<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2000
-----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _____________________ to ________________________
Commission file number 000-28393
----------------------------------------
eCollege.com
---------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 84-1351729
----------------------------------- ---------------------------------------
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
10200 A East Girard Avenue, Denver, Colorado 80231
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (303) 873-7400
-----------------------------
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [_] No
The number of shares outstanding of the Registrant's Common Stock, $.01 par
value, as of November 7, 2000 was 16,111,725.
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eCollege.com(SM)
TABLE OF CONTENTS
PART I CONDENSED FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS (UNAUDITED)
Balance Sheets. . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Statements of Operations. . . . . . . . . . . . . . . . . . . . . . .4
Statements of Cash Flows. . . . . . . . . . . . . . . . . . . . . . .5
Notes to Unaudited Condensed Financial Statements . . . . . . . . . .6
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . .8
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. . . . . 14
PART II OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 1 LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . . . . 14
ITEM 2 CHANGES IN SECURITIES AND USE OF PROCEEDS . . . . . . . . . . . . 14
ITEM 3 DEFAULTS UPON SENIOR SECURITIES . . . . . . . . . . . . . . . . . . 15
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS . . . . . . . . 15
ITEM 5 OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . 15
ITEM 6 EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . . . 15
SIGNATURES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
2
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PART I
CONDENSED FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
eCollege.com(SM)
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
----------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents......................................................................... $18,679,046 $46,307,674
Available-for-sale securities......................................................... 15,122,991 -
Accounts receivable, net of allowances
of $195,698 and $44,800, respectively............................................... 3,730,807 1,509,453
Accrued revenue receivable............................................................ 602,658 126,477
Notes receivable - related party...................................................... 425,244 -
Other current assets.................................................................. 1,054,113 639,360
----------- -----------
Total current assets.............................................................. 39,614,859 48,582,964
Property and equipment, net........................................................... 6,700,309 4,553,661
Other assets.......................................................................... 2,574,137 630,100
----------- -----------
TOTAL ASSETS.......................................................................... $48,889,305 $53,766,725
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable..................................................................... $ 1,953,915 $ 2,619,365
Capital lease obligation............................................................. 609,428 -
Accrued liabilities.................................................................. 6,538,707 2,192,966
Deferred revenue..................................................................... 2,837,946 2,431,164
Contract loss reserve................................................................ 1,609,325 1,808,615
----------- -----------
Total current liabilities......................................................... 13,549,321 9,052,110
LONG TERM LIABILITIES:
Capital lease obligation............................................................. 1,551,758 -
Other liabilities.................................................................... 7,785 22,785
Contract loss reserve................................................................ 145,158 679,440
----------- -----------
Total long term liabilities....................................................... 1,704,701 702,225
----------- -----------
Total Liabilities 15,254,022 9,754,335
----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common stock, $0.01 par value; 50,000,000
shares authorized; 16,044,055 and
14,711,893 shares, respectively, issued
and outstanding..................................................................... 160,441 147,119
Additional paid-in capital........................................................... 83,228,590 75,388,591
Warrants and options for common stock................................................ 4,876,814 4,252,376
Notes receivable..................................................................... - (593,593)
Deferred compensation................................................................ (1,404,005) (2,920,325)
Net unrealized loss on available-for-sale securities................................. 382 -
Accumulated deficit.................................................................. (53,226,939) (32,261,778)
----------- -----------
Total stockholders' equity........................................................... 33,635,283 44,012,390
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................................................................ $48,889,305 $53,766,725
=========== ===========
</TABLE>
The accompanying notes to the unaudited condensed financial statements are an
integral part of these balance sheets.
3
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eCollege.com(SM)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
--------------------------- ----------------------------
2000 1999 2000 1999
----------- ----------- ------------ ------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUE:
Campus and course
development fees...................... $ 2,586,129 $ 878,449 $ 4,786,698 $ 1,536,932
Student fees........................... 2,186,878 641,839 4,882,536 1,378,880
----------- ----------- ------------ ------------
Total revenue...................... 4,773,007 1,520,288 9,669,234 2,915,812
COST OF REVENUE........................ 3,098,651 1,756,308 8,158,254 4,880,983
----------- ----------- ------------ ------------
Gross profit (loss)................ 1,674,356 (236,020) 1,510,980 (1,965,171)
----------- ----------- ------------ ------------
OPERATING EXPENSES:
Selling and
marketing............................. 2,798,688 1,658,201 8,265,698 4,884,679
General and
administrative........................ 2,907,570 1,730,350 8,711,637 3,484,766
Product development.................... 2,375,171 358,285 4,677,606 1,316,513
Additional general and administrative
expenses (Note 10).................... 2,570,408 - 2,570,408 -
----------- ----------- ------------ ------------
Total operating
expenses.......................... 10,651,837 3,746,836 24,225,349 9,685,958
----------- ----------- ------------ ------------
LOSS FROM OPERATIONS................... (8,977,481) (3,982,856) (22,714,369) (11,651,129)
OTHER INCOME (EXPENSE):
Interest and other
income............................... 593,758 83,988 1,975,454 286,242
Interest expense...................... (108,721) - (226,246) -
----------- ----------- ------------ ------------
NET LOSS............................... (8,492,444) (3,898,868) (20,965,161) (11,364,887)
Dividends on
mandatorily redeemable,
convertible preferred
stock................................ - (550,031) - (1,630,329)
Accretion of
mandatorily redeemable,
convertible preferred
stock................................ - (85,250) - (255,748)
----------- ----------- ------------ ------------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS................... $(8,492,444) $(4,534,149) $(20,965,161) $(13,250,964)
=========== =========== ============ ============
BASIC AND DILUTED NET
LOSS APPLICABLE TO COMMON SHAREHOLDERS
PER SHARE............................. $ (0.53) $ (0.87) $ (1.34) $ (2.57)
=========== =========== ============ ============
Weighted Average Shares Outstanding -
Basic and Diluted.................... 16,043,901 5,204,730 15,623,606 5,159,501
=========== =========== ============ ============
PRO FORMA NET LOSS PER SHARE:
Basic and diluted net loss per share $ (0.42) $ (1.23)
=========== ============
Weighted average common shares
outstanding - basic and diluted... 9,355,137 9,276,421
=========== ============
</TABLE>
The accompanying notes to the condensed financial statements are an
integral part of these statements.
4
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eCollege.com(SM)
STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
--------------------------
2000 1999
------------ -----------
(Unaudited)
NET CASH USED IN OPERATIONS..................... $(17,120,007) $(8,614,119)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............. (4,175,481) (2,117,304)
Purchases of marketable securities............. (29,255,056) -
Proceeds from sales of marketable securities... 14,132,447 -
Notes receivable from related parties.......... (416,000) -
------------ -----------
Net cash used in investing activities......... (19,714,090) (2,117,304)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of common stock......... 6,837,394 129,363
Proceeds from issuance of preferred stock...... - 2,250,000
Payment of stock issuance costs................ (386,705) (656,000)
Borrowings from lease line of credit........... 2,244,057 -
Payment on lease line of credit................ (82,870) -
Proceeds from notes receivable for stock....... 593,593 -
Deferred initial public offering costs......... - (389,353)
------------ -----------
Net cash provided by financing activities..... 9,205,469 1,334,010
------------ -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS....... (27,628,628) (9,397,413)
CASH AND CASH EQUIVALENTS, beginning of period.. 46,307,674 11,661,186
------------ -----------
CASH AND CASH EQUIVALENTS, end of period......... $ 18,679,046 $ 2,263,773
============ ===========
The accompanying notes to the condensed financial statements are an
integral part of these statements.
5
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eCollege.com(SM)
NOTES TO UNAUDITED CONDENSED
FINANCIAL STATEMENTS
1. Organization and Nature of Business
The Company provides online campuses, online courses and online course
supplements, training and consulting services and hosting services to the
educational market for both face-to-face and distance education. The Company's
integrated platform of software and services allows colleges, universities, K-12
schools and corporations 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.
In December 1999, the Company completed an initial public offering of
5,000,000 shares of common stock at $11.00 per share. Net proceeds to the
Company aggregated to $51,150,000. In January 2000, the Company received net
proceeds of $5,115,000 from the exercise of 500,000 shares of the underwriters'
over-allotment option. The amount received was net of underwriting offering
expenses.
2. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission ("SEC"). Certain information and footnote disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
regulations. The unaudited condensed financial statements reflect all
adjustments and disclosures that are, in the opinion of management, necessary
for a fair presentation. All such adjustments are of a normal recurring nature.
Certain amounts in the 1999 financial statements have been reclassified to
conform to the 2000 presentation. Management does not believe the effects of
such reclassifications are material. The results of operations for the interim
period ended September 30, 2000, are not necessarily indicative of the results
of the full fiscal year. For further information, refer to the audited financial
statements and notes thereto included in the Company's Annual Report on Form 10-
K, for the year ended December 31, 1999 and other filings we have made with the
SEC.
3. Recent Accounting Pronouncements
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") 101, "Revenue Recognition in Financial Statements,"
which provides guidance related to revenue recognition. As originally issued,
SAB 101 was to be effective for the first fiscal quarter of fiscal years
beginning after December 15, 1999, and requires companies to report any changes
in previously reported revenue as a cumulative change in accounting principle at
the time of implementation in accordance with Accounting Principles Board
Opinion 20, "Accounting Changes." In March 2000, the SEC issued SAB 101A "First
Amendment: Revenue Recognition in Financial Statements," which delayed
implementation of SAB 101 until no later than the Company's second quarter of
2000. In June 2000, the SEC issued SAB 101B "Second Amendment: Revenue
Recognition in Financial Statements," which delays the implementation of SAB 101
until no later than the Company's fourth quarter of 2000.
In March 2000, the Emerging Issues Task Force reached a consensus on Issue
No. 00-3, Application of AICPA SOP 97-2, "Software Revenue Recognition to
Arrangements That Include the Right to Use Software Stored on Another Entity's
Hardware" ("EITF Issue No. 00-3"). The consensus identifies those software
arrangements under which entities can account for sales of software in
accordance with SOP 97-2, and those arrangements that do not qualify as a sale
of software.
The Company is currently evaluating SAB 101 in conjunction with EITF Issue
No. 00-3 and is in the process of determining the impact SAB 101 will have on
its financial position, revenues and results of operations for the year ending
December 31, 2000 and on interim periods within this year. The impact of SAB 101
will be reported as a change in accounting principle, computed as of January 1,
2000, in accordance with APB Opinion Number 20 and FASB Statement No. 3. This
may result in a significant cumulative effect adjustment that would be reflected
in the Company's results of operations for the year ended December 31, 2000.
Previously reported interim information for the year ended December 31, 2000
would be recast to reflect the retroactive application of SAB 101 effective as
of January 1, 2000.
6
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In March 2000, the FASB issued Interpretation No. 44, ("FIN 44"),
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB 25." This Interpretation clarifies (a) the definition of
employee for purposes of applying Opinion 25, (b) the criteria for determining
whether a plan qualifies as a non-compensatory plan, (c) the accounting
consequence of various modifications to the terms of a previously fixed stock
option or award, and (d) the accounting for an exchange of stock compensation
awards in a business combination. This Interpretation is effective July 1, 2000,
but certain conclusions in this Interpretation cover specific events that occur
after either December 15, 1998, or January 12, 2000. To the extent that this
Interpretation covers events occurring during the period after December 15,
1998, or January 12, 2000, but before the effective date of July 1, 2000, the
effects of applying this Interpretation are recognized on a prospective basis
from July 1, 2000. The adoption of FIN 44 had no impact on the Company's
financial statements.
4. Net Loss Per Share
Net loss per share is calculated in accordance with SFAS No. 128, "Earnings
Per Share" ("SFAS 128"). Under the provisions of SFAS 128 and SAB 98, basic net
loss per share is computed by dividing net loss available to common stockholders
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. As a result of the Company's net losses, all potentially dilutive
securities, as indicated in the table below, would be anti-dilutive and are
excluded from the computation of diluted loss per share.
September 30,
2000 1999
--------- ---------
Stock options 3,152,923 1,881,502
Warrants 77,185 686,518
Series A Preferred Stock -- 616,000
Series B Preferred Stock -- 1,526,221
Series C Preferred Stock -- 2,009,187
========= =========
Total 3,230,108 6,719,428
The Common Stock equivalent of the number of shares excluded from the
earning per share calculation because they are anti-dilutive, using the treasury
stock method, were 424,951 and 234,186 for the three and nine months ended
September 30, 2000, respectively, and 5,793,097 and 5,574,185 for the three and
nine months ended September 30, 1999, respectively.
5. Warrants
In connection with the sale of Series A in June 1997, the Company issued
warrants to purchase 616,000 shares of the Company's Common Stock at an exercise
price of approximately $1.62 per share. The warrants vested immediately and
were exercisable for a period of three years. Based on the fair market value of
the Common Stock at the date of issuance, the fair value of the warrants was
determined to be immaterial. On May 31, 2000, these warrants were converted into
530,181 shares of Common Stock. A portion of the warrants were exercised via
cashless exercise, whereby the holder received a lesser number of shares in lieu
of payment of the exercise price.
6. Comprehensive Loss
Total comprehensive loss was $8,480,744 and $20,964,779 for the three and
nine months ended September 30, 2000, respectively, and is the same as net loss
for the three months ended and nine months ended September 30, 1999,
respectively. Adjustments to the Company's net loss to derive comprehensive loss
are comprised of net unrealized gains on the Company's available-for-sale
securities.
7
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7. Capital Lease
In the second quarter of 2000, the Company entered into a leasing
arrangement with a third party. Under the lease agreement, the Company may lease
up to $2,500,000 of equipment for an initial term of 36 months. At the end of
the lease term, the Company will buy the equipment for 8.5% of the amount drawn.
The lease will be treated for accounting purposes as a capital lease. As of
September 30, 2000, the Company leased $2,244,057 of equipment and has $255,943
of additional financing available under the lease line. Accumulated depreciation
on leased equipment was $124,670 as of September 30, 2000.
The following is a schedule by year of future minimum capital lease payments,
together with the present value of the net minimum lease payments as of
September 30, 2000:
Year Ending December 31:
------------------------
2000 $ 215,981
2001 859,563
2002 859,563
2003 709,692
----------
Total minimum lease payments $2,644,799
Less: Amount representing interest 483,613
----------
Present value of future minimum base payments $2,161,186
Current portion of capital lease obligation 609,428
----------
Long-term capital lease obligation $1,551,758
==========
8. Capitalized Software
On April 1, 2000, the Company began capitalizing costs related to
development of its CampusPortal(SM) product. As of September 30, 2000, the
Company capitalized $2,067,237 in development costs.
9. Related Party Transaction
On June 23, 2000, the Company issued secured promissory notes to two
employees, totaling $416,000. The notes are full recourse and are secured by the
Common Stock of the Company owned by the employees. These notes bear interest at
8% per year and are due on December 31, 2000.
10. Options
Mr. Oakleigh Thorne was appointed as Chief Executive Officer on May 30,
2000 and serves as Chairman of the Board. In lieu of salary, benefits and other
compensation, the Company granted an investment fund affiliated with Mr. Thorne
fully vested options to purchase up to 1,000,000 shares of the Company's Common
Stock. Options for 200,000 shares have an exercise price of $3.875, the fair
market value of the Company's Common Stock on the date of the grant. Options for
800,000 shares have an exercise price of $15.00 per share, which can be adjusted
to $3.875 based on certain stock price performance criteria. In the third
quarter of 2000, the Company recorded the fair market value of these non-
employee options of $2,570,408 as compensation expense. This amount is reflected
as Additional General and Administrative expense in the accompanying statements
of operations.
11. Legal Matters
The Company is exposed to asserted and unasserted legal claims encountered
in the normal course of business. Management believes that the ultimate
resolution of any such matters will not have a material adverse effect on the
operating results or the financial position of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements in this Section and elsewhere in this report are
forward-looking in nature and relate to trends and events that may affect the
Company's future financial position and operating results. Such statements are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. The terms "expect," "anticipate," "intend," "project" and
similar words or expressions are intended to identify forward-looking
statements. These statements speak only as of the date of this report. The
statements are based on current expectations, are inherently uncertain, are
subject to risks, and should be viewed with caution. Actual results and
experience may differ materially from the forward-looking statements as a result
8
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of many factors, including changes in economic conditions in the markets served
by the Company, increasing competition, and other unanticipated events and
conditions. It is not possible to foresee or identify all such factors. The
Company makes no commitment to update any forward-looking statement or to
disclose any facts, events or circumstances after the date hereof that may
affect the accuracy of any forward-looking statement.
Forward-looking statements made in this Form 10-Q include references to our
development of our CampusPortal(SM) product, and the expected impact of this
product on our financial results. The CampusPortal(SM) product development
contains certain risks including possible delays in development, cost overruns
and market acceptance. This Form 10-Q also contains statements about our
expected increases in revenues and expected trends in our operating expenses.
These statements are forward-looking statements and should be read in
conjunction with certain risk factors in our Form S-1 dated December 14, 1999,
our Form 10-K dated March 30, 2000, and other filings we have made with the SEC.
Overview
eCollege.com(SM) is a leading provider of technology and services that
enable colleges, universities, K-12 schools and corporations 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 products and 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. As of September
30, 2000, we had 198 contracts covering 287 individual campuses. Since our
inception, our customers have purchased or ordered more than 5,500 online
courses along with course building services. For the fall 2000 academic term, we
had 169 customers offering online courses to students, and our customers had
approximately 32,000 student enrollments in online courses provided by us. We
have invested, and continue to invest, in expanding our service capabilities by
expanding our infrastructure and increasing our human resources. 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, and to enhance
existing and develop new technologies.
