<PAGE>
As filed with the Securities and Exchange Commission on November 19, 1999
Registration No. 333-78365
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
Amendment No. 5
To
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
---------------
eCollege.com
(Exact name of registrant as specified in its charter)
Delaware 7379 84-1351729
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification
Incorporation or Number)
Organization)
---------------
10200 A East Girard Avenue
Denver, Colorado 80231
(303) 873-7400
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
---------------
Mr. Robert N. Helmick
President and Chief Executive Officer
eCollege.com
10200 A East Girard Avenue
Denver, Colorado 80231
(303) 873-7400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
with copies to:
Richard R. Plumridge, Esq. James C.T. Linfield, Esq.
John E. Hayes, III, Esq. Cooley Godward LLP
Lexi Methvin, Esq. 2595 Canyon Boulevard, Suite 250
Brobeck, Phleger & Harrison LLP Boulder, Colorado 80302
370 Interlocken Boulevard, Suite 500 (303) 546-4000
Broomfield, Colorado 80021
(303) 410-2000
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
---------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information contained in this preliminary prospectus is not complete and +
+may be changed. We may not sell these securities until the registration +
+statement filed with the Securities and Exchange Commission is effective. +
+This preliminary prospectus is not an offer to sell these securities and it +
+is not soliciting an offer to buy these securities in any state where the +
+offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Prospectus (Not Complete)
Issued November 19, 1999
4,500,000 Shares
[LOGO OF eCOLLEGE.COM]
Common Stock
-----------
eCollege.com is offering shares of its common stock in an initial public
offering. We are offering 4,500,000 shares in this offering. No public market
currently exists for our common stock. We anticipate that the initial public
offering price will be between $8.00 and $10.00 per share.
-----------
Our common stock has been approved for listing on the Nasdaq National Market
under the symbol "ECLG."
-----------
Investing in our common stock involves risks. See "Risk Factors" on page 9.
-----------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public Offering Price $ $
Discounts and Commissions to Underwriters $ $
Offering Proceeds to eCollege.com $ $
</TABLE>
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
eCollege.com has granted the underwriters the right to purchase up to an
additional 675,000 shares of common stock to cover over-allotments. The
underwriters can exercise this right at any time within thirty days after the
offering. Banc of America Securities LLC expects to deliver the shares of
common stock to investors on , 1999.
Banc of America Securities LLC
William Blair & Company
Volpe Brown Whelan & Company
The date of this prospectus is , 1999.
<PAGE>
[picture of eCollege.com's homepage from its website with text "eCollege.com is
about possibilities. Not merely the possibilities that arise in the wake of
classrooms without walls, but also those which occur when educators are given
the ability to communicate with students through a whole new medium. At
eCollege.com, our sole purpose is to provide educators and students with new
options for learning using the Internet - not only extending the classroom, but
elevating its potential."]
2
<PAGE>
[gatefold picture--picture of representative eCollege Campus home page with
text "For universities seeking to create online campuses utilizing the
Internet." Picture of representative home page using eCompanion with text "A
software and services platform for creating and managing online courses."
Picture of representative home page using eCourse with text "A software and
services platform for creating and managing online courses." Picture of
representative home page using eToolKit with text "Software tools providing
online administrative functions for on-campus courses." Graphic also includes
the company's logo.]
<PAGE>
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 4
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 34
Management............................................................... 44
Certain Transactions..................................................... 54
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 58
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 65
Experts.................................................................. 65
Additional Information................................................... 66
Index to Financial Statements............................................ F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
You should read this entire prospectus carefully. Unless otherwise indicated,
all information contained in this prospectus assumes that the underwriters will
not exercise their over-allotment option. This prospectus contains forward-
looking statements, which involve risks and uncertainties. eCollege.com's
actual results could differ materially from those anticipated in these forward-
looking statements as a result of certain factors, including those set forth
under "Risk Factors" and elsewhere in this prospectus. Unless otherwise
indicated, all information contained in this prospectus reflects the conversion
of our outstanding preferred stock into common stock and a two for three
reverse stock split of our common stock and preferred stock.
eCollege.com
eCollege.com, formerly Real Education, Inc., is a provider of technology and
services that enable colleges and universities to offer an online environment
for distance and on-campus learning. Our software and services allow colleges
and universities to outsource the creation, launch, management and support of
an online education platform. Our technology and services consist of online
campuses, courses, course supplements and support services, including design,
development, management and hosting services, as well as ongoing
administration, faculty and student support. We can create and deliver a
complete online campus, including training of faculty and administration,
typically in 60 business days. We charge our customers an upfront fee for
creating an online campus and for developing each course. In addition, we
charge a per student fee for each student enrolled in a course utilizing our
technology and services, and ongoing fees for maintenance, support and faculty
training. Our technology enables our customers to reach a large number of
additional students who wish to take online courses at convenient times and
locations. Our customers can also use our technology to supplement their on-
campus courses with an online learning environment.
As of October 31, 1999, we had 121 contracts covering over 150 individual
campuses. Since our inception our customers have purchased or ordered more than
2,000 online courses from us. For the Fall 1999 term, our customers have
approximately 12,000 student enrollments in online courses provided by us.
We believe the Internet's universal accessibility and interactivity make it
an ideal platform for distance learning and for providing online course
supplements for on-campus classes. Distance learning has become a fast growing
segment of the education marketplace. International Data Corporation estimated
that the number of Web users worldwide would exceed 95 million by the end of
1998 and will grow to over 320 million by the end of 2002. International Data
Corporation also estimates that approximately 85% of higher education
institutions will offer distance learning courses by 2002 and that the number
of students taking such courses will increase by more than 30% per year through
2002. In addition, we believe educators are increasingly using the Internet to
supplement their on-campus course offerings. Despite this projected growth,
colleges and universities face several challenges in delivering high quality
online courses. Effective online education requires that students receive a
learning experience of comparable quality, content and student/faculty
interaction to an on-campus education. In addition, we believe that many
colleges and universities have found internally developed solutions to be time-
consuming, expensive and difficult to implement. As a result of these
challenges, we believe a growing number of colleges and universities are
outsourcing the development and maintenance of their online campus and courses.
Our products are designed to be flexible to meet the online learning needs
of colleges and universities and their students. Our suite of products enables
colleges and universities to either completely outsource the development of
their online campus and courses or to select those products that meet their
needs.
4
<PAGE>
The eCollege.com online learning platform has the following key elements:
Products and Services. We provide a suite of software consisting of online
campuses, courses, course supplements and services, including design,
development, management, and hosting services, as well as ongoing
administration, faculty and student support. We can create an online campus
which replicates key services of a physical campus, including admissions,
registration, bookstore, library, academic advising, career counseling, student
union, bursar's office and financial aid services. We can also work with
faculty to convert courses for online delivery or provide online supplements
for on-campus courses. We host the online campuses, courses and course
supplements on our reliable infrastructure.
Rapid, Cost-Effective Development of Online Campuses and Courses. We can
create and deliver a complete online campus, including training of faculty and
administration, typically in 60 business days. Our flexible pricing structure
allows our customers to purchase products and services that meet their needs.
We believe most colleges and universities would incur substantially greater
costs to develop comparable technology and services internally.
Easy Online Course Development. We typically work with faculty members to
convert courses into presentations designed for delivery over the Internet
using an array of course design tools and support services. We believe our
automated authoring tools are user-friendly, enabling faculty with little or no
programming experience to develop and update high quality courses through a
standard Web browser.
Easy to Use Online Learning Environment. We believe our online campuses and
courses are easy for students and faculty to use and our other services, such
as faculty and student support, allow colleges and universities to provide a
well-supported online learning environment. Using a standard Web browser,
students and faculty access the online campus and courses, which include easily
navigable screens and rich multimedia content.
Standard, Scalable Technology. We integrate industry standard, open
technology to provide a scalable and reliable delivery system. We have made
significant investments in our infrastructure and technical support to ensure
the reliability and scalability of our solution. We utilize multiple or
"redundant" high bandwidth sources for Internet connections. As a result, we
are capable of achieving nearly 100% uptime.
We target more than 3,800 colleges and universities in the United States and
Canada. We first began delivering courses in 1996 to the University of
Colorado. In mid-1998, we significantly increased our sales force and have
entered into more than 110 new contracts since then. Our management team and
sales force have significant experience in the education industry, which we
believe will continue to be a key factor in our ability to increase our
customer base. Our twelve largest customers in terms of 1999 year-to-date
revenue are: University of Colorado, Colorado Community College Consortium,
Keller Graduate School of Management, Connecticut State University System,
Rogers State University, California State University-Hayward, University of
South Alabama, Eastern Michigan University, National University, Keiser
College, Dallas Baptist University and Seton Hall University. In addition, we
have contracts with several providers of continuing education and corporate
training, including DeVry/Becker Educational Development Corp., Earth Tech,
Inc., National Association of Realtors and Palmer Chiropractic University
Foundation d/b/a Palmer Institute for Professional Advancement.
Our objective is to continue to expand our presence within the college and
university market and to further develop our presence within the continuing
education and corporate training markets. The key elements of our growth
strategy are to:
Add Additional Colleges and Universities. Using a focused regional approach,
we are actively targeting more than 3,800 colleges and universities. We are
also increasing our marketing efforts, including increased print and online
media advertising and greater participation in trade shows and executive
speaking engagements.
5
<PAGE>
Increase Course Offerings and Enrollments with Existing Customers. In order
to increase course offerings and student enrollments, we recently implemented a
$10 million grant program designed to assist new and existing customers in
increasing the number of online courses they offer using our technology and
services and the number of students pursuing online degrees. The grants will be
used by our customers to increase marketing of our customers' online courses,
increase the online teaching skills of our customers' educators, as well as
fund the purchase of computer equipment to allow our customers to facilitate
online education.
Further Develop Relationships with Existing Customers. We seek to build
long-term relationships with colleges and universities and their faculties so
that the online campus becomes an important extension of the college or
university. We believe this will be a key factor in our ability to serve
additional departments within the college or university.
Unbundle and Expand Product Offerings for New and Existing
Customers. Historically we marketed and sold our online campus bundled with a
minimum number of courses, as well as maintenance and support. We recently
unbundled these offerings in order to provide our potential customers with
greater flexibility in meeting their individual needs. Customers can also
purchase implementation services and training on an as-needed basis. We believe
this sales approach will expand the number of prospects that will be interested
in purchasing our product and services. In addition, we have recently
introduced several new products to expand our targeted online education market.
Risk Factors
Investing in our common stock involves a high degree of risk. Risk factors
of this offering include:
. our limited operating history;
. our history of more than $22 million of net losses applicable to
common stockholders since inception and expected future losses;
. our unproven business model;
. our highly competitive market;
. our reliance on a single service offering; and
. the uncertain acceptance of online learning by academics and
educators.
For a discussion of these and other risk factors you should consider carefully
before you decide to buy our common stock, see "Risk Factors."
6
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by us........ 4,500,000 shares
Common stock to be outstanding
after this offering.............. 13,862,395 shares
Use of proceeds................... For working capital and general corporate
purposes including sales and marketing
activities, capital expenditure product
development activities and the repayment of
outstanding indebtedness. A portion of the
net proceeds may also be used for the
acquisition of businesses, products,
services or technologies that are
complementary to those of eCollege.com.
Proposed Nasdaq National Market
symbol........................... ECLG
</TABLE>
The common stock to be outstanding after this offering is based on shares
outstanding as of September 30, 1999 and excludes 1,880,126 shares of common
stock issuable upon the exercise of outstanding stock options and 686,519
shares of common stock issuable upon the exercise of outstanding warrants. The
outstanding options and warrants, have an aggregate, weighted-average exercise
price of $4.41. See "Capitalization" and Note 4 in the notes to financial
statements.
----------------
Our company was incorporated in Colorado on July 26, 1996 and was
reincorporated in Delaware as eCollege.com on June 22, 1999. Our principal
executive offices are located at 10200 A East Girard Avenue, Denver, Colorado
80231. Our telephone number is (303) 873-7400. Information contained on our
Website is not incorporated by reference into this prospectus and you should
not consider such information a part of this prospectus.
eCollege.com, our logo, eCollege System, eCollege Campus, eCollege eCourse,
eTeaching Solutions, eCompanion and eToolKit are service marks of eCollege.com.
Each trademark, trade name or service mark of any other company appearing in
this prospectus belongs to its holder.
7
<PAGE>
Summary Financial Data
The following table sets forth our summary financial data. You should read
this information together with the financial statements and the notes to those
statements beginning on page F-1 of this prospectus and the information under
"Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Please see Note 2 in the notes
to financial statements for the method of computing pro forma basic and diluted
net loss from continuing operations per share.
<TABLE>
<CAPTION>
Period from Year Ended December Nine Months Ended
July 26, 1996 31, September 30,
(inception) through -------------------- ---------------------
December 31, 1996 1997 1998 1998 1999
------------------- --------- --------- ---------- ---------
(Unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Campus and course de-
velopment fees........ $ -- $ 628 $ 1,086 $ 657 $ 1,537
Student fees........... 22 400 579 384 1,379
--------- --------- --------- ---------- ---------
Total revenue.......... 22 1,028 1,665 1,041 2,916
Cost of revenue......... 110 528 2,065 1,218 4,881
--------- --------- --------- ---------- ---------
Gross profit (loss).... (88) 500 (400) (177) (1,965)
Operating expenses:
Selling and marketing.. 25 106 3,394 1,933 4,756
General and administra-
tive.................. 249 768 2,509 1,610 3,613
Product development.... 60 212 1,099 601 1,317
--------- --------- --------- ---------- ---------
Total operating ex-
penses................ 334 1,086 7,002 4,144 9,686
--------- --------- --------- ---------- ---------
Net loss from opera-
tions.................. (422) (586) (7,402) (4,321) (11,651)
Other income (expense),
net.................... 18 (29) 112 122 286
--------- --------- --------- ---------- ---------
Net loss from continuing
operations............. $(404) $ (615) $(7,290) $(4,199) $(11,365)
========= ========= ========= ========== =========
Net loss from continuing
operations applicable
to common
stockholders........... $(404) $ (674) $(7,993) $(4,686) $(13,251)
========= ========= ========= ========== =========
Basic and diluted net
loss from continuing
operations per common
share.................. $ -- $ (0.16) $ (1.58) $ (0.93) $ (2.57)
========= ========= ========= ========== =========
Weighted average common
shares outstanding--ba-
sic and di-
luted.................. -- 4,107,964 5,074,697 5,062,143 5,159,501
========= ========= ========= ========== =========
Pro forma net loss from
continuing operations
per common share--basic
and diluted (unau-
dited)................. $ (1.02) $ (0.60) $ (1.23)
========= ========== =========
Pro forma weighted aver-
age common shares out-
standing--pro forma ba-
sic and diluted (unau-
dited)................. 7,120,022 7,012,711 9,276,421
========= ========== =========
</TABLE>
The following table is a summary of our balance sheet data. The pro forma
column reflects the automatic conversion of all shares of our preferred stock
into common stock upon completion of this offering. The pro forma as adjusted
column also reflects our receipt of the estimated net proceeds of the 4,500,000
shares of common stock we are selling in this offering at an assumed initial
public offering price of $9.00 per share, after deducting estimated
underwriting discounts and expenses.
<TABLE>
<CAPTION>
September 30, 1999
-----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- -------------- -----------
(Unaudited)
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................. $ 2,264 $2,264 $38,955
Working capital .......................... (65) (65) 36,626
Total assets.............................. 7,817 7,817 44,508
Total liabilities......................... 4,998 4,998 4,998
Mandatorily redeemable, convertible
preferred stock.......................... 23,785 -- --
Total stockholders' equity (deficit)...... (20,966) 2,819 39,510
</TABLE>
8
<PAGE>
RISK FACTORS
You should consider carefully the risks described below before you decide to
buy our common stock. The risks and uncertainties described below are not the
only ones facing us. Additional risks and uncertainties that we do not
presently know about or that we currently believe are immaterial may also
adversely impact our business operations. If any of the following risks
actually occur, our business, financial condition or results of operations
would likely suffer. In such case, the trading price of our common stock could
fall, and you may lose all or part of the money you paid to buy our common
stock.
This prospectus contains forward-looking statements that involve risks and
uncertainties. These forward-looking statements are usually accompanied by
words such as "believes," "anticipates," "plans," "expects" and similar
expressions. Our actual results may differ materially from the results
discussed in the forward-looking statements because of factors such as the Risk
Factors discussed below.
Risks Relating to Our Business
Our prospects are difficult to evaluate because we have only been operating our
business since July 1996
We began offering our services in July 1996 and until March 1998 we operated
our business with limited financial and personnel resources, servicing a
relatively small number of colleges and universities. Accordingly, we have a
limited operating history from which you may evaluate our business and
prospects. Further, our revenue growth to date may not be indicative of our
future operating results.
We have a history of net operating losses and expect net operating losses and
negative cash flow for the foreseeable future
We have experienced aggregate net losses from operations of $20,061,340
since our inception in July 1996. These losses consist of $422,075 for the
period from inception to December 31, 1996, and $585,800 and $7,402,336 for the
years ended December 31, 1997 and 1998, respectively, and $11,651,129 for the
nine months ended September 30, 1999. We may never achieve profitability, and
if we do, we may not be able to sustain profitability. We have invested heavily
to develop our services and establish our development, sales and marketing
capabilities. We believe that our success depends, among other things, on our
ability to develop new relationships with colleges and universities and
maintain existing customer relationships. Accordingly, we intend to continue to
incur significant expenses for development and sales and marketing. As such, we
expect to continue experiencing net operating losses and negative cash flow for
the foreseeable future. To the extent our sales and marketing efforts do not
significantly increase our revenues, our business and financial results will be
materially and adversely affected.
Our operating results are likely to fluctuate significantly and may be below
the expectations of analysts and investors
Because of our limited operating history and the emerging nature of the
online learning market, we may be unable to accurately forecast our revenues.
The sales cycle for our products and services varies widely and it is difficult
for us to predict the timing of particular sales, the rate at which online
campuses, courses and/or course supplements will be implemented or the number
of students who will enroll in the online courses. The cancellation or delay of
even a small number of campus and/or course implementations could cause our
revenues to fall short of projections. Since most of our costs are fixed and
are based on anticipated revenue levels, small variations in the timing of
revenue recognition could cause significant variations in operating results
from quarter to quarter.
Among the most significant factors that may affect our quarterly operating
results are:
. our development of online campuses and courses;
. the number of online courses that our customers offer each term;
. the number of students who enroll in our customers' online courses each
term; and
. the seasonality inherent in the academic calendar.
9
<PAGE>
Additionally, the following factors may affect our quarterly, as well as our
annual, operating results:
. our ability to attract and retain colleges and universities;
. our ability to successfully implement online campuses and courses;
. our ability to sell support services;
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business;
. our introduction of new or enhanced services and products, and similar
introductions by our competitors;
. the budgetary cycles of colleges and universities;
. our ability to upgrade and develop our systems and infrastructure;
. our ability to attract, motivate and retain personnel;
. technical difficulties in delivering our services;
. governmental regulation; and
. general economic conditions.
As a result, we believe that quarter-to-quarter comparisons of our sales and
operating results are not necessarily meaningful, and that such comparisons may
not be accurate indicators of future performance. During 1998, revenue for the
quarters ended March 31, June 30, September 30 and December 31 comprised 15%,
23%, 25% and 37%, respectively, of total revenue for the year. During 1999,
revenue for the quarters ended March 31, June 30 and September 30 comprised
21%, 27% and 52%, respectively, of total revenue for the nine month period.
However, because our business grew substantially during this period, we can
give no assurance that these percentages will reflect the ongoing seasonal
pattern of our business. Since we may be unable to adjust spending in a timely
manner to compensate for any unexpected revenue shortfall, any significant
decrease in revenue would likely have an immediate material adverse effect on
our business and financial results. In addition, if our future operating
results are below the expectations of securities analysts or investors, our
stock price may decline.
We cannot predict our success because our business and pricing models are
unproven
Our success depends on our ability to generate revenues by providing online
learning products and services to colleges and universities. The viability and
profitability of this model are unproven. To be successful, we must develop and
market products and services that achieve broad market acceptance with both
colleges and universities and their students. Online learning, in general, and
our products and services, in particular, may not achieve broad market
acceptance. In addition, our pricing model generally includes initial campus
and course development fees from colleges and universities, fees for student
and faculty support and a per student fee for each enrollment in an online
course. Our contracts do not require customers to guarantee any minimum number
of student enrollments or to commit to developing any courses. This pricing
model may not be successful and it may not achieve or maintain revenue growth
in the future. The failure of either our business model or our pricing model
would have a material adverse affect on our business and financial results.
Our sales cycle is lengthy and can vary widely
The sales cycle between initial customer contact and signing of a contract
varies widely, reflecting differences in our customers' decision-making
processes and budget cycles. As a result, we may not be able to forecast the
timing and amount of specific sales and resulting revenue. Our customers
typically conduct extensive and lengthy evaluations before committing to our
system. Delays in the sales cycle can result from, among other things, changes
in a college or university's budget, the need for approval from both the
customer's administration and faculty, and the need to educate a college or
university as to the potential applications of and cost savings associated with
our services. We generally have little or no control over these factors, which
may cause a potential customer to favor a competitor's products and services,
or to delay or forego purchases altogether. The delay in or failure to complete
planned transactions could have a material adverse effect on our business and
financial results and could cause our financial results to vary significantly
from period to period.
10
<PAGE>
Since our business focuses solely on online education, we are particularly
vulnerable to uncertain market acceptance, competing services, implementation
difficulties and other factors that could inhibit our ability to generate sales
and achieve market penetration
We currently derive more than 90% of our revenues from developing and
delivering our online education platform. We expect that revenues from these
services will continue to account for substantially all of our revenues in
future periods. Consequently, if online learning does not become a widely
accepted alternative and/or companion to classroom instruction, our business
will not be successful. Our inability to generate sufficient sales and achieve
market penetration of our service due to competitive factors, implementation
difficulties or other reasons would have a material adverse effect on our
business and financial results.
We may have difficulty identifying and meeting the needs of colleges and
universities
We may not be able to accurately determine customer requirements or deliver
features and functions that will satisfy customer demands. Furthermore, even if
we correctly identify our customers' requirements, we may not be able to design
and implement services incorporating these features in a timely and efficient
manner. Our failure to determine and address customer requirements in a timely
and efficient manner would have a material adverse effect on our business and
financial results.
Managing our growth effectively may be difficult
We are currently experiencing a period of significant expansion, which may
be difficult to manage. Our growth has placed, and any further growth is likely
to continue to place, a significant strain on our managerial, operational,
financial and other resources. We have grown from 17 employees as of July 31,
1996 to 272 employees as of October 31, 1999. This growth will require us to
implement additional management information systems, to further develop our
operating, administrative, financial and accounting systems and controls and to
maintain close coordination among our technology development, accounting,
finance, marketing, sales, and customer service and support departments. If we
cannot effectively manage our expanding operations, we may not be able to
continue to grow, or may grow at a slower pace. Our failure to successfully
manage growth and to develop financial controls and accounting and reporting
systems or to add and retain personnel that adequately support our growth would
have a material adverse effect on our business and financial results.
We must expand our customer service and support department and it may be
difficult for us to do so
As we increase the number of colleges and universities we serve, we will
require greater numbers of development personnel and account service
representatives to ensure rapid and successful implementation of our technology
and services. For these positions, we seek individuals with postgraduate
degrees and we face great competition in hiring them. We may not be able to
increase the size of our customer service and support department on a timely
basis, or at all, and we may not be able to provide the high level of support
required by our customers, especially during the initial implementation and
development of our services. As of October 31, 1999, we had 111 individuals in
various departments servicing our customers. In the past we have not
experienced any difficulty providing customer support. Our failure to continue
to provide a high level of customer support would have a material adverse
effect on our business and financial results.
Our network infrastructure and computer systems may fail
The continuing and uninterrupted performance of our network infrastructure
and computer systems is critical to our success. Any system failure that causes
interruptions in our ability to provide service to our customers or their
students could reduce customer satisfaction and, if sustained or repeated,
would reduce the attractiveness of our technology and services to higher
education providers or their students. An increase in the number of online
campuses delivered through our servers could strain the capacity of our
software or hardware, which could lead to slower response times or system
failures. To the extent we do not successfully address any capacity
constraints, such constraints would have a material adverse effect on our
business and financial results.
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Our operations are dependent upon our ability to protect our computer
systems against damage from fire, power loss, telecommunications failures,
vandalism and other malicious acts, and similar unexpected adverse events. In
addition, the failure of our telecommunications provider or our network
backbone provider, which provides us with our Internet connection, to provide
the data communications capacity and network infrastructure in the time frame
we require could cause service interruptions or slower response times. Despite
precautions we have taken, unanticipated problems affecting our systems have
from time to time in the past caused, and in the future could cause,
interruptions or delays in the delivery of our products and services. Any
damage or failure that interrupts or delays our operations could have a
material adverse effect on our business and financial results.
Our network may be vulnerable to security risks
Our success depends on our ability to provide superior network security
protection and the confidence of our customers in that ability. Our system is
designed to prevent unauthorized access from the Internet and, to date, our
operations have not been affected by security breaks; nevertheless, in the
future we may not be able to prevent unauthorized disruptions of our network
operations, whether caused unintentionally or by computer "hackers." As such,
disruptions may result in liability to us and harm to our customers, and our
failure to prevent such disruptions would have a material adverse effect on our
business and financial results.
We depend on our key personnel and may have difficulty attracting and retaining
skilled employees
We depend on our key personnel and may have difficulty attracting and
retaining skilled employees. If we are unable to retain key personnel or
attract new personnel, it could have a material adverse effect on our business.
The loss of the services of any of our key personnel or our inability to
successfully attract and retain qualified personnel in the future would have a
material adverse effect on our business. Our future success depends on the
continued service of Robert N. Helmick, our President and Chief Executive
Officer, Charles P. Schneider, our Chief Operating Officer and Executive Vice
President, and Douglas H. Kelsall, our Chief Financial Officer and Treasurer.
We maintain a life insurance policy on Mr. Helmick which has a face value of
$1,000,000. The loss of the services of Mr. Helmick, Mr. Schneider or Mr.
Kelsall would have a material adverse effect on our business and financial
results. Our success also depends on our ability to attract, motivate and
retain highly-skilled managerial, sales and marketing, customer service and
support and technology development personnel. Competition for such personnel in
our industry is intense. We may not be able to retain our key employees or
attract, motivate and retain additional key employees in the future. Our
failure to retain these key employees would have a material adverse effect on
our business and financial results.
We may expand internationally and become subject to risks of international
operations
Although we are not actively pursuing international operations and
international operations do not currently comprise a significant portion of our
business, we have on a limited basis entered into agreements to provide our
products and services to colleges and universities outside of the United States
and may pursue additional international expansion in the future. Accordingly,
the risks of conducting business internationally may become more significant
for us. These risks include:
. unexpected changes in regulatory requirements, including the regulation
of Internet access;
. uncertainty regarding liability for information retrieved and replicated
in foreign countries;
. foreign currency fluctuations, which could result in reduced revenues and
increased operating expenses;
. tariffs and trade barriers;
. potentially longer payment cycles;
. difficulty in collecting accounts receivable;
. foreign taxes; and
. the burdens of complying with a variety of foreign laws and trade
standards.
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In increasing our international expansion, we would also be subject to
general geopolitical risks, such as political and economic instability and
changes in diplomatic and trade relationships, in connection with our proposed
international operations. The risks associated with any international
operations could materially and adversely affect our business and financial
results.
We must protect our intellectual property and proprietary rights
Our success depends, in part, on our ability to protect our proprietary
rights and technology, such as our trade and product names, and the software
included in our products. We rely on a combination of copyrights, trademarks,
trade secret laws, and employee and third-party nondisclosure agreements to
protect our proprietary rights. Despite our efforts to protect these rights,
unauthorized parties may attempt to duplicate or copy aspects of our services
or software or to obtain and use information that we regard as proprietary.
Policing unauthorized use of the software underlying our services is difficult,
and while we are unable to determine the extent to which piracy of our software
exists, software piracy in general will likely be a persistent problem. In
addition, the laws of many countries do not protect our proprietary rights to
as great an extent as do the laws of the United States. As a consequence,
effective trademark, service mark, copyright, and trade secret protection may
not be available in every country in which our products and services are made
available online. Our proprietary rights and technology may not be adequate,
and our competitors could independently develop similar rights and technology.
Our failure to meaningfully protect our intellectual property could have a
material adverse effect on our business and financial results.
We may from time to time encounter disputes over rights and obligations
concerning intellectual property. Although we believe that our intellectual
property rights are sufficient to allow us to market our existing services
without incurring liability to third parties, and we are not aware of any
disputes with third parties relating to competing intellectual property rights,
we might not prevail in such disputes. Failure to prevail in one or more such
disputes could impair our right to market our services, which, in turn, could
have a material adverse effect on our business and financial results.
To date, we have not been notified that our services infringe the
proprietary rights of third parties, but there can be no assurance that third
parties will not claim that our current or future services are infringing their
proprietary rights.
Any acquisitions or investments we make could be disruptive to our business,
have adverse accounting consequences or be dilutive to our investors
Although we have no present agreement or understanding relating to any
material acquisition or investment, from time to time we have had discussions
with companies regarding our acquiring, or investing in, their businesses. If
we buy a company, we could have difficulty in assimilating its operations, or
assimilating and retaining its key personnel. These difficulties could disrupt
our ongoing business and distract our management and employees. Also,
acquisitions may result in a variety of accounting charges which would increase
our reported expenses, including amortization of goodwill and the write off of
acquired in-process research and development. Furthermore, we may incur debt or
issue dilutive equity securities to pay for any future acquisitions or
investments. As a result, any future business acquisitions or investments could
have a material adverse effect on our business and financial results.
We must monitor and protect our Internet domain names
We currently hold various Internet domain names. Third parties may acquire
substantially similar or conceptually similar domain names that decrease the
value of our domain name and trademarks and other proprietary rights which may
hurt our business. Domain names generally are regulated by governmental
agencies and their designees. For example, in the United States, the National
Science Foundation has appointed Network Solutions, Inc. as the exclusive
registrar for the ".com," ".net," and ".org" generic domains. The
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regulation of domain names in the United States and in foreign countries is
subject to change. Governing bodies could appoint additional domain name
registrars or modify the requirements for holding domain names. Governing
bodies could also establish additional "top-level" domains, which are the
portion of a Web address that appears to the right of the "dot," such as "com,"
"gov" or "org." The relationship between regulations governing domain names and
laws protecting trademarks and similar proprietary rights is unclear. As a
result, we may not acquire or maintain exclusive rights to our domain names in
the United States or in other countries in which we conduct business.
We would lose revenues, incur significant costs and potentially lose customers
if our systems do not prove to be Year 2000 compliant
The Year 2000 issue is concerned with whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. The issue
arose because many computer programs were written using two digits rather than
four to represent the applicable year. Any computer programs or hardware that
have date-sensitive software or embedded chips may interpret a date ending in
"00" as the year 1900 instead of the year 2000. In addition, the year 2000 is a
leap year, which may not be recognized accurately. In addition to our
internally developed software, we use software and hardware developed by third
parties for both our network and internal information systems. An incorrect
date could result in failures of our systems or miscalculations causing
disruptions to our operations, including, among other things, an inability to
connect to the Internet, process transactions, send invoices or otherwise
engage in normal business activities. We have completed the testing of our
internal information technology and non-information technology systems. Based
on our Year 2000 assessment and confirmation by an outside firm specializing in
Year 2000 issues, we believe that our system, and those on which we rely, are
Year 2000 compliant. The most reasonably likely worst case scenario is a
systemic failure beyond our control such as prolonged telecommunications or
electrical failure. Such a failure could prevent us from operating our
customers' online campuses and online courses. The primary business risk, in
the event of such failure would include loss of revenue and customers. We are
also subject to the risk of failure of third-party providers to be Year 2000
compliant, in particular those third-party providers that provide local access
and long distance service. We rely on third party network infrastructure
providers to gain access to the Internet. If such providers experience business
interruptions as a result of their failure to achieve Year 2000 compliance, our
ability to provide Internet connectivity could be impaired. We have obtained
Year 2000 compliance certificates from all of our software vendors that provide
system components, all firms that provide network bandwidth, and all providers
of software development tools used in the creation of our product. These
vendors are in the process of reviewing and implementing their own Year 2000
compliance programs. In addition, we provide a warranty to our customers
regarding the Year 2000 compliance of our system, including our software and
the interfaces necessary to deliver courses over the Internet. If we were to
breach this representation, our customers would have the right to terminate
their contracts with us upon 30 days notice and could potentially bring claims
of mismanagement, misrepresentation or breach of contract; these claims and the
related litigation could be costly and time consuming to defend. Our inability
to timely correct, or to correct at all, a Year 2000 problem, would result in a
material adverse effect on our business and financial results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Year 2000 Issues."
We may need additional capital in the future and it may not be available on
acceptable terms, or at all
We expect the proceeds of this offering, together with cash generated from
operations and our current cash, cash equivalents and short term investments to
meet our working capital and capital expenditure requirements for at least the
next 12 months. However, after that time, we may need to raise additional funds
to fund our operations, to finance the substantial investments in equipment and
corporate infrastructure we will need for our planned expansion, to enhance
and/or expand the range of services we offer, to increase our promotional and
marketing activities, or to respond to competitive pressures and/or perceived
opportunities, such as investment, acquisition and international expansion
activities. Additional financing may not be available on terms favorable to us,
or at all. If adequate funds are not available when required or on acceptable
terms, our business and financial results could suffer.
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Without this offering, we believe that current cash on hand, funds available
under the bank line of credit, the bridge loan facility and the other sources
of liquidity are sufficient to fund our operations through at least
December 31, 1999. In order to fund our operations without the proceeds of this
offering, we would be required to raise additional capital through debt or
private equity financings, consistent with our historical practices.
Risks Relating to Our Industry
Online learning may not be broadly accepted by academics and educators
Through our relationships with educational institutions and educators we
understand that some academics and educators are opposed to online learning in
principle. They also have expressed concerns regarding the perceived loss of
control over the education process that can result from the outsourcing of
online campuses and courses. Some of these critics, particularly college and
university professors, have the capacity to influence the market for our
services, and their opposition could have a material adverse impact on our
business and financial results. Further, the growth and development of the
market for online learning has resulted in some concerns from the academic
community about the protection of intellectual property associated with course
content, which may impose additional burdens on companies offering online
learning. We are unaware of any legal action resulting from course content
being delivered over the Internet. The adoption of any additional laws or
regulations may impair the growth of online learning, which could have a
material adverse effect on our business and financial results.
The market for online learning in higher education is in an early stage and may
not continue to develop
The market for online learning is new and emerging. Although online learning
has been available for several years, it currently represents only a small
portion of the overall higher education market. Accordingly, our success
depends upon colleges and universities adopting online learning. Although we
have entered into contracts with some colleges and universities, these colleges
and universities may not continue to use the online learning products and
services we provide. Further, given their relatively early entry into the
market for online learning, the colleges and universities with which we have
contracts are likely to be less risk-averse than most colleges and
universities. Accordingly, the rate at which we have been able to enter into
contracts with colleges and universities in the past may not be indicative of
the rate at which we will be able to enter into contracts in the future. The
use of online learning may not become widespread and our services may not
achieve commercial success. In addition, colleges and universities that have
already invested substantial resources in other nontraditional methods of
instruction may be reluctant to adopt new methods that compete with their
existing offerings. Any failure of online learning to gain continuing market
acceptance would have a material adverse effect on our business and financial
results.
We operate in a highly competitive market and we may not have adequate
resources to compete successfully
The online learning market is quickly evolving and is subject to rapid
technological change. Although the market is highly fragmented with no single
competitor accounting for a dominant market share, competition is intense. Our
competitors vary in size and in the scope and breadth of the products and
services they offer. Competition is most intense from colleges' and
universities' internal information technology departments. Some colleges and
universities construct online learning systems utilizing in-house personnel and
creating their own software or purchasing software components from a vendor. We
also face significant competition from a variety of companies including:
. other companies which seek to offer a complete solution including
software and services;
. software companies with specific products for the college and university
market;
. systems integrators; and
. hardware vendors.
Other competitors in this market include a wide range of education and
training providers. These companies use video, cable, correspondence, CD-ROM,
computer-based training, and online training.
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We believe that the level of competition will continue to increase as
current competitors increase the sophistication of their offerings and as new
participants enter the market. Many of our current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do and may enter into strategic or commercial relationships with
larger, more established and well-financed companies. Certain competitors may
be able to secure alliances with customers and affiliates on more favorable
terms, devote greater resources to marketing and promotional campaigns and
devote substantially more resources to systems development than we can. In
addition, new technologies and the expansion of existing technologies may
increase the competitive pressures we face. Increased competition may result in
reduced operating margins, as well as loss of market share and brand
recognition. We may not be able to compete successfully against current and
future competitors, and competitive pressures we face could have a material
adverse effect on our business and financial results.
Our market is characterized by rapid technological change, and our services may
become obsolete or unmarketable
The market for our software and services is characterized by rapid
technological change, changes in customer demands and evolving industry
standards. The introduction of services embodying new technologies and the
emergence of new industry standards can render existing services obsolete and
unmarketable. To succeed, we must address the increasingly sophisticated needs
of higher education by improving our software and services to keep pace with
technological developments, emerging industry standards and customer
requirements. We may not be able to do so successfully.
Government regulations, including those relating to the Internet in general and
to our industry in particular, could adversely affect our business
Our operating results could be impaired if we become subject to burdensome
government regulation and legal uncertainties. We may be subject to government
laws and regulations, such as the Family Educational Rights and Privacy Act and
Alberta's Freedom of Information and Protection of Privacy Regulation. Our
violation of these statutes, or of any other law or regulation, could have a
material adverse effect on our business and financial results. In addition, it
is possible that a number of laws and regulations may be adopted with respect
to the Internet, relating to
. user privacy;
. pricing;
. content;
. copyrights;
. distribution; and
. characteristics and quality of products and services.
The adoption of any additional laws or regulations may decrease the
popularity or expansion of the Internet. A decline in the growth of the
Internet could decrease demand for our products and services and increase our
cost of doing business. Moreover, the applicability of existing laws to the
Internet is uncertain with regard to many issues including property ownership,
intellectual property, export of encryption technology, sales tax, libel and
personal privacy. Our business and financial results could be seriously harmed
by any new legislation or regulation of these types. There are an increasing
number of laws and regulations pertaining to the Internet. These laws and
regulations relate to liability for information received from or transmitted
over the Internet, online content regulation, user privacy, taxation and
quality of products and services. Moreover, the applicability to the Internet
of existing laws governing intellectual property ownership and infringement,
copyright, trademark, trade secret, obscenity, libel, employment, personal
privacy and other issues is uncertain and developing. We cannot predict the
impact, if any, that future regulation or regulatory changes may have on our
business.
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College and university accreditation standards could adversely affect our
business
Many colleges and universities are accredited by regional accreditation
organizations whose approval may be required for the college or university to
offer courses over the Internet. Any delay in, or failure to receive, such
approval could limit or prevent a college or university from using our
solution, which would adversely affect our business and financial results.
We are dependent on government funding of higher education
Federal and state governments provide various forms of direct and indirect
support for higher education, including guaranteed student loan programs as
well as direct subsidies and grants. Accordingly, most of the colleges and
universities we serve and intend to serve in the future depend substantially on
government funding. Thus, decreases or delays in government funding of higher
education could affect student enrollments and impede an institution's ability
to fund an online learning program. Any decrease or delay in government funding
could therefore have a material adverse effect on our business and financial
results.
In addition, we receive funds from the Federal government for work performed
under a grant. This revenue is anticipated to be less than 8% of total revenues
for 1999. We currently do not anticipate that revenue from government grants
will be a significant portion of our business.
Our success depends on maintenance and continued development of the Internet's
infrastructure
Our success depends, in large part, upon the maintenance of the Internet's
infrastructure with the necessary speed, data capacity and security, and timely
development of enabling products such as high speed modems, for providing
reliable Web access and services as well as improved content. We currently
depend on Web servers located in three commercial data centers, commonly known
as Web "server farms," to provide us a network backbone connection and are in
the process of increasing our number of Web server farms to five. Increases in
the number of users, frequency of use or bandwidth requirements may strain the
Internet's infrastructure and degrade the performance and reliability of the
Web. Furthermore, the Web has experienced a variety of outages and delays as a
result of damage to portions of its infrastructure, and any future outages or
delays could adversely affect our online campuses. In addition, delays in the
development or adoption of new standards and protocols that are designed to
handle increased levels of activity, could reduce the viability of the Web. The
infrastructure or complementary products or services necessary to maintain and
enhance the Web as a commercial medium may never be developed. If the necessary
infrastructure, standards or protocols or complementary products, services, or
facilities are not developed, or if the Web does not continue to develop as a
viable commercial medium, our business and financial results would be
materially and adversely affected. Even if such infrastructure, standards or
protocols or complementary products, services or facilities are developed, we
may be required to incur substantial expenditures in order to adapt our
services to changing or emerging technologies, which could have a material
adverse effect on our business and financial results.
If use of the Internet does not continue to grow, our business could be harmed
Our success is highly dependent on the continued growth in the general use
of the Internet. There can be no guarantee that the general use of the Internet
will continue to grow. Several factors, including concerns related to security,
cost and ease of use and access could limit future growth in Internet use,
which could materially and adversely impact our business and financial results.
Risks Relating to this Offering
You will experience immediate and substantial dilution in the book value of
your investment
Purchasers of common stock in this offering will incur immediate and
substantial dilution of $5.90 in the pro forma net tangible book value per
share of common stock from the assumed initial public offering price. Net
tangible book value represents the amount of our tangible assets less our total
liabilities. To the extent
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outstanding options and warrants to purchase common stock are exercised, there
may be further dilution to investors, because most of our outstanding options
and warrants have an exercise price below the initial public offering price. As
of September 30, 1999, 2,566,645 shares of our common stock were issuable upon
the exercise of outstanding stock options and warrants with a weighted average
exercise price of $4.41 per share.
After this offering, our executive officers, directors and 5% or greater
stockholders will still control all matters requiring a stockholder vote
Currently, our existing officers, directors and 5% or greater stockholders
and their affiliates, in the aggregate, beneficially own approximately 76.5% of
our outstanding capital stock. Upon consummation of this offering, this group
will continue to own a majority of our outstanding capital stock. As a result,
such persons, acting together, will have the ability to control the vote on all
matters requiring approval by our stockholders, including the election of
directors and approval of significant corporate transactions, and might act in
a manner inconsistent with the wishes of our other stockholders. This
concentration of ownership may have the effect of delaying, deferring or
preventing a change in control.
Future sales by our existing stockholders could adversely affect the market
price of our common stock
Approximately 10,331,000 shares of our common stock, including shares of
common stock issuable upon exercise of outstanding and vested options and
warrants, are eligible for resale after this offering immediately upon the
expiration of 180-day lock-up agreements, subject in many cases to the volume
limitations and other restrictions of Rule 144 under the Securities Act. Banc
of America Securities LLC may, in its sole discretion, release all or some of
the shares covered by these lock-up agreements. Sales of our common stock in
the public market following this offering could adversely affect the market
price of the common stock. See "Shares Eligible for Future Sale."
There has been no prior market for our stock, and our stock price is likely to
be highly volatile
Prior to this offering, there has been no public market for our common
stock. We cannot predict the extent to which investor interest in us will lead
to the development of an active trading market in our stock or how liquid that
market might become. The initial public offering price for the shares will be
determined by negotiations between us and the representatives of the
underwriters and may not be indicative of prices that will prevail in any
future trading market. The stock market has experienced extreme price and
volume fluctuations. The market prices of the securities of Internet-related
companies have been especially volatile. In the past, companies that have
experienced volatility in the market price of their stock have been the object
of securities class action litigation. If we were the object of securities
class action litigation, it could result in substantial costs and a diversion
of our management's attention and resources.
Our anti-takeover provisions could prevent a third party from acquiring your
shares at a premium to the market price
Various provisions of our certificate of incorporation, bylaws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so might be beneficial to you and our other stockholders. For example, our
board of directors will have the authority to issue up to 5,000,000 shares of
preferred stock. Further, without any further vote or action on the part of the
stockholders, the board of directors will have the authority to determine the
price, rights, preferences, privileges and restrictions of the preferred stock.
This preferred stock, if it is ever issued, may have preference over and harm
the rights of the holders of common stock. Although the issuance of this
preferred stock will provide us with flexibility in connection with possible
acquisitions and other corporate purposes, this issuance may make it more
difficult for a third party to acquire a majority of our outstanding voting
stock. Further, our directors may only be removed from office by the
affirmative vote of the holders of a majority of our capital stock, and the
removal must be for cause. Our certificate of incorporation provides that the
board of directors may fill vacancies or increase the size of the board. Also,
our bylaws do not allow stockholders to call a special meeting and place limits
on their ability to make proposals for stockholder action or nominations for
our board of directors.
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USE OF PROCEEDS
The net proceeds we will receive from the sale of the 4,500,000 shares of
common stock offered hereby are estimated to be $36,691,168, or $42,340,918 if
the underwriters' over-allotment option is exercised in full, after deducting
the estimated underwriting discount and offering expenses and assuming an
initial public offering price of $9.00 per share.
We intend to use the net proceeds from this offering as follows:
. approximately 30% for capital expenditures to increase our hosting
capacity and expand our infrastructure to accommodate our growth,
. up to $1,650,000 for repayment of outstanding indebtedness under our
bank line of credit, which currently has an outstanding balance of
$675,000 bearing interest at 11.25% and is due on January 14, 2000; and
. remaining proceeds will be used for working capital purposes, including
support sales and marketing activities, product development activities
and other expenses associated with our growth.
In addition, a portion of the net proceeds may also be used for the
acquisition of businesses, products, services or technologies that are
complementary to those of eCollege.com. Although we have from time to time had
discussions with companies in the online learning market regarding our
acquiring or investing in their businesses, we have no present agreement or
understanding relating to any material acquisition or investment. We have not
yet determined the amount of net proceeds to be used specifically for each of
the foregoing purposes. Accordingly, management will have significant
flexibility in applying the net proceeds of this offering. Pending these uses,
we intend to invest the net proceeds from this offering in short term,
investment grade, interest-bearing securities.
DIVIDEND POLICY
We have not declared or paid any cash dividends on our capital stock since
inception. We do not expect to pay any cash dividends in the foreseeable future
and pursuant to the terms of our line of credit we are prohibited from paying
dividends on our common stock. We currently intend to retain future earnings,
if any, to finance the expansion of our business.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999:
. On an actual basis, including the two-for-three reverse stock split of
our common stock and preferred stock;
. On a pro forma basis to reflect the automatic conversion of all
outstanding shares of Series A, B and C mandatorily redeemable,
convertible preferred stock into 4,150,402 shares of common stock upon
the completion of this offering; and
. On a pro forma as adjusted basis to reflect to the sale of 4,500,000
shares common stock offered hereby, at an assumed initial public offering
price of $9.00 per share, after deducting the estimated underwriting
discounts and commissions and offering expenses, and the application of
the net proceeds therefrom.
This table should be read together with the financial statements and notes
to those statements appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
September 30, 1999
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- -------- -----------
(Unaudited)
(In thousands, except share
data)
<S> <C> <C> <C>
Mandatorily redeemable convertible preferred
stock:
Series A, mandatorily redeemable, convertible
preferred stock, no par value; 616,000 shares
authorized, issued and outstanding, actual;
no shares authorized, issued or outstanding,
pro forma and pro forma as adjusted.......... $ 1,217 -- --
-------- -------- --------
Series B, mandatorily redeemable, convertible
preferred stock, no par value, 1,525,218
shares authorized, issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted..................................... 6,989 -- --
-------- -------- --------
Series C, mandatorily redeemable, convertible
preferred stock, no par value, 2,009,184
shares authorized, issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted..................................... 15,579 -- --
-------- -------- --------
Stockholders' equity:
Preferred stock, no shares authorized, issued
or outstanding, actual; $0.01 par value,
5,000,000 shares authorized, no shares issued
and outstanding, pro forma and pro forma as
adjusted..................................... -- -- --
Common stock, $.01 par value, 50,000,000
shares authorized; 5,211,993 shares issued
and outstanding, actual; 9,362,395 shares
issued and outstanding, pro forma; and
13,862,395 shares issued and outstanding, pro
forma as adjusted............................ 52 $ 94 $ 139
Additional paid-in capital.................... 533 24,276 60,922
Warrants and stock options.................... 4,323 4,323 4,323
Notes receivable.............................. (341) (341) (341)
Deferred compensation......................... (3,246) (3,246) (3,246)
Accumulated deficit........................... (22,287) (22,287) (22,287)
-------- -------- --------
Total stockholders' equity................... (20,966) 2,819 39,510
-------- -------- --------
Total capitalization....................... $ 2,819 $ 2,819 $ 39,510
======== ======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of September 30, 1999. We are
permitted, and in some cases obligated, to issue shares of
20
<PAGE>
common stock in addition to the common stock to be outstanding after this
offering. The following is a summary of these additional shares of common
stock:
. 1,880,126 shares that could be issued upon the exercise of options
outstanding as of September 30, 1999 at a weighted average exercise price
of $5.28 per share;
. 686,519 shares that could be issued upon exercise of outstanding warrants
as of September 30, 1999 at a weighted average exercise price of $2.00
per share;
. 666,667 shares that can be issued to our employees who elect to buy stock
in the future under our employee stock purchase plan;
. 1,440,583 shares that can be issued pursuant to our stock incentive plan;
and
. 30,000 shares pursuant to a warrant issued in connection with our line of
credit at an exercise price equal to the initial offering price of common
stock sold in this offering, assuming an offering price of $9.00 per
share. See "Description of Capital Stock--Warrants."
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
$2,819,177, or approximately $0.30 per share. Pro forma net tangible book value
per share represents the amount of tangible assets less total liabilities,
assuming the consummation of the bridge loan in October 1999, divided by the
number of shares of common stock outstanding, assuming conversion of all
outstanding shares of preferred stock into common stock. Without taking into
account any other changes in the net tangible book value after September 30,
1999, other than the sale of the shares offered hereby at an assumed offering
price of $9.00 per share, our pro forma net tangible book value as of September
30, 1999 would have been $39,510,345, or $2.85 per share. The pro forma net
tangible book value assumes that the proceeds to us, net of offering expenses
and underwriting discount, will be approximately $36.7 million. This represents
an immediate increase in net tangible book value to existing stockholders
attributable to new investors of $2.55 per share and the immediate dilution of
$6.15 per share to new investors. The following table illustrates this per
share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share.................... $9.00
Pro forma book value per share before this offering............... $0.30
Increase per share attributable to new investors.................. $2.55
-----
Pro forma net tangible book value per share after this offering.... $2.85
-----
Dilution per share to new investors................................ $6.15
=====
</TABLE>
The following table sets forth, on a pro forma basis as of September 30,
1999, the differences between existing stockholders and the new investors with
respect to:
(1) the number of shares of common stock purchased from us;
(2) the total consideration paid to us; and
(3) the average price paid per share by existing stockholders and by the new
investors purchasing shares of common stock in this offering, at an assumed
initial public offering price of $9.00 per share.
Underwriting discounts, commissions and other estimated offering expenses
have not been deducted.
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 9,362,395 68% $22,615,573 36% $2.42
New investors.............. 4,500,000 32% $40,500,000 64% $9.00
---------- --- ----------- --- -----
Total.................... 13,862,395 100% $63,115,573 100% $4.55
========== === =========== === =====
</TABLE>
The foregoing discussion and tables assume no exercise of the underwriters'
over-allotment option or of any outstanding stock options or warrants after
September 30, 1999.
As of September 30, 1999, there were options outstanding to purchase
1,880,126 shares of common stock at a weighted average exercise price of $5.28
per share, warrants outstanding to purchase 686,519 shares of common stock at a
weighted average exercise price of $2.00 per share, and 2,107,250 additional
shares reserved for future grants under our stock incentive plan and employee
stock purchase plan. In connection with our line of credit obtained in October
1999, we issued a warrant to purchase 30,000 shares of common stock at an
exercise price equal to the initial offering price of common stock sold in this
offering, assuming an offering price of $9.00 per share. To the extent that any
of these options or warrants are exercised, there will be further dilution to
new investors.
22
<PAGE>
SELECTED FINANCIAL DATA
The data should be read in conjunction with the financial statements and the
notes to such statements and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
prospectus. The selected financial data as of December 31, 1997 and 1998, for
the period from July 26, 1996 (inception) through December 31, 1996 and for the
years ended December 31, 1997 and 1998, is derived from our audited financial
statements included elsewhere in this prospectus. The balance sheet data as of
December 31, 1996 is derived from audited financial statements not included
elsewhere in this prospectus. The selected financial data at September 30, 1999
and for the nine months ended September 30, 1998 and 1999 is derived from
unaudited financial statements included elsewhere in this prospectus. The
unaudited financial statements include all adjustments, consisting only of
normal recurring adjustments which we consider necessary for the fair
presentation of our financial position and results of operations for these
periods. Operating results for the nine months ended September 30, 1999 are not
necessarily indicative of the results that we will experience for the entire
year. Historical results are not necessarily indications of the results to be
expected in the future. Please see Note 2 in the notes to financial statements
for the method of computing pro forma basic and diluted net loss from
continuing operations per share.
<TABLE>
<CAPTION>
Period from
July 26, 1996
(inception) Year Ended December Nine Months Ended
through 31, September 30,
December 31, -------------------- --------------------
1996 1997 1998 1998 1999
------------- --------- --------- --------- ---------
(Unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
Campus and course
development fees...... $ -- $ 628 $ 1,086 $ 657 $ 1,537
Student fees........... 22 400 579 384 1,379
----- --------- --------- --------- ---------
Total revenue.......... 22 1,028 1,665 1,041 2,916
Cost of revenue......... 110 528 2,065 1,218 4,881
----- --------- --------- --------- ---------
Gross profit (loss)..... (88) 500 (400) (177) (1,965)
Operating expenses:
Selling and marketing.. 25 106 3,394 1,933 4,756
General and
administrative........ 249 768 2,509 1,610 3,613
Product development.... 60 212 1,099 601 1,317
----- --------- --------- --------- ---------
Total operating
expenses.............. 334 1,086 7,002 4,144 9,686
----- --------- --------- --------- ---------
Net loss from
operations............. (422) (586) (7,402) (4,321) (11,651)
Other income (expense),
net.................... 18 (29) 112 122 286
----- --------- --------- --------- ---------
Net loss from continuing
operations............. $(404) $ (615) $(7,290) $(4,199) $(11,365)
===== ========= ========= ========= =========
Net loss from continuing
operations applicable
to common
stockholders........... $(404) $ (674) $(7,993) $(4,686) $(13,251)
===== ========= ========= ========= =========
Basic and diluted net
loss from continuing
operations per common
share.................. $ -- $ (0.16) $ (1.58) $ (0.93) $ (2.57)
========= ========= ========= =========
Weighted average common
shares outstanding--
basic and diluted...... -- 4,107,964 5,074,697 5,062,143 5,159,501
========= ========= ========= =========
Pro forma net loss from
continuing operations
per common share--basic
and diluted
(unaudited)............ $ (1.02) $ (0.60) $ (1.23)
========= ========= =========
Pro forma weighted
average common shares
outstanding--pro forma
basic and diluted
(unaudited)............ 7,120,122 7,012,711 9,276,421
========= ========= =========
</TABLE>
23
<PAGE>
The following table is a summary of our balance sheet data. The pro forma
column reflects the automatic conversion of all shares of our preferred stock
into common stock upon completion of this offering. The pro forma as adjusted
column also reflects our receipt of the estimated net proceeds of the 4,500,000
shares of common stock we are selling in this offering at an assumed initial
public offering price of $9.00 per share, after deducting estimated
underwriting discounts and expenses.
<TABLE>
<CAPTION>
December 31, September 30, 1999
----------------------- -------------------------------
Pro Forma
1996 1997 1998 Actual Pro Forma As Adjusted
------ ------ ------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
(Unaudited)
(In thousands)
Balance Sheet Data:
Cash and cash
equivalents............ $ 20 $ 208 $11,661 $ 2,264 $ 2,264 $38,955
Working capital......... (657) 58 9,577 (65) (65) 36,626
Total assets............ 269 748 13,660 7,817 7,817 44,508
Long-term notes payable
to related parties..... -- 231 -- -- -- --
Total liabilities....... 703 621 2,549 4,998 4,998 4,998
Mandatorily redeemable,
convertible preferred
stock.................. -- 1,029 19,649 23,785 -- --
Total stockholders'
equity (deficit)....... (434) (902) (8,539) (20,966) 2,819 39,510
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with
"Selected Financial Data" and the financial statements and notes attached to
those statements included elsewhere in this prospectus. This discussion
contains certain forward-looking statements that involve risks and
uncertainties. Please see "Risk Factors" elsewhere in this prospectus.
Overview
eCollege.com is a provider of technology and services that enable colleges
and universities to offer an online environment for distance and on-campus
learning. Our technology enables our customers to reach a large number of
additional students who wish to take online courses at convenient times and
locations. Our customers can also use our technology to supplement their on-
campus courses with an online learning environment.
We were founded and began delivering our services to the University of
Colorado in 1996. In 1997, we grew our customer base and revenue while
developing our technology to support substantial growth. In mid-1998, we
significantly increased our selling and marketing efforts, and have entered
into more than 110 new contracts since then. Similarly, we have invested, and
continue to invest, in expanding our service capabilities by expanding our
infrastructure and personnel. Our expenditures have exceeded our revenues since
our inception, and our losses have increased as a result of our accelerated
growth. We currently intend to continue to increase our operating expenses to
support anticipated growth, to fund increased sales and marketing, and to
enhance existing technology. As a result, we believe that we will incur
operating losses for at least the next 24 months. As a result, we will need to
obtain additional debt and/or equity financing to fund our operations and
anticipated growth.
As of October 31, 1999, we had 121 contracts covering over 150 individual
campuses. Since our inception our customers have purchased or ordered more than
2,000 online courses from us. For the Fall 1999 term, our customers have
approximately 12,000 student enrollments in online courses provided by us.
Revenue
We primarily generate revenue from three sources:
. an initial development and design services fee to build an online campus;
. development and design services fees to build online courses; and
. per student fees for each enrollment in an online course.
Historically, we offered an online campus bundled with a minimum number of
courses, as well as maintenance and support. In September 1999, based largely
on ongoing discussions with our current and prospective customers, we made the
strategic decision to unbundle our product and service offerings. We believe
that our unbundled services will attract a greater number of prospective
customers by allowing them to customize our offering to meet their needs.
Accordingly, while we continue to offer our online campus product either alone
or bundled with online courses, we have recently begun to generate revenues
from additional sources, including:
.maintenance fees to manage the online campus during the term of the
agreement; and
.service fees, including online campus implementation, faculty training and
support and technical consulting services.
We typically enter into multi-year contracts with colleges and universities
to provide our online learning products and services. Each contract is based on
our standard form, customized for each college or university,
25
<PAGE>
and specifies the products and services we will provide. These contracts
specify the online campus purchased, the initial number of online courses
purchased as well as the price for additional online courses and services. Our
contracts do not require customers to guarantee any minimum number of student
enrollments or to commit to developing any courses beyond the initial courses
covered by the contract. The initial fee is generally fixed, covering
development and design of the online campus and the initial courses purchased.
We recognize our initial fee as the online campus, course development and
design services are performed. In addition, customers are charged a per student
fee for each student enrolled in an online course or on-campus class using
online course supplements. Such fees are recognized ratably over the duration
of the course. Subsequent incremental fees for additional courses and services
are recognized as the course development and design services are performed. Our
contracts typically have a term of three to five years.
Our business model is based upon a number of factors, including increasing
the acceptance of online learning among colleges and universities, adding new
customers, developing additional courses for our existing customers, increasing
student enrollment in online courses, and selling new products and services to
our clients. From our inception through September 30, 1999, the majority of our
revenue has been generated by development and design services fees for building
campuses and courses, and, to a lesser extent, per student fees. We expect that
the development revenue stream will continue to grow, but that the per student
fees will become a larger percentage of total revenue as the number of online
courses offered by our customers and the numbers of students in those courses
continue to increase. We also expect service and maintenance fees will commence
and increase as we develop new online campuses. Revenue is recognized primarily
using the percentage of completion method. Our use of this method requires
management to estimate the degree of completion of each contract. To the extent
the original estimate proves to be inaccurate, the revenues and gross profit
reported for the periods during which work on the contract is ongoing may not
accurately reflect the final results of the contract. Any anticipated losses on
contracts are charged to earnings when identified.
In October 1998 we were awarded a grant of $1.9 million by the National
Institute of Standards and Technology, or NIST, a department of the U.S.
Department of Commerce. We are entitled to receive payments under the grant as
we perform research related to automated course content creation and
organization, and tutoring delivery systems. Maximum payments under the NIST
grant are $713,000 in 1999, $583,000 in 2000 and $583,000 in 2001. As of
September 30, 1999, we had received aggregate payments of $159,170 from the
NIST grant. Pursuant to the terms of the NIST grant, work must be performed at
a prescribed format and pace. We believe we will be able to perform under the
terms of the NIST grant, however, there is no assurance we will continue to
receive payments under the NIST grant. We do not intend that revenue from such
grant will constitute a significant portion of our revenue in the future. We
may apply for other grants in the future, although we have no present plans to
do so.
Cost of Revenue
Our cost of revenue consists primarily of employee compensation and benefits
for development, course design, account management, technical personnel, and
sales commission. We also allocate a portion of our occupancy and
infrastructure costs to cost of revenue. To continue to execute our business
plan, we intend to expand our operations, including our marketing, technical,
operational and customer support resources.
Historically, our sales commissions have been paid when a new contract is
signed, and when a customer is invoiced for the development of courses in
excess of the original number of courses purchased. Beginning in the year 2000,
sales commissions will be paid as the development work is completed and the
student fees are earned to more closely match the revenue recognized. As we
implement our grant program, cost of revenue will include costs such as faculty
stipends, technology and travel funds to the extent such costs relate to the
development of online courses. We have also hired personnel and made
investments in our infrastructure to support future growth which has resulted
in a cost of revenue that exceeds current revenue. As most of our costs are
fixed and based on anticipated revenue levels, we expect revenue will exceed
our cost of revenue in the future. We experienced a negative gross margin of
$1,965,171 for the nine months ended September 30, 1999 as compared
26
<PAGE>
to a negative gross margin of $177,163 for the nine months ended September 30,
1998. The reduction in margin over the prior period is due to an increase in
the amount of commissions, promotional and other contract pricing decreases for
campus and course development, and an increase in production staff in
anticipation of increased development activity.
Grant Program
We recently implemented a $10 million dollar grant program designed to
assist new and existing customers in increasing the number of online courses
they offer using our products and services and the number of students pursuing
online degrees. The grants will be used by our customers to increase marketing
of our customers' online courses, increase the online teaching skills of our
customers' educators, as well as fund the purchase of computer equipment to
allow our customers to facilitate online education. Grants are awarded, at our
discretion, to institutions based on demonstrated commitment to a quality
online degree program, the number of current and potential students, the
college or university's unique approach to online learning and other factors.
The grant will consist of both marketing funds and educational support
funds. Marketing funds will be recorded as marketing expenses over the period
that our customers earn these funds. A portion of the educational support funds
may be considered contract costs. If contract costs, including appropriate
educational support funds, are in excess of the revenue to build a customer's
campus or courses, such excess will be expensed as a contract loss in the
quarter in which the grant is awarded. We expect that in certain cases, the
award of grants will result in such losses. The grant program has been
structured to be awarded in the fourth quarter of 1999. Since we expect that
the award of certain grants will result in estimated contract losses, we expect
to record estimated contract losses associated with these programs in our
fourth quarter of 1999.
Selling and Marketing
The principal components of our selling and marketing expenses are employee
compensation and benefits, advertising and travel. Other significant components
include marketing collateral expenses, consulting fees, and related occupancy
and depreciation expenses. As revenue increases, we expect total selling and
marketing expenses to increase but to decrease as a percentage of revenue.
General and Administrative
The principal component of our general and administrative expenses is
employee compensation and benefits. Other components include facilities,
depreciation, communications, professional and consulting fees, and deferred
compensation. As operations increase, we expect total general and
administrative expenses to increase but to decrease as a percentage of
revenues.
Product Development
Product development expenses consist primarily of employee compensation and
related benefits for product development personnel and related depreciation,
occupancy costs and consulting fees associated with developing, maintaining,
and improving our product.
Results of Continuing Operations
We have incurred significant losses since our inception, resulting in an
accumulated deficit of $9,036,572 as of December 31, 1998, and $22,287,536 as
of September 30, 1999. We intend to continue to make investments in technology,
which may involve the development, acquisition or licensing of technologies
that complement or augment our existing services and technologies. We also
intend to continue to invest heavily in marketing activities. Accordingly, we
expect to incur significant operating losses for the foreseeable future.
Seasonality
Due to the seasonality inherent in the academic calendar which typically
consists of three academic terms, as well as our customers' plans for online
campus and course development, we experience fluctuations in our quarterly
results. We typically have lower revenue in the summer academic term which
spans the second and third calendar quarters. Our operating expenses are
relatively fixed in nature and seasonal fluctuations in revenue will result in
seasonal fluctuation in our operating results. As a result, quarter-to-quarter
financial results are not directly comparable.
In view of the rapidly evolving nature of our business and our limited
operating history, we believe that our revenue and other operating results
should not be relied upon as indications of future performance.
27
<PAGE>
Nine Months Ended September 30, 1999 and 1998
Revenue. Revenue increased to $2,915,812 for the nine months ended September
30, 1999 from $1,040,596 for the nine months ended September 30, 1998.
Increases in revenue are due to increased student enrollment in online courses,
as well as an increased number of online campuses and courses developed.
Student fees represented $1,378,880 and $383,691 of total revenue for the nine
months ended September 30, 1999 and 1998, respectively. Campus and course
development fees represented $1,536,932 and $656,905 of total revenue,
respectively, for these same periods. Revenue from the NIST grant was $213,621
for the nine months ended September 30, 1999 and is included in development
revenue.
Cost of Revenue. Cost of revenue increased to $4,880,983 for the nine months
ended September 30, 1999 from $1,217,759 for the nine months ended September
30, 1998. Our cost of revenue increased primarily due to increased personnel
costs, depreciation expense and sales commissions, which historically have been
earned when a new contract is signed and when a customer is invoiced for the
purchase of courses in excess of the original number of courses purchased.
Beginning in 2000, sales commissions will be paid as the development work is
completed and the student fees are earned to more closely match the revenue
recognized. These costs were approximately 167% and 117% of total revenue for
the nine months ended September 30, 1999 and 1998, respectively. Our operations
and account management personnel increased to 138 at September 30, 1999 from 58
at September 30, 1998.
Selling and Marketing. Selling and marketing expenses increased to
$4,756,319 for the nine months ended September 30, 1999 from $1,933,201 for the
nine months ended September 30, 1998. The increase was primarily due to
increases in the number of selling and marketing personnel, additional trade
show participation and other promotional activities, and increases in travel
expense. Our selling and marketing personnel increased to 44 at September 30,
1999 from 31 at September 30, 1998. The increase in selling and marketing
expenses also reflects an increase in advertising to $870,537 for the nine
months ended September 30, 1999 from $457,425 for the nine months ended
September 30, 1998.
General and Administrative. General and administrative expenses increased to
$3,613,126 for the nine months ended September 30, 1999 from $1,609,960 for the
nine months ended September 30, 1998. The increase was primarily due to an
increase in the number of general and administrative personnel to 44 at
September 30, 1999 from 21 at September 30, 1998. In addition, outside
consulting, professional fees, recruiting fees and travel expenses increased,
reflecting our expanded business activities.
Through September 30, 1999, we recorded aggregate deferred compensation
totaling approximately $4.1 million in connection with the grant of options to
employees. During the first nine months of 1999, we recorded aggregate deferred
compensation in the amount of approximately $2.7 million. The deferred charge
is being amortized over the vesting period of such options, which ranges from 2
to 3 years. Of the total deferred compensation, approximately $200,000 was
amortized in the year ended December 31, 1998, and approximately $694,000 was
amortized in the nine months ended September 30, 1999. We expect approximate
future per quarter amortization related to deferred compensation to be as
follows:
<TABLE>
<CAPTION>
Quarters
in the
Year
Ended
December
31, Quarterly Amount
-------- --------------------
<S> <C>
1999 $325,000
2000 $340,000 -- $350,000
2001 $280,000 -- $340,000
2002 $ 80,000 -- $200,000
</TABLE>
The majority of compensation expense related to such options is included in
general and administrative expense. However, a portion of such compensation
expense has been and will continue to be allocated to cost of revenue, selling
and marketing expense, and product development expense as appropriate.
Product Development. Product development expenses increased to $1,316,513
for the nine months ended September 30, 1999 from $600,843 for the nine months
ended September 30, 1998. The increase was primarily due to an increase in the
number of product development personnel to 19 at September 30, 1999 from 7 at
September 30, 1998.
28
<PAGE>
Other Income (Expense). Other income (expense), which consists primarily of
interest earnings on our cash and cash equivalents, increased to $286,242 for
the nine months ended September 30, 1999 from $121,834 for the nine months
ended September 30, 1998, primarily due to the completion of a private
placement of equity securities in February 1999, which provided net proceeds of
$14,188,955, of which $11,938,955 was received as of December 31, 1998.
Net loss. Our net loss applicable to common stockholders increased to
$13,250,964, or $2.57 per share, from $4,685,889, or $0.93 per share, for the
nine months ended September 30, 1999 and 1998, respectively. The net loss
applicable to common stockholders includes the impact of dividends and
accretion related to our mandatorily redeemable convertible preferred stock.
Our pro forma net loss from continuing operations applicable to common
stockholders, which assumes the conversion of all outstanding shares of
preferred stock, increased from $0.60 per share to $1.23 per share for the nine
months ended September 30, 1999 and 1998, respectively.
Years Ended December 31, 1998, 1997 and 1996
Revenue. Revenue increased to $1,665,069 for 1998 from $1,028,180 for 1997
and $22,464 for 1996. Increases in revenue are due to an increased number of
online campuses and courses developed, as well as increased student enrollment
in online courses. Campus and course development fees represented 65%, 61% and
0% of 1998, 1997 and 1996 total revenue, respectively. Per student fees
represented 35%, 39% and 100%, respectively, of total revenue. We expect that
per student fees will account for a greater percentage of total revenue in the
future.
Cost of Revenue. Since 1996, the growth in the number of online campuses
and courses has resulted in increased cost of revenue. Cost of revenue
increased to $2,064,909 for 1998 from $528,090 for 1997 and $109,974 for 1996.
Our cost of revenue increased in 1998 and 1997 primarily due to increased
personnel costs, depreciation expense and sales commissions. Our operations and
account management personnel increased to 65 from 21 and 5 at December 31,
1998, 1997 and 1996, respectively. During 1998, cost of revenue was
approximately 124% of total revenue. We have made investments in people and
technology that will support higher revenue than our historical levels, which
has resulted in a cost of revenue that exceeds current revenue. Since most of
our costs are fixed and based on anticipated revenue levels, we believe our
revenue will exceed our cost of revenue in the future.
Selling and Marketing. Selling and marketing expenses increased to
$3,394,000 for 1998 from $106,026 for 1997 and $25,474 for 1996. The increases
in 1998 and 1997 were primarily due to increases in the number of sales and
marketing personnel, which numbered 42, 5 and 0 at December 31, 1998, 1997 and
1996, respectively. In addition, we increased advertising expenditures to
$1,096,843 for 1998 from $18,000 for 1997.
General and Administrative. General and administrative expenses increased to
$2,509,496 for 1998 from $767,812 for 1997 and $248,884 for 1996. The increases
in 1998 and 1997 were primarily due to increases in the number of general and
administrative personnel, which numbered 19, 7 and 6 at December 31, 1998, 1997
and 1996, respectively. In addition, outside consulting and professional fees,
recruiting fees and travel expenses increased, reflecting our expanded business
activities.
During 1998, we recorded aggregate deferred compensation in the amount of
approximately $1.4 million in connection with the grant of certain stock
options during this period. Amortization of deferred compensation totaled
approximately $200,000 during this period. No such deferred compensation was
recorded prior to January 1, 1998.
The majority of compensation expense related to such options is included in
general and administrative expense. However, a portion of such compensation
expense has been and will continue to be allocated to selling and marketing
expense and research and development expense as appropriate.
Product Development. Product development expenses increased to $1,099,000
for 1998 from $212,052 for 1997 and $60,207 for 1996. The increases in 1998 and
1997 were primarily due to ongoing development and improvement of our current
online learning solutions, as well as increases in the number of product
development personnel, which numbered 28, 8 and 2 at December 31, 1998, 1997
and 1996, respectively.
29
<PAGE>
Other Income (Expense). Other income, which is comprised primarily of
interest earnings on our cash and cash equivalents, was $149,308 for 1998,
$8,993 for 1997 and $27,001 for 1996. We completed private placements of equity
securities in June 1997, February 1998 and late December 1998, which provided
net proceeds of $970,150, $5,978,000 and $11,938,955, respectively. Interest
expense from notes payable and a bridge loan was $36,819 in 1998, $37,990 in
1997 and $9,186 in 1996. The notes payable and the bridge loan were repaid in
1998.
Net loss. Our net loss applicable to common stockholders increased to
$7,993,023, or $1.58 per share for 1998, from $610,050, or $0.15 per share, for
1998 and 1997, respectively. The net loss applicable to common stockholders
includes the impact of dividends and accretion related to our mandatorily
redeemable convertible preferred stock.
Income Taxes
Income taxes will consist of federal, state and local taxes, when
applicable. We expect significant net losses for the forseeable future that
should generate net operating loss carryforwards. However, utilization of such
prospective net operating loss carryforwards may be subject to certain
limitations. In addition, income taxes may be payable during this time due to
operating income in certain tax jurisdictions. If we achieve operating profits
and the net operating loss carryforwards have been exhausted or have expired,
we may experience significant tax expense. We have recorded no provision or
benefit for federal and state income taxes because we incurred net operating
losses from inception through September 30, 1999. As of December 31, 1998 we
had approximately $7,800,000 of federal and state operating net operating loss
carryforwards available to offset future taxable income which expire in varying
amounts beginning in 2011. We have established a valuation allowance against
the entire amount of our deferred tax asset because our management has not been
able to conclude that it is more likely than not that we will be able to
realize the deferred tax asset, due primarily to our history of operating
losses.
Liquidity and Capital Resources
Our cash and cash equivalents increased from $208,346 at December 31, 1997
to $11,661,186 at December 31, 1998. This net change occurred primarily because
we raised $18,750,020 in proceeds from the sale of equity securities and
incurred a net loss of $7,289,847 during 1998. At September 30, 1999, we had
$2,263,773 in cash and cash equivalents. The decrease from December 31, 1998
reflects cash used to fund our operations during the nine months then ended,
offset by $2,250,000 in cash from sales of preferred stock.
Our investment in property and equipment for the twelve months ended
December 31, 1998 was $1,663,128 and $2,117,304 for the first nine months of
1999. Installation of network infrastructure equipment, equipment for new
employees and leasehold improvements related to expansions accounted for most
of our capital expenditures during these periods. We intend to continue to make
investments in these types of equipment and property, although we have no
material commitments to do so.
We have financed the majority of our operations through the issuance of
equity securities. We have sold common stock and preferred stock generating
aggregate proceeds of $22,144,049 from inception through September 30, 1999.
In October 1999, we entered into a $2.5 million line of credit with a bank.
Pursuant to this bank line of credit, $1,650,000 will be immediately available.
The remaining $850,000 will be available only if we raise additional private
equity in a manner acceptable to the lender. The bank line of credit will
mature and any amounts borrowed thereunder will be due on January 14, 2000,
unless extended to February 13, 2000 pursuant to the terms of the bank line of
credit. If we raise a minimum of $40,000,000 in gross proceeds in equity prior
to the maturity date, the bank line of credit will be converted into a
revolving line of credit with a maturity date of November 1, 2000. The bank
line of credit contains covenants limiting our ability to obtain additional
debt financing and to enter into mergers and acquisitions. The bank line of
credit is secured by all of our assets. As of September 30, 1999, there were no
amounts outstanding under the bank line of credit.
In connection with the bank line of credit and assuming an offering price of
common stock pursuant to this offering of $9.00 per share, we provided the
lender with a warrant to purchase 30,000 shares of our common stock that have
been calculated to have a value of $173,000. The exercise price of the warrant
will be equal to
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the offering price of common stock sold in connection with this offering.
Additionally, the warrant is exercisable into 36,667 shares if we complete an
initial public offering at a price of greater than $12.00 per share and 46,667
shares if we complete an initial public offering at a price of greater than
$16.50 per share. The warrant is also exercisable into additional shares if the
maturity of the bank line of credit is extended beyond January 14, 2000. If the
bank line of credit is converted into a revolving line of credit and the
maturity date of the facility is thereby extended, we will expense the value of
the warrants over the life of the facility. If the maturity date of the bank
line of credit is not extended, the warrant expense will be recorded in the
fourth quarter of 1999. The bank line of credit bears interest at an adjustable
rate of prime plus 2.75%, which is currently 11.25%, and the revolving line of
credit will bear interest at an adjustable rate of prime plus 1.25%.
In November 1999, we received a commitment for a subordinated bridge loan
facility from some of our current institutional investors. The facility
described in the commitment will make available $2 million of borrowings for
working capital purposes. The facility would be subordinated to the existing
bank line of credit. Borrowings under the facility would bear interest at a
fixed annual rate of 11%, and the borrowings would be secured by a second lien
on all of our assets. The borrowings would mature upon the earlier of the
closing of an equity financing in excess of $10 million or May 31, 2000. The
facility also provides for the issuance of warrants for a maximum of 150,000
shares of our common stock to the lenders. Warrants would be issued only upon
our draw under the facility, in the amount of one warrant for each $20 drawn.
The warrants would be for a three year term from the date of the related draw,
and will have an exercise price of $9.00 per share. Such warrants, if any, will
be valued on the date of issuance, and would be amortized over the term of the
borrowing as additional interest expense.
Without this offering, management believes that current cash on hand, funds
available under the bank line of credit, bridge loan facility and other sources
of liquidity are sufficient to fund our operations through at least December
31, 1999. As noted above, any amounts borrowed under the bank line of credit
are due January 14, 2000 unless extended to February 13, 2000 pursuant to the
terms of the bank line of credit, and amounts drawn on the bridge loan are due
on May 31, 2000, or earlier. In order to fund our operations beyond December
31, 1999, without this offering, we would be required to raise additional
capital through debt or private equity financings, consistent with our
historical practices.
We expect the proceeds of this offering, together with cash generated from
operations and our current cash, cash equivalents and short term investments to
meet our working capital and capital expenditure requirements for at least the
next 12 months. Beyond the next 12 months, we will need to obtain additional
debt and/or equity financing to fund our operations and anticipated growth.
Although there can be no guarantee, we believe such funds will be available to
us.
Year 2000 Issues
The Year 2000 issue is concerned with whether computer systems will properly
recognize date-sensitive information when the year changes to 2000. The issue
arose because many computer programs were written using two digits rather than
four to represent the applicable year. Any computer programs or hardware that
have date-sensitive software or embedded chips may interpret a date ending in
"00" as the year 1900 instead of the year 2000. In addition, the year 2000 is a
leap year, which may not be recognized accurately. This could result in system
failures or miscalculations causing disruptions of operations for any company
using such computer programs or hardware, including, among other things, an
inability to connect to the Internet, process transactions, send invoices or
engage in normal business activities. As a result, many companies and
individuals must upgrade or replace their computer systems to avoid "Year 2000"
issues.
The software and hardware we use to manage our business has substantially
all been purchased or developed by us within the last 30 months. While this
does not uniformly protect us against Year 2000 exposure, we believe that our
information technology is not based upon "legacy" hardware and software
systems. "Legacy system" is a term often used to describe hardware and software
systems that were developed
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in previous decades when there was less awareness of Year 2000 issues.
Generally, hardware and software design within the current decade, and the past
several years in particular, has given greater consideration to Year 2000
issues. All of the software code we have internally developed to manage our
network and to develop courses, for example, is written with four digits to
define the applicable year.
We have completed the process of testing our internal information technology
and non-information technology systems. Internal information technology
includes our production and operational software and hardware. Non-information
technology refers to elements outside our operations and production
environment. We have a dedicated Year 2000 project manager and our own
personnel have performed all of the testing we have completed. Our initial
testing produced no results that would lead us to believe such software is not
Year 2000 compliant. Nevertheless, we may experience material unexpected costs
caused by undetected errors or defects in the technology used in our systems.
To confirm our results, we retained an outside firm specializing in Year 2000
issues. The outside firm found no material non-compliant systems operated by
us.
In addition to our internally developed software, we use software and
hardware developed by third parties both for our network and internal
information systems. We may be affected by Year 2000 issues related to non-
compliant information technology ("IT") systems or non-IT systems operated by
third parties. We have conducted testing of such third-party software and
hardware to determine Year 2000 compliance. Our testing included over 200 check
points and has produced no results that would lead us to believe such software
is not Year 2000 compliant. In addition, we have completed the process of
obtaining certifications from our key vendors to ensure that their hardware and
software is Year 2000 compliant. Based on our initial evaluation of our list of
material software and hardware providers, we believe that these providers are
presently compliant or are reviewing and implementing their own Year 2000
compliance programs. We intend to work with these providers to address the Year
2000 issue and continue to seek assurances from them that their products are
Year 2000 compliant.
We rely on third party network infrastructure providers to gain access to
the Internet. We also rely on other third party providers such as utilities who
provide electricity to our physical facilities. If such providers experience
business interruptions as a result of their failure to achieve Year 2000
compliance, our ability to provide Internet connectivity, for example, could be
impaired, which could have a material adverse effect on our business, results
of operations and financial condition.
Moreover, our users' success in maintaining Year 2000 compliance is also
significant to our ability to generate revenue and execute our business plan.
Interruptions in our users' services and on-line activities caused by Year 2000
problems could have a material adverse effect on our revenue.
We have completed our Year 2000 compliance program, including any necessary
remediation measures. Other than the cost of the outside consulting firm and
internal compliance costs, which were approximately $90,000, we have not
incurred any significant expenses to date and we are not aware of any material
costs associated with our anticipated Year 2000 efforts. Costs or other amounts
incurred in connection with Year 2000 issues have been expensed or will be
expensed as they occur. We have obtained written Year 2000 compliance
certificates from all of our software vendors that provide system components,
all firms that provide network bandwidth, and all providers of software
development tools used in the creation of our product. All of these vendors
have indicated that they are Year 2000 compliant. However, if we, a significant
number of our users, our providers of hardware and software or our third-party
network or utility providers fail to remedy any Year 2000 issues, we would
experience a material loss of revenue that could materially adversely affect
our business, results of operations and financial condition. We would consider
an interruption in our ability to provide our services to be the most likely
result of any failure by us, or failure by the third parties upon whom we rely,
to achieve Year 2000 compliance. Presently, we are unable to reasonably
estimate the duration and extent of any such interruption, or quantify the
effect it may have on our future revenue. In addition, we provide a warranty to
our customers regarding the Year 2000 compliance of our system, including our
software and the interfaces necessary to deliver courses over the Internet. If
we were to breach this representation, our customers would have the right to
terminate their contracts with us upon 30 days notice. To the extent that our
assessment is
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finalized without any additional material non-compliant IT system operated by
us or by third party vendors, the most reasonably likely worst case scenario is
a systemic failure beyond our control, such as prolonged telecommunications or
electrical failure. Such failure could prevent us from operating our business
and prevent users from accessing our customers' online campuses and courses.
The primary business risk in the event of such failure, would include, but not
be limited to, loss of revenues and loss of customers. We have developed a
contingency plan to ensure the continuity of our core business processes in the
event of a Year 2000-related failure of our systems and to mitigate any
interruption in our services. The contingency plan includes an analysis of the
business operations, communications requirements, staff availability, plan
execution authorities and triggers, and plan process. The plan focuses on but
is not limited to the most complicated recovery situation. That plan includes a
determination of the critical core processes that would be at risk during a
system failure. The plan prioritizes the areas where resources should be
applied. The costs of developing the plan have not been material. Although
future costs are difficult to estimate, we do not currently expect that such
costs will be material.
Quantitative and Qualitative Disclosures about Market Risk
Market risk represents the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
market prices and rates. We are, or may become, exposed to market risk in the
areas of changes in United States interest rates and changes in foreign
currency exchange rates as measured against the United States Dollar. These
exposures are directly related to our normal operating and funding activities.
Historically and as of September 30, 1999, we have not used derivative
instruments or engaged in hedging activities.
Interest Rate Risk
We manage interest rate risk by investing excess funds in cash equivalents
and short-term investments bearing variable interest rates, which are tied to
various market indices. As a result, we do not believe that near-term changes
in interest rates will result in a material effect on our future earnings, fair
values or cash flows.
Foreign Currency Risk
We may enter into contracts where we pay or a third party pays us in a
foreign currency. This would expose us to changes in exchange rates. Changes in
the foreign exchange rates may positively or negatively affect our financial
position, results of operations or cash flows. We do not believe that near-term
changes in exchange rates will result in a material effect on future earnings,
fair values or cash flows, and therefore, have chosen not to enter into foreign
currency hedging instruments. There can be no assurance that such an approach
will be successful, especially in the event of a significant and sudden decline
in the foreign exchange rates.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," which provides guidance on
accounting for the cost of such software. SOP No. 98-1 is effective for
financial statements for fiscal years beginning after December 15, 1998. The
adoption of SOP No. 98-1 did not have a material impact on our 1999 financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). We are required to adopt
SFAS No. 133 in the year ended December 31, 2001. SFAS No. 133 establishes
methods of accounting for derivative financial instruments and hedging
activities related to those instruments as well as other hedging activities. To
date, we have not entered into any derivative financial instruments or hedging
activities.
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BUSINESS
Overview
eCollege.com is a provider of technology and services that enable colleges
and universities to offer an online environment for distance and on-campus
learning. Our software and services allow colleges and universities to
outsource the creation, launch, management and support of an online education
platform. Our technology and services consist of online campuses, courses,
course supplements and support services including design, development,
management and hosting services, as well as ongoing administration, faculty and
student support. We can create and deliver a complete online campus, including
training of faculty and administration, typically in 60 business days. We
charge our customers an upfront fee for creating an online campus, and for
developing each course. In addition, we charge a per student fee for each
student enrolled in a course utilizing our technology and services, and ongoing
fees for maintenance, support and faculty training. Our technology enables our
customers to reach a large number of additional students who wish to take
online courses at convenient times and locations. Our customers can also use
our technology to supplement their on-campus courses with an online learning
environment.
As of October 31, 1999, we had 121 contracts covering over 150 individual
campuses. Since our inception our customers have purchased or ordered more than
2,000 online courses from us. For the Fall 1999 term, our customers have
approximately 12,000 student enrollments in online courses provided by us.
Market Opportunity
The market for higher education is large and growing. The U.S. Department of
Education estimates that more than $200 billion is spent annually in the higher
education market and that more than 14.5 million students were enrolled in
colleges and universities in 1998. We believe that a growing demand for skilled
labor, a larger population of potential students and the economic value of
post-secondary education to students will continue to drive demand for higher
education over the next decade. Moreover, a change in demographics has resulted
in a greater percentage of older students. The U.S. Department of Education
estimated that for 1996, adults over 24 years of age comprised approximately
6.1 million, or 42.7%, of the students enrolled in higher education programs.
The U.S. Bureau of Census estimates that approximately 75% of students over the
age of 24 work while attending school. This growing population of older
students has caused colleges and universities to alter their approach to
traditional education to meet the different needs of this population.
The Internet's universal accessibility and real-time interactive nature make
it an ideal platform for distance learning and for providing online course
supplements for on-campus classes. Accordingly, distance learning has become a
fast growing segment of the education marketplace. Online learning allows
students to participate in courses at times that are convenient for them and
from a variety of geographic locations, including satellite campuses or their
own homes. Colleges and universities are experiencing increased demand for
online learning and are increasingly recognizing that online learning allows
them to reach more students, presenting additional revenue opportunities.
International Data Corporation also estimates that approximately 85% of higher
education institutions will offer distance learning courses by 2002 and that
the number of students taking such courses will increase by more than 30% per
year through 2002. In addition, educators are increasingly using the Internet
to supplement their on-campus course offerings.
Despite this projected growth, colleges and universities face several
challenges in delivering high quality online courses. Effective online learning
requires that students receive a learning experience of comparable quality,
content and student/faculty interaction to an on-campus education. A college or
university may attempt to develop online education internally, creating its own
software or purchasing software components from a vendor. In addition, we
believe that many colleges and universities have found internally developed
products and services to be time-consuming, expensive and difficult to
implement. As a result, a growing number of colleges and universities are
outsourcing the development and maintenance of their online campus and courses.
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The eCollege.com Solution
Our products are designed to be flexible to meet the online learning needs
of colleges and universities and their students. Our suite of products enables
colleges and universities to either completely outsource the development of
their online campus and courses or to select those products that meet their
needs. The eCollege.com online learning platform has the following key
elements:
Products and Services. We provide a suite of software consisting of online
campuses, courses, course supplements and services, including design,
development, management and hosting services, as well as ongoing
administration, faculty and student support. We can create an online campus
which replicates key services of a physical campus, including admissions,
registration, bookstore, library, academic advising, career counseling, student
union, bursar's office and financial aid services. We can also work with
faculty to convert courses for online delivery or provide online supplements
for on-campus courses. We host the online campuses, courses and course
supplements on our reliable infrastructure.
Rapid, Cost-Effective Development of Online Campuses and Courses. We can
create and deliver a complete online campus, including training of faculty and
administration, typically in 60 business days. Our flexible pricing structure
allows our customers to purchase products and services that meet their needs.
We believe most colleges and universities would incur substantially greater
costs to develop comparable products and services internally.
Easy Online Course Development. We typically work with faculty members to
convert courses into presentations designated for delivery over the Internet
using an array of course design tools and support services. We believe our
automated authoring tools are user-friendly, enabling faculty with little or no
programming experience to develop and update high quality courses easily
through a standard Web browser. We believe that ease of use for the faculty and
the availability of our technical support services are critical to achieving
faculty acceptance of our technology and services.
Easy to Use Online Learning Environment. We believe the online campuses and
courses are easy for students and faculty to use and our other services, such
as faculty and student support, allow colleges and universities to provide a
well-supported online learning experience. A student can access our system with
a Pentium 75 megahertz computer with a 28.8 kilobits-per-second modem and a
standard Web browser. The online campus includes easily navigable screens, as
well as highly customizable courses and student services. Our system allows the
use of rich multimedia content, including video and audio clips, and a variety
of interactive learning tools. Our high capacity, fully-redundant hosting
infrastructure helps to ensure availability of the online campus and convenient
"anytime/anywhere" delivery of courses. Our customer support personnel are
available 24 hours a day, seven days a week.
Standard, Scalable Technology. We integrate industry standard, open
technology to provide a scalable and reliable delivery system. We have made
significant investments in our infrastructure and technical support to ensure
the reliability and scalability of our technology and services. We utilize
multiple or "redundant" high bandwidth sources for Internet connections. As a
result, we are capable of achieving nearly 100% uptime.
Growth Strategy
Our objective is to continue to expand our presence within the college and
university market and to further develop our presence within the continuing
education and corporate training markets. The key elements of our growth
strategy are to:
Add Additional Colleges and Universities. Using a focused regional approach,
we are actively targeting more than 3,800 colleges and universities. In
addition, we intend to further develop the eCollege.com brand and reputation by
increasing our marketing efforts, including increased use of print and online
media advertising and greater participation at trade shows and executive
speaking engagements. We believe our larger sales force and an increased
marketing effort will enable us to further penetrate the higher education
market.
Increase Course Offerings and Enrollments with Existing Customers. In order
to increase course offerings and student enrollments, we recently implemented a
$10 million grant program designed to assist new
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and existing customers in increasing the number of online courses they offer
using our technology and services. The grants will be used by our customers to
increase marketing of our customers' online courses, increase the online
teaching skills of our customers' educators, as well as fund additional
technology to allow our customers to facilitate online education. We have
received over 200 applications for the grant program from both existing and
prospective customers.
Further Develop Relationships with Existing Customers. We seek to build
long-term relationships with colleges and universities and their faculties so
that the online campus becomes an important extension of the college or
university. We invest heavily in course development personnel and technology
and work closely with faculty to ensure easy-to-implement, high quality
courses. We are available to assist faculty and administrators on an ongoing
basis. To further develop the relationships with our customers' faculty, we
recently developed an area within the eCollege.com Website focused on faculty
issues relating to online learning. We believe that development of long-term
relationships with our customers will help us to penetrate additional
departments within the college or university, and will create a strong barrier
to exit.
Unbundle and Expand Product Offerings for New and Existing
Customers. Historically we marketed and sold our campus product bundled with a
minimum number of courses, as well as maintenance and support. We recently
unbundled these offerings in order to provide our potential customers with
greater flexibility in meeting their individual needs. Customers can also
purchase implementation services and training on an as-needed basis. We believe
this sales approach will expand the number of prospects that will be interested
in purchasing our products and services.
In addition, we have recently introduced several new products to expand our
targeted online education market. These new products include eToolkit, a basic
version of our online course development software, which allows web-based
communication between faculty and students, and encourages professors to begin
using our technology and services; and eCompanion, a course development product
specifically designed to enable instructors to supplement their existing on-
campus courses with an online component delivered over the Internet. We believe
these new offerings will enable us to further penetrate our existing customer
base, as well as expand our offerings to new customers.
eCollege.com Customers
We target more than 3,800 colleges and universities in the United States and
Canada. We first began delivering courses in 1996 to the University of
Colorado. In mid-1998, we significantly increased our sales force and have
entered into more than 110 new contracts since then. Our management team and
sales force have significant experience in the education industry, which we
believe will continue to be a key factor in our ability to increase our
customer base. Our twelve largest customers in terms of 1999 year-to-date
revenue are: University of Colorado, Colorado Community College Consortium,
Keller Graduate School of Management, Connecticut State University System,
Rogers State University, California State University-Hayward, University of
South Alabama, Eastern Michigan University, National University, Keiser
College, Dallas Baptist University and Seton Hall University. The University of
Colorado accounted for 9.6% of our revenue in the first nine months of 1999,
21% of our revenue in 1998, 62% of our revenue in 1997 and 93% of our revenue
in 1996. In addition, we have contracts with several providers of continuing
education and corporate training, including DeVry/Becker Educational
Development Corp., Earth Tech, Inc., National Association of Realtors and
Palmer Chiropractic University Foundation d/b/a Palmer Institute for
Professional Advancement.
eCollege System
The eCollege System is made up of the following integrated and scalable
components:
. eCollege Campus, a complete product offering for educational
institutions seeking to create an online campus;
. eCollege eTeaching Solutions, comprised of three versions of a course
delivery and course authoring system for delivering academic content
online, available through a college or university's specific eCollege
Campus or through the eCollege.com Website; and
. eCollege Administrative Reports, a component of eCollege Campus that
allows administrators to monitor and control their online program and
student enrollment.
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Graphic depicting components of eCollege System: eCollege System (SM)
Students/Faculty/Administrators Web Browser -----------------------------------
----------------------------- eCollege Campus (SM) eCollege.com Website *
Unique Welcome Page * Searchable Course Catalog * Registration * Personal
Homepage & Calendar * Inquiry Form * Technical Requirements * Technical
Requirements * Reference Tools * Student Services * Registration Feature *
Searchable Course Catalog * Online Payment * Academic Calendar ----------------
------------------------------------------------ --------------------------
eCollege .com Administrative Reports (Restricted Access) * Student tracking *
Payment records * Bulk email notification --------------------------
- -------------------------------------------------------------------------------
- - eCollege eTeaching Solutions (Restricted Access) ----------------------------
- ---------------------------------------------------- -------------------- -----
---------------- ------------------- eCollege eCollege eCollege eCourse
eCompanion eToolKit * Personal Homepage * Personal Homepage * Personal Homepage
* Message Center * Message Center * Calendar * Document Sharing * Document
Sharing * Syllabus * Journal * Journal * Class Email * Class Email * Class
Email * Chat Room * Webliography * Webliography * Gradebook * Threaded
Discussion * Threaded Discussion * Authoring Tool * Testing Functions * Testing
Functions * Gradebook * Gradebook * Drop/Add Functions * Multi-media * Multi-
media * Authoring Tool * Authoring Tool -------------------- ------------------
--- -------------------
eCollege Campus and eCollege.com Website. eCollege Campus is a complete
product offering for educational institutions seeking to create an online
campus offering online courses. eCollege Campus includes college or university
specific logos, colors, fonts and student services. The eCollege Campus is an
initial entry point for
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all student, faculty and administrative services, including class drop/add
functions, account balance information, online bookstores, online admissions,
course catalogs, registration and online tutorial, as well as the personal
homepage listing each course in which a student is currently enrolled. This is
the entry point to access the password protected eCollege eCourse or
eCompanion, which contain the online courses and course material. eCollege
Campus is designed to be easy to use and to reflect a college's distinctive
character and unique preferences. The eCollege.com Website enables colleges and
universities without an online campus to offer online courses.
Administrative Reports. The Administrative Reports, one component of
eCollege Campus, capture and display student information for college and
university officials and administrators. College and university administrators
can sort information by class code, student name, city or state or the
student's Internet provider. The Administrative Reports maintain faculty and
student evaluations and offer the ability to broadcast email messages to any
group, based on enrollment classifications, demographics or other
characteristics.
Below and on the following page are examples of eCollege Campuses for the
University of Colorado and Seton Hall University.
[PICTURE OF WEB PAGE FROM "CUONLINE.EDU,"
THE ONLINE CAMPUS OF UNIVERSITY OF COLORADO, APPEARS HERE]
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[PICTURE OF WEB PAGE FROM "SETONWORLDWIDE.NET,"
THE ONLINE CAMPUS OF SETON HALL UNIVERSITY]
eCollege eCourse. eCourse is a course development product used for the
delivery and management of online courses over the Internet. eCourse includes
everything necessary for course management, outlining assignments, conducting
lectures, testing, grading and interacting with students. eCollege eCourse
presents course material online with features that enable faculty to track and
manage student progression through a course. eCollege eCourse also emphasizes
student-to-faculty and student-to-student communication. Substantially all
online courses begin with an introduction to the course and incorporate an
audio or video presentation. The audio and video presentations use streaming
technology--a new industry standard for delivering audio or video files through
the Internet immediately as the files are downloaded through the Internet to
introduce the faculty member. Within the eCollege eCourse, faculty members
using a wide variety of online teaching tools can create, administer and score
a variety of types of exams. Faculty members are also able to incorporate
multimedia capabilities to enhance presentations.
eCollege eCompanion. eCompanion offers customers a choice of all of the
functions of eCollege eCourse, and provides professors with the tools necessary
to create an interactive online component to supplement traditional on-campus
courses. Designed for the professor who wants to enhance classroom learning
with Internet capabilities, eCompanion allows the professor to make lectures
available online, conduct online practice tests, guide students to Internet
resources, share documents and continue class discussion outside of the
classroom.
eCollege eToolKit. eToolKit is a set of online tools created for professors
interested in using the Internet to administer classes more easily and open
channels of communication with students. Through any Web browser, a professor
can update the course syllabus, build an online calendar, chat with students in
real-time and post grades. eToolKit provides professors with the ability to
automate course administration and concentrate on teaching their courses. We
provide eToolKit to professors free of charge through the eCollege.com Website
and for a small fee through the college or university online campus. By
providing a
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product with a limited functionality for free through our Website, our strategy
is to increase awareness and usage of the eCollege.com system, thereby
increasing the likelihood of selling our other products.
The eCollege Authoring System is included in each of the eTeaching
Solutions, but with limited features in eToolKit. Our course developers and
faculty use the Authoring System to build online courses and materials. The
Authoring System also provides faculty with an organized format for inputting
content into the Authoring System for display while offering design flexibility
in the use of communications and assessment tools in their courses. After
minimal training, faculty can use the Authoring System to create and update
their own course material in real time. This functionality encourages faculty
to continually improve and update their courses, leading to better quality
courses and materials for students.
eCollege.com Services and Support
We offer a suite of fee-based services that include implementation and
training, course development, instructional design, maintenance and support. We
believe that our service offering is a key competitive advantage and will be an
important factor in achieving market acceptance and maintaining long-term
relationships with colleges and universities.
Implementation. Our service representatives are responsible for
implementation and management of our customer contracts and for overseeing all
services provided to our customers. Account service representatives facilitate
the efficient development and growth of the online campus and other
eCollege.com products, frequently consult with college and university
administrators and serve as a point of contact for all services. The account
service representatives gather information regarding the distinctive character
and preferences of each college or university and serve as a liaison to our
design and technology teams. After the online campus is built or the
eCollege.com eTeaching Solutions are adopted, the account service
representatives assist the customer with ongoing maintenance issues and manage
all aspects of our relationship with the college or university. In addition to
a base salary, these representatives earn a bonus based on customer revenue.
Instructional Design. Our instructional design consultants train faculty,
provide written and multimedia resources and work individually with faculty to
help them present their material in an attractive online format. In addition,
they consult with faculty and our research and technology teams to generate
ideas for improving our course delivery system.
Course Development. Our course developers help faculty build their online
courses. Course developers use our proprietory Authoring System to input
content and build an online course to the faculty member's specifications. We
offer a studio for faculty to record lectures and our course developers work
with our audio and video group to create multimedia content for online courses.
Faculty can also send audio and video clips to us and we will insert the media
into online courses.
Maintenance and Support. For an annual maintenance fee, a college or
university may receive upgrades, system maintenance and content updates for its
online campus or courses. In addition, our help desk provides technical support
to students and faculty using the eCollege System. The help desk is available
through email and telephone 24 hours a day, seven days a week.
Sales and Marketing
Sales. We target more than 3,800 colleges and universities in the United
States and Canada. We have a sales force of over 50 individuals, most with a
background in education and/or technology. We compensate our sales personnel
with a combination of a salary and commissions. Our sales force covers 20
regions throughout the entire continental United States and Canada. We divide
the United States and Canada into three geographic areas, each managed by a
regional vice president who is responsible for approximately 7 smaller regions.
These regions are covered by account managers who are located within the
territories they serve. Their assignments and objectives include:
. working with our marketing department team to develop awareness of our
services in each manager's region;
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. developing the initial business relationship with the roughly 100
colleges and universities in their region; and
. broadening the business relationship by working with additional
departments in a given college or university.
The sales process is based on leads generated by the account managers,
inquiries to the website and through attendance at conferences or trade shows.
After a lead is generated, the account manager qualifies each prospect. We
typically give each prospect access to a demonstration course and make an
appointment for a presentation. Each presentation includes an online or CD-ROM
demonstration of our system. Subsequent presentations may be scheduled with
faculty and other interested parties. Once a contract is signed, we begin
implementation of the online campus, courses or course supplements.
Marketing. We market our technology and services through a combination of
print and online media advertising, trade shows and direct marketing to
promote our services to colleges and universities. Our website has been
designed as our primary marketing communications tool, incorporating a
demonstration of the eCollege System, information on industry trends, market
research, webcasts from industry experts, and other important events in online
learning. We also advertise in industry periodicals such as The Chronicle of
Higher Education to address key decision-makers in our target market,
generally senior administrators, faculty and IT administrators. We continue to
strengthen our brand identity by participating in trade shows, conferences and
executive speaking engagements. Finally, we hold online learning symposiums to
build market awareness and identify qualified prospects.
We market to students through our website, which highlights the benefits of
online learning and provides students with information on online higher
education alternatives. We intend to continue to develop our website for
students as an important source for their online learning needs. We also
market to faculty through an area within the eCollege.com Website focused on
faculty issues relating to online learning.
We provide our customers with additional marketing support to drive
enrollment of online students, including:
. an instructional enrollment marketing kit for our customers including
media plans, sample advertisements and public relations and Web marketing
strategies;
. pamphlets distributed on campus;
. marketing consulting services;
. international promotion and recruitment; and
. awareness of advanced degree, continuing education and corporate training
alternatives.
We recently implemented a $10 million dollar grant program designed to
assist new and existing customers in increasing the number of online courses
they offer using our technology and services and the number of students
pursuing online degrees. Grants are awarded, at our discretion, to
institutions based on demonstrated commitment to a quality online degree
program, the number of current and potential students, the institution's
unique approach to online learning and other factors.
Technology
Our technology strategy is to employ the best available software on stable
and scalable platforms. All of our software products, such as the eCollege
System, eCollege Campus, eTeaching Solutions and eCollege Administrative
Reports, contain our proprietary software, which we have created using a
combination of our custom software and widely-available software products we
license from third parties. To create the custom components of our software,
we employ Microsoft's commonly used Internet programming technologies. We rely
on copyrights, trademarks, trade secret laws, and employee and third-party
non-disclosure agreements to protect our proprietary software.
Because our business depends on our ability to host Web-based software
applications for our customers, one of our primary technical goals is to
provide a highly reliable, fault tolerant system. To do so, we have made
substantial investments in systems monitoring, fault handling, technology
redundancy and other system uptime
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enhancements. For example, we continuously monitor our customers' websites and
our own core systems. All of our primary servers contain fault-tolerant disk
storage technology, backup network cards and power supplies which eliminate the
possibility of a single point of failure in our servers and decrease their
downtime. Our database servers contain the latest clustering technology that
uses a combination of scaleable hardware and Microsoft software technologies.
Finally, we maintain sophisticated "firewall" technology to prevent access by
unauthorized users and to minimize known vulnerabilities to system security.
Our expenses for research and development were $1,099,000 for 1998, $212,052
for 1997 and $60,207 for the period from our inception through December 31,
1996.
Our products are delivered to our customers from a network of centralized
Web servers. Our Web servers are located in three commercial data centers,
commonly known as Web "server farms," which house our servers and provide us
with scalable, high bandwidth Internet connections. These facilities are
located in California and Colorado. We are in the process of implementing
additional data centers in California and New Jersey. Having multiple data
centers allows us to use "load balancing" to spread Internet traffic among
various locations, thereby protecting our customers from experiencing Internet
outages in any geographic region.
Competition
The online learning market is quickly evolving and is subject to rapid
technological change. Although the market is highly fragmented with no single
competitor accounting for a dominant market share, competition is intense. We
believe that the principal competitive factors in our market include:
. the ability to provide online learning meeting the needs of colleges,
universities and students;
. quality and performance of online learning products and services;
. service features such as adaptability, scalability and ability to
integrate other technology-based products;
. quality of implementation and service teams;
. company reputation; and
. pricing.
Our competitors vary in size and in the scope and breadth of the products
and services they offer. Competition is most intense from colleges' and
universities' internal information technology departments. Some colleges and
universities construct online learning systems utilizing in-house personnel and
creating their own software or purchasing software components from a vendor. We
also face significant competition from a variety of companies including:
. other companies which seek to offer a complete solution including
software and services;
. software companies with specific products for the college and university
market;
. systems integrators; and
. hardware vendors.
Other competitors in this market include a wide range of education and
training providers. These companies use video, cable, correspondence, CD-ROM,
computer-based training, and online training.
We believe that the level of competition will continue to increase as
current competitors increase the sophistication of their offerings and as new
participants enter the market. Many of our current and potential competitors
have longer operating histories, larger customer bases, greater brand
recognition and significantly greater financial, marketing and other resources
than we do and may enter into strategic or commercial relationships with
larger, more established and well-financed companies. Certain competitors may
be able to secure alliances with customers and affiliates on more favorable
terms, devote greater resources to marketing
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and promotional campaigns and devote substantially more resources to systems
development than we can. In addition, new technologies and the expansion of
existing technologies may increase the competitive pressures we face. Increased
competition may result in reduced operating margins, as well as loss of market
share and brand recognition. We may not be able to compete successfully against
current and future competitors, and competitive pressures we face could have a
material adverse effect on our business and financial results.
Proprietary Rights and Technology
Although our business model and the services we provide define our business,
our software and our copyrights, service marks, trademarks, trade dress, trade
secrets, proprietary technology and similar intellectual property are also very
important to our success. We need to protect the eCollege System, eCollege
Campus and eTeaching Solutions service marks. We rely on a combination of
trademark and copyright laws, trade secret protection and confidentiality
and/or license agreements with our employees, customers, partners and others to
protect our proprietary rights. We have applied for the registration of certain
of our trademarks and service marks in the United States, including
"eCollege.com," "eTeaching Solutions," "eToolKit," "eCompanion" and "eCourse"
and our logo. In addition to our Internet domain name, we also license and may
license in the future, certain of our proprietary rights, such as trademarks,
technology or copyrighted material, to third parties.
Employees
As of October 31, 1999, we employed 272 people; 52 employees engaged in
sales and marketing; 87 employees engaged in product development; 111 employees
engaged in customer service; and 22 employees engaged in general administrative
and management. None of our employees is subject to any collective bargaining
agreements, and we consider our relations with our employees to be good.
Facilities
Our corporate headquarters are located in Denver, Colorado. The headquarters
facility encompasses approximately 69,000 square feet and is leased under two
separate leases which expire on June 30, 2002 and April 30, 2003, respectively.
We believe our existing facilities are adequate for current requirements and
that additional space can be obtained on commercially reasonable terms to meet
future requirements.
Legal Proceedings
We are not a party to any material legal proceedings.
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MANAGEMENT
Executive Officers, Directors and Key Employees
The executive officers, directors and key employees of eCollege.com as of
September 30, 1999 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ----------------------------------- --- ---------------------------------------------
<S> <C> <C>
Executive Officers and Directors
Robert N. Helmick.................. 42 Chairman, President and Chief Executive
Officer
</TABLE>
<TABLE>
<S> <C> <C>
Douglas H. Kelsall........... 45 Chief Financial Officer and Treasurer
Charles P. Schneider......... 42 Chief Operating Officer and Executive Vice
President
Jonathan M. Dobrin........... 27 Vice President, Chief Technology Officer and
Director
Ray Henderson................ 36 Senior Vice President, Engineering &
Technology
John V. Helmick.............. 40 Vice President, Corporate Services and
Secretary
Mark J. Fine................. 43 Vice President, Sales
Kevin L. Johnson............. 38 Vice President, Business Development
James N. Sigman.............. 38 Vice President, Professional Services
Ginger C. Smith.............. 39 Vice President, Finance
Jack W. Blumenstein (1) (2).. 56 Director
Christopher E. Girgenti (1)
(2)......................... 36 Director
Jeri Korshak (1) (2)......... 45 Director
Oakleigh Thorne.............. 42 Director
Key Employees
Bradley V. Felix............. 26 Vice President, Systems Development
Denise LaBier Pilkington..... 36 General Counsel
</TABLE>
- --------
(1) Member of the Compensation Committee.
(2) Member of the Audit Committee.
Robert N. Helmick founded eCollege.com in July 1996 and has served as our
Chairman of the Board, President and Chief Executive Officer since our
inception. Mr. Helmick founded and served as Chief Executive Officer of Helmick
and Associates, International, a consulting firm for higher education from 1990
through 1996. During that time, he served on the Board of Trustees of several
universities. Previously, he practiced law with Bradshaw, Fowler, Proctor and
Fairgrave, a law firm in Des Moines, Iowa, from 1982 through 1990. Mr. Helmick
received a JD from the University of Southern California Law School and a BA
from Drake University. Mr. Helmick is the brother of John V. Helmick, our Vice
President, Corporate Services.
Douglas H. Kelsall has served as our Chief Financial Officer and Treasurer
since September 1999. From July 1997 to August 1999, Mr. Kelsall served as
Chief Financial Officer of TAVA Technologies, Inc.; from December 1995 to June
1997, he served as Chief Financial Officer of Evolving Systems, Inc.; from June
1993 to December 1995, he served as President of Caribou Capital Corporation.
Prior to that time, Mr. Kelsall served in various management and Vice President
positions at Colorado National Bank. Mr. Kelsall holds a Bachelor of Arts
degree from the University of Colorado and a Master of Business Administration
degree from the University of Denver.
Charles P. Schneider has served as our Chief Operating Officer and Executive
Vice President since June 1999. From March 1994 to June 1999, Mr. Schneider was
employed by Oracle Corporation, initially as Vice President, Oracle Vertical
Markets & Solutions, and then as Senior Vice President, Consumer Sector. As
Senior Vice President, Consumer Sector, Mr. Schneider was responsible for
product and service definition, including identification of strategic
acquisitions and partnerships, and product marketing and positioning.
Additionally, Mr. Schneider created the marketing, sales, strategy and
consulting organizations worldwide for Oracle Corporation's business in the
consumer sector. As Vice President, Oracle Vertical Markets & Solutions, Mr.
Schneider was responsible for building and leading a team to create Oracle's
vertical industry strategy and program. Mr. Schneider received an MBA from New
York University and a BS from Drexel University.
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Jonathan M. Dobrin has served as our Vice President and Chief Technology
Officer since August 1998. Mr. Dobrin also served as our Vice President and
Chief Operating Officer from July 1996 through July 1998. Mr. Dobrin has served
as a director since 1997. He founded and served as Vice President of Real
Information Systems LLC, a company that specialized in the development and
deployment of premium Web sites, from October 1994 through July 1996. From June
through October 1994, Mr. Dobrin was pursuing personal interests. Mr. Dobrin
received a BA from the University of Vermont.
Ray Henderson has served as our Senior Vice President, Engineering &
Technology since January 1, 1999. From 1987 to 1998, he was employed by Simon &
Schuster's Higher Education Division, where he was Vice President, Product
Systems & Technology. In this role he pioneered many of the higher education
industry's first Web-based products, and created a highly scaleable technology
infrastructure for producing Internet-based educational products. Mr. Henderson
received a BS from Trinity University.
John V. Helmick has served as our Vice President, Corporate Services since
March 1999. Mr. Helmick has served as our Secretary since our inception. He
also served as a director from our inception through January 1999, as our
General Counsel from August 1996 through March 1999 and as our Treasurer from
our inception through January 1998. Mr. Helmick was an attorney specializing in
corporate finance and securities regulation with Hershner, Hunter, Moulton,
Andrews & Neill in Eugene, Oregon from 1993 until joining the Company in 1996.
Mr. Helmick received a JD from Yale Law School and a BBA from the University of
Texas at Austin. Mr. Helmick is the brother of Robert N. Helmick, our Chairman,
President and Chief Executive Officer.
Mark J. Fine has served as our Vice President, Sales since October 1997.
From August 1980 through April 1996, he held various positions at Columbine
JDS, a leading provider of software and services to the broadcasting and cable
industries, including Vice President, Corporate Development, Vice President,
Director of Automation Business Unit and most recently, Vice President, Sales
and Marketing. Mr. Fine holds a BS in Quantitative Business Analysis from
Arizona State University.
Kevin L. Johnson has served as our Vice President, Business Development
since October 1998. From December 1984 through October 1998, he held various
positions, most recently as the Director of Strategic Relationships for the
Simon & Schuster Higher Education Distributed Learning Group responsible for
business development and partnership work as well as sales management of
several regional sales managers. Mr. Johnson has over fifteen years of higher
education sales, editorial and business development experience. Mr. Johnson
received a BA from Middlebury College.
James N. Sigman has served as our Vice President, Professional Services
since our inception. From 1992 through May 1996, he was an attorney with
Laurence J. Rich & Associates, specializing in corporate law, employment law
and litigation. Mr. Sigman received a JD from the University of Denver Law
School and a BA from Tulane University.
Ginger C. Smith has served as our Vice President, Finance since July 1999
and from March 1998 through June 1999 Ms. Smith served as our Controller. Ms.
Smith has over fourteen years of experience in finance and accounting. She has
held financial management positions at NovaLogic, Inc., a software start-up,
and Paramount Pictures. From 1985 to 1990, Ms. Smith was an auditor with
Coopers & Lybrand. She received an MBA from California State University, and a
BS in Finance and a BA in Accounting from George Mason University.
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Jack W. Blumenstein has served as a member of our board of directors since
February 1998. Mr. Blumenstein has been the President of TBG Information
Investors, LLC, and the co-president of Blumenstein/Thorne Information
Partners, L.L.C. since October 1996, and is a co-founder of these private
equity investment firms. TBG, a partnership with GS Capital Partners II, is a
private equity fund that focuses on capital transactions in the information
industry. From October 1992 to September 1996, Mr. Blumenstein held various
positions with The Chicago Corporation (now ABN AMRO, Inc.), serving most
recently as Vice President, Debt Capital Markets Group and a member of the
board of directors. Mr. Blumenstein was President and CEO of Ardis, a joint
venture of Motorola and IBM, and has held various senior management positions
in product development and sales and marketing for Rolm Corporation and IBM.
Christopher E. Girgenti has served as a member of our board of directors
since June 1997. Mr. Girgenti has been Senior Managing Director of New World
Equities, Inc. since November 1996 and Managing Director of New World Venture
Advisors, LLC since January 1998. He serves on the boards of several technology
and telecommunications companies. From April 1994 through October 1996, Mr.
Girgenti served as Vice President and was co-head of the technology investment
banking group of The Chicago Corporation (now ABN AMRO, Inc.). He has held
various corporate finance positions with Kemper Securities, Inc. and KPMG Peat
Marwick. Mr. Girgenti is a Chartered Financial Analyst.
Jeri Korshak has served as a member of our board of directors since February
1999. Ms. Korshak has over twenty years of experience in marketing and business
development. Ms. Korshak has been the Vice President of Strategy for MediaOne
Group since June 1998. Ms. Korshak was Vice President and General Manager of US
WEST Dex--Mountain Region from September 1995 to May 1998, and Vice President
and General Manager of Interactive Television of US WEST Multimedia from
November 1994 to September 1995. In these and other positions, Ms. Korshak has
been involved in developing and introducing interactive services.
Oakleigh Thorne has served as a member of our board of directors since
February 1998. Mr. Thorne has been Chairman and Chief Executive Officer of TBG
Information Investors, LLC and the co-president of Blumenstein/Thorne
Information Partners, L.L.C. since October 1996, and is a co-founder of these
private equity investment firms. TBG, a partnership with GS Capital Partners
II, is a private equity fund that focuses on capital transactions in the
information industry. Prior to that time, from January 1991 to August 1996, Mr.
Thorne served in various management positions, including most recently
President and Chief Executive Officer, of CCH Incorporated, a leading provider
of tax and business law information, software, and services.
Bradley V. Felix has served as our Vice President, Systems Development since
August 1996. He founded and served as President of Timberline Internet
Services, Inc., a consulting firm specializing in programming for Internet
commerce from March 1996 through March 1997. In June 1997, Mr. Felix also co-
authored Building an Extranet: Connect Your Intranet with Vendors and
Customers. Mr. Felix also co-founded and developed ColoradoNet, an Internet
service provider in 1995 and served in various technical and management
capacities from December 1995 through August 1996. ColoradoNet was purchased by
eCollege.com in August 1996. From September 1995 to June 1996, Mr. Felix served
as a transportation specialist for Ralston Resorts. Mr. Felix served as a
systems developer with Futures Tech on the Net from May 1995 to September 1995.
Mr. Felix received a BS from Tufts University in 1995.
Denise LaBier Pilkington has served as our General Counsel since March 1999.
From August 1998 to March 1999, she was our Associate General Counsel. From
1992 to 1998, she was an attorney with Woodrow & Gruskin, PC, specializing in
corporate and business law. Ms. LaBier Pilkington received a BA from the
University of Colorado and a JD from the University of Denver Law School.
Directors' Terms
All directors hold office until the next annual meeting of stockholders or
until their successors have been duly elected and qualified.
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Board Committees
The Compensation Committee consists of Messrs. Girgenti and Blumenstein, and
Ms. Korshak. There is currently one vacancy on the Compensation Committee. The
Compensation Committee reviews and evaluates the salaries, supplemental
compensation and benefits of our officers, reviews general policy matters
relating to compensation and benefits of our employees and makes
recommendations concerning these matters to the Board of Directors. The
Compensation Committee also administers our stock option and stock purchase
plans. See "--1999 Stock Incentive Plan" and "--1999 Employee Stock Purchase
Plan."
The Audit Committee consists of Messrs. Girgenti and Blumenstein, and Ms.
Korshak. The Audit Committee reviews with our independent auditor the scope and
timing of its audit services, the auditor's report on our financial statements
following completion of its audit and our policies and procedures with respect
to internal accounting and financial controls. In addition, the Audit Committee
will make annual recommendations to the board of directors for the appointment
of independent auditors for the ensuing year.
Director Compensation
We do not currently compensate directors for attending meetings of the board
of directors or committee meetings of the board of directors, but we do
reimburse directors for their reasonable travel expenses incurred in connection
with attending these meetings.
Compensation Committee Interlocks and Insider Participation
No member of the Compensation Committee was at any time an employee of
eCollege.com. None of our executive officers serves as a member of the board of
directors or Compensation Committee of any other entity which has one or more
executive officers serving as a member of our board of directors or
Compensation Committee.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan is intended to serve as the successor equity
incentive program to our 1997 Stock Option Plan. The 1999 Stock Incentive Plan
was adopted by the board and effective as of September 1999 and was
subsequently approved by the stockholders. The 1999 Stock Incentive Plan will
become effective upon the effective date of the offering. All outstanding
options under our predecessor plan will at that time be incorporated into the
1999 Stock Incentive Plan, and no further option grants will be made under that
plan. The incorporated options will continue to be governed by their existing
terms, unless the plan administrator elects to extend one or more features of
the 1999 Stock Incentive Plan to those options. Except as otherwise noted
below, the incorporated options have substantially the same terms as will be in
effect for grants made under the Discretionary Option Grant Program of the 1999
Stock Incentive Plan.
3,269,327 shares of common stock have been authorized for issuance under the
1999 Stock Incentive Plan. This share reserve consists of 73,916 shares
estimated to remain available for issuance under our predecessor plan, and
1,695,411 shares subject to outstanding options thereunder, plus an increase of
1,500,000 shares. The share reserve will automatically increase on the first
trading day in January each calendar year, beginning January 2, 2000, by an
amount equal to three percent (3%) of the total number of shares of common
stock outstanding on the last trading day in December in the preceding calendar
year, but in no event will this annual increase exceed 1,000,000 shares. In
addition, no participant in the 1999 Stock Incentive Plan may be granted stock
options, separately exercisable stock appreciation rights and direct stock
issuances for more than 500,000 shares of common stock in total per calendar
year.
The 1999 Stock Incentive Plan is divided into five separate programs:
. The discretionary option grant program under which eligible individuals
in the employ of eCollege.com may be granted options to purchase shares
of common stock at an exercise price not less than 100% of the fair
market value of those shares on the grant date;
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. The stock issuance program under which such individuals may be issued
shares of common stock directly, through the purchase of such shares at a
price not less than 100% of their fair market value at the time of
issuance or as a bonus tied to the performance of services;
. The salary investment option grant program which may, at the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow executive officers and other highly
compensated employees the opportunity to apply a portion of their base
salary to the acquisition of special below-market stock option grants;
. The automatic option grant program under which option grants will
automatically be made at periodic intervals to eligible non-employee
board members to purchase shares of common stock at an exercise price
equal to 100% of the fair market value of those shares on the grant date;
and
. The director fee option grant program which may, in the plan
administrator's discretion, be activated for one or more calendar years
and, if so activated, will allow non-employee board members the
opportunity to apply a portion of the annual retainer fee otherwise
payable to them in cash each year to the acquisition of special below-
market option grants.
The discretionary option grant program and the stock issuance program will
be administered by our Compensation Committee. This committee will determine
which eligible individuals are to receive option grants or stock issuances
under those programs, the time or times when such option grants or stock
issuances are to be made, the number of shares subject to each such grant or
issuance, the status of any granted option as either an incentive stock option
or a non-statutory stock option under the Federal tax laws, the vesting
schedule to be in effect for the option grant or stock issuance and the maximum
term for which any granted option is to remain outstanding. The compensation
committee will also have the authority to select the executive officers and
other highly compensated employees who may participate in the salary investment
option grant program in the event that program is activated for one or more
calendar years.
Plan Features. The 1999 Stock Incentive Plan will include the following
features:
. The exercise price for any options granted under the plan may be paid in
cash or in shares of common stock valued at fair market value on the
exercise date. The option may also be exercised through a same-day sale
program without any cash outlay by the optionee.
. The compensation committee will have the authority to cancel outstanding
options under the discretionary option grant program in return for the
grant of new options for the same or different number of option shares
with an exercise price per share based upon the fair market value of
common stock on the new grant date.
. Stock appreciation rights may be issued under the discretionary option
grant program. Such rights will provide the holders with the election to
surrender their outstanding options for an appreciation distribution from
eCollege.com equal to the fair market value of the vested shares of
common stock subject to the surrendered option less the exercise price
payable for those shares. eCollege.com may make the payment in cash or in
shares of common stock.
The 1999 Stock Incentive Plan will include the following change in control
provisions which may result in the accelerated vesting of outstanding option
grants and stock issuances:
. In the event that the eCollege.com is acquired by merger or asset sale or
a board-approved sale of more than fifty percent of eCollege.com stock by
its stockholders, each outstanding option under the discretionary option
grant program which is not assumed or continued by the successor
corporation will immediately become exercisable for all the option
shares, and all unvested shares will immediately vest, except to the
extent our repurchase rights with respect to those shares are to be
assigned to the successor corporation.
. The plan administrator will have complete discretion to grant one or more
options which will become exercisable for all the option shares in the
event those options are assumed in the acquisition but the optionee's
service with eCollege.com or the acquiring entity is subsequently
terminated. The vesting of
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outstanding shares under the 1999 Stock Incentive Plan may be accelerated
upon similar terms and conditions;
. The plan administrator may also grant options which will immediately vest
upon an acquisition of eCollege.com, whether or not those options are
assumed by the successor corporation; and
. The plan administrator may grant options and structure repurchase rights
so that the shares subject to those options or repurchase rights will
immediately vest in connection with a successful tender offer for more
than fifty percent (50%) of our outstanding voting stock or a change in
the majority of our board through one or more contested elections. Such
accelerated vesting may occur either at the time of such transaction or
upon the subsequent termination of the individual's service.
. In the event of a merger, tender or takeover offer, or sale of all or
substantially all of our assets (collectively, a "Change of Control
Event"), or stockholder approval of our dissolution, the board has the
authority to provide for full automatic vesting and exercisability of
each non-qualified option granted under the 1997 Stock Option Plan,
including shares which would not otherwise be exercisable. An option
exercise under the 1997 Stock Option Plan may be made contingent upon the
completion of a Change of Control Event. After a Change of Control Event
occurs or articles of dissolution are filed, all unexercised options will
terminate.
In the event the Compensation Committee decides to put the salary investment
option grant program into effect for one or more calendar years, each of our
executive officers and other highly compensated employees selected for
participation may elect to reduce his or her base salary for that calendar year
by a specified dollar amount not less than $10,000 nor more than $50,000. Each
selected individual who makes this election will automatically be granted, on
the first trading day in January of the calendar year for which that salary
reduction is to be in effect, an option to purchase that number of shares of
common stock determined by dividing the salary reduction amount by two-thirds
of the fair market value per share of common stock on the grant date. The
option will be exercisable at a price per share equal to one-third of the fair
market value of the option shares on the grant date. As a result, the total
spread on the option shares at the time of grant (the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares) will be equal to the amount of salary invested in that option.
The option will vest and become exercisable in a series of twelve (12) equal
monthly installments over the calendar year for which the salary reduction is
to be in effect and will be subject to full and immediate vesting upon certain
changes in our ownership or control.
Each individual who first becomes a non-employee board member at any time
after the completion of this offering will automatically receive an option
grant for 5,000 shares on the date such individual joins the board, provided
such individual has not been in our prior employ. In addition, on the date of
each meeting of stockholders held after the completion of this offering, each
non-employee board member who is to continue to serve as a non-employee board
member will automatically be granted an option to purchase 2,500 shares of
common stock, provided such individual has served on the board for at least six
months.
Each automatic grant will have a term of ten years, subject to earlier
termination following the optionee's cessation of board service. The option
will be immediately exercisable for all of the option shares; however, any
unvested shares purchased under the option will be subject to repurchase by
eCollege.com, at the exercise price paid per share, should the optionee cease
board service prior to vesting in those shares. Each automatic option will be
immediately exercisable for all of the option shares; however, any unvested
shares purchased under the option will be subject to repurchase by
eCollege.com, at the exercise price paid per share, should the optionee cease
to serve on the board prior to vesting in those shares. The shares subject to
each 5,000 share automatic option grant will vest over a four (4) year period
in successive equal annual installments upon the individual's completion of
each year of board service over the four (4) year period measured from the
option grant date. Each 2,500 share automatic option grant will vest upon the
individual's completion of one year of board service measured from the option
grant date. However, the shares subject to each automatic grant will
immediately vest in full upon certain changes in control or ownership of
eCollege.com or upon the optionee's death or disability while a board member.
