<PAGE> 1
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UNITED STATES
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, 1999.
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________.
-----------------------------
COMMISSION FILE NUMBER 0-21421
-----------------------------
VCAMPUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 54-1290319
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
8251 GREENSBORO DRIVE, 22102
SUITE 500, (Zip Code)
MCLEAN, VIRGINIA
(Address of principal executive
offices)
</TABLE>
703-893-7800
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes ____ No____
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
<TABLE>
<S> <C>
Common Stock, $0.01 Par Value 4,922,201
(Class) (Outstanding at November 15, 1999)
</TABLE>
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<PAGE> 2
PART I -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
VCAMPUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- ---------------------------
1998 1999 1998 1999
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
Instructor-led training revenues...... $ 1,610,581 $ 1,434,622 $ 4,713,121 $ 3,995,201
Online tuition revenues............... 463,539 1,108,967 993,921 2,957,706
Product sales revenues................ 983,001 133,541 2,810,212 844,686
Online development and other
revenues........................... 478,031 265,244 842,284 841,443
Other service revenues................ 718,466 81,044 1,879,077 231,360
Virtual campus software revenues...... 29,669 53,070 73,003 170,162
----------- ----------- ------------ ------------
Net revenues............................ 4,283,287 3,076,488 11,311,618 9,040,558
Costs and expenses:
Cost of revenues...................... 2,182,003 1,568,453 6,734,390 4,518,376
Sales and marketing................... 1,023,755 1,107,623 4,291,079 3,304,063
Product development and operations.... 866,850 477,248 5,507,409 1,488,879
General and administrative............ 510,859 584,156 3,059,560 1,906,199
Depreciation and amortization......... 837,952 707,861 2,357,584 2,246,677
Reorganization costs.................. -- -- 1,396,510 --
----------- ----------- ------------ ------------
Total costs and expenses................ 5,421,419 4,445,341 23,346,532 13,464,194
----------- ----------- ------------ ------------
Loss from operations.................... (1,138,132) (1,368,853) (12,034,914) (4,423,636)
Gain (loss) on the sale of subsidiary... (381,954) -- (381,954) 1,446
Interest expense........................ (135,857) (158,440) (430,727) (450,758)
----------- ----------- ------------ ------------
Net loss................................ $(1,655,943) $(1,527,293) $(12,847,595) $ (4,872,948)
=========== =========== ============ ============
Dividends to preferred stockholders..... (75,858) (74,535) (75,858) (222,172)
----------- ----------- ------------ ------------
Net loss attributable to common
stockholders.......................... $(1,731,801) $(1,601,828) $(12,923,453) $ (5,095,120)
=========== =========== ============ ============
Net loss per share...................... $ (0.45) $ (0.33) $ (3.39) $ (1.12)
=========== =========== ============ ============
Net loss per share -- assuming
dilution.............................. $ (0.45) $ (0.33) $ (3.39) $ (1.12)
=========== =========== ============ ============
</TABLE>
See accompanying notes.
