<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 22, 2000
REGISTRATION STATEMENT NO. 333-83885
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
POST EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
VCAMPUS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
Delaware 8299 54-1290319
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
</TABLE>
1850 CENTENNIAL PARK DRIVE, SUITE 200
RESTON, VIRGINIA 20191
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
DANIEL J. NEAL
CHIEF EXECUTIVE OFFICER
VCAMPUS CORPORATION
1850 CENTENNIAL PARK DRIVE, SUITE 200
RESTON, VIRGINIA 20191
(703) 893-7800
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
Copies to:
DONALD R. REYNOLDS, ESQ.
KEVIN A. PRAKKE, ESQ.
WYRICK ROBBINS YATES & PONTON LLP
4101 LAKE BOONE TRAIL, SUITE 300
RALEIGH, NORTH CAROLINA 27607
(919) 781-4000
FAX (919) 781-4865
---------------
<PAGE> 2
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after this post-effective amendment No. 1 to registration statement becomes
effective.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
-------------------------------------------
EXPLANATORY NOTE
THIS POST-EFFECTIVE AMENDMENT IS BEING FILED PURSUANT TO ITEM
512 (a)(1)(i) OF REGULATION S-K IN ORDER TO UPDATE THE PROSPECTUS THAT WILL BE
USED BY THE SELLING STOCKHOLDERS OF THE REGISTRANT, INCLUDING UPDATED DISCLOSURE
TO REFLECT SALES THAT HAVE BEEN MADE TO DATE AS PART OF THIS REGISTRATION.
<PAGE> 3
3,633,887 SHARES
[VCAMPUS CORPORATION LOGO]
COMMON STOCK
This prospectus may be used only in connection with the following resales
of common stock of VCampus Corporation:
- 2,330,831 shares may be offered and sold, from time to time, by the
stockholders listed below
- 1,190,456 shares remaining registered and available for resale under
this prospectus by Hambrecht & Quist Guaranty Finance. Of those
1,190,456 shares, 158,632 of such shares relate to common stock
issuable upon exercise of warrants issued to H&QGF and the
remaining 1,031,824 shares relate to shares of common stock issued
or issuable upon conversion of Series E Preferred Stock issued
from time to time under our equity line of credit agreement with
H&QGF
- 112,600 shares may be offered and sold, from time to time, by BH
Capital Investments, L.P and Excalibur Limited Partnership, who
will originally receive these shares upon exercise of warrants
We refer to H&QGF, BH Capital, Excalibur and the other stockholders who
may offer and sell shares of our common stock under this prospectus as "Selling
Stockholders."
Pursuant to our equity line agreement with H&QGF, we have sold or "put" a
total of 984,952 shares of our preferred stock to H&QGF from November 1999
through August 2000, of which 709,544 shares have been converted to common stock
and resold as part of this registration through the date of this prospectus.
Beginning on the date the post-effective amendment to the registration
statement, of which this prospectus forms a part, is declared effective by the
SEC through December 31, 2000, subject to certain conditions we may from time to
time, in our sole discretion, sell or "put" up to the remaining 756,416 shares
of our preferred stock to H&QGF. Upon conversion of these shares to common
stock, H&QGF may resell these shares pursuant to this prospectus. H&QGF is an
"underwriter" within the meaning of the Securities Act in connection with these
sales.
We will not receive any proceeds from the sale of shares by the Selling
Stockholders.
Our common stock is traded on the Nasdaq SmallCap Market under the symbol
VCMP. Prior to changing our name from UOL Publishing, Inc. to VCampus
Corporation in September 1999, our common stock was traded under the symbol
UOLP. On November 21, 2000, the last sale price of our common stock on the
Nasdaq SmallCap Market was $1.875 per share.
INVESTING IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
---------------
NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED
OUR SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. IT IS ILLEGAL FOR ANYONE TO TELL YOU OTHERWISE.
---------------
FOR CALIFORNIA INVESTORS ONLY
In California sales will be limited to those investors:
(i) who have a minimum net worth of not less than $250,000
(exclusive of their home, home furnishings, and automobile) and a gross
annual income of not less than $65,000; or
(ii) who have a minimum net worth of $500,000 (exclusive of
their home, home furnishings, and automobile);
provided, that in either case the investment will not exceed ten percent
(10%) of the investor's net worth.
