<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarter ended SEPTEMBER 30, 1998 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 0-22844
-------
CALIBER LEARNING NETWORK, INC.
------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
MARYLAND 52-2001020
- ------------------------------- ----------------
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3600 CLIPPER MILL ROAD, SUITE 300, BALTIMORE, MARYLAND 21211
- ------------------------------------------------------ --------
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (410) 843-1000
----------------
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 [_].
The registrant had 12,296,710 shares of Common Stock outstanding as of November
13, 1998.
<PAGE>
INDEX
CALIBER LEARNING NETWORK, INC.
(A DEVELOPMENT STAGE COMPANY)
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance sheets - December 31, 1997 and September 30, 1998 3
Statements of operations -- Three months ended September 30, 1997 and 1998;
Nine months ended September 30, 1997 and 1998; For the period from
November 22, 1996 (inception) through September 30, 1998 5
Statements of cash flows - Nine months ended September 30, 1997 and 1998;
For the period from November 22, 1996 (inception) through September 30,
1998 6
Notes to financial statements - September 30, 1998 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 13
PART II. OTHER INFORMATION 17
Item 1. Legal Proceedings 17
Item 2. Changes In Securities 17
Item 3. Defaults upon Senior Securities 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 18
SIGNATURES
</TABLE>
2
<PAGE>
PART I. FINANCIAL INFORMATION
Caliber Learning Network, Inc.
(A Development Stage Company)
Balance Sheets
<TABLE>
<CAPTION>
December 31, September 30,
1997 1998
---------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 3,850,440 $ 29,733,694
Available-for-sale securities - 10,853,986
Accounts receivable, less allowance of $150,000 in 1998 17,400 6,267,936
Due from landlords for tenant allowances 1,427,525 252,233
Other receivables 574,807 116,750
Prepaid expenses 25,066 75,839
---------------------------------
Total current assets 5,895,238 47,300,438
Property and equipment
Furniture and fixtures 1,271,930 2,876,279
Computer equipment and software 2,723,993 10,994,892
Leasehold improvements 4,727,830 9,753,743
---------------------------------
8,723,753 23,624,914
Accumulated depreciation and amortization (388,483) (3,278,666)
---------------------------------
8,335,270 20,346,248
Other assets 279,881 383,238
---------------------------------
Total assets $ 14,510,389 $ 68,029,924
=================================
</TABLE>
3
<PAGE>
Caliber Learning Network, Inc.
(A Development Stage Company)
Balance Sheets (continued)
<TABLE>
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 2,065,436 $ 6,517,338
Borrowings from Sylvan 3,000,000 -
Interest payable to Sylvan 301,784 -
Accrued dividends payable 995,000 83,720
Current portion of deferred tenant allowances 208,014 362,370
Current portion of capital lease obligations
due to related party 615,895 3,094,929
------------------------------
Total current liabilities 7,186,129 10,058,357
Management fee payable to Sylvan 2,880,500 166,667
Deferred tenant allowances, less current portion 1,226,935 1,686,378
Capital lease obligations due to related party,
less current portion 3,417,181 10,359,354
8% Series A Redeemable Convertible Preferred Stock, $.01
par value; 2,442,513 shares authorized, issued and
outstanding in 1997, 0 in 1998 10,000,000 -
6% Series B Redeemable Junior Convertible Preferred Stock,
$.01 par value; 1,227,393 shares authorized, issued and
outstanding in 1997, 0 in 1998 1,300,000 -
Commitments and contingencies - -
Stockholders' Equity (Deficit)
6% Non-Voting Convertible Preferred Stock, $.01 par
value; 5,167,328 shares authorized, issued and
outstanding in 1998 - 51,674
Class A Common Stock, $.01 par value:
Authorized shares -- 42,800,000; issued and
outstanding shares of 3,829,986 in 1997, 0 in 1998 38,300 -
Class B Common Stock, $.01 par value:
Authorized, issued and outstanding shares --
5,167,328 in 1997, 0 in 1998 51,674 -
Common Stock, $.01 par value:
Authorized shares -- 50,000,000 shares; issued and
outstanding shares of 12,293,642 in 1998 - 122,937
Additional paid-in capital 9,975,334 82,799,605
Subscription receivable (5,364,358) -
Deficit accumulated during the development stage (16,201,306) (37,215,048)
---------------------------------
Total stockholders' equity (deficit) (11,500,356) 45,759,168
---------------------------------
Total liabilities and stockholders' equity (deficit) $ 14,510,389 $ 68,029,924
=================================
</TABLE>
See accompanying notes.