2
<PAGE> 3
VCAMPUS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 336,194 $ 169,227
Accounts receivable, less allowance of approximately
$567,000 and $437,000 at December 31, 1998 and
September 30, 1999, respectively....................... 3,087,268 1,633,819
Loans receivable from related parties..................... 143,515 122,182
Loans receivable -- current............................... 232,375 1,201,900
Prepaid expenses and other current assets................. 172,926 978,762
------------ ------------
Total current assets.............................. 3,972,278 4,105,890
Property and equipment, net................................. 2,436,534 1,702,988
Capitalized software costs and courseware development costs,
net....................................................... 2,130,665 1,695,760
Acquired online publishing rights, net...................... 407,552 300,487
Loans receivable -- less current portion.................... 380,234 358,715
Other assets................................................ 194,644 195,960
Other intangible assets, net................................ 2,508,664 2,035,163
Goodwill, net............................................... 2,840,460 1,803,702
------------ ------------
Total assets...................................... $ 14,871,031 $ 12,198,665
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 4,617,418 $ 4,501,059
Notes payable -- current portion.......................... 3,075,139 573,358
Deferred revenues -- current portion...................... 911,072 948,201
Accrued dividends payable................................. -- 74,535
------------ ------------
Total current liabilities......................... 8,603,629 6,097,153
Deferred revenues -- less current portion................. 109,834 8,835
Notes payable -- less current portion..................... 337,235 2,167,707
------------ ------------
Total liabilities................................. 9,050,698 8,273,695
------------ ------------
Stockholders' equity:
Series C convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $7,912,509;
1,000,000 shares authorized; 626,293 and 623,339 shares
issued and outstanding at December 31, 1998 and
September 30, 1999, respectively....................... 6,263 6,233
Series D convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $8,931,656;
1,200,000 shares authorized; 1,082,625 and 1,073,370
shares issued and outstanding at December 31, 1998 and
September 30, 1999, respectively....................... 10,826 10,734
Common Stock, $0.01 par value per share; 36,000,000 shares
authorized; 3,990,046 and 4,864,444 shares issued and
outstanding at December 31, 1998 and September 30,
1999, respectively..................................... 39,900 48,644
Additional paid-in capital................................ 53,460,264 56,651,399
Accumulated deficit....................................... (47,696,920) (52,792,040)
------------ ------------
Total stockholders' equity........................ 5,820,333 3,924,970
============ ============
Total liabilities and stockholders' equity........ $ 14,871,031 $ 12,198,665
============ ============
</TABLE>
See accompanying notes.
3
<PAGE> 4
VCAMPUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
1998 1999
------------ -----------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(12,847,595) $(4,872,948)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 2,357,586 2,246,674
Net write-off of acquired online publishing rights........ 241,000 --
Net write-off of capitalized courseware development
costs.................................................. 502,669 --
(Gain) loss on sale of subsidiary......................... 381,954 (1,446)
Loss on sale of fixed assets.............................. -- 16,134
Stock option and stock warrant compensation............... -- 176,904
Increase (decrease) in allowance for doubtful accounts.... 1,034,593 (355,436)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable............. (317,012) 1,313,881
(Increase) decrease in prepaid expenses and other
current assets........................................ 126,137 (531,039)
(Increase) decrease in other assets.................... 46,196 (1,316)
Decrease in accounts payable and accrued Expenses...... (1,348,138) (16,359)
Increase(decrease) in deferred revenues................ 493,035 (63,870)
------------ -----------
Net cash used in operating activities....................... (9,329,575) (2,088,821)
INVESTING ACTIVITIES
Purchases of property and equipment......................... (661,784) (55,996)
Capitalized software and courseware development costs....... (669,322) (264,384)
Additions to intangible assets.............................. (355,810) --
Proceeds from loans from related parties.................... -- 23,541
Proceeds from loans receivable.............................. -- 275,225
Proceeds from sale of subsidiary............................ 25,000 75,000
Advances under loans receivable............................. -- (30,439)
Advances under loans receivable from related parties........ (33,988) --
------------ -----------
Net cash provided by (used in) investing activities......... (1,695,904) 22,947
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock...................... 77,925 2,426,469
Proceeds from Series C convertible Preferred Stock.......... 5,244,824 --
Proceeds from Series D convertible Preferred Stock.......... 5,115,545 --
Proceeds from notes payable................................. 4,142,833 2,300,000
Repayments of notes payable................................. (5,876,665) (2,827,562)
------------ -----------
Net cash provided by financing activities................... 8,704,462 1,898,907
------------ -----------
Net decrease in cash and cash equivalents................... (2,321,017) (166,967)
Cash and cash equivalents at the beginning of the period.... 2,705,490 336,194
------------ -----------
Cash and cash equivalents at the end of the period.......... $ 384,473 $ 169,227
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................... $ 343,858 $ 311,500
============ ===========
</TABLE>
See accompanying notes.
4
<PAGE> 5
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the interim periods are not necessarily indicative of the
results that may be expected for any future period, including the year ending
December 31, 1999. For further information, refer to the audited financial
statements and footnotes thereto included in the VCampus Corporation ("VCMP" or
the "Company") (formerly UOL Publishing, Inc. (UOLP)) Annual Report on Form 10-K
for the year ended December 31, 1998.
