UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2004

 

OR

 

o 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 000-28393

 

eCollege.com

(Exact name of registrant as specified in its charter)

 

Delaware		84-1351729
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)
4900 South Monaco Street, Denver, Colorado		80237
(Address of principal executive offices)		(Zip Code)
Registrant’s telephone number, including area code (303) 873-7400

 

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. ý Yes o No

 

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).Yes ý No o

 

As of November 5, 2004, 20,694,481 shares of our common stock were outstanding.

 

 

FORM 10-Q

 

For the Three Months Ended September 30, 2004

 

TABLE OF CONTENTS

 

PART I	FINANCIAL INFORMATION
ITEM 1:	CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
	Consolidated Balance Sheets
	Consolidated Statements of Operations
	Consolidated Statements of Cash Flows
	Notes to Unaudited Condensed Consolidated Financial Statements
ITEM 2:	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3:	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4:	CONTROLS AND PROCEDURES
PART II	OTHER INFORMATION
ITEM 1:	LEGAL PROCEEDINGS
ITEM 2:	CHANGES IN SECURITIES AND USE OF PROCEEDS
ITEM 3:	DEFAULTS UPON SENIOR SECURITIES
ITEM 4:	SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
ITEM 5:	OTHER INFORMATION
ITEM 6:	EXHIBITS AND REPORTS ON FORM 8-K
Signatures

 

2

 

PART I

FINANCIAL INFORMATION

 

ITEM 1: CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

eCollege.com and subsidiaries

 

CONSOLIDATED BALANCE SHEETS

(in thousands except per share data)

(unaudited)

 

		September 30, 2004			December 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents		$	24,260		$	15,974
Accounts receivable, net of allowances of $274 and $188, respectively		16,567			8,722
Due from former Datamark stockholders, including $1,000 in escrow		1,208			1,208
Other current assets		2,538			1,764
Total current assets		44,573			27,668
Property and equipment, net		5,919			5,268
Software development costs, net		1,013			314
Investments		516			—
Intangible assets, net		10,732			11,851
Goodwill		55,951			55,797
Other assets		940			1,125
TOTAL ASSETS		$	119,644		$	102,023
LIABILITIES AND STOCKHOLDERS’ EQUITY
CURRENT LIABILITIES:
Accounts payable		$	9,033		$	4,643
Other accrued liabilities		6,303			5,724
Customer advances		1,460			753
Deferred revenue, current portion		5,753			1,746
Current portion of capital lease obligations		133			—
Line of credit		9,688			9,365
Current portion of long-term debt		1,000			1,000
Total current liabilities		33,370			23,231
LONG-TERM LIABILITIES:
Deferred revenue, net of current portion		100			97
Other liabilities		421			477
Capital lease obligations, net of current portion		183			—
Long-term debt, net of current portion		28,600			27,785
Total long-term liabilities		29,304			28,359
Total liabilities		62,674			51,590
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY:
Preferred stock, no par value; 5,000 shares authorized; none issued or outstanding		—			—
Common stock, $0.01 par value, 50,000 shares authorized, 20,603 and 20,119 shares issued, respectively, and 20,588 and 20,108 shares outstanding, respectively		206			201
Additional paid-in capital		124,198			121,301
Treasury stock at cost, 15 and 11 shares, respectively		(148		)	(81		)
Warrants, restricted stock rights, and options for common stock		8,731			6,880
Deferred compensation		(4		)	(29		)
Accumulated deficit		(76,013		)	(77,839		)
Total stockholders’ equity		56,970			50,433
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY		$	119,644		$	102,023

 

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these consolidated balance sheets.

 

3

 

eCollege.com and subsidiaries

 

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

 

		For the Three Months Ended						For the Nine Months Ended
		September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
REVENUE:
eLearning:
Student fees		$	7,868		$	6,456		$	22,815		$	18,364
Campus and course fees		451			648			1,429			2,061
Other eLearning		478			497			1,238			1,198
Enrollment Marketing:
Direct mail		9,978			—			28,274			—
Interactive marketing		4,128			—			7,221			—
Media placement services		856			—			2,481			—
Other enrollment marketing		532			—			1,380			—
Total revenue		24,291			7,601			64,838			21,623
COST OF REVENUE:
eLearning cost of revenue		2,407			2,629			7,726			8,290
Enrollment marketing cost of revenue		10,480			—			25,980			—
Total cost of revenue		12,887			2,629			33,706			8,290
Gross profit		11,404			4,972			31,132			13,333
OPERATING EXPENSES:
Product development		1,545			1,483			5,022			4,378
Selling and marketing		2,317			1,261			7,443			3,848
General and administrative		4,743			1,563			11,807			4,561
Amortization of intangible assets		373			—			1,119			—
Total operating expenses		8,978			4,307			25,391			12,787
INCOME FROM OPERATIONS		2,426			665			5,741			546
OTHER INCOME (EXPENSE):
Interest income and other income (expense)		7			29			(13		)	73
Interest expense		(1,285		)	(23		)	(3,800		)	(109		)
INCOME BEFORE INCOME TAXES		1,148			671			1,928			510
INCOME TAXES:
Income taxes		(40		)	—			(102		)	—
NET INCOME		$	1,108		$	671		$	1,826		$	510
BASIC EARNNGS PER SHARE		$	0.05		$	0.04		$	0.09		$	0.03
DILUTED EARNINGS PER SHARE		$	0.05		$	0.03		$	0.08		$	0.03
WEIGHTED AVERAGE SHARES OUTSTANDING
BASIC		20,411			18,096			20,254			17,007
DILUTED		21,926			19,948			22,376			18,333

 

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

 