4
<PAGE>
Caliber Learning Network, Inc.
(A Development Stage Company)
Statements of Operations (Unaudited)
<TABLE>
<CAPTION>
For the period
November 22,1996
Three Months Ended Nine Months Ended (inception) through
September 30, September 30, September 30,
1997 1998 1997 1998 1998
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Service fee revenue $ - $ 5,271,009 $ - $ 9,504,227 $ 9,504,227
Management fee from Sylvan 400,279 427,500 714,113 1,282,500 2,481,793
-------------------------------------------------------------------------------
400,279 5,698,509 714,113 10,786,727 11,986,020
Cost and expenses:
Operating expenses 1,636,175 9,298,161 2,845,921 22,948,743 30,082,487
Management fees to Sylvan 650,000 500,000 1,750,000 1,500,001 4,380,501
Other selling, general and administrative
expenses 2,478,572 2,079,719 5,011,529 7,016,720 13,552,866
-------------------------------------------------------------------------------
4,764,747 11,877,880 9,607,450 31,465,464 48,015,854
Other income (expense):
Interest income 140,622 647,263 447,257 1,061,559 1,597,662
Interest expense (93,249) (312,315) (181,784) (1,097,155) (1,488,467)
-------------------------------------------------------------------------------
47,373 334,948 265,473 (35,596) 109,195
-------------------------------------------------------------------------------
Net loss (4,317,095) (5,844,423) (8,627,864) (20,714,333) (35,920,639)
Dividends accrued on redeemable preferred
stock 199,000 15,000 597,000 299,409 1,294,409
-------------------------------------------------------------------------------
Net loss attributable to common stockholders $(4,516,095) $(5,859,423) $(9,224,864) $(21,013,742) $(37,215,048)
===============================================================================
Basic and diluted loss per common share
attributable to common stockholders $(0.50) $(0.48) $(1.04) $(1.95) $(3.86)
===================================================================================
</TABLE>
See accompanying notes.
5
<PAGE>
Caliber Learning Network, Inc.
(A Development Stage Company)
Statements of Cash Flows (Unaudited)
<TABLE>
<CAPTION>
For the period
November 22,1996
(inception) through
Nine Months Ended September 30 September 30,
1997 1998 1998
-----------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(8,627,864) $(20,714,333) $(35,920,639)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 123,356 2,890,183 3,278,666
Non-cash compensation 66,668 - 115,000
Negative amortization of capital lease obligations
charged to interest expense - 800,876 887,933
Amortization of deferred tenant allowances recorded
as a reduction of rent expense - (83,284) (83,284)
Changes in operating assets and liabilities:
Accounts receivable (1,550,109) (6,250,536) (6,189,936)
Other receivables 28,000 (82,628) (187,140)
Prepaid expenses (21,623) (50,773) (75,839)
Accounts payable and accrued expenses related to
operating expenses 1,552,280 4,261,626 5,253,159
Management fee payable to Sylvan 1,750,942 (2,713,833) 166,667
Interest payable to Sylvan 181,783 (301,784) -
------------------------------------------------------------
Net cash used in operating activities (6,496,567) (22,244,486) (32,755,413)
INVESTING ACTIVITIES
Purchases of property and equipment (3,340,358) (5,398,514) (9,643,216)
Purchase of available-for-sale securities - (10,853,986) (10,853,986)
Proceeds from sale-leaseback of property and equipment - 540,685 540,685
Proceeds from deferred tenant allowances - 1,872,375 1,872,375
Increase in other assets (104,163) (103,357) (383,238)
------------------------------------------------------------
Net cash used in investing activities (3,444,521) (13,942,797) (18,467,380)
FINANCING ACTIVITIES
Initial issuance of stock for cash - - 13,000,000
Issuance of common stock in initial public offering,
net of offering costs - 61,458,908 61,458,908
Borrowings from Sylvan 1,787,200 - 3,000,000
Repayments to Sylvan - (3,000,000) (3,000,000)
Issuance of Class A common stock 275,371 150,000 400,308
Payment of subscription receivable 2,599,011 5,364,358 8,000,000
Payment of capital lease obligations - (692,044) (692,044)
Payment of accrued dividends on preferred stock - (1,210,685) (1,210,685)
------------------------------------------------------------
Net cash provided by financing activities 4,661,582 62,070,537 80,956,487
------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (5,279,506) 25,883,254 29,733,694
Cash and cash equivalents, beginning of period 13,000,000 3,850,440 -
------------------------------------------------------------
Cash and cash equivalents, end of period $ 7,720,494 $ 29,733,694 $ 29,733,694
============================================================
</TABLE>
See accompanying notes.
6
<PAGE>
Caliber Learning Network, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited)
September 30, 1998
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three and nine month periods ended September 30, 1998
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1998. For further information, refer to the financial
statements for the year ended December 31, 1997 included in the Company's
registration statement on Form S-1, File No. 333-47565, filed March 10, 1998, as
amended (the "Registration Statement").
The Company, since inception, has devoted most of its efforts to raising
capital, developing markets, recruiting and training personnel and establishing
relationships with universities, corporations and suppliers. Accordingly,
minimal revenue has been generated from planned principal operations, and the
Company is considered a development stage company at September 30, 1998.
7
<PAGE>
Caliber Learning Network, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited) (Continued)
2. LOSS PER SHARE
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
For the period
November 22,1996
Three Months Ended, Nine Months Ended (inception) through
September 30 September 30 September 30,
1997 1998 1997 1998 1998
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Numerator:
Net loss $(4,317,095) $(5,844,423) $(8,627,864) $(20,714,333) $(35,920,639)
Preferred stock dividends (199,000) (15,000) (597,000) (299,409) (1,294,409)
-----------------------------------------------------------------------------------
$(4,516,095) $(5,859,423) $(9,224,864) $(21,013,742) $(37,215,048)
Denominator:
Weighted average number of shares of
common stock outstanding during the
period 8,849,843 12,293,642 8,704,519 10,736,817 9,533,169
Shares of common stock issued for a
nominal value 147,471 - 147,471 66,983 115,232
-----------------------------------------------------------------------------------
Denominator for loss per share 8,997,314 12,293,642 8,851,990 10,803,800 9,648,401
Loss per share $ (0.50) $ (0.48) $ (1.04) $ (1.95) $ (3.86)
</TABLE>
Loss per share is based upon the average number of shares of common stock
outstanding during each period. As required by the Securities and Exchange
Commission in Staff Accounting Bulletin No. 98, all securities issued by the
Company for a nominal value have been included in the computations as if they
were outstanding for all periods prior to the Company's initial public offering
of Common Stock in May 1998.
Diluted loss per common share is equal to basic loss per common share because if
potentially dilutive securities were included in the computation the result
would be anti-dilutive.
8
<PAGE>
Caliber Learning Network, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited) (Continued)
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
For the period
November 22,1996
(inception) through
Nine Months Ended September 30, September 30,
1997 1998 1998
-------------------------------------------- ------------------
<S> <C> <C> <C>
Non-cash investing and financing
activities:
Equipment acquired under capital lease $1,247,267 $9,502,651 $13,448,671
Dividends accrued on Series A and 6% Non-
Voting Convertible Preferred Stock 597,000 299,409 1,294,409
</TABLE>
4. CAPITAL LEASES
MCI Communications Corporation, a stockholder of the Company has agreed to
provide an aggregate of $20.0 million in lease financing or lease guarantees for
the purchase of furniture and equipment.