NOTE B -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
Through December 31, 1998 the Company recognized online tuition fees from
academic institutions once the drop/add period had expired. Beginning January 1,
1999 the Company changed its revenue recognition policy for academic
institutions to recognize revenue ratably over the semester period the services
are delivered.
Reclassification
Certain 1998 amounts have been reclassified to conform to the 1999
presentation.
NOTE C -- EQUITY TRANSACTIONS
During the nine months ended September 30, 1999, the Company raised
approximately $2,350,000 though two private placements of 282,500 and 448,287
shares of its common stock at $4.00 and $2.94 per share respectively.
The Company entered into a Private Equity Line of Credit Agreement (the
"Equity Line Agreement") with Hambrecht & Quist Guaranty Finance, LLC ("H&QGF")
effective May 4, 1999. Under the Equity Line Agreement, the Company has the
right, subject to certain conditions, to issue and sell to H&QGF, from time to
time, shares of its Series E Convertible Preferred Stock, for cash consideration
of up to an aggregate of $3.0 million, subject to availability.
Pursuant to the Equity Line Agreement, the Company filed a Registration
Statement with the SEC on July 28,1999. Beginning on the date the Registration
Statement is declared effective, the Company may sell to H&QGF shares of its
Series E Convertible Preferred Stock at a price equal to 85% of the lower of (1)
the closing market price of the Company's common stock on the date of issuance
and (2) the average of the lowest intra-day prices of the Company's common stock
over the five-day period ending on the date of issuance. The Company may sell as
much as $500,000 in preferred stock at any time, subject to certain conditions,
with the total amount sold not to exceed $3.0 million; except that the number of
shares of preferred stock that can be sold to H&QGF is further limited by the
requirement that H&QGF hold no more than 9.9% of our outstanding stock at any
given time.
5
<PAGE> 6
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE D -- NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
1998 1999 1998 1999
----------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
Numerator:
Net loss....................... $(1,655,943) $(1,527,293) $(12,847,595) $(4,872,948)
Accrued dividends to preferred
stockholders................ (75,858) (74,535) (75,858) (222,172)
----------- ----------- ------------ -----------
Net loss available to common
stockholders................ $(1,731,801) $(1,601,828) $(12,923,453) $(5,095,120)
=========== =========== ============ ===========
Denominator:
Denominator for basic earnings
per
share -- weighted-average
shares...................... 3,826,282 4,838,668 3,816,898 4,553,835
=========== =========== ============ ===========
Denominator for diluted
earnings per
share -- adjusted weighted-
average shares.............. 3,826,282 4,838,668 3,816,898 4,553,835
=========== =========== ============ ===========
Basic net loss per share......... $ (0.45) $ (0.33) $ (3.39) $ (1.12)
=========== =========== ============ ===========
Diluted net loss per share....... $ (0.45) $ (0.33) $ (3.39) $ (1.12)
=========== =========== ============ ===========
</TABLE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Statements in this Form 10-Q that are not descriptions of historical facts
are forward-looking statements that are subject to risks and uncertainties.
Actual results could differ materially from those currently anticipated due to a
number of factors, including those set forth herein and in the Company's other
SEC filings, and including, in particular, the availability of sufficient
capital to finance the Company's business plan on terms satisfactory to the
Company, risks relating to uncertainties relating to dependence on strategic
partners and third party relationships, management of rapid growth, dependence
on online distribution, the risks and the Company's payment obligations relating
to acquisitions, security risks, government regulations and competition.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 Compared to Three Months Ended
September 30, 1998
Summary
For the three months ended September 30, 1999, the Company incurred a net
loss of $1,601,828 (or $0.33 per share after accrual of dividends for preferred
stockholders) as compared to a net loss of $1,731,801 (or $0.45 per share) for
the three months ended September 30, 1998. The improvement in third quarter 1999
results as compared to the three months ended September 30, 1998 was due
primarily to an increase in higher margin online tuition revenues as a
percentage of total revenues, and to cost controls implemented during the first
and second quarters of 1998 as a result of management reorganization plans,
partially offset by a non-recurring charge in the third quarter of 1998.