Offers and sales in California may also be made to purchasers who are
accredited investors as defined in Rule 501(a) of Regulation D under the
Securities Act of 1933.
The date of this prospectus is November 22, 2000.
HAMBRECHT & QUIST GUARANTY FINANCE, LLC
<PAGE> 4
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. We are not making an offer of these securities in any jurisdiction where it
is not permitted. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the front of the
prospectus. Our business, financial condition, results of operations and
prospects may have changed since that date.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. It is not complete and may not contain all the information that you
should consider before investing in the common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section, the financial
statements and the notes to the financial statements.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ significantly from the results
we discuss in the forward-looking statements. See "Special Note Regarding
Forward-Looking Statements." We discuss some of the factors that might cause
differences in actual results in the "Risk Factors" section of this prospectus.
OUR COMPANY
VCampus Corporation is a leading e-Learning Application Service Provider
(ASP) that develops, manages and hosts turn-key, web-based learning environments
for corporations, academic institutions and government agencies enabling them to
offer global distance learning solutions to their customers, employees and
students. The VCampus(R) e-Learning platform allows our customers to address
their Customer Relationship Management (CRM), Enterprise Resource Planning (ERP)
and product-related strategic business plans through a rapidly-deployed,
outsourced, scalable e-Learning solution. Our e-Learning solution enables
customers to improve the performance of their distribution channels, measure and
develop their employees' knowledge, skills and abilities, and increase their
customers' satisfaction and loyalty. When an organization's internal courses are
combined with our off-the shelf library, offering hundreds of courses in
Management Skills, Information Technology, Telecommunications and Personal
Development, the combined delivery and tracking of courses creates a turn-key
solution for those entities requiring an enterprise-wide learning environment. A
VCampus(TM) is accessible by virtually any Internet-ready PC. Enrolled students
can then access the courseware online, typically via a PC connected to the
Internet or a corporate intranet. Once a student has completed a course, he or
she receives credit or certification, as appropriate. As of September 30, 2000,
the Company had approximately 50 VCampuses(TM) in operation with its corporate
and academic institution partners.
We also offer courseware through more traditional media, including
on-site and classroom training, diskette, CD-ROM and printed formats, through
our HTR and Teletutor subsidiaries. In December 1998, we announced plans to sell
our non-online "legacy" businesses (with the exception of Teletutor and our
instructor-led training business) in order to focus on our core online business.
We believe this move is consistent with our strategy of moving content and
customers to an online training platform from the traditional classroom and
computer-based training methods used in our non-online businesses.
Our objectives are to be the leading e-Learning ASP for the corporate
training, academic, and government education market, and to make our VCampus
e-Learning platform the global standard for online delivery of corporate
training and education courseware. Our strategy to achieve these objectives
includes: increasing our customer base (through targeted marketing, expanding
our direct sales force, and by leveraging the sales channels of strategic
partners), developing strong brand recognition for our products and services,
delivering high-demand courseware (including courseware certified by independent
academic institutions) and upgrading our existing technologies to maintain our
position as a leader in corporate e-Learning. Our strategy also includes
enhancing the "stickyness" of our customer sites by converting more and more of
the customer's proprietary content for online distribution through the VCampus
platform. The intended result is increased penetration into the enterprise and
enhanced customer loyalty.
We target customers in the telecommunications, healthcare, utilities,
information technology and financial services industries, as well as academic
institutions, all of which we believe have relatively large training and
education budgets, significant training needs and receptiveness to new
technology. Our existing courseware library includes over 1,300 online courses.
These courses are in what we believe to be high-demand subject matter areas such
as information technology, telecommunications, compliance/ OSHA, business,
management and finance. We convert to our interactive online format courses that
we believe are proven and popular in diverse subject matter areas. Through
September 30, 2000, we had delivered over 1,100,000 courses to over 360,000
adult learners through our corporate and academic partnerships.
The Company was incorporated in Virginia in July 1984 and reincorporated
in Delaware in March 1985. Our principal executive offices are located at 1850
Centennial Park Drive, Suite 200, Reston, Virginia 20191, our telephone number
at that address is (703) 893-7800, and our web-site is located at
http://www.vcampus.com.
2
<PAGE> 5
THE OFFERING
H&QGF, BH Capital and Excalibur and the other Selling Stockholders may
offer and sell shares of our common stock under this prospectus.