49
<PAGE>
If the director fee option grant program is put into effect in the future,
then each non-employee board member may elect to apply all or a portion of any
annual retainer fee otherwise payable in cash to the acquisition of a below-
market option grant. The option grant will automatically be made on the first
trading day in January in the year for which the retainer fee would otherwise
be payable in cash. The option will have an exercise price per share equal to
one-third of the fair market value of the option shares on the grant date, and
the number of shares of common stock subject to the option will be determined
by dividing the amount of the retainer fee applied to the program by two-thirds
of the fair market value per share of common stock on the grant date. As a
result, the option will be structured so that the fair market value of the
option shares on the grant date less the aggregate exercise price payable for
those shares will be equal to the portion of the retainer fee invested in that
option. The option will become exercisable in a series of twelve (12) equal
monthly installments over the calendar year for which the election is to be in
effect. However, the option will become immediately exercisable for all the
option shares upon certain changes in the ownership or control of eCollege.com
or the death or disability of the optionee while serving as a board member.
Limited stock appreciation rights will automatically be included as part of
each grant made under the automatic option grant, salary investment option
grant and director fee option grant programs and may be granted to one or more
of our officers as part of their option grants under the discretionary option
grant program. Options with limited stock appreciation right may be surrendered
to us upon the successful completion of a hostile tender offer for more than
50% of our outstanding voting stock. In return for the surrendered option, the
optionee will be entitled to a cash distribution from us in an amount per
surrendered option share based on the highest price per share of common stock
paid in connection with the tender offer.
The board may amend or modify the 1999 Stock Incentive Plan at any time,
subject to any required stockholder approval. The 1999 Stock Incentive Plan
will terminate no later than August 31, 2009.
1999 Employee Stock Purchase Plan
Introduction. Our 1999 Employee Stock Purchase Plan was adopted by the board
in June 1999 and approved by the stockholders in June 1999. The plan will
become effective immediately upon the signing of the underwriting agreement for
this offering. The plan is designed to allow our eligible employees and the
eligible employees of our participating subsidiaries to purchase shares of
common stock, at semi-annual intervals, with their accumulated payroll
deductions.
Share Reserve. 666,667 shares of our common stock will initially be reserved
for issuance.
Offering Periods. The plan will have a series of successive offering
periods, each with a maximum duration of 24 months. The initial offering period
will start on the date the underwriting agreement for our initial public
offering and will end on the last business day of October 2001. The next
offering period will start on the first business day in November 2001, and
subsequent offering periods will be set by our compensation committee.
Eligible Employees. Individuals scheduled to work more than 20 hours per
week for more than 5 calendar months per year may join an offering period on
the start date or any semi-annual entry date within that period. Semi-annual
entry dates will occur on the first business day of May and November each year.
Individuals who become eligible employees after the start date of an offering
period may join the plan on any subsequent semi-annual entry date within that
offering period.
Payroll Deductions. A participant may contribute up to 15% of his or her
cash earnings through payroll deductions, and the accumulated deductions will
be applied to the purchase of shares on each semi-annual purchase date. The
purchase price per share will be equal to 85% of the fair market value per
share on the participant's entry date into the offering period or, if lower,
85% of the fair market value per share on the semi-annual purchase date. Semi-
annual purchase dates will occur on the last business day of April and October
each year. In no event, however, may any participant purchase more than 1,000
shares on any purchase date, and not more than 166,667 shares may be purchased
in total by all participants on any purchase date.
50
<PAGE>
Reset Feature. If the fair market value per share of our common stock on any
purchase date is less than the fair market value per share on the start date of
the two-year offering period, then that offering period will automatically
terminate, and a new two-year offering period will begin on the next business
day. All participants in the terminated offering will be transferred to the new
offering period.
Change in Control. Should we be acquired by merger or sale of substantially
all of our assets or more than fifty percent of our voting securities, then all
outstanding purchase rights will automatically be exercised immediately prior
to the effective date of the acquisition. The purchase price will be equal to
85% of the market value per share on the participant's entry date into the
offering period in which an acquisition occurs or, if lower, 85% of the fair
market value per share immediately prior to the acquisition.
Plan Provisions. The following provisions will also be in effect under the
plan:
. The plan will terminate no later than the last business day of July,
2009; and
. The board may at any time amend, suspend or discontinue the plan.
However, certain amendments may require stockholder approval.
Executive Compensation
The following table sets forth all compensation received during the year
ended December 31, 1998 by Mr. Robert Helmick, our Chief Executive Officer. No
other executive officer had salary and bonus exceeding $100,000 for services
rendered in all capacities during 1998.
Summary Compensation Table
In accordance with the rules of the SEC, other compensation in the form of
perquisites and other personal benefits has been omitted from the following
table because the aggregate amount of these perquisites and other personal
benefits constituted less than the lesser of $50,000 or 10% of the total annual
salary and bonus in 1998.
<TABLE>
<CAPTION>
Annual
Compensation
--------------
Name and Principal Position Year Salary Bonus
- ------------------------------------------------------------ ---- -------- -----
<S> <C> <C> <C>
Robert N. Helmick
President and Chief Executive Officer...................... 1998 $120,000 $ 0
</TABLE>
Aggregate Year-End Option Values
The following table sets forth certain information concerning the number and
value of unexercised options held by Mr. Robert Helmick at December 31, 1998.
Mr. Helmick did not exercise options to purchase common stock during the year
ended December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 at December 31, 1998(1)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Robert N. Helmick........... 23,334 -0- $196,239 $0
</TABLE>
- --------
(1) There was no public trading market for the common stock as of December 31,
1998. Accordingly, these values have been calculated on the basis of the
assumed initial public offering price of $9.00 per share, less the
applicable exercise price per share, multiplied by the number of shares
underlying such options.
Employment Agreement
We have entered into an employment agreement with Mr. Robert N. Helmick. Mr.
Helmick's current annual base salary is $200,000, and Mr. Helmick is currently
eligible for an annual bonus of up to $200,000
51
<PAGE>
payable in cash, eCollege.com stock, or other consideration as determined by
our board of directors, although we are not required to pay any bonus. Mr.
Helmick is also entitled to standard benefits including vacation days,
participation in a flexible reimbursement plan, and medical/dental insurance.
The initial term of employment under Mr. Helmick's employment agreement is
from May 1, 1997 through December 31, 2000.
The term of employment is automatically extended for successive one-year
renewal periods if not terminated by Mr. Helmick or by us upon written notice.
The agreement generally provides for termination:
. upon employee's willful and continuous failure or refusal to comply with
our policies, standards and regulations;
. if employee engages in fraud, dishonesty or any other act of material
misconduct; and
. if employee receives notice of a breach of a material provision of the
agreement and fails to cure the breach.
The agreement contains non-competition provisions during the term of
employment and for the period twelve months after termination of employment.
Under these provisions, Mr. Helmick may not:
. engage in, own an interest in, or perform services for any competitive
business or activity;
. for the 6 months subsequent to termination, solicit any of our employees
to terminate their employment; and
. for the 12 months subsequent to termination, sell or attempt to sell any
competitive services or goods to any of our customers.
The agreement also contains a confidentiality provision as well as a
provision recognizing that we own all ideas and inventions conceived by Mr.
Helmick during the term of the employment agreement.
We have entered into an employment agreement with Mr. Schneider. The
agreement sets an annual base salary for Mr. Schneider of $195,000, which
salary may be adjusted by the board of directors. In addition to a base salary,
Mr. Schneider is eligible for an annual bonus of up to $100,000, payable in
cash. We also issued to Mr. Schneider options to purchase up to 326,667 shares
of our common stock at an exercise price of $6.00 per share. These options are
subject to vesting requirements. All unvested options will vest upon a change
of control of eCollege.com. Mr. Schneider is also entitled to standard benefits
including vacation days, participation in a flexible reimbursement plan, and
medical/dental insurance.
Mr. Schneider's employment may be terminated by eCollege.com or by him at
any time and for any reason. The agreement generally provides for termination:
. upon employee's willful and continuous failure or refusal to comply with
our policies, standards and regulations;
. if employee engages in fraud, dishonesty or any other act of material
misconduct; or
. if employee receives notice of a breach of a material provision of the
agreement and fails to cure the breach.
52
<PAGE>
We have agreed to provide Mr. Schneider with severance pay equal to six
months of his base salary, unless his employment is terminated for cause, as
defined in the agreement.
The agreement contains non-competition provisions during the term of
employment and for the period six months after termination of employment. Under
these provisions, Mr. Schneider may not:
. own an interest in, participate in the management of, or perform services
for any competitive business or activity; or
. for a period of 12 months subsequent to termination, solicit any of our
employees to terminate their employment.
The agreement also contains a confidentiality provision as well as a
provision recognizing that we own all ideas and inventions conceived by Mr.
Schneider during the term of the agreement.
We have entered into an employment agreement with Mr. Kelsall. The agreement
sets an annual base salary for Mr. Kelsall of $168,000, which salary may be
adjusted by the board of directors. In addition to a base salary, Mr. Kelsall
is eligible for an annual bonus of up to $85,000, payable in cash. We also
issued to Mr. Kelsall options to purchase up to 133,334 shares of our common
stock at an exercise price of $9.00 per share. These options are subject to
vesting requirements. All unvested options will vest upon a change of control
of eCollege.com. Mr. Kelsall is also entitled to standard benefits including
vacation days, participation in a flexible reimbursement plan, and
medical/dental insurance.
Mr. Kelsall's employment may be terminated by eCollege.com or by him at any
time and for any reason. The agreement generally provides for termination:
. upon employee's willful and continuous failure or refusal to comply with
our policies, standards and regulations;
.if employee engages in fraud, dishonesty or any other act of material
misconduct; or
. if employee receives notice of a breach of a material provision of the
agreement and fails to cure the breach.
We have agreed to provide Mr. Kelsall with severance pay equal to six months
of his base salary, unless his employment is terminated for cause, as defined
in the agreement.
The agreement contains non-competition provisions during the term of
employment and for the period six months after termination of employment. Under
these provisions, Mr. Kelsall may not:
. own an interest in, participate in the management of, or perform services
for any competitive business or activity; or
. for a period of 12 months subsequent to termination, solicit any of our
employees to terminate their employment.
The agreement also contains a confidentiality provision as well as a
provision recognizing that we own all ideas and inventions conceived by Mr.
Kelsall during the term of the agreement.
53
<PAGE>
CERTAIN TRANSACTIONS
Transactions With Management and Others
The following are brief descriptions of transactions between us and any of
our directors, executive officers or stockholders known to us to own
beneficially more than 5% of our shares, or any member of the immediate family
of any of those persons, since our inception, where the amount involved
exceeded $60,000:
Sales of Common Stock
In February 1997, Robert N. Helmick, Chairman, President and Chief Executive
Officer, Jonathan M. Dobrin, Vice President, Chief Technology Officer and
Director, and John V. Helmick, Vice President, Corporate Services, made the
following purchases of our common stock:
<TABLE>
<CAPTION>
Shares Price Per Aggregate
Purchased Share Proceeds
--------- --------- ---------
<S> <C> <C> <C>
Mr. R. Helmick................................. 4,526,666 $0.03 $130,950
Mr. J. Dobrin.................................. 140,000 0.03 4,050
Mr. J. Helmick................................. 233,334 0.03 6,750
</TABLE>
Mr. R. Helmick's contribution of $130,950 was paid in the form of services
he performed as our Chief Executive Officer. Mr. Dobrin's contribution of
$4,050 was in the form of assets, including computer equipment, office
furniture and computer software.
On March 4, 1998, Mr. Sigman, our Vice President, Accounts and Services,
purchased 69,953 shares of our common stock for $113,624 pursuant to the
exercise of warrants. As payment for the shares Mr. Sigman issued us a
promissory note. The note has an interest rate of 8% per annum, and is
repayable in twenty-four monthly payments of $5,500 beginning March 31, 2000.
Sales of Preferred Stock
On June 11, 1997, we entered into a Unit Purchase Agreement with New World
Equities, Inc., Steven M. Singer, Robert C. Douglas, William E. Waldeck,
Patrick T. DeLacey and David P. Shieldrop. New World Equities, Inc. is the
beneficial owner of 9.5% of our common stock before the offering, and
Christopher E. Girgenti, one of our directors, is a senior managing director of
New World Equities, Inc. Under the agreement we sold a total of 132,000 units
for an aggregate purchase price of $1,000,000. Each unit consisted of
approximately 4.6667 shares of Series A Convertible Preferred Stock and a
warrant to purchase approximately 4.6667 shares of our common stock at an
exercise price of $1.62 per share. Pursuant to our Amended and Restated
Certificate of Incorporation, the shares of Series A Preferred Stock will
automatically convert into a total of 616,000 shares of common stock upon the
completion of this offering; each share of Series A Preferred Stock will
convert into one share of Common Stock. New World Equities, Inc. purchased
66,000 units for an aggregate purchase price of $500,000.
On February 2, 1998, we entered into a Series B Preferred Share Purchase
Agreement with Blumenstein/Thorne Information Partners I, L.P., the beneficial
owner of 15.4% of our common stock before the offering, Stanley R. Dobrin, the
father of Jonathan M. Dobrin, our Vice President, Chief Technology Officer and
Director, and Alan L. Sigman, the father of James N. Sigman, our Vice
President, Professional Services. Directors Jack W. Blumenstein and Oakleigh
Thorne are co-presidents of Blumenstein/Thorne Information Partners L.L.C.,
which is the general partner of Blumenstein/Thorne Information Partners I, L.P.
The following parties were also purchasers under the Series B Preferred Share
Purchase Agreement: Lee S. Mendel, Davis B. Weidner, James F. Hemmer, Michael
J. Walker, Robert A. Conway and Darlene A. Conway, JTWROS, Mark A. Timmerman,
Silver Family Trust U/D/T December 19, 1997, Jay S. Perlmutter, William O.
Kasten, McDonald & Co. Securities, Inc., McDonald Venture Capital Fund, L.P.,
Sue Thompson, Robert C. Douglas and McDonald & Co. Securities, Inc., as
Custodian for William E. Waldeck. Under the agreement we sold a total of
1,525,218 shares of Series B Convertible Preferred Stock for an aggregate
purchase price of $6,000,000. Pursuant to our Amended and Restated Certificate
of Incorporation, the shares of Series B Preferred Stock will automatically
convert into a total of 1,525,218 shares of common stock upon the completion of
this offering; each share of Series B Preferred Stock will convert into one
share of Common Stock. Blumenstein/Thorne Information
54
<PAGE>
Partners I, L.P. purchased 1,270,878 shares of Series B Preferred Stock for an
aggregate purchase price of $4,999,997. Stanley R. Dobrin purchased 12,707
shares of Series B Preferred Stock for an aggregate purchase price of $49,994.
Alan L. Sigman purchased 6,356 shares of Series B Preferred Stock for an
aggregate purchase price of $25,006.
On December 21, 1998, we entered into a Series C Preferred Share Purchase
Agreement with MediaOne Interactive Services, Inc., VSI Holdings, Inc.,
Blumenstein/Thorne Information Partners I, L.P., New World Equities, Inc. and
Stanley R. and Carol L. Dobrin, JTWOS. MediaOne Interactive Services, Inc. is
the beneficial owner of 10.0% of our common stock before the offering. Director
Jeri Korshak is Vice President of Strategy for MediaOne Interactive Services,
Inc. VSI Holdings, Inc. is the beneficial owner of 5.0% of our common stock
before the offering. Stanley R. and Carol L. Dobrin are the parents of Jonathan
M. Dobrin, our Vice President, Chief Technology Officer and Director. The
following parties were also purchasers under the Series C Preferred Share
Purchase Agreement: H&K Partners V, Davis Weidner and Sue Thompson, and N.T.
Ruddock Company. Under the agreement we sold a total of 2,009,184 shares of
Series C Convertible Preferred Stock for an aggregate purchase price of
$15,000,000 in a series of closings from December 21, 1998 through March 1,
1999. Pursuant to our Amended and Restated Certificate of Incorporation, the
shares of Series C Preferred Stock will automatically convert into a total of
2,009,184 shares of common stock upon the completion of this offering; each
share of Series C Preferred Stock will convert into one share of common stock.
MediaOne Interactive Services, Inc. purchased 937,622 shares of Series C
Preferred Stock for an aggregate purchase price of $7,000,017. VSI Holdings,
Inc. purchased 468,808 shares of Series C Preferred Stock for an aggregate
purchase price of $3,499,992. New World Equities, Inc. purchased 301,378 shares
of Series C Preferred Stock for an aggregate purchase price of $2,250,002.
Blumenstein/Thorne Information Partners I, L.P. purchased 172,097 shares of
Series C Preferred Stock for an aggregate purchase price of $1,284,830. Stanley
R. and Carol L. Dobrin, JTWOS purchased 6,696 shares of Series C Preferred
Stock for an aggregate purchase price of $49,995.
Amended and Restated Shareholders Agreement
In connection with the sale of Series C Preferred Stock, we entered into an
amended and restated shareholders agreement with the Series C Preferred
purchasers and our Series A Preferred and Series B preferred stockholders and
all of our common stockholders at that time. The amended and restated
shareholders agreement provided that our board of directors would consist of
ten members. The agreement, to which substantially all of our subsequent
stockholders are parties, was subsequently amended as of January 1999 to
provide that the board would consist of seven members, to be designated as
follows:
. The common stockholders have the right to designate three directors, one
of whom shall be an independent director;
. The holders of Series A Preferred Stock have the right to designate one
director;
. Blumenstein/Thorne Information Partners I, L.P. has the right to
designate one director;
. MediaOne Interactive Services, Inc. has the right to designate one
director; and
. All stockholders as a group will vote to elect one director, provided
that this director must receive the affirmative vote of at least 66.67%
of the shares voting.
The common stockholders have designated Robert Helmick and Jon Dobrin as
directors, the common stockholders have not designated their independent
director. The holders of Series A Preferred Stock have designated Chris
Girgenti as director, Blumenstein/Thorne have designated Jack Blumenstein as
director, MediaOne has designated Jeri Korshak as director, and the
stockholders, as a group, have designated Oakleigh Thorne as director. In
addition, the agreement restricts the sale or transfer of shares of stock
except in limited instances or in compliance with a co-sale procedure which
permits each other stockholder to participate in the proposed sale, based on
such stockholder's pro-rata stock holdings on an as converted basis. The
agreement will terminate upon the completion of this offering and the board of
directors designation and co-sale provisions will no longer be applicable.
55
<PAGE>
Amended and Restated Registration Rights Agreement
In connection with the sale of Series C Preferred Stock, we also entered
into an amended and restated registration agreement which provided the
Series A, Series B and Series C stockholders with demand and piggyback
registration rights. The holders of 30% or more of the registrable securities
are entitled to demand that we register their registrable securities under the
Securities Act on Form S-1 or any similar long form registration statement. We
are not required to effect more than two registrations pursuant to these demand
registrations rights. The holders of the registrable securities are entitled to
demand that we register their registrable securities under the Securities Act
on Form S-3 or any similar short form registration statement then available to
the Company, provided that the anticipated aggregate offering price of the
securities to be registered exceeds $500,000. In addition, the holders of
registrable securities are entitled to require us to include their registrable
securities in future registration statements that we may file. Please see
"Description of Capital Stock--Registration Rights."
Indemnification Agreements
We have entered into indemnification agreements with our non-employee
directors, Mr. Blumenstein, Mr. Girgenti and Ms. Korshak.
Certain Other Transactions
From August 2, 1996 through January 31, 1997, we borrowed a total of
$443,277 from a limited liability company of which Mr. R. Helmick is a manager
and a member. Each loan was made under a promissory note that had an interest
rate of 8% per annum. We repaid these loans in a series of installments from
July 1997 through April 1998, together with a total of $42,269 in accrued
interest.
On March 10, 1997 we borrowed $87,000 from Mr. R. Helmick pursuant to a
promissory note. The note was payable in 60 monthly installments of $1,868, and
had an interest rate of 10.25% per annum. We made monthly payments through
March 1998 and repaid the remainder of the note in full in April 1998.
In November 1999, we received a commitment for a subordinated bridge loan
facility from some of our current institutional investors. The facility
described in the commitment will make available $2 million of borrowings for
working capital purposes. The facility would be subordinated to the existing
bank line of credit. Borrowings under the facility would bear interest at a
fixed annual rate of 11%, and the borrowings would be secured by a second lien
on all of our assets. The borrowings would mature upon the earlier of the
closing of an equity financing in excess of $10 million or May 31, 2000. The
facility also provides for the issuance of warrants for a maximum of 150,000
shares of our common stock to the lenders. Warrants would be issued only upon
our draw under the facility, in the amount of one warrant for each $20 drawn.
The warrants would be for a three year term from the date of the related draw,
and will have an exercise price of $9.00 per share. Such warrants, if any, will
be valued on the date of issuance, and would be amortized over the term of the
borrowing as additional interest expense.
Certain Business Relationships
During 1998 we paid $35,245 in legal fees to Dorsey & Whitney LLP and we
have paid $102,615 in legal fees to that firm as of September 30, 1999. Robert
H. Helmick, Esq., the father of Mr. R. Helmick and Mr. J. Helmick, is a partner
of that firm.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of September 30, 1999, and as adjusted to
reflect the sale of shares offered hereby assuming no exercise of the over-
allotment option, by (1) each of our directors, (2) our Chief Executive
Officer, (3) each person (or group of affiliated persons) known by us to
beneficially own more than 5% of our common stock and (4) all directors and
executive officers as a group.
Unless otherwise indicated, each person named in the table has sole voting
power and investment power or shares such power with his or her spouse with
respect to all shares of capital stock listed as owned by such person.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and includes voting or investment power with
respect to the securities. The number of shares of common stock outstanding for
each listed person includes any shares the individual has the right to acquire
within 60 days.
<TABLE>
<CAPTION>
Percent of
Number of Ownership
Shares -----------------
Beneficially Before After
Name of Beneficial Owner Owned Offering Offering
- ------------------------ ------------ -------- --------
<S> <C> <C> <C>
Robert N. Helmick.......................... 4,550,000 (1) 48.5% 32.8%
Jonathan M. Dobrin......................... 206,112 (2) 2.2% 1.5%
Blumenstein/Thorne Information Partners I,
L.P. ..................................... 1,442,975 (3) 15.4% 10.4%
MediaOne Interactive Services, Inc. ....... 937,622 (4) 10.0% 6.8%
New World Equities, Inc. .................. 917,378 (5) 9.5% 6.5%
VSI Holding, Inc........................... 468,808 (6) 5.0% 3.4%
Jack W. Blumenstein........................ 1,442,975 (7) 15.4% 10.4%
Christopher E. Girgenti.................... 917,378 (8) 9.5% 6.5%
Oakleigh Thorne............................ 1,442,975 (9) 15.4% 10.4%
Jeri Korshak............................... -- -- --
All directors and executive officers as a
group..................................... 7,539,856 (10) 76.5% 52.5%
</TABLE>
- --------
(1) Consists of 4,526,666 shares held by the Robert N. Helmick Trust and
options to purchase 23,334 shares of common stock exercisable within 60
days of September 30, 1999. The address for Mr. Helmick is 10200 A East
Girard Avenue, Denver, Colorado 80231.
(2) Includes options to purchase 66,112 shares of common stock exercisable
within 60 days of September 30, 1999. The address for Mr. Dobrin is 10200
A East Girard Avenue, Denver, Colorado 80231.
(3) The address for Blumenstein/Thorne Information Partners I, L.P. is P.O.
Box 871, Lake Forest, Illinois 60045.
(4) The address for MediaOne Interactive Services, Inc. is 5613 DTC Parkway,
Suite 700, Englewood, Colorado 80111.
(5) Consists of 609,378 shares and warrants to purchase 308,000 shares of
common stock exercisable within 60 days of September 30, 1999. The address
for New World Equities, Inc. is 1603 Orrington Avenue, Suite 1070,
Evanston, Illinois 60201.
(6) The address for VSI Holding, Inc. is 2100 N. Woodward Ave., Suite 201
West, Bloomfield Hills, Michigan 48304-2263.
(7) Consists of shares beneficially owned by Blumenstein/Thorne Information
Partners I, L.P. Mr. Blumenstein is a co-President of Blumenstein/Thorne
Information Partners L.L.C., the general partner of Blumenstein/Thorne
Information Partners I, L.P. Mr. Blumenstein disclaims beneficial
ownership of such shares, except to the extent of his pecuniary interest,
if any. The address for Mr. Blumenstein is P.O. Box 871, Lake Forest,
Illinois 60045.
(8) Consists of 609,378 shares and warrants to purchase 308,000 shares of
common stock exerciseable within 60 days of September 30, 1999,
beneficially owned by New World Equities, Inc., of which Mr. Girgenti is a
Senior Managing Director. Mr. Girgenti disclaims beneficial ownership of
such shares, except to the extent of his pecuniary interest, if any. The
address for Mr. Girgenti is 1603 Orrington Avenue, Suite 1070, Evanston,
Illinois 60201.
(9) Consists of shares beneficially owned by Blumenstein/Thorne Information
Partners I, L.P. Mr. Thorne is a co-President of Blumenstein/Thorne
Information Partners L.L.C., the general partner of Blumenstein/Thorne
Information Partners I, L.P. Mr. Thorne disclaims beneficial ownership of
such shares, except to the extent of his pecuniary interest, if any. The
address for Mr. Thorne is P.O. Box 871, Lake Forest, Illinois 60045.
(10) Includes 186,172 shares issuable upon the exercise of options exercisable
within 60 days of September 30, 1999 and 308,000 shares issuable upon the
exercise of warrants exercisable within 60 days of September 30, 1999. See
notes 1, 2 7, 8 and 9 above.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Upon completion of this offering, our authorized capital stock will consist
of 50,000,000 shares of common stock, par value $.01 per share, and 5,000,000
shares of preferred stock, par value $.01 per share.
In June 1999, we reincorporated in Delaware. Upon the completion of this
offering we plan to further amend and restate our Certificate of Incorporation.
The following summary of the provisions of the common stock and preferred stock
does not purport to be complete and is subject to, and qualified in its
entirety by, the provisions of the forms of Amended and Restated Certificate of
Incorporation and Amended and Restated Bylaws to be effective upon the
completion of this offering.
Common Stock
As of the date of this prospectus, assuming conversion of our outstanding
preferred stock there are 9,362,395 shares of common stock outstanding and held
of record by 62 stockholders. There will be 13,862,395 shares of common stock
outstanding upon the closing of this offering.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of common stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of common stock are entitled to receive ratably
such dividends, if any, as may be declared by the board of directors out of
funds legally available therefor, subject to any preferential dividend rights
of any outstanding preferred stock. In the event of our liquidation,
dissolution or winding up, the holders of common stock are entitled to share
ratably in all of our assets remaining after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding preferred stock.
Holders of the common stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of common stock are, and the shares
sold in this offering will be, when issued in consideration for payment
thereof, fully paid and nonassessable. The rights, preferences and privileges
of holders of common stock are subject to, and may be adversely affected by,
the rights of the holders of shares of any series of preferred stock which we
may designate and issue in the future. Upon completion of this offering, there
will be no shares of preferred stock outstanding.
Preferred Stock
Upon completion of this offering, the board of directors will be authorized,
without further stockholder approval, to issue from time to time up to an
aggregate of 5,000,000 shares of preferred stock in one or more series and to
fix or alter the designations, preferences, rights and any qualifications,
limitations or restrictions of the shares of each such series thereof,
including the dividend rights, dividend rates, conversion rights, voting
rights, terms of redemption (including sinking fund provisions), redemption
price or prices, liquidation preferences and the number of shares constituting
any series or designations of such series. We have no present plans to issue
any shares of preferred stock.
Warrants
We are a party to warrant agreements that entitle the warrant holders to
purchase 639,334 shares of common stock at a purchase price of $1.62 per share.
All shares of common stock issuable upon exercise of these warrants are
entitled to registration rights. See "Description of Capital Stock--
Registration Rights." The warrants expire if not exercised on or prior to June
11, 2000. The warrants provide the holders with anti-dilution protection. We
are also a party to a warrant agreement that entitles the warrant holder to
purchase 40,185 shares of common stock at a purchase price of $7.47 per share.
This warrant expires if not exercised on or prior to February 26, 2002. The
terms of this warrant are the same as those of the warrants described above.
We are also a party to a warrant agreement that entitles the warrant holder
to purchase 7,000 shares of common stock. The exercise price of the warrant is
$3.93 per share for fifty percent of the shares of common stock and $7.47 per
share for the remaining fifty percent. In the event that we are acquired by
another entity,
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<PAGE>
the warrant holder, at its option, may elect to receive either (i) the
consideration to be received by the holders of common stock, or (ii) cash in
an amount equal to the difference between the fair market value of the
consideration that the warrant holder would otherwise have received and the
exercise price of the warrant. The warrant shares are subject to an anti-
dilution agreement. In addition, all shares of common stock issuable upon
exercise of this warrant are entitled to registration rights.
Assuming an offering price of the common stock sold in this offering of
$9.00 per share, we will issue to the lender of our line of credit a warrant
to purchase 30,000 shares of common stock. The exercise price of this warrant
will be equal to the price of the common stock sold in this offering, with a
maximum exercise price of $21 per share. If the offering price of the common
stock sold in this offering is:
(1) less than $12.00 per share, we will issue the lender a warrant to
purchase 30,000 of common stock;
(2) greater than $12.00 per share; and less than $16.50 per share, we will
issue the lender a warrant to purchase 36,667 shares of common stock; or
(3) greater than $16.50 per share, we will issue the lender a warrant to
purchase 46,667 shares.
All shares of common stock issuable upon exercise of these warrants are
entitled to registration rights.
Options
As of September 30, 1999, options to purchase a total of 1,880,126 shares
of common stock were outstanding, all of which are subject to lock-up
arrangements. Options to purchase a total of 940,583 shares of common stock
may be granted under our 1999 Stock Incentive Plan.
Registration Rights
We entered into registration rights agreements with many of our existing
stockholders. After the completion of this offering, the holders of 4,150,402
shares of common stock issuable upon the conversion of all of the outstanding
preferred stock, and warrants to purchase an additional 623,000 shares of
common stock, will be entitled to demand registration rights with respect to
the registration of their registrable securities under the Securities Act. The
holders of 30% or more of the registrable securities are entitled to demand
that we register their registrable securities under the Securities Act on Form
S-1 or any similar long form registration statement. We are not required to
effect more than two registrations pursuant to these demand registrations
rights. The holders of the of the registrable securities are entitled to
demand that we register their registrable securities under the Securities Act
on Form S-3 or any similar short form registration statement then available to
us, provided that the anticipated aggregate offering price of the securities
to be registered exceeds $500,000. In addition, the holders of registrable
securities are entitled to require us to include their registrable securities
in future registration statements that we may file. These registration rights
are subject to various conditions and limitations, including the right of the
underwriters of an offering to limit the number of registrable securities that
may be included in the offering. In addition, holders of all of these shares
will be restricted from exercising their demand rights until 180 days after
the date of this prospectus. We are generally required to bear all of the
expenses of these registrations, except underwriting discounts and selling
commissions. Registration of any of the registrable securities held by
security holders with registration rights will result in shares becoming
freely tradable without restriction under the Securities Act immediately upon
the effectiveness of such registration.
Anti-Takeover Effects of Provisions of Delaware Law and the Certificate of
Incorporation and Bylaws
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law (as amended from time to time, the "DGCL"). Subject to
exceptions, Section 203 of the DGCL prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the interested
stockholder attained such status with the approval of the board of directors
or unless the business combination is approved in a prescribed manner. A
"business combination" includes mergers, asset sales and other transactions
resulting in a financial benefit to the interested stockholder. Subject to
certain
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<PAGE>
exceptions, an "interested stockholder" is a person who, together with
affiliates and associates, owns, or within three years did own, fifteen percent
(15%) or more of the corporation's voting stock. This statute could prohibit or
delay the accomplishment of mergers or other takeover or change in control
attempts and, accordingly, may discourage attempts to acquire us.
In addition, provisions of the Amended and Restated Certificate of
Incorporation and Bylaws, which provisions will be in effect upon the closing
of this offering and are summarized in the following paragraphs, may be deemed
to have an anti-takeover effect and may delay, defer or prevent a tender offer
or takeover attempt that a stockholder might consider in its best interest,
including those attempts that might result in a premium over the market price
for the shares held by stockholders.
Board of Directors Vacancies
The Amended and Restated Certificate of Incorporation authorizes the board
of directors to fill vacant directorships or increase the size of the board of
directors. This may deter a stockholder from removing incumbent directors and
simultaneously gaining control of the board of directors by filling the
vacancies created by such removal with its own nominees.
Stockholder Action; Special Meeting of Stockholders
The Amended and Restated Certificate of Incorporation provides that
stockholders may not take action by written consent, but only at duly called
annual or special meetings of stockholders. The Bylaws further provide that
special meetings of stockholders of eCollege.com may be called only by the
President, the Chairman of the board of directors or a majority of the board of
directors.
Advance Notice Requirements for Stockholder Proposals and Director Nominations
The Bylaws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to
or mailed and received at our principal executive offices not less than 120
days nor more than 150 days prior to the first anniversary of the date of our
notice of annual meeting provided with respect to the previous year's annual
meeting of stockholders; provided, that if no annual meeting of stockholders
was held in the previous year or the date of the annual meeting of stockholders
has been changed to be more than 30 calendar day earlier than or 60 calendar
days after such anniversary, notice by the stockholder, to be timely, must be
so received not more than 90 days nor later than the later of:
(1) 60 days prior to the annual meeting of stockholders; or
(2) the close of business on the 10th day following the date on which notice
of the date of the meeting is given to stockholders or made public.
The Bylaws also specify certain requirements as to the form and content of a
stockholder's notice. These provisions may preclude stockholders from bringing
matters before an annual meeting of stockholders or from making nominations for
directors at an annual meeting of stockholders.
Authorized But Unissued Shares
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval, subject to certain
limitations imposed by the Nasdaq National Market. These additional shares may
be utilized for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued and unreserved common
stock and preferred stock could render more difficult or discourage an attempt
to obtain control of us by means of a proxy contest, tender offer, merger or
otherwise.
Transfer Agent and Registrar
The transfer agent and registrar for the common stock is American Securities
Transfer and Trust, Inc., Denver, Colorado.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has not been any public market for the common
stock, and no prediction can be made as to the effect, if any, that market
sales of shares of common stock or the availability of shares of common stock
for sale will have on the market price of the common stock prevailing from time
to time. Nevertheless, sales of substantial amounts of common stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the common stock and could impair our future ability
to raise capital through the sale of our equity securities.
Upon the closing of this offering, we will have an aggregate of 13,862,395
shares of common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. Upon
the closing of this offering, 1,880,126 shares of common stock will be issuable
upon exercise of outstanding options, of which 580,767 shares will be vested
and exercisable, and 686,519 shares of common stock will be issuable upon
exercise of outstanding warrants, not including the warrant issued in
connection with the bank line of credit. Of the outstanding 13,862,395 shares,
the 4,500,000 shares sold in this offering will be freely tradable, except that
any shares held by our "affiliates" (as that term is defined in Rule 144
promulgated under the Securities Act) may only be sold in compliance with the
limitations described below. The remaining 9,362,395 shares of common stock
will be deemed "restricted securities" as defined under Rule 144. Restricted
securities may be sold in the public market only if registered or if they
qualify for an exemption from registration under Rules 144, 144(k) or 701
promulgated under the Securities Act, which rules are summarized below. After
taking into account the 180-day lock-up agreements described below and the
provisions of Rules 144, 144(k) and 701, additional shares will be available
for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
------------------------ -------------------------------------------------
<S> <C>
9,063,714............... 180 days after the date of this prospectus
298,681................. At various times from the date of this prospectus
</TABLE>
Of these shares, approximately 8,452,115 of the shares that will become
eligible for resale after the expiration of the 180-day lock-up agreements are
held by affiliates and therefore will remain subject to the volume limitations
and other restrictions of Rule 144.
In general, under Rule 144, as currently in effect, a person or persons
whose shares are required to be aggregated, including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of:
(1) 1% of the then outstanding shares of common stock (approximately
shares immediately after this offering); or
(2) the average weekly trading volume in the common stock during the four
calendar weeks preceding the date on which notice of such sale is filed,
subject to certain restrictions.
In addition, a person who is not deemed to have been an affiliate of us at
any time during the 90 days preceding a sale and who has beneficially owned the
shares proposed to be sold for at least two years would be entitled to sell
such shares under Rule 144(k) without regard to the requirements described
above. To the extent that shares were acquired from an affiliate of us such
person's holding period for the purpose of effecting a sale under Rule 144
commences on the date of transfer from the affiliate.
Rule 701 promulgated under the Securities Act provides that shares of common
stock acquired pursuant to written plans such as the 1999 Stock Incentive Plan
may be resold by persons other than affiliates, beginning 90 days after the
date of this prospectus, subject only to the manner of sale provisions of Rule
144, and by affiliates, beginning 90 days after the date of this prospectus,
subject to all provisions of Rule 144 except its one-year minimum holding
period.
All of our directors, officers and stockholders, and our optionholders and
warrantholders have agreed that they will not, without the prior written
consent of the representatives of the underwriters, sell or otherwise dispose
of any shares of common stock or options to acquire shares of common stock
during the 180-day period following the date of this prospectus. See
"Underwriting."
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<PAGE>
We intend to file a Form S-8 registration statement under the Securities Act
on or immediately after the date of this prospectus to register all shares of
common stock issuable under the 1999 Stock Incentive Plan and our 1999 Employee
Stock Purchase Plan. Such registration statement will automatically become
effective upon filing. Accordingly, shares covered by that registration
statement will thereupon be eligible for sale in the public markets, unless
such options are subject to vesting restrictions or the contractual
restrictions described above.
We have agreed not to sell or otherwise dispose of any shares of common
stock during the 180-day period following the date of the prospectus, except we
may issue, and grant options to purchase, shares of common stock under the
Stock Option Plan and we may offer and sell shares of common stock under our
Employee Stock Purchase Plan. In addition, we may issue shares of common stock
in connection with any acquisition of another company if the terms of such
issuance provide that such common stock shall not be resold prior to the
expiration of the 180-day period referenced in the preceding sentence.
Following this offering, in some circumstances and subject to conditions,
holders of 4,773,402 shares of our outstanding common stock will have demand
registration rights to require us to register their shares of common stock
under the Securities Act, and they will have rights to participate in any
future registration of securities by us. These holders are subject to lock-up
periods of not more than 180 days following the date of this prospectus or 90
days after any subsequent prospectus.
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<PAGE>
UNDERWRITING
We are offering the shares of common stock described in this prospectus
through a number of investment banks, which will purchase the common stock
directly from eCollege.com for distribution to the public, referred to as
underwriters. Banc of America Securities LLC, William Blair & Company, L.L.C.
and Volpe Brown Whelan & Company, LLC are the representatives of the
underwriters and will negotiate on behalf of the underwriters and will enter
into the underwriting agreement with us. Subject to the terms and conditions of
the underwriting agreement, we have agreed to sell to the underwriters, and
each of the underwriters has agreed to purchase, the number of shares of common
stock listed next to its name in the following table:
<TABLE>
<CAPTION>
Number of
Shares
Underwriter ----------
<S> <C>
Banc of America Securities LLC.......................................
William Blair & Company, L.L.C.......................................
Volpe Brown Whelan & Company, LLC....................................
<CAPTION>
----------
<S> <C>
Total.............................................................. 4,500,000
<CAPTION>
==========
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement. The conditions contained in the
underwriting agreement include, among others, the requirements that:
.the representations and warranties made by us to the underwriters are true;
.there is no material change in the financial markets;
.we deliver to the underwriters customary closing documents such as various
certificates and opinions of counsel; and
.this registration statement has been declared effective by the SEC.
The underwriting agreement also provides that the underwriters are obligated
to purchase all of the shares of common stock in the offering if any are
purchased, other than those shares covered by the over-allotment option
described below.
We have granted an option to the underwriters to buy up to 675,000
additional shares of common stock. These additional shares would cover sales of
shares by the underwriters which exceed the number of shares specified in the
table above. The underwriters have 30 days to exercise this option. If the
underwriters exercise this option, they will each purchase additional shares
approximately in proportion to the amounts specified in the table above.
The representatives of the underwriters have advised us that the
underwriters propose initially to offer the shares of common stock to the
public at the price set forth on the cover page of this prospectus, and to
dealers, such as stockbrokers, at that price less a concession not in excess of
$ per share of common stock. The underwriters may allow, and such dealers
may reallow, a discount not in excess of $ per share of common stock to
other dealers. After the initial public offering, the public offering price,
concession and discount may change.
The following table shows the per share and total underwriting discount to
be paid by us to the underwriters and the proceeds before expenses to us. This
information is presented assuming both no exercise and full exercise by the
underwriters of their over-allotment option.
<TABLE>
<CAPTION>
Per Share Without Option With Option
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price.................... $ $ $
Underwriting discount.................... $ $ $
Proceeds, before expenses, to
eCollege.com............................ $ $ $
</TABLE>
The underwriting fee will be an amount equal to the offering price per share
to the public of the common stock, less the amount paid by the underwriters to
eCollege.com per share of common stock. The underwriting fee currently is not
expected to exceed 7% of the initial public offering price. The expenses of the
offering, exclusive of the underwriting discount, are estimated at $973,832 and
are payable entirely by us. The expenses consist of the following:
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<PAGE>
.a registration fee of $14,067;
.an NASD filing fee of $6,250;
.Nasdaq application and listing fee of $95,000;
.estimated blue sky qualification fees and expenses of $10,000;
.estimated printing and engraving expenses of $250,000;
.estimated legal fees and expenses of $300,000;
.estimated accounting fees and expenses of $250,000;
.estimated transfer agent and registrar fees of $15,000; and
.estimated miscellaneous fees and expenses of $33,515.
We and all holders of our stock prior to this offering, as well as all
holders of stock options, have entered into lock-up agreements with the
underwriters. Under those agreements, we and those holders of stock and options
may not dispose of or hedge any common stock or securities convertible into or
exchangeable for shares of common stock. These restrictions will be in effect
for a period of 180 days after the date of this prospectus. At any time and
without notice, Banc of America Securities LLC may, in its sole discretion,
release all or some of the securities from these lock-up agreements.
We have agreed to indemnify the underwriters against liabilities, including
liabilities for misstatements and omissions under the Securities Act of 1933
and liabilities arising from breaches of the representations and warranties
contained in the underwriting agreement, and to contribute to payments that the
underwriters may be required to make for these liabilities.
Rules of the SEC may limit the ability of the underwriters to bid for or
purchase shares before the distribution of the shares is completed. However,
the underwriters may engage in the following activities in accordance with the
rules:
. Stabilizing transactions--The representatives may make bids or purchases
for the purpose of pegging, fixing or maintaining the price of the
shares, so long as stabilizing bids do not exceed a specified maximum.
. Over-allotments and syndicate covering transactions--The underwriters may
create a short position in the shares by selling more shares than are set
forth on the cover page of this prospectus. If a short position is
created in connection with the offering, the representatives may engage
in syndicate covering transactions by purchasing shares in the open
market. The representatives may also elect to reduce any short position
by exercising all or part of the over-allotment option.
. Penalty bids--Penalty bids occur when a particular underwriter repays to
the other underwriters a portion of the underwriting discount received by
it because the representatives have repurchased shares sold by or for the
account of such underwriter in stabilizing or covering transactions.
. Passive market making--Market makers in the shares who are underwriters
or prospective underwriters may make bids for or purchases of shares,
subject to certain limitations, until the time, if ever, at which a
stabilizing bid is made.
Stabilization and syndicate covering transactions may cause the price of the
shares to be higher than it would be in the absence of such transactions. The
imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither eCollege.com nor the underwriters make any representation or
prediction as to the effect that the transactions described above may have the
price of the shares. These transactions may occur on the Nasdaq National Market
or otherwise. If these transactions are commenced, they may be discontinued
without notice at any time.
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<PAGE>
The underwriters do not expect sales to discretionary accounts to exceed 5%
of the total number of shares of common stock offered by this prospectus.
Prior to this offering, there has been no public market for our common
stock. The initial public offering price will be negotiated between us and the
underwriters. The primary factors to be considered in such negotiations are:
. our history and prospects, and the history and prospects of the industry
in which we compete;
. our past and present financial performance;
. an assessment of our management;
. the present state of our development;
. our prospects for future earnings;
. the prevailing market conditions of the applicable U.S. securities market
at the time of this offer;
. market valuations of publicly traded companies that we and the
representatives believe to be comparable to us; and
. other factors deemed relevant, such as the evaluation of the above
factors in relation to the market valuation of companies in related
businesses.
The underwriters have reserved up to 5% of the common stock offered hereby
for sale to our employees, families and friends of directors and executive
officers, faculty members and other employees of our customers and vendors at
the initial public offering price set forth on the cover page of this
prospectus. These persons must commit to purchase no later than the close of
business on the day following the date of this prospectus, and will be required
to sign a 60 day lock-up agreement with the Company. The number of shares
available for sale to the general public will be reduced to the extent such
persons purchase these reserved shares.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for eCollege.com by Brobeck, Phleger & Harrison LLP, Broomfield, Colorado.
Certain legal matters in connection with this offering will be passed upon for
the underwriters by Cooley Godward LLP, Boulder, Colorado.
EXPERTS
The financial statements included in this prospectus have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
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<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the common stock
offered hereby. This prospectus, which constitutes part of the registration
statement, does not contain all of the information set forth in the
registration statement, certain parts of which are omitted in accordance with
the rules and regulations of the Securities and Exchange Commission. For
further information about us and the common stock offered hereby, reference is
made to the registration statement. Statements contained in this prospectus as
to the contents of any contract or other document filed as an exhibit to the
registration statement are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
registration statement, each such statement being qualified in all respects by
such reference. The registration statement (and all amendments, exhibits and
schedules thereto) may be inspected without charge at the principal office of
the Securities and Exchange Commission in Washington, D.C. and copies of all or
any part thereof may be inspected and copied at the public reference facilities
maintained by the Securities and Exchange Commission at 450 Fifth Street, N.W.,
Judiciary Plaza, Room 1024, Washington, D.C. 20549, and at the Securities and
Exchange Commission's regional offices located at Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade
Center, Suite 1300, New York, New York 10048. Copies of such material can also
be obtained at prescribed rates by mail from the Public Reference Section of
the Securities and Exchange Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, the Securities and Exchange Commission maintains a
Website (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Securities and Exchange Commission.
We intend to distribute to our stockholders annual reports containing
audited consolidated financial statements.
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<PAGE>
eCollege.com
(formerly Real Education, Inc.)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants................................... F-2
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Deficit........................................ F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</TABLE>
F-1
<PAGE>
After the reverse stock split discussed in Note 11 to the Company's financial
statements is effected, we expect to be in a position to render the following
audit report.
Arthur Andersen LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To eCollege.com:
We have audited the accompanying balance sheets of eCollege.com (a Delaware
corporation, formerly Real Education, Inc.) as of December 31, 1997 and 1998,
and the related statements of operations, stockholders' deficit and cash flows
for the period from inception (July 26, 1996) to December 31, 1996, and for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of eCollege.com as of December
31, 1997 and 1998, and the results of its operations and its cash flows for the
period from inception (July 26, 1996) to December 31, 1996, and for each of the
two years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Denver, Colorado,
April 23, 1999 (except with
respect to the matters discussed
in Note 11, as to which the date
is , 1999).
F-2
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
------------------------ September 30, September 30, 1999
1997 1998 1999 (See Note 2)
----------- ----------- ------------- ------------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents........... $ 208,346 $11,661,186 $ 2,263,773
Accounts receivable,
net................... 214,660 258,980 1,688,277
Accrued revenue
receivable............ 10,000 57,885 303,249
Other current assets... 15,550 112,357 607,193
----------- ----------- ------------
Total current
assets.............. 448,556 12,090,408 4,862,492
PROPERTY AND EQUIPMENT,
net.................... 299,842 1,569,129 2,954,456
----------- ----------- ------------
TOTAL ASSETS............ $ 748,398 $13,659,537 $ 7,816,948
=========== =========== ============
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT)
CURRENT LIABILITIES:
Accounts payable....... $ 229,337 $ 658,643 $ 1,568,708
Accounts payable-
related party......... 6,500 -- --
Accrued liabilities.... 79,725 1,284,967 1,025,862
Deferred revenue....... 35,750 569,599 2,333,115
Current portion of
notes payable to
related parties....... 39,441 -- --
----------- ----------- ------------
Total current
liabilities......... 390,753 2,513,209 4,927,685
OTHER LIABILITIES....... -- 35,900 70,086
NOTES PAYABLE TO RELATED
PARTIES................ 230,534 -- --
COMMITMENTS AND
CONTINGENCIES (Notes 1
and 8)
CONVERTIBLE PREFERRED
STOCK SUBJECT TO
MANDATORY REDEMPTION,
no par value;
Series A; 616,000,
616,000, 616,000 and
0 (unaudited, pro
forma) shares
authorized, issued
and outstanding,
respectively;
entitled to
preference in
liquidation (includes
cumulative preferred
return of $55,030,
$155,086, $230,124
and $0,
respectively)......... 1,029,284 1,136,803 1,217,436 $ --
Series B; 0,
1,525,218, 1,525,218
and 0 (unaudited, pro
forma) shares
authorized, issued
and outstanding,
respectively;
entitled to
preference in
liquidation (includes
cumulative preferred
return of $0,
$550,060, $1,000,109
and $0,
respectively)......... -- 6,534,046 6,989,048 --
Series C; 0,
2,009,184, 2,009,184
and 0 (unaudited, pro
forma) shares
authorized,
respectively; 0,
1,707,809, 2,009,184
and 0 shares issued
and outstanding,
respectively;
entitled to
preference in
liquidation (includes
cumulative preferred
return of $0,
$31,438, $1,136,680
and $0,
respectively)......... -- 11,978,566 15,579,008 --
STOCKHOLDERS' EQUITY
(DEFICIT)
Common stock, $0.01
par value; 50,000,000
shares authorized;
4,900,047, 5,112,333,
5,211,993 and
9,362,395 (unaudited,
pro forma) shares,
respectively, issued
and outstanding....... 49,000 51,123 52,120 93,624
Additional paid-in
capital............... 92,376 405,067 533,433 24,277,421
Warrants and options
for common stock...... -- 1,626,426 4,322,510 4,322,510
Notes receivable....... -- (341,024) (341,024) (341,024)
Deferred
compensation.......... -- (1,244,007) (3,245,818) (3,245,818)
Accumulated deficit.... (1,043,549) (9,036,572) (22,287,536) (22,287,536)
----------- ----------- ------------ ------------
Total stockholders'
equity (deficit).... (902,173) (8,538,987) (20,966,315) $ 2,819,177
----------- ----------- ------------ ============
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIT).............. $ 748,398 $13,659,537 $ 7,816,948
=========== =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-3
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
From Inception For the Years For the Nine
(July 26, 1996) Ended Months Ended
through December 31, September 30,
December 31, ---------------------- -------------------------
1996 1997 1998 1998 1999
--------------- --------- ----------- ----------- ------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE:
Campus and course
development fees...... $ -- $ 628,250 $ 1,086,022 $ 656,905 $ 1,536,932
Student fees........... 22,464 399,930 579,047 383,691 1,378,880
--------- --------- ----------- ----------- ------------
Total revenue........ 22,464 1,028,180 1,665,069 1,040,596 2,915,812
COST OF REVENUE......... 109,974 528,090 2,064,909 1,217,759 4,880,983
--------- --------- ----------- ----------- ------------
Gross profit (loss).. (87,510) 500,090 (399,840) (177,163) (1,965,171)
--------- --------- ----------- ----------- ------------
OPERATING EXPENSES:
Selling and
marketing............. 25,474 106,026 3,394,000 1,933,201 4,756,319
General and
administrative........ 248,884 767,812 2,509,496 1,609,960 3,613,126
Product development.... 60,207 212,052 1,099,000 600,843 1,316,513
--------- --------- ----------- ----------- ------------
Total operating
expenses............ 334,565 1,085,890 7,002,496 4,144,004 9,685,958
--------- --------- ----------- ----------- ------------
LOSS FROM OPERATIONS.... (422,075) (585,800) (7,402,336) (4,321,167) (11,651,129)
OTHER INCOME (EXPENSE):
Interest and other
income................ 27,001 8,993 149,308 122,866 286,242
Interest expense....... (9,186) (37,990) (36,819) (1,032) --
--------- --------- ----------- ----------- ------------
NET LOSS FROM CONTINUING
OPERATIONS............. (404,260) (614,797) (7,289,847) (4,199,333) (11,364,887)
DISCONTINUED OPERATIONS
(Note 5):
Income (loss) from
operations............ (29,239) 29,249 -- -- --
Gain on disposal of
discontinued
operations............ -- 34,632 -- -- --
--------- --------- ----------- ----------- ------------
NET LOSS................ $(433,499) $(550,916) $(7,289,847) $(4,199,333) $(11,364,887)
========= ========= =========== =========== ============
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS:
Net loss............... $(433,499) $(550,916) $(7,289,847) $(4,199,333) $(11,364,887)
Dividends on
mandatorily
redeemable,
convertible preferred
stock................. -- (55,030) (681,554) (475,552) (1,630,329)
Accretion of
mandatorily
redeemable,
convertible preferred
stock................. -- (4,104) (21,622) (11,004) (255,748)
--------- --------- ----------- ----------- ------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS.... $(433,499) $(610,050) $(7,993,023) $(4,685,889) $(13,250,964)
========= ========= =========== =========== ============
BASIC AND DILUTED NET
LOSS FROM CONTINUING
OPERATIONS PER SHARE .. $ -- $ (0.16) $ (1.58) $ (0.93) $ (2.57)
========= ========= =========== =========== ============
BASIC AND DILUTED NET
LOSS PER SHARE ........ $ -- $ (0.15) $ (1.58) $ (0.93) $ (2.57)
========= ========= =========== =========== ============
WEIGHTED AVERAGE SHARES
OUTSTANDING--BASIC AND
DILUTED................ -- 4,107,964 5,074,697 5,062,143 5,159,501
========= ========= =========== =========== ============
PRO FORMA NET LOSS FROM
CONTINUING
OPERATIONS PER SHARE
(UNAUDITED--Note 2):
Basic and diluted net
loss per share........ $ (1.02) $ (.60) $ (1.23)
=========== =========== ============
Weighted average
common shares
outstanding--basic
and diluted........... 7,120,022 7,012,711 9,276,421
=========== =========== ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-4
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock
----------------------------
Additional Warrants
Par Paid-in and Notes Deferred Accumulated
Shares Value Capital Options Receivable Compensation Deficit Total
--------- ------- ---------- ---------- ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES, JULY 26, 1996
(Inception)............ -- $ -- $ -- $ -- $ -- $ -- $ -- $ --
Net loss............... -- -- -- -- -- -- (433,499) (433,499)
--------- ------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, DECEMBER 31,
1996................... -- -- -- -- -- -- (433,499) (433,499)
Issuance of common
stock at approximately
$0.03 per share....... 373,333 3,733 7,067 -- -- -- -- 10,800
Issuance of common
stock in February 1997
for services
provided.............. 4,526,667 45,267 85,233 -- -- -- -- 130,500
Common stock issued
upon exercise of
warrants.............. 47 -- 76 -- -- -- -- 76
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock................. -- -- -- -- -- -- (55,030) (55,030)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value................. -- -- -- -- -- -- (4,104) (4,104)
Net loss............... -- -- -- -- -- -- (550,916) (550,916)
--------- ------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, DECEMBER 31,
1997................... 4,900,047 49,000 92,376 -- -- -- (1,043,549) (902,173)
Issuance of common
stock upon exercise of
warrants and options
...................... 212,286 2,123 342,691 -- (341,024) -- -- 3,790
Repurchase of warrants
for common stock...... -- -- (30,000) -- -- -- -- (30,000)
Deferred compensation.. -- -- -- 1,443,542 -- (1,443,542) -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 199,535 -- 199,535
Warrants for common
stock issued in
connection with line
of credit............. -- -- -- 27,819 -- -- -- 27,819
Warrants for common
stock issued in
connection with Series
C preferred stock..... -- -- -- 155,065 -- -- -- 155,065
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock................. -- -- -- -- -- -- (681,554) (681,554)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value................. -- -- -- -- -- -- (21,622) (21,622)
Net loss............... -- -- -- -- -- -- (7,289,847) (7,289,847)
--------- ------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, DECEMBER 31,
1998................... 5,112,333 51,123 405,067 1,626,426 (341,024) (1,244,007) (9,036,572) (8,538,987)
Issuance of common
stock upon exercise of
options (Unaudited)... 99,660 997 128,366 -- -- -- -- 129,363
Deferred compensation
(Unaudited)........... -- -- -- 2,696,084 -- (2,696,084) -- --
Amortization of
deferred compensation
(Unaudited)........... -- -- -- -- -- 694,273 -- 694,273
Dividends accrued on
mandatorily
redeemable,
convertible preferred
stock (Unaudited)..... -- -- -- -- -- -- (1,630,329) (1,630,329)
Accretion of
mandatorily
redeemable,
convertible preferred
stock to redemption
value (Unaudited)..... -- -- -- -- -- -- (255,748) (255,748)
Net loss (Unaudited)... -- -- -- -- -- -- (11,364,887) (11,364,887)
--------- ------- -------- ---------- --------- ----------- ------------ ------------
BALANCES, September 30,
1999 (UNAUDITED)....... 5,211,993 $52,120 $533,433 $4,322,510 $(341,024) $(3,245,818) $(22,287,536) $(20,966,315)
========= ======= ======== ========== ========= =========== ============ ============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-5
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
From Inception For the Nine
(July 26, 1996) For the Years Ended Months Ended
through December 31, September 30,
December 31, ------------------------ ---------------------------
1996 1997 1998 1998 1999
--------------- ---------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: (Unaudited)
Net loss....................................... $(433,499) $ (550,916) $ (7,289,847) $ (4,199,333) $ (11,364,887)
Adjustments to reconcile net loss to net cash
used in operating activities-
Depreciation and amortization................. 18,376 126,199 393,841 250,972 731,977
Provision for doubtful accounts............... -- -- 9,800 3,000 --
Gain on disposal of discontinued operations... -- (34,632) -- -- --
Common stock issued for services.............. -- 65,250 -- -- --
Deferred compensation......................... -- -- 199,535 62,454 694,273
Noncash interest expense...................... -- -- 27,819 -- --
Change in-
Accounts receivable and accrued
revenue receivables......................... (14,433) (190,607) (102,005) (367,317) (1,674,661)
Other current assets......................... (1,399) (14,151) (96,807) (141,053) (105,483)
Accounts payable and accrued liabilities..... 112,379 268,433 972,048 1,051,975 1,306,960
Deferred revenue............................. 35,000 750 533,849 637,414 1,763,516
Other liabilities............................ -- -- 35,900 36,901 34,186
--------- ---------- ------------ ------------ -------------
Net cash used in operating activities...... (283,576) (329,674) (5,315,867) (2,664,987) (8,614,119)
--------- ---------- ------------ ------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (53,090) (369,653) (1,663,128) (1,355,707) (2,117,304)
Proceeds from sale of ColoradoNet.............. -- 200,000 -- -- --
Purchase of ColoradoNet, net of cash
acquired...................................... (77,662) -- -- -- --
--------- ---------- ------------ ------------ -------------
Net cash used in investing activities...... (130,752) (169,653) (1,663,128) (1,355,707) (2,117,304)
--------- ---------- ------------ ------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock...... -- 1,000,000 18,750,020 6,000,000 2,250,000
Proceeds from line of credit .................. -- -- 500,000 -- --
Payments on line of credit .................... -- -- (500,000) -- --
Payments on notes payable...................... -- (129,000) -- -- --
Proceeds from notes payable to related
parties....................................... 434,465 120,812 -- -- --
Payments on notes payable to related parties... -- (285,302) (269,975) (269,975) --
Payment of stock issuance costs................ -- (29,850) (22,000) (22,000) (656,000)
Repurchase of warrants......................... -- -- (30,000) (26,210) --
Proceeds from issuance of common stock......... -- 10,876 3,790 -- 129,363
Deferred initial public offering costs......... -- -- -- -- (389,353)
--------- ---------- ------------ ------------ -------------
Net cash provided by financing activities.. 434,465 687,536 18,431,835 5,681,815 1,334,010
--------- ---------- ------------ ------------ -------------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 20,137 188,209 11,452,840 1,661,121 (9,397,413)
CASH AND CASH EQUIVALENTS, beginning of year.... -- 20,137 208,346 208,346 11,661,186
--------- ---------- ------------ ------------ -------------
CASH AND CASH EQUIVALENTS, end of year.......... $ 20,137 $ 208,346 $ 11,661,186 $ 1,869,467 $ 2,263,773
========= ========== ============ ============ =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for interest........................ $ -- $ 47,176 $ 9,000 $ 1,032 $ --
========= ========== ============ ============ =============
SUPPLEMENTAL SCHEDULE OF NONCASH
FINANCING ACTIVITIES:
Dividends accrued on Series A, B and C
mandatorily redeemable, convertible
preferred stock.............................. $ -- $ 55,030 $ 681,554 $ 475,552 $ 1,630,329
========= ========== ============ ============ =============
Accretion on Series A, B and C mandatorily
redeemable, convertible preferred stock...... $ -- $ 4,104 $ 21,622 $ 11,004 $ 255,748
========= ========== ============ ============ =============
Common stock issued for accrued services
payable...................................... $ -- $ 65,250 $ -- $ -- $ --
========= ========== ============ ============ =============
Issuance of note payable in connection with
acquisition.................................. $ 129,000 $ -- $ -- $ -- $ --
========= ========== ============ ============ =============
Warrants issued for offering costs............ $ -- $ -- $ 155,065 $ -- $ --
========= ========== ============ ============ =============
Accrued offering costs........................ $ -- $ -- $ 656,000 $ -- $ --
========= ========== ============ ============ =============
Common stock issued in exchange for notes
receivable................................... $ -- $ -- $ 341,024 $ -- $ --
========= ========== ============ ============ =============
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-6
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS
December 31, 1997 and 1998
(Information as of and for the Nine Months
Ended September 30, 1998 and 1999 is Unaudited)
(1) Organization and Nature of Business
eCollege.com (the "Company," formerly Real Education, Inc. and Real
Information Systems, Inc.) was organized and incorporated in the state of
Colorado on July 26, 1996. As discussed in Note 11, the Company reincorporated
in the State of Delaware on June 22, 1999. The Company is a provider of
technology and services that enable colleges and universities to deliver an
online campus and courses over the Internet. The Company's integrated platform
of software and services allows colleges and universities to outsource the
creation, launch, management and support of online campuses and courses. The
Company's services include campus and course design, development, hosting,
maintenance and customer support services.
The Company is subject to various risks and uncertainties frequently
encountered by companies in the early stages of development, particularly
companies in the new and rapidly evolving market for Internet-based products
and services. Such risks and uncertainties include, but are not limited to, its
limited operating history, evolving and unpredictable technology and market
demands and the management of rapid growth. To address these risks, the Company
must, among other things, maintain and increase its customer base, implement
and successfully execute its business and marketing strategy, continue to
develop and upgrade its technology, provide superior customer service and
attract, retain and motivate qualified personnel. There can be no guarantee
that the Company will be successful in addressing such risks.
Unaudited
The Company's current business plan contemplates significant growth, and the
Company believes that for at least the next 12 months it will experience
operating losses and will generate negative cash flows from operating and
investing activities. The Company had cash and cash equivalents of $2,263,773
at September 30, 1999. In October 1999, the Company secured a $2.5 million bank
line of credit which allows for $1,650,000 of immediately available borrowings.
In connection with the bank line of credit, the Company issued warrants to the
lender for 30,000 shares of common stock, which number may be increased in
certain circumstances. The exercise price of the warrants will be equal to the
offering price of common shares sold in connection with the Company's proposed
initial public offering. The value of the warrants at the date of issuance was
approximately $173,000. The warrants were valued using the Black-Scholes option
pricing model, assuming volatility of 100%, a risk-free interest rate of 5.0%,
expected dividend yield of 0%, an estimated life of three years and $9.00 as
the estimated fair value of the underlying common stock on the date of
issuance.
As discussed in Note 11, in November 1999, the Company received a commitment
for a subordinated bridge loan facility with certain of its existing preferred
stock investors. This facility, which consists of $2 million of available
borrowings, is to be used for working capital and is subordinated to the
existing bank line of credit. This facility matures upon the earlier of the
closing of an equity financing in excess of $10 million or May 31, 2000.
In the opinion of management, the Company's existing cash balances, the
amount of cash immediately available under the bank line of credit, the bridge
loan facility and other sources of liquidity will allow the Company to continue
operations through at least December 31, 1999. However, amounts drawn under the
bank line of credit may be required to be repaid on January 14, 2000, unless
the Company extends the maturity, in accordance with its terms, to February 13,
2000. Such extension will require the Company to issue additional warrants.
Further, the Company will be required to repay the bridge loan facility no
later than May 31, 2000. Due to the above, the Company will be required to
secure additional financings in order to remain viable subsequent to December
31, 1999. The Company is currently in the process of an initial public offering
of its common stock.
F-7
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(2) Summary of Significant Accounting Policies
Interim Financial Statements (Unaudited)
The interim financial statements for the nine months ended September 30,
1998 and 1999, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. 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 the
Company's management, the unaudited interim financial statements contain all
adjustments, consisting of normal recurring adjustments, considered necessary
for a fair presentation. Where appropriate, items within the interim financial
statements have been reclassified from the previous periods to conform to
current period presentation. The results of operations for the interim periods
are not necessarily indicative of the results for the entire year. In addition,
our results of operations in interim periods will fluctuate due to the
seasonality inherent in the academic calendar.
Use of Estimates in the Preparation of Financial Statements
The presentation of financial statements in conformity with generally
accepted accounting principles 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 revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The Company considers investments in highly liquid instruments purchased
with an original maturity of 90 days or less to be cash equivalents. Such
investments are held in money market accounts whose costs approximate their
fair market values.
Revenue Recognition
The Company generates revenue primarily from two sources--campus and course
development revenue and per-course student fees.
Online campus and course design and development services are generally
conducted under fixed price contracts, and revenue is recognized using the
percentage of completion method. Frequently, customers will elect to add
courses in addition to those under the initial contract, and the Company
recognizes revenue related to these courses as the courses are developed.
Revenue from online campus and course design and development contracts are
recognized on the percentage of completion method for individual contracts,
commencing when progress reaches a point where experience is sufficient to
estimate final results with reasonable accuracy. Revenues are recognized in the
ratio that hours incurred bear to total estimated hours at completion. The
Company's use of the percentage of completion method of revenue recognition
requires estimates of percentage of project completion. Changes in job
performance, estimated profitability and final contract settlements may result
in revisions to the estimated degree of completion and corresponding revenue in
the period in which the revisions are determined. Provisions for any estimated
losses on uncompleted contracts are made in the period in which such losses are
determinable. Contract costs include all labor costs directly related to
contract performance as well as other direct contract costs.
Revenue that is recognized is reflected as accrued revenue receivable to the
extent that the customer has not yet been billed for such services. The Company
records deferred revenue for amounts received from or billed to customers in
excess of the revenue that has been earned.
F-8
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company also generates student fee revenue when students sign up for
online courses developed by the Company for its customers at an agreed upon
price with the customer. This student fee revenue is recognized ratably over
the period the course is delivered.
The Company generates development revenue from services performed under a
government grant. This revenue is recognized as the work is performed by the
company or its subcontractors.
Costs and Estimated Earnings on Uncompleted Contracts
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
--------- -----------
<S> <C> <C>
Costs incurred on uncompleted contracts............ $ 152,750 $ 607,750
Estimated earnings................................. 16,500 5,136
--------- -----------
169,250 612,886
Less: Billings to date............................. (195,000) (1,104,000)
--------- -----------
$ (25,750) $ (491,114)
========= ===========
Included in accompanying balance sheets under the
following captions:
Accrued revenue receivable....................... $ 10,000 $ 57,885
Deferred revenue--development.................... (35,750) (548,999)
--------- -----------
$ (25,750) $ (491,114)
========= ===========
</TABLE>
In addition to the amounts disclosed above, at December 31, 1998 the Company
had $20,600 of deferred revenue related to student fees.
Accounts Receivable
The Company maintains an allowance for doubtful accounts based upon the
expected collectibility of accounts receivable. At December 31, 1997 and 1998,
the allowance for doubtful accounts was approximately $0 and $10,000,
respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company has no significant off-balance sheet
concentrations of credit risk, such as foreign exchange contracts, option
contracts or other foreign currency hedging arrangements. The Company maintains
its cash balances in the form of bank demand deposits and money market accounts
with financial institutions that management believes are creditworthy. Accounts
receivable are typically unsecured and are derived from transactions with and
from educational institutions primarily located in the United States.
Accordingly, the Company may be exposed to credit risk generally associated
with educational institutions. The Company performs ongoing credit evaluations
of its customers and maintains reserves for potential credit losses.
As discussed in Note 9, the Company had one customer in 1996, two customers
in 1997 and one customer in 1998 that accounted for more than 10% of revenue.
In addition, as of December 31, 1997 and 1998, the Company had five and four
customers, respectively, that individually accounted for more than 10% of
accounts receivable. These customers in the aggregate accounted for 99% and 53%
of accounts receivable balances at December 31, 1997 and 1998, respectively.
The loss of such customers could result in a significant reduction of revenues.
F-9
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Property and Equipment
Property and equipment are stated at cost and depreciation is provided using
the straight-line method, generally over estimated useful lives of three to
five years. Maintenance and repairs are expensed as incurred and major
additions, replacements and improvements are capitalized.
Leasehold improvements are amortized using the straight-line method over the
shorter of the useful life or the life of the lease.
The components of property and equipment are as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ----------
<S> <C> <C>
Computer equipment................................ $ 308,795 $1,609,401
Office furniture and equipment.................... 19,805 349,305
Leasehold improvements............................ 90,649 123,671
--------- ----------
419,249 2,082,377
Less: Accumulated depreciation and amortization... (119,407) (513,248)
--------- ----------
$ 299,842 $1,569,129
========= ==========
</TABLE>
Impairment of Long-Lived Assets
The Company reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. The Company evaluates the recoverability of its long-lived
assets based on estimated undiscounted future cash flows and provides for
impairment if such undiscounted cash flows are insufficient to recover the
carrying amount of the long-lived asset.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash equivalents, short-term
trade receivables and payables, and notes payable. The carrying values of the
cash equivalents and short-term trade receivables and payables approximate
their fair values. Based on borrowing rates currently used by the Company for
financing, the carrying value of the notes payable approximates estimated fair
value. Financial instruments also consist of convertible preferred stock
subject to mandatory redemption, whose fair value at December 31, 1997 and
1998, was approximately $1.2 million and $28.7 million, respectively. Such
values were estimated based upon the estimated value of the common stock into
which such preferred stock could be converted.
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 basis 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 completely reduced by a
valuation allowance because management does not believe realization of the
deferred tax asset is sufficiently assured at each balance sheet date (Note
10).
Development
Costs incurred in the development of new software and enhancements to
existing software and services are expensed as incurred.
F-10
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Advertising Costs
Advertising costs are expensed as incurred and are included in sales and
marketing expense in the accompanying statements of operations. Advertising
expense for each of the periods presented in the accompanying statement of
operations related to continuing operations is as follows:
<TABLE>
<CAPTION>
For the Year Ended For the Nine Months Ended
December 31, September 30,
------------------------------ --------------------------------------------
1997 1998 1998 1999
--------- ----------- -------- --------
(Unaudited)
<S> <C> <C> <C>
$ 18,000 $ 1,097,000 $457,425 $870,537
======== =========== ======== ========
</TABLE>
For the period from inception to December 31, 1996, approximately $9,000 of
advertising expense was incurred in connection with discontinued operations.
Stock-Based Compensation
The Company accounts for its employee stock option plans and other stock-
based compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB Opinion No. 25"), and related interpretations. The Company adopted the
disclosure-only provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, "Accounting for Stock-Based Compensation," which allows
entities to continue to apply the provisions of APB Opinion No. 25 for
transactions with employees and provide pro forma disclosures for employee
stock grants made in 1997 and future years as if the fair-value-based method of
accounting in SFAS No. 123 had been applied to these transactions. The Company
accounts for equity instruments issued to non-employees in accordance with the
provisions of SFAS No. 123 and related interpretations.
Stock Split
Upon the reincorporation of the Company discussed in Note 11, the Company
effected a seven-for-one split of its common and preferred stock, and changed
its authorized common stock to 50,000,000 shares and preferred stock to
5,000,000 shares. All references in the accompanying financial statements to
the number of common and preferred shares have been retroactively restated to
reflect the stock split and the increase in the authorized common and preferred
stock.
Additionally, as discussed in Note 11, upon the completion of its proposed
initial public offering the Company will effect a two-for-three reverse stock
split. Such reverse stock split has been retroactively reflected in the
accompanying financial statements.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss available to
common shareholders for the period by the weighted average number of common
shares outstanding for the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and potential common shares outstanding during the period if the effect of the
potential common shares is dilutive. The Company has excluded the weighted
average effect (using the treasury stock method) of common stock issuable upon
conversion of all convertible preferred stock, warrants and stock options from
the computation of
F-11
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
diluted earnings per share as the effect of all such securities is anti-
dilutive for all periods presented. The shares excluded are as follows:
<TABLE>
<S> <C>
For the years ended December 31,
1997.......................................................... 387,917
=========
1998.......................................................... 2,794,140
=========
For the nine months ended September 30,
1998 (unaudited).............................................. 2,534,303
=========
1999 (unaudited).............................................. 5,278,413
=========
</TABLE>
At December 31, 1998, the Company had issued rights to 5,764,892 shares of
common stock under such agreements.
Net loss from continuing operations per share is calculated as follows:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Numerator: (Unaudited)
Net loss from continu-
ing operations........ $ (614,797) $ (7,289,847) $(4,199,333) $(11,364,887)
Dividends on
mandatorily redeem-
able, convertible pre-
ferred stock.......... (55,030) (681,554) (475,552) (1,630,329)
Accretion of
mandatorily redeem-
able, convertible pre-
ferred stock.......... (4,104) (21,622) (11,004) (255,748)
----------- ------------ ----------- ------------
Net loss from continu-
ing operations appli-
cable to common share-
holders............... $ (673,931) $ (7,993,023) $(4,685,889) $(13,250,964)
=========== ============ =========== ============
Denominator:
Weighted average shares
outstanding........... 4,107,964 5,074,697 5,062,143 5,159,501
=========== ============ =========== ============
</TABLE>
The Company was incorporated in 1996 without capital contributions. As of
December 31, 1996, no shares of common stock were outstanding. Therefore, no
earnings per share amounts have been reflected for the period from inception to
December 31, 1996.
Pro Forma Stockholders' Equity (Unaudited)
Effective upon the closing of the Company's planned initial public offering,
the outstanding shares of Series Preferred (as defined below) will
automatically convert into 4,150,402 shares of common stock. The pro forma
effects of these transactions are unaudited and have been reflected in the
accompanying pro forma balance sheet at September 30, 1999.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share for the year ended December 31, 1998 is
computed using the net loss and weighted average number of common shares
outstanding, including the pro forma effects of the assumed conversion of the
Company's Series A, B and C convertible preferred stock into shares of the
Company's common stock as if such conversion occurred on January 1, 1998, or at
date of original issuance, if later. The
F-12
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
resulting pro forma adjustment includes an increase in the weighted average
shares used to compute basic and diluted net loss per share of approximately
2,045,325, 1,950,568 and 4,116,920 shares for the year ended December 31, 1998
and for the nine months ended September 30, 1998 and 1999, respectively, and
pro forma entries to eliminate preferred stock dividend accruals and accretion
charges for each period. The pro forma effects of these transactions are
unaudited.
Comprehensive Income
Effective January 1, 1998, the Company adopted the provisions of SFAS No.
130, "Reporting Comprehensive Income." SFAS No. 130 establishes standards for
reporting comprehensive income and its components in financial statements.
Comprehensive income, as defined, includes all changes in equity (net assets)
during a period from non-owner sources. Since inception, comprehensive loss has
been the same as net loss.
Segment Information
In June 1997, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 131, "Disclosures about Segments of an Enterprise and Related Information."
This statement establishes standards for the way companies report information
about operating segments in annual financial statements. It also establishes
standards for related disclosures about products and services, geographic areas
and major customers. In accordance with the provisions of SFAS No. 131, the
Company has determined that it has one reportable operating segment at December
31, 1998.
Start-Up Activities
Effective January 1, 1998, the Company adopted Statement of Position ("SOP")
98-5, "Reporting on the Costs of Start-Up Activities." In general, SOP 98-5
requires costs of start-up activities and organization costs to be expensed as
incurred. Initial application of SOP 98-5 is reported as the cumulative effect
of a change in accounting principle. The adoption of SOP 98-5 did not have a
material impact on the Company's financial position or results of its
operations.
Recent Accounting Pronouncements
In March 1998, the American Institute of Certified Public Accountants issued
SOP 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," which provides guidance on accounting for the cost of such
software. SOP 98-1 is effective for financial statements for fiscal years
beginning after December 15, 1998. The adoption of SOP 98-1 did not have a
material impact on the Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." The Company is required to adopt SFAS No.
133 in the year ended December 31, 2000. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. To date, the Company
has not entered into any derivative financial instruments or hedging
activities.
Reclassifications
Certain prior years balances were reclassified to conform to current year
presentation.
F-13
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(3) Convertible Preferred Stock Subject to Mandatory Redemption
A summary of the Company's mandatorily redeemable, convertible preferred
stock is presented in the table below:
<TABLE>
<CAPTION>
Series A Series B Series C
------------------ -------------------- ---------------------
Shares Amount Shares Amount Shares Amount
------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balances, December 31,
1996 -- $ -- -- $ -- -- $ --
Issuance of Series A
mandatorily
redeemable,
convertible preferred
stock in May 1997 for
cash of approximately
$1.62 per share, net
of stock issuance
costs of $29,850..... 616,000 970,150 -- -- -- --
Dividends accrued..... -- 55,030 -- -- -- --
Accretion to
redemption value..... -- 4,104 -- -- -- --
------- ---------- --------- ---------- --------- -----------
Balances, December 31,
1997.................... 616,000 1,029,284 -- -- -- --
Issuance of Series B
mandatorily
redeemable,
convertible preferred
stock in February
1998 for cash of
approximately $3.93
per share, net of
stock issuance costs
of $22,000........... -- -- 1,525,218 5,978,000 -- --
Issuance of Series C
mandatorily
redeemable,
convertible preferred
stock in December
1998 for cash of
approximately $7.47
per share, net of
stock issuance costs
of $811,065.......... -- -- -- -- 1,707,809 11,938,955
Dividends accrued..... -- 100,056 -- 550,060 -- 31,438
Accretion to
redemption value..... -- 7,463 -- 5,986 -- 8,173
------- ---------- --------- ---------- --------- -----------
Balances, December 31,
1998.................... 616,000 1,136,803 1,525,218 6,534,046 1,707,809 11,978,566
Issuances of Series C
mandatorily
redeemable,
convertible preferred
stock in January,
February and March
1999 for cash of
approximately $7.47
per share
(unaudited).......... -- -- -- -- 301,375 2,250,000
Dividends accrued
(unaudited).......... -- 75,038 -- 450,049 -- 1,105,242
Accretion to
redemption value
(unaudited).......... -- 5,595 -- 4,953 -- 245,200
------- ---------- --------- ---------- --------- -----------
Balances, September 30,
1999 (unaudited)........ 616,000 $1,217,436 1,525,218 $6,989,048 2,009,184 $15,579,008
======= ========== ========= ========== ========= ===========
</TABLE>
F-14
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Under the Company's certificate of incorporation, the Company is authorized
to issue 4,150,402 shares of preferred stock. Shares of preferred stock may be
issued from time to time in one or more series, with designations, rights,
preferences and limitations established by the Company's Board of Directors. As
of December 31, 1998, the Company has the following shares of preferred stock
authorized for issuance:
<TABLE>
<CAPTION>
Liquidation,
Redemption Annual
Shares Value per Dividend
Outstanding Share Rate
----------- ------------ --------
<S> <C> <C> <C>
Series A mandatorily redeemable,
convertible preferred stock (Series
A) 616,000 $1.62 $0.162
========= ===== ======
Series B mandatorily redeemable,
convertible preferred stock (Series
B) 1,525,218 $3.93 $0.393
========= ===== ======
Series C mandatorily redeemable,
convertible preferred stock (Series
C) 1,707,809 $7.47 $0.747
========= ===== ======
</TABLE>
Dividends
Dividends accrue at an annual rate of ten-percent of the face value of the
preferred stock. Dividends accrue whether or not they have been declared, are
cumulative, and in addition, to the extent there are unpaid dividends,
dividends are payable on such unpaid dividends. Upon conversion, accrued and
unpaid dividends are not paid or converted and are extinguished. If at any time
the Company pays less than the total amount of dividends then accrued with
respect to the Series A, Series B and Series C (collectively, the "Preferred
Stock"), such payment will be distributed first to the holders of the Series C
on a pro rata basis, second to the holders of the Series B and then to holders
of Series A. No dividends may be paid to junior classes of the Company's
capital stock if there are unpaid Preferred Stock dividends. Further, if
dividends or other distributions are declared for the holders of the Company's
common stock, holders of Preferred Stock are entitled to participate on an as-
if-converted to common stock basis. As of December 31, 1998, $155,086, $550,060
and $31,438 has been accumulated for dividends on Series A, Series B and Series
C, respectively.
Liquidation Preference
Holders of Series C are entitled to a preference of $7.47 per share (an
aggregate of approximately $15 million), plus accrued and unpaid dividends,
upon any liquidation, dissolution or winding up of the Company before
distribution or payment is made upon Series A, Series B or the Company's common
stock. Holders of Series B are entitled to a preference of $3.93 per share (an
aggregate of approximately $6 million), plus accrued and unpaid dividends, upon
any liquidation, dissolution or winding up of the Company before distribution
or payment is made upon Series A or the Company's common stock. Holders of
Series A are entitled to a preference of $1.62 per share (an aggregate of
approximately $1 million), plus accrued and unpaid dividends upon the
occurrence of such events. Remaining proceeds, if any, from such events are
allocable to the holders of the Company's common stock. Holders of Preferred
Stock have the option to have the proceeds from such events allocated to them
as common stockholders on an as-if-converted to common stock basis.
F-15
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Mandatory Redemption
The Preferred Stock outstanding as of December 31, 1998 is subject to
redemption at the following dates:
<TABLE>
<CAPTION>
Series A Series B Series C Total
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
June 15 -
2001....................... $ 385,215 $2,183,571 $ 4,260,486 $ 6,829,272
2002....................... 385,215 2,183,571 4,260,486 6,829,272
2003....................... 385,216 2,183,572 4,260,486 6,829,274
---------- ---------- ----------- -----------
Total.................... 1,155,646 6,550,714 12,781,458 20,487,818
Less: Unaccreted issuance
costs................... (18,843) (16,668) (802,892) (838,403)
---------- ---------- ----------- -----------
$1,136,803 $6,534,046 $11,978,566 $19,649,415
========== ========== =========== ===========
</TABLE>
If the Preferred Stock is still outstanding at June 1, 2001, holders of the
Preferred Stock may require redemption of all or a portion of their stock on
or before June 15, 2001. The redemption amount per share is $1.62, $3.93 and
$7.47 for the Series A, Series B and Series C, respectively, plus accrued and
unpaid dividends. The redemption will be made in three equal annual
redemptions. If the Preferred Stock is outstanding at June 1, 2002, then on or
before June 15, 2002, holders of Preferred Stock may require redemption of all
or a portion of their preferred shares. The redemption price upon such
election is the greater of $1.62, $3.93 and $7.47 for the Series A, Series B
and Series C per share, respectively, plus accrued and unpaid dividends or the
market value of the Preferred Stock.
Accretion
The difference between the redemption price and the recorded value, which
is net of the offering costs of $29,850, $22,000 and $811,065 for Series A,
Series B and Series C, respectively, is being accreted to the earliest
possible redemption date.
Voting Rights
The Preferred Stock is entitled to vote on an as-if-converted to common
stock basis.
Conversion Rights
At any time, any holder may convert all or any portion of such shares into
common stock at a rate of one share of common stock per one share of preferred
stock. The conversion price is subject to adjustment to prevent dilution based
on criteria defined in the articles of incorporation. Upon conversion, accrued
and unpaid dividends are not paid or converted and are extinguished. Each
share of Preferred Stock is subject to a mandatory conversion to common stock
at the conversion price in effect at that time immediately upon the closing of
a public offering which meets certain conditions.
Warrants
In connection with the sale of Series C, the Company issued 40,185 warrants
to purchase one share of the Company's common stock for approximately $7.47.
Upon issuance, the warrants had a value totaling $155,065, which has been
reflected as a cost of the offering. The warrants vest immediately and are
exercisable for a period of three years. As of December 31, 1998, none of the
warrants have been exercised. In addition, the Company incurred $656,000 of
direct costs in connection with the issuance of Series C.
F-16
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In connection with the sale of Series A, the Company issued 616,000 warrants
to purchase one share of the Company's common stock for approximately $1.62.
The warrants vest immediately and are exercisable for a period of three years.
Based upon the fair market value of the common stock at the date of issuance,
the fair value of the warrants was determined to be immaterial. As of December
31, 1998, none of the warrants have been exercised.