Property and equipment includes the following amounts for leases that have been
capitalized at September 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Furniture and fixtures $ 632,265
Computer equipment and software 9,478,003
Leasehold improvements 3,338,403
-----------
13,448,671
Less: accumulated amortization (2,060,555)
------------
$11,388,116
============
</TABLE>
9
<PAGE>
Caliber Learning Network, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited) (Continued)
4. CAPITAL LEASES (CONTINUED)
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum payments under capital lease obligations consist of the following
at September 30, 1998:
<TABLE>
<S> <C>
Through December 31, 1998 $ 1,030,230
1999 4,220,831
2000 4,220,831
2001 4,127,030
2002 1,448,710
Thereafter 926,763
-----------
Total minimum lease payments 15,974,395
Amounts representing interest (2,520,112)
-----------
Present value of net minimum lease payments
(including current portion of $3,094,929) $13,454,283
===========
</TABLE>
5. INITIAL PUBLIC OFFERING AND RECAPITALIZATION
On April 10, 1998, the Company declared a 1.2274-for-1 stock split of all
classes of common and preferred stock outstanding. Accordingly, all share and
per share data have been restated in the financial statements retroactively to
reflect the stock split.
In May 1998, the Company completed an initial public offering of its Common
Stock. The net proceeds to the Company from the sale of the 4,500,000 shares of
Common Stock offered therein were approximately $57.9 million. Also during May
1998, the Underwriters of the initial public offering exercised their over-
allotment option in full. The net proceeds to the Company from this sale of an
additional 275,000 shares of its Common Stock were approximately $3.6 million.
The initial public offering of Common Stock met the criteria for the automatic
conversion of the outstanding 8% Series A Redeemable Convertible Preferred Stock
and Series B Redeemable Junior Convertible Preferred Stock into Common Stock and
the repayment of all accrued and unpaid dividends on the 8% Series A Redeemable
Convertible Preferred Stock and the payment by Sylvan Learning Systems, Inc.
("Sylvan") of the balance of its subscription receivable.
10
<PAGE>
Also in May 1998, the Company completed a recapitalization effective upon
closing of the initial public offering referred to above. The Company's charter
was amended to authorize a single class of Common Stock, $0.01 par value, for
which all shares of Class A Common Stock were exchanged on a share-for-share
basis, and a series of 6% Non-Voting Convertible Preferred Stock, for which all
shares of Class B Common Stock were exchanged on a share-for-share basis.
Each share of the 6% Non-Voting Convertible Preferred Stock is convertible into
one share of Common Stock at the option of the holder at any time after the two
year anniversary of its issuance, subject to earlier rights of conversion under
certain circumstances. Dividends of $60,000 per year are cumulative and are
first payable in May 1999.
The following is a rollforward of stockholders' equity from January 1, 1998 to
September 30, 1998:
<TABLE>
<CAPTION>
6% Non-Voting Class A Class B
Convertible Common Common Common Additional
Preferred Stock Stock Stock Stock Paid In Capital
--------------- --------- --------- --------- ---------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 $ - $ 38,300 $ 51,674 $ - $ 9,975,334
Issuance of 18,750 shares of Class A Commons Stock 188 149,812
Conversion of 3,848,736 shares of Class A Common (38,488) 38,488
Stock into 3,848,736 shares of Common Stock
Conversion of 5,167,328 shares of Class B Common 51,674 (51,674)
Stock into 5,167,328 shares of 6% Non-Voting
Convertible Preferred Stock
Conversion of 2,442,513 shares of Series B Redeemable 24,425 9,975,575
Convertible Preferred Stock into 2,442,513 shares of
Common Stock
Conversion of 1,227,393 shares of Series B Redeemable 12,274 1,287,726
Junior Convertible Preferred Stock into 1,227,393
shares of Common Stock
Payment of stock subscription
Issuance of 4,775,000 shares of Common Stock, net of 47,750 61,411,158
offering costs of $711,592
Net loss for nine month period ended September 30, 1998
Dividends accrued on 8% Series A Convertible
Preferred Stock and 6% Non-Voting Convertible
Preferred Stock
---------------------------------------------------------------------
Balance at September 30, 1998 $51,674 $ - $ - $122,937 $82,799,605
=====================================================================
<CAPTION>
Deficit
Accumulated Total
Subscription During the Stockholder's
Receivable Development Stage Equity
------------- ------------------ --------------
<S> <C> <C> <C>
Balance at January 1, 1998 $(5,364,358) $(16,201,306) $(11,500,356)
Issuance of 18,750 shares of Class A Commons Stock 150,000
Conversion of 3,848,736 shares of Class A Common -
Stock into 3,848,736 shares of Common Stock
Conversion of 5,167,328 shares of Class B Common -
Stock into 5,167,328 shares of 6% Non-Voting
Convertible Preferred Stock
Conversion of 2,442,513 shares of Series B Redeemable 10,000,000
Convertible Preferred Stock into 2,442,513 shares of
Common Stock
Conversion of 1,227,393 shares of Series B Redeemable 1,300,000
Junior Convertible Preferred Stock into 1,227,393
shares of Common Stock
Payment of stock subscription 5,364,358 5,364,358
Issuance of 4,775,000 shares of Common Stock, net of 61,458,908
offering costs of $711,592
Net loss for nine month period ended September 30, 1998 (20,714,333) (20,714,333)
Dividends accrued on 8% Series A Convertible (299,409) (299,409)
Preferred Stock and 6% Non-Voting Convertible
Preferred Stock
----------------------------------------------------
Balance at September 30, 1998 $ - $(37,215,048) $ 45,759,168
====================================================
</TABLE>
11
<PAGE>
Caliber Learning Network, Inc.