H&QGF
We entered into an equity line of credit agreement with H&QGF effective
May 4, 1999. This agreement, as amended, entitles us to sell, from time to time
through December 31, 2000, up to $7.0 million of our Series E Convertible
Preferred Stock at a price equal to 85% of the lower of (1) the closing market
price of our common stock on the date of issuance and (2) the average of the
lowest intra-day prices of our common stock over the five-day period ending on
the date of issuance. We 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
$7.0 million; except that the number of shares of preferred stock we can sell 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. Through the date of this prospectus, we
have drawn down a total of $5.0 million of the total of $7.0 million available
under the equity line in exchange for a total of 984,952 shares of preferred
stock.
Pursuant to the equity line of credit agreement, we:
- filed a registration statement that includes the 1,741,368 shares of
common stock issued or issuable upon conversion of the preferred
stock that we have sold and may continue to sell to H&QGF, of
which there remains 1,031,824 shares of common stock that H&QGF
may continue to offer and sell to the public through this
prospectus; and
- issued to H&QGF warrants to purchase an aggregate of 158,632 shares of
Series E Convertible Preferred Stock, convertible into 158,632
shares of common stock that H&QGF may also offer and sell to the
public through this prospectus.
As soon as practicable after the effectiveness of this post-effective
amendment to the registration statement (probably within a week), we plan to
drawdown the maximum permitted under our equity line. Based on our 30-day
average share price of $2.31 per share and our 30-day average trading volume of
38,765 shares as of November 17, 2000, we would be entitled to drawdown
approximately $180,000 in connection with our first drawdown. We expect to
effect subsequent drawdowns of the applicable maximum amount available under the
equity line every 15 trading days thereafter until December 31, 2000, the
termination date of the equity line.
BH CAPITAL AND EXCALIBUR
We issued $2.5 million principal amount of our 9% Secured Subordinated
Convertible Debentures due December 15, 2000 to BH Capital and Excalibur in June
1999. The entire amount of principal and accrued interest under these debentures
was converted into a total of 1,022,866 shares of our common stock at various
times from November 30, 1999 through the final conversion on March 10, 2000 at
an average conversion price of $2.58 per share. BH Capital and Excalibur have
advised us that all of their shares have been resold pursuant to this
registration.
Pursuant to the agreement with BH Capital and Excalibur providing for the
issuance of the debentures, we:
- filed a registration statement that included an estimated up to
1,100,000 shares of common stock available for issuance upon
conversion of the debentures, all of which shares BH Capital and
Excalibur have since offered and sold to the public through the
original prospectus relating to this registration; and
- issued warrants to BH Capital and Excalibur to purchase 112,600 shares
of common stock at an exercise price of $6.38 per share (which
equals 115% of the 5-day average closing bid price for our common
stock prior to the funding date of June 15, 1999), which shares BH
Capital and Excalibur may also offer and sell to the public
through this prospectus.
The effective interest rate of the Secured Subordinated Convertible
Debentures is approximately 20% after valuation of the warrants issued to BH
Capital and Excalibur and the conversion feature.
3
<PAGE> 6
OTHER SELLING STOCKHOLDERS
We have filed a registration statement that also includes 2,330,831
shares of common stock held by other stockholders listed on pages 50 and 51
under "Selling Stockholders."
<TABLE>
<S> <C>
Offered by the Selling Stockholders
(including H&QGF, BH Capital and
Excalibur)......................... 3,633,887 shares of common stock of VCampus
Corporation, $0.01 par value.
Offering Price....................... Determined at the time of sale by the Selling
Stockholders.
Common Stock outstanding as of
September 30, 2000................... 8,284,472 shares*
Use of Proceeds...................... We will not receive any of the proceeds of the
offering of shares by the Selling Stockholders
under this prospectus. Any proceeds we receive
from the sale of preferred stock pursuant to
the equity line of credit agreement with
Hambrecht & Quist and the exercise of the
H&QGF warrant will be used for general
corporate purposes. See "The Equity Line of
Credit Agreement."
Dividend Policy...................... We currently intend to retain any future
earnings to fund the development and growth of
our business. Therefore, we do not currently
anticipate paying cash dividends on our common
stock. See "Dividend Policy."
Nasdaq SmallCap Market Symbol........ VCMP
</TABLE>
----------
* Does not include:
- 3,178,785 shares of common stock issuable upon exercise of
warrants outstