701 or Rule 144 promulgated thereunder. Some of the shares that are or will be eligible for future sale have been or will be issued at discounts to the market price of our common stock on the date of issuance. The number of shares of common stock issuable upon exercise of several classes of our preferred stock has increased as a result of antidilution rights triggered by recent financings. Resales or the prospect of resales of these shares may have an adverse effect on the market price of our common stock.

 

We substantially depend on third-party relationships.  We rely on maintaining and developing relationships with customers, academic and government institutions and businesses that provide content for our products and services and with companies that provide the Internet and related telecommunications services used to distribute our products and services to customers.

 

We have relationships with a number of customers, academic institutions and businesses that provide us with course content for our online products and services. Some of the agreements we have entered into with these content providers limit our use of their course content, some do not cover use of any future course content and most may be terminated by either party upon breach or bankruptcy. Our ASP-based business model is not compatible with the business models of certain content providers which may lead them to terminate the future licensing of existing and new course content to us or fail to make this content available to us at commercially reasonable rates or terms necessary for success under our business model. Given our plans to introduce additional online courses in the future, we will need to license new course content from existing and prospective content providers. However we might not be able to maintain and modify, if necessary, our existing agreements with content providers, or successfully negotiate agreements with prospective content providers. If the fees we pay to acquire or distribute content increase, our results of operations could be adversely affected. We might not be able to license course content at commercially reasonable rates or at all.

 

We depend heavily on third-party providers of Internet and related telecommunications services. In order to reach customers, our products and services have to be compatible with the web browsers they typically use. Our customers have access to us through their arrangements with Internet service providers.

 

For the customers, academic and government institutions and businesses that provide content for our products and services, the companies that provide the Internet and related telecommunications services used to distribute our products and services to customers, and the web-site operators that provide links to our company web-sites, we cannot assure you that:

 

• they regard their relationships with us as important to their own businesses and operations;

 

• they will not reassess their commitment to our products or services at any time in the future;

 

• they will not develop their own competitive products or services;

 

• the products or services by which they provide access or links to our products or services will achieve market acceptance or commercial success; or

 

• our relationships with them will result in successful product or service offerings or generate significant revenues.

 

If one or more of these entities fail to achieve or maintain market acceptance or commercial success, or if one or more of the entities that do succeed decide to end their relationship with us, it could have a material adverse effect on our company.

 

We operate in a highly competitive industry and may not be able to compete effectively.  The market for educational and training products and services is highly competitive and we expect that competition will continue to intensify. There are no

 

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substantial barriers to entry into our business, and we expect that established and new entities will enter the market for online educational and training products and services in the near future.

 

A number of our existing competitors, as well as a number of potential new competitors (including some of our strategic partners), have longer operating histories, greater name recognition, larger customer bases, more diversified lines of products and services and significantly greater resources than we do. Such competitors may be able to undertake more extensive marketing campaigns, adopt more aggressive pricing policies and make more attractive offers to potential customers. Recently, we have noticed that some of the more widely available online course offerings, particularly those targeted to the corporate training market, are increasingly competing primarily on price, which commoditization drives down margins for all competitors in our industry. In competing against us, our strategic partners could use information obtained from us to gain an additional competitive advantage over us. Our current and potential competitors might develop products and services that are superior to ours or that achieve greater market acceptance than ours. We might not compete effectively and competitive pressures might have a material adverse effect on our business, financial condition and results of operations.

 

As the revenue potential for online delivery of educational and training courses continues to grow, the market is likely to attract a number of large, well capitalized competitors seeking to diversify their revenue streams into this market. Not only will some of these potential competitors be well capitalized and be willing to operate in the market at a loss to build market share, they may also acquire and/or substantially fund our other competitors which might have a material adverse effect on our business, financial condition and results of operations.

 

We depend on key personnel.  Our future success depends on the continued contributions of our key senior management personnel, some of whom have worked together for only a short period of time. We do not maintain “key man” life insurance on any of our executive officers. The loss of services of any of our key management personnel, whether through resignation or other causes, or the inability to attract qualified personnel as needed, could have a material adverse effect on our financial condition and results of operation.

 

We anticipate significant fluctuations in our quarterly results.  Our expense levels are based in part on our expectations as to future revenues. Quarterly sales and operating results generally depend on the online revenues and development and other revenues, which are difficult to forecast. In addition, past results have shown our business to be subject to a material adverse seasonality associated with the large number of holidays in the calendar fourth quarter. We may not be able to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant revenue shortfall would have an immediate adverse impact on our business and financial condition.

 

Our operating results may fluctuate significantly in the future as a result of a variety of factors, some of which are outside of our control. These factors include:

 

• demand for online education;

 

• the budgeting cycles of customers;

 

• seasonality of revenues corresponding to academic calendars;

 

• capital expenditures and other costs relating to the expansion of operations;

 

• the introduction of new products or services by us or our competitors;

 

• the mix of the products and services sold and the channels through which those products and services are sold;

 

• pricing changes; and

 

• general economic conditions.

 

As a strategic response to a changing competitive environment, we may elect from time to time to make certain pricing, service or marketing decisions that could have a material adverse effect on us. We believe that period-to-period comparisons of our operating results should not be relied upon as an indication of future performance. Due to all of the foregoing factors, it is possible that in some future quarter, our operating results will be below the expectations of public market analysts and investors. In such event, the price of our common stock would likely be materially and adversely affected.

 

We rely on significant customers.  A significant portion of our revenues is generated by a limited number of customers. We expect that we will continue to depend on large contracts with a limited number of significant customers through the near

 

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future. This situation can cause our revenue and earnings to fluctuate between quarters based on the timing of contracts. Most of our customers have no obligation to purchase additional products or services from us. Furthermore, VCampus has been notified that the GSA (General Services Administration of the United States) will be terminating its VCampus contract in April 2003. This termination decision was reached to enable GSA to comply with a request from the OPM (Office of Personnel Management) and the OMB (Office of Management and Budget) that GSA consolidate its e-learning with e-learning campus hosted by a competitor.  As of the date of this report, no other federal government customers of VCampus have indicated that they intend to move their business to this government-approved competitor; however, VCampus could face similar loss of government customers due to the attempts by OPM and OMB to centralize the federal government’s e-learning purchases with this competitor. Consequently, if we fail to develop relationships with significant new customers, our business, financial condition and results of operations will be materially and adversely affected.

 

We face the risk of system failures and capacity constraints.  A key element of our strategy is to generate a high volume of online traffic to our products and services. Accordingly, the performance of our products and services is critical to our reputation, our ability to attract customers and market acceptance of our products and services. Any system failure that causes interruptions in the availability or increases response time of our products and services would result in less usage of our products and services and, especially if sustained or repeated, would reduce the attractiveness of our products and services. An increase in the volume of use of our products and services could strain the capacity of the software or hardware we use or the capacity of our network infrastructure, which could lead to slower response time. Any failure to expand the capacity of our hardware or network infrastructure on a timely basis or on commercially reasonably terms would have a material adverse effect on our business. We also depend on web browsers and Internet service providers for access to their products and services, and users may experience difficulties due to system failures unrelated to our systems, products and services.

 

We face security risks.  We include in our products certain security protocols that operate in conjunction with encryption and authentication technology. Despite these technologies, our products may be vulnerable to break-ins and similar disruptive problems caused by online users. Such computer break-ins and other disruptions would jeopardize the security of information stored in and transmitted through our computer systems and the computer systems of end-users, which may result in significant liability for us and may also deter potential customers. For example, computer “hackers” could remove or alter portions of our online courseware. Persistent security problems continue to plague the Internet, the Web and other public and private data networks. Alleviating problems caused by third parties may require us to make significant expenditures of capital and other resources and may cause interruptions, delays or cessation of service to our customers and to us. Moreover, our security and privacy concerns and those of existing and potential customers, as well as concerns related to computer viruses, may inhibit the growth of the online marketplace generally, and our customer base and revenues in particular. We attempt to limit our liability to customers, including liability arising from a failure of the security features contained in our products, through contractual provisions limiting warranties and disallowing damages in excess of the price paid for the products and services purchased. However, these limitations might not be enforceable. We maintain liability insurance to protect against these risks however this insurance may be inadequate or may not apply in certain situations.

 

We face an undeveloped and rapidly changing market for our products and services.  The market for our products and services is rapidly evolving in response to recent developments relating to online technology. The market is characterized by evolving industry standards and customer demands and an increasing number of market entrants who have introduced or developed online products and services. It is difficult to predict the size and growth rate, if any, of this market. As is typical in the case of a rapidly evolving industry, demand and market acceptance for recently introduced products and services are subject to a high level of uncertainty. Our future success will depend in significant part on our ability to continue to improve the performance, features and reliability of our products and services in response to both evolving demands of the marketplace and competitive product offerings, and we cannot assure that we will be successful in developing, integrating or marketing such products or services. In addition, our new product releases may contain undetected errors that require significant design modifications, resulting in a loss of customer confidence and adversely affecting our business.

 

There are risks relating to our intellectual property rights.  We regard our copyrights, trademarks, trade dress, trade secrets and similar intellectual property as critical to our success, and we rely upon trademark and copyright law, trade secret protection and confidentiality and/or license agreements with our employees, customers, partners and others to protect our proprietary rights.

 

We have had certain trademark applications denied and may have more denied in the future. We will continue to evaluate the need for registration of additional marks as appropriate. Despite our efforts to protect our proprietary rights, unauthorized parties may attempt to copy aspects of our products or services or to obtain and use information that we regard 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 our proprietary technology. Any such litigation may be time-consuming and costly, cause product release delays, require us to redesign our products or services or require us to enter into royalty or licensing agreements, any of which could have a material adverse effect upon us. These royalty or licensing agreements, if required, may not

 

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be available on terms acceptable to us or at all. Our means of protecting our proprietary rights might not be adequate and our competitors might independently develop similar technology, duplicate our products or services or design around patents or other intellectual property rights we have. In addition, distributing our products through online networks makes our software more susceptible than other software to unauthorized copying and use. For example, online delivery of our courseware makes it difficult to ensure that others comply with contractual restrictions, if any, as to the parties who may access such courseware. If, as a result of changing legal interpretations of liability for unauthorized use of our software or otherwise, users were to become less sensitive to avoiding copyright infringement, we could be materially adversely affected.

 

We face government regulation and legal uncertainties.  There are currently few laws or regulations that directly apply to activities on the Internet. We believe that we are not currently subject to direct regulation by any government agency in the United States, other than regulations that are generally applicable to all businesses. A number of legislative and regulatory proposals are under consideration by federal and state lawmakers and regulatory bodies and may be adopted with respect to the Internet and/or online delivery of course content. Some of the issues that these laws and regulations may cover include user privacy, pricing and characteristics and quality of products and services. The adoption of any such laws or regulations may decrease the growth of the Internet, which could in turn decrease the projected demand for our products and services or increase our cost of doing business. The applicability to the Internet of existing U.S. and international laws governing issues such as property ownership, copyright, trade secret, libel, taxation and personal privacy is uncertain and developing. Any new legislation or regulation, or application or interpretation of existing laws, could have a material adverse effect on our business, results of operations, financial condition and prospects.

 

We could issue preferred stock and take other actions that might discourage third parties from acquiring us.  Our board of directors has the authority, without further action by the stockholders, to issue up to 10,000,000 shares of preferred stock and to fix the rights, preferences, privileges and restrictions, including voting rights, of such shares. We currently have outstanding seven classes of preferred stock. The rights of the holders of the common stock are subject to the rights of the holders of our outstanding preferred stock, and will be subject to, and may be adversely affected by, the rights of the holders of any preferred stock that may be issued in the future. Issuing preferred stock could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting stock, thereby delaying, deferring or preventing a change in control of our company. Furthermore, the preferred stock may have other rights, including economic rights, senior to our common stock, and as a result, issuing preferred stock could have a material adverse effect on the market value of our common stock.

 

Certain provisions of our certificate of incorporation and our bylaws could make it more difficult for a third party to acquire, and could discourage a third party from attempting to acquire, control of our Company. Some of them eliminate the right of stockholders to act by written consent and impose various procedural and other requirements which could make it more difficult for stockholders to undertake certain corporate actions. These provisions could limit the price that certain investors might be willing to pay in the future for shares of our common stock and may have the effect of delaying or preventing a change in control of our Company. We may in the future adopt other measures that may have the effect of delaying, deferring or preventing a change in control of our Company. Certain of these measures may be adopted without any further vote or action by the stockholders, although we have no present plans to adopt any such measures. We are also afforded the protections of Section 203 of the Delaware General Corporation Law, which could delay or prevent a change in control of our Company, impede a merger, consolidation or other business combination involving our company or discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of our Company.

 

We might not be able to use net operating loss carryforwards.  As of December 31, 2002, we had net operating loss carryforwards for federal income tax purposes of approximately $56 million, which will expire at various dates through 2022. Our ability to use these net operating loss and credit carryforwards to offset future tax obligations, if any, may be limited by changes in ownership. Any limitation on the use of net operating loss carryforwards, to the extent it increases the amount of federal income tax that we must actually pay, may have an adverse impact on our financial condition.

 

We do not presently anticipate paying cash dividends on our common stock.  We intend to retain all earnings, if any, for the foreseeable future for funding our business operations.  In addition, our outstanding preferred stock contains restrictions on our ability to declare and pay dividends on our common stock.  Consequently, we do not anticipate paying any cash dividends on our common stock for the foreseeable future.

 

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Item 2.   Properties.

 

A current summary showing the operating properties of the Company, all of which are leased, is shown below:

 

Location

Principal Use