6
<PAGE> 7
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Net Revenues
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
----------------------------------------------
1998 1999
--------------------- ---------------------
<S> <C> <C> <C> <C>
Instructor-led training revenues.................... $1,610,581 37.6% $1,434,622 46.7%
Online tuition revenues............................. 463,539 10.8 1,108,967 36.0
Product sales revenues.............................. 983,001 22.9 133,541 4.4
Online development and other revenues............... 478,031 11.2 265,244 8.6
Other service revenues.............................. 718,466 16.8 81,044 2.6
Virtual campus software revenues.................... 29,669 0.7 53,070 1.7
---------- ----- ---------- -----
Total net revenues........................ $4,283,287 100.0% $3,076,488 100.0%
========== ===== ========== =====
</TABLE>
Instructor-led training revenues decreased 10.9% to $1,434,622 in the third
quarter of 1999, compared to $1,610,581 for the same period in 1998. The
decrease was due primarily to the closing of two instructor-led training
facilities at the end of the second quarter of 1998 as a result of management
reorganization plans.
Online tuition revenues increased 139.2% to $1,108,967 in the third quarter
of 1999, compared to $463,539 for the same period in 1998. For the three months
ended September 30, 1999, sales of online courses increased to approximately
109,000 courses delivered during the quarter, up from third quarter 1998
deliveries of approximately 27,000 online courses. The Company believes that
online tuition revenues will continue to increase in absolute dollars and as a
percentage of total revenue as the Company completes the previously-announced
divestitures of its non-online businesses, with the exception of Teletutor.
Product sales revenues decreased 86.4% to $133,541 in the third quarter of
1999, compared to $983,001 for the same period in 1998. The decrease was due to
the sale of Ivy and Knowledgeworks at the end of the third quarter of 1998 and
second quarter of 1999, respectively.
Development and other revenues decreased 44.5% to $265,244 in the third
quarter of 1999, compared to $478,031 for the third quarter of 1998. The
decrease was primarily due to the sale of Knowledgeworks at the end of the
second quarter of 1999.
Other service revenues decreased 88.7% to $81,044 in the third quarter of
1999, compared to $718,466 for the same period in 1998. The decrease was due to
the sale of HTR's consulting business at the end of the fourth quarter of 1998.
Virtual campus software revenues were $53,070 in the third quarter of 1999,
compared to $29,669 in the second quarter of 1998. The Company continues to
receive virtual campus licensing fees from existing customers who renew their
licenses.
7
<PAGE> 8
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth selected financial data:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------
1998 1999
---------------------- ----------------------
<S> <C> <C> <C> <C>
Revenue.................................... $ 4,283,287 100.0% $ 3,076,488 100.0%
Cost of revenues........................... 2,182,003 50.9 1,568,453 51.0
Sales and marketing........................ 1,023,755 24.0 1,107,623 36.0
Product development........................ 866,850 20.2 477,248 15.5
General and administrative................. 510,859 11.9 584,156 19.0
Depreciation and amortization.............. 837,952 19.6 707,861 23.0
Reorganization and other non-recurring
charges.................................. -- -- -- --
----------- ----- ----------- -----
Loss from operations..................... (1,138,132) (26.6) (1,368,853) (44.5)
Loss on sale of subsidiary............... (381,954) (8.9) -- 0.0
Interest expense........................... (135,857) (3.2) (158,440) (5.2)
----------- ----- ----------- -----
Net loss................................. (1,655,943) (38.7) (1,527,293) (49.7)
Accrued dividends to preferred
stockholders............................. (75,858) (1.8) (74,535) (2.4)
----------- ----- ----------- -----
Net loss to common stockholders.......... $(1,731,801) (40.5)% $(1,601,828) (52.1)%
=========== ===== =========== =====
</TABLE>
Cost of Revenues
Cost of revenues decreased 28.1% to $1,568,453 in the third quarter of 1999
as compared to $2,182,003 for the third quarter of 1998. The decrease was due
primarily to the closing of two instructor-led training facilities at the end of
the second quarter of 1998, the sale of HTR's consulting business at the end of
the fourth quarter of 1998, and to a lesser extent, the sale of Ivy and
Knowledgeworks at the end of the third quarter of 1998 and second quarter of
1999, respectively.