Business Strategy
Our objectives are to be the leading provider of technology for use in
education and training, and for our services to be the highest standard in the
industry. Our strategy to achieve these objectives includes providing the
leading eTeaching platform for teaching and learning on campus, for distance
education and for corporate training; providing solutions for key front-office
transactions between educators and their students; progressing towards a self-
service model where customers can deploy our product without substantial
involvement from our service staff; and helping institutions create lifelong
learning communities.
We are also developing technology that will allow eCollege.com(SM) and its
customers to include online advertising on their online campus portals and to
generate eCommerce revenue from the online communities of the customers using
the eCollege.com(SM) campus product. The new version of the eCollege.com(SM)
campus product (CampusPortal(SM)) will have options including online courses and
online course supplements, community or corporate information, faculty/
instructor development, customized personal homepages, and administrative
student or employee services, as well as advertising and eCommerce, as approved
by our customers. We are considering several pricing strategies for this product
and are therefore not yet able to estimate the impact of the release of this
product on our financial statements.
9
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We are also evaluating other products and services to continue to
expand revenue opportunities from clients.
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
. enrollment fees for each student in an online course.
As we expand and diversify our product offerings, we expect to generate
revenue from additional sources. These additional sources include:
. maintenance fees to manage the online campus during the term of the
agreement;
. service fees, including online campus implementation, faculty training
and support and technical consulting services;
. fees for products that supplement traditional classroom courses
(eCompanion(SM) and eToolKit(SM)); and
. fees for advertising and eCommerce through our CampusPortal(SM)
product.
In the third quarter of 2000, revenue from these additional sources was
insignificant. We intend to use some of these products as marketing tools. We
expect that adoption of some of these products will increase student enrollment
and generate revenue later this year and in 2001.
We typically enter into contracts with colleges, universities and
corporations to provide our online learning products and services. The average
term of our contracts is one to three years. Each contract is based on our
standard form, customized for each college, university or corporation and
specifies the products and services we will provide. These contracts specify the
online campus purchased and the initial number of online courses purchased, as
well as the price for additional online courses and services. We recognize our
development fees on a percentage of completion basis as the online campus and
course development and design services are performed. 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 or loss reported for the periods during which work on the contract is
ongoing and may not accurately reflect the final results of the contract. Any
anticipated losses on contracts are charged to earnings when identified.
We charge our customers a student fee for each student enrolled in an
online course or on-campus course using online course supplements. These fees
are recognized ratably over the duration of the course.
10
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Our business model is based upon a number of factors, including increasing
the acceptance of online learning among colleges, universities and corporations,
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. For the quarter ended September 30, 2000, we received
approximately fifty-four percent (54%) of our revenue from development and
design services fees for building campuses and courses, and approximately forty
six percent (46%) from student fees. This mix is influenced by the seasonality
associated with academic terms. Since the third quarter revenue represents the
end of the summer academic term and the beginning of the fall term, much of the
course development work for the fall has been completed. For the nine months
ended September 30, 2000, we received approximately fifty percent (50%) of our
revenue from development and design services fees for building campuses and
courses, and approximately fifty percent (50%) of our revenue from student fees.
We expect that the development revenue stream will continue to grow, but that
the student fees will become a larger percentage of total revenue as the number
of online courses offered by our customers and the number of students in those
courses continue to increase. As our incremental cost to service additional
student enrollment declines due to increased student enrollments, we will be
able to offer discounts to our customers who guarantee higher student volumes.
Additionally, our supplemental online teaching solutions are generally priced
lower than our full-course solutions. As our pricing and product mix change, we
anticipate that student enrollment will increase and the average student fee may
decline.
In October 1998, we were awarded a grant of approximately $1,900,000 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. 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 or that we will receive the maximum payments under the NIST grant. We
recognized $183,860 and $95,621 of NIST revenue for the three months ended
September 30, 2000 and 1999, respectively. We recognized $366,539 and $213,621
of NIST revenue for the nine months ended September 30, 2000 and 1999,
respectively. This revenue is included in campus and course development fees. We
do not intend that revenue from such grants 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.
Grant Program
We implemented a Grant Program in late 1999 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.
Seventy-two Grants were 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. Pursuant to the Grant Program, we stopped
awarding additional grants in January 2000.
Funds granted consist of both marketing funds and educational support funds.
Marketing funds are reimbursed to our customers based on demonstration of
payment for approved marketing activities. These reimbursements are recorded as
marketing expenses as we estimate they are incurred by our customers. A portion
of the grants are educational support funds and are considered contract costs.