4

 

eCollege.com and subsidiaries

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

		For the Nine Months Ended
		September 30, 2004			September 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	1,826		$	510
Adjustments to reconcile net income to net cash provided by operating activities—
Provision for doubtful accounts		86			—
Depreciation		1,786			1,525
Amortization of capitalized internal-use software development costs		314			941
Amortization of intangible assets		1,119			—
Amortization of debt issuance costs and discounts on debt		783			—
Interest accrued on long-term debt		900			—
Stock-based compensation		2,853			283
(Gains) losses on disposition of equipment, net		73			8
Changes in-
Accounts receivable		(7,930		)	(1,148		)
Other current assets		(774		)	(44		)
Other assets		66			(602		)
Accounts payable and accrued liabilities		4,824			150
Deferred revenue and customer advances		4,718			741
Other liabilities		(58		)	(25		)
Net cash provided by operating activities		10,586			2,339
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment		(2,074		)	(646		)
Proceeds from disposition of property and equipment		6			6
Capitalized software costs		(1,013		)	—
Reclassification of restricted cash to long-term investments		(516		)	—
Net cash paid for business acquisition costs		(154		)	(242		)
Net cash used in investing activities		(3,751		)	(882		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock		1,981			32,611
Payment of stock issuance costs		(10		)	(1,649		)
Payments on leasing arrangements		(93		)	(1,193		)
Proceeds from and payments on line of credit, net		323			(2,938		)
Payments on term loan		(750		)	1,169
Net cash provided by financing activities		1,451			28,000
NET INCREASE IN CASH AND CASH EQUIVALENTS		8,286			29,457
CASH AND CASH EQUIVALENTS, beginning of period		15,974			13,633
CASH AND CASH EQUIVALENTS, end of period		$	24,260		$	43,090
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest		$	3,112		$	109
SCHEDULE OF NON-CASH ACTIVITIES:
Financed hardware purchases		$	443		$	19
Acquisition of treasury stock included in accrued liabilities		$	67		$	35
Restricted stock forfeited in lieu of related tax liabilities		$	44		$	—

 

The accompanying notes to unaudited condensed consolidated financial statements are an integral part of these statements.

 

5

 

eCollege.com and subsidiaries

 

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(1) Organization and Nature of Business

 

Company History

 

eCollege.com is incorporated in the state of Delaware. eCollege International, Inc. is a wholly owned subsidiary of eCollege.com and was incorporated in the state of Colorado on January 9, 2002. On October 31, 2003, eCollege.com acquired all of the capital stock of Datamark, Inc., a Delaware corporation (“Datamark”), at which time Datamark became a wholly owned subsidiary of eCollege.com. eCollege.com and its wholly owned subsidiaries are collectively referred to herein as “eCollege” or “the Company.”

 

Business Activity

 

eCollege is an outsource provider of value added information services to the post-secondary education industry.  eCollege’s eLearning division provides outsourced technology, products and services that enable proprietary post-secondary schools, colleges, universities, and school districts (“K-12 schools”) to offer an online environment for distance, on-campus, and hybrid learning. As an application service provider (“ASP”), the Company’s technology enables its customers to reach a large number of students who wish to take online courses at convenient times and locations via the Internet. Customers can also use the Company’s technology to supplement their on-campus courses with an online environment. Additionally, the Company provides services complementing its software, including design, development, and management of online campuses and courses, as well as ongoing administration, faculty, and student support.

 

Datamark, the Company’s Enrollment division, is an outsource provider of integrated enrollment marketing services to the proprietary post-secondary school industry. Datamark provides full-service research and direct-marketing for colleges and proprietary schools, offering comprehensive marketing solutions that include direct mail, online, television and other media, and software solutions. These solutions are used by higher education institutions to increase student enrollment leads, conversion rates, and retention rates. The Company also offers lead conversion systems and training to enhance the performance of a school’s admissions staff, as well as post-lead communication campaigns to increase the number of leads that actually convert into enrollments.

 

(2) Summary of Significant Accounting Policies

 

Consolidation and Operating Segments

 

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such regulations. The unaudited condensed consolidated financial statements reflect all adjustments and disclosures that are, in the opinion of management, necessary for a fair presentation. All such adjustments are of a normal recurring nature. Certain amounts in the 2003 financial statements have been reclassified to conform to the 2004 presentation. Management does not believe the effects of such reclassifications are material. The results of operations for the interim period ended September 30, 2004 are not necessarily indicative of the results of the full fiscal year.

 

6

 

The Company has determined that it has two reportable operating segments: its eLearning and Enrollment divisons. All of the Company’s operating results and identifiable assets are in the United States. The Company has eliminated intercompany transactions and balances in consolidation.

 

Use of Estimates in the Preparation of Financial Statements

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Some of the most significant areas for which management uses significant estimates and assumptions are in the valuation of goodwill and identified intangible assets, establishing reserves for uncollectible accounts receivable, establishing estimated useful lives for long-lived assets, establishing the point at which it is proper to capitalize software development costs, revenue recognition, estimating the fair value of debt obligations, assessing the realizability of deferred tax assets, and estimating the fair value of stock options and warrants.

 

Revenue Recognition

 

The majority of the Company’s revenue for the three months ended September 30, 2004 was generated from direct mail advertising campaigns and enrollment fees for students enrolled in online courses. The Company also generated revenue from interactive marketing, media placement services and enrollment fees for students enrolled in online supplements for on-campus or hybrid courses; services fees for the design, development, licensing and hosting of online digital campuses; and services fees for the design and development of online courses. Other revenue is primarily from professional consulting, other training services, retention services, and research services.

 

Revenue is recognized when all of the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and, (4) collectibility is reasonably assured.

 

Both divisions of the Company enter into agreements that may contain multiple elements. For such arrangements, the Company recognizes revenue for delivered elements when the delivered item has stand-alone value to the customer, fair values of undelivered elements are known, customer acceptance has occurred, and there are only customary refund rights related to the delivered elements.

 

eLearning Division

 

The Company’s eLearning services are generally sold at fixed prices as set forth in customer contracts. The primary source of eLearning revenue is student technology service fees charged to customers for each enrollment in their online courses, as of agreed upon enrollment census dates, delivered on the eCollege course management platform. Customers are invoiced for student fees after the number of course enrollments is determined on the census date of each respective academic term. The Company also sells student fee licenses which allow for up to a specified number of student enrollments in online supplements for on-campus or hybrid courses over a specified period of time, usually one year. Student fee revenue is recognized on a straight-line basis over each course’s specific academic term or over the length of the student fee license purchased by a customer, depending upon contract terms.