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased 8.2% to
$1,107,623 in the third quarter of 1999 as compared to $1,023,755 for the third
quarter in 1998.
Product Development. Product development expenses decreased 44.9% to
$477,248 in the third quarter of 1999 as compared to $866,850 for the third
quarter of 1998. The decrease was due primarily to cost controls initiated at
the end of the first quarter of 1998 as a result of management reorganization
plans and the sale of Knowledgeworks at the end of the second quarter of 1999.
General and Administrative. General and administrative expenses increased
14.3% to $584,156 in the third quarter of 1999 as compared to $510,859 for the
third quarter of 1998.
Depreciation and Amortization. Depreciation and amortization expense
decreased 15.5% to $707,861 in the third quarter of 1999 as compared to $837,952
for the third quarter of 1998. The decrease was due primarily to the reduction
in goodwill and other intangibles following the sale of Ivy at the end of the
third quarter of 1998, the sale of HTR's consulting business at the end of the
fourth quarter of 1998, the sale of Knowledgeworks at the end of the second
quarter of 1999 and the write-down of goodwill related to the non-online
businesses at the end of the fourth quarter of 1998 as a result of the Company's
plan to divest these assets in 1999.
Loss on Sale of Subsidiary. The Company recognized a loss of $381,954 on
the sale of Ivy in the third quarter of 1998.
8
<PAGE> 9
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest Expense. Interest expense remained relatively unchanged in the
third quarter of 1999 as compared to the third quarter of 1998. Interest expense
was primarily incurred in connection with the Company's borrowings on its line
of credit facilities and term loans. See "Liquidity and Capital Resources".
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Summary
For the nine months ended September 30, 1999, the Company incurred a net
loss of $5,095,120 (or $1.12 per share after accrual of dividends for preferred
stockholders) as compared to a net loss of $12,923,453 (or $3.39 per share) for
the nine months ended September 30, 1998. The improvement in results for the
nine months ended September 30, 1999 as compared to results for the nine months
ended September 30, 1998 was due primarily to an increase in higher margin
online tuition revenues as a percentage of total revenues, and to cost controls
implemented during the first six months of 1998 as a result of management
reorganization plans, and certain non-recurring charges in the same period.
Net Revenues
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-----------------------------------------------
1998 1999
---------------------- ---------------------
<S> <C> <C> <C> <C>
Instructor-led training revenues................... $ 4,713,121 41.8% $3,995,201 44.2%
Online tuition revenues............................ 993,921 8.8 2,957,706 32.7
Product sales revenues............................. 2,810,212 24.8 844,686 9.3
Online development and other revenues.............. 842,284 7.4 841,443 9.3
Other service revenues............................. 1,879,077 16.6 231,360 2.6
Virtual campus software revenues................... 73,003 0.6 170,162 1.9
----------- ------- ---------- -------
Total net revenues....................... $11,311,618 100.0% $9,040,558 100.0%
=========== ======= ========== =======
</TABLE>
Instructor-led training revenues decreased 15.2% to $3,995,201 for the nine
months ended September 30, 1999, compared to $4,713,121 for the same period in
1998. The decrease was due primarily to the closing of two instructor-led
training facilities at the end of the second quarter of 1998 as a result of
management reorganization plans.
Online tuition revenues increased 197.6% to $2,957,706 for the nine months
ended September 30, 1999, compared to $993,921 for the same period in 1998.
Sales of online courses increased to approximately 269,000 courses delivered for
the nine months ended September 30, 1999, as compared to course deliveries of
approximately 61,700 during the nine months ended September 30, 1998.
Product sales revenues decreased 69.9% to $844,686 for the nine months
ended September 30, 1999, compared to $2,810,212 for the same period in 1998.
The decrease was due to the sale of Ivy at the end of the third quarter of 1998,
a decrease in Teletutor product sales due to the downsizing of its operations at
the end of the first quarter of 1998 and movement of certain of its customers
online, and the sale of Knowledgeworks at the end of the second quarter of 1999.