The Company valued the warrants using the Black-Scholes option pricing
model, and the following assumptions:
<TABLE>
<CAPTION>
Series A Series C
Warrants Warrants
-------- --------
<S> <C> <C>
Risk-free interest rate.................................. 6.04% 5.00%
Expected dividend yield.................................. 0.00% 0.00%
Expected lives outstanding............................... 3 years 3 years
Expected volatility...................................... 50% 70%
Fair market value of the underlying common stock on the
date of issuance........................................ $0.54 $7.47
</TABLE>
(4) Stockholders' Equity
Common Stock
In February 1997, the Company issued 373,333 shares of common stock for cash
of approximately $0.03 per share. In 1998, an individual exercised options for
2,333 shares of common stock for cash of approximately $1.62 per share.
Noncash Common Stock Issuance
In February 1997, the Company issued 4,526,667 shares of common stock for
services provided during formation of the Company, a portion of which was
accrued at December 31, 1996. The Company recorded the stock at its fair market
value of approximately $0.03 per share, which approximated the value of the
services rendered with the corresponding expense being recorded in the
Company's statement of operations over the period that the services were
provided.
Warrants
In June 1997, the Company issued warrants for 280,000 shares of common stock
with an exercise price of approximately $1.62. The warrants vested immediately
and are exercisable for a period of three years. In 1997, the Company issued 47
shares of common stock upon the exercise of warrants in return for cash
consideration totaling $76. During 1998, the Company issued 209,953 shares of
common stock upon the exercise of such warrants. The employees issued notes for
the purchase price of the common stock received upon exercise of the warrants.
These notes receivable, totaling $341,024 at December 31, 1998, are reflected
as a reduction of stockholders' equity. Interest on the loans is at a rate of
8% per annum, and the principal and the accrued and unpaid interest is due in
twenty-four monthly payments, beginning on March 31, 2000. The loans are due in
full on February 28, 2002. The loans are full recourse loans and are secured by
the underlying shares of common stock. The Company also issued security buy-
sell agreements in connection with these loans which place restrictions on the
transfer of ownership interests, as defined in the agreement. These agreements
will be removed upon completion of the offering discussed in Note 11.
During 1998, the Company repurchased 46,667 warrants issued to an employee
of the Company for $30,000, their intrinsic value on the date of purchase. As
of December 31, 1998, 23,333 of the original 280,000 warrants remained
outstanding.
F-17
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In November 1998, the Company obtained a $500,000 line of credit from a
bank. In connection with the line of credit, the Company issued 7,000 warrants
to the bank. Fifty-percent of the warrants have a strike price of $3.93 and
fifty-percent have a strike price of $7.47. The value of the warrants at the
date of issuance was approximately $28,000, which is included in interest
expense in the accompanying statement of operations for the year ended December
31, 1998. The warrants were valued using the Black-Scholes pricing model,
assuming volatility of 70%, risk free interest rate of 5.0%, no expected
dividends and a life of five years.
Employee Stock Option Grants
During 1997, the Company adopted the 1997 Stock Option Plan ("the Plan")
under which the Company is authorized to grant incentive and non-qualified
stock options to acquire up to 1,096,667 shares of the Company's common stock
to employees and directors of the Company. Options granted vest over various
terms, with a maximum vesting period of five years, and expire after a maximum
of 6 years. The Company accounts for the Plan under APB Opinion No. 25, under
which the Company has recorded deferred compensation of $1,443,542 during 1998
and an additional $2,696,084 during the nine months ended September 30, 1999
(unaudited) which will be amortized over the period that services are provided
to the Company. During 1998, the Company recognized $199,535 of such
compensation. During the nine months ended September 30, 1998 and 1999, the
Company recognized $62,454 and $694,273 of such compensation, respectively
(unaudited).
The following table summarizes the Plan at December 31, 1997 and 1998, and
activity during the years then ended:
<TABLE>
<CAPTION>
1997 1998
---------------- -----------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
------- -------- ------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of year............. -- $ -- 513,800 $ 1.51
Granted.................................... 513,800 1.51 456,167 2.12
Forfeited or canceled...................... -- -- (95,667) (1.74)
Exercised.................................. -- -- (2,333) (1.62)
------- ----- ------- ------
Outstanding, end of year................... 513,800 $1.51 871,967 $ 1.81
======= ===== ======= ======
Exercisable, end of year................... 70,000 $1.72 266,233 $ 1.57
======= ===== ======= ======
Weighted average fair value of options
granted during the year................... $0.32 $ 3.30
===== ======
</TABLE>
The status of stock options outstanding and exercisable under the Plan as of
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Stock Options Outstanding Stock Options Exercisable
------------------------------------ ---------------------------
Weighted
Average Weighted
Range of Remaining Weighted Average
Exercise Number of Contractual Average Number of Exercise
Prices Shares Life Exercise Price Shares Price
- ----------- --------- ----------- -------------- --------- --------
<S> <C> <C> <C> <C> <C>
$0.54-$0.59 88,667 3.34 $ .54 44,333 $ .54
$1.62-$1.79 366,800 4.90 1.73 212,567 1.76
$2.14 416,500 5.88 2.14 9,333 2.14
------- ---- ----- ------------- -----------
871,967 5.21 $1.81 266,233 $1.57
======= ==== ===== ============= ===========
</TABLE>
F-18
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In addition, during March 1997 the Company issued options for 56,000 shares
of common stock outside of the Plan with an exercise price of $0.59. All such
options vested over a two year period from March 1997 to March 1999.
Pro Forma Fair Value Disclosures
The fair value of each option grant is calculated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998
----------- -----------
<S> <C> <C>
Risk-free interest rate........................... 5.8% 5.0%
Expected dividend yield........................... 0% 0%
Expected lives outstanding........................ 2.0 years 2.9 years
Expected volatility............................... 0.001% 0.001%
</TABLE>
Cumulative compensation costs recognized in pro forma net income or loss
with respect to options that are forfeited prior to vesting are adjusted as a
reduction of pro forma compensation expense in the period of forfeiture.
Had compensation cost for the Plan been determined consistent with SFAS No.
123, the Company's net loss would have been increased to the following pro
forma amounts for the years ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
--------- -----------
<S> <C> <C>
Net loss applicable to common stockholders:
As reported.................................... $(610,050) $(7,993,023)
========= ===========
Pro forma...................................... $(617,580) $(8,028,721)
========= ===========
Basic and diluted net loss per share:
As reported.................................... $ (0.15) $ (1.58)
========= ===========
Pro forma...................................... $ (0.15) $ (1.58)
========= ===========
</TABLE>
(5) Discontinued Operations
Pursuant to a Stock Purchase Agreement dated August 5, 1996, the Company
acquired Brecknet Internet Services, Inc. ("ColoradoNet"), an Internet access
provider for cash of $80,000 and a note payable of $129,000. The acquisition
was accounted for in accordance with the purchase method of accounting, and
accordingly, a new basis of accounting for the assets acquired was established
as of August 5, 1996, based on the fair market value of the assets acquired.
The purchase price was allocated as follows:
<TABLE>
<CAPTION>
Fair Value of
Net Assets Acquired
--------------------
<S> <C>
Cash................................................. $ 2,338
Accounts receivable.................................. 19,620
Furniture, fixtures and equipment.................... 37,196
Leasehold improvements............................... 7,295
Cost in excess of identifiable assets acquired....... 142,551
--------
Total cost of purchased assets................... $209,000
========
</TABLE>
F-19
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
On March 24, 1997, the Board of Directors approved the disposition of
ColoradoNet, as the Company determined that such business did not compliment
its primary business focus of Internet education. Pursuant to an Asset Purchase
Agreement dated May 30, 1997, the Company sold substantially all of the net
assets of ColoradoNet for cash of $200,000 to a third party. The gain on the
sale of this discontinued operation was $34,632.
Total revenue for ColoradoNet during the Company's operation of the business
was $90,512 and $137,055 in 1996 and 1997, respectively.
(6) Notes Payable To Related Parties
As of December 31, 1997, notes payable to related parties consisted of the
following:
<TABLE>
<S> <C>
Unsecured note payable to related party, interest
payable on a quarterly basis at 8% per
annum, principal payments equal to one-sixteenth
of the outstanding principal amount at December 31, 1997,
payable in 16 quarterly installments
beginning June 30, 1998 and ending March 31, 2002............ $193,277
Unsecured note payable to officer of the
Company, interest and principal due in
monthly installments of $1,868, at 10.25%
per annum, matures March 10, 2002............................ 76,698
--------
269,975
Less: Current portion........................................... (39,441)
--------
Long-term portion of notes payable to related parties........... $230,534
========
</TABLE>
On April 7, 1998, the Company repaid the $193,277 note payable to a related
party. On April 17, 1998, the Company repaid the $76,698 note payable to a
related party.
Interest expense for the period from inception to December 31, 1996 and for
the years ended December 31, 1997 and 1998 was $9,186, $37,990 and $36,819,
respectively. Interest expense for the year ended December 31, 1998 includes
$27,819 related to warrants for common stock issued in connection with the line
of credit (Note 4).
(7) Other Related Party Transactions
The Company engaged the brother of the chief executive officer to provide
legal services to the Company. For the years ended December 31, 1997 and 1998,
the Company incurred approximately $39,000 and $16,400 in legal expenses to
this related party. As of December 31, 1997, the Company owed approximately
$6,500 to this related party for legal services performed.
On February 14, 1997, an officer of the Company extended a loan to the
Company in the amount of $25,000 to fund operations. The note was repaid on May
29, 1997.
F-20
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
(8) Commitments And Contingencies
Operating Lease Obligations
The Company leases its office space under a noncancellable operating lease
agreement which expires in July 2002. Future minimum lease obligations as of
December 31, 1998 are as follows:
<TABLE>
<S> <C>
Year ending December 31-
1999......................................................... $ 564,467
2000......................................................... 671,811
2001......................................................... 462,858
2002......................................................... 26,925
----------
$1,726,061
==========
</TABLE>
Rent expense for the period from inception to December 31, 1996 and for the
years ended December 31, 1997 and 1998 was $14,002, $57,426 and $331,219,
respectively.
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 such matters will not have a material adverse effect on the
operating results or the financial position of the Company.
(9) Major Customers
Below is a listing of major customers, each of which comprised more than 10%
of revenue for the period from inception to December 31, 1996 and for the years
ended December 31, 1997 and 1998:
<TABLE>
<CAPTION>
1996 1997 1998
----------- ------------ ------------
Amount % Amount % Amount %
------- --- -------- --- -------- ---
<S> <C> <C> <C> <C> <C> <C>
Customer 1.......................... $20,944 93% $637,690 62% $346,382 21%
Customer 2.......................... $ -- -- $157,240 15% $121,560 7%
</TABLE>
As of December 31, 1998, Customer 1 owed the Company $9,000 related
primarily to course development fees.
(10) Income Taxes
Components of the income tax provision applicable to federal and state
income taxes are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
-------- -------- ----------
<S> <C> <C> <C>
Current benefit:
Federal....................................... $ -- $ -- $ --
State......................................... -- -- --
-------- -------- ----------
Total....................................... -- -- --
-------- -------- ----------
Deferred benefit:...............................
Federal....................................... (146,818) (184,891) (2,401,048)
State......................................... (14,250) (17,945) (233,043)
-------- -------- ----------
Total....................................... (161,068) (202,836) (2,634,091)
-------- -------- ----------
Total tax benefit........................... (161,068) (202,836) (2,634,091)
-------- -------- ----------
Valuation allowance............................. 161,068 202,836 2,634,091
-------- -------- ----------
Net tax benefit............................. $ -- $ -- $ --
======== ======== ==========
</TABLE>
F-21
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The difference between the statutory federal income tax rate and the
Company's effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal income tax rate................................. 34.0% 34.0% 34.0%
Increase (decrease) as a result of-
State income tax net of federal benefit................ 3.3% 3.3% 3.3%
Permanent differences.................................. (0.1%) (0.5%) (1.2%)
Valuation allowance.................................... (37.2%) (36.8%) (36.1%)
----- ----- -----
Effective tax rate...................................... --% --% --%
===== ===== =====
</TABLE>
Deferred tax assets and liabilities result from the following:
<TABLE>
<CAPTION>
December 31,
--------------------
1997 1998
-------- ----------
<S> <C> <C>
Deferred tax assets-
Non-current:
Net operating loss carryforward....................... $354,363 $2,919,417
Depreciation differences.............................. 9,541 32,255
Deferred rent......................................... -- 13,391
Current:
Vacation accrual...................................... -- 29,277
Allowance for doubtful accounts....................... -- 3,655
-------- ----------
Total deferred tax assets............................. 363,904 2,997,995
-------- ----------
Less: Valuation allowance................................. (363,904) (2,997,995)
-------- ----------
Net deferred tax assets................................... $ -- $ --
======== ==========
</TABLE>
From its inception, the Company has generated losses for both financial
reporting and tax purposes. Accordingly, for income tax return reporting
purposes, the Company may utilize approximately $7.8 million of net operating
loss carryforwards, which begin to expire in 2011. The Tax Reform Act of 1986
contains provisions which may limit the net operating loss carryforwards
available to be used in any given year if certain events occur, including
significant changes in ownership interests.
The Company has determined that approximately $364,000 and $2,998,000 of
deferred tax assets as of December 31, 1997 and 1998, respectively, did not
satisfy the realization criteria set forth in SFAS No. 109, primarily due to
the Company's operating loss since inception and the start up nature of the
Company. Accordingly, a valuation allowance was recorded against the entire
deferred tax asset.
(11) Subsequent Events
Employee Benefit Plan
Effective January 1, 1999, the Company adopted a defined contribution plan
under Section 401(k) of the Internal Revenue Code. Eligible employees are
permitted to contribute up to 15% of their annual compensation. In addition,
the Company may make discretionary and/or matching contributions on behalf of
participating employees.
F-22
<PAGE>
eCollege.com
(formerly Real Education, Inc.)
NOTES TO FINANCIAL STATEMENTS--(Concluded)
Stock Option Grants
From January 1, 1999 through September 30, 1999, the Company granted stock
options to employees to purchase 1,099,990 shares of common stock at a weighted
average exercise price of $7.80 per share. In connection with these option
grants, the Company recognized unearned compensation totaling approximately
$2.7 million which is being amortized over the vesting period of the related
options.
Reincorporation
On June 22, 1999, the Company reincorporated in the State of Delaware, at
which time each share of Real Education, Inc. common and preferred stock was
exchanged for seven shares of eCollege.com common and preferred stock,
respectively. The reincorporation has been reflected retroactively in the
accompanying financial statements and notes thereto.
Initial Public Offering
On May 13, 1999, the Company filed a registration statement with the SEC on
Form S-1.
Upon the completion of its initial public offering, the Company will effect
a two-for-three reverse stock split, which has been retroactively reflected in
the accompanying financial statements and notes thereto.
Financings
In October 1999, the Company entered into a $2.5 million line of credit with
a bank (the "Bank Line"). Pursuant to this agreement, the Company could
immediately borrow up to $1,650,000. The remaining $850,000 will be available
should the Company complete the sale of additional private equity in a manner
acceptable to the lender. The Bank Line will mature and any amounts borrowed
thereunder will be due on January 14, 2000, unless extended to February 13,
2000 pursuant to the terms of the Bank Line. If the Company completes the sale
of at least $40 million of equity prior to the maturity date, the Bank Line
will be converted into a revolving line of credit with a maturity date of
November 1, 2000. The Bank Line is secured by all of our assets.
In connection with the Bank Line, the Company issued the lender warrants to
acquire between 30,000 shares and 46,667 shares of the Company's common stock
at an exercise price that will be equal to the offering price of common stock
sold in connection with the Company's proposed initial public offering. The
number of shares will be determined based upon the offering price of the
Company's common stock in its proposed initial public offering.
In November 1999, the Company received a commitment for a subordinated
bridge loan facility from some of our existing preferred stock investors. The
facility described in the commitment will make available $2 million of
borrowings for working capital purposes. The facility would be subordinated to
the existing bank line of credit. Borrowings under the facility would bear
interest at a fixed annual rate of 11%, and the borrowings would be secured by
a second lien on all of our assets. The borrowings would mature upon the
earlier of the closing of an equity financing in excess of $10 million or May
31, 2000. The facility also provides for the issuance of warrants for a maximum
of 150,000 shares of our common stock to the lenders. Warrants would be issued
only upon our draws under the facility, in the amount of one warrant for each
$20 drawn. The warrants would be for a three year term from the date of the
related draw, and will have an exercise price of $9.00 per share. Such
warrants, if any, will be valued on the date of issuance, and would be
amortized over the term of the borrowing as additional interest expense.
F-23
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,500,000 Shares
[LOGO OF eCOLLEGE]
Common Stock
---------------------
Prospectus
, 1999
---------------------
Banc of America Securities LLC
William Blair & Company
Volpe Brown Whelan & Company
Until , 1999, all dealers that buy, sell or trade the common stock may be
required to deliver a prospectus, regardless of whether they are participating
in this offering. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
the Common Stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<CAPTION>
Amount to
be Paid
---------
<S> <C>
SEC registration fee............................................ $ 14,067
NASD filing fee................................................. 6,250
Nasdaq National Market listing fee.............................. 95,000
Legal fees and expenses......................................... 300,000
Accounting fees and expenses.................................... 250,000
Printing and engraving.......................................... 250,000
Blue sky fees and expenses (including legal fees)............... 10,000
Transfer agent fees............................................. 15,000
Miscellaneous................................................... 33,515
--------
Total......................................................... $973,832
</TABLE>
Item 14. Indemnification of Directors and Officers
The Registrant's Amended and Restated Certificate of Incorporation in effect
as of the date hereof, and the Registrant's Second Amended and Restated
Certificate of Incorporation to be in effect upon the closing of this offering
(collectively, the "Certificate") provides that, except to the extent
prohibited by the Delaware General Corporation Law, as amended (the "DGCL"),
the Registrant's directors shall not be personally liable to the Registrant or
its stockholders for monetary damages for any breach of fiduciary duty as
directors of the Registrant. Under the DGCL, the directors have a fiduciary
duty to the Registrant which is not eliminated by this provision of the
Certificate and, in appropriate circumstances, equitable remedies such as
injunctive or other forms of nonmonetary relief will remain available. In
addition, each director will continue to be subject to liability under the DGCL
for breach of the director's duty of loyalty to the Registrant, for acts or
omissions which are found by a court of competent jurisdiction to be not in
good faith or involving intentional misconduct, for knowing violations of law,
for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
prohibited by the DGCL. This provision also does not affect the directors'
responsibilities under any other laws, such as the Federal securities laws or
state or Federal environmental laws. The Registrant has applied for liability
insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this
provision shall not eliminate or limit the liability of a director: (i) for any
breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) arising under
Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. The DGCL provides further that the
indemnification permitted thereunder shall not be deemed exclusive of any other
rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest
extent permitted by Section 102(b)(7) of the DGCL and provides that the
Registrant may fully indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding (whether civil, criminal, administrative or investigative)
by reason of the fact that such person is or was a director or officer of the
Registrant, or is or was serving at the request of the Registrant as a director
or officer of another corporation, partnership, joint venture, trust, employee
benefit plan or other enterprise, against expenses
II-1
<PAGE>
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Certificate. The Registrant is not aware of any
threatened litigation or proceeding that may result in a claim for such
indemnification.
Item 15. Recent Sales of Unregistered Securities
The Registrant has sold and issued the following securities since July 26,
1996 (inception):
Common Stock and Preferred Stock. In February 1997, the Registrant issued
(i) 4,526,666 shares of its common stock, no par value per share, to its
founder Robert N. Helmick in exchange for $130,950 in services, (ii) 233,333
shares of its common stock to John V. Helmick in exchange for $6,750 in cash,
and (iii) 140,000 shares of its common stock, no par value per share, to
Jonathan M. Dobrin, in exchange for $4,050 in property. The above securities
were offered and sold by the Registrant in reliance upon the exemption from
registration pursuant to Section 4(2) of the Securities Act.
On June 11, 1997, the Registrant issued an aggregate of 132,000 investment
units; each unit consisting of 4.6667 shares of Series A Convertible Preferred
Stock (the "Series A Preferred") and one warrant to purchase 4.6667 shares of
Registrant's common stock (exercisable at a price of $1.62 per share), at a
purchase price of $7.58 per unit, to New World Equities, Inc., Steven M.
Singer, Robert C. Douglas, William E. Waldeck, Douglas P. Schieldrop and
Patrick T. Delacey in consideration for the payment of approximately
$1,000,000. Upon the closing of this offering, all of the outstanding shares of
Series A Preferred will convert into an aggregate of 616,000 shares of common
stock. The above securities were offered and sold by the Registrant in reliance
upon exemptions from registration pursuant to Rule 504 and Rule 506 of
Regulation D promulgated under the Securities Act.
On February 2, 1998, the Registrant issued an aggregate of 1,525,218 shares
of Series B Convertible Preferred Stock (the "Series B Preferred"), at a
purchase price of $3.93 per share, to Blumenstein/Thorne Infomation Partners I,
L.P., Robert A. Conway and Darlene A. Conway, Stanley R. Dobrin, William O.
Kasten, James F. Hemmer, McD Venture Capitial Fund, L. P., McDonald & Company
Securities, Inc., McDonald & Company Securities, Inc., Lee S. Mendel, Jay S.
Perlmutter, Silver Family Trust, U/D/T, Alan L. Sigman, Mark A. Timmerman,
Michael J. Walker and Davis B. Weidner in consideration for the payment of
approximately $6,000,000. Upon the closing of this offering, all of the
outstanding shares of Series B Preferred will convert into an aggregate of
1,525,218 shares of common stock. The above securities were offered and sold by
the Registrant in reliance upon the exemptions from registration pursuant to
Section 4(2) of the Securities Act and Rule 506 of Regulation D promulgated
thereunder.
In a series of closings from December 21, 1998 through March 1, 1999, the
Registrant issued an aggregate of 2,009,184 shares of Series C Convertible
Preferred Stock (the "Series C Preferred"), at a purchase price of $7.47 per
share, to MediaOne Interactive Services, Inc. Blumenstein/Thorne Information
Partners I, L.P., VSI Holdings, Inc., New World Equities, Inc., H & K Partners
V, Stanley R. and Carol L. Dobrin JTWOS, Davis Weidner and Sue Thompson and N.
T. Ruddock Company in consideration for the payment of $15,000,000. Upon the
closing of this offering, all of the outstanding shares of Series C Preferred
will convert into an aggregate of 2,009,184 shares of common stock. The above
securities were offered and sold by the Registrant in reliance upon exemptions
from registration pursuant to Section 4(2) of the Securities Act and Rule 506
of Regulation D promulgated thereunder.
II-2
<PAGE>
Warrants. The Registrant from time to time has granted warrants to
investors, consultants and other third parties in connection with business
transactions. Except as otherwise noted below, these warrants were issued in
reliance upon the exemption from registration pursuant to Section 4(2) of the
Securities.
<TABLE>
<CAPTION>
Weighted-
average
Number of Exercise
Shares Prices
--------- ---------
<S> <C> <C>
July 26, 1996 (inception) to December 31, 1996....... -- --
January 1, 1997 to December 31, 1997/1............/.. 896,000 $1.62
January 1, 1998 to December 31, 1998/2............/.. 7,000 $5.70
January 1 to June 30, 1999/3....................../.. 40,185 $7.47
July 1 to October 31, 1999/4....................../.. 30,000 $9.00
</TABLE>
- --------
1. 616,000 of these warrants were issued to purchasers of our Series A
Preferred, as described above. 280,000 of these warrants were issued to
executive officers, in reliance upon the exemption from registration
provided by Rule 701 promulgated under the Securities Act and by Section
4(2) of the Securities Act.
2. These warrants were issued to a bank in connection with entering into a
credit facility.
3. These warrants were issued to Hambrecht & Quist LLC in connection with
serving as placement agent for our Series C Preferred financing.
4. These warrants were issued to a bank in connection with entering into a
bank line of credit.
Options. The Registrant from time to time has granted stock options to
employees in reliance upon exemption from registration pursuant to either (i)
Section 4(2) of the Securities Act, or (ii) Rule 701 promulgated under the
Securities Act.
<TABLE>
<CAPTION>
Shares
Remaining
as of
Number of Exercise September
Shares Prices 30, 1999
--------- -------- ---------
<S> <C> <C> <C>
July 26, 1996 (inception) to April 30,
1997..................................... 51,335 $0.59 51,335
May 1, 1997............................... 88,669 $0.54 46,668
July 15, 1997 through January 6, 1998..... 443,806 $1.79 352,804
January 7, 1998 to December 31, 1998...... 438,215 $2.14 335,863
January 1, 1999 to June 30, 1999.......... 438,909 $6.00 433,775
July 1, 1999 to September 20, 1999........ 661,081 $9.00 659,681
</TABLE>
No underwriters were involved in connection with the sales of securities
referred to in this Item 15, except that Hambrecht & Quist LLC received a fee
of $645,000 and warrants to purchase 40,185 of Common Stock for $7.47 per share
in connection with the sale of our Series C Preferred.
The common stock amounts and per share purchase and exercise prices in the
above discussion have been adjusted to reflect a 2-for-3 reverse stock split to
be effected immediately prior to the closing of this offering.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Second Amended and Restated Certificate of Incorporation, as amended.
3.2** Form of Amendment to Second Amended and Restated Certificate of
Incorporation to be in effect upon the closing of this offering.
3.3 [Not Used]
3.4** Amended and Restated Bylaws to be in effect upon the closing of this
offering.
4.1** Specimen Common Stock certificate.
5.1* Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Unit Purchase Agreement dated June 11, 1997, between the Registrant and
the Persons listed on the Schedule of Purchasers attached thereto.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
10.2** Series B Preferred Share Purchase Agreement dated February 2, 1998,
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.3** Series C Preferred Share Purchase Agreement dated December 21, 1998,
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.4** Amended and Restated Registration Agreement made as of December 21,
1998, by and among the Registrant, each of the Series A Investors,
each of the Series B Investors and each of the Series C Purchasers.
10.5** Amended and Restated Shareholders Agreement made as of December 21,
1998, by and among the Registrant and each of the Parties listed on
the Schedules attached thereto.
10.6** Form of Indemnification Agreement by and between the Registrant and
its outside directors.
10.7** Consulting Agreement dated as of June 11, 1997, between the Registrant
and New World Equities, Inc.
10.8** Employment Agreement dated as of May 1, 1997, between the Registrant
and Robert N. Helmick.
10.9** Form of Common Stock Purchase Warrant expiring June 11, 2000 issued
pursuant to the Unit Purchase Agreement dated June 11, 1997.
10.10** Agreement between the Registrant and the University of Colorado dated
May 22, 1998.
10.11** Promissory Note dated June 1, 1997 by Registrant in the favor of
Advanced Worldwide Education, LC.
10.12 [Not Used]
10.13** Lease Agreement dated May 10, 1999 between Kennedy Center Partnership
and the Registrant.
10.14** Lease Agreement dated May 10, 1999 between Kennedy Center Partnership
and the Registrant.
10.15** 1999 Employee Stock Purchase Plan.
10.16** 1999 Stock Incentive Plan.
10.17** Employment Agreement dated as of April 12, 1999 between the Registrant
and Charles P. Schneider.
10.18** Employment Agreement dated as of August 9, 1999 between the Registrant
and Douglas H. Kelsall.
10.19** Amendment to Amended and Restated Stockholders Agreement.
10.20 Warrant to Purchase Common Stock issued October 21, 1999.
10.21 U.S. Department of Commerce Financial Assistance Award.
10.22 Loan and Security Agreement dated October 21, 1999.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1** Powers of Attorney (See Signature Page on Page II-5).
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
Item 17. Undertakings
The undersigned Registrant hereby undertakes to provide to the Underwriter
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
II-4
<PAGE>
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424 (b)(1)
or (4), or 497(h) under the Securities Act, shall be deemed to be part
of this registration statement as of the time it was declared
effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and this offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in Denver, Colorado, on
this 19th day of November, 1999.
eCollege.com
By: ___/s/ Robert N. Helmick___
Name:Robert N. Helmick
Title:President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on November 19, 1999:
<TABLE>
<CAPTION>
Signature Title(s)
--------- --------
<S> <C>
* President, Chief Executive Officer and
___________________________________________ Chairman of the Board of Directors
Robert N. Helmick (principal executive officer)
* Chief Financial Officer and Treasurer
___________________________________________ (principal financial officer)
Douglas H. Kelsall
* Vice President, Finance (principal
___________________________________________ accounting officer)
Ginger C. Smith
* Vice President, Chief Technology Officer
___________________________________________ and Director
Jonathan M. Dobrin
* Director
___________________________________________
Jack W. Blumenstein
* Director
___________________________________________
Christopher E. Girgenti
* Director
___________________________________________
Oakleigh Thorne
* Director
___________________________________________
Jeri Korshak
</TABLE>
Robert N. Helmick
*By: /s/_______________________
Robert N. Helmick
Attorney-in-Fact
II-6
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Number Description
------ -----------
<C> <S>
1.1** Form of Underwriting Agreement.
3.1** Second Amended and Restated Certificate of Incorporation.
3.2** Form of Amendment to Second Amended and Restated Certificate of
Incorporation to be in effect upon the closing of this offering.
3.3 [Not Used]
3.4** Amended and Restated Bylaws to be in effect upon the closing of this
offering.
4.1** Specimen Common Stock certificate.
5.1 Opinion of Brobeck, Phleger & Harrison LLP.
10.1** Unit Purchase Agreement as of June 11, 1997, between the Registrant
and the Persons listed on the Schedule of Purchasers attached thereto.
10.2** Series B Preferred Share Purchase Agreement dated February 2, 1998
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.3** Series C Preferred Share Purchase Agreement dated December 21, 1998
between the Registrant and the Persons listed on the Schedule of
Purchasers attached thereto.
10.4** Amended and Restated Registration Agreement made as of December 21,
1998, by and among the Registrant, each of the Series A Investors,
each of the Series B Investors and each of the Series C Purchasers.
10.5** Amended and Restated Shareholders Agreement made as of December 21,
1998, by and among the Registrant and each of the Parties listed on
the Schedules attached thereto.
10.6** Form of Indemnification Agreement by and between the Registrant and
its outside directors.
10.7** Consulting Agreement dated as of June 11, 1997, between the Registrant
and New World Equities, Inc.
10.8** Employment Agreement dated as of May 1, 1997, between the Registrant
and Robert N. Helmick.
10.9** Form of Common Stock Purchase Warrant expiring June 11, 2000, issued
pursuant to the Unit Purchase Agreement dated June 11, 1997.
10.10** Agreement between the Registrant and the University of Colorado dated
May 22, 1998.
10.11** Promissory Note dated June 1, 1997 by Registrant in the favor of
Advanced Worldwide Education, LC.
10.12 [Not Used]
10.13** Lease Agreement dated May 10, 1999 between Kennedy Center Partnership
and the Registrant.
10.14** Lease Agreement dated May 10, 1999 between Kennedy Center Partnership
and the Registrant.
10.15** 1999 Employee Stock Purchase Plan.
10.16** 1999 Stock Incentive Plan.
10.17** Employment Agreement dated as of April 12, 1999 between the Registrant
and Charles P Schneider.
10.18** Employment Agreement dated as of August 9, 1999 between the Registrant
and Douglas H. Kelsall.
10.19** Amendment to Amended and Restated Stockholders Agreement.
10.20 Warrant to Purchase Common Stock issued October 21, 1999.
10.21 U.S. Department of Commerce Financial Assistance Award.
10.22 Loan and Security Agreement dated October 21, 1999.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Brobeck, Phleger & Harrison LLP (included in Exhibit 5.1).
24.1** Powers of Attorney (See Signature Page on Page II-5).
27.1** Financial Data Schedule.
</TABLE>
- --------
* To be filed by amendment.
** Previously filed.
<PAGE>
Exhibit 5.1
November 19, 1999
eCollege.com
10200 A East Girard Avenue
Denver, CO 80231
Re: eCollege.com Registration Statement on Form S-1
for Delaware Shares of Common Stock
Ladies and Gentlemen:
We have acted as counsel to eCollege.com, a Delaware corporation (the
"Company"), in connection with the proposed issuance and sale by the Company of
up to 4,600,000 shares of the Company's common stock, par value $.01, (the
"Shares") pursuant to the Company's Registration Statement No. 333-78365 on Form
S-1 (the "Registration Statement") filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Act").
This opinion is being furnished in accordance with the requirements of
Item 16(a) of Form S-1 and Item 601(b)(5)(i) of Regulation S-K.
We have reviewed the Company's charter documents and the corporate
proceedings taken by the Company in connection with the issuance and sale of the
Shares. Based on such review, we are of the opinion that the Shares have been
duly authorized, and if, as and when issued in accordance with the Registration
Statement and the related prospectus (as amended and supplemented through the
date of issuance) will be legally issued, fully paid and nonassessable.
We consent to the filing of this opinion letter as Exhibit 5.1 to the
Registration Statement and to the reference to this firm under the caption
"Legal Matters" in the prospectus which is part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Act, the rules and
regulations of the Securities and Exchange Commission promulgated thereunder, or
Item 509 of Regulation S-K.
<PAGE>
eCollege.com
Page 2
This opinion letter is rendered as of the date first written above and
we disclaim any obligation to advise you of facts, circumstances, events or
developments which hereafter may be brought to our attention and which may
alter, affect or modify the opinion expressed herein. Our opinion is expressly
limited to the matters set forth above and we render no opinion, whether by
implication or otherwise, as to any other matters relating to the Company or the
Shares.
Very truly yours,
BROBECK, PHLEGER & HARRISON LLP
<PAGE>
Exhibit 10.20
THIS WARRANT AND THE SHARES ISSUABLE HEREUNDER HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT
OR PURSUANT TO RULE 144 OR AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE
CORPORATION AND ITS COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
WARRANT TO PURCHASE COMMON STOCK
Corporation: eCollege.com
Number of Shares: See below.
Class of Stock: Common
Initial Exercise Price: See below.
Issue Date: October 21, 1999
Expiration Date: October 21, 2002
THIS WARRANT CERTIFIES THAT, in consideration of the payment of $1.00 and
for other good and valuable consideration, SILICON VALLEY BANK or registered
assignee ("Holder") is entitled to purchase the number of fully paid and
nonassessable shares of the class of securities (the "Shares") of the
corporation (the "Company") at the initial exercise price per Share (the
"Warrant Price") all as set forth herein and as adjusted pursuant to Article 2
of this Warrant, subject to the provisions and upon the terms and conditions set
forth in this Warrant. The Warrant Price shall equal the lesser of (i) the
price per share at which the Shares are issued in the IPO, and (ii) $14.00 per
Share. Holder may acquire Shares under this Warrant from and after the date
that Borrower has made its first bona fide offering pursuant to a registration
statement under the Securities Act of 1933, as amended, of the sale of its
equity securities (the "IPO") and prior (i) to the completion by Borrower of the
-----
sale of its Preferred Series D Stock pursuant to an offering in which the
Company receives not less than Four Million Dollars ($4,000,000), and (ii) to
the Extended Bridge Loan Maturity Date (as defined in the Loan and Security
Agreement dated as of the Issue Date by and between Company, as borrower, and
Holder, as bank (the "Loan Agreement"))
This Warrant is issued in conjunction with that certain Warrant to Purchase
Preferred Stock dated as of the Issue Date (the "Preferred Warrant"). This
Warrant shall be effective upon the expiration of the Preferred Warrant as a
consequence of the closing of the IPO. If the initial exercise price of the IPO
is less than, or equal to, $8.00 per Share, then Holder shall be entitled to
purchase 45,000 Shares. Notwithstanding the foregoing, if the initial exercise
price of the IPO is greater than $8.00 per Share but less than, or equal to,
$11.00 per Share, then Holder shall be entitled to purchase 55,000 Shares.
Notwithstanding the foregoing, if the initial exercise price of the IPO is
greater than $11.00 per Share, then Holder shall be entitled to purchase 70,000
Shares. In addition, if Borrower has not fully repaid all outstanding Bridge
Loan Advances and accrued interest thereon as of the Bridge Loan Maturity Date,
then this Warrant shall be exercisable for an additional 1,250 Shares per day
until the same is fully repaid. Notwithstanding the foregoing, if Borrower has
not fully repaid all outstanding Bridge Loan Advances and accrued interest
thereon as of the earlier of (i) February 14, 2000 and (ii) 30 days following
the Equity Event (as defined in the Loan Agreement), then this Warrant shall be
exercisable for an additional 3,250 Shares per day until the same is fully
repaid.
ARTICLE 1. EXERCISE.
--------
1.1 Method of Exercise. Holder may exercise this Warrant by delivering
------------------
this Warrant and a duly executed Notice of Exercise in substantially the form
attached as Appendix 1 to the principal office of the Company. Unless Holder is
exercising the conversion right set forth in Section 1.2, Holder shall also
deliver to the Company a check for the aggregate Warrant Price for the Shares
being purchased.
1.2 Conversion Right. In lieu of exercising this Warrant as specified in
----------------
Section 1.1, Holder may from time to time convert this Warrant, in whole or in
part, into a number of Shares determined by dividing (a) the aggregate fair
market value of the Shares or other securities otherwise issuable upon exercise
of this Warrant minus the aggregate Warrant Price of such Shares by (b) the fair
market value of one Share. The fair market value of the Shares shall be
determined pursuant to Section 1.5.
1
<PAGE>
1.3 Intentionally Omitted.
---------------------
1.4 Fair Market Value. If the Shares are traded regularly in a public
-----------------
market, the fair market value of the Shares shall be the closing price of the
Shares (or the closing price of the Company's stock into which the Shares are
convertible) reported for the business day immediately before Holder delivers
its Notice of Exercise to the Company. If the Shares are not regularly traded in
a public market, the Board of Directors of the Company shall determine fair
market value in its reasonable good faith judgment. The foregoing
notwithstanding, if Holder advises the Board of Directors in writing that Holder
disagrees with such determination, then the Company and Holder shall promptly
agree upon a reputable investment banking firm to undertake such valuation. If
the valuation of such investment banking firm is greater than that determined by
the Board of Directors, then all fees and expenses of such investment banking
firm shall be paid by the Company. In all other circumstances, such fees and
expenses shall be paid by Holder.
1.5 Delivery of Certificate and New Warrant. Promptly after Holder
---------------------------------------
exercises or converts this Warrant, the Company shall deliver to Holder
certificates for the Shares acquired and, if this Warrant has not been fully
exercised or converted and has not expired, a new Warrant representing the
Shares not so acquired.
1.6 Replacement of Warrants. On receipt of evidence reasonably
-----------------------
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Warrant and, in the case of loss, theft or destruction, on delivery of an
indemnity agreement reasonably satisfactory in form and amount to the Company
or, in the case of mutilation, on surrender and cancellation of this Warrant,
the Company at its expense shall execute and deliver, in lieu of this Warrant, a
new warrant of like tenor.
1.7 Repurchase on Sale, Merger, or Consolidation of the Company.
-----------------------------------------------------------
1.7.1 "Acquisition." For the purpose of this Warrant, "Acquisition"
--------------
means any sale, license, or other disposition of all or substantially all of the
assets (including intellectual property) of the Company, or any reorganization,
consolidation, or merger of the Company where the holders of the Company's
securities before the transaction beneficially own less than 50% of the
outstanding voting securities of the surviving entity after the transaction.
1.7.2 Assumption of Warrant. Upon the closing of any Acquisition the
---------------------
successor entity shall assume the obligations of this Warrant, and this Warrant
shall be exercisable for the same securities, cash, and property as would be
payable for the Shares issuable upon exercise of the unexercised portion of this
Warrant as if such Shares were outstanding on the record date for the
Acquisition and subsequent closing. The Warrant Price shall be adjusted
accordingly.
1.7.3 Purchase Right. Notwithstanding the foregoing, at the election
--------------
of Holder, the Company shall purchase the unexercised portion of this Warrant
for cash upon the closing of any Acquisition for an amount equal to (a) the fair
market value of any consideration that would have been received by Holder in
consideration of the Shares had Holder exercised the unexercised portion of this
Warrant immediately before the record date for determining the shareholders
entitled to participate in the proceeds of the Acquisition, less (b) the
aggregate Warrant Price of the Shares, but in no event less than zero.
ARTICLE 2. ADJUSTMENTS TO THE SHARES.
-------------------------
2.1 Stock Dividends, Splits, Etc. If the Company declares or pays a
----------------------------
dividend on its common stock (or the Shares if the Shares are securities other
than common stock) payable in common stock, or other securities, subdivides the
outstanding common stock into a greater amount of common stock, or, if the
Shares are securities other than common stock, subdivides the Shares in a
transaction that increases the amount of common stock into which the Shares are
convertible, then upon exercise of this Warrant, for each Share acquired, Holder
shall receive, without cost to Holder, the total number and kind of securities
to which Holder would have been entitled had Holder owned the Shares of record
as of the date the dividend or subdivision occurred.
2
<PAGE>
2.2 Reclassification, Exchange or Substitution. Upon any
------------------------------------------
reclassification, exchange, substitution, or other event that results in a
change of the number and/or class of the securities issuable upon exercise or
conversion of this Warrant, Holder shall be entitled to receive, upon exercise
or conversion of this Warrant, the number and kind of securities and property
that Holder would have received for the Shares if this Warrant had been
exercised immediately before such reclassification, exchange, substitution, or
other event. Such an event shall include any automatic conversion of the
outstanding or issuable securities of the Company of the same class or series as
the Shares to common stock pursuant to the terms of the Company's Articles of
Incorporation upon the closing of a registered public offering of the Company's
common stock. The Company or its successor shall promptly issue to Holder a new
Warrant for such new securities or other property. The new Warrant shall provide
for adjustments which shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Article 2 including, without limitation,
adjustments to the Warrant Price and to the number of securities or property
issuable upon exercise of the new Warrant. The provisions of this Section 2.2
shall similarly apply to successive reclassifications, exchanges, substitutions,
or other events.
2.3 Adjustments for Combinations, Etc. If the outstanding Shares are
----------------------------------
combined or consolidated, by reclassification or otherwise, into a lesser
number of shares, the Warrant Price shall be proportionately increased.
2.4 Adjustments for Diluting Issuances. The Warrant Price and the
----------------------------------
number of Shares issuable upon exercise of this Warrant or, if the Shares are
Preferred Stock, the number of shares of common stock issuable upon conversion
of the Shares, shall be subject to adjustment, from time to time, in the manner
set forth on Exhibit A, if attached, in the event of Diluting Issuances (as
---------
defined on Exhibit A).
---------
2.5 No Impairment. The Company shall not, by amendment of its Articles of
-------------
Incorporation or through a reorganization, transfer of assets, consolidation,
merger, dissolution, issue, or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed under this Warrant by the Company, but shall at all times
in good faith assist in carrying out all the provisions of this Article 2 and in
taking all such action as may be necessary or appropriate to protect Holder's
rights under this Article against impairment. If the Company takes any action
affecting the Shares or its common stock other than as described above that
adversely affects Holder's rights under this Warrant, the Warrant Price shall be
adjusted downward and the number of Shares issuable upon exercise of this
Warrant shall be adjusted upward in such a manner that the aggregate Warrant
Price of this Warrant is unchanged.
