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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, 2000
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.)
1850 CENTENNIAL PARK DRIVE 20191
SUITE 200 (ZIP CODE)
RESTON, 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
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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 common stock held by non-affiliates of
the registrant based upon the closing price of the Common Stock on March 27,
2001, on the NASDAQ SmallCap Market System was approximately $6,258,825 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 19, 2001, the registrant had outstanding 9,799,963 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's Proxy Statement for the 2001 Annual Meeting of
Stockholders are incorporated herein by reference into Part III.
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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 creates and hosts online courseware delivery systems
known as virtual campuses, or VCampuses, to meet corporate and institutional
needs for education and training. VCampus is a leading e-Learning Application
Service Provider, or ASP, that develops, manages and hosts turn-key, web-based
learning environments for corporations, institutions of higher education and
government agencies, enabling them to offer global distance learning solutions
to their customers, employees, distributors, suppliers and students.
The VCampus(R) e-Learning platform enables the Company's customers to
develop and execute learning strategies designed to make:
- employees and sales channels more productive;
- their customers more satisfied and loyal; and
- supply chains more efficient.
VCampus allows customers to deliver on their Customer Relationship
Management, or CRM, Enterprise Resource Planning, or ERP, and product-related
strategic business plans through a rapidly deployed, outsourced, scalable
e-Learning solution that is designed to ensure that affected individuals are
trained to get maximum benefit out of a particular business initiative.
The Company believes that its ASP approach to Web-based hosting of
e-Learning software provides significant business advantages. The Company
charges customers a relatively low fee to establish a customized VCampus, and
the Company then charges them on either a subscription or usage basis for the
service. The Company believes this model creates a consistent and more
predictable revenue stream, as well as a significant "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 the advantages of the ASP model to customers, particularly in the
Company's target markets, are significant. VCampus offers:
- a rapid, non-time-consuming implementation;
- low up-front costs and a predictable recurring expense for the service;
- access to world-class e-Learning and infrastructure talent;
- anywhere, anytime learning;
- consistent delivery of high-quality courseware; and
- delivery of content from virtually any source.
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VCampus believes that it holds several key advantages in the e-Learning
marketplace:
Experience. As of March 1, 2001, the Company had approximately 65
VCampuses in operation and had delivered more than 1.9 million courses to
approximately 467,000 enrollees. The Company's total library includes
approximately 3,500 courses, marketed under the name ContentMattersTM. The
Company has operated in the e-Learning space for more than six years and have
been established as an ASP for nearly five years. 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. 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
third-party and proprietary courseware. The Company offers customization of its
products and services on a per-customer basis, 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. The Company's platform is designed
to provide customers with carrier-grade scalability.
Complete Solution. VCampus offers a completely hosted solution, accessible
by virtually any web browser. The VCampus solution includes a leading edge
Student Management System, Courseware Construction Set (TM) and Courseware
Delivery Engine. The technology and service has been proven and tested through
successful implementations at customer sites including Graybar Electric, Lucent
Technologies, University of Texas System and the U.S. General Services
Administration, where thousands of students have experienced VCampus-based
e-Learning for up to four years.
Strong Management Team. In 2000, VCampus added a cadre of skilled,
experienced business executives to the management team. VCampus is now led not
only by founding members whom have led the development of e-learning as an
industry from concept to reality, but also by executives skilled in sales,
product management and executive leadership who are bringing new discipline and
leadership to VCampus. Senior VCampus staff average more than 20 years of
executive experience.
INDUSTRY BACKGROUND
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. Rapid changes in technology and in the workplace underscore
the need for ongoing education and re-training at every level. In the past,
corporate training budgets were often viewed as discretionary. Today, they are
increasingly viewed as mission-critical. The U.S. corporate learning market,
according to a recent annual survey by Training Magazine, is estimated at $62.5
billion. The corporate e-Learning market share is now approximately 20% of the
total corporate learning market and is expected to double by 2003, according to
a 1999 study by Corporate University Xchange. According to a report published by
IDC, the e-Learning industry is expected to grow from approximately $1 billion
in 2000 to more than $11 billion by 2003.
E-Learning is expanding quickly and broadly due to its many benefits.
Online delivery technology significantly reduces training costs, including those
associated with students' time away from work, and permits resources to be
applied directly to the educational process. E-Learning supports globalization
of the workforce. E-learning solutions enhance relationships with customers,
suppliers, and distribution channels. Historically, corporations, training
organizations and institutions of higher education have provided education
through traditional classroom training. Companies providing this type of
training in-house must devote managerial and financial resources to 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 alternatively 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 institutions of higher
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education 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.
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 Company believes that the rapid,
all-encompassing development of the Web into a public data network with the
quality and reliability comparable to the traditional public switched telephone
network has opened up a wide market for VCampus' services. The recent and
continuing proliferation of corporate Intranets provides portals to Web-based
e-Learning. Furthermore, e-Learning is rapidly expanding to corporate extranets.
COMPANY STRATEGY
The Company's objectives are to be the leading e-Learning application
service provider, or ASP, for the corporate training, higher education, and
government education markets and to make the VCampus e-Learning platform the
global standard for online delivery of corporate training and education
courseware. The Company's strategies to achieve these objectives include
continuing to: expand its customer base, develop brand recognition for its
products and services, improve its customer service infrastructure, deliver
high-demand courseware and upgrade its existing technologies to maintain its
position as a leader in corporate e-Learning. The Company's strategy also
includes enhancing the "stickiness" of its customer sites by converting more and
more of the customer's proprietary content to online distribution through the
VCampus platform. The intended result is increased penetration into the
enterprise and enhanced customer loyalty.
- Expand Customer Base. The Company is intensely focused on expanding its
customer base. The Company uses both its direct sales force as well as
its newly-formed indirect sales force to form relationships with
potential new customers as well as to expand relationships with existing
customers. The Company also leverages the sales channels of strategic
partners to more quickly scale its customer base, as well as to actively
pursue new partners offering an indirect channel for VCampus content and
services. VCampus signed a total of 15 new online customers in 2000.
In 2000, VCampus embarked on an expansion of its early position in the
federal government market. The Company believes this market offers
opportunities for e-Learning on a variety of subjects to a wide audience.
VCampus has secured contracts with the Department of Veterans Affairs,
the Environmental Protection Agency and the General Services
Administration and plans to actively pursue more government contracts in
the near future.
The Company believes that development of a VCampus for customers provides
it with cross-marketing opportunities. For example, the American Chemical
Society builds high-end statistical courses which have been used
exclusively by their own membership as a continuing education alternative
to day-long seminars requiring two days of inefficient travel time.
Recently, Johnson & Johnson, an existing VCampus client, began offering
these courses on its own campus, creating an additional revenue stream
for the American Chemical Society and VCampus. The Company intends to
continue cross-selling among its clients and to further extend its
library by pursuing distribution agreements with heretofore "proprietary"
clients to offer their courseware in the VCampus general library. VCampus
currently has distribution agreements with the following customers: BOCA,
Dearborn Publishing, Kelly Scientific, American Chemical Society and the
New York Institute of Finance.
VCampus' primary target markets include telecommunications, healthcare,
utilities, information technology and financial services industries, as
well as institutions of higher education and government agencies, all of
which the Company believes have relatively large training and education
budgets, significant training needs and receptiveness to new technology.
VCampus focuses on organizations in the "middle market" -- meaning
companies with annual sales of between $100 million and $1 billion, plus
divisions of Global 2000 companies. Although VCampus serves customers
outside of this range, it believes that this market offers the Company
the greatest growth opportunity given its ASP business
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model. These middle market customers have relatively small information
technology staffs, are relatively cash constrained, and benefit from
VCampus' ability to get them up and running quickly with relatively low
up-front costs.
VCampus has been successful in its strategy to expand relationships with
new and existing customers by expanding its focus beyond traditional
educational training into solving diverse business problems with an
e-Learning solution. For example, VCampus has helped customers, such as
Graybar, train sales and distribution channel partners and customers on
how to sell and use their products. The Company believes significant
opportunities exist for it to expand its business with existing customers
as well as to attract new customers with this approach to solving diverse
business problems quickly and easily.
- Develop Brand Recognition for Products and Services. The Company plans
to build and maintain brand recognition through the following marketing
and public relations activities: press releases, editorials, media tours,
analyst tours, media events, seminars over the Internet and press events
at trade shows and conferences. The Company also gains public exposure
through trade publications and industry related media venues. VCampus
marketing strategies include banner advertisements targeted at industry
experts' web pages, online industry trade magazines, or an online
vertical market publication to target product managers. In addition, the
Company cross-markets through customers' VCampuses to promote its
products and services and to attract students.
- Improve customer service infrastructure. VCampus' core customer service
principle is to deliver to its customers great service through creative,
committed and well-trained employees who work as a team. Additionally,
the Company launched TeamCareSM, 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 call 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 content needs (both self-paced and instructor-led), recommendation of
suitable additional content, identification of the potential need for
custom courseware development and the recommendation of platform
configurations for customer-specific business processes.
- Deliver High-Demand Courseware. The Company intends to continue to
expand its courseware library primarily through relationships with third
party content providers. The Company seeks high quality courseware in
subject areas that the Company projects 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 institutions of higher
education. The Company's existing courseware library includes more than
3,500 online courses (of which approximately 900 are available in
multiple languages). When an organization's internal courses are combined
with the VCampus off-the-shelf library, the combined delivery and
tracking of courses creates a turnkey solution for entities requiring an
enterprise-wide learning environment.
- 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. VCampus' 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 necessarily requiring a large
investment on their part. Additionally, the VCampus system is a
completely outsourced system; no downloading is necessary because the
VCampus system does not utilize thin client technology.
VCampus expects to release major upgrades of both its Course Delivery
Engine and Course Construction SetTM during 2001. The Company believes
these upgrades will lower the cost of course delivery, increase the
scalability and reliability of the system as well as improve the ease of
use for both learners and content courseware authors. Additionally,
VCampus is planning to enhance the function-
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ality of the Learning Management System for administrators as well as improve
its look and feel for students.
The VCampus technology team has been active in preparing its e-Learning platform
for an accredited learning standard and expects to release an AICC-compliant
system in 2001. VCampus has been involved with the development of
accredited learning technology standards, such as the IEEE Learning
Technology Standards Committee, since 1998. In addition to its accredited
standards involvement, VCampus has been prototyping and analyzing the
non-accredited specifications that are being issued by standards
organizations such as AICC, IMS and ADL.
PRODUCTS AND SERVICES
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 distance learners. The
Company provides a value-added service that enables customers to place
third-party courseware, proprietary training courses and/or accredited courses
on an open architecture, remotely-hosted, Internet distribution platform
displaying each 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.
The Company offers 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 methods, including on-site classroom training, diskette, CD-ROM and
printed formats, although the Company has transitioned its business to focus
primarily on its core online businesses. In 2000, approximately 66% of the
Company's total revenues were derived from its online businesses.
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 or extranet. Once 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 1.9 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 includes the following
components:
Registrar: In the "Registrar" function, students can sign up for
courses and modify their student profiles. 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 can also access courses and view
student grades.
Faculty: Students can use the "Faculty" function to contact
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.
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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. Also, technology provided through Akamai provides the
Company's customers with smooth, reliable video streaming to deliver video-based
content. In addition, the Company has developed the following proprietary
software tools that facilitate the functionality of the VCampus:
VCampus Courseware Delivery Engine. The Courseware Delivery Engine
is 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 is currently at the release level 3.01 and has been used to
build and deliver the Company's courseware library of more than 3,500
online courses as of March 1, 2001 (including approximately 900 courses in
multiple languages). 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.
The VCampus Courseware Delivery Engine 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 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 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. 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.
VCampus Curriculum/Group Manager. This product 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. This product
can improve overall system efficiency and facilitate interaction among
students. 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 minimum standards established by the VCampus administrator for test
scores and attendance.
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.
To enable custom course development, VCampus offers customers its
user-friendly, turn-key Courseware Construction Set(R). Additionally, VCampus
provides custom content conversion services in-house.
Existing Courseware Library
VCampus's total library includes approximately 3,500 courses (approximately
900 of which are available in multiple languages), marketed under the name
ContentMattersTM. The Company's courseware strategy involves two separate but
equally important components: (1) COTS, or commercial off-the-shelf, courses
from a variety of leading third-party course vendors; and (2) custom courseware
development for the proprietary training needs of the Company's customers.
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COTS Library
The Company's existing COTS library includes approximately 450 courses that
are currently available for general distribution. The current library was built
from a combination of acquisitions, the Company's own development efforts and
relationships with leading content providers such as NIIT, Infosource, Vital
Learning, Crisp Publications Inc., Marcom, Aztec Software and American Media
Inc. In addition, the Company's recently-formed content relationship with
SmartForce has added more than 1,800 online competency-based courses (of which
approximately 900 are available in multiple languages). 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 Company intends to continue pursuing distribution agreements with
major content developers and to extend its position as a content-neutral, but
content-centric e-learning service provider.
Custom Library
The Company's existing custom courseware library includes approximately
1,300 online courses built by VCampus corporate, higher education and government
clients for their own proprietary use. The Company believes these courses
provide more long-term revenue potential than COTS courses, which may become
commoditized over time. The Company believes the growth of this custom library
is evidence of customer satisfaction with the Company's authoring and delivery
products and allows for extensive cross-selling opportunities among VCampus
partners.
Online Instructor-Led Training (Synchronous and Asynchronous)
VCampus offers certified instructor-delivered asynchronous e-learning that
facilitates online training for Microsoft and Lotus certification. The Company
plans to introduce instructor-led, asynchronous training in "soft skills" in the
near future. VCampus can also design and deliver third-party and custom courses
to meet unique training needs. VCampus has facilitated instructor-delivered
e-learning at leading higher education institutions such as University of Texas
System, Park University and Northeastern University.
As with web-based training, instructor-delivered e-learning allows for
self-paced learning anytime, anywhere, but with the added advantage of a
certified instructor. This provides clients the opportunity to train employees
who cannot attend out-of-office training and eliminates unnecessary travel
expenses, saving both time and money. Once a student enrolls, VCampus delivers
the certified course materials. The student then enters the VCampus, which
serves as the venue for interaction with the instructor and other students. This
allows students to get feedback on course content and questions. Other features
include the ability for online testing, tracking, and reporting. The VCampus can
provide pre-testing for prerequisite purposes or post-testing to ensure the
student understands the fundamentals of the course. Additionally, the VCampus
will track a student's progress, record attendance and administer reports
VCampus plans to introduce online, synchronous instructor-led training for
information technology subjects in the second quarter of 2001.
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
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, streamlining the operations in Rockville and
Washington D.C., and focusing on moving the remaining customer base to online.
In December 2000, the Company further restructured its operations to
de-emphasize classroom-based training and increase the amount of instructor-led
training it delivers via its internet-based platform. As a result, the Company
closed its remaining two training facilities in Rockville, MD and Washington,
D.C.