 

Customers are typically charged for annual license, hosting and maintenance fees as well as initial design and development services fees for an online digital campus. Design and development services fees to build online courses are also specified in contracts. Other services, including faculty training and support, instructional design and technical consulting services and online evaluation services, may be purchased at prices set forth in customer contracts.

 

All contracted online campus-related fees are deferred and recognized on a straight-line basis from the campus launch date through the end of the contract period or the expected life of the customer relationship, whichever is greater. The Company recognizes course development fees over the period of time during which the Company completes its obligations to the customer.  All other eLearning revenue sources are recognized at the time of the performance of the service (e.g., course design and development consulting hours, training, instructional design and technical consulting) or over the length of the service period (e.g., annual license fees).

 

7

 

Enrollment Division

 

Enrollment division revenues are primarily generated from the sale of direct mail, interactive marketing, and media placement services. The Company derives other revenue from research services, admissions training, and retention services.

 

It is the Company’s practice to execute contracts or work orders of various lengths, typically up to three months for direct mail advertising campaigns.  Fees are determined based on number of pieces mailed and the associated revenue is recognized when the marketing materials are mailed.  Payments from direct mail customers are generally due two days before marketing materials are mailed. The payments are booked as customer advances until the work is performed and the revenue recognition requirements are met. Direct mail revenue includes all applicable postage costs which are charged to customers.

 

Interactive marketing arrangements are priced based on a fee-per-lead-generated model, with an initial up front deposit due at the time the customer’s agreement is signed. The customer is billed at the end of each month for actual leads received and is required to pay monthly. The deposit will be applied to the final months billing at the end of the campaign.  If payment is received as a deposit the Company records the receipt of cash as a customer advance until the revenue recognition requirements are met.

 

Media placement service agreements call for the Company to act as an agent by billing its customers and collecting for the cost of the advertisement placed with a third-party media supplier (i.e. newspaper, television, radio station, etc) in the customer’s name and based on the customer’s credit.  The Company generally charges the customer a commission for these services.  Revenue is recognized when the media advertisements are run by the third-party media supplier. Revenue is recorded on a net basis, meaning that the Company includes in consolidated revenue only commissions charged, not the gross amount of fees invoiced to, and collected from, customers. Accordingly, the Company excludes the direct cost of the advertisement charged by the media supplier from cost of revenue in the consolidated statements of operations.

 

Other enrollment marketing revenue is billed and recognized at the time of the performance of the service or over the length of the service period (e.g. student retention services).

 

The Company records customer advances for amounts received from or billed to customers in excess of revenue that has been earned. The Company also records a liability for customer advances (deposits) that it requires customers to pay for enrollment marketing services, and revenue is recognized once the Company’s obligations are fulfilled. Revenue that is recognized is reflected as accrued revenue receivable included in current assets to the extent that the customer has not yet been billed for such services.

 

Stock-Based Compensation

 

Effective January 1, 2003, the Company adopted a fair value-based method for accounting for employee stock-based compensation arrangements as prescribed by Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and related interpretations. Prior to January 1, 2003, the Company accounted for stock-based employee compensation using the intrinsic value-based method in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”) and related interpretations. The Company adopted SFAS No. 123 using the prospective method under SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment of SFAS No. 123.” This method applies the provisions of SFAS No. 123 to all employee stock awards granted, modified, or settled on or after January 1, 2003 and accordingly, eCollege recognized compensation expense for such awards made under the Company’s stock-based employee compensation plans.

 

On September 13, 2004, the Company granted stock appreciation rights to executives and selected other key employees.  The rights were granted under the terms and conditions of the Company’s 1999 Stock Incentive Plan, as amended and approved by stockholders.  The rights will be settled in stock.  Each grant is separated into five different levels of base prices to reflect minimum levels of stockholder return over a five-year performance period.  The base price for the first level is 10% higher than the grant date stock price, and the base price for each successive level is 10% higher than the previous level.  Except in the case of a change in control of the Company, as described below, a participant will receive a distribution with respect to the shares of common stock in each grant level only if the average closing price of our common stock for the last quarter in the five year term exceeds the base price for such shares.  Each participant may elect to receive a distribution with respect to 10% of the rights he or she was granted after the third anniversary of the grant and with respect to an additional 10% after the fourth anniversary.  In the event of a change in control, participants will be entitled to receive a distribution with respect to a specified percentage of the shares granted(50% if the change in control occurs on the grant date, increasing by 1/36 each month to 100% on the third anniversary of the grant date), and will forfeit the right to receive a distribution with respect to the unvested portion of the shares. The number of shares of common stock issued following a change in control will be based on the difference between the base prices and the share price as of the date the change in control occurs.The fair value of each stock appreciation right was estimated on the date of grant using a Monte Carlo simulation for an Asian type award.  Subject to obtaining stockholder approval, the Company currently intends to grant current participants additional stock appreciation rights in 2005.  Such grants will require stockholder approval.  In addition, the Company may grant stock appreciation rights to new hires and in connection with promotions and other special circumstances.

 

8

 

Effective November 1, 2004, the Company amended its 1999 Employee Stock Purchase Plan.  The current two year offering period under the Plan ends April 30, 2005.  Effective with the purchase interval that began on November 1, the ability of plan participants to increase contributions during an offering period has been eliminated as has the Plan’s reset feature.  Effective May 1, 2005, the length of an offering period will be reduced from two years to one year and the length of each purchase interval will be increased from six months to one year.

 

The table below summarizes the awards granted and the respective fair values ($ in thousands) of those awards for the three and nine month periods ended September 30, 2004 and 2003.