2.6 Fractional Shares. No fractional Shares shall be issuable upon
-----------------
exercise or conversion of the Warrant and the number of Shares to be issued
shall be rounded down to the nearest whole Share. If a fractional share interest
arises upon any exercise or conversion of the Warrant, the Company shall
eliminate such fractional share interest by paying Holder amount computed by
multiplying the fractional interest by the fair market value of a full Share.
2.7 Certificate as to Adjustments. Upon each adjustment of the Warrant
-----------------------------
Price, the Company at its expense shall promptly compute such adjustment, and
furnish Holder with a certificate of its Chief Financial Officer setting forth
such adjustment and the facts upon which such adjustment is based. The Company
shall, upon written request, furnish Holder a certificate setting forth the
Warrant Price in effect upon the date thereof and the series of adjustments
leading to such Warrant Price.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY.
--------------------------------------------
3.1 Representations and Warranties. The Company hereby represents and
------------------------------
warrants to the Holder as follows:
(a) The initial Warrant Price referenced on the first page of this
Warrant is not greater than (i) the price per share at which the Shares were
last issued in an arms-length transaction in which at least $500,000 of the
Shares were sold and (ii) the fair market value of the Shares as of the date of
this Warrant.
3
<PAGE>
(b) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant, and all securities, if any, issuable upon
conversion of the Shares, shall, upon issuance, be duly authorized, validly
issued, fully paid and nonassessable, and free of any liens and encumbrances
except for restrictions on transfer provided for herein or under applicable
federal and state securities laws.
3.2 Notice of Certain Events. If the Company proposes at any time (a) to
------------------------
declare any dividend or distribution upon its common stock, whether in cash,
property, stock, or other securities and whether or not a regular cash dividend;
(b) to offer for subscription pro rata to the holders of any class or series of
its stock any additional shares of stock of any class or series or other rights;
(c) to effect any reclassification or recapitalization of common stock; (d) to
merge or consolidate with or into any other corporation, or sell, lease,
license, or convey all or substantially all of its assets, or to liquidate,
dissolve or wind up; or (e) offer holders of registration rights the opportunity
to participate in an underwritten public offering of the company's securities
for cash, then, in connection with each such event, the Company shall give
Holder (1) at least 20 days prior written notice of the date on which a record
will be taken for such dividend, distribution, or subscription rights (and
specifying the date on which the holders of common stock will be entitled
thereto) or for determining rights to vote, if any, in respect of the matters
referred to in (c) and (d) above; (2) in the case of the matters referred to in
(c) and (d) above at least 20 days prior written notice of the date when the
same will take place (and specifying the date on which the holders of common
stock will be entitled to exchange their common stock for securities or other
property deliverable upon the occurrence of such event); and (3) in the case of
the matter referred to in (e) above, the same notice as is given to the holders
of such registration rights.
3.3 Information Rights. So long as the Holder holds this Warrant and/or
------------------
any of the Shares, the Company shall deliver to the Holder (a) promptly after
mailing, copies of all notices or other written communications to the
shareholders of the Company, (b) within ninety (90) days after the end of each
fiscal year of the Company, the annual audited financial statements of the
Company certified by independent public accountants of recognized standing and
(c) such other financial statements required under and in accordance with any
loan documents between Holder and the Company (or if there are no such
requirements [or if the subject loan(s) no longer are outstanding]), then within
forty-five (45) days after the end of each of the first three quarters of each
fiscal year, the Company's quarterly, unaudited financial statements.
3.4 Registration Under Securities Act of 1933, as amended. The Company
-----------------------------------------------------
agrees that the Shares or, if the Shares are convertible into common stock of
the Company, such common stock, shall be subject to the registration rights set
forth on Exhibit B, if attached.
ARTICLE 4. MISCELLANEOUS.
-------------
4.1 Term: Notice of Expiration. This Warrant is exercisable, in whole
--------------------------
or in part, at any time and from time to time on or before the Expiration Date
set forth above. The Company shall give Holder written notice of Holder's right
to exercise this Warrant in the form attached as Appendix 2 not more than 90
days and not less than 30 days before the Expiration Date. If the notice is not
so given, the Expiration Date shall automatically be extended until 30 days
after the date the Company delivers the notice to Holder.
4.2 Legends. This Warrant and the Shares (and the securities issuable,
-------
directly or indirectly, upon conversion of the Shares, if any) shall be
imprinted with a legend in substantially the following form:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE SOLD, PLEDGED OR OTHERWISE TRANSFERRED WITHOUT AN
EFFECTIVE REGISTRATION THEREOF UNDER SUCH ACT OR PURSUANT TO RULE 144 OR AN
OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE CORPORATION AND ITS
COUNSEL THAT SUCH REGISTRATION IS NOT REQUIRED.
4.3 Compliance with Securities Laws on Transfer. This Warrant and the
-------------------------------------------
Shares issuable upon exercise this Warrant (and the securities issuable,
directly or indirectly, upon conversion of the Shares, if any) may
4
<PAGE>
not be transferred or assigned in whole or in part without compliance with
applicable federal and state securities laws by the transferor and the
transferee (including, without limitation, the delivery of investment
representation letters and legal opinions reasonably satisfactory to the
Company, as reasonably requested by the Company). The Company shall not require
Holder to provide an opinion of counsel if the transfer is to an affiliate of
Holder or if there is no material question as to the availability of current
information as referenced in Rule 144(c), Holder represents that it has complied
with Rule 144(d) and (e) in reasonable detail, the selling broker represents
that it has complied with Rule 144(f), and the Company is provided with a copy
of Holder's notice of proposed sale.
4.4 Transfer Procedure. Subject to the provisions of Section 4.3, Holder
------------------
may transfer all or part of this Warrant or the Shares issuable upon exercise of
this Warrant (or the securities issuable, directly or indirectly, upon
conversion of the Shares, if any) at any time to Silicon Valley Bancshares or
The Silicon Valley Bank Foundation, or, to any other transferree by giving the
Company notice of the portion of the Warrant being transferred setting forth the
name, address and taxpayer identification number of the transferee and
surrendering this Warrant to the Company for reissuance to the transferee(s)
(and Holder, if applicable). Unless the Company is filing financial information
with the SEC pursuant to the Securities Exchange Act of 1934, the Company shall
have the right to refuse to transfer any portion of this Warrant to any person
who directly competes with the Company.
4.5 Notices. All notices and other communications from the Company to the
-------
Holder, or vice versa, shall be deemed delivered and effective when given
personally or mailed by first-class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company or the
Holder, as the case may be, in writing by the Company or such Holder from time
to time.
4.6 Waiver. This Warrant and any term hereof may be changed, waived,
------
discharged or terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or termination is
sought.
4.7 Attorneys' Fees. In the event of any dispute between the parties
---------------
concerning the terms and provisions of this Warrant, the party prevailing in
such dispute shall be entitled to collect from the other party all costs
incurred in such dispute, including reasonable attorneys' fees.
4.8 Governing Law. This Warrant shall be governed by and construed in
-------------
accordance with the laws of the State of California, without giving effect to
its principles regarding conflicts of law.
eCollege.com
By:_______________________________________
Name:_____________________________________
(Print)
Title: Chairman of the Board, President or
Vice President
By:_______________________________________
Name:_____________________________________
(Print)
Title: Chief Financial Officer, Secretary,
Assistant Treasurer or Assistant Secretary
5
<PAGE>
APPENDIX 1
NOTICE OF EXERCISE
------------------
1. The undersigned hereby elects to purchase ______________ shares of the
Common Stock of eCollege.com pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price of such shares in full.
1. The undersigned hereby elects to convert the attached Warrant into
Shares in the manner specified in the Warrant. This conversion is exercised
with respect to ______________ of the Shares covered by the Warrant.
[Strike paragraph that does not apply.]
2. Please issue a certificate or certificates representing said shares
in the name of the undersigned or in such other name as is specified below:
(NAME)
________________________________
(ADDRESS)
________________________________
________________________________
________________________________
3. The undersigned represents it is acquiring the shares solely for its
own account and not as a nominee for any other party and not with a view toward
the resale or distribution thereof except in compliance with applicable
securities laws.
SILICON VALLEY BANK or a Registered
Assignee
____________________________________
(Signature)
____________________________________
(Date)
1
<PAGE>
APPENDIX 2
NOTICE THAT WARRANT IS ABOUT TO EXPIRE
--------------------------------------
_________________, _____
(Name of Holder)
____________________
(Address of Holder)
____________________
____________________
____________________
Attn: Chief Financial Officer
Gentleperson:
This is to advise you that the Warrant issued to you described below will
expire on Date.
Issuer: _________
Issue Date: _________
Class of Security Issuable: _________
Exercise Price Per Share: $________
Number of Shares Issuable: _________
Procedure for Exercise: Please contact ____________________ (name)
at _______________ (phone number)
with any questions you may have concerning
exercise of the Warrant.
This is your only notice of pending expiration.
eCollege.com
By:__________________________
Its:_________________________
1
<PAGE>
EXHIBIT A
---------
Anti-Dilution Provisions
In the event of the issuance (a "Diluting Issuance") by the Company, after
the Issue Date of the Warrant, of securities at a price per share less than the
Warrant Price, or, if the Shares are common stock, less than the then conversion
price of the Company's Series C Preferred Stock, then the number of shares of
common stock issuable upon conversion of the Shares, or if the Shares are common
stock, the number of Shares issuable upon exercise of the Warrant, shall be
adjusted as a result of Diluting Issuances in accordance with the Holder's
standard form of Anti-Dilution Agreement in effect on the Issue Date.
Under no circumstances shall the aggregate Warrant Price payable by the
Holder upon exercise of the Warrant increase as a result of any adjustment
arising from a Diluting Issuance.
<PAGE>
EXHIBIT B
---------
Registration Rights
-------------------
The Shares (if common stock), or the common stock issuable upon conversion
of the Shares, shall be deemed "registrable securities" or otherwise entitled to
"piggy back" registration rights in accordance with the terms of the following
agreement (the "Agreement") between the Company and its investor(s):
------------------------------------------------------------------------
[Identify Agreement by date, title and parties. If no Agreement
exists, indicate by "none".]
The Company agrees that no amendments will be made to the Agreement which
would have an adverse impact on Holder's registration rights thereunder without
the consent of Holder. By acceptance of the Warrant to which this Exhibit B is
attached, Holder shall be deemed to be a party to the Agreement, unless Holder
otherwise elects not to become or to cease being a party thereto.
If no Agreement exists, then the Company and the Holder shall enter into
Holder's standard form of Registration Rights Agreement as in effect on the
Issue Date of the Warrant.
<PAGE>
Exhibit 10.21
<TABLE>
<S> <C> <C>
FORM CD-450 U.S. DEPARTMENT OF COMMERCE
(REV. 10-93) [ ] GRANT [ X ] COOPERATIVE AGREEMENT
DAO 203-26
FINANCIAL ASSISTANCE AWARD ACCOUNTING CODE
***SEE BELOW
- ------------------------------------------------------------------------------------------------------------------------------------
RECIPIENT NAME AWARD NUMBER
Real Education 7ONANB8H4037
- ------------------------------------------------------------------------------------------------------------------------------------
STREET ADDRESS FEDERAL SHARE OF COST
10200 East Girard Ave., 4th Floor $ $1,877,800
- ------------------------------------------------------------------------------------------------------------------------------------
CITY, STATE, ZIP CODE RECIPIENT SHARE OF COST
Denver Colorado, 80231 $ $508,000
- ------------------------------------------------------------------------------------------------------------------------------------
AWARD PERIOD TOTAL ESTIMATED COST
November 1, 1998 - October 31, 2001 $ $2,385,800
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
DEPARTMENT OF COMMERCE OPERATING UNIT
NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY, GRANTS OFFICE
BUILDING 301, ROOM B129, GAITHERSBURG, MARYLAND 20899-0001
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
AUTHORITY
P.L. 100-418, Section 5131 (codified at 15 USC 278n) as modified by P.L. 102-245.
- ------------------------------------------------------------------------------------------------------------------------------------
PROJECT TITLE
"Real Adaptive Intelligent Learning Systems (RAILS)" under Advanced Technology Program - (ATP) 98-09
- ------------------------------------------------------------------------------------------------------------------------------------
This Award approved by the Grants Officer is issued in triplicate and constitutes an obligation of Federal funding. By signing the
three documents, the Recipient agrees to comply with the Award provisions checked below and attached. Upon acceptance by the
Recipient, two signed Award documents shall be returned to the Grants Officer and the third document shall be retained by the
Recipient. If not signed and returned by the Recipient within 15 days of receipt, the Grants Officer may declare this Award null and
void.
[ X ] Department of Commerce Financial Assistance Standard Terms and Conditions
[ X ] Special Award Conditions
[ X ] Line Item Budget
[ ] OMB Circular A-21, Cost Principles for Educational Institutions
[ ] OMB Circular A-87, Cost Principles for State and Local Governments
[ X ] OMB Circular A-110, Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit
Organizations Uniform Administrative Requirements
[ ] OMB Circular A-122, Cost Principles for Nonprofit Organizations
[ ] 15 CFR Part 24, Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments
[ ] 15 CFR Part 29a, Audit Requirements for State and Local Governments
[ ] 15 CFR Part 29b, Audit Requirements for Institutions of Higher Education and Nonprofit Organizations
[ X ] 48 CFR Part 31, Contract Cost Principles and Procedures
[ X ] Other(s): General Terms and Conditions Advanced Technology Program - 9/98 Specific Audit Guidelines for Advanced Technology
- ------------------------------------------------------------------------------------------------------------------------------------
Program - Single 11/96 **ACCOUNTING CODE:CC: 8/472-0346 Obj. Cl. 4110 Req. No. 8/472-2247 $712,600.00
- ------------------------------------------------------------------------------------------------------------------------------------
B-AE93-N-C-F-N-A-08-91007 EIN: 84-1351729 472/R.Sies
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SIGNATURE OF DEPARTMENT OF COMMERCE GRANTS OFFICER TITLE DATE
Shamim Shaikh /s/ Shamim Shaikh Grants Officer 9/30/98
- ------------------------------------------------------------------------------------------------------------------------------------
TYPED NAME AND SIGNATURE OF AUTHORIZED RECIPIENT OFFICIAL TITLE DATE
/s/ Illegible President and CEO 10/09/98
- ------------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC FORM ORIGINAL
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
FORM CD-450 U.S. DEPARTMENT OF COMMERCE
(REV. 10-93) [ ] GRANT [ X ] COOPERATIVE AGREEMENT
DAO 203-26
FINANCIAL ASSISTANCE AWARD ACCOUNTING CODE
***SEE BELOW
- ------------------------------------------------------------------------------------------------------------------------------------
RECIPIENT NAME AWARD NUMBER
Real Education 7ONANB8H4037
- ------------------------------------------------------------------------------------------------------------------------------------
STREET ADDRESS FEDERAL SHARE OF COST
10200 East Girard Ave., 4th Floor $ $1,877,800
- ------------------------------------------------------------------------------------------------------------------------------------
CITY, STATE, ZIP CODE RECIPIENT SHARE OF COST
Denver Colorado, 80231 $ $508,000
- ------------------------------------------------------------------------------------------------------------------------------------
AWARD PERIOD TOTAL ESTIMATED COST
November 1, 1998 - October 31, 2001 $ $2,385,800
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
DEPARTMENT OF COMMERCE OPERATING UNIT
NATIONAL INSTITUTE OF STANDARDS AND TECHNOLOGY, GRANTS OFFICE
BUILDING 301, ROOM B129, GAITHERSBURG, MARYLAND 20899-0001
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
AUTHORITY
P.L. 100-418, Section 5131 (codified at 15 USC 278n) as modified by P.L. 102-245.
- ------------------------------------------------------------------------------------------------------------------------------------
PROJECT TITLE
"Real Adaptive Intelligent Learning Systems (RAILS)" under Advanced Technology Program - (ATP) 98-09
- ------------------------------------------------------------------------------------------------------------------------------------
This Award approved by the Grants Officer is issued in triplicate and constitutes an obligation of Federal funding. By signing the
three documents, the Recipient agrees to comply with the Award provisions checked below and attached. Upon acceptance by the
Recipient, two signed Award documents shall be returned to the Grants Officer and the third document shall be retained by the
Recipient. If not signed and returned by the Recipient within 15 days of receipt, the Grants Officer may declare this Award null and
void.
[ X ] Department of Commerce Financial Assistance Standard Terms and Conditions
[ X ] Special Award Conditions
[ X ] Line Item Budget
[ ] OMB Circular A-21, Cost Principles for Educational Institutions
[ ] OMB Circular A-87, Cost Principles for State and Local Governments
[ X ] OMB Circular A-110, Grants and Agreements with Institutions of Higher Education, Hospitals, and Other Nonprofit
Organizations Uniform Administrative Requirements
[ ] OMB Circular A-122, Cost Principles for Nonprofit Organizations
[ ] 15 CFR Part 24, Uniform Administrative Requirements for Grants and Cooperative Agreements to State and Local Governments
[ ] 15 CFR Part 29a, Audit Requirements for State and Local Governments
[ ] 15 CFR Part 29b, Audit Requirements for Institutions of Higher Education and Nonprofit Organizations
[ X ] 48 CFR Part 31, Contract Cost Principles and Procedures
[ X ] Other(s): General Terms and Conditions Advanced Technology Program - 9/98 Specific Audit Guidelines for Advanced Technology
- ------------------------------------------------------------------------------------------------------------------------------------
Program - Single 11/96 **ACCOUNTING CODE:CC: 8/472-0346 Obj. Cl. 4110 Req. No. 8/472-2247 $712,600.00
- ------------------------------------------------------------------------------------------------------------------------------------
B-AE93-N-C-F-N-A-08-91007 EIN: 84-1351729 472/R.Sies
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
SIGNATURE OF DEPARTMENT OF COMMERCE GRANTS OFFICER TITLE DATE
Shamim Shaikh /s/ Shamim Shaikh Grants Officer 9/30/98
- ------------------------------------------------------------------------------------------------------------------------------------
TYPED NAME AND SIGNATURE OF AUTHORIZED RECIPIENT OFFICIAL TITLE DATE
/s/ Illegible President and CEO 10/09/98
- ------------------------------------------------------------------------------------------------------------------------------------
ELECTRONIC FORM ORIGINAL
</TABLE>
<PAGE>
SPECIAL AWARD CONDITIONS
ADVANCED TECHNOLOGY PROGRAM -- SINGLE
REAL EDUCATION
COOPERATIVE AGREEMENT NO. 70NANB8H4037
1. RECIPIENT ADMINISTRATOR CONTACT
The Recipient Administrator Contact's name,
title, address, and telephone number are:
(Technical) Daniel Bell
(303) 873-7400
(Administrative) John Helmick, (303) 873-7400
10200 East Girard Ave., 4th Floor
Denver, CO 80231
2. GRANTS OFFICER
The Grants Officer's name, address, and telephone number are:
Shamim Shaikh
National Institute of Standards and Technology
Bldg. 301, Room B129
Gaithersburg, MD 20899-0001
(301) 975-6558
3. GRANTS SPECIALIST
The Grants Specialist's name, address, and telephone number are:
Tim Moffatt
National Institute of Standards and Technology
Bldg. 301, Room B129
Gaithersburg, MD 20899-0001
(301) 975-6672
4. PROJECT MANAGEMENT
a. The Technical Project, Manager's name, address, and telephone number are:
Roger Sies
National Institute of Standards and Technology
Bldg. 101, Room A430
Gaithersburg, MD 20899-0001
(301) 975-3540
b. The Business Project Manager's name, address, and telephone number are:
c.
Richard Morris
National Institute of Standards and Technology
Bldg. 101, Room A421
Gaithersburg, MD 20899-0001
(301) 975-4695
5. PROJECT DESCRIPTION
All research shall be conducted in accordance with the Recipient's proposal
dated May 8, 1998 and revised budget dated August 9, 1998.
6. FUNDING LIMITATIONS
The scope of work and budget incorporated into this award covers a three-year
----------
period (referred to as the "project period") for a total amount of
$1,877,800 in Federal funds. However, Federal funding available at this time is
- ----------
limited to $712,600 for the first year period (referred to as the "budget
--------
period"). Receipt of any additional funding up to the level projected under the
award is contingent upon the availability of funds from Congress satisfactory
performance, and will be at the sole discretion of the National Institute of
Standards and Technology (NIST). The Recipient may not obligate, incur any any
expenditures, nor engage any commitments which involve any amount in excess of
the Federal amount presently available. No legal liability exists or will result
on the part of the Federal Government for payment of a portion of the remaining
funds which have not been made available under the award. If additional funds
are not made available, any expenses incurred related to closeout activities
must be funded from the amount already made available under this award. The
notice of availability or non-availability additional funding for the second
and third years will be made writing by the Grants Officer. Only ------
----- ---------------------
the Grants Officer is authorized to obligate funds. No other verbal or written
notification should be relied upon by the Recipient. The Grants Officer written
notification shall be made prior to or no later than 30 days after the
expiration of each year's activities.
Anticipated Future Funding:
Year 2: $582,600 (From 11/01/99 to 10/31/00)
Year 3: $582,600 (From 11/01/00 to 10/31/01)
7. COST SHARE
For the first year period, the direct costs only cost sharing ratio applicable
-----------------
to this award is the Recipient's contribution of 15.42% ($130,000) and NIST's
contribution of 84.58% ($712,600). Recipient's must meet or exceed the cost
share ratio on a quarterly financial reporting basis.
Special Award Conditions/ATP-SR/8-98
<PAGE>
<TABLE>
<CAPTION>
YEAR ONE YEAR TWO YEAR THREE TOTAL
-------- -------- ---------- -----------
<S> <C> <C> <C> <C>
1. OBJECT CLASS CATEGORY
A. Technical Personnel Salaries/Wages $457,000 $457,000 $457,000 $1,371,000
B. Technical Personnel Fringe Benefits 91,400 91,400 91,400 274,200
C. Administrative Personnel Salaries/Wages 61,000 61,000 61,000 183,000
D. Administrative Personnel Fringe Benefits 12,200 12,200 12,200 36,600
E. Travel
F. Equipment 71,000 0 0 71,000
G. Materials/Supplies
H. Subcontracts 150,000 150,000 150,000 450,000
I. Other
J. Total Direct Costs (Line A thru I) 842,600 771,600 771,600 2,385,800
K. Total Direct Costs Requested From ATP 712,600 582,600 582,600 1,877,800
L. Total Direct Costs Shared by Proposer (If Any) $130,000 $189,000 $189,000 $ 508,000
M. Total Indirect Costs Absorbed by Proposer $ 89,620 $ 80,120 $ 87,620 $ 257,360
N. Total Costs (Lines J + M) $932,220 $851,720 $859,220 $2,643,160
2. SOURCES OF FUNDS
A. ATP (Same as Line K) $712,600 $582,600 $582,600 $1,877,800
B. Real Education 219,620 269,120 276,620 765,360
C.
D.
E. Total Sources of Funds (Same as Line N) $932,220 $851,720 $859,220 $2,643,160
3. TASKS
A. Smart Search $754,560 $ $ $ 754,560
B. IMS Meta Tag (Phase I) 170,160 170,160
C. Automatic Course Content Creator 769,860 769,860
D. IMS Meta Tag (Phase II) 81,860 81,860
E. ITS Knowledge-Base Generator 851,720 851,720
F. Audit 7,500 7,500 150,000
G
H.
I. Total Costs of All Tasks (Same as Line N) $932,220 $851,720 $859,220 $2,643,160
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
NIST-1262 (REV. 9-97) (PAGE 3)
ELECTRONIC INFORMS
<PAGE>
This LOAN AND SECURITY AGREEMENT (this "Agreement") dated October 21,
1999, between SILICON VALLEY BANK ("Bank") and eCollege.com ("Borrower"),
provides the terms on which Bank will lend to Borrower and Borrower will repay
Bank. The parties agree as follows:
1. ACCOUNTING AND OTHER TERMS
Accounting terms not defined in this Agreement will be construed
following GAAP. Calculations and determinations must be made following GAAP. The
term "financial statements" includes the notes and schedules. The terms
"including" and "includes" always mean "including (or includes) without
limitation" in this or any Loan Document. Capitalized terms in this Agreement
shall have the meanings set forth in Section 14. This Agreement shall be
construed to impart upon Bank a duty to act reasonably at all times.
2. LOAN AND TERMS OF PAYMENT
2.1 Credit Extensions. Borrower will pay Bank the unpaid principal amount of all
Credit Extensions and interest on the unpaid principal amount of the Credit
Extensions.
2.1.1 Bridge Loan.
(a) Before its receipt of the Term Sheets, Bank will make advances
("Bridge Loan Advance" and, collectively, "Bridge Loan Advances") in an
aggregate amount up to One Million Six Hundred Fifty Thousand Dollars
($1,650,000). After its receipt of the Term Sheets, Borrower will make Bridge
Loan Advances in an aggregate amount not to exceed the Committed Bridge Loan.
All outstanding Bridge Loan Advances plus all accrued interest will be due and
payable on the Bridge Loan Maturity Date. Notwithstanding the foregoing,
Borrower may extend the Bridge Loan Maturity Date (the "Extended Bridge Loan
Maturity Date") to the earlier of (i) 120 days after the Closing Date, or (ii)
February 14, 2000, provided that Bank has received (a) written notice of such
extension from Borrower prior to the Bridge Loan Maturity Date, (b) a $12,250
extension fee which shall be fully earned and non-refundable, and (c) term
sheets signed by investors satisfactory to Bank in form and substance
satisfactory to Bank, evidencing such investors' intention to invest not less
than Four Million Dollars ($4,000,000) in Borrower in the form of Borrower's
equity securities. Bridge Loan Advances, when repaid, may not be reborrowed.
(b) To obtain a Bridge Loan Advance, Borrower must notify Bank (the
notice is irrevocable) by facsimile no later than 3:00 p.m. Pacific time 1
Business Day before the day on which the Bridge Loan is to be made. The notice
must be in the form of Exhibit B (Payment/Advance Form). The notice must be
signed by a Responsible Officer or designee.
2.1.2 Revolving Advances.
(a) Upon (i) the occurrence of an Equity Event, (ii) the pay off by
Borrower of all outstanding Bridge Loan Advances and accrued interest thereon,
(iii) the termination of Bank's obligation to make Bridge Loan Advances under
the Bridge Loan, (iv) Bank's receipt of a $6,250 conversion fee which shall be
fully earned and nonrefundable, and (v) an audit of Borrower's Accounts
satisfactory to Bank, Bank will make aggregate Advances not exceeding the
Committed Revolving Line or the Borrowing Base, whichever is less. Amounts
borrowed under this Section may be repaid and reborrowed during the term of this
Agreement.
(b) To obtain an Advance, Borrower must notify Bank by facsimile or
telephone by 3:00 p.m. Pacific time on the Business Day the Advance is to be
made. Borrower must promptly confirm the notification by delivering to Bank the
Payment/Advance Form attached as Exhibit B. Bank will credit Advances to
Borrower's deposit account. Bank may make Advances under this Agreement based on
instructions from a Responsible Officer or his or her designee or without
instructions if the Advances are necessary to meet Obligations which have become
due. Bank may rely on any telephone notice given by a person whom Bank believes
is a Responsible Officer or designee. Borrower will indemnify Bank for any loss
Bank suffers due to that reliance.
1
<PAGE>
(c) The Committed Revolving Line terminates on the Revolving Maturity
Date, when all Advances and accrued interest thereon are immediately payable.
2.2 Overadvances. If Borrower's Obligations under Section 2.1.2 exceed the
lesser of either (i) the Committed Revolving Line or (ii) the Borrowing Base,
Borrower must immediately pay in cash to Bank the excess.
2.3 Interest Rate; Payments.
(a) Interest Rate. Bridge Loan Advances accrue interest on the
outstanding principal balance at a per annum rate of two and three quarters of
one percent (2.75%) above the Prime Rate. Advances accrue interest on the
outstanding principal balance at a per annum rate of one and one quarter of one
percent (1.25%) above the Prime Rate. After an Event of Default, Obligations
accrue interest at 5 percent above the rate effective immediately before the
Event of Default. The interest rate increases or decreases when the Prime Rate
changes. Interest is computed on a 360 day year for the actual number of days
elapsed.
(b) Payments. Interest is payable on the twentieth (20th) of each
month. Bank may debit any of Borrower's deposit accounts including Account
Number __________ for principal and interest payments or any amounts Borrower
owes Bank. Bank will notify Borrower when it debits Borrower's accounts. These
debits are not a set-off. Payments received after 12:00 noon Pacific time are
considered received at the opening of business on the next Business Day. When a
payment is due on a day that is not a Business Day, the payment is due the next
Business Day and additional fees or interest accrue.
2.4 Fees. Borrower will pay to Bank:
(a) Facility Fee. A fully earned, non-refundable facility fee of
$18,750 due on the Closing Date; and
(b) Bank Expenses. All Bank Expenses (including reasonable attorneys'
fees and expenses incurred through and after the Closing Date when due.
3. CONDITIONS OF LOANS
3.1 Conditions Precedent to Initial Credit Extension. Bank's obligation to
make the initial Credit Extension is subject to the condition precedent that it
receive the agreements, documents and fees it requires.
3.2 Conditions Precedent to all Credit Extensions. Bank's obligations to
make each Credit Extension, including the initial Credit Extension, is subject
to the following:
(a) timely receipt of any Payment/Advance Form; and
(b) the representations and warranties in Section 5 must be materially
true on the date of the Payment/Advance Form and on the effective date of each
Credit Extension and no Event of Default may have occurred and be continuing, or
result from the Credit Extension. Each Credit Extension is Borrower's
representation and warranty on that date that the representations and warranties
in Section 5 remain true.
4. CREATION OF SECURITY INTEREST
4.1 Grant of Security Interest. Borrower grants Bank a continuing security
interest in all presently existing and later acquired Collateral to secure all
Obligations and performance of each of Borrower's duties under the Loan
Documents. Except for Permitted Liens, any security interest will be a first
priority security interest in the Collateral. Bank may place a "hold" on any
deposit account pledged as Collateral. If the Agreement is terminated, Bank's
lien and security interest in the Collateral will continue until Borrower fully
satisfies its Obligations.
5. REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants as follows:
2
<PAGE>
5.1 Due Organization and Authorization. Borrower and each Subsidiary is
duly existing and in good standing in its state of formation and qualified and
licensed to do business in, and in good standing in, any state in which the
conduct of its business or its ownership of property requires that it be
qualified.
The execution, delivery and performance of the Loan Documents have been
duly authorized, and do not conflict with Borrower's formations documents, nor
constitute an event of default under any material agreement by which Borrower is
bound. Borrower is not in default under any agreement to which or by which it is
bound in which the default could cause a Material Adverse Change.
5.2 Collateral. Borrower has good title to the Collateral, free of Liens
except Permitted Liens. The Eligible Accounts are bona fide, existing
obligations, and the service or property has been performed or delivered to the
account debtor or its agent for immediate shipment to and unconditional
acceptance by the account debtor. Borrower has no notice of any actual or
imminent Insolvency Proceeding of any account debtor whose accounts are an
Eligible Account in any Borrowing Base Certificate. All Inventory is in all
material respects of good and marketable quality, free from material defects.
Borrower is the sole owner of the Intellectual Property, except for
non-exclusive licenses granted to its customers in the ordinary course of
business. Each Patent is valid and enforceable and no part of the Intellectual
Property has been judged invalid or unenforceable, in whole or in part, and no
claim has been made that any part of the Intellectual Property violates the
rights of any third party except to the extent such claim could not reasonably
be expected to cause a Material Adverse Change.
5.3 Litigation. Except as shown in the Schedule, there are no actions or
proceedings pending or, to Borrower's knowledge, threatened by or against
Borrower or any Subsidiary in which an adverse decision could cause a Material
Adverse Change.
5.4 No Material Adverse Change in Financial Statements. All consolidated
financial statements for Borrower and any Subsidiary delivered to Bank fairly
present in all material respects Borrower's consolidated financial condition and
Borrower's consolidated results of operations. There has not been any material
deterioration in Borrower's consolidated financial condition since the date of
the most recent financial statements submitted to Bank.
5.5 Solvency. The fair salable value of Borrower's assets (including
goodwill minus disposition costs) exceeds the fair value of its liabilities; the
Borrower is not left with unreasonably small capital after the transactions in
this Agreement; and Borrower is able to pay its debts (including trade debts) as
they mature.
5.6 Regulatory Compliance. Borrower is not an "investment company" or a
company "controlled" by an "investment company" under the Investment Company
Act. Borrower is not engaged as one of its important activities in extending
credit for margin stock (under Regulations T and U of the Federal Reserve Board
of Governors). Borrower has complied with the Federal Fair Labor Standards Act.
Borrower has not violated any laws, ordinances or rules, the violation of which
could cause a Material Adverse Change. None of Borrower's or any Subsidiary's
properties or assets has been used by Borrower or any Subsidiary or, to the best
of Borrower's knowledge, by previous Persons, in disposing, producing, storing,
treating, or transporting any hazardous substance other than legally. Borrower
and each Subsidiary has timely filed all required tax returns and paid, or made
adequate provision to pay, all material taxes. Borrower and each Subsidiary has
obtained all consents, approvals and authorizations of, made all declarations or
filings with, and given all notices to, all government authorities that are
necessary to continue its business as currently conducted.
5.7 Subsidiaries. Borrower does not own any stock, partnership interest or
other equity securities except for Permitted Investments.
5.8 Full Disclosure. No representation, warranty or other statement of
Borrower in any certificate or written statement given to Bank contains any
untrue statement of a material fact or omits to state a material fact necessary
to make the statements contained in the certificates or statements not
misleading.
3
<PAGE>
6. AFFIRMATIVE COVENANTS
Borrower will do all of the following:
6.1 Government Compliance. Borrower will maintain its and all Subsidiaries'
corporate existence and good standing in its jurisdiction of incorporation and
maintain qualification in each jurisdiction in which the failure to so qualify
could have a material adverse effect on Borrower's business or operations.
Borrower will comply, and have each Subsidiary comply, with all laws, ordinances
and regulations to which it is subject, noncompliance with which could have a
material adverse effect on Borrower's business or operations or cause a Material
Adverse Change.
6.2 Financial Statements, Reports, Certificates.
(a) Borrower will deliver to Bank: (i) as soon as available, but no
later than 30 days after the last day of each month, a company prepared
consolidated balance sheet and income statement covering Borrower's consolidated
operations during the period, in a form acceptable to Bank and certified by a
Responsible Officer; (ii) as soon as available, but no later than 120 days after
the end of Borrower's fiscal year, consolidated financial statements prepared
under GAAP, consistently applied, together with an unqualified opinion on the
financial statements from an independent certified public accounting firm
acceptable to Bank; (iii) or if Borrower is or becomes a public Company, then in
lieu of the requirements in this Section 6.2(a)(i) and 6.2(a)(ii), within 5 days
of filing, copies of all statements, reports and notices made available to
Borrower's security holders or to any holders of Subordinated Debt and all
reports on Form 10-K, 10-Q and 8-K filed with the Securities and Exchange
Commission; (iv) a prompt report of any legal actions pending or threatened
against Borrower or any Subsidiary that could result in damages or costs to
Borrower or any Subsidiary of $100,000 or more; (v) prompt notice of any
material change in the composition of the Intellectual Property, including any
subsequent ownership right of Borrower in or to any Copyright, Patent or
Trademark not shown in any intellectual property security agreement between
Borrower and Bank or knowledge of an event that materially adversely affects the
value of the Intellectual Property; and (vi) budgets, sales projections,
operating plans or other financial information Bank requests.
(b) Prior to the initial Advance, and within 30 days after the last day
of each month, Borrower will deliver to Bank a Borrowing Base Certificate signed
by a Responsible Officer in the form of Exhibit C, with aged listings of
accounts receivable and accounts payable.
(c) Prior to the initial Advance, and within 30 days after the last day
of each month, Borrower will deliver to Bank with the monthly financial
statements a Compliance Certificate signed by a Responsible Officer in the form
of Exhibit D.
(d) Bank has the right to audit Borrower's Accounts at Borrower's
expense, but the audits will be conducted no more often than prior to the
initial Advance and once every 6 months thereafter unless an Event of Default
has occurred and is continuing.
6.3 Inventory; Returns. Borrower will keep all Inventory in good and
marketable condition, free from material defects. Returns and allowances between
Borrower and its account debtors will follow Borrower's customary practices as
they exist at the Closing Date. Borrower must promptly notify Bank of all
returns, recoveries, disputes and claims that involve more than $50,000.
6.4 Taxes. Borrower will make, and cause each Subsidiary to make, timely
payment of all material federal, state, and local taxes or assessments and will
deliver to Bank, on demand, appropriate certificates attesting to the payment.
6.5 Insurance. Borrower will keep its business and the Collateral insured
for risks and in amounts, as Bank requests. Insurance policies will be in a
form, with companies, and in amounts that are satisfactory to Bank. All property
policies will have a lender's loss payable endorsement showing Bank as a loss
payee and all liability policies will show the Bank as an additional insured and
provide that the insurer must give Bank at least [20] days notice before
canceling its policy. At Bank's request, Borrower will deliver certified copies
of policies and evidence
4
<PAGE>
of all premium payments. Proceeds payable under any policy will, at Bank's
option, be payable to Bank on account of the Obligations.
6.6 Primary Accounts. Borrower will maintain its primary depository and
operating accounts with Bank.
6.7 Financial Covenants.
Prior to the initial Advance and continuing thereafter, Borrower will
maintain as of the last day of each month, unless otherwise noted:
Quick Ratio. A ratio of Quick Assets to Current Liabilities of
at least 2.0 to 1.0.
Tangible Net Worth. A Tangible Net Worth plus Subordinated
Debt of at least $13,000,000.
Profitability/Losses. Prior to the initial Advance and
continuing thereafter, Borrower shall not suffer a loss in excess of
$9,000,000 for the fiscal quarter ending March 31, 2000. Borrower shall
not suffer a loss in excess of $9,500,000 for the fiscal quarter ending
June 30, 2000. Borrower shall not suffer a loss in excess of $7,500,000
for the fiscal quarter ending September 30, 2000.
6.8 Registration of Intellectual Property Rights. Borrower will register
with the United States Copyright Office (i) any software material to the
business of Borrower it has, develops or acquires (including those in Exhibit A
to the Intellectual Property Security Agreement) within 30 days of the Closing
Date, and additional software rights developed or acquired, including
significant revisions, additions or improvements to the software or revisions,
additions or improvements which significantly improve the functionality of the
software, after the Closing Date before the sale or licensing to any third party
of the software or any product based on or containing any software. Borrower
will promptly notify Bank upon Borrower's filing of any application or
registration of any Intellectual Property rights with the United States Patent
and Trademark Office and Borrower will execute and deliver any and all
instruments and documents as Bank may require to evidence or perfect Bank's
security interest in such application or registration.
Borrower will: (i) protect, defend and maintain the validity and
enforceability of the Intellectual Property; (ii) promptly advise Bank in
writing of material infringements of the Intellectual Property; and (iii) not
allow any Intellectual Property to be abandoned, forfeited or dedicated to the
public without Bank's written consent.
6.9 Further Assurances. Borrower will execute any further instruments and
take further action as Bank requests to perfect or continue Bank's security
interest in the Collateral or to effect the purposes of this Agreement.
7. NEGATIVE COVENANTS
Borrower will not do any of the following without the Bank's written
consent, which will not be unreasonably withheld:
7.1 Dispositions. Convey, sell, lease, transfer or otherwise dispose of
(collectively a "Transfer"), or permit any of its Subsidiaries to Transfer, all
or any part of its business or property, other than a Transfer (i) of Inventory
in the ordinary course of business; (ii) of non-exclusive licenses and similar
arrangements for the use of the property of Borrower or its Subsidiaries in the
ordinary course of business; or (iii) of worn-out or obsolete Equipment.
7.2 Changes in Business, Ownership, Management or Business Locations.
Engage in or permit any of its Subsidiaries to engage in any business other than
the businesses currently engaged in by Borrower or have a change in its
ownership (other than the sale of Borrower's equity securities in a public
offering or to venture capital investors approved by Bank) or management.
Borrower will not, without at least 30 days prior written notice to Bank,
relocate its principal executive office or add any new offices or business
locations.
7.3 Mergers or Acquisitions. Merge or consolidate, or permit any of its
Subsidiaries to merge or consolidate, with any other Person, or acquire, or
permit any of its Subsidiaries to acquire, all or substantially all of the
capital
5
<PAGE>
stock or property of another Person except where (i) such transactions do not
result in a decrease of more than 25% of Tangible Net Worth and (ii) no Event of
Default has occurred and is continuing or would exist after giving effect to the
transactions. A Subsidiary may merge or consolidate into another Subsidiary or
into Borrower.
7.4 Indebtedness. Create, incur, assume, or be liable for any Indebtedness,
or permit any Subsidiary to do so, other than Permitted Indebtedness.
7.5 Encumbrance. Create, incur, or allow any Lien on any of its property,
or assign or convey any right to receive income, including the sale of any
Accounts, or permit any of its Subsidiaries to do so, except for Permitted
Liens, or permit any of Bank's first priority security interest in the
Collateral to change.
7.6 Investments; Distributions. (i) Directly or indirectly acquire or own
any Person, or make any Investment in any Person, other than Permitted
Investments, or permit any of its Subsidiaries to do so; or (ii) pay any
dividends or make any distribution or payment or redeem, retire or purchase any
capital stock.
7.7 Transactions with Affiliates. Directly or indirectly enter or permit
any material transaction with any Affiliate, except transactions that are in the
ordinary course of Borrower's business, on terms less favorable to Borrower than
would be obtained in an arm's length transaction with a non-affiliated Person.
7.8 Subordinated Debt. Make or permit any payment on any Subordinated Debt,
except under the terms of the Subordinated Debt, or amend any provision in any
document relating to the Subordinated Debt, without Bank's prior written
consent.
7.9 Compliance. Undertake as one of its important activities extending
credit to purchase or carry margin stock, or use the proceeds of any Advance for
that purpose; fail to meet the minimum funding requirements of ERISA, permit a
Reportable Event or Prohibited Transaction, as defined in ERISA, to occur; fail
to comply with the Federal Fair Labor Standards Act or violate any other law or
regulation, if the violation could have a material adverse effect on Borrower's
business or operations or cause a Material Adverse Change, or permit any of its
Subsidiaries to do so.