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CUSTOMERS
The Company's primary target market is the corporate training and education
market. The Company focuses its sales and marketing efforts on "middle market"
companies and is primarily targeting customers in the telecommunications,
healthcare, utilities, information technology 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 2000, one customer, State Farm, accounted
for approximately 12.2% 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 March 1, 2001, the Company had approximately 50 online corporate
business customers, including: Agilent Technologies; All-Phase Electrical Supply
Company; A.T. Kearney, Inc; Cable and Wireless, Inc.; Carolina Broadband; Ciena;
Graybar Electric Co. Inc.; Global One Communications, Inc.; Johnson & Johnson;
MCI Worldcom; State Farm; the Vanguard Group; and Verizon Wireless. 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.
Higher Education Institution Customers
As of March 1, 2001, the Company had eight online higher education
customers, including: AIMS Community College; Columbia College; George Mason
University; Northeastern University; Park University; Swindon College, England;
and the University of Texas System. The Company plans to establish relationships
with additional higher education customers, in particular those that have
significant potential for online 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 higher education institutions
provide the Company with the exclusive rights to distribute the institutions'
courses through the Company's delivery engine, or limit the institutions' rights
to develop and/or distribute the online courseware subject to the agreements.
Higher Education 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 service provider 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 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 parties who will sell, promote and market the
Company's products and services will be important for rapid market penetration.
The Company anticipates its recently formed International Sales Team will
be an additional source of growth and competitive differentiation. For example,
the Company holds the exclusive right to be the e-Learning platform provider for
UOL Inc., S.A.'s portals within Latin America through 2004. UOL is the leading
Internet portal in South America. The Company anticipates launching the first
VCampus for UOL
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Inc. in the second quarter of 2001 on the uol.com.ar web site (UOL Inc.'s
presence in Argentina). This will be followed in the future by launches in
Brazil, Mexico, Chile, Colombia and Venezuela.
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
Learn2.com, Inc., Click2learn.com, DigitalThink, Inc., Centra Software, Inc.,
SmartForce 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 some of 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.
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
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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 Teletutor, The
Chalkboard, VCampus, VCampus.com, Take It Online and Courseware Construction
Set. Additionally, the Company has applied for registration in the United States
for certain of its other trademarks, including V-VCampus, the VCampus logo, Test
Wizard, the E-Learning Solution Provider and PointPage. The Company intends to
file applications to register the ContentMatters(TM) and TeamCare(SM) marks.
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, 2000, the Company had 90 employees, including 89
full-time employees and one part-time employee, consisting of 32 full-time
employees in general business operations, 34 full-time employees in sales and
marketing, ten full-time employees in product development, and 13 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.
WE HAVE INCURRED LOSSES AND ANTICIPATE FUTURE LOSSES. We have incurred
significant losses since our inception in 1984, including net losses of $19.8
million, $8.5 million and $12.4 million for the years ended
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December 31, 1998, 1999 and 2000. As of December 31, 2000, we had an accumulated
deficit of $70.6 million, stockholder's equity of $3.0 million and a working
capital deficit of $2.0 million. We expect losses from operations to continue at
least through the second quarter of 2001 until our online revenue stream
matures. For these and other reasons, we cannot assure you that we will ever
operate profitably.
WE HAVE A LIMITED OPERATING HISTORY. Although the Company was founded in
1984, we changed our business focus in 1993 to take advantage of, among other
things, the market opportunities we saw for online education that resulted from
technological developments relating to the Internet. We introduced our first
revenue-generating Web-based course in Spring 1996. Given our limited operating
history in the online education and training business, we cannot assure you that
our online revenues will grow.
WE MAY NOT BE ABLE TO MEET OUR ONLINE BUSINESS OBJECTIVE. Our key
objective is to be the leading provider of online courseware for the corporate
training and education market. Pursuing this objective may significantly strain
our administrative, operational and financial resources. We cannot assure you
that we will be able to find, train and retain qualified administrative
personnel, or do so on a timely basis, or 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. In the near future, 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; and
- to maintain compliance with Nasdaq listing requirements.
As of the date of this filing, we have initiated efforts to raise
additional capital. We cannot assure you, however, that additional funds will be
available 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 may issue in the future 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. If we continue to experience losses from
our operations or if we are unable to raise additional funds, we may not be able
to maintain the standards for continued quotation on the Nasdaq SmallCap Market.
The Nasdaq SmallCap Market is a significantly less active market 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.
Furthermore, Nasdaq recently adopted new rules that make continued listing
of companies on the Nasdaq SmallCap Market more difficult. If as a result of the
application of these new rules, 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 of our common stock could be
adversely affected.
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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, or issuable upon exercise of options
or warrants, is eligible for resale, which may adversely affect the market price
of our common stock. As of December 31, 2000, we had 9,508,509 shares of common
stock outstanding, an additional 2,400,749 shares were issuable upon conversion
of outstanding preferred stock and another 6,233,410 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 promulgated thereunder. Some of the shares that are or will
be eligible for future sale have been or will be issued at discounts on the
market price of our common stock on the date of issuance. 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 academic 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 academic institutions and businesses
that provide us with course content for our online products and services. Many
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. 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 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 academic 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. Likewise, if our position on a web browser is
terminated, or if one of our competitors secures an exclusive arrangement with
respect to positioning on a web browser, traffic on our web-sites would be
significantly reduced, which could have a material adverse effect on our results
of operations.
We sell a significant amount of products and services through resellers and
strategic partners. We might not be able to attract resellers and partners that
can market our products effectively and provide timely and cost-effective
customer support and service. Some of our resellers and partners compete with
one another and with prospective resellers of our products. Conflicts among
resellers and partners can potentially have an
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adverse effect on our operations, such as when a reseller requires us to refrain
from linking our products with competing products. We may be adversely affected
by pricing pressure or other adverse consequences of competition or conflict
among or with our resellers and partners, or should any reseller or partner fail
to adequately penetrate its market segment. The inability to recruit, manage or
retain important resellers or partners, or their inability to penetrate their
respective market segments, would materially adversely affect 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 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. 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.
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. Certain of our executive officers,
including Narasimhan P. Kannan, Chairman of the Board of Directors and Daniel J.
Neal, Chief Executive Officer, have employment agreements and we maintain "key
man" life insurance in the amount of $1 million each on Mr. Kannan and Mr. Neal.
Neither the insurance nor the employment agreements will necessarily fully
compensate us for, or preclude, the loss of services of these 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 licensing and
support revenues, online revenues and development and other revenues, which are
difficult to forecast. 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;
- acceptance and usage of the Internet;
- 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
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- 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 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. 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 DEPEND ON THE INCREASED USAGE AND STABILITY OF THE INTERNET. The future
of the Internet as a center of commerce and information exchange will depend in
significant part on the following factors:
- continued rapid growth in the number of households and commercial,
educational and government institutions with access to the Internet;
- the level of Internet usage by individuals;
- the number and quality of products and services designed for use on the
Internet; and
- expansion of the Internet infrastructure.
Because usage of the Internet as a medium for online education, exchange of
information, advertising, merchandising and entertainment is a recent
phenomenon, it is difficult to predict whether the number of users will continue
to increase and whether any significant market for our online products and
services, or any substantial commercial use of the Internet, will develop. It is
also uncertain whether the cost of Internet access will decrease. If Internet
communication fails to achieve increased acceptance and does not become
accessible to a broad audience at moderate costs, the viability of Internet
commerce and the market for our products and services will be jeopardized.
The success of our business also depends on a significant expansion of the
Internet infrastructure to provide adequate Internet access and proper
management of Internet traffic. It also needs to be expanded to provide a
substantial amount of public education to increase confidence in the integrity
and security of Internet commerce and communication. If the Internet
infrastructure is not adequately expanded or managed, or if our products and
services do not achieve sufficient market acceptance, then 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 traffic to our web-sites 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. We experienced
capacity constraints in early 1999, and might again. 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
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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 currently do not have product liability insurance to
protect against these risks and insurance might not be available to us on
commercially reasonable terms or at all.
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. Moreover, critical issues concerning the
commercial use of online networks (including reliability, cost, ease of use and
access, quality of service and market acceptance) remain unresolved and may
impact potential future growth. Although costs have been decreasing while ease
of use, market acceptance and access have been increasing, we cannot assure that
these trends will continue. 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 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. We allow users to
download electronically certain of our courseware content, which could adversely
affect our ability to collect payment from users that obtain copies from our
existing or past customers. If, as a result of
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changing legal interpretations of liability for unauthorized use of our software
or otherwise, users were to become less sensitive to avoiding copyright
infringement, we would 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. 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 three
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, 2000, we had net operating loss carryforwards for federal income
tax purposes of approximately $ 47.1 million, which will expire at various dates
through 2020. 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 for the foreseeable future for funding
our business operations. In addition, our outstanding preferred stock and credit
facilities contain 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:
LEASE
AREA EXPIRATION MONTHLY
LOCATION PRINCIPAL USE (SQUARE FEET) DATE RENT
-------- ------------- ------------- ------------- -------
Reston, VA..................... Executive offices and 16,701 February 2010 $37,925(1)
principal administration,
technical marketing and
sales operations
Waxahachie, TX................. CTA offices 5,000 July 2001 2,000
Rockville, MD(2)............... HTR executive offices 6,222 January 2006 11,936
Washington, DC(2).............. HTR Branch office 2,253 July 2002 5,539
- ---------------
(1) Subject to 3% annual increases
(2) As part of the Company's transition to focus primarily on its online
businesses, the Company is negotiating to terminate these leases. The
Washington DC property has been subleased.
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
2001 should the need arise.
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 paid this award in 2000.
In 2000, Techsearch L.L.C. filed a claim against a number of defendants,
including the Company, alleging, in our case, that the Company's method that
allows end users to take online courses infringes Techsearch's patented method.
The Company has filed an answer denying the allegation and plans to file a
motion to stay the proceedings pending the outcome of a similar patent
infringement case brought by Techsearch. Techsearch seeks unspecified damages
and an injunction prohibiting further alleged infringement. The Company believes
the claim is without merit and plans to defend against it vigorously.
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, 2000.
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EXECUTIVE OFFICERS
As of March 30, 2001, the executive officers of the Company were as
follows:
NAME AGE POSITIONS
---- --- ---------
Narasimhan P. Kannan.............. 51 Chairman of the Board of Directors
Daniel J. Neal.................... 42 Chief Executive Officer
Michael W. Anderson............... 45 Executive Vice President -- Publishing and Academic Markets
Michael A. Schwien................ 45 Chief Financial Officer and Secretary
Randi J. Saari.................... 48 Senior Vice President -- Worldwide Sales
Charles A. Williams............... 42 Vice President of Marketing and Product Management
Vini N. Handler................... 47 Chief Information Officer
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. In September 2000, Mr. Kannan stepped down as Chief Executive Officer
to focus exclusively on his role as Chairman. 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.
Daniel J. Neal has served as a director and Chief Executive Officer of the
Company since joining the Company in September 2000. From July 1998 until
joining the Company, Mr. Neal served in various positions with
USinternetworking, Inc., including Vice President/General Manager, Senior
Director, E-Commerce Partnering and Senior Director, Acquisition Integration.
From April 1996 until July 1998, he was the Director of National Partnering for
Global One Communications, LLC, a subsidiary of Sprint. Prior to that, Mr. Neal
served as a Senior Staff Member with the Office of the Vice President of the
United States. Mr. Neal received his B.A. from the University of California,
Berkeley, and holds an M.B.A. from the Wharton School at the University of
Pennsylvania.
Michael W. Anderson serves as the Company's Executive Vice President,
Publishing and Academic Markets. From November 1998 to September 2000, he was
the Company's Chief Operating Officer 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. Mr. Anderson holds a B.A. in
English and Mathematics from the University of Texas.
Michael Schwien joined the Company as Controller in May 1998 and was named
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.
Randy J. Saari joined the Company in October 2000 as Senior Vice President
of Worldwide Sales and is responsible for leading the VCampus direct and
indirect sales efforts both domestically and abroad, and for the execution of
VCampus' overall sales strategy. Before joining VCampus, Mr. Saari led the
Central Region Sales efforts at The Hunter Group, a Baltimore-based consulting
firm specializing in enterprise applications and information management, from
1996 to February 2000. Since 1994, Mr. Saari focused on developing "Greenfield"
regions. Mr. Saari has over twenty years' experience managing people, including
at Tadpole Technology from 1995 to 1996, at Sapient Corporation from February
2000 to May 2000 and at Extraprise from May 2000 to October 2000. Mr. Saari
holds a B.S. in Accounting from Plymouth State College.
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Charles A. Williams joined VCampus in October 2000 and serves as Vice
President of Marketing and Product Management. Mr. Williams is responsible for
identifying target markets for the VCampus service platform, leading all product
management efforts and managing all company marketing and communications
activities. Mr. Williams brings over 20 years of marketing, product management,
sales and technology experience to VCampus. Prior to joining VCampus, Mr.
Williams served as Vice President of Product Management, Marketing, and Sales
Support for COMSAT International, a Lockheed Martin Global Telecommunications
company from September 1999 to October 2000, and as Assistant Vice President of
Product Management, Marketing Strategy and Sales for Global One from October
1998 to September 1999. Mr. Williams holds a B.S. in Electrical Engineering
Technology from Washington Technical Institute and is completing a Master of
Science degree program at George Washington University.
Vini N. Handler joined VCampus in December 2000 as Chief Information
Officer. Ms. Handler brings both domestic and international expertise in
technology operations, IP/Data services strategies, product development and ASP
solutions. She is responsible for all aspects of VCampus' application services
and support. Ms. Handler's executive experience in the Internet/IP and data
industry includes management roles with Loral CyberStar from July 2000 to
November 2000, Cable & Wireless from 1998 to 2000, Global One from 1996 to 1998,
and Sprint & GTE Telenet from 1980 to 1996. Ms. Handler holds a bachelor's
degree in electrical engineering from the Indian Institute of Technology in
Kanpur, India, and an M.B.A. in Operations Research from American University.
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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 1999, the
high and low bid quotations for our common stock, as reported by Nasdaq, were as
follows:
HIGH LOW
------ -----
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
2000
First quarter............................................. $19.00 $3.38
Second quarter............................................ $11.00 $4.25
Third quarter............................................. $10.38 $2.88
Fourth quarter............................................ $ 4.44 $0.38
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, 2000 to December 31, 2000, the Company issued the following
unregistered securities:
(1) 225,518 shares of common stock, valued at $0.66 per share, were
issued as a dividend to the holders of the Company's Series D Preferred
Stock on December 31, 2000.
(2) 357,577 shares of Series E Preferred Stock were issued to
Hambrecht & Quist Guaranty Finance LLC (H&QGF), an accredited investor, at
a price per share ranging from $0.52 to $1.06 pursuant to the terms of the
Company's equity line with H&QGF. The resale of the shares of common stock
issued and issuable upon conversion of the Series E Preferred Stock was
covered by an effective registration statement on Form S-1 (333-838850)
until the Company voluntarily terminated such registration in February
2001. The Series E Preferred Stock converts on a one-for-one basis into
common stock at any time at the election of the holder. A warrant to
purchase 15,000 shares of common stock was issued to H&QGF on October 20,
2000 with an exercise price of $1.94 per share.