Development and other revenues remained materially unchanged for the nine
months ended September 30, 1999, compared to the same period in 1998.
Other service revenues decreased 87.7% to $231,360 for the nine months
ended September 30, 1999, compared to $1,879,077 for the same period in 1998.
The decrease was due to the sale of HTR's consulting business at the end of the
fourth quarter of 1998.
9
<PAGE> 10
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Virtual campus software revenues increased 133.1% to $170,162 for the nine
months ended September 30, 1999, compared to $73,003 for the same period in
1998. The Company continues to receive virtual campus licensing fees from
existing customers who renew their licenses.
The following table sets forth selected financial data:
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------------------------
1998 1999
----------------------- ----------------------
<S> <C> <C> <C> <C>
Revenue.................................. $ 11,311,618 100.0% $ 9,040,558 100.0%
Cost of revenues......................... 6,734,390 59.5 4,518,376 50.0
Sales and marketing...................... 4,291,079 38.0 3,304,063 36.5
Product development...................... 5,507,409 48.7 1,488,879 16.5
General and administrative............... 3,059,560 27.1 1,906,199 21.1
Depreciation and amortization............ 2,357,584 20.8 2,246,677 24.8
Reorganization and other non-recurring
charges................................ 1,396,510 12.3 -- --
------------ ------ ----------- -----
Loss from operations................... (12,034,914) (106.4) (4,423,636) (48.9)
Gain (loss) on sale of subsidiary...... (381,954) (3.4) 1,446 0.0
Interest expense......................... (430,727) (3.8) (450,758) (5.0)
------------ ------ ----------- -----
Net loss............................... (12,847,595) (113.6) (4,872,948) (53.9)
Accrued dividends to preferred
stockholders........................... (75,858) (0.7) (222,172) (2.5)
------------ ------ ----------- -----
Net loss to common stockholders........ $(12,923,453) (114.3)% $(5,095,120) (56.4)%
============ ====== =========== =====
</TABLE>
Cost of Revenues
Cost of revenues decreased 32.9% to $4,518,376 for the nine months ended
September 30, 1999 as compared to $6,734,390 for the same period in 1998. The
decrease was due primarily to the closing of two instructor-led training
facilities at the end of the second quarter of 1998, the sale of HTR's
consulting business at the end of the fourth quarter of 1998, and the increase
in higher gross margin online tuition revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased 23.0% to
$3,304,063 for the nine months ended September 30, 1999 as compared to
$4,291,079 for the same period in 1998. The decrease was due primarily to cost
controls initiated at the end of the first quarter of 1998 as a result of
management reorganization plans.
Product Development. Product development expenses decreased 73.0% to
$1,488,879 for the nine months ended September 30, 1999 compared to $5,507,409
for the same period in 1998. The decrease was due primarily to cost controls
initiated at the end of the first quarter of 1998 as a result of management
reorganization plans, and the write-off during the first quarter of 1998 of
approximately $750,000 related to previously capitalized content acquisition and
development costs.
General and Administrative. General and administrative expenses decreased
37.7% to $1,906,199 for the nine months ended September 30, 1999 as compared to
$3,059,560 for the same period in 1998. The decrease was due primarily to
approximately $1,075,000 of bad debt expense in the first quarter of 1998, and
to a lesser extent, cost controls initiated at the end of the first quarter of
1998 as a result of management reorganization plans.
Depreciation and Amortization. Depreciation and amortization expense
remained relatively unchanged for the nine months ended September 30, 1999 as
compared to the same period in 1998.
10
<PAGE> 11
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Reorganization Costs. Reorganization costs of $1,396,510 incurred during
the nine months ended September 30, 1998 primarily relate to the Company's
workforce reduction plan, closing of certain office and training facilities, and
elimination and/or re-definition of certain positions within VCMP and HTR to
reduce costs and improve functionality.
Gain (loss) on Sale of Subsidiary. The Company recognized a gain of $1,446
on the sale of its Knowledgeworks line of business in the second quarter of 1999
and a loss of $381,954 on the sale of Ivy in the third quarter of 1998.