 

9

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2004			2003			2004			2003
Stock options granted to non-employee board members:
Shares underlying awards		—			—			3,264			20,304
Aggregate fair value of awards		$	—		$	—		$	41		$	48
Stock options granted to employees:
Shares underlying awards		—			2,000			—			51,200
Aggregate fair value of awards		$	—		$	13		$	—		$	127
Restricted stock awards granted to employees:
Shares underlying awards		7,964			—			69,788			—
Aggregate fair value of awards		$	77		—			$	1,312		—
Employee stock purchase plan:
Shares underlying awards		—			—			37,624			103,974
Aggregate fair value of awards		$	—		$	—		$	253		$	278
Stock appreciation rights granted to employees:
Shares underlying awards		1,100,000			—			1,100,000			—
Aggregate fair value of awards		$	5,419		$	—		$	5,419		$	—

 

The Company estimated the fair value of stock options, restricted stock awards, and employee stock purchase plan awards using the Black-Scholes option pricing model.  The fair value of stock appreciation rights was estimated using a Monte Carlo simulation for an Asian type award.  The following assumptions were used for the fair value calculations:

 

		For the Three Months Ended September 30,				For the Nine Months Ended September 30,
		2004		2003		2004		2003
Stock options granted to non-employee board members:
Expected lives outstanding		—		—		5 years		5years
Expected volatility		—		—		85	%	85	%
Risk-free interest rates		—		—		3.4	%	3.0	%
Expected dividend yield		—		—		0	%	0	%
Stock options granted to employees:
Expected lives outstanding		—		2.2 years		—		3.0 years
Expected volatility		—		79	%	—		85	%
Risk-free interest rates		—		3.1	%	—		3.0	%
Expected dividend yield		—		0	%	—		0	%
Employee stock purchase plan:
Expected lives outstanding		—		—		6 months - 2 years		6 months - 2 years
Expected volatility		—		—		66	%	68	%
Risk-free interest rates		—		—		1.4	%	1.3	%
Expected dividend yield		—		—		0	%	0	%
Stock Appreciation Rights granted to employees:
Expected lives outstanding		4.7 years		—		4.7 years		—
Expected volatility		77	%	—		77	%	—
Risk-free interest rates		3.2	%	—		3.2	%	—
Expected dividend yield		0	%	—		0	%	—

 

The estimated fair values of these awards, adjusted for estimated forfeitures, are being amortized over the applicable vesting period.  Net of estimated forfeitures, the fair value of the stock appreciation rights is $4.4 million.

 

Total stock-based compensation expense recorded in the financial statements was approximately $849,000 and $2.9 million for the three and nine months ended September 30, 2004, respectively, which included $12,000 and $53,000 for stock options, $359,000 and $1.5 million for shares purchased under the Purchase Plan, $431,000 and $1.2 million for restricted share rights awarded, $0 and $25,000 of deferred compensation from restricted stock awards granted prior to 2003, and $47,000 and $47,000 for stock appreciation rights, respectively. Stock-based compensation recorded for the three and nine months ended September 30, 2003 was $147,000 and $283,000, respectively.

 

10

 

As required by SFAS No. 123, the Company presents pro forma disclosures of its net income using the fair value-based accounting model for awards granted prior to January 1, 2003, as shown below (in thousands, except per share data):

 

11

 

		For the Three Months Ended September 30,						For the Nine Months Ended September 30,
		2004			2003			2004			2003
Net income as reported		$	1,108		$	671		$	1826		$	510
Add back: Stock-based compensation expense, as reported		849			147			2,853			283
Subtract: Stock-based compensation expense, pro forma		(896		)	(269		)	(3,033		)	(780		)
Pro forma income		$	1,061		$	549		$	1,646		$	13
Earnings per share, basic:
As reported		$	0.05		$	0.04		$	0.09		$	0.03
Pro forma		$	0.05		$	0.03		$	0.08		$	0.00
Earnings per share, diluted:
As reported		$	0.05		$	0.03		$	0.08		$	0.03
Pro forma		$	0.05		$	0.03		$	0.07		$	0.00

 

Income Taxes

 

The current provision for income taxes represents actual or estimated amounts payable on tax return filings each year. Deferred tax assets and liabilities are recorded for the estimated future tax effects of temporary differences between the tax bases of assets and liabilities and amounts reported in the accompanying balance sheets, and for operating loss and tax credit carryforwards. The change in deferred tax assets and liabilities for the period measures the deferred tax provision or benefit for the period. Effects of changes in enacted tax laws on deferred tax assets and liabilities are reflected as adjustments to the tax provision or benefit in the period of enactment. The Company’s deferred tax assets have been reduced by a valuation allowance to the extent that management cannot conclude that realization of the assets is more likely than not at each balance sheet date.

 

Total gross tax expense for federal income taxes in 2004 and 2003 is mostly offset by the change in the Company’s valuation allowance; therefore the Company did not record any federal income tax expense for the three- and nine-month periods ended September 30, 2004 and 2003.  The Company recorded federal alternative minimum tax and state income tax expense for the three and nine months ended September 30, 2004 of $40,000 and $102,000, respectively. The Company recorded no federal income tax expense for the three and nine months ended September 30, 2003.

 

The Company’s deferred tax asset is primarily related to the Company’s net operating losses while deferred tax liabilities arise from the Company’s intangible assets.  Through 2003, the Company generated losses for tax purposes. As a result, for income tax return reporting purposes, the Company may utilize approximately $66 million of net operating loss carryforwards, which begin to expire in 2011 and are available as late as 2022. The net operating loss carryforwards available to be used in any given year may be limited if certain events occur, including significant changes in ownership interests. However, the Company expects that all but $5 million of its net operating loss carryforwards will be available for use in 2004.

 

The Company has determined that approximately $21 million of deferred tax assets as of September 30, 2004 did not satisfy the realization criteria under accounting principles generally accepted in the United States of America, primarily due to the Company’s history of operating losses. Accordingly, a valuation allowance has been recorded against the Company’s deferred tax assets. Should management conclude that these deferred tax assets are realizable, the valuation allowance will be reversed to the extent of such realizability. The reversal of the valuation allowance, if any, would be recognized as deferred income tax benefit, excluding the reversal related to approximately $2.0 million of non-qualified stock-based compensation, which would be recognized as an increase to Additional Paid-in Capital. The Company evaluates the realizability of the deferred tax asset each quarter.