(3) An aggregate of 40,000 shares of common stock were issued to four
service providers on December 15, 2000 for services rendered.
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(4) 519,480 shares of common stock and a warrant to purchase 519,480
shares of common stock with an exercise price of $0.96 per share were
issued to one accredited institutional investor on December 13, 2000 for
total cash consideration of $500,000.
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 19, 2001, the number of record holders of the Company's Common
Stock was 129 and the Company believes that the number of beneficial owners was
approximately 1065.
(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, 1998, 1999 and 2000 and
the consolidated balance sheet data as of December 31, 1999 and 2000 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, 1996 and 1997 and the consolidated balance sheet data
as of December 31, 1996, 1997 and 1998 are derived from financial statements not
included in this Annual Report on Form 10-K.
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
STATEMENT OF OPERATIONS DATA:
Net revenues:
Online tuition revenues.................. $ 119 $ 1,662 $ 1,549 $ 3,835 $ 5,065
Virtual campus software revenues......... 2,718 112 216 115
Online development and other revenues.... 399 1,631 926 977 1,022
Product sales revenues................... 2,330 3,348 1,222 414
Other service revenues................... 424 718 2,445 305 175
Instructor-led training revenues......... 1,086 6,303 4,992 2,665
-------- -------- -------- -------- ---------
Total net revenues......................... 942 10,145 14,683 11,547 9,456
Costs and expenses:
Cost of revenues......................... 129 1,849 8,869 5,749 3,296
Sales and marketing...................... 1,593 4,439 5,304 4,286 6,242
Product development and operations....... 1,548 4,926 6,102 2,241 3,555
General and administrative............... 2,477 2,387 3,783 2,633 2,761
Depreciation and amortization............ 144 1,012 3,347 2,956 2,916
Acquired in-process research, development
and content........................... -- 11,100 -- -- --
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1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
Compensation expense in connection with
the acquisition of HTR, Inc........... -- 690 -- 1,089 654
Reorganization and other non-recurring
charges............................... -- 340 5,585 360 2,261
Stock-based compensation................. -- -- -- -- 361
-------- -------- -------- -------- ---------
Total costs and expenses................... 5,891 26,743 32,990 19,314 22,046
Loss from operations....................... (4,949) (16,599) (18,307) (7,767) (12,590)
Other income (expense):
Gain (loss) on sale of subsidiaries...... -- -- (907) 1 --
Other income............................. 304 125 -- -- --
Interest income (expense)................ 4 329 (597) (721) 166
Cumulative effect of accounting change..... -- -- -- -- (461)
-------- -------- -------- -------- ---------
Net loss................................... $ (4,641) $(16,145) $(19,811) $ (8,487) $ (12,885)
======== ======== ======== ======== =========
Dividends to preferred stockholders........ (331) -- (358) (448) (1,153)
-------- -------- -------- -------- ---------
Net loss attributable to common
stockholders............................. $ (4,972) $(16,145) $(20,169) $ (8,935) $ (14,038)
======== ======== ======== ======== =========
Net loss per share......................... $ (4.98) $ (4.91) $ (5.27) $ (1.91) $ (1.76)
======== ======== ======== ======== =========
Net loss per share -- assuming dilution.... $ (4.98) $ (4.91) $ (5.27) $ (1.91) $ (1.76)
======== ======== ======== ======== =========
1996 1997 1998 1999 2000
-------- -------- -------- -------- --------
BALANCE SHEET DATA:
Working capital (deficit)................. $ 14,833 $ (3,789) $ (4,631) $ (5,155) $ (2,036)
Total assets.............................. 17,489 26,465 14,871 10,668 6,652
Total liabilities......................... 1,287 13,054 9,051 8,646 3,620
Accumulated deficit....................... (11,383) (27,528) (47,697) (56,632) (70,585)
Total stockholders' equity................ 16,202 13,411 5,820 2,022 3,031
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION.
From time to time, as used herein, the term "Company" or "VCampus" 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 is a leading e-learning Application Service Provider (ASP) that
develops, manages and hosts turn-key, Internet-based learning environments for
corporations, higher education institutions and government agencies, which
enable them to offer global distance learning solutions to their customers,
sales channel partners, employees and students. 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, in order to focus its efforts on
managing its core online customers and content. In December 2000, the Company
closed HTR's remaining Instructor-led training sites in Washington D.C. and
Rockville, MD,
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and is in the process of launching a new asynchronous mentored online product
with the remaining instructors. In 2000, 1999, and 1998, the Company's online
related businesses accounted for 66.0%, 43.6% and 17.6%, respectively, of the
Company's total revenues.
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 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, the Company'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, government, and higher education customers. Product sales
revenues are derived from the sale of telecommunications related 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
creating and developing new online courseware and web-enabling existing
courseware. Other service revenues consist primarily of monthly fees generated
by the licensing and maintenance of the CYBIS courseware under contract with the
U.S. Army. Instructor-led training revenues are generated from on-site and
classroom training fees.
During 1998, the Company changed its pricing model from a platform license
fee for hosting services to an ASP service fees and subscription model based on
course usage commitments. This new pricing structure provides a lower cost of
entry and generates a recurring revenue stream for VCampus. While prior to 1997
licensing and support revenues have represented a substantial majority of the
Company's revenues, the Company believes that online related revenues will
become the primary sources of its revenues in the future.
ACQUISITIONS AND DIVESTITURES
Since 1996, the Company has completed four acquisitions -- HTR Inc., Cooper
& Associates, Inc. (d/b/a Teletutor), Ivy Software, Inc. and Cognitive Training
Associates, Inc. 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 2000, the Company closed HTR's remaining instructor-led
training sites in Washington D.C. and Rockville, MD, and is in the process of
launching a new asynchronous mentored online product with the remaining
instructors.
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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,
--------------------------
1998 1999 2000
------ ------ ------
STATEMENT OF OPERATIONS DATA:
Revenues:
Online tuition revenues................................ 10.6% 33.2% 53.6%
Virtual campus software revenues....................... 0.8 1.9 1.2
Product sales revenues................................. 22.8 10.6 4.4
Development and other revenues......................... 6.3 8.5 10.8
Instructor-led training revenues....................... 42.9 43.2 28.2
Other service revenues................................. 16.6 2.6 1.8
------ ------ ------
Total net revenues............................. 100.0 100.0 100.0
Costs and expenses:
Cost of revenues....................................... 60.4 49.8 34.9
Sales and marketing.................................... 36.1 37.1 66.1
Product development and operations..................... 41.6 19.4 37.6
General and administrative............................. 25.8 22.8 29.2
Depreciation and amortization.......................... 22.8 25.6 30.8
Reorganization and other non-recurring charges......... 38.0 12.6 34.6
------ ------ ------
Total costs and expenses....................... 224.7 167.3 233.2
------ ------ ------
Loss from operations..................................... (124.7) (67.3) (133.2)
Other income (expense):
Other income (expense)................................. (6.2) -- --
Interest income (expense).............................. (4.1) (6.2) 1.8
------ ------ ------
Cumulative effect of accounting changes.................. -- -- (4.9)
------ ------ ------
Net loss................................................. (135.0)% (73.5)% (136.3)%
====== ====== ======
2000 COMPARED TO 1999
Summary
The Company incurred a net loss of $14,037,564 (or $1.76 per share) in 2000
as compared to a net loss of $8,934,909 (or $1.91 per share) in 1999. Excluding
certain non-recurring items in both years, the Company incurred a net loss of
$10,299,544 (or $1.28 per share) in 2000 as compared to a net loss of $7,487,115
(or $1.60 per share) in 1999. Non-recurring items for 2000 amounted to
$3,738,020 (or $0.48 per share) and included $654,294 of compensation payable to
the former executives of HTR pursuant to their employment agreements, $1,226,335
of adjustment to goodwill related to the Company's restructuring of HTR,
$700,000 of adjustment to the Company's note receivable related to the sale of
Knowledgeworks, $335,000 of costs related to the Company's restructuring of
operations in December 2000, $361,391 of compensation expense recorded in
connection with the issuance of stock, stock warrants and stock options, and
$461,000 recorded in connection with the cumulative effect of change in
accounting principle. Non-recurring items for 1999 amounted to $1,447,794 (or
$0.31 per share) and included $1,089,240 of compensation payable to the former
executives of HTR pursuant to their employment agreements, $360,000 of costs
related to a settlement with a former partner, and $1,446 of gain related to the
sale of Knowledgeworks.
Total revenues in 2000 were $9,456,083 as compared to $11,547,439 for 1999.
The decrease in revenues was primarily due to the closing of two HTR training
facilities in 1999 (approximately $2,327,000) the sale of Knowledgeworks in June
1999 (approximately $268,000) and the decrease in Teletutor revenues
(approximately $593,000) as the Company focused on its core online business. The
decrease was partially offset by increases in online tuition revenues and
development and other revenue. Online tuition revenues increased
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26
from $3,834,617 in 1999 to $5,064,889 in 2000, 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 $18,768,608
in 2000 as compared to costs of $17,864,951 for 1999. The increase was due
primarily to increases in product development and operations expenses and sales
and marketing expenses, partially offset by a decrease in cost of revenues as
the Company's lower margin instructor-led training revenues decreased.
Net Revenues
Total net revenues decreased 18.1% from $11,547,439 in 1999 to $9,456,083
in 2000. Online tuition revenues increased from 3,834,617 (33.2% of net
revenues) in 1999 to $5,064,889 (53.5% of net revenues) in 2000. The increase in
online tuition revenues was primarily due to increased course usage by some of
the Company's older customers (approximately $900,000) and the addition of new
customers (approximately $330,000). Virtual campus software revenues decreased
from $216,341 (1.9% of net revenues) for 1999 to $115,093 (1.2% of net revenues)
for 1999. The decrease in virtual campus software revenues is primarily due to
the decrease of customers with virtual campus software license agreements.
Online development and other revenues increased slightly from $977,295 (8.5% of
net revenues) in 1999 to $1,021,811 (10.8% of net revenues) in 2000. Development
revenues were primarily related to developing online courseware for customers in
both years. Product sales revenues decreased from $1,222,389 (10.6% of net
revenues) in 1999 to $413,999 (4.4% of net revenues) in 2000. The decrease in
product sales revenues 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 $305,046 (2.6% of net revenues) in
1999 to $175,399 (1.9% of net revenues) in 2000. The decrease in other service
revenues was due primarily to decreased sales to the Company's legacy customers
using its CYBIS courseware. Instructor-led training revenues decreased from
$4,991,751 (43.2% of net revenues) in 1999 to $2,664,892 (28.2% of net revenues)
in 2000. This decrease was due primarily to the closing of two HTR training
facilities in 1999 as a result of management reorganization plans.
Cost of Revenues
Total cost of revenues decreased 42.7% from $5,748,745 (49.8% of net
revenues) in 1999 to $3,296,284 (34.9% of net revenues) in 2000. The decrease
was due primarily to the closing of two lower margin instructor-led training
facilities in 1999 (representing a decrease of approximately $2,300,000) and the
decrease in product sales revenues (representing a decrease of approximately
$300,000) partially offset by the increase in cost of online revenues
(approximately $150,000) as a result of the increase in online tuition revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 45.6% from
$4,285,989 (37.1% of net revenues) in 1999 to $6,241,397 (66.1% of net revenues)
in 2000. Sales and marketing expenses consist primarily of costs related to
personnel, sales commissions, travel, market research, advertising and marketing
materials. The increase was due primarily to the Company's expansion of its
sales force and increased marketing investments in 2000.
Product Development and Operations. Product development and operations
expenses increased to 58.6% from $2,241,283 (19.4% of net revenues) in 1999 to
$3,555,093 (37.6% of net revenues) in 2000. 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 increase was primarily due to additional costs
incurred transitioning to a new hosting facility, re-configuring the
architecture of the courseware delivery platform, and leasing certain hardware
designed to improve capacity and performance of delivering courseware, as well
up-front costs related to establishing an application hosting platform under the
Company's application hosting agreement with a large reseller.
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General and Administrative. General and administrative expenses increased
4.8% from $2,632,937 (22.8% of net revenues) in 1999 to $2,759,682 (29.2% 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 costs.
Depreciation and Amortization. Depreciation and amortization expense
decreased 1.3% from $2,955,997 (25.6% of net revenues) in 2000 to $2,916,152
(30.8% of net revenues) in 1999.
Compensation expense in connection with the acquisition of HTR,
Inc. During 2000, the Company recognized the final portion of compensation
expense of $654,294 related to compensation paid to the HTR executives pursuant
to their employment agreements.
Reorganization and Other Non-Recurring Charges. In December 2000, the
Company implemented a plan to reduce its workforce and close certain office
facilities. The plan called for and resulted in (i) the termination of
approximately 37 employees primarily from the product development and
instructor-led training areas and (ii) the closure of the Company's training
facilities located in Washington, DC and Rockville, MD. As a result, the Company
recorded a restructuring charge of approximately $1,561,000. The restructuring
charge included approximately $1,226,000 for the write off of goodwill related
to HTR and $335,000 primarily for expenses related to facilities lease
cancellations. The Company believes that the restructuring plan will be
completed by the second quarter of 2001 and does not anticipate adjustments to
its restructuring accrual. No amounts related to the restructuring had been paid
as of December 31, 2000. The operating activities of the closed facilities were
not tracked separately by the Company. Reorganization and other non-recurring
charges in 2000 also included an increase of $700,000 to the Company's reserve
for its notes receivable issued in connection with the sale of Knowledgeworks,
which note was restructured in 2000.
Stock Based Compensation. Stock based compensation was $361,391 in 2000
and consisted of expense related to the issuance of compensatory stock and stock
options to the Company's newly appointed President and Chief Executive Officer,
and compensatory stock and stock warrants issued to several service providers.
Interest and Other Income (Expense). Interest income in 2000 was primarily
derived from income earned on divestiture-related notes receivable and cash
raised in the Company's private placements. Interest expense in 1999 was
primarily attributable to the Company's borrowings under its then convertible
debentures and credit facilities.
Cumulative Effect of Accounting Change. During the fourth quarter of 2000,
the Company implemented Emerging Issues Task Force Issue No. 00-27, Application
of EITF Issue No. 98-5, "Accounting for Convertible Securities with Beneficial
Conversion Features or Contingently Adjustable Conversion Ratios," to Certain
Convertible Instruments (EITF 00-27). Issue 1 of EITF 00-27 modified the
calculation of beneficial conversion features for convertible securities issued
with detachable instruments for all transactions subject to EITF Issue No. 98-5.
As a result of implementation of EITF 00-27, the beneficial conversion feature
associated with the Company's Secured Subordinated Convertible Debentures
increased by $461,000. This non-cash item has been recorded by the Company as a
cumulative effect of a change in accounting principle in accordance with EITF
00-27.