Interest Expense. Interest expense remained relatively unchanged for the
nine months ended September 30, 1999 as compared to the same period in 1998.
Interest expense was primarily incurred in connection with the Company's
borrowings on its lines of credit facility and term loans. See "Liquidity and
Capital Resources".
YEAR 2000
Computers, software and microprocessors that use only two digits to
identify a year in a date field may be unable to process accurately certain
date-based information at or after the year 2000. This is commonly referred to
as the "Year 2000" issue. The Company is addressing the issue in several ways.
First, the Company has established a team to monitor product compliance and
believes that all Company products are Year 2000 compliant. Secondly, the
Company is in the process of seeking Year 2000 compliance certification from its
major suppliers and vendors related to their products and internal business
applications. Finally, the Company has established a team to coordinate Year
2000 compliance related to internal systems.
Many of the Company's systems use vendor-provided software, and Year 2000
compliance is expected to be achieved through vendor specific upgrades. For
other internal systems, testing will be completed internally to ensure Year 2000
compliance. As of September 30, 1999, the Company has completed its assessments
of Year 2000 compliance with respect to all of its own products and internal
systems and 95% of its vendor-provided systems and applications. The Company
anticipates all of its systems will have been addressed and updated through
vendor provided upgrades or through completion of internal testing prior to the
end of the fourth quarter of 1999. The Company does not believe that the cost of
its Year 2000 compliance program will be material to its financial condition or
results of operations. The Company does not believe that the Year 2000 issue
will materially adversely affect its business. However, the Company continues to
bear risk related to Year 2000 and could be materially adversely affected if
significant customers or suppliers fail to address the issue or if vendor
upgrades are not provided to the Company as required. The Company could be
forced to spend significant resources and funds to find alternative providers of
systems and applications used by the Company. The Company's contingency plan for
any vendor-provided product found to be non-Year 2000 compliant upon completion
of the Company's assessment is to insist upon vendor compliance within a
reasonable time in advance of Year 2000 and to pursue alternative products with
other Year 2000 compliant vendors.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1999, the Company had $169,227 in cash and cash
equivalents. Net cash used in operating activities was $2,088,821 for the nine
months ended September 30, 1999, the majority of which was funded by two private
placements of common stock totaling approximately $2,366,000. Net cash used in
operating activities for the same period in 1998 was $9,329,575. The improvement
primarily reflects cost controls initiated at the end of the first quarter of
1998 as a result of management reorganization plans.
Net cash provided by investing activities was $22,947 for the nine months
ended September 30, 1999 and net cash utilized in investing activities was
$1,695,904 for the nine months ended September 30, 1998. Net cash proceeds from
investing activities in 1999 was primarily attributable to divestitures and
related notes
11
<PAGE> 12
VCAMPUS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
receivable which were offset by software development costs capitalized. The use
of cash for investing activities in 1998 was primarily attributable to purchases
of equipment, software development costs that were capitalized, and
approximately $356,000 paid to the former shareholder of Ivy pursuant to the
acquisition agreement relating to the Company's acquisition of Ivy.
Net cash provided by financing activities was $1,898,907 for the nine
months ended September 30, 1999 and $8,704,462 for the nine months ended
September 30, 1998. During the nine months ended September 30, 1999 the Company
raised approximately $1,050,000 through a private placement of 282,500 shares of
its common stock at $4.00 per share. In connection with this transaction, the
Company also issued warrants, exercisable over 3 years at $3.00 per share, for
the purchase of 70,625 shares of common stock. During the same period, the
Company also raised approximately $1,316,000 though a private placement of
448,297 shares of its common stock at $2.94 per share. For the nine months ended
September 30, 1998 the Company raised $5,300,000 through a private placement of
626,300 shares of its Series C convertible Preferred Stock, raised approximately
$5,200,000 in a private placement of 1,082,625 shares of its Series D
convertible Preferred Stock, and borrowed on its then existing line of credit
facility.