 

Earnings Per Share

 

Basic earnings per share is computed by dividing net income for the period by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by (i) adjusting net income for the effects, if any, of assuming the conversion of certain convertible securities, and (ii) adjusting the weighted average number of shares outstanding for the effects, if any, of common shares issuable upon the conversion or exercise of certain securities such as warrants and options for common stock outstanding during the period, if the effect of such adjustments is dilutive. Certain options and warrants to purchase shares of common stock were dilutive for the three and nine months ended September 30, 2004 and, using the treasury stock method, resulted in an additional 1.5 and 2.1 million weighted-average common shares outstanding for the computation of diluted earnings per share for the three and nine months ended September 30, 2004. There were no adjustments to net income in the determination of dilutive earnings per share. Common stock equivalents for the three and nine months ended September 30, 2004 which would have been included except for their anti-dilutive effect are 1.5 million and 970,000, respectively.  Common stock equivalents for the three and nine

 

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months ended September 30, 2003 that would have been included except for their anti-dilutive effect are 303,000 and 760,000, respectively.

 

The Company has never paid cash dividends on its stock, and is currently precluded from doing so under its borrowing agreements.

 

Comprehensive Income

 

Total comprehensive income is the same as net income for the three and nine months ended September 30, 2004 and 2003, respectively.

 

Accounts Receivable

 

The Company maintains an allowance for doubtful accounts based upon the expected collection of accounts receivable. A portion of the allowance is related to specifically identified doubtful accounts, while the majority of the allowance is not account-specific, but rather based on management’s analysis of several factors, including sales volume and collection history. The methodology used to determine the allowance balance is based on the Company’s prior collection experience and accounts receivable balances in various aging categories, and is also influenced by specific customers’ financial strength and circumstances. Accounts that are determined to be uncollectible are written off in the period in which they are determined to be uncollectible. Periodic changes to the allowance balance are recorded as increases or decreases to bad debt expense, which is included in the “General and administrative” expense in the accompanying consolidated statements of operations. At September 30, 2004 and December 31, 2003, the allowance for doubtful accounts was $274,000 and $188,000, respectively.

 

Foreign Currency

 

The Company transacts business outside of the United States in the currency of the foreign country.  This includes the receipt of payment and payment to vendors.  In accordance with Statement of Financial Accounting Standards No. 52, “Foreign Currency Translation” the company values the foreign currency on a transaction basis and the gain or loss is included in net income.  For the three months ended September 30, 2004, the company recognized a foreign currency exchange gain of approximately $24,000.  For the nine months ended September 30, 2004, the company recognized a foreign currency gain of approximately $57,000.

 

Software Development Costs

 

The Company’s primary activities include ongoing development of internal-use software used in connection with delivery of services via its proprietary software platform and network. Pursuant to the provisions of the AICPA’s Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use,” costs incurred during the application development stage are capitalized and costs incurred during the preliminary project and the post-implementation stages are expensed as incurred. Capitalized software development costs are amortized using the straight-line method over their estimated useful lives, generally three years. Amortization begins when the software is ready for its intended use.

 

In general, the Company has expensed costs for the development of internal-use software as costs qualifying for capitalization have been insignificant and the related lives short. The determination of the point at which capitalization of qualifying costs properly commences is subject to a high degree of management judgment.  As of September 30, 2004, the Company has capitalized $1.0 million of costs related to development of internal use software. No amortization has been recorded as of September 30, 2004 on the $1.0 million of costs capitalized during the nine months ended September 30, 2004 as this software was not ready for its intended use. The Company recorded $0 and $314,000 of amortization expense for the three months ended September 30, 2004 and 2003, respectively. The Company recorded $314,000 and $941,000 of amortization expense for the nine months ended September 30, 2004 and 2003, respectively. Given the Company’s ongoing investment and development, the Company expects to incur costs for the development of internal-use software in the future that are required to be capitalized and amortized over the software’s estimated useful life.

 

Other Accrued Liabilities

 

Other accrued liabilities are comprised primarily of accrued compensation expense and the related taxes, as well as other accrued expense items as of each reporting date as shown below (in thousands):

 

		September 30, 2004			December 31, 2003
Accrued compensation and related taxes		$	4,298		$	4,178
Other accruals		2,005			1,546
Total other accrued liabilities		$	6,303		$	5,724

 

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Treasury Stock

 

The Company accounts for treasury stock purchases at cost. As of September 30, 2004, the Company has withheld an aggregate of 14,926 shares of common stock with a cost of $148,000 in satisfaction of statutory tax withholding requirements upon the vesting of restricted share rights held by an officer of the Company. These shares are presented as treasury stock in the condensed consolidated balance sheets.

 

(3) Acquisition of Datamark

 

On October 31, 2003, the Company, pursuant to a definitive purchase agreement dated September 15, 2003, acquired all of the capital stock of Datamark. The Company’s consolidated financial statements include Datamark’s results of operations since October 31, 2003.

 

Under the terms of the stock purchase agreement, the purchase price was to be adjusted based upon Datamark’s working capital at the date of completion of the transaction. eCollege and the former Datamark stockholders agreed that $1.0 million of the cash consideration paid by eCollege would be put into a working capital escrow until the final purchase price was determined. Based upon the reported amount of working capital on October 31, 2003, the Company recorded the acquisition based upon an adjusted purchase price of $70.3 million. In addition, the Company currently has recorded $1.2 million as due from former Datamark stockholders on the condensed consolidated balance sheets, of which $1.0 million of cash is in escrow and $208,000 is owed from the former Datamark stockholders. However, the calculation of the purchase price adjustment is being reviewed by the selling stockholders.  Their review is expected to be completed during the fourth quarter of 2004, and the Company believes that it will subsequently collect the $1.2 million recorded on the condensed consolidated balance sheet as of September 30, 2004.

 

During the three and nine months ended September 30, 2004 the total purchase price allocated to the acquired assets and assumed liabilities increased by $12,000 and $154,000, respectively, due to additional capitalized acquisition costs for legal and accounting services to finalize pre-acquisition contingencies; therefore the amount of goodwill recorded has increased. The Company is in the process of finalizing its purchase price accounting.