1999 COMPARED TO 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 compensation 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,
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$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 usage, 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 software revenues and development and other 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 in September 1998, and the
sale of HTR's consulting and Knowledgeworks businesses in 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 in
online tuition revenues was primarily due to increased course usage by some of
the Company's older customers (approximately $1,894,000), the addition of new
customers (approximately $271,000), and the transition of some Teletutor
customers to online delivery (approximately $121,000). 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 was 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 by
the Company for 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, 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, primarily due 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, primarily due 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 primarily due to the closing of two instructor-led training facilities at
the end of the second quarter of 1998 (approximately $938,000), the sale of
HTR's consulting business at the end of the fourth quarter of 1998
(approximately $1,558,000) and the sale of Knowledgeworks in June 1999
(approximately $839,000).
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 primarily due 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 and Operations. Product development and operations
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
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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 primarily
due to cost controls initiated at the end of the first quarter of 1998 as a
result of management reorganization plans. The plan resulted in the termination
of approximately 48 employees in the product development and operations area
with an approximate decrease of $3,100,000 in payroll and related costs for the
year. The decrease in 1999 was also due to the write-off during the first
quarter of 1998 of approximately $700,000 related to previously capitalized
software development costs ($280,000), courseware development costs ($150,000)
and acquired online publishing rights costs ($270,000).
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 costs. The decrease was primarily due 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. Bad debt expense consisted primarily of accounts with
customer with whom the Company chose not to further its relationship in 1998
mainly due to its reduction in workforce.
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 primarily due 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 compensation 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
(consistent with the plan) 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. The operating activities of the
discontinued operations were not tracked separately by the Company. During 1998,
the Company paid approximately $1,224,000 in costs under the restructuring
accrual. The remaining amount was paid in 1999. The total amounts paid did not
materially differ from the amounts accrued. 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
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 line of credit
facility and term loans. 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
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30
$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.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2000, the Company had $243,204 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 $9,465,895
for the year ended December 31, 2000 and $2,670,523 for the year ended December
31, 1999. Use of cash was primarily attributable to the net loss recorded.
Cash utilized in investing activities was $1,832,420 for the year ended
December 31, 2000 as compared to $60,514 for the year ended December 31, 1999.
The use of cash for investing activities in 1999 and 2000 was primarily
attributable to purchases of equipment and investments in software and
courseware development.
Cash provided by financing activities was $11,337,064 for the year ended
December 31, 2000 as compared to $2,599,298 provided by financing activities for
the year ended December 31, 1999. In January 2000, the Company completed a
private placement of its common stock to iGate Capital Corporation, pursuant to
which the Company issued 1,136,253 shares of common stock at $3.62 per share,
resulting in net proceeds to the Company of approximately $4,000,000. The
Company also issued one-year warrants to purchase 450,000 shares of its common
stock at an exercise price between $4.34 and $6.125 per share. These warrants
expired unexercised in January 2001. Under the terms of the H&QGF equity line
agreement, the Company drew down approximately $4,380,000 during 2000, and
issued to H&QGF 963,092 shares of Series E Preferred Stock at an average price
of $4.55 per share. In the first quarter of 2000, the Company also issued
482,574 shares of its common stock to its convertible debenture holders at an
average price of $3.30 per share, upon conversion of the remaining balance of
approximately $1,590,000 in principal and accrued interest. In April 2000, the
Company raised $2,500,000 through a private placement of 357,142 shares of
common stock to US West Internet Ventures, Inc. at $7.00 per share and five-year
warrants to purchase 714,285 shares of the Company's common stock at $7.00 per
share. In December 2000, the Company raised $500,000 through a private placement
to Rudman Partners of 519,480 shares at $0.96 per share and five-year warrants
to purchase 519,480 shares of common stock at an exercise price of $0.96 per
share. The Company also raised an additional $161,000 in December 2000 through
the sale of 167,056 shares of common stock to its employees, executive officers
and directors at $0.96 per share.
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 must raise additional funding to meet its working capital
requirements and fund anticipated ongoing operating losses, particularly in the
near term. The Company's equity line with H&QGF expired in February 2001.
Consequently, the Company is currently negotiating with a new lender for a new
equity line and is negotiating to secure bridge financing to provide sufficient
working capital until the new equity line, or alternative financing
arrangements, can be completed during the second quarter of 2001. In February
2001, the Company secured $1,150,000 of bridge financing through the issuance of
short-term notes bearing interest at 10%, to Barry Fingerhut, a director and
shareholder of the Company, and John Sears, a director of the Company. These
notes were cancelled in March 2001 in exchange for an aggregate of 1,183,782
shares of common stock at a purchase price of $0.978 per share and warrants to
purchase an aggregate of 287,500 shares of common stock at an exercise price of
$1.076 per share.
Although the Company expects to achieve breakeven sometime during 2001, the
Company expects it will need to secure more substantial long-term private equity
financings during the second quarter of 2001 to satisfy its working capital
needs for the remainder of 2001. If the Company does not achieve substantial
positive cash flow from operations during 2001 or 2002, it will need to continue
to raise additional funds in those years to support operations and fund its
efforts to grow online revenues. Additional financing, both short-
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31
term and long-term, might not be available to the Company, or might not be
available on terms acceptable to the Company
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 resellers, and the extent to which the Company invests in new
technology and research and development projects.
As of December 31, 2000, the Company had net operating loss carryforwards
of approximately $47.1 million for federal income tax purposes, which will
expire at various dates through 2020. The Company's ability to utilize all of
its net operating loss and credit carryforwards may be limited by changes in
ownership. The Company has recognized a full valuation allowance against these
deferred tax assets because it is more likely than not that sufficient taxable
income will not be generated during the carryforward period available under the
tax law to utilize the deferred tax assets.
RECENTLY ENACTED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through net income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for the Company's year ending
December 31, 2001. The Company does not currently hold any derivatives and does
not expect the adoption of SFAS 133 to materially impact its financial position
or results of its operations.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation ("FIN 44"), which contains
rules designed to clarify the application of APB 25. FIN 44 was effective on
July 1, 2000. The adoption of this standard did not have a material impact on
the Company's financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The information required by this item is included in this Report at pages
F-1 through F- 21. 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.
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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 2001
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 Report.
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.
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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.
10.24(b) Employment Agreement, dated January 1, 1997, with Michael W.
Anderson.
10.25(b) Employment Agreement, dated October 31, 1997, with Kamyar
Kaviani.
10.26(b) Employment Agreement, dated October 31, 1997, with Farzin
Arsanjani.
10.27(b) Employment Agreement, dated October 31, 1997, with Daniel J.
Callahan, IV.
10.30(c) Series C Preferred Stock and Warrant Purchase Agreement.
10.31(c) Registration Rights Agreement, dated March 31, 1998.
10.32(c) Series D Preferred Stock Purchase Agreement, dated June 29,
1998.
10.33(c) Amended and Restated Registration Rights Agreement, dated
June 29, 1998.
10.34(c) Certificate of Designations, Preferences and Rights of
Series D Convertible Preferred Stock dated June 26, 1998.
10.35(d) Certificate of Designations, Preferences and Rights of
Series C Convertible Preferred Stock dated June 25, 1998.
10.40(e) Form of Subscription Agreement for the $1.05 million Spencer
Trask Financing.
10.41(f) Private Equity Line of Credit Agreement dated May 4, 1999
with Hambrecht & Quist Guaranty Finance, LLC.
10.42(f) Certificate of Designations, Preferences and Rights of
Series E Convertible Preferred Stock.
10.43(f) 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(f) Form of Convertible Debenture for the $2.5 million
convertible debenture financing in June 1999.
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EXHIBIT NO. DESCRIPTION
----------- -----------
10.45(g) Asset Purchase Agreement relating to the sale of the
Knowledgeworks division of HTR effective on June 30, 1999.
10.46(g) Receivables factoring agreements, as amended, with Bankers
Capital.
10.47(h) Stock Purchase Agreement dated as of January 11, 2000 by and
among the Registrant and Mastech Corporation (now iGate
Capital Corporation).
10.48(h) Registration Rights Agreement dated as of January 11, 2000
by and among the Registrant and Mastech Corporation (now
iGate Capital Corporation).
10.49(h) Warrant issued to Mastech Corporation (now iGate Capital
Corporation), dated as of January 11, 2000.
10.50(i) Subscription Agreement dated as of April 20, 2000, by and
between the Registrant and US West Internet Ventures, Inc.
10.51(i) Registration Rights Agreement dated as of April 20, 2000 by
and between the Registrant and US West Internet Ventures,
Inc.
10.52(i) Warrant issued to US West Internet Ventures, Inc., dated as
of April 20, 2000.
10.53(i) Board Nomination and Observer Rights Agreement dated April
20, 2000.
10.54(j)* Application Hosting Agreement dated April 20, 2000 between
the Company and US West Interprise America, Inc.
10.55 Employment Agreement, dated August 8, 2000, with Daniel J.
Neal.
10.56 Amendment No. 1 to Employment Agreement with Narasimhan P.
Kannan dated August 10, 2000.
21.1 List of Subsidiaries.
23.1 Consent of Ernst & Young, LLP, Independent Auditors
99.1 Audit Committee Charter
- ---------------
* Confidential treatment granted.
(a) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 333-12135).
(b) 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.
(c) 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.
(d) 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.
(e) 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.
(f) 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.
(g) 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.
(h) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's current Report on Form 8-K filed January 13, 2000.
(i) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's current Report on Form 8-K filed May 1, 2000.
(j) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q filed May 15, 2000.
(b) The Registrant filed no reports on Form 8-K during the fourth quarter
of the fiscal year ended December 31, 2000.
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35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
VCAMPUS CORPORATION
By: /s/ DANIEL J. NEAL
------------------------------------
Daniel J. Neal
Chief Executive Officer
Date: March 29, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following person on behalf of the Registrant
and in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
--------- -------- ----
/s/ NARASIMHAN P. KANNAN Chairman March 29, 2001
- ---------------------------------------------------
Narasimhan P. Kannan
/s/ DANIEL J. NEAL Director and Chief Executive March 29, 2001
- --------------------------------------------------- Officer (Principal Executive
Daniel J. Neal Officer)
/s/ MICHAEL A. SCHWIEN Chief Financial Officer March 29, 2001
- --------------------------------------------------- (Principal Financial and
Michael A. Schwien Accounting Officer)
/s/ EDSON D. DECASTRO Director March 30, 2001
- ---------------------------------------------------
Edson D. deCastro
/s/ BARRY K. FINGERHUT Director March 30, 2001
- ---------------------------------------------------
Barry K. Fingerhut
/s/ WILLIAM E. KIMBERLY Director March 26, 2001
- ---------------------------------------------------
William E. Kimberly
/s/ JOHN D. SEARS Director March 30, 2001
- ---------------------------------------------------
John D. Sears
/s/ ASHOK TRIVEDI Director March 30, 2001
- ---------------------------------------------------
Ashok Trivedi
/s/ MARTIN E. MALESKA Director March 30, 2001
- ---------------------------------------------------
Martin E. Maleska
36
VCAMPUS CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Ernst & Young LLP, Independent Auditors........... F-2
Consolidated Balance Sheets as of December 31, 1999 and
2000...................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1998, 1999 and 2000.............. F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998, 1999 and 2000.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
F-1
37
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
VCampus Corporation
We have audited the accompanying consolidated balance sheets of VCampus
Corporation as of December 31, 1999 and 2000, and the related consolidated
statements of operations, stockholders' equity, and cash flows for each of the
three years in the period ended December 31, 2000. Our audits also included the
financial statement schedule for the years ended December 31, 1998, 1999 and
2000 listed in the Index at Item 14(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedule based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of VCampus
Corporation at December 31, 1999 and 2000, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States. Also, in our opinion, the related financial statement
schedule for the years ended December 31, 1998, 1999 and 2000, when considered
in relation to the basic financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
As discussed in Note 2 of Notes to Consolidated Financial Statements, in
2000 the Company changed its method of accounting for convertible securities
with beneficial conversion features in accordance with the consensus reached by
the Emerging Issues Task Force on Issue No. 00-27, Application of EITF Issue No.
98-5, "Accounting for Convertible Securities with Beneficial Conversion Features
or Contingently Adjustable Conversion Ratios," to Certain Convertible
Instruments.
/s/ ERNST & YOUNG LLP
McLean, Virginia
March 8, 2001
F-2
38
VCAMPUS CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
--------------------------
1999 2000
----------- ------------
ASSETS
Current assets:
Cash and cash equivalents................................. $ 204,455 $ 243,204
Accounts receivable, less allowance of $142,000 and
$218,000 at December 31, 1999 and 2000, respectively... 1,349,332 705,975
Loans receivable from related parties..................... 124,182 132,182
Loans receivable -- current............................... 1,213,717 269,596
Prepaid expenses and other current assets................. 599,645 232,781
----------- ------------
Total current assets........................................ 3,491,331 1,583,738
Property and equipment, net................................. 1,464,483 1,643,205
Capitalized software costs and courseware development costs,
Net....................................................... 1,543,520 1,226,904
Acquired online publishing rights, net...................... 169,624 40,608
Loans receivable -- less current portion.................... 150,226 123,649
Other assets................................................ 180,988 250,684
Other intangible assets, net................................ 1,913,259 1,453,233
Goodwill, net............................................... 1,754,682 329,571
----------- ------------
Total assets...................................... $10,668,113 $ 6,651,592
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 2,819,956 $ 1,396,815
Accrued expenses.......................................... 2,672,160 1,372,826
Notes payable -- current portion.......................... 1,877,509 --
Deferred revenues......................................... 1,276,283 850,570
----------- ------------
Total current liabilities......................... 8,645,908 3,620,211
Stockholders' equity:
Series C convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $7,910,172;
1,000,000 shares authorized; 623,339 shares issued and
outstanding at December 31, 1999 and 2000.............. 6,233 6,233
Series D convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $8,832,805;
1,200,000 shares authorized; 1,073,370 and 1,070,643
shares issued and outstanding at December 31, 1999 and
2000, respectively..................................... 10,734 10,706
Series E convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $860,370 and
$2,242,826, respectively; 3,000,000 shares authorized;
214,928 and 574,557 shares issued and outstanding at
December 31, 1999 and 2000, respectively............... 2,149 5,746
Common Stock, $0.01 par value per share; 36,000,000 shares
authorized 5,684,110 and 9,508,509 shares issued and
outstanding at December 31, 1999 and 2000,
respectively........................................... 56,840 95,085
Additional paid-in capital................................ 58,578,078 73,499,027
Accumulated deficit....................................... (56,631,829) (70,585,416)
----------- ------------
Total stockholders' equity........................ 2,022,205 3,031,381
----------- ------------
Total liabilities and stockholders' equity........ $10,668,113 $ 6,651,592
=========== ============
The accompanying notes are an integral part of the financial statements.