8. EVENTS OF DEFAULT
Any one of the following is an Event of Default:
8.1 Payment Default. Borrower fails to pay any of the Obligations when due;
8.2 Covenant Default. Borrower does not perform any obligation in Section 6
or violates any covenant in Article 7 or does not perform or observe any other
material term, condition or covenant in this Agreement, any Loan Documents, or
in any agreement between Borrower and Bank and as to any default under a term,
condition or covenant that can be cured, has not cured the default within 10
days after it occurs, or if the default cannot be cured within 10 days or cannot
be cured after Borrower's attempts in the 10 day period, and the default may be
cured within a reasonable time, then Borrower has an additional time, (of not
more than 30 days) to attempt to cure the default. During the additional period
the failure to cure the default is not an Event of Default (but no Credit
Extensions will be made during the cure period);
8.3 Material Adverse Change. (i) A material impairment in the perfection or
priority of Bank's security interest in the Collateral or in the value of such
Collateral which is not covered by adequate insurance occurs; or (ii) Bank
determines, based upon information available to it and in its reasonable
judgment, that there is a reasonable likelihood that Borrower will fail to
comply with one or more of the financial covenants in Section 6 during the next
succeeding financial reporting period;
8.4 Attachment. (i) Any material portion of Borrower's assets is attached,
seized, levied on, or comes into possession of a trustee or receiver and the
attachment, seizure or levy is not removed in 10 days; (ii) Borrower is
enjoined, restrained, or prevented by court order from conducting a material
part of its business; (iii) a judgment or other claim becomes a Lien on a
material portion of Borrower's assets; or (iv) a notice of lien, levy, or
assessment is
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filed against any of Borrower's assets by any government agency and not paid
within 10 days after Borrower receives notice. These are not Events of Default
if stayed or if a bond is posted pending contest by Borrower (but no Credit
Extensions will be made during the cure period);
8.5 Insolvency. (i) Borrower becomes insolvent; (ii) Borrower begins an
Insolvency Proceeding; or (iii) an Insolvency Proceeding is begun against
Borrower and not dismissed or stayed within 30 days (but no Credit Extensions
will be made before any Insolvency Proceeding is dismissed);
8.6 Misrepresentations. If Borrower or any Person acting for Borrower makes
any material misrepresentation or material misstatement now or later in any
warranty or representation in this Agreement or in any communication delivered
to Bank or to induce Bank to enter this Agreement or any Loan Document.
9. BANK'S RIGHTS AND REMEDIES
9.1 Rights and Remedies. When an Event of Default occurs and continues Bank
may, without notice or demand, do any or all of the following:
(a) Declare all Obligations immediately due and payable (but if an
Event of Default described in Section 8.5 occurs all Obligations are immediately
due and payable without any action by Bank);
(b) Stop advancing money or extending credit for Borrower's benefit
under this Agreement or under any other agreement between Borrower and Bank;
(c) Settle or adjust disputes and claims directly with account debtors
for amounts, on terms and in any order that Bank considers advisable;
(d) Make any payments and do any acts it considers necessary or
reasonable to protect its security interest in the Collateral. Borrower will
assemble the Collateral if Bank requests and make it available as Bank
designates. Bank may enter premises where the Collateral is located, take and
maintain possession of any part of the Collateral, and pay, purchase, contest,
or compromise any Lien which appears to be prior or superior to its security
interest and pay all expenses incurred. Borrower grants Bank a license to enter
and occupy any of its premises, without charge, to exercise any of Bank's rights
or remedies;
(e) Apply to the Obligations any (i) balances and deposits of Borrower
it holds, or (ii) any amount held by Bank owing to or for the credit or the
account of Borrower;
(f) Ship, reclaim, recover, store, finish, maintain, repair, prepare
for sale, advertise for sale, and sell the Collateral. Bank is granted a
non-exclusive, royalty-free license or other right to use, without charge,
Borrower's labels, Patents, Copyrights, Mask Works, rights of use of any name,
trade secrets, trade names, Trademarks, service marks, and advertising matter,
or any similar property as it pertains to the Collateral, in completing
production of, advertising for sale, and selling any Collateral and, in
connection with Bank's exercise of its rights under this Section, Borrower's
rights under all licenses and all franchise agreements inure to Bank's benefit;
and
(g) Dispose of the Collateral according to the Code.
9.2 Power of Attorney. When an Event of Default occurs and continues,
Borrower irrevocably appoints Bank as its lawful attorney to: (i) endorse
Borrower's name on any checks or other forms of payment or security; (ii) sign
Borrower's name on any invoice or bill of lading for any Account or drafts
against account debtors, (iii) make, settle, and adjust all claims under
Borrower's insurance policies; (iv) settle and adjust disputes and claims about
the Accounts directly with account debtors, for amounts and on terms Bank
determines reasonable; and (v) transfer the Collateral into the name of Bank or
a third party as the Code permits. Bank may exercise the power of attorney to
sign Borrower's name on any documents necessary to perfect or continue the
perfection of any security interest regardless of whether an Event of Default
has occurred. Bank's appointment as Borrower's attorney in fact, and all
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of Bank's rights and powers, coupled with an interest, are irrevocable until all
Obligations have been fully repaid and performed and Bank's obligation to
provide Credit Extensions terminates.
9.3 Accounts Collection. When an Event of Default occurs and continues,
Bank may notify any Person owing Borrower money of Bank's security interest in
the funds and verify the amount of the Account. Borrower must collect all
payments in trust for Bank and, if requested by Bank, immediately deliver the
payments to Bank in the form received from the account debtor, with proper
endorsements for deposit.
9.4 Bank Expenses. If Borrower fails to pay any amount or furnish any
required proof of payment to third persons Bank may make all or part of the
payment or obtain insurance policies required in Section 6.5, and take any
action under the policies Bank deems prudent. Any amounts paid by Bank are Bank
Expenses and immediately due and payable, bearing interest at the then
applicable rate and secured by the Collateral. No payments by Bank are deemed an
agreement to make similar payments in the future or Bank's waiver of any Event
of Default.
9.5 Bank's Liability for Collateral. If Bank complies with reasonable
banking practices and Section 9-207 of the Code, it is not liable or responsible
for: (a) the safekeeping of the Collateral; (b) any loss or damage to the
Collateral; (c) any diminution in the value of the Collateral; or (d) any act or
default of any carrier, warehouseman, bailee, or other person. Borrower bears
all risk of loss, damage or destruction of the Collateral.
9.6 Remedies Cumulative. Bank's rights and remedies under this Agreement,
the Loan Documents, and all other agreements are cumulative. Bank has all rights
and remedies provided under the Code, by law, or in equity. Bank's exercise of
one right or remedy is not an election, and Bank's waiver of any Event of
Default is not a continuing waiver. Bank's delay is not a waiver, election, or
acquiescence. No waiver is effective unless signed by Bank and then is only
effective for the specific instance and purpose for which it was given.
9.7 Demand Waiver. Borrower waives demand, notice of default or dishonor,
notice of payment and nonpayment, notice of any default, nonpayment at maturity,
release, compromise, settlement, extension, or renewal of accounts, documents,
instruments, chattel paper, and guaranties held by Bank on which Borrower is
liable.
10. NOTICES
All notices or demands by any party to this Agreement or any other
related agreement must be in writing and be personally delivered or sent by an
overnight delivery service, by certified mail, postage prepaid, return receipt
requested, or by telefacsimile at the addresses listed at the beginning of this
Agreement. A Party may change its notice address by giving the other Party
written notice.
11. CHOICE OF LAW, VENUE AND JURY TRIAL WAIVER
California law governs the Loan Documents without regard to principles
of conflicts of law. Borrower and Bank each submit to the exclusive jurisdiction
of the State and Federal courts in Santa Clara County, California.
BORROWER AND BANK EACH WAIVE THEIR RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE
OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY
CONTEMPLATED TRANSACTION, INCLUDING CONTRACT, TORT, BREACH OF DUTY AND ALL OTHER
CLAIMS. THIS WAIVER IS A MATERIAL INDUCEMENT FOR BOTH PARTIES TO ENTER INTO THIS
AGREEMENT. EACH PARTY HAS REVIEWED THIS WAIVER WITH ITS COUNSEL.
12. GENERAL PROVISIONS
12.1 Successors and Assigns. This Agreement binds and is for the benefit of
the successors and permitted assigns of each party. Borrower may not assign this
Agreement or any rights or Obligations under it without Bank's prior written
consent which may be granted or withheld in Bank's discretion. Bank has the
right, without the consent of or notice to Borrower, to sell, transfer,
negotiate, or grant participation in all or any part of, or any interest in,
Bank's obligations, rights and benefits under this Agreement, the Loan Documents
or any related agreement.
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12.2 Indemnification. Borrower will indemnify, defend and hold harmless Bank
and its officers, employees and agents against: (a) all obligations, demands,
claims, and liabilities asserted by any other party in connection with the
transactions contemplated by the Loan Documents; and (b) all losses or Bank
Expenses incurred, or paid by Bank from, following, or consequential to
transactions between Bank and Borrower (including reasonable attorneys' fees and
expenses), except for losses caused by Bank's gross negligence or willful
misconduct.
12.3 Time of Essence. Time is of the essence for the performance of all
Obligations in this Agreement.
12.4 Severability of Provision. Each provision of this Agreement is
severable from every other provision in determining the enforceability of any
provision.
12.5 Amendments in Writing, Integration. All amendments to this Agreement
must be in writing signed by both Bank and Borrower. This Agreement and the Loan
Documents represent the entire agreement about this subject matter, and
supersedes prior or contemporaneous negotiations or agreements. All prior or
contemporaneous agreements, understandings, representations, warranties, and
negotiations between the parties about the subject matter of this Agreement and
the Loan Documents merge into this Agreement and the Loan Documents.
12.6 Counterparts. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts, each of which,
when executed and delivered, are an original, and all taken together, are one
Agreement.
12.7 Survival. All covenants, representations and warranties made in this
Agreement continue in full force while any Obligations remain outstanding.
Notwithstanding the foregoing, Bank's rights set forth under Section 13 of this
Agreement shall survive termination of this Agreement. The obligations of
Borrower in Section 12.2 to indemnify Bank will survive until all statutes of
limitations for actions that may be brought against Bank have run.
12.8 Confidentiality. In handling any confidential information, Bank will
exercise the same degree of care that it exercises for its own proprietary
information, but disclosure of information may be made: (i) to Bank's
subsidiaries or affiliates in connection with their present or prospective
business relations with Borrower; (ii) to prospective transferees or purchasers
of any interest in the Loans; (iii) as required by law, regulation, subpoena, or
other order, (iv) as required in connection with Bank's examination or audit;
and (v) as Bank considers appropriate in exercising remedies under this
Agreement. Confidential information does not include information that either:
(a) is in the public domain or in Bank's possession when disclosed to Bank, or
becomes part of the public domain after disclosure to Bank; or (b) is disclosed
to Bank by a third party, if Bank does not know that the third party is
prohibited from disclosing the information.
12.9 Attorneys' Fees, Costs and Expenses. In any action or proceeding
between Borrower and Bank arising out of the Loan Documents, the prevailing
party will be entitled to recover its reasonable attorneys' fees and other costs
and expenses incurred, in addition to any other relief to which it may be
entitled, whether or not a lawsuit is filed.
13. BANK'S RIGHT TO INVEST IN BORROWER. Bank shall have the right, but not
the obligation, to participate as an investor with a one-time option to invest
up to $250,000 in cash in a future round of equity of Borrower following its
Series D Preferred Stock offering, or prior to the occurrence of Borrower's
first bona fide offering pursuant to a registration statement under the
Securities Act of 1933, as amended (the "IPO"), Borrower shall recommend to its
underwriters that Bank be allowed to invest up to $250,000 in cash in the IPO.
14. DEFINITIONS
14.1 Definitions.
"Accounts" are all existing and later arising accounts, contract
rights, and other obligations owed Borrower in connection with its sale or lease
of goods (including licensing software and other technology) or provision of
services, all credit insurance, guaranties, other security and all merchandise
returned or reclaimed by Borrower and Borrower's Books relating to any of the
foregoing.
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"Advance" or "Advances" is a loan advance (or advances) under the
Committed Revolving Line.
"Affiliate" of a Person is a Person that owns or controls directly or
indirectly the Person, any Person that controls or is controlled by or is under
common control with the Person, and each of that Person's senior executive
officers, directors, partners and, for any Person that is a limited liability
company, that Person's managers and members.
"Bank Expenses" are all audit fees and expenses and reasonable costs or
expenses (including reasonable attorneys' fees and expenses) for preparing,
negotiating, administering, defending and enforcing the Loan Documents
(including appeals or Insolvency Proceedings).
"Borrower's Books" are all Borrower's books and records including
ledgers, records regarding Borrower's assets or liabilities, the Collateral,
business operations or financial condition and all computer programs or discs or
any equipment containing the information.
"Borrowing Base" is (i) Eighty percent (80%) of Eligible Accounts, as
determined by Bank from Borrower's most recent Borrowing Base Certificate.
Bridge Loan Advance" is defined in Section 2.1.1
"Bridge Loan Maturity Date" is, subject to the extension set forth in
Section 2.1.1, the earlier of (i) the Equity Event, (ii) ninety (90) days from
the Closing Date, or (iii) January 14, 2000.
"Business Day" is any day that is not a Saturday, Sunday or a day on
which the Bank is closed.
"Closing Date" is the date of this Agreement.
"Code" is the California Uniform Commercial Code.
"Collateral" is the property described on Exhibit A.
"Committed Bridge Loan" is a Credit Extension of up to Two Million Five
Hundred Thousand Dollars ($2,500,000).
"Committed Revolving Line" is a Credit Extension of up to Two Million
Five Hundred Thousand Dollars ($2,500,000).
"Contingent Obligation" is, for any Person, any direct or indirect
liability, contingent or not, of that Person for (i) any indebtedness, lease,
dividend, letter of credit or other obligation of another such as an obligation
directly or indirectly guaranteed, endorsed, co-made, discounted or sold with
recourse by that Person, or for which that Person is directly or indirectly
liable; (ii) any obligations for undrawn letters of credit for the account of
that Person; and (iii) all obligations from any interest rate, currency or
commodity swap agreement, interest rate cap or collar agreement, or other
agreement or arrangement designated to protect a Person against fluctuation in
interest rates, currency exchange rates or commodity prices; but "Contingent
Obligation" does not include endorsements in the ordinary course of business.
The amount of a Contingent Obligation is the stated or determined amount of the
primary obligation for which the Contingent Obligation is made or, if not
determinable, the maximum reasonably anticipated liability for it determined by
the Person in good faith; but the amount may not exceed the maximum of the
obligations under the guarantee or other support arrangement.
"Copyrights" are all copyright rights, applications or registrations
and like protections in each work or authorship or derivative work, whether
published or not (whether or not it is a trade secret) now or later existing,
created, acquired or held.
"Credit Extension" is each Advance, Bridge Loan Advance, or any other
extension of credit by Bank for Borrower's benefit.
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"Current Assets" are amounts that under GAAP should be included on that
date as current assets on Borrower's consolidated balance sheet.
"Current Liabilities" are the aggregate amount of Borrower's Total
Liabilities which mature within one (1) year.
"Eligible Accounts" are Accounts in the ordinary course of Borrower's
business that meet all Borrower's representations and warranties in Section 5.2;
but Bank may change eligibility standards by giving Borrower 30 days prior
written notice. Unless Bank agrees otherwise in writing, Eligible Accounts will
not include:
(a) Accounts that the account debtor has not paid within 90 days of
invoice date;
(b) Accounts for an account debtor, 50% or more of whose Accounts have
not been paid within 90 days of invoice date;
(c) Credit balances over 90 days from invoice date;
(d) Accounts for an account debtor, including Affiliates, whose total
obligations to Borrower exceed 25% of all Accounts, for the amounts that exceed
that percentage, unless Bank approves in writing;
(e) Accounts for which the account debtor does not have its principal
place of business in the United States (except for Eligible Foreign Accounts);
(f) Accounts for which the account debtor is a federal, state or local
government entity or any department, agency, or instrumentality except for
Accounts of the United States if the payee has assigned its payment rights to
Bank and the assignment has been acknowledged under the Assignment of Claims Act
of 1940 (31 U.S.C. 3727);
(g) Accounts for which Borrower owes the account debtor, but only up to
the amount owed (sometimes called "contra" accounts, accounts payable, customer
deposits or credit accounts);
(h) Accounts for demonstration or promotional equipment, or in which
goods are consigned, sales guaranteed, sale or return, sale on approval, bill
and hold, or other terms if account debtor's payment may be conditional;
(i) Accounts for which the account debtor is Borrower's Affiliate,
officer, employee, or agent;
(j) Accounts in which the account debtor disputes liability or makes
any claim and Bank believes there may be a basis for dispute (but only up to the
disputed or claimed amount), or if the Account Debtor is subject to an
Insolvency Proceeding, or becomes insolvent, or goes out of business;
(k) Accounts for which Bank reasonably determines collection to be
doubtful.
"Eligible Foreign Accounts" are Accounts for which the account debtor
does not have its principal place of business in the United States but are: (1)
covered by credit insurance satisfactory to Bank, less any deductible; or (2)
supported by letter(s) of credit acceptable to Bank; or (3) that Bank approves
in writing.
"Equipment" is all present and future machinery, equipment, tenant
improvements, furniture, fixtures, vehicles, tools, parts and attachments in
which Borrower has any interest.
"Equity Event" means the receipt by Borrower of not less than Forty
Million Dollars ($40,000,000) of proceeds from the sale or issuance after the
Closing Date of its equity securities to investors satisfactory to Bank.
"ERISA" is the Employment Retirement Income Security Act of 1974, and
its regulations.
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"GAAP" is generally accepted accounting principles.
"Indebtedness" is (a) indebtedness for borrowed money or the deferred
price of property or services, such as reimbursement and other obligations for
surety bonds and letters of credit, (b) obligations evidenced by notes, bonds,
debentures or similar instruments, (c) capital lease obligations and (d)
Contingent Obligations.
"Insolvency Proceeding" is any proceeding by or against any Person
under the United States Bankruptcy Code, or any other bankruptcy or insolvency
law, including assignments for the benefit of creditors, compositions,
extensions generally with its creditors, or proceedings seeking reorganization,
arrangement, or other relief.
"Intellectual Property" is:
(a) Copyrights, Trademarks, Patents, and Mask Works including
amendments, renewals, extensions, and all licenses or other rights to use and
all license fees and royalties from the use;
(b) Any trade secrets and any Intellectual Property Rights in computer
software and computer software products now or later existing, created, acquired
or held;
(c) All design rights which may be available to Borrower now or later
created, acquired or held;
(d) Any claims for damages (past, present or future) for infringement
of any of the rights above, with the right, but not the obligation, to sue and
collect damages for use or infringement of the intellectual property rights
above;
All proceeds and products of the foregoing, including all insurance,
indemnity or warranty payments.
"Inventory" is present and future inventory in which Borrower has any
interest, including merchandise, raw materials, parts, supplies, packing and
shipping materials, work in process and finished products intended for sale or
lease or to be furnished under a contract of service, of every kind and
description now or later owned by or in the custody or possession, actual or
constructive, of Borrower, including inventory temporarily out of its custody or
possession or in transit and including returns on any accounts or other proceeds
(including insurance proceeds) from the sale or disposition of any of the
foregoing and any documents of title.
"Investment" is any beneficial ownership of (including stock,
partnership interest or other securities) any Person, or any loan, advance or
capital contribution to any Person.
"Lien" is a mortgage, lien, deed of trust, charge, pledge, security
interest or other encumbrance.
"Loan Documents" are, collectively, this Agreement, any note, or notes
or guaranties executed by Borrower or Guarantor, and any other present or future
agreement between Borrower and/or for the benefit of Bank in connection with
this Agreement, all as amended, extended or restated.
"Material Adverse Change" is defined in Section 8.3.
"Mask Works" are all mask works or similar rights available for the
protection of semiconductor chips, now owned or later acquired.
"Maturity Date" is the Revolving Maturity Date.
"Obligations" are debts, principal, interest, Bank Expenses and other
amounts Borrower owes Bank now or later, including letters of credit and foreign
exchange contracts, if any, and including interest accruing after Insolvency
Proceedings begin and debts, liabilities, or obligations of Borrower assigned to
Bank.
"Patents" are patents, patent applications and like protections,
including improvements, divisions, continuations, renewals, reissues, extensions
and continuations-in-part of the same.
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"Permitted Indebtedness" is:
(a) Borrower's indebtedness to Bank under this Agreement or the Loan
Documents;
(b) Indebtedness existing on the Closing Date and shown on the
Schedule;
(c) Subordinated Debt;
(d) Indebtedness to trade creditors incurred in the ordinary course of
business; and
(e) Indebtedness secured by Permitted Liens[;
(f) Indebtedness of Borrower to any Subsidiary and Contingent
Obligations of any Subsidiary with respect to obligations of Borrower (provided
that the primary obligations are not prohibited hereby), and Indebtedness of any
Subsidiary to any other Subsidiary and Contingent Obligations of any Subsidiary
with respect to obligations of any other Subsidiary (provided that the primary
obligations are not prohibited hereby);
(g) Other Indebtedness not otherwise permitted by Section 7.4 not
exceeding $50,000 in the aggregate outstanding at any time; and
(h) Extensions, refinancings, modifications, amendments and
restatements of any items of Permitted Indebtedness (a) through (f) above,
provided that the principal amount thereof is not increased or the terms thereof
are not modified to impose more burdensome terms upon Borrower or its
Subsidiary, as the case may be.
"Permitted Investments" are:
(a) Investments shown on the Schedule and existing on the Closing Date;
and
(b) (i) marketable direct obligations issued or unconditionally
guaranteed by the United States or its agency or any State maturing within 1
year from its acquisition, (ii) commercial paper maturing no more than 1 year
after its creation and having the highest rating from either Standard & Poor's
Corporation or Moody's Investors Service, Inc., and (iii) Bank's certificates of
deposit issued maturing no more than 1 year after issue and (iv) any Investments
permitted by Borrower's investment policy, as amended from time to time,
provided that such investment policy (and any such amendment thereto) has been
approved by Bank;
(c) Investments consisting of the endorsement of negotiable instruments
for deposit or collection or similar transactions in the ordinary course of
Borrower;
(d) Investments accepted in connection with Transfers permitted by
Section 7.1;
(e) Investments of Subsidiaries in or to other Subsidiaries or Borrower
and Investments by Borrower in Subsidiaries not to exceed $50,000 in the
aggregate in any fiscal year;
(f) Investments consisting of (i) travel advances and employee
relocation loans and other employee loans and advances in the ordinary course of
business, and (ii) loans to employees, officers or directors relating to the
purchase of equity securities of Borrower or its Subsidiaries pursuant to
employee stock purchase plans or agreements approved by Borrower's Board of
Directors;
(g) Investments (including debt obligations) received in connection
with the bankruptcy or reorganization of customers or suppliers and in
settlement of delinquent obligations of, and other disputes with, customers or
suppliers arising in the ordinary course of business;
(h) Investments consisting of notes receivable of, or prepaid royalties
and other credit extensions, to customers and suppliers who are not Affiliates,
in the ordinary course of business; provided that this paragraph (h) shall not
apply to Investments of Borrower in any Subsidiary;
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(i) Joint ventures or strategic alliances {in the ordinary course of
Borrower's business} consisting of the {non-exclusive} licensing of technology,
the development of technology or the providing of technical support, provided
that any cash investments by Borrower do not exceed $50,000 in the aggregate in
any fiscal year; and
(j) Other Investments not otherwise permitted by Section 7.7 not
exceeding $50,000 in the aggregate outstanding at any time.
"Permitted Liens" are:
(a) Liens existing on the Closing Date and shown on the Schedule or
arising under this Agreement or other Loan Documents;
(b) Liens for taxes, fees, assessments or other government charges or
levies, either not delinquent or being contested in good faith and for which
Borrower maintains adequate reserves on its Books, if they have no priority over
any of Bank's security interests;
(c) Purchase money Liens (i) on Equipment acquired or held by Borrower
or its Subsidiaries incurred for financing the acquisition of the Equipment, or
(ii) existing on equipment when acquired, if the Lien is confined to the
property and improvements and the proceeds of the equipment;
(d) Leases or subleases and licenses or sublicenses granted in the
ordinary course of Borrower's business, if the leases, subleases, licenses and
sublicenses permit granting Bank a security interest;
(e) Liens incurred in the extension, renewal or refinancing of the
indebtedness secured by Liens described in (a) through (c), but any extension,
renewal or replacement Lien must be limited to the property encumbered by the
existing Lien and the principal amount of the indebtedness may not increase;
(f) Liens arising from judgments, decrees or attachments in
circumstances not constituting an Event of Default under Section 8.4 or 8.7;
(g) Liens in favor of other financial institutions arising in
connection with Borrower's deposit accounts held at such institutions, provided
that Bank has a perfected security interest in the amounts held in such deposit
accounts; and
(h) Other Liens not described above arising in the ordinary course of
business and not having or not reasonably likely to have a material adverse
effect on Borrower and its Subsidiaries taken as a whole.
"Person" is any individual, sole proprietorship, partnership, limited
liability company, joint venture, company, trust, unincorporated organization,
association, corporation, institution, public benefit corporation, firm, joint
stock company, estate, entity or government agency.
"Prime Rate" is Bank's most recently announced "prime rate," even if it
is not Bank's lowest rate.
"Quick Assets" is, on any date, the Borrower's consolidated,
unrestricted cash, cash equivalents, net billed accounts receivable and
investments with maturities of less than 12 months determined according to GAAP.
"Responsible Officer" is each of the Chief Executive Officer, the
President, the Chief Financial Officer and the Controller of Borrower.
"Revolving Maturity Date" is the earlier of (i) twelve (12) months
following the Closing Date, or (ii) November 1, 2000.
"Schedule" is any attached schedule of exceptions.
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"Subordinated Debt" is debt incurred by Borrower subordinated to
Borrower's debt to Bank (and identified as subordinated by Borrower and Bank).
"Subsidiary" is for any Person, joint venture, or any other business
entity of which more than 50% of the voting stock or other equity interests is
owned or controlled, directly or indirectly, by the Person or one or more
Affiliates of the Person.
"Tangible Net Worth" is, on any date, the consolidated total assets of
Borrower and its Subsidiaries minus, (i) any amounts attributable to (a)
goodwill, (b) intangible items such as unamortized debt discount and expense,
Patents, trade and service marks and names, Copyrights and research and
development expenses except prepaid expenses, and (c) reserves not already
deducted from assets, and (ii) Total Liabilities plus Subordinated Debt.
"Term Sheets" means term sheets signed by investors satisfactory to
Bank in form and substance satisfactory to Bank, evidencing such investors'
intention to invest not less than Seven Million Five Hundred Thousand Dollars
($7,500,000) in Borrower in the form of Borrower's equity securities.
"Total Liabilities" is on any day, obligations that should, under GAAP,
be classified as liabilities on Borrower's consolidated balance sheet, including
all Indebtedness, and current portion Subordinated Debt allowed to be paid, but
excluding all other Subordinated Debt.
"Trademarks" are trademark and service mark rights, registered or not,
applications to register and registrations and like protections, and the entire
goodwill of the business of Assignor connected with the trademarks.
BORROWER:
eCollege.com
By: _____________________________________
Title: ___________________________________
SILICON VALLEY BANK
By: _____________________________________
Title: ___________________________________
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EXHIBIT A
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COLLATERAL DESCRIPTION ATTACHMENT
TO LOAN AND SECURITY AGREEMENT
All personal property of Borrower (herein referred to as "Borrower" or
"Debtor") whether presently existing or hereafter created, written, produced or
acquired, including, but not limited to:
(a) all accounts receivable, accounts, chattel paper, contract
rights (including, without limitation, royalty agreements, license agreements
and distribution agreements), documents, instruments, money, deposit accounts
and general intangibles, including, without limitation, returns, repossessions,
books and records relating thereto, and equipment containing said books and
records, all investment property, including securities and securities
entitlements;
(b) all software, computer source codes and other computer
programs (collectively, the "Software Products"), and all common law and
statutory copyrights and copyright registrations, applications for registration,
now existing or hereafter arising, United States of America and foreign,
obtained or to be obtained on or in connection with the Software Products, or
any parts thereof or any underlying or component elements of the Software
Products together with the right to copyright and all rights to renew or extend
such copyrights and the right (but not the obligation) of Bank (herein referred
to as "Bank" or "Secured Party") to sue in its own name and/or the name of the
Debtor for past, present and future infringements of copyright;
(c) all goods, including, without limitation, equipment and
inventory (including, without limitation, all export inventory);
(d) all guarantees and other security therefor;
(e) all trademarks, service marks, trade names and service
names and the goodwill associated therewith;
(f) (a) all patents and patent applications filed in the
United States Patent and Trademark Office or any similar office of any foreign
jurisdiction, and interests under patent license agreements, including, without
limitation, the inventions and improvements described and claimed therein, (b)
licenses pertaining to any patent whether Debtor is licensor or licensee, (c)
all income, royalties, damages, payments, accounts and accounts receivable now
or hereafter due and/or payable under and with respect thereto, including,
without limitation, damages and payments for past, present or future
infringements thereof, (d) the right (but not the obligation) to sue for past,
present and future infringements thereof, (e) all rights corresponding thereto
throughout the world in all jurisdictions in which such patents have been issued
or applied for, and (f) the reissues, divisions, continuations, renewals,
extensions and continuations-in-part with any of the foregoing (all of the
foregoing patents and applications and interests under patent license
agreements, together with the items described in clauses (a) through (f) in this
paragraph are sometimes herein individually and collectively referred to as the
"Patents"); and
(g) all products and proceeds, including, without limitation,
insurance proceeds, of any of the foregoing.
16
<PAGE>
EXHIBIT B
---------
LOAN PAYMENT/ADVANCE TELEPHONE REQUEST FORM
DEADLINE FOR SAME DAY PROCESSING IS 3:00 P.M., P.S.T.
TO: CENTRAL CLIENT DIVISION DATE: _______________
FAX #: (408) 496-2426 TIME: _______________
- --------------------------------------------------------------------------------
FROM: _________________________________________________________________________
CLIENT NAME (BORROWER)
REQUESTED BY: _________________________________________________________________
AUTHORIZED SIGNER'S NAME
AUTHORIZED SIGNATURE:__________________________________________________________
PHONE NUMBER: _________________________________________________________________
FROM ACCOUNT # ______________________ TO ACCOUNT # ________________________
REQUESTED TRANSACTION TYPE REQUEST DOLLAR AMOUNT
- -------------------------- ---------------------
$_____________________________
PRINCIPAL INCREASE (ADVANCE) $_____________________________
PRINCIPAL PAYMENT (ONLY) $_____________________________
INTEREST PAYMENT (ONLY) $_____________________________
PRINCIPAL AND INTEREST (PAYMENT) $_____________________________
OTHER INSTRUCTIONS: __________________________________________________________
- --------------------------------------------------------------------------------
All representations and warranties of Borrower stated in the Amended
and Restated Loan Agreement are true, correct and complete in all material
respects as of the date of the telephone request for and Advance confirmed by
this Borrowing Certificate; provided, however, that those representations and
warranties expressly referring to another date shall be true, correct and
complete in all material respects as of such date.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BANK USE ONLY
TELEPHONE REQUEST:
- ------------------
The following person is authorized to request the loan payment transfer/loan
advance on the advance designated account and is known to me.
_____________________________ _____________________________
Authorized Requester Phone #
_____________________________ _____________________________
Received By (Bank) Phone #
_____________________________
Authorized Signature (Bank)
17
<PAGE>
EXHIBIT C
BORROWING BASE CERTIFICATE
- --------------------------------------------------------------------------------
Borrower: eCollege.com Lender: Silicon Valley Bank
Commitment Amount: $2,500,000
- --------------------------------------------------------------------------------
ACCOUNTS RECEIVABLE
1. Accounts Receivable Book Value as of ___ $__________
2. Additions (please explain on reverse) $__________
3. TOTAL ACCOUNTS RECEIVABLE $__________
ACCOUNTS RECEIVABLE DEDUCTIONS (without duplication)
4. Amounts over 90 days due $__________
5. Balance of 50% over 90 day accounts $________
6. Credit balances over 90 days $__________
7. Concentration Limits $__________
8. Foreign Accounts $__________
9. Governmental Accounts $__________
10. Contra Accounts $__________
11. Promotion or Demo Accounts $__________
12. Intercompany/Employee Accounts $________ $__________
13. Other (please explain on reverse) $________
14. TOTAL ACCOUNTS RECEIVABLE DEDUCTIONS $__________
15. Eligible Accounts (#3 minus #14) $__________
16. LOAN VALUE OF ACCOUNTS (80% of #15) $__________
BALANCES
17. Maximum Loan Amount $2,500,000
18. Total Funds Available [Lesser of #17 or #16] $__________
19. Present balance owing on Line of Credit $__________
20. Outstanding under Sublimits (if any) $__________
21. RESERVE POSITION (#18 minus #19 and #20) $__________
The undersigned represents and warrants that the foregoing is true, complete and
correct, and that the information reflected in this Borrowing Base Certificate
complies with the representations and warranties set forth in the Loan and
Security Agreement between the undersigned and Silicon Valley Bank.
------------------------------
COMMENTS:
By: ___________________________________
Authorized Signer
------------------------------
18
<PAGE>
EXHIBIT D
COMPLIANCE CERTIFICATE
TO: SILICON VALLEY BANK
FROM: eCollege.com
The undersigned authorized officer of eCollege.com certifies that under
the terms and conditions of the Loan and Security Agreement between Borrower and
Bank (the "Agreement"), (i) Borrower is in complete compliance for the period
ending _______________ with all required covenants except as noted below and
(ii) all representations and warranties in the Agreement are true and correct in
all material respects on this date. Attached are the required documents
supporting the certification. The Officer certifies that these are prepared in
accordance with Generally Accepted Accounting Principles (GAAP) consistently
applied from one period to the next except as explained in an accompanying
letter or footnotes. The Officer acknowledges that no borrowings may be
requested at any time or date of determination that Borrower is not in
compliance with any of the terms of the Agreement, and that compliance is
determined not just at the date this certificate is delivered.
Please indicate compliance status by circling Yes/No under "Complies" column.
<TABLE>
<CAPTION>
Reporting Covenant Required Complies
------------------ -------- --------
<S> <C> <C> <C>
Monthly financial statements Monthly within 30 days Yes No
Annual (CPA Audited) FYE within 120 days Yes No
10-Q, 10K and 8-K Within 5 days after filing with SEC Yes No
A/R & A/P Agings Monthly within 30 days Yes No
Financial Covenant Required Actual Complies
------------------ -------- ------ --------
Maintain on a Monthly Basis:
Minimum Quick Ratio 2.0:1.0 _____:1.0 Yes No
Minimum Tangible Net Worth $13,000,000 $___________ Yes No
Profitability/Losses Quarterly* $___________ $___________ Yes No
</TABLE>
*$9,000,000 for FQE 3/31/00, $9,500,000 for FQE 6/30/00, and
$7,500,000 for FQE 9/30/00
---------------------------------
Comments Regarding Exceptions: See Attached.
BANK USE ONLY
Received by:_____________________
Sincerely, AUTHORIZED SIGNER
Date:____________________________
____________________________________________ Verified:________________________
SIGNATURE AUTHORIZED SIGNER
____________________________________________ Date:____________________________
TITLE
Compliance Status Yes No
____________________________________________
DATE
---------------------------------
19
<PAGE>
DISBURSEMENT REQUEST AND AUTHORIZATION
Borrower: eCollege.com Bank: Silicon Valley Bank
================================================================================
LOAN TYPE. This is a Variable Rate bridge loan converting to a revolving line of
credit up to $2,500,000.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for business.
SPECIFIC PURPOSE. The specific purpose of this loan is: Short term Working
Capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Bank's conditions for making the loan have been
satisfied. Please disburse the loan proceeds as follows:
Bridge
Amount paid to Borrower directly: $_________
Undisbursed Funds $_________
Principal $2,500,000
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
Charges Paid in Cash:
$18,750 Initial Loan Fee
$TBD Outside Counsel Fees and Expenses
Total Charges Paid in Cash: $___________
AUTOMATIC PAYMENTS. Borrower hereby authorizes Bank automatically to deduct from
Borrower's account numbered _____________ the amount of any loan payment. If the
funds in the account are insufficient to cover any payment, Bank shall not be
obligated to advance funds to cover the payment.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO BANK THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO ADVERSE CHANGE IN BORROWER'S FINANCIAL CONDITION AS
DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO BANK. THIS
AUTHORIZATION IS DATED AS OF OCTOBER _______, 1999.
BORROWER:
eCollege.com
______________________________________
Authorized Officer
<PAGE>
AGREEMENT TO PROVIDE INSURANCE
Grantor: eCollege.com Bank: Silicon Valley Bank
================================================================================
INSURANCE REQUIREMENTS. eCollege.com ("Grantor") understands that
insurance coverage is required in connection with the extending of a loan or the
providing of other financial accommodations to Grantor by Bank. These
requirements are set forth in the Loan Documents. The following minimum
insurance coverages must be provided on the following described collateral (the
"Collateral"):
Collateral: All Inventory, Equipment and Fixtures.
Type: All risks, including fire, theft and liability.
Amount: Full insurable value.
Basis: Replacement value.
Endorsements: Loss payable clause to Bank with stipulation
that coverage will not be canceled or
diminished without a minimum of twenty (20)
days' prior written notice to Bank.
INSURANCE COMPANY. Grantor may obtain insurance from any insurance
company Grantor may choose that is reasonably acceptable to Bank. Grantor
understands that credit may not be denied solely because insurance was not
purchased through Bank.
FAILURE TO PROVIDE INSURANCE. Grantor agrees to deliver to Bank, on or
before closing, evidence of the required insurance as provided above, with an
effective date of October ______, 1999, or earlier. Grantor acknowledges and
agrees that if Grantor fails to provide any required insurance or fails to
continue such insurance in force, Bank may do so at Grantor's expense as
provided in the Loan and Security Agreement. The cost of such insurance, at the
option of Bank, shall be payable on demand or shall be added to the indebtedness
as provided in the security document. GRANTOR ACKNOWLEDGES THAT IF BANK SO
PURCHASES ANY SUCH INSURANCE, THE INSURANCE WILL PROVIDE LIMITED PROTECTION
AGAINST PHYSICAL DAMAGE TO THE COLLATERAL, UP TO THE BALANCE OF THE LOAN;
HOWEVER, GRANTOR'S EQUITY IN THE COLLATERAL MAY NOT BE INSURED. IN ADDITION, THE
INSURANCE MAY NOT PROVIDE ANY PUBLIC LIABILITY OR PROPERTY DAMAGE
INDEMNIFICATION AND MAY NOT MEET THE REQUIREMENTS OF ANY FINANCIAL
RESPONSIBILITY LAWS.
AUTHORIZATION. For purposes of insurance coverage on the Collateral,
Grantor authorizes Bank to provide to any person (including any insurance agent
or company) all information Bank deems appropriate, whether regarding the
Collateral, the loan or other financial accommodations, or both.
GRANTOR ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS AGREEMENT
TO PROVIDE INSURANCE AND AGREES TO ITS TERMS. THIS AGREEMENT IS DATED OCTOBER
_______, 1999.
GRANTOR:
eCollege.com
x_______________________________
Authorized Officer
================================================================================
FOR BANK USE ONLY
INSURANCE VERIFICATION
DATE:_____________________________________________________ PHONE:_________
AGENT'S NAME:_____________________________________________
INSURANCE COMPANY:________________________________________
POLICY NUMBER:____________________________________________
EFFECTIVE DATES:__________________________________________
COMMENTS:_________________________________________________
================================================================================
<PAGE>
CORPORATE RESOLUTIONS TO BORROW
- --------------------------------------------------------------------------------
Borrower: eCollege.com
- --------------------------------------------------------------------------------
I, the undersigned Secretary or Assistant Secretary of eCollege.com
(the "Corporation"), HEREBY CERTIFY that the Corporation is organized and
existing under and by virtue of the laws of the State of _______________.
I FURTHER CERTIFY that attached hereto as Attachments 1 and 2 are true
and complete copies of the Certificate of Incorporation and Bylaws of the
Corporation, each of which is in full force and effect on the date hereof.
I FURTHER CERTIFY that at a meeting of the Directors of the
Corporation, duly called and held, at which a quorum was present and voting (or
by other duly authorized corporate action in lieu of a meeting), the following
resolutions were adopted.
BE IT RESOLVED, that any one (1) of the following named officers,
employees, or agents of this Corporation, whose actual signatures are shown
below:
NAMES POSITIONS ACTUAL SIGNATURES
_____________________ ____________________ _____________________
_____________________ ____________________ _____________________
_____________________ ____________________ _____________________
_____________________ ____________________ _____________________
_____________________ ____________________ _____________________
acting for an on behalf of this Corporation and as its act and deed be, and they
hereby are, authorized and empowered:
Borrow Money. To borrow from time to time from Silicon Valley Bank
("Bank"), on such terms as may be agreed upon between the officers, employees,
or agents and Bank, such sum or sums of money as in their judgment should be
borrowed, without limitation, including such sums as are specified in that
certain Loan and Security Agreement dated as of October ______, 1999, as amended
from time to time (the "Loan Agreement").
Execute Notes. To execute and deliver to Bank the promissory note or
notes of the Corporation, on Lender's forms, at such rates of interest and on
such terms as may be agreed upon, evidencing the sums of money so borrowed or
any indebtedness of the Corporation to Bank, and also to execute and deliver to
Lender one or more renewals, extensions, modifications, refinancings,
consolidations, or substitutions for one or more of the notes, or any portion of
the notes.
Grant Security. To grant a security interest to Bank in the Collateral
described in the Loan Agreement, which security interest shall secure all of the
Corporation's Obligations, as described in the Loan Agreement.
Negotiate Items. To draw, endorse, and discount with Bank all drafts,
trade acceptances, promissory notes, or other evidences of indebtedness payable
to or belonging to the Corporation or in which the Corporation may have an
interest, and either to receive cash for the same or to cause such proceeds to
be credited to the account of the Corporation with Bank, or to cause such other
disposition of the proceeds derived therefrom as they may deem advisable.
Warrants. To issue a warrants to purchase the Corporation's capital
stock.
Letters of Credit; Foreign Exchange. To execute letters of credit
applications, foreign exchange agreements and other related documents pertaining
to Bank's issuance of letters of credit and foreign exchange contracts.
Cash Management Services. To enter into that certain Cash Management
Services Agreement by and between Borrower and Bank authorizing Bank to perform
Cash Management Services as defined therein.
<PAGE>
Further Acts. In the case of lines of credit, to designate additional
or alternate individuals as being authorized to request advances thereunder, and
in all cases, to do and perform such other acts and things, to pay any and all
fees and costs, and to execute and deliver such other documents and agreements
as they may in their discretion deem reasonably necessary or proper in order to
carry into effect the provisions of these Resolutions.
BE IT FURTHER RESOLVED, that any and all acts authorized pursuant to
these resolutions and performed prior to the passage of these resolutions are
hereby ratified and approved, that these Resolutions shall remain in full force
and effect and Bank may rely on these Resolutions until written notice of their
revocation shall have been delivered to and received by Bank. Any such notice
shall not affect any of the Corporation's agreements or commitments in effect at
the time notice is given.
I FURTHER CERTIFY that the officers, employees, and agents named above
are duly elected, appointed, or employed by or for the Corporation, as the case
may be, and occupy the positions set forth opposite their respective names; that
the foregoing Resolutions now stand of record on the books of the Corporation;
and that the Resolutions are in full force and effect and have not been modified
or revoked in any manner whatsoever.
IN WITNESS WHEREOF, I have hereunto set my hand on _______________,
19___ and attest that the signatures set opposite the names listed above are
their genuine signatures.
CERTIFIED TO AND ATTESTED BY:
X____________________________
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 23.1
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
November 19, 1999
Denver, Colorado.