 

 (4) Debt

 

Revolving Line of Credit

 

In October 2003, the Company entered into an agreement with a bank to obtain a $10.0 million revolving line of credit, (the “Revolver”) that matures on October 31, 2005. The interest rate on the Revolver is equal to the bank’s prime rate, which was 4.50% at September 30, 2004, plus 1.25%, but at no time will be less than 5.25%. The Revolver contains certain financial covenants and is secured by all of the Company’s assets. The Company was in compliance with all financial covenants as of September 30, 2004.  In December 2003, the Company drew $9.4 million from the Revolver. The entire amount was subsequently repaid in January 2004. In March 2004, the Company drew $9.7 million from the Revolver. The entire amount was subsequently repaid in April 2004. In June 2004, the Company drew $9.7 million from the Revolver. The entire amount was subsequently repaid in July 2004. In September 2004, the Company drew $9.7 million from the Revolver. The entire amount was subsequently repaid in October 2004.

 

Long-Term Debt

 

Term Loan

 

The Company obtained a $3.0 million term loan (“Term Loan”) with a bank in October 2003. The Term Loan refinanced an existing term loan and the outstanding debt on an equipment lease facility with the same bank. The Term Loan has an interest rate of 7.0% per annum. The Term Loan is to be repaid in 36 equal installments and is secured by all of the Company’s assets. The Term Loan contains certain financial covenants. The Company was in compliance with all financial covenants as of September 30, 2004.

 

Subordinated Notes

 

In conjunction with the acquisition of Datamark, in October 2003, the Company issued $20.0 million in senior subordinated secured notes (“Senior Subordinated Notes”) to a lender. The Senior Subordinated Notes have principal payments due in $5.0 million quarterly increments beginning on December 31, 2007, with interest payments due quarterly beginning on December 31, 2003, at a rate of 12.5% per annum. The Senior Subordinated Notes are secured by all of the Company’s assets. In connection with the issuance of the Senior Subordinated Notes, the Company issued warrants to the lender to purchase 200,000 shares of common stock. The Company allocated $3.3 million of financing proceeds to the warrants based upon the fair value of the warrants, which was estimated using the Black-Scholes option pricing model. The remaining $16.7 million was allocated to the Senior Subordinated Notes. The discount attributable to the value of the warrants is being amortized as interest expense over the five-year term of the Senior Subordinated Notes. The Senior Subordinated Notes contain certain financial covenants. The Company was in compliance with all financial covenants as of September 30, 2004.

 

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Also in connection with the acquisition of Datamark in October 2003, the Company issued subordinated seller notes (“Seller Notes”) totaling $12.0 million. The Seller Notes, with interest and principal due in 2008, are comprised of a series of notes issued to the selling stockholders, aggregating $7.0 million, which bear simple interest at a rate of 10.0% per annum, and another series of notes issued to the selling stockholders, aggregating $5.0 million, which bear interest at a rate of 10.0%, compounded annually. The Company recorded $8.9 million for the notes issued to the Sellers based upon their estimated fair value as of October 31, 2003, resulting in a discount of $3.1 million, which is being amortized over the term of the debt.

 

Due to the discounts on the Senior Subordinated Notes and Seller Notes, any pre-payments of these debt obligations would result in additional interest expense in the period of any such pre-payment. The Senior Subordinated Notes also contain a provision that provides for the acceleration of all interest payments due through October 31, 2006 upon early extinguishment of the debt prior to October 31, 2006.

 

Capital Lease Obligations

 

In January 2004 the Company entered into an equipment lease with a vendor.  The lease has an interest rate of 8.4% per annum and is to be repaid in 36 equal installments.  At September 30, 2004, the Company had $316 thousand outstanding under the lease.

 

Schedules of Long-Term Debt and Capital Lease Obligations

 

The following is a summary of the Company’s long-term debt and capital lease obligations as of September 30, 2004 and December 31, 2003, respectively (in thousands):

 

		September 30, 2004			December 31, 2003
Term loan		$	2,167		$	2,917
Seller notes, principal of $12.0 million		10,136			9,071
Senior subordinated notes, principal of $20.0 million		17,297			16,797
Capital lease obligations		316			—
Total		29,916			28,785
Less current portion		(1,133		)	(1,000		)
Long-term portion		$	28,783		$	27,785

 

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The following is a schedule by year of future principal debt payments, as of September 30, 2004. Amounts represent the contractual cash payments of our debt and exclude debt discounts discussed above (in thousands):

 

Period ending December 31,		Term Loan			Senior Subordinated Notes			Seller Notes			Total
2004		$	250		$	—		$	—		$	250
2005		1,000			—			—			1,000
2006		917			—			—			917
2007		—			5,000			—			5,000
2008		—			15,000			12,000			27,000
Principal of debt obligations		$	2,167		$	20,000		$	12,000		$	34,167

 

(5) Commitments and Contingencies

 

Acquisition-related Contingency

 

In November 2003, Datamark was issued a preliminary notice of a sales and use tax liability by the Utah State Tax Commission for the period of April 1, 2000 through December 31, 2002, in the amount of $530,000 with interest of $58,000 for a total amount of $588,000. The Company has paid $52,000 of this amount, and is currently disputing the remaining $536,000 of this liability. In addition, there is an additional potential liability exposure of approximately $360,000 for sales and use taxes related to the period from January 1, 2003 through September 30, 2004. Because Datamark disputes the unpaid taxes for the audit period, it has not paid and does not intend to pay potential taxes arising after the audit period until a final judicial determination that such taxes are payable. If such taxes are determined to be payable, interest will accrue on such taxes at the rate of three percent per annum in 2002 and 2003 and four percent per annum in 2004 and thereafter. Pursuant to the stock purchase agreement, the former stockholders of Datamark agreed to indemnify eCollege for the potential tax liability related to periods prior to October 31, 2003, which totaled approximately $680,000, plus interest and attorneys’ fees. Although the ultimate liability cannot be determined at the present time, the Company believes that the liability resulting from this matter, if any, will not have a material adverse effect on the operating results or the financial position of the Company.