F-3
39
VCAMPUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
------------ ----------- ------------
Revenues:
Online tuition revenues............................. $ 1,548,950 $ 3,834,617 $ 5,064,889
Virtual campus software revenues.................... 112,253 216,341 115,093
Online development and other revenues............... 925,751 977,295 1,021,811
Product sales revenues.............................. 3,347,777 1,222,389 413,999
Other service revenues.............................. 2,444,719 305,046 175,399
Instructor-led training revenues.................... 6,303,662 4,991,751 2,664,892
------------ ----------- ------------
Net revenues.......................................... 14,683,112 11,547,439 9,456,083
Costs and expenses:
Cost of revenues.................................... 8,868,351 5,748,745 3,296,284
Sales and marketing................................. 5,304,394 4,285,989 6,241,397
Product development and operations.................. 6,102,265 2,241,283 3,555,093
General and administrative.......................... 3,782,844 2,632,937 2,759,682
Depreciation and amortization....................... 3,346,744 2,955,997 2,916,152
Compensation expense in connection with the
acquisition of HTR, Inc.......................... -- 1,089,240 654,294
Reorganization and other non-recurring charges...... 5,585,214 360,000 2,261,335
Stock-based compensation............................ -- -- 361,391
------------ ----------- ------------
Total costs and expenses.............................. 32,989,812 19,314,191 22,045,628
------------ ----------- ------------
Loss from operations.................................. (18,306,700) (7,766,752) (12,589,545)
Other income (expense):
Gain (loss) on sale of subsidiaries................. (907,426) 1,446 --
Interest income (expense)........................... (597,139) (721,423) 165,800
------------ ----------- ------------
Loss before cumulative effect of change in accounting
principle........................................... (19,811,265) (8,486,729) (12,423,745)
Cumulative effect of change in accounting principle... -- -- (461,000)
------------ ----------- ------------
Net loss.............................................. (19,811,265) (8,486,729) (12,884,745)
Dividends to preferred stockholders................... (357,890) (448,180) (1,152,819)
------------ ----------- ------------
Net loss attributable to common stockholders.......... $(20,169,155) $(8,934,909) $(14,037,564)
============ =========== ============
Net loss per share before cumulative effect of change
in accounting principle............................. $ (5.27) $ (1.91) $ (1.70)
Cumulative effect of change in accounting principle... -- -- (0.06)
------------ ----------- ------------
Basic and diluted loss per share...................... $ (5.27) $ (1.91) $ (1.76)
============ =========== ============
Proforma amounts assuming the accounting change is
applied retroactively:
Net loss to common stockholders....................... $(20,169,155) $(9,395,909) $(13,576,564)
============ =========== ============
Net loss per share, basic and diluted................. $ (5.27) $ (2.01) $ (1.70)
============ =========== ============
The accompanying notes are an integral part of the financial statements.
F-4
40
VCAMPUS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
SERIES C SERIES D SERIES E
CONVERTIBLE CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK
---------------- ------------------- ------------------ -------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
------- ------ --------- ------- -------- ------- --------- -------
Balance at December 31, 1997....... -- -- -- -- -- -- 3,785,210 37,852
Issuance of Series C convertible
Preferred Stock................. 626,293 $6,263 -- -- -- -- -- --
Issuance of Series D convertible
Preferred Stock................. -- -- 1,082,625 10,826 -- -- -- --
Issuance of Common Stock primarily
in connection with conversion of
debt to equity.................. -- -- -- -- -- -- 138,039 1,380
Issuance of Common Stock for
payment of Series D convertible
Preferred Stock dividends....... -- -- -- -- -- -- 28,902 289
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ -- -- -- -- -- -- 37,895 379
Compensatory stock options and
warrants........................ -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
Dividends on convertible Preferred
Stock........................... -- -- -- -- -- -- -- --
------- ------ --------- ------- -------- ------- --------- -------
Balance at December 31, 1998....... 626,293 6,263 1,082,625 10,826 -- -- 3,990,046 39,900
Issuance of Series E convertible
Preferred Stock................. -- -- -- -- 379,437 3,794 -- --
Issuance of Series E convertible
Preferred Stock for payment of
Series E dividends.............. -- -- -- -- 532 5 -- --
Issuance of Common Stock.......... -- -- -- -- -- -- 850,567 8,506
Conversion of Preferred Stock to
Common Stock.................... (2,954) (30) (9,255) (92) (165,041) (1,650) 177,876 1,779
Issuance of Common Stock primarily
in connection with conversion of
debt to equity.................. -- -- -- -- -- -- 540,292 5,402
Issuance of Common Stock for
payment of Series D Convertible
Preferred Stock dividends....... -- -- -- -- -- -- 79,395 794
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ -- -- -- -- -- -- 45,934 459
Compensatory stock options and
warrants........................ -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
Dividends on convertible preferred
stock........................... -- -- -- -- -- -- -- --
------- ------ --------- ------- -------- ------- --------- -------
Balance at December 31, 1999....... 623,339 6,233 1,073,370 10,734 214,928 2,149 5,684,110 56,840
Issuance of Series E convertible
Preferred Stock................. -- -- -- -- 963,092 9,631 -- --
Issuance of Series E convertible
Preferred Stock for payment of
Series E dividends.............. -- -- -- -- 18,040 181 -- --
Issuance of Common Stock.......... -- -- -- -- -- -- 2,052,875 20,528
Conversion of Preferred Stock to
Common Stock.................... -- -- (2,727) (28) (621,503) (6,215) 624,230 6,243
Issuance of Common Stock primarily
in connection with conversion of
debt to equity.................. -- -- -- -- -- -- 482,574 4,826
Issuance of Common Stock for
payment of Series D Convertible
Preferred Stock dividends....... -- -- -- -- -- -- 245,070 2,451
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ -- -- -- -- -- -- 419,650 4,197
Cumulative effect of change in
accounting principle............ -- -- -- -- -- -- -- --
Compensatory stock, stock options
and warrants.................... -- -- -- -- -- -- -- --
Net loss.......................... -- -- -- -- -- -- -- --
Dividends on convertible preferred
stock........................... -- -- -- -- -- -- -- --
------- ------ --------- ------- -------- ------- --------- -------
Balance at December 31, 2000....... 623,339 $6,233 1,070,643 $10,706 574,557 $ 5,746 9,508,509 $95,085
======= ====== ========= ======= ======== ======= ========= =======
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
----------- ------------ -------------
Balance at December 31, 1997....... 40,901,196 (27,527,765) 13,411,283
Issuance of Series C convertible
Preferred Stock................. 5,445,553 -- 5,451,816
Issuance of Series D convertible
Preferred Stock................. 5,859,185 -- 5,870,011
Issuance of Common Stock primarily
in connection with conversion of
debt to equity.................. 806,166 -- 807,546
Issuance of Common Stock for
payment of Series D convertible
Preferred Stock dividends....... 150,585 -- 150,874
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ 88,279 -- 88,658
Compensatory stock options and
warrants........................ 209,300 -- 209,300
Net loss.......................... -- (19,811,265) (19,811,265)
Dividends on convertible Preferred
Stock........................... -- (357,890) (357,890)
----------- ------------ ------------
Balance at December 31, 1998....... 53,460,264 (47,696,920) 5,820,333
Issuance of Series E convertible
Preferred Stock................. 1,006,795 -- 1,010,589
Issuance of Series E convertible
Preferred Stock for payment of
Series E dividends.............. (7) -- (2)
Issuance of Common Stock.......... 2,059,849 -- 2,068,355
Conversion of Preferred Stock to
Common Stock.................... -- -- 7
Issuance of Common Stock primarily
in connection with conversion of
debt to equity.................. 945,972 -- 951,374
Issuance of Common Stock for
payment of Series D Convertible
Preferred Stock dividends....... 295,757 -- 296,551
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ 78,229 -- 78,688
Compensatory stock options and
warrants........................ 731,219 -- 731,219
Net loss.......................... -- (8,486,729) (8,486,729)
Dividends on convertible preferred
stock........................... -- (448,180) (448,180)
----------- ------------ ------------
Balance at December 31, 1999....... 58,578,078 (56,631,829) 2,022,205
Issuance of Series E convertible
Preferred Stock................. 4,315,006 -- 4,324,637
Issuance of Series E convertible
Preferred Stock for payment of
Series E dividends.............. (181) -- --
Issuance of Common Stock.......... 6,664,415 -- 6,684,943
Conversion of Preferred Stock to
Common Stock.................... -- -- --
Issuance of Common Stock primarily
in connection with conversion of
debt to equity.................. 1,180,412 -- 1,185,238
Issuance of Common Stock for
payment of Series D Convertible
Preferred Stock dividends....... 293,121 -- 295,572
Issuance of Common Stock in
connection with exercise of
options and exercise of
warrants........................ 872,557 -- 876,754
Cumulative effect of change in
accounting principle............ 461,000 -- 461,000
Compensatory stock, stock options
and warrants.................... 361,391 -- 361,391
Net loss.......................... -- (12,884,745) (12,884,745)
Dividends on convertible preferred
stock........................... 773,228 (1,068,842) (295,614)
----------- ------------ ------------
Balance at December 31, 2000....... $73,499,027 $(70,585,416) $ 3,031,381
=========== ============ ============
The accompanying notes are an integral part of the financial statements.
F-5
41
VCAMPUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
------------ ----------- ------------
OPERATING ACTIVITIES
Net loss.................................................... $(19,811,265) $(8,486,729) $(12,884,745)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation.............................................. 1,058,950 1,033,354 1,186,190
Amortization.............................................. 2,287,796 1,922,643 1,729,962
Loss (gain) on sale of subsidiaries....................... 907,426 (1,446) --
Loss on debt restructuring................................ 145,208 166,135 --
Net write-off of acquired online publishing rights........ 266,000 95,000 --
Net write-off of capitalized software and courseware
development costs....................................... 428,284 -- --
Non-cash stock option and stock warrant expense........... -- 349,201 361,391
Write-off of intangible assets............................ 3,669,598 -- 1,226,335
Write-off of other assets................................. -- 16,134 700,918
Cumulative effect of change in accounting principle....... -- -- 461,000
(Decrease) Increase in allowance for doubtful accounts.... (162,693) (650,505) 76,239
Changes in operating assets and liabilities:
Accounts receivable..................................... 1,425,813 1,893,441 567,118
Prepaid expenses and other current assets............... 307,112 (384,662) 134,313
Other assets............................................ 49,814 13,656 (69,696)
Accounts payable and accrued expenses................... (596,041) 1,107,878 (2,529,207)
Deferred revenues....................................... 523,516 255,377 (425,713)
------------ ----------- ------------
Net cash used in operating activities....................... (9,500,482) (2,670,523) (9,465,895)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (700,383) (77,643) (1,417,720)
Capitalized courseware development costs.................... (992,163) (354,735) (625,528)
Additions to intangible assets.............................. (355,809) -- --
Proceeds from loans receivable from related parties......... -- 27,333 --
Advances under loans receivable from related parties........ (9,999) (8,000) (8,000)
Proceeds from sale of subsidiaries.......................... 337,500 75,000 300,334
Proceeds from loans receivable.............................. 325,000 277,531 (81,506)
Advances under loans receivable............................. (2,939) -- --
------------ ----------- ------------
Net cash used in investing activities....................... (1,398,793) (60,514) (1,832,420)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock...................... 123,466 2,148,001 7,548,061
Proceeds from the issuance of Series C convertible Preferred
Stock..................................................... 5,244,824 -- --
Proceeds from the issuance of Series D convertible Preferred
Stock..................................................... 5,115,545 -- --
Proceeds from the issuance of Series E convertible Preferred
Stock..................................................... -- 859,000 4,324,637
Proceeds from notes payable................................. 4,047,931 2,521,561 --
Repayments of notes payable................................. (6,001,787) (2,929,264) (535,634)
------------ ----------- ------------
Net cash provided by financing activities................... 8,529,979 2,599,298 11,337,064
Net (decrease) increase in cash and cash equivalents........ (2,369,296) (131,739) 38,749
Cash and cash equivalents at the beginning of the year...... 2,705,490 336,194 204,455
------------ ----------- ------------
Cash and cash equivalents at the end of the year............ $ 336,194 $ 204,455 $ 243,204
============ =========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................... $ 377,516 $ 445,000 $ 26,600
============ =========== ============
The accompanying notes are an integral part of the financial statements.
F-6
42
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
VCampus Corporation, formerly known as UOL Publishing, Inc., (the
"Company") was incorporated in Virginia in 1984 and reincorporated in Delaware
in 1985. The Company creates and hosts online courseware delivery systems known
as virtual campuses, or VCampuses, to meet corporation and institutional needs
for education and training. Through certain of its subsidiaries, the Company
also offers courseware through more traditional methods, including on-site and
classroom training, diskette, CD-ROM, and printed formats.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents, which are stated at cost, consist of highly liquid
investments with original maturities of three months or less.
Capitalized Software Costs
During 1998, 1999 and 2000, the Company capitalized certain software
development costs. Capitalization of software costs began upon the establishment
of technological feasibility, which management deemed to have occurred upon the
completion of a working model of the Company's virtual campus product
("VCampus(TM)"). The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software costs requires considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technology.
Amortization of such costs is based on the greater of (1) the ratio of current
gross revenues to the sum of current and anticipated gross revenues, or (2) the
straight-line method over the remaining economic life of the VCampus. During
1998, the Company changed its estimate of the economic life of the VCampus(TM)
from five years to three years. This change in estimate was not material to the
net loss or net loss per share recorded by the Company for 1998. As with
estimates of this nature, it is possible that estimates of future gross
revenues, the remaining economic life of the products or both may be revised
again as a result of future events. During 1998, the Company wrote off
approximately $280,000 of software development costs for courses within certain
industry segments that the Company does not anticipate pursuing in the
short-term. The write off has been included in product development costs in the
1998 statement of operations.
Web site Development Costs
The Company accounts for web site development costs in accordance with
Emerging Issues Task Force Issue No. 00-2, Accounting for Web Site Development
Costs ("EITF 00-2"). The implementation of EITF 00-2 did not have a material
impact on the Company's financial position or results of operations. In 1998,
1999
F-7
43
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
and 2000 all costs were incurred in the operating stage, including maintenance
and minor enhancements and upgrades, and were expensed as incurred.
Capitalized Courseware Development Costs
During 1997 and 2000, the Company capitalized certain courseware
development costs. Capitalization of courseware development costs began upon the
establishment of technological feasibility, which management deemed to have
occurred upon the completion of a working model of the relevant courseware. The
establishment of technological feasibility and the ongoing assessment of
recoverability of capitalized courseware development costs requires considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technology.
Amortization of such costs is based on the greater of (1) the ratio of current
gross revenues to the sum of current and anticipated gross revenues, or (2) the
straight-line method over the remaining economic life of the product, typically
two to three years. It is possible that those estimates of future gross
revenues, the remaining economic life of the products or both may be reduced as
a result of future events. During 1998, the Company wrote off approximately
$150,000 of courseware development costs for courses within certain industry
segments that the Company does not anticipate pursuing in the short-term or
courses that have not shown meaningful activity. The write-off has been included
in product development costs in the 1998 statement of operations.
Acquired Online Publishing Rights
During 1997, the Company acquired online publishing rights to certain
courseware. At the time of licensing to the Company, this courseware was
generally established in CD-ROM, diskette or printed formats. The Company
capitalized the costs associated with acquiring this content and amortizes them
based on the greater of (1) the ratio of current gross revenues to the sum of
current and anticipated gross revenues, or (2) the straight-line method over the
remaining economic life of the product, typically two to three years.
Amortization begins when the course becomes available for sale online. It is
possible that those estimates of future gross revenues, the remaining economic
life of the products or both may be reduced as a result of future events. During
1998 and 1999, the Company wrote off approximately $270,000 and $95,000,
respectively, of acquired online publishing rights to courses belonging to
certain industry segments that the Company does not anticipate pursuing in the
short-term. The write-off has been included in product development costs in the
1998 and 1999 statements of operations.
Goodwill and Other Intangible Assets
Goodwill and other intangibles represent the unamortized excess of the cost
of acquiring subsidiary companies over the fair values of such companies' net
tangible assets at the dates of acquisition. Goodwill related to the Company's
acquisitions as described in Notes 6 and 7 are being amortized on a
straight-line basis over periods ranging from ten to twelve years. Other
intangibles, including contracts, content, trademarks, workforce, customer base
and others, are being amortized on a straight-line basis over periods ranging
from three to twelve years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property and
equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of. The Company evaluates the carrying amount of long-lived assets to
be held and used, including goodwill and other intangible assets, when events
and circumstances warrant such a review. The carrying amount of a long lived
asset is considered impaired when the estimated undiscounted cash flow from each
F-8
44
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
asset is less than its carrying amount. In that event, the Company records a
loss equal to the amount by which the carrying amount exceeds the fair market
value of the long-lived asset. Assets to be disposed of are measured at the
lower of carrying amount or fair value less cost to sell.
During 1998, the Company wrote off approximately $280,000 in capitalized
software development costs, $150,000 in capitalized courseware development costs
and approximately $270,000 in acquired online publishing rights. Also, during
1998, the Company wrote off approximately $3,670,000 of goodwill recorded in
connection with the acquisition of HTR, Inc. ("HTR"). During 1999, the Company
wrote off $95,000 in acquired online publishing rights. During 2000, the Company
wrote off the remaining goodwill, $1,226,000, recorded in connection with the
acquisition of HTR as a result of its decision to discontinue the majority of
HTR's non- online businesses as described in Note 7.
Revenue Recognition
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 ("SAB 101"). SAB 101 summarizes certain areas of the
Staff's views in applying generally accepted accounting principles to revenue
recognition in financial statements. SAB 101 was implemented by the Company
during the fourth quarter of 2000. The implementation of SAB 101 did not have a
material impact on the Company's financial position or results of operations.
The Company derives its revenues from the following sources -- online
tuition revenues, instructor-led training revenues, product sales revenues,
other service revenues, virtual campus software revenues, and development and
other revenues.
Online tuition revenues are generated primarily through three types of
contracts: (i) higher education partners, (ii) corporate subscriptions, and
(iii) corporate usage. For higher education partners and corporate
subscriptions, revenue is recognized ratably over the semester term and
subscription period, respectively. For corporate usage contracts, revenue is
recognized upon enrollment in a course. Once a student has enrolled in a course,
he cannot cancel delivery of a course or receive a refund. Initial set-up fees
related to all online tuition services are recognized ratably over the
respective contract term.
Revenues for instructor-led training and other services are recognized as
the services are delivered. The Company does not recognize revenue until the
class is delivered, at which time the cancellation period has ellapsed,
therefore no reserve for cancellations is necessary.
The Company recognizes product sales revenues and virtual campus software
revenues in accordance with Statement of Position 97-2, Software Revenue
Recognition ("SOP 97-2"), as amended by Statement of Position 98-4, Deferral of
the Effective Date of a Provision of SOP 97-2 and Statement of Position 98-9,
Modification of SOP 97-2 Software Revenue Recognition With Respect to Certain
Transactions. The Company recognizes revenues from product sales upon delivery
of the product to the customer, provided no significant obligations remain. The
costs of remaining Company obligations (which are insignificant) are accrued
when the related revenues are recognized. For VCampus(TM) software revenues, the
Company recognizes revenue ratably over the duration of the VCampus(TM)
licenses.
Development and other revenues earned under courseware conversion contracts
are recognized based on the ratio that total costs incurred to date bear to the
total estimated costs of the contract. Provisions for losses on contracts are
made in the period in which they are determined.
In 1998, no individual customer represented more than 10% of net revenues.
In 1999 and 2000, one customer represented approximately 10% and 12%,
respectively, of net revenues.
F-9
45
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, ("SFAS No. 123"). SFAS No. 123
allows companies to account for stock-based compensation either under the
provisions of SFAS No. 123 or under the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB No. 25"),
but requires pro forma disclosures in the footnotes to the consolidated
financial statements as if the measurement provisions of SFAS No. 123 had been
adopted. The Company accounts for its stock-based compensation in accordance
with the intrinsic value method of APB No. 25.
Stock options and warrants granted to non-employees are accounted for in
accordance with SFAS 123 and the Emerging Issues Task Force Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral. The Company maintains
reserves for credit losses, and such losses have been within management's
expectations.
Royalties
The Company has a royalty arrangement with an entity that has provided
product development funding, which royalties become due and payable by the
Company upon the completion and sale of these products.
Royalties are also due and payable by the Company upon the sale of certain
courses for which the Company has acquired the online publishing rights. In
addition, the Company may be obligated to pay certain royalties related to
courses which a VCampus(TM) customer may have converted to an online format and
elected to distribute to all the Company's VCampus(TM)customers. Royalties
accrue at a rate of 10% to 70% of the tuition fees received with respect to
certain courses.
Royalties are classified as a cost of revenues and amounted to
approximately $368,000, $335,000 and $436,000 during the years ended December
31, 1998, 1999 and 2000, respectively.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs
amounted to approximately $153,000, $380,000 and $606,000 for the years ended
December 31, 1998, 1999, and 2000 respectively.
Income Taxes
The Company provides for income taxes in accordance with the liability
method.
Change in Accounting Principle
During the fourth quarter of 2000, the Company implemented Emerging Issues
Task Force Issue No. 00-27, Application of EITF Issue No. 98-5, "Accounting for
Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," to Certain Convertible Instruments ("EITF
00-27"). Issue 1 of EITF 00-27 modified the calculation of beneficial conversion
features for convertible securities issued with detachable instruments for all
transactions subject to EITF Issue No. 98-5. Companies are required to report
any changes in a beneficial conversion feature as a result of applying Issue 1
of EITF 00-27 as a cumulative effect of a change in accounting principle at the
time of implementation in accordance with APB Opinion No. 20, Accounting
Changes. As a result of the implementation of EITF 00-27,
F-10
46
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
the Company has recorded a charge of $461,000, or $0.06 per share, as a
cumulative effect of a change in accounting principle.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128").
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All net loss per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
Comprehensive Income
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting of
Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for
the display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in equity during
a period except those resulting from the issuance of shares of stock and
distributions to shareholders. There were no differences between net loss and
comprehensive loss.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities ("SFAS 133"). SFAS 133 requires the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through net income. If the derivative is a
hedge, depending on the nature of the hedge, changes in the fair value of the
derivative are either offset against the change in fair value of assets,
liabilities, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in earnings. The
ineffective portion of the derivative's change in fair value will be immediately
recognized in earnings. SFAS 133 is effective for the Company's year ending
December 31, 2001. The Company does not currently hold any derivatives and does
not expect the adoption of SFAS 133 to materially impact its financial position
or results of its operations.
In March 2000, the FASB issued FASB Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation ("FIN 44"), which contains
rules designed to clarify the application of APB 25. FIN 44 was effective on
July 1, 2000. The adoption of this standard did not have a material impact on
the Company's financial position or results of operations.
Management's Plans
The Company expects negative cash flow from operations to continue for at
least the next six months until the online revenue stream matures. During 2000,
the Company reduced its workforce and closed facilities related to HTR's
non-online businesses. This restructuring is expected to provide significant
costs savings to the Company. In addition, the Company has implemented measures
to curtail the rate of discretionary spending. The Company recognizes that it
will need to raise additional funding to meet its working capital requirements
and that such funding may not be available on favorable terms, or at all.
3. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is calculated using the straight-line method over an
estimated useful life of three to seven years. Leasehold improvements
F-11
47
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
are amortized over the lesser of the related lease term or the useful life.
Property and equipment consisted of the following:
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Equipment............................................. $2,681,366 $2,778,167
Computer software..................................... 1,078,030 960,512
Leasehold improvements................................ 84,940 152,118
Furniture and fixtures................................ 394,884 565,828
---------- ----------
4,239,220 4,456,625
Less accumulated depreciation......................... (2,774,737) (2,813,420)
---------- ----------
Total....................................... $1,464,483 $1,643,205
========== ==========
4. CAPITALIZED SOFTWARE AND COURSEWARE DEVELOPMENT COSTS
Capitalized software and courseware development costs consisted of the
following:
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Capitalized software costs............................ $2,529,503 $2,842,809
Capitalized courseware development costs.............. 806,425 1,118,647
---------- ----------
3,335,928 3,961,456
Less accumulated amortization......................... (1,792,408) (2,734,552)
---------- ----------
Total....................................... $1,543,520 $1,226,904
========== ==========
5. ACQUIRED ONLINE PUBLISHING RIGHTS
Acquired online publishing rights consisted of the following:
DECEMBER 31,
-------------------
1999 2000
-------- --------
Acquired online publishing rights........................ $410,000 $410,000
Less accumulated amortization............................ (240,376) (369,392)
-------- --------
Total.......................................... $169,624 $ 40,608
======== ========
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets were comprised of:
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Goodwill.............................................. $2,265,340 $ 583,252
Developed content..................................... 1,369,836 1,223,800
Work force............................................ 393,580 231,257
Trademarks and names.................................. 969,444 904,720
Customer base......................................... 369,444 304,820
---------- ----------
5,367,644 3,247,849
Less accumulated amortization......................... (1,699,703) (1,465,045)
---------- ----------
$3,667,941 $1,782,804
========== ==========
F-12
48
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In 1998, as a result of the sale of Ivy Software, Inc. ("Ivy"), the Company
wrote off approximately $775,000, which was the remaining net unamortized
goodwill balance that had resulted from the acquisition of Ivy. In addition,
during 1998, goodwill that had resulted from the acquisition of Cooper &
Associates, Inc., d/b/a.Teletutor, ("Teletutor") in April 1997 was reduced to
zero and the remaining intangible assets were reduced ratably by approximately
$329,000 due to purchase price adjustments. In December 1998, upon the sale of
its consulting line of business, the Company wrote off approximately $1,238,000
in goodwill and workforce assets. In addition, in accordance with its impairment
policy for long-lived assets, the Company determined that goodwill that resulted
from the HTR, Inc. ("HTR") acquisition, which related to HTR's non-online
businesses, had been impaired as of December 31, 1998. As a result, the Company
wrote off approximately $3,670,000 of goodwill (see Note 7). In 2000, as a
result of the restructuring of HTR's non-online business, the Company wrote off
approximately $1,226,000, which was the remaining net unamortized goodwill
balance that had resulted from the acquisition of HTR. This write-off is
included in reorganization and other non-recurring charges in the 2000 statement
of operations. See Note 8. Goodwill remaining at December 31, 2000 relates to
the Company's acquisition of CTA.
7. DISPOSITIONS
Ivy Software, Inc.
In September 1998, the Company sold Ivy for approximately $250,000 in cash
and $196,000 in a note receivable. The note bears interest at 6% and is payable
in quarterly installments through September 2005. The Company retained the
rights to sell and distribute the online versions of Ivy software. As a result
of the sale, the Company wrote off the unamortized goodwill balance and recorded
a loss on the sale of subsidiary of $381,954. The Company's potential future
obligations of approximately $300,000 related to the acquisition were terminated
upon the sale. The operating results of Ivy are included in the Company's
financial statements from the effective date of the acquisition through the
effective date of the sale.
HTR, Inc.
In December 1998, the Company sold HTR's consulting business for $750,000
in cash and a note receivable. The note bears interest at 5% and is payable in
quarterly installments through December 2000. As a result of the sale, the
Company wrote off the intangible assets related to the consulting business and
recorded a loss on the sale of $525,472.
In December 1998, the Company announced its intention to dispose of HTR's
non-online businesses. In accordance with SFAS 121, the Company reported assets
related to such businesses at the lower of carrying amount or fair value less
estimated selling costs. This resulted in a write off of approximately
$3,670,000 of goodwill related to the non-online businesses. In December 1999,
the Company decided to retain HTR's non-online business and began to further
restructure these operations.
In June 1999, the Company sold HTR's Knowledgeworks business for $1,500,000
in cash and a note receivable. The note accrued interest at 7% and was payable
in quarterly installments through December 2000. As a result of the sale, the
Company wrote off intangible assets related to Knowledgeworks of approximately
$844,000 and recorded a gain on the sale of $1,446. In December 2000, the
Company restructured the Knowledgeworks indebtness and received two new notes, a
Convertible Promissory Note (the "Convertible Note") in the principal amount of
$400,000 and an Amended and Restated Secured Subordinated Promissory Note (the
"New Note") in the amount of $910,861 to replace the original note. Both notes
bear interest at 7%. The Convertible Note is due on June 30, 2001 and will
automatically covert into securities of the debtor issued in the debtor's next
financing in which at least $500,000 in gross cash proceeds are received. The
conversion will be at the same price per unit as paid by the investors.
Principal payments on the New Note are due in six monthly installments of
$45,000 plus accrued interest for the first six months and six monthly
installments of $60,000 plus accrued interest for the next six months beginning
on the earlier of the closing of a
F-13
49
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
financing or April 10, 2001. All remaining principal and interest will be due on
March 10, 2002. Due to concerns regarding repayment, the Company has recorded a
reserve of $1,152,000 at December 31, 2000 against the Notes. The reserve
recorded in 2000 of $700,000 is included in reorganization and other
nonrecurring charges in the 2000 statement of operations.
During 1999, the Company recognized compensation expense of approximately
$1,089,000 to be paid to the HTR executives pursuant to their employment
agreements.
In December 2000, the Company announced its decision to discontinue the
majority of HTR's non-online business. The Company determined that the remaining
goodwill related to HTR at the time of the decision was impaired under the
guidance in SFAS 121. The Company compared the carrying value of the HTR
goodwill to its fair value as determined using the present value of the
projected net cash flows of the remaining HTR non-online operations. This
resulted in a write off of approximately $1,226,000 of goodwill related to the
non-online businesses.
8. RESTRUCTURING OF OPERATIONS AND OTHER NON-RECURRING ITEMS
During 1998, the Company implemented a plan to reduce workforce and close
certain office facilities. The plan resulted in (i) the termination of
approximately 85 employees (consistent with the plan) primarily from the product
development and administrative areas and (ii) 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 in 1998 included in reorganization and other non-
recurring charges in the 1998 statement of operations. 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, all of
which were paid out in 1999. Actual amounts paid did not differ materially from
amounts accrued. The operating activities of the discontinued operations were
not tracked separately by the Company.
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 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. The award was
paid in 2000.
During 2000, the Company implemented a plan to close certain office
facilities related to HTR's non-online business. The plan resulted in the
closure of the Company's facilities located in Dallas, Texas and Rockville,
Maryland and Washington, D.C. As a result, the Company recorded a restructuring
charge of approximately $335,000 in 2000 included in reorganization and other
non-recurring charges in the 2000 statement of operations. The restructuring
charge included expenses related to facilities lease cancellations and
write-down of assets no longer in use. During 2000, the Company paid no costs
under the restructuring accrual. Included in accounts payable and accrued
expenses at December 31, 2000 is approximately $335,000 primarily representing
future lease termination payments. The Company anticipates to have all
termination fees settled by the second quarter of 2001. The operating activities
of the discontinued operations were not tracked separately by the Company.
9. LOANS RECEIVABLE FROM RELATED PARTIES
Loans receivable from the Company's officers and employees amounted to
$100,000 as of December 31, 1999 and 2000. The Company accrues interest on the
loans receivable at a rate of prime less 1%. Interest income related to loans
receivable amounted to $10,000, $8,840, and $8,000 during the years ended
December 31, 1998, 1999 and 2000, respectively.
F-14
50
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. NOTES PAYABLE
In connection with the Teletutor acquisition in 1997, the Company entered
into a non-interest bearing promissory note with the stockholders of Teletutor
whereby the Company agreed to pay $2,000,000 due in three annual installments of
$666,667 beginning on May 1, 1998. The Company has used a 5.5% discount rate in
recording this note. During 1998, the Company paid $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; and the Company executed a new
non-interest bearing promissory note for $826,666, payable in installments
through April 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 on debt restructuring is included in reorganization
and non-recurring expenses in the 1998 statement of operations.
The Company issued notes payable to former stockholders of HTR totaling
$509,968 and bearing simple interest at an annual rate of 6%. The principal
amounts of these notes were due in two annual installments payable on October
31, 1998 and October 31, 1999. During 1998, the Company repaid approximately
$100,000 and converted approximately $352,000 into 9,191 and 58,194 of the
Company's Common and Series D convertible Preferred Stock, respectively (see
Note 13). During 1999, the Company repaid approximately $16,000 of these notes.
During 2000, the remaining amounts outstanding on these notes were repaid.
In August 1998, the Company obtained a secured lending facility through a
new lending institution that provided up to $2,000,000 in a revolving line of
credit ("Line of Credit") and a $500,000 senior term loan ("Senior Term Loan").
Borrowings under the Line of Credit originally matured on February 15, 1999,
while the Senior Term Loan was set to mature on July 15, 2001. In addition, in
August 1998, the Company obtained a secured term loan for $500,000 with another
lending institution, that was subordinated to the two facilities described above
(the "Subordinated Term Loan"). The Subordinated Term Loan initially expired on
February 15, 1999. In connection with these transactions, the Company issued
warrants for the purchase of an aggregate of 90,000 shares of Series D Preferred
Stock at an aggregate exercise price of $495,000.
In February 1999, the Company repaid the Senior Term Loan. During 1999, the
Company issued warrants for the purchase of an aggregate of 127,000 shares of
its common stock at an aggregate exercise price of $515,500 in exchange for the
lender's agreement to extend the maturity dates of the Line of Credit and
Subordinated Term Loan. The fair value of such warrants was recognized during
1999 as additional interest expense on the related borrowings. In June 1999, all
amounts outstanding under the Line of Credit and Subordinated Term Loan were
repaid with proceeds from the Secured Subordinated Convertible Debentures.
In June 1999, the Company raised $2.5 million through the issuance of 9%
Secured Subordinated Convertible Debentures. The debentures were set to mature
on December 15, 2000 with accrued interest payable quarterly. The debentures
were convertible into shares of the Company's common stock at a per share price
of $5.55. The conversion price was at a discount from the market value of the
Company's common stock on the date the debentures were issued. In addition, the
Company issued five-year warrants to the debenture holders for the purchase of
112,600 shares of the Company's common stock at $6.38 per share. The Company
recorded an aggregate debt discount of approximately $413,000 for the value of
the warrants and the ability to convert at a discount from market value.
Throughout 1999 and 2000 all of the debentures were converted into shares of
common stock. See Note 13. In the fourth quarter of 2000, the Company
recalculated the debt discount related to the debentures under the guidance
provided in EITF 00-27 and recorded a cumulative effect of change in accounting
principle. See Note 2.
F-15
51
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Notes payable at December 31, 1999 and 2000 consisted of the following:
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Secured Subordinated Convertible debentures........... $1,341,875 --
Notes payable to former stockholders of Teletutor..... 453,797 --
Notes payable to former stockholders of HTR........... 43,902 --
Other................................................. 37,935 --
---------- ----------
$1,877,509 $ --
---------- ----------
Current portion of notes payable...................... $1,877,509 $ --
---------- ----------
Notes payable, less current portion................... $ -- $ --
========== ==========
11. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office space under non-cancelable operating lease
agreements with various renewal options. Future minimum lease payments may be
periodically adjusted based on changes in the lessors' operating charges.
Additionally, the Company leases various office equipment under non-cancelable
operating leases. Rent expense for the years ended December 31, 1998, 1999 and
2000 was $1,022,693, $882,776, and $792,459 respectively.
As of December 31, 2000, payments due under non-cancelable operating leases
were as follows:
2001........................................................ $ 818,290
2002........................................................ 798,692
2003........................................................ 763,213
2004........................................................ 782,755
2005........................................................ 802,883
Thereafter.................................................. 2,361,379
----------
$6,327,212
==========
Employment Agreements
The Company has entered into employment agreements with certain members of
management and other key employees. These agreements specify minimum annual
salaries as well as discretionary bonus amounts to be paid over the next two
years.
Purchase Commitment
Effective December 15, 2000 the Company entered into a three-year reseller
agreement with a vendor to resell certain software. The agreement specifies a
minimum contract commitment of $333,333 over the three year period.
Litigation
In 2000, Techsearch L.L.C. ("Techsearch") filed a claim against a number of
defendants, including the Company, alleging, in the Company's case, that the
Company's method that allows customers to take online courses infringes
Techsearch's patented method. The Company has filed an answer denying the
allegation and plans to file a motion to stay the proceedings pending the
outcome of a similar patent infringement case brought by Techsearch. Techsearch
is seeking unspecified damages and an injunction prohibiting further
F-16
52
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
alleged infringement. The Company believes this claim is without merit and
intends to defend itself vigorously. The Company cannot estimate at this time
the amount of the liability to be incurred, if any, but does not believe that
this matter will have a material adverse effect upon the Company's financial
position or results of operations.
12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
DECEMBER 31,
-----------------------
1999 2000
---------- ----------
Accounts payable and accrued expenses................. $3,968,743 $2,297,680
Accrued payroll and payroll taxes..................... 127,049 56,342
Accrued reorganization and non recurring costs........ 1,274,240 312,976
Accrued vacation...................................... 122,084 102,643
---------- ----------
$5,492,116 $2,769,641
========== ==========
Accrued payroll as of December 31, 1999 and 2000 consists of earned but
unpaid commissions.
Amounts accrued as non recurring costs in 1999 consist of the Company's
obligations under the employment agreements with the executive officers of HTR
and its dispute with Sage Interactive. In 2000, the Company implemented a
reorganization plan to close certain office facilities. Amounts accrued at
December 31, 2000 primarily represent payments to be made upon lease
terminations. See Notes 7 and 8.
13. STOCKHOLDERS' EQUITY
Equity Transactions
In March 1998, the Company raised net proceeds of approximately $5,300,000
in a private placement of Series C Preferred Stock and warrants (the "Series C
Preferred Stock"). In this transaction, the Company issued approximately 626,300
shares of the Series C Preferred Stock, which are convertible into approximately
759,100 shares of Common Stock. The Company also issued five-year warrants,
which were fully vested, to purchase approximately 626,300 shares of Common
Stock at an exercise price of $8.46 per share. The Series C Preferred Stock has
a liquidation preference of $12.69 per share upon sale or liquidation of the
Company. The Common Stock underlying both the Preferred Stock and the warrants
has certain registration rights. The Company has recorded a deemed dividend of
approximately $207,000 due to the Series C Preferred Stock being convertible to
Common Stock at a discount from fair value on the date of issuance.
In June 1998, the Company raised approximately $5,200,000 in net proceeds
through its private placement of Series D Preferred Stock (the "Series D
Preferred Stock"). In this transaction, the Company issued 1,082,625 shares of
the Series D Preferred Stock, which are convertible to an equal number of common
shares. The holders of Series D Preferred Stock are entitled to receive a 5%
annual dividend compounded and paid semi-annually beginning December 31, 1998.
Such dividends are payable, at the option of the Company, either in cash or in
Common Stock. The Series D Preferred Stock has a liquidation preference of $8.25
per share upon sale or liquidation of the Company. In June and September 1998,
respectively, 137,174 of Series D shares and 17,569 shares of the Company's
Common Stock were issued in connection with the conversion of approximately
$867,000 of indebtedness primarily to certain former shareholders of HTR. The
non-cash portion of this transaction has been excluded from the 1998
consolidated statement of cash flows.
In October 1998, the Company issued 9,191 shares of Common Stock at $3.75
per share, the closing price of the Company's Common Stock on the date of
issuance, to two former HTR shareholders in exchange for cancellation of the
Company's indebtedness to such shareholders.
F-17
53
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In December 1998, the Company issued 6,279 shares at $7.06 per share though
an employee stock purchase program. For each share purchased, employees also
received a fully vested option to purchase one share of the Company's Common
Stock at an exercise price of $7.06, the closing price of the Common Stock at
the date of issuance.
In December 1998, the Company issued 105,000 shares at $5.875 per share,
the closing price of the Company's Common Stock on the date of issuance,
primarily to former Teletutor shareholders pursuant to a restructuring of the
Company's indebtedness to such shareholders. Pursuant to that restructuring, the
Company also issued three-year warrants, which were fully vested, to purchase
55,000 shares of its Common Stock with an exercise price of $6.00 per share.
In December 1998, the Company also issued 28,902 shares of Common Stock to
its Series D Preferred Stockholders as payment for accrued dividends. The number
of shares to be issued as payment of the dividend was determined based on the
fair market value of the Company's Common Stock on the date of issuance.
In February 1999, the Company issued 282,500 shares of its common stock at
$4.00 per share to certain accredited investors. In connection with this
transaction, the Company also issued warrants, which were fully vested upon
issuance, that are exercisable over 3 years at $3.00 per share, for the purchase
of 70,625 shares of common stock. During 1999, the Company issued an additional
119,770 shares of its common stock to the same investors pursuant to their
subscription agreements.
In April 1999, the Company issued 448,297 shares of its common stock to
certain accredited investors at $2.94 per share.
The Company entered into a Private Equity Line of Credit Agreement (the
"Equity Line Agreement") with Hambrecht & Quist Guaranty Finance, LLC ("H&QGF")
effective May 4, 1999. Under the Equity Line Agreement, the Company had the
right, subject to certain conditions, to issue and sell to H&QGF, from time to
time, shares of its Series E Convertible Preferred Stock, for cash consideration
of up to an aggregate of $3.0 million, subject to availability. The Company had
the right to sell to H&QGF shares of its Series E Convertible Preferred Stock at
a price equal to 85% of the lower of (1) the closing market price of the
Company's common stock on the date of issuance and (2) the average of the lowest
intra-day prices of the Company's common stock over the five-day period ending
on the date of issuance. As of December 31, 1999 the Company had issued 379,969
shares of Series E Preferred Stock at an average price of approximately $2.26
under this Agreement, of which 165,041 shares were converted to common stock on
a one-to-one ratio. In connection with the same Agreement, the Company issued
seven-year warrants, which were fully vested, to purchase 100,000 shares of its
Series E preferred stock to H&QGF at $2.50 per share, and ten-year warrants,
which were fully vested, to purchase 100,000 shares of its common stock at $4.00
per share to a third party. During 1999 and 2000, the Company recorded deemed
dividends of approximately $152,000 and $773,000, respectively, due to the
Series E Convertible Preferred Stock being issued at a discount from fair value
on the date of issuance.
During 1999, the Company issued an aggregate of 12,836 shares of its common
stock upon the conversion of 2,954 and 9,255 shares of its Series C and Series D
Preferred Stock, respectively.
During 1999, the Company issued 540,292 shares of its common stock at an
average price of $1.93 per share upon the conversion of a portion of the
Company's Secured Subordinated Convertible Debentures. See Note 10. Pursuant to
the same Agreement, the Company also issued five-year warrants, which were fully
vested, to purchase 225,200 shares of its common stock at $6.38 per share. In
addition, fully vested three-year warrants to purchase 55,000 shares of the
Company's common stock at $2.75 per share were issued to the debenture holders
as an inducement to convert a portion of the debentures. The fair value of the
warrants (approximately $70,000) was recognized as inducement expense during
1999.
F-18
54
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
In June and December 1999, the Company also issued 22,819 and 56,576 shares
of Common Stock respectively to its Series D Preferred Stockholders as payment
for accrued dividends. The number of shares to be issued as payment of the
dividend was determined based on the fair market value of the Company's Common
Stock on the date of issuance.
In January 2000, the Company completed a private placement of its Common
Stock to iGate Capital Corporation (formerly Mastech Corporation). The Company
issued 1,136,253 shares of Common Stock at $3.62 per share, a 20% premium over
the average closing price for a 15-day trailing period, resulting in gross
proceeds to VCampus of approximately $4,000,000. No obligations with respect to
the delivery of goods or the performance of services were involved in
determining this purchase price. The Company also issued warrants, which were
fully vested, to purchase 450,000 shares of its Common Stock at exercise prices
between $4.34 and $6.125 per share. The warrants expired in January 2001.
During 2000, the Company issued 482,574 shares of its common stock to its
convertible debenture holders, at an average price of $3.30 per share, in
exchange for the conversion of the remaining balance of approximately $1,590,000
in principal and accrued interest under the Secured Subordinated Convertible
Debentures.
On March 23, 2000, H&QGF agreed to increase the capacity under the Equity
Line Agreement from $3.0 million to $5.0 million and to extend the term of the
agreement through July 31, 2000 in exchange for fully vested warrants, which
expire in November 2006, to purchase 43,632 shares at an exercise price of $8.50
for the purchase of the Company's Series E Convertible Preferred Stock. In
October 2000, the borrowing capacity was further increased to $7 million and the
term extended through December 31, 2000 in exchange for fully vested warrants,
which expire in October 2007, to purchase 15,000 shares of the Company's Series
E Convertible Preferred Stock at an exercise price of $1.94. During the year
ended December 31, 2000, the Company drew down $4,382,000 under the terms of its
equity line agreement with H&QGF, and issued to H&QGF 963,092 shares of Series E
Preferred Stock at an average price of $4.55 per share. During 2000, 621,503
shares of Series E Convertible Preferred Stock were converted to Common Stock on
a one-to-one ratio.
In April 2000, the Company raised $2,500,000 through a private placement of
its common stock to US West Internet Ventures, Inc. The Company issued 357,142
shares of common stock at $7.00 per share and five-year warrants to purchase
714,285 shares of the Company's Common Stock at $7.00 per share. One-half of the
warrants vested immediately with the second half vesting on the first
anniversary of the issuance of the warrants. Also in April 2000, the Company
entered into a one-year Application Hosting Contract with US West Interprise
America, Inc. (US West) under which US West may resell certain VCampus services.