If contract costs, including appropriate educational support funds, are in
excess of the revenue we receive to build a customer's campus or courses, such
excess is expensed as a contract loss in the quarter in which the loss is first
identified. For the year ending December 31, 1999, the Company recognized a loss
on such contracts of $2,438,055. As we complete the development work under these
contracts, the loss reserve is reduced such that our gross margin related to
this revenue is zero. This reduction is included in Cost of Revenue and was
$446,166 and $733,572 for the three and nine months ended September 30, 2000.
The remaining estimated contract loss reserve at September 30, 2000 is
$1,704,483. The determination of the contract loss requires management to make
estimates and assumptions regarding the total amount of costs to be incurred.
These estimates and assumptions may change and affect the reported amounts of
the contingent liability on the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. As
contracts are completed, actual results could impact reported amounts of revenue
and expense in the current reporting period.
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<PAGE>
We have granted $7,402,268, which consists of $1,698,941 in marketing funds
and $5,703,327 in educational support funds. Pursuant to the terms of the
grants, funds are paid to our customers after they have provided evidence of
payment for appropriate expenditure. For the three months and nine months ended
September 30, 2000, we made disbursements under the Grant Program of $216,404
and $467,444, respectively. We expense the marketing fund component as we expect
our customers to incur them. We have estimated that our customers have incurred
$400,000 and $1,200,000 for the three months and nine months ended September 30,
2000, respectively. We expense educational support funds as they are incurred,
which is generally as the courses under the grant are developed. For the three
months and nine months ended September 30, 2000, we have reserved $1,133,583 and
$1,615,135 of educational support funds, respectively.
Results Of Continuing Operations
We have incurred significant losses since our inception, resulting in an
accumulated deficit of $53,226,939 as of September 30, 2000, compared to
$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, technologies and
products. We also intend to continue to invest in sales and marketing
activities. Accordingly, we expect to incur operating losses for the foreseeable
future.
Three Months and Nine Months Ended September 30, 2000 and 1999
Revenue. Our total revenue increased to $4,773,007 and $9,669,234 for the
three months and nine months ended September 30, 2000, respectively, from
$1,520,288 and $2,915,812 for the three months and nine months ended September
30, 1999, respectively. Increases in revenue are due to increased student
enrollment in online courses, as well as an increased number of online campuses
and online courses developed. During the quarter ended September 30, 2000, the
Company recorded revenue of $177,000 resulting from contract amendments and
expirations, as well as $85,536 of revenue, previously deferred, resulting from
the completion of the Company's obligations thereunder. Revenue from the NIST
grant was $183,860 and $366,539 for the three months and nine months ended
September 30, 2000, and is included in development revenue.
Cost of Revenue. Cost of revenue increased to $3,098,651 and $8,158,254 for
the three months and nine months ended September 30, 2000, respectively, from
$1,756,308 and $4,880,983 for the three months and nine months ended September
30, 1999, respectively. Our cost of revenue increased due to additional
personnel costs to support our growth in revenue, in addition to grant expense
incurred during the period. Our operations and account management personnel
increased to 145 at September 30, 2000, from 138 at September 30, 1999. We
recorded grant expenses of approximately $687,384 and $881,530 for the three
months and nine months ended September 30, 2000, respectively. We expect the
grant expenses to increase in the fourth quarter of 2000 as the online courses
under the Grant Program are developed.
Gross Margin. We experienced a positive gross margin of $1,674,356 and
$1,510,980 for the three months and nine months ended September 30, 2000,
respectively, as compared to a negative gross margin of $236,020 and $1,965,171
for the three months and nine months ended September 30, 1999, respectively. The
improvement in gross margin this quarter is due to the increase in our student
fees, which have a higher contribution margin, improved utilization of our
professional services staff and realizing operating leverage on our fixed
expenses as our revenues increase.
Selling and Marketing. Selling and marketing expenses increased to
$2,798,688 and $8,265,698 for the three months and nine months ended September
30, 2000, respectively, from $1,658,201 and $4,884,679 for the three months and
nine months ended September 30, 1999, respectively. 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 70 at
September 30, 2000, from 44 at September 30, 1999. The increase in selling and
marketing expenses also reflects an increase in marketing costs associated with
the Grant Program of $400,000 and $1,200,000 for the three months and nine
months ended September 30, 2000, respectively, from $0 and $0 for the three
months and nine months ended September 30, 1999, respectively.
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<PAGE>
General and Administrative. General and administrative expenses increased
to $2,907,570 and $8,711,637 for the three months and nine months ended
September 30, 2000, respectively, from $1,730,350 and $3,484,766 for the three
months and nine months ended September 30, 1999, respectively. General and
administrative expenses for the nine months ended September 30, 2000, include
severance pay of approximately $250,000 for the former chief executive officer.
Expenses have increased in the form of additional salaries, consulting,
professional fees, and travel expenses as we build and develop our management
team and operating infrastructure. The number of general and administrative
personnel increased to 67 at September 30, 2000, from 44 at September 30, 1999.
This includes staff in business development and systems administration. We
expect our general and administrative expenses to grow in absolute dollars.
Since inception, we incurred aggregate deferred compensation of $4,139,631
in connection with the grant of options to employees. We have recorded this
amount as a reduction of equity and are amortizing this amount to compensation
expense over the vesting period of such options, which ranges from two to three
years. During the three months and nine months ended September 30, 2000, we
recognized compensation expense in the amount of $254,689 and $952,945,
respectively, compared with $404,000 and $694,000 for the three months and nine
months ended September 30, 1999, respectively.
Additional General and Administrative. Additional general and
administrative expenses of $ 2,570,408 for the three months and nine months
ended September 30, 2000, respectively, compared to $0 for the three months and
nine months ended September 30, 1999, reflect the fair market value of options
issued to a non-employee investment partnership for the services of our Chief
Executive Officer Mr. Thorne, in the amount of $2,570,408.
Product Development. Product development expenses increased to $2,375,171
and $4,677,606 for the three months and nine months ended September 30, 2000,
respectively, from $358,285 and $1,316,513 for the three months and nine months
ended September 30, 1999, respectively. The increase was primarily due to the
development of our CampusPortal(SM) product, enhancements for our eTeaching
Solutions(SM) and an investment in tools to improve our efficiency in developing
online campuses and online courses. On April 1, 2000, we started to capitalize
software development costs related to our CampusPortal(SM) product. As of
September 30, 2000, we have capitalized approximately $2,067,237 in development
costs. We expect that product development costs will remain approximately the
same for the quarters ending December 31, 2000 and March 31, 2001, and will then
decline after our CampusPortal(SM) product is released.
Other Income (Expense). Interest and other income, which consists primarily
of interest earnings on our cash and cash equivalents and short-term
investments, increased to $593,758 and $1,975,454 for the three months and nine
months ended September 30, 2000, respectively, from $83,988 and $286,242 for the
three months and nine months ended September 30, 1999, respectively. This
increase is primarily due to an increase in cash as a result of the equity
financing that occurred in the fourth quarter of 1999 and the first quarter of
2000 of $51,150,000 and $5,115,000, respectively. Interest expense resulting
from amortization of warrants and prepaid fees associated with establishing the
line of credit entered into in 1999 was $55,518 and $166,034 for the three
months and nine months ended September 30, 2000, respectively. Interest expense
associated with our capital lease facility was $43,921 for the three months and
$44,408 for the nine months ended September 30, 2000.
Net loss. Our net loss applicable to common stockholders increased to
$8,492,444, or $0.53 per share, and $20,965,161, or $1.34 per share, for the
three months and nine months ended September 30, 2000, respectively, from
$4,534,149, or $0.87 per share, and $13,250,964, or $2.57 per share, for the
three months and nine months ended September 30, 1999, respectively. The net
loss applicable to common stockholders in 1999 includes the impact of dividends
and accretion related to our mandatorily redeemable, convertible preferred
stock.
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<PAGE>
Liquidity and Capital Resources
The Company's cash, cash equivalents, and short-term investments decreased
$12,505,637 from $46,307,674 at December 31, 1999, to $33,802,037 at September
30, 2000. Specifically, the Company had cash and cash equivalents of $18,679,046
and available for sale securities of $15,122,991 at September 30, 2000. The
decrease for the nine months ended September 30 was due to cash used in
operating activities of $17,120,007 and cash used in investing activities of
$4,175,099. The decrease in cash provided from operating and investing
activities was offset by cash provided by financing activities of $9,205,469.
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 $84,358,779 from inception through September 30, 2000.
In January 2000, we received net proceeds of $5,115,000 from the exercise
of the underwriters' over-allotment option. The amount received was net of the
estimated underwriting offering expenses. In May 2000, we received $588,208 from
the exercise of Series A warrants.
We used the net proceeds from our equity financing to fund capital
expenditures and to support sales and marketing activities, product development
activities, expanding our data center, investing in short term marketable
securities with maturities of one year or less, enhance new accounting and
financial information systems and for other expenses associated with our growth.