 

Denver, Colorado Sales, Use and Occupational Privilege Tax Audit

 

The Company has been issued a preliminary notice of a sales, use and occupational privilege tax liability by the City of Denver for the period of July 1, 2001 through June 30, 2004, in the amount of $242,000 with interest and penalties of $71,000 for a total amount of $313,000.  The Company is currently disputing this amount and has engaged outside experts to assist in the evaluation.  Although the ultimate liability cannot be determined at the present time, the Company believes that the liability resulting from this matter, if any, will not have a material adverse effect on the operating results or the financial position of the Company.

 

Legal Matters

 

The Company is exposed to asserted and unasserted legal claims encountered in the normal course of business. Management believes that the ultimate resolution of any such matters will not have a material adverse effect on the operating results or the financial position of the Company.

 

Operating Lease Obligations

 

The Company leases office space and equipment under various non-cancelable operating leases. At September 30, 2004 the aggregate future minimum lease commitments were as follows (in thousands):

 

 

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(6) Segment Information

 

Description of Segments

 

Beginning October 31, 2003, as a result of the acquisition of Datamark, the Company organized its operations into two business segments: eLearning and Enrollment. The organizational structure is based on factors that management uses to evaluate, view and run its business operations which include, but are not limited to, customer base, homogeneity of products, technology and delivery channels. The business segments are based on this organizational structure and information reviewed by eCollege’s management to evaluate the associated business group results. A description of the types of products and services provided by each reportable segment follows:

 

•      eLearning provides software products, consisting of online campuses, courses, and course supplements, through hosting services in the Company’s data centers. The eLearning division also provides services complementing the software products, including design, development, and management of online campuses and courses, as well as ongoing administration, faculty and student support. eLearning’s suite of products and services enables customers to either completely outsource the development of their online campus and courses, or to select individual products and services to meet their unique needs.

 

•      Enrollment provides full-service research and direct-marketing for colleges and proprietary schools, offering comprehensive marketing solutions that include direct mail, online, media placement, custom research, admissions training, retention services and software solutions.. These solutions are used by higher education institutions to increase student enrollment leads, conversion rates, and retention rates.

 

Segment Data

 

The results of the reportable segments are derived directly from eCollege’s internal management reporting system. The accounting policies used to derive reportable segment results are substantially the same as those used by the consolidated Company. Management measures the performance of each segment based on several metrics, including income (loss) from operations. These results are used, in part, to evaluate the performance of, and to assign resources to, each of the segments. A significant portion of total consolidated expenditures are directly attributable to the two business segments. However, certain operating expenses, which are separately managed at the corporate level, are not allocated to segments. These unallocated costs include amortization of intangibles and debt costs. There was no inter-segment revenue for the three and nine months ended September 30, 2004.

 

Selected financial information for each reportable segment, together with a reconciliation of segment information to eCollege’s consolidated total, was as follows for the three and nine months ended September 30, 2004 and 2003 (in thousands):

 

		For the Three Months Ended September 30, 2004
		eLearning			Enrollment			Corporate			Total
Revenue		$	8,797		$	15,494		$	—		$	24,291
Income (loss) from operations		$	2,770		$	2,223		$	(2,567	)	$	2,426

 

		For the Three Months Ended September 30, 2003
		eLearning			Enrollment(1)		Corporate		Total
Revenue		$	7,601		n/a		n/a		$	7,601
Income from operations		$	665		n/a		n/a		$	665

 

(1) Enrollment division was acquired in October 31, 2003.

 

		For the Nine Months Ended September 30, 2004
		eLearning			Enrollment			Corporate			Total
Revenue		$	25,482		$	39,356		$	—		$	64,838
Income from operations		$	6,080		$	5,298		$	(5,637	)	$	5,741

 

		For the Nine Months Ended September 30, 2003
		eLearning			Enrollment(1)		Corporate		Total
Revenue		$	21,623		n/a		n/a		$	21,623
Income from operations		$	546		n/a		n/a		$	546

 

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(1) Enrollment division was acquired in October 31, 2003.

 

Assets are allocated to the individual segments based on the primary segment benefiting from the assets. Corporate assets are composed primarily of cash and cash equivalents, amounts due from former Datamark stockholders, goodwill, and purchased intangible assets. The table below shows total assets by segment and the reconciliation of segment assets to eCollege consolidated total assets as of September 30, 2004 and December 31, 2003 (in thousands):

 

		September 30, 2004			December 31, 2003
eLearning		$	15,422		$	11,845
Enrollment		20,875			11,288
Goodwill and intangible assets		66,683			67,648
Corporate		16,664			11,242
		$	119,644		$	102,023

 

Significant Customer Information

 

Three customers in total accounted for 38% of consolidated revenue for the three months ended September 30, 2004.  Two customers, representing 16% and 10% of consolidated revenue, were customers of both the eLearning and Enrollment divisions.  One customer, representing 12% of consolidated revenue was a customer of only the Enrollment division.  One customer of both the eLearning and Enrollment divisions representing 10% of accounts receivable as of September 30, 2004.  One customer of the Enrollment division represented 12% of accounts receivable as of September 30, 2004.

 

Geographic Information

 

Substantially all of the Company’s assets are located in and substantially all of the Company’s operating results are derived from operations in the United States.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Certain statements in this Item 2 and elsewhere in this Report on Form 10-Q contain forward-looking statements based on our current expectations about our Company and our industry. Such statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  You can identify these forward-looking statements when you see us using words such as “expect,” “anticipate,” “estimate,” “plan,” “believe” and other similar expressions. These forward-looking statements involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of, among other things, changes in economic conditions in the markets served by the Company, increasing competition, and other unanticipated events and conditions, as well as the factors described in the Risk Factors and elsewhere in this report, and in the Company’s other SEC filings. We undertake no obligation to publicly update any forward-looking statements for any reason, even if new information becomes available or other events occur in the future, except as required by law.