Management recognizes the need to raise additional funds in order to retire
existing debt and to fund anticipated ongoing operating losses, which management
expects to continue at least until the Company divests its remaining non-online
legacy businesses. The Company has also taken the following actions to provide
future funding for operations:
- The Company raised $2.5 million in June 1999 through the issuance of 9%
Secured Subordinated Convertible Debentures due December 15, 2000,
substantially all of the proceeds from which were used to retire all of
the Company's existing bank debt.
- The Company has retained investment-banking services to assist in the
divestiture of the HTR instructor-led training business, and expects to
complete this transaction during the fourth quarter of 1999.
- The Company has retained advisory services to identify a strategic
partner to provide both global marketing leverage and additional capital.
The Company has filed a registration statement, as amended, with the
Securities Exchange Commission for the resale of 5,588,429 shares of its common
stock held by Company stockholders or issuable upon conversion of debt or
preferred stock. Shares to be registered include up to 1,800,000 shares that may
be offered and sold, from time to time, by H&QGF, who will originally receive
these shares by converting shares of preferred stock that the Company may issue
and sell to H&QGF in the aggregate of up to $3.0 million under its private
equity line of credit agreement with H&QGF.
If the Company does not address its funding needs, it will be materially
adversely affected. The Company's future capital requirements will depend on
many factors, including, but not limited to, acceptance of and demand for its
products and services, the types of arrangements that the Company may enter into
with customers and resellers, and the extent to which the Company invests in new
technology and research and development projects.
12
<PAGE> 13
PART II -- OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) No modifications.
(b) No limitations or qualifications.
(c) From July 1, 1999 to September 30, 1999, the Company issued the
following unregistered securities:
1. 48,261 shares of Common Stock were issued to certain accredited
holders of the Company's Common Stock pursuant to the terms of their
subscription agreements.
2. 9,255 shares of Common Stock were issued to a Series D Preferred
Stockholder pursuant to his conversion of 9,255 shares of Series D
Preferred Stock on a 1 to 1 ratio.
3. 820 shares of Common Stock were issued to one investor upon the
exercise of warrants.
The sales of the above securities were deemed to be exempt from
registration under the Act in reliance upon section 4(2) of the Securities Act
of 1933, as amended (the "Act"), or Regulation D promulgated thereunder as
transactions by an issuer not involving a public offering. Recipients of the
securities in each such transaction represented their intentions to acquire such
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the
instruments issued in such transactions. All recipients had adequate access to
information about the Company.
ITEM 6. EXHIBITS
(a) Exhibits
27.1 Financial Data Schedule, which is submitted electronically to the
Securities and Exchange Commission for information only and not filed.
(b) No current reports on Form 8-K were filed during the quarter ended
September 30, 1999.
13
<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by each of the
undersigned thereunto duly authorized.
VCAMPUS CORPORATION
By: /s/ NARASIMHAN P. KANNAN
------------------------------------
Narasimhan P. Kannan
Chief Executive Officer
By: /s/ MICHAEL A. SCHWIEN
------------------------------------
Michael A. Schwien
Chief Financial Officer
(Principal Financial and Accounting
Officer)
Date: November 15, 1999
14
<PAGE> 15
EXHIBIT INDEX
<TABLE>
<S> <C>
27.1 Financial Data Schedule, which is submitted electronically
to the Securities and Exchange Commission for information
only and not filed.
</TABLE>
15
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 169,227
<SECURITIES> 0
<RECEIVABLES> 2,070,527
<ALLOWANCES> 436,708
<INVENTORY> 0
<CURRENT-ASSETS> 4,105,890
<PP&E> 4,217,779
<DEPRECIATION> 2,514,791
<TOTAL-ASSETS> 12,198,665
<CURRENT-LIABILITIES> 6,097,153
<BONDS> 0
0
16,967
<COMMON> 48,644
<OTHER-SE> 3,859,359
<TOTAL-LIABILITY-AND-EQUITY> 12,198,665
<SALES> 9,040,558
<TOTAL-REVENUES> 9,040,558
<CGS> 4,518,376
<TOTAL-COSTS> 4,518,376
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 450,758
<INCOME-PRETAX> (4,872,948)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,872,948)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,872,948)
<EPS-BASIC> (1.12)
<EPS-DILUTED> (1.12)
</TABLE>