In the upcoming year, we specifically plan to invest in fixed assets to support
our continued growth and to continue to invest in the development of new
products and services.
We expect the proceeds that we received from our initial public offering in
December 1999, the exercise of the underwriter's over-allotment option in the
first quarter of 2000, and the exercise of Series A warrants in May 2000,
together with cash generated from operations, to meet our working capital and
capital expenditure requirements for at least the next 12 months.
Item 3. 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. The Company is, 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, 2000, we have not used derivative
instruments, engaged in hedging activities or entered into any foreign currency
transactions.
PART II
OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On December 15, 1999, the Company consummated its initial public offering
(the "Offering") of its Common Stock, par value $.01 per share (the "Common
Stock"). The registration statement relating to the Offering (File No. 333-
78365) was declared effective on December 14, 1999. Banc of America Securities
LLC, William Blair & Company, and Prudential Volpe Technology were the managing
underwriters of the Offering. The Offering terminated on January 13, 2000 upon
the sale of 500,000 shares of the underwriters' over-allotment option. The
Company registered and sold a total, including the underwriters' over-allotment,
of 5,500,000 shares with an aggregate registered price of $60,500,000.
The Company incurred underwriting discounts and commissions of $4,235,000
with respect to the Offering during the period December 15, 1999, through
January 13, 2000, none of which were direct or indirect payments to directors,
officers, general partners of the Company or their associates or to persons
owning 10% or more of any class of equity securities of the Company or to
affiliates of the Company.
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The net offering proceeds to the Company was $56,265,000, of which
$5,115,000 relates to the exercise of 500,000 shares of the underwriters' over-
allotment option on January 13, 2000. The Company used a portion of the proceeds
to repay $2,050,000 in bank debt. At the time of the Offering, 4,150,402 shares
of the Company's Series A, B and C Preferred Stock were converted to 4,150,402
shares of Common Stock. The Company expects to use its remaining net proceeds to
expand and enhance our data centers, continue to develop new products and
services, and continue to invest in new equipment to support our increasing
human resources.
Item 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on September 27, 2000.
All nominees for director were elected. All directors are elected annually for
one-year terms. The vote with respect to each of the Company's directors was as
follows:
Non-Votes &
Director Votes For Votes Withheld Abstentions
======== ========== ============== ===========
Oakleigh Thorne 10,851,515 1,194,218 2,963,854
Robert N. Helmick 12,027,412 18,321 2,963,854
Jonathan M. Dobrin 12,036,888 8,845 2,963,854
Jack W. Blumenstein 12,037,236 8,497 2,963,854
Christopher E. Girgenti 12,039,308 6,425 2,963,854
Jeri L. Korshak 12,038,373 7,360 2,963,854
Robert N. Helmick resigned as a director on September 29, 2000.
The Company's Stockholders also approved the appointment of Arthur Andersen
LLP as independent auditors for the fiscal year ending December 31, 2000 with
the voting results as follows:
Votes For Votes Against Votes Withheld Non-Votes & Abstentions
========== ============= ============== =======================
11,929,260 98,471 18,002 2,963,854
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
The following is a list of exhibits filed as part of this Report on Form
10-Q. Where so indicated by footnote, exhibits which were previously filed
are incorporated by reference. For exhibits incorporated by reference, the
location of the exhibit in the previous filing is indicated parenthetically
except for in those situations where the exhibit number was the same as set
forth below.
Exhibit
Number Description
------- ---------------------------------------------------------
1 Statement Regarding Computation of Per Share Earnings (Loss)
(included in notes to financial statements)
10.2 Registration Agreement between eCollege.com and
Blumenstein/Thorne Information Partners I, L.P.
10.3 eCollege.com Stock Option Agreement between Blumenstein/Thorne
Information Partners, I, L.P.
27 Financial Data Schedule
(b) Reports on Form 8-K
8-K filed on August 1, 2000.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report on Form 10-Q to be signed on its
behalf by the undersigned, thereunto duly authorized in Denver, Colorado, on
this 14th day of November, 2000.
eCollege.com
/s/ Oakleigh Thorne
----------------------------------------------
Name: Oakleigh Thorne
Title: Chief Executive Officer and Co-Chairman
of the Board of Directors
(principal executive officer)
/s/ Douglas H. Kelsall
----------------------------------------------
Name: Douglas H. Kelsall
Title: Chief Financial Officer and
Treasurer (principal financial
officer)
/s/ Linda Schmehl
----------------------------------------------
Name: Linda Schmehl C.P.A.
Title: Chief Accounting Officer
16