 

You can obtain access to our other SEC filings from the Investor Relations section via a hyperlink to a third-party SEC filings web site as soon as reasonably practicable after those reports are electronically filed with or furnished to the SEC.  However, our corporate website should not be considered a part of this filing.

 

The following discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto appearing elsewhere in this Report on Form 10-Q as well as our other SEC filings.

 

Overview

 

eCollege.com and its wholly owned subsidiary, Datamark, Inc. (“Datamark”), are collectively referred to herein as “eCollege” or “the Company.” eCollege is an outsource provider of value added information services to the post-secondary education industry. We focus our growth on information-based products and services which concentrate on the lifeblood of our customers: their students. The student life cycle starts with lead generation and continues through enrollment, student services, retention, instruction, and ultimately through job placement and continuing education. Our mission is to provide a broad array of offerings that facilitate the effective management of the student life cycle, from lead generation through job placement, and to power the success and growth of our customers’ online distance education programs by providing industry leading technology and support services.

 

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eLearning Division Overview

 

We provide outsourced technology, products and services that enable proprietary post-secondary schools, colleges, universities, and school districts (“K-12 schools”) to offer an online environment for distance, on-campus, and hybrid learning. As an application service provider (“ASP”), we provide our customers access to our software products, consisting of online campuses, courses, and course supplements, through hosting services in our reliable data centers. Our technology enables our customers to reach a large number of students who wish to take courses at convenient times and locations via the Internet. Our customers can also use our technology to supplement their on-campus courses with an online learning environment or as a hybrid solution by substituting online components for a portion of their on-campus learning.  We also provide services complementing our software, including design, development, and management of online campuses and courses, as well as ongoing administration, faculty, and student support. Our suites of products and services enable customers to either completely outsource the development of their online campus and courses, or to select individual products and services to meet their unique needs.

 

Our primary source of eLearning revenue is student technology service fees we charge to our customers for each enrollment in their online courses delivered on our course management platform. Since our inception, our customers have had approximately 2.0 million student enrollments in online courses or course supplements. In total, our customers have developed approximately 18,000 unique online distance courses on our platform.

 

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Enrollment Division Overview

 

Datamark, our Enrollment division which we acquired in October 2003, is an outsource provider of integrated enrollment marketing services to the proprietary post-secondary school market.  We offer comprehensive solutions to increase student enrollment leads, conversion rates, and retention rates of our customers and therefore the customers’ corresponding revenue. We provide full-service research and direct-marketing for colleges and proprietary schools, offering comprehensive marketing solutions that include direct mail, online, television, and other media solutions.  We also offer lead conversion systems and training to enhance the performance of a school’s admissions staff, as well as post-lead communication campaigns to increase the number of leads that actually convert into enrollments.  Our retention marketing products and services include a suite of tools for identifying “at risk” students, communication plans to help those students stay in school and monitoring and response plans to track students as they progress through the program.

 

Datamark’s lead generation services, consisting primarily of targeted direct-response marketing using mail and internet-based solutions as well as media placement services, generate most of the division’s revenue. Datamark’s focus historically has been on increasing student enrollments at its customers’ on-campus locations; however, its marketing solutions have started to be embraced by eLearning online customers.

 

Our Solution

 

eLearning

 

The eCollege System^SM. The eCollege System consists of our proprietary services and software that create and support the operational and academic needs of our customers for their online programs and includes: eCollege Teaching Solutions^SM, eCollege Program Administrative Solutions^SM, and our technology infrastructure. The eCollege Teaching Solutions include our fully online course product (eCourse) designed for distance learning and hybrid learning (which encompasses both online and face-to-face class sessions), and eCompanion, our lower-priced online supplement to a face to face or on-campus course.

 

Enrollment Marketing

 

Our Enrollment division’s products and services are focused on three stages of the student life cycle: (i) lead generation, (ii) lead conversion, and (iii) student retention.  Our lead generation products primarily consist of direct mail, media placement, and internet marketing solutions that are designed to attract the interest of the most likely candidates for enrollment at our customers’ institutions.  We provide sophisticated lead response tracking and utilize that tracking to optimize the media mix for customers on a continual basis.  We provide lead conversion systems and training to enhance the performance of our customers’ admissions staff, as well as post-lead communication campaigns to increase the number of leads that actually convert into enrollments.  Our retention marketing products and services include a suite of tools for identifying “at risk” students, communication plans to help those students stay in school and monitoring and response plans to keep track of students as they progress through the program.  Historically, our customers have purchased their marketing services primarily to drive on-campus enrollments; however demand for marketing solutions for online learning programs is growing quickly and is becoming a strategic focus for the Company.

 

Our products and services, as well as the manner in which we price and sell our products and services, have not changed significantly from the way we described these items in our Annual Report on Form 10-K/A.  Therefore, please refer to that report for a detailed description of our products and services.

 

Key Indicators of Financial Condition and Operating Performance

 

Since the majority of our eLearning division revenue is earned by charging a per-enrollment student technology service fee to our customers for access to their eCourses and our help desk, eCourse enrollments are a key operating metric.  Our student fee revenue growth has been outpaced by the growth in our customers’ total online enrollments due to various pricing programs that we offer to benefit customers with large online distance programs.

 

Our eLearning customers benefit from volume discounts on their student technology fees based on the success of their distance programs. Some of our customers guarantee a minimum amount of student technology fees for each year they are under contract with us,  for which they receive discounts on student fees. Therefore, the increase in our student fee revenue will not be directly proportional to the increase in our customers’ online student enrollments. In addition, our customers have also begun to use our eCourse product for alternative uses, such as for continuing education for faculty.  As a result of the pricing and length of academic terms for such alternative courses, revenue will not follow the historical trends of our traditional eCourse enrollment fees. Student enrollments in fully distance eCourses increased 47% in the Summer of 2004.

 

Student enrollments in our lower priced eCompanion product (online supplements for on-campus courses) and enrollments in eCourses used by customers for “hybrid” courses (i.e. portion of course delivered online, but still has on-campus component as well)

 

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