(A Development Stage Company)
Notes to Financial Statements (Unaudited) (Continued)
6. INVESTMENTS
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses, net of tax, reported in a separate component of stockholders'
equity. The amortized costs of debt securities in this category are adjusted
for amortization of premiums and accretion of discounts to maturity. Such
amortization is included in interest income. Realized gains and losses and
declines in value judged to be other than temporary on available-for-sale
securities are included in interest income. The cost of securities sold is
based on the specific identification method. Interest and dividends on
securities classified as available-for-sale are included in interest income.
At September 30, 1998, available-for-sale securities consisted of commercial
paper, the cost of which approximates fair value. The Company has not had
significant realized or unrealized gains or losses on its investments during the
periods presented. These investments are classified as current as all
maturities are less than one year.
7. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of accounts receivable and
available-for-sale securities. The Company maintains an allowance for losses on
receivables based on the collectibility of all amounts owed. The Company
generally does not require collateral for trade receivables. At September 30,
1998, 72% of accounts receivable was due from three customers. These customers
represented 30%, 19% and 2% of revenues for the three months ended September 30,
1998 and 21%, 19% and 13% of revenues for the nine months ended September 30,
1998.
The Company entered into a $2.7 million agreement with Macmillan Computer
Publishing ("Macmillan") to provide software training through the year 2001. The
agreement obligated Macmillan to develop and deliver a minimum number of courses
during the first nine months of the contract term. Macmillan has notified the
Company of its decision to discontinue software training initiatives under the
agreement and is currently contesting payment of all amounts invoiced under the
agreement. Management is unable to predict the outcome of this matter but
believes its ultimate resolution will not have a material adverse effect on the
Company's financial position.
12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
ALL STATEMENTS CONTAINED HEREIN THAT ARE NOT HISTORICAL FACTS, INCLUDING BUT NOT
LIMITED TO STATEMENTS REGARDING THE ANTICIPATED IMPACT OF UNCOLLECTIBLE ACCOUNTS
RECEIVABLE ON FUTURE LIQUIDITY, EXPENDITURES TO LEASE PROPERTY AND EQUIPMENT FOR
THE CALIBER CAMPUSES, FUTURE CAPITAL REQUIREMENTS, AND THE COMPANY'S FUTURE
DEVELOPMENT PLANS ARE BASED ON CURRENT EXPECTATIONS. THESE STATEMENTS ARE
FORWARD LOOKING IN NATURE AND INVOLVE A NUMBER OF RISKS AND UNCERTAINTIES.
ACTUAL RESULTS MAY DIFFER MATERIALLY. AMONG THE FACTORS THAT COULD CAUSE ACTUAL
RESULTS TO DIFFER MATERIALLY ARE THE FOLLOWING: CHANGES IN THE FINANCIAL
RESOURCES OF THE COMPANY'S CLIENTS; TIMING AND EXTENT OF ACCEPTANCE BY
UNIVERSITIES, FACULTY, CORPORATIONS, AND WORKING ADULTS OF THE CALIBER LEARNING
NETWORK AS AN APPROPRIATE WAY TO PROVIDE QUALITY EDUCATION AND TRAINING; AMOUNT
OF REVENUES GENERATED BY THE COMPANY'S OPERATIONS; THE AVAILABILITY OF
SUFFICIENT CAPITAL TO FINANCE THE COMPANY'S BUSINESS PLAN ON TERMS SATISFACTORY
TO THE COMPANY; GENERAL BUSINESS AND ECONOMIC CONDITIONS; AND OTHER RISK FACTORS
DESCRIBED IN THE COMPANY'S REGISTRATION STATEMENT (NO. 333-47565) AND SUBSEQUENT
REPORTS FILED FROM TIME TO TIME WITH THE COMMISSION. THE COMPANY CAUTIONS
READERS NOT TO PLACE UNDUE RELIANCE ON ANY SUCH FORWARD LOOKING STATEMENTS,
WHICH STATEMENTS ARE MADE PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM
ACT OF 1995 AND, AS SUCH, SPEAK ONLY AS OF THE DATE MADE.
OVERVIEW
Since its organization in November 1996, the Company has devoted substantially
all of its efforts to raising capital, developing the Caliber network,
recruiting and training personnel and establishing relationships with
universities, corporations and suppliers (see financial notes for major
customers). The Company has incurred cumulative net losses since its inception
and expects to incur additional losses for at least the next year, due primarily
to additional start-up costs related to the expansion of the Caliber network and
costs associated with the development and marketing of products and services.
The Company expects that losses will fluctuate from quarter to quarter and that
the fluctuations may be substantial. As of September 30, 1998, the Company had
accumulated net losses of $35.9 million.
RESULTS OF OPERATIONS
Since inception, the Company has generated $12.0 million of revenue. A total of
$8.4 million of revenue, all of which was generated in the first three quarters
of 1998, resulted primarily from the Company's agreements to provide corporate
training programs and academic programs through its satellite-linked network of
campuses. To date, the Company has recognized $2.0 million from Macmillan
Computer Publishing. The remaining $3.6 million consisted of $1.1 million of
revenue from the Company's Training Services business and $2.5 million of
revenue from the Testing Center Management and CBT Services Agreement with
Sylvan. Under this agreement, Caliber manages 28 Sylvan Technology Centers
("STCs") that may be converted to Caliber Campuses in the future. The Company
receives a fixed fee per month to manage these centers, a fee per test delivered
above a specified number of tests and 50% of any profits to Sylvan from Sylvan's
digital fingerprinting joint venture with Identix Corporation. Caliber pays all
operating expenses for these 28 centers. Since inception, operating expenses
exceeded the revenue received from Sylvan for Caliber's management of the 28
centers.
13
<PAGE>
Since inception, the Company has incurred $30.1 million of operating expenses.
Operating expenses include costs associated with the following: the opening of
41 Caliber Campuses in 1997 and 1998, 28 STCs managed by Caliber and costs
associated with the development and marketing of products and services.
Since inception, the Company has incurred $4.4 million in management fees
payable to Sylvan for office space and management, administrative, legal,
accounting and financial services provided by Sylvan under a Management
Agreement between Sylvan and the Company.
Since inception, the Company has incurred $13.6 million of other selling,
general and administrative expenses. As of September 30, 1998, the Company
employed 74 management, sales and administrative personnel, which has increased
from 14 at March 31, 1997. Since inception, the Company has incurred
approximately $1.1 million of non-recurring expenses related to executive
recruiting and relocation.
Since inception, the Company has realized net interest income of $0.1 million.
The Company generated $1.6 million of interest income from the temporary
investment of cash received from its initial capitalization and from the
proceeds of its initial public offering that was completed in the second quarter
of 1998. Interest expense of $1.5 million has resulted from interest on capital
lease obligations, borrowings on the $3.0 million loan from Sylvan, and interest
accrued on the unpaid management fee payable to Sylvan. The loan and unpaid
management fee to Sylvan through April 1998 were paid during the second quarter
of 1998 concurrent with the company's initial public offering.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has used $ 32.8 million of cash in operating
activities and $18.5 million for investing activities, consisting principally of
developing and implementing the Caliber network and the acquisition of property
and equipment. These cash needs have been primarily financed through the initial
capitalization of $13.0 million, the Sylvan loan of $3.0 million, a subscription
receivable from Sylvan of $8.0 million and the proceeds from the Company's
initial public offering in May 1998 of $61.5 million. As of September 30, 1998,
the Company had cash and available-for-sale securities of $40.6 million and $6.6
million available under the $20.0 million Lease and Guarantee Commitment from
MCI Communications Corporation, one of the Company's stockholders. The Company
believes that these resources will be sufficient capital for implementation of
the Caliber network and to fund negative cash flow through at least 1999.
However, there can be no assurance that the Company's cash resources will be
sufficient to fund the Company's negative cash flow and expected capital
expenditures through 1999. The Company may need to obtain additional equity or
debt financing during this period. There can be no assurance that the Company
will be able to obtain the additional financing to satisfy its cash requirements
or to implement its growth strategy successfully.
14
<PAGE>
YEAR 2000 COMPLIANCE
The year 2000 (Y2K) issue is the result of computer programs written using two
digits (rather than four) to define the applicable year. Absent corrective
actions, programs with date-sensitive logic may recognize "00" as 1900 rather
than 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, production
difficulties, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Caliber has put in place a corporate wide Year 2000 task force with
representatives from all departments. This task force has conducted a
comprehensive review of Cailber's systems to identify the systems that could be
affected by the Year 2000 issue and has developed an implementation plan to
resolve them. The process involves five phases:
Phase I Inventory and Data Collection. This phase involves conducting a
comprehensive inventory of its information systems which includes but is not
limited to data communications systems, computer hardware, software and networks
and building infrastructure such as HVAC, elevators and security systems.
The identification of key third party vendors is also involved. During this
phase, all new systems are required to have passed Year 2000 compliance testing
before being purchased and implemented. The Company commenced this phase in the
first quarter of 1998 and this phase is now 95% complete.
Phase II Assessment / Date Impact. In this phase, systems identified during
the inventory phase are reviewed to determine what impact, if any, the year 2000
has on the operation of these systems. This phase also identifies the effects of
the year 2000 being a leap year. This phase is now 95% complete.
Phase III Remediation. This phase involves modifying, replacing or upgrading
the systems that have failed during the assessment phase. The Company expects to
complete this phase by the middle of the first quarter of 1999. This phase is
now 50% complete.
Phase IV Testing. This phase involves review of all systems for compliance and
re-testing as necessary. The Company expects to complete this phase by the end
of the first quarter of 1999. This phase is now 50% complete.
Phase V Implementation. This phase involves implementing the systems after
they have been successfully remediated and tested. This is the final step in
assuring that the systems are Year 2000 complaint. The Company expects to
complete this phase by the end of the second quarter of 1999. This phase is now
50% complete.
Currently, the Company believes that its major systems are substantially Year
2000 compliant. This substantial compliance has been achieved without the need
to acquire significant new hardware, software, or systems other than in the
ordinary course of business. The Company is not aware of any material non-
compliance that would require repair or replacement that would have a material
effect on its financial position. As part of the Y2K process, formal
communication with the Company's suppliers, customers and other support services
has been
15
<PAGE>
initiated and efforts will continue until positive statements of readiness have
been received. To date, the Company is not aware of any Year 2000
non-compliance by its customers or suppliers that would have material impact on
the Company's business. Nevertheless, there can be no assurance that
unanticipated non-compliance will not occur, and such non-compliance could
require material costs to repair or could cause material disruptions if not
repaired. The Company is in the process of developing a strategy to address
these potential consequences that may result from unresolved Year 2000 issues,
which will include the development of one or more contingency plans by the third
quarter of 1999.
16
<PAGE>
Part II Other Information
Item 1. Legal Proceedings
-----------------
The Company is not a party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
-----------------------------------------
(a) - (c) None.
(d) The Company filed its first registration statement under the
Securities Act effective May 4, 1998, File No. 333-47565. From
the effective date of the registration statement to September 30,
1998, the Company's use of net proceeds from the offering of
securities covered thereby was as follows:
NET OFFERING PROCEEDS TO ISSUER $61,458,500
USE OF PROCEEDS:
Plant, building and facilities $ 1,975,000
Working capital $10,630,500
Repayment of indebtedness (1) $7,054,000
Temporary investments:
Cash and cash equivalents $29,734,000
Marketable securities $10,854,000
Other expenses:
Payment of accrued dividends (2) $ 1,211,000
-----------
Total $61,458,500
NOTES
-----
(1) Payments were made to Sylvan Learning Systems, Inc., an
affiliate of the issuer and the beneficial owner of ten
percent (10%) or more of the issuer's issued and outstanding
Common Stock and all of the issuer's issued and outstanding
6% Non-Voting Convertible Preferred Stock.
(2) Payments were made to MCI Communications Corporation, an
affiliate of the issuer and the beneficial owner of ten
percent (10%) or more of the issuer's issued and outstanding
Common Stock.
Item 3. Defaults Upon Senior Securities
-------------------------------
None.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
17
<PAGE>
Item 5. Other Information
-----------------
None
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
--------
3.01 Articles of Amendment and Restatement of the Charter*
3.02 Bylaws *
4.01 Specimen Common Stock Certificate*
10.01(a) 1997 Stock Option Plan*
10.01(b) 1998 Stock Incentive Plan*
10.03 Warrant issued to MCI Communications Corporation, dated
as of November 22, 1996, as amended*
10.04 Agreement between Caliber Learning Network, Inc. and The
Johns Hopkins University, dated as of January 29, 1998*
10.05 Agreement between Caliber Learning Network, Inc. and MCI
Systemhouse Corp. dated March 2, 1998*
10.06 Agreement between Caliber Learning Network, Inc. and
Macmillian Computer Publishing USA, dated February 2,
1998*
10.07 Agreement between Caliber Learning Network, Inc. and
Compaq Computer Corporation, dated December 22, 1997*
10.08 Letter Agreement and Line of Credit Promissory Note dated
as of December 1, 1996 between Caliber Learning Network,
Inc. and Sylvan Learning Systems, Inc.*
10.09 Agreement between Caliber Learning Network, Inc. and MCI
Systemhouse Corp., dated July 1, 1997*
10.10 Management Agreement between Caliber Learning Network,
Inc. and Sylvan Learning Systems, Inc. dated January 1,
1998*
10.11 Testing Center Management and CBT Services Agreement, as
amended, between Caliber Learning Network, Inc. and
Sylvan Learning Systems, Inc. dated May 1, 1997*
27.01 Financial Data Schedule
18
<PAGE>
* Incorporated by reference to the Company's Registration
Statement on Form S-1, as amended (File No. 333-47565).
(b) Reports on Form 8-K.
-------------------
No reports on Form 8-K were filed during the quarter for which this
report is filed.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CALIBER LEARNING NETWORK, INC.
------------------------------
(Registrant)
Date: November 13, 1998 /s/ Rick P. Frier
-------------------
Rick P. Frier
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited quarterly financial statements and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> DEC-31-1998
<PERIOD-END> SEP-30-1998
<CASH> 29,733,694
<SECURITIES> 10,853,986
<RECEIVABLES> 6,417,936
<ALLOWANCES> 150,000
<INVENTORY> 0
<CURRENT-ASSETS> 47,300,438
<PP&E> 23,624,914
<DEPRECIATION> 3,278,666
<TOTAL-ASSETS> 68,029,924
<CURRENT-LIABILITIES> 10,058,357
<BONDS> 12,212,399
0
51,674
<COMMON> 122,937
<OTHER-SE> 45,584,557
<TOTAL-LIABILITY-AND-EQUITY> 68,029,924
<SALES> 0
<TOTAL-REVENUES> 10,786,727
<CGS> 0
<TOTAL-COSTS> 22,948,743
<OTHER-EXPENSES> 8,516,721
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,097,155
<INCOME-PRETAX> (20,714,333)
<INCOME-TAX> 0
<INCOME-CONTINUING> (20,714,333)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (20,714,333)
<EPS-PRIMARY> (1.95)
<EPS-DILUTED> (1.95)
</TABLE>