The Company has valued the warrants associated with the application hosting
contract as of December 31, 2000 using the Black-Scholes option pricing model
with the following assumptions: dividend yield of 0%; expected volatility of
131%; risk-free interest rate of 6.0%; and expected life of five years. The fair
value of the warrants at December 31, 2000 was $207,142. Of that amount,
$144,716 was recognized as stock based compensation for the year ended December
31, 2000.
In October 2000, the Company granted 20,000 shares of restricted stock with
a purchase price of $0.01 to an employee. An additional 5,000 options were
granted with an exercise price equal to 50% of the fair market value at the date
of grant to the same employee. The Company recorded compensation expense, under
APB 25, related to these stock issuances of approximately $184,000.
In December 2000, the Company sold 519,480 shares of its Common Stock at
$0.9625 per share to accredited investors. The purchase price of $0.9625 equaled
110% of the fair market value of the stock on the date of the transaction. In
connection with this transaction, the Company also issued fully vested 5-year
warrants to purchase 519,480 shares of the Company's common stock at $0.9625 per
share. No obligations
F-19
55
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
with respect to the delivery of goods or the performance of services were
involved in determining this purchase price.
In December 2000, the Company issued 167,056 shares of its common stock at
$0.9625 per share to certain employees, executive officers, and directors. The
purchase price of $0.9625 equaled 110% of the fair market value of the stock on
the date of the transaction. In connection with this transaction, the Company
also issued fully vested 5-year stock options to purchase 167,056 shares of the
Company's common stock at $0.9625 per share.
In December 2000, the Company issued 40,000 shares of its Common Stock to a
financial advisor as a retainer fee. The stock was valued at the then fair
market value of $0.8125 per share. The Company recorded an expense related to
the stock issuance of $32,500.
In 2000, the Company also issued 245,070 shares of Common Stock
respectively to its Series D Preferred Stockholders as payment for accrued
dividends. The number of shares to be issued as payment of the dividend was
determined based on the fair market value of the Company's Common Stock on the
date of issuance.
Stock Option Plans
The Company adopted a stock option plan (the "Original Plan") which
permitted the Company to grant options to purchase up to 288,916 shares of
Common Stock to employees, board members and others who contribute materially to
the success of the Company. In November 1996, the Company's Board of Directors
decided not to grant any further options under the Original Plan.
During 1996, the Company's Board of Directors approved a new stock plan
(the "1996 Plan"), which reserved 135,960 shares of Common Stock for issuance,
pursuant to options or otherwise, to employees, directors and consultants. The
number of shares reserved was subsequently increased to 524,893 options. During
1997, the Company's Board of Directors approved an additional increase of
1,000,000 shares, which was approved by the stockholders at the annual
stockholder meeting in 1998. During 1999, the Company's Board of Directors
approved an additional increase of 1,000,000 shares, which was approved by the
stockholders at the annual stockholder meeting in 1999. During 2000, the
Company's Board of Directors approved an additional increase of 500,000 shares,
which was approved by the stockholders at the annual stockholder meeting in
2000. Stock options under the Original Plan and 1996 Plan are generally granted
at prices which the Company's Board of Directors believes approximates the fair
market value of its Common Stock at the date of grant. Individual grants
generally become exercisable ratably over a period of four to five years from
the date of grant. The contractual terms of the options range from three to ten
years from the date of grant.
Common stock option activity was as follows:
YEARS ENDED DECEMBER 31,
------------------------------------------------------------------
1998 1999 2000
-------------------- -------------------- --------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- -------- --------- -------- --------- --------
Outstanding at the beginning of the
Year............................... 1,236,481 $11.69 1,456,046 $10.62 1,408,156 $ 9.79
Granted............................ 1,096,877 9.08 346,571 4.08 2,293,231 6.28
Exercised.......................... (33,265) 3.25 (45,114) 1.74 (357,677) 2.04
Canceled or expired................ (844,047) 12.61 (349,347) 8.65 (884,027) 11.21
--------- ------ --------- ------ --------- ------
Outstanding at the end of the Year... 1,456,046 10.62 1,408,156 9.79 2,459,683 7.14
========= ====== ========= ====== ========= ======
Options exercisable at year-end...... 364,824 $ 9.79 390,529 $ 9.11 597,240 $ 6.94
========= ====== ========= ====== ========= ======
F-20
56
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 2000, 248,851 shares were available for issuance under
the 1996 Plan.
The following table summarizes information about fixed-price stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------- --------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 2000 LIFE PRICE 2000 PRICE
--------------- -------------- ----------- --------- -------------- ---------
Less than $1.00........ 76,591 9.9 $ 0.95 76,591 $ 0.95
$1.01 -- $3.00......... 346,656 9.7 1.30 30,206 1.61
$3.01 -- $6.00......... 382,113 8.4 4.08 216,212 4.05
$6.01 -- $9.00......... 1,159,390 9.3 7.65 98,128 8.11
$9.01 -- $12.00........ 66,000 7.2 11.28 43,125 11.30
$12.01 -- $15.00....... 423,108 7.8 13.60 128,508 13.93
$15.01 -- $18.00....... 5,825 6.7 16.78 4,650 16.73
--------- --- ------ ------- ------
2,459,683 8.9 $ 7.14 597,420 6.94
========= === ====== ======= ======
Had compensation expense related to the stock option plans been determined
based on the fair value at the grant date for options granted during the years
ended December 31, 1998, 1999 and 2000 consistent with the provisions of SFAS
No. 123, the Company's net loss and net loss per share would have been as
follows:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
------------ ----------- ------------
Net loss -- pro-forma................. $(22,672,194) $(9,506,125) $(19,539,572)
------------ ----------- ------------
Net loss per share -- pro-forma....... $ ($5.92) $ ($2.03) $ ($2.46)
============ =========== ============
The effect of applying SFAS No. 123 on the years ended December 31, 1998,
1999, and 2000 pro forma net loss as stated above is not necessarily
representative of the effects on reported net loss for future years due to,
among other things, the vesting period of the stock options and the fair value
of additional stock options in future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1998: dividend yield of 0%;
expected volatility of 100%; risk-free interest rate of 5.0%; and expected life
of the option term of seven years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option pricing fair value
model with the following weighted average assumptions used for grants in 1999:
dividend yield of 0%; expected volatility of 100%; risk free interest rate of
5.5%; and expected life of the option term of seven years. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option-pricing fair value model with the following weighted-average assumptions
used for grants in 2000: dividend yield of 0%; expected volatility of 69%;
risk-free interest rate of 6.5%; and expected life of the option term of seven
years. The weighted average fair values of the options granted in 1998 with a
stock price equal to the exercise price, and with a stock price greater than the
exercise price, and with a stock price less than the exercise price are $6.07,
$7.98 and $6.27, respectively. The weighted average fair values of the options
granted in 1999 with a stock price equal to the exercise price was $3.46. The
weighted average fair values of the options granted in 2000 with a stock price
equal to the exercise price, and with a stock price greater than the exercise
price, and with a stock price less than the exercise price are $0.78, $7.27 and
$0.96, respectively.
F-21
57
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Warrants
The Company has also granted warrants to purchase Common Stock to various
investors, employees and outside vendors. Warrant activity was as follows:
YEARS ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
Outstanding at the beginning of the year...... 535,368 1,355,512 1,971,137
Granted..................................... 862,294 1,033,389 1,977,198
Exercised................................... (42,150) (3,399) (116,468)
Canceled or expired......................... -- (414,365) (58,140)
--------- --------- ---------
Outstanding at the end of the year............ 1,355,512 1,971,137 3,773,727
========= ========= =========
Exercise prices on the outstanding warrants range from $1.94 to $20.50 per
share. The fair value of each warrant grant is estimated on the date of grant
using the Black-Scholes option-pricing fair value model with the following
ranges of assumptions: dividend yield of 0%; expected volatility of 100% to
131%; risk-free interest rate of 5.0% to 7.0%; and expected life of the warrant
term of three to seven years. During 1998, 1999 and 2000, the number of shares
and exercise prices of certain warrants were adjusted to satisfy certain anti-
dilution rights previously granted.
Reserve for Issuance
As of December 31, 2000 the Company had reserved 6,233,410 shares of Common
Stock for issuance upon the exercise of outstanding options and warrants.
14. RETIREMENT PLANS
Teletutor had a 401(k) Retirement Savings Plan covering all employees who
met defined eligibility requirements. Employee contributions to Teletutor's plan
were made at predetermined rates elected by the employees. Additionally, the
employer had the option to match a portion of the employee contributions and
make a discretionary contribution to the plan. The Company did not make
discretionary contributions in 1997 or 1998. The Company did automatically vest
all employees separated from Teletutor in 1998 due to a partial plan
termination, which was approved on November 30, 1998.
HTR, Inc. maintained a tax deferred savings and retirement plan to provide
retirement benefits for all eligible employees. HTR's 401(k) plan assets were
frozen in July 1998 and all participants were eligible to begin deferrals into
the VCampus Corporation 401(k) plan at that time. All assets were merged into
the VCampus Corporation 401(k) plan on December 31, 1998.
The VCampus Corporation 401(k) plan (adopted in 1997) allows employees to
elect an amount between 1% and 15% of their total compensation to contribute to
the plan. All full-time employees are eligible to make participation elections
in January and July of each year. There is a graduated vesting schedule for
employee contributions in which contributions fully vest over a period of four
years. The plan allows discretionary Company contributions. In 1998, 1999 and
2000, there were no discretionary Company contributions made to the plan.
15. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
and income tax purposes. The Company has recognized a full valuation allowance
against the deferred tax assets because it is more likely than not that
sufficient taxable
F-22
58
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
income will not be generated during the carryforward period available under the
tax law to utilize the deferred tax assets. Significant components of the
Company's net deferred tax assets were as follows:
DECEMBER 31,
--------------------------
1999 2000
----------- ------------
Net operating loss carryforwards................... $15,215,000 18,875,000
Accrued payroll.................................... 485,000 64,000
Reserves........................................... 217,000 527,000
Other assets and liabilities, net.................. 1,525,000 1,314,000
----------- ------------
Total deferred tax assets................ 17,442,000 20,780,000
Valuation allowance................................ (17,442,000) (20,780,000)
----------- ------------
Net deferred tax assets............................ $ -- $ --
=========== ============
As of December 31, 1999 and 2000 the Company had net operating loss
carryforwards for federal income tax purposes of approximately $38,033,000 and
$47,183,000 respectively, which will expire at various dates through 2020. The
Company may have had changes in ownership, which may impose limitations on its
ability to utilize net operating loss carryforwards under Section 382 of the
Internal Revenue Code.
The Company's effective rate reconciling items relate to non-deductible
expenses, state income taxes, and changes to the valuation allowance.
16. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
YEARS ENDED DECEMBER 31,
-----------------------------------------
1998 1999 2000
------------ ----------- ------------
Numerator:
Loss before cumulative effect of
change in accounting principle... $(19,811,265) $(8,486,729) $(12,423,745)
Less: Accrued dividends to preferred
stockholders..................... (357,890) (448,180) (1,152,819)
------------ ----------- ------------
Net loss before cumulative effect of
change in accounting principle... (20,169,155) (8,934,909) (13,576,564)
Cumulative effect of change in
accounting principle............. -- -- (461,000)
------------ ----------- ------------
Net loss available to common
stockholders..................... $(20,169,155) $(8,934,909) $(14,037,564)
============ =========== ============
Denominator:
Denominator for basic earnings per
share -- weighted-average
shares........................... 3,827,216 4,680,850 7,953,484
============ =========== ============
Denominator for diluted earnings per
share -- adjusted
weighted-average shares.......... 3,827,216 4,680,850 7,953,484
============ =========== ============
Basic and diluted loss per share:
Net loss per share before cumulative
effect of change in accounting
principle........................... $ (5.27) $ (1.91) $ (1.70)
Cumulative effect of change in
accounting principle per share... -- -- (0.06)
------------ ----------- ------------
Net loss per share available to
common stockholders.............. $ (5.27) $ (1.91) $ (1.76)
============ =========== ============
F-23
59
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following equity instruments were not included in the diluted net loss
per share calculation because their effect would have been anti-dilutive:
YEAR ENDED DECEMBER 31,
---------------------------------
1998 1999 2000
--------- --------- ---------
Convertible notes payable..................... -- 533,691 48,131
Convertible preferred stock:
Series C.................................... 580,266 757,305 755,549
Series D.................................... 545,761 1,078,491 1,073,370
Series E.................................... -- 84,543 286,457
Stock options................................. 1,456,046 1,408,156 2,459,683
Warrants...................................... 1,355,512 1,971,137 3,773,727
17. SUBSEQUENT EVENTS
On February 28, 2001, the Company entered into a $500,000 unsecured
promissory note bearing interest at 10% with a director of the Company. On March
8, 2001, the Company entered into another $500,000 unsecured promissory note
bearing interest at 10% with the same director. The notes are due in August 2001
and September 2001, respectively.
18. QUARTERLY SALES AND EARNINGS DATA -- UNAUDITED
The following table presents the quarterly results for VCampus Corporation
and its subsidiaries for the years ending December 31, 1999 and 2000:
1ST QUARTER 2ND QUARTER 3RD QUARTER 4TH QUARTER
----------- ----------- ----------- -----------
2000
Revenue..................................... $ 2,458,778 $ 2,420,991 $ 2,297,575 $ 2,278,739
Loss from operations........................ (2,516,208) (2,223,143) (3,200,563) (4,649,631)
Loss before cumulative effect of change in
accounting principle...................... (2,498,921) (2,151,003) (3,142,211) (4,631,610)
Cumulative effect of change in accounting
principle................................. -- -- -- (461,000)
----------- ----------- ----------- -----------
Net loss.................................... $(2,498,921) $(2,151,003) $(3,142,211) $(5,092,610)
=========== =========== =========== ===========
Basic and diluted net loss per share before
cumulative effect of change in accounting
principle................................. $ (0.36) $ (0.34) $ (0.43) $ (0.55)
Cumulative effect of change in accounting
principle................................. -- -- -- (0.06)
----------- ----------- ----------- -----------
Net loss per share, basic and diluted....... $ (0.36) $ (0.34) $ (0.43) $ (0.61)
=========== =========== =========== ===========
1999
Revenue..................................... $ 3,035,083 $ 2,928,987 $ 3,076,488 $ 2,506,881
Loss from operations........................ (1,439,312) (1,615,471) (1,368,853) (3,343,116)
Net loss.................................... (1,567,079) (1,778,576) (1,527,293) (3,613,781)
Net loss per share, basic and diluted....... $ (0.39) $ (0.40) $ (0.33) $ (0.76)
F-24
60
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNT AND RESERVE
(IN THOUSANDS)
VCAMPUS CORPORATION
BALANCE AT
BEGINNING OF BALANCE AT
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
-------------- ------------ --------- ---------- -------------
Allowance for doubtful accounts:
Year ended December 31, 1998..................... 739 1,293 1,465 567
Year ended December 31, 1999..................... 567 257 682 142
Year ended December 31, 2000..................... 142 76 -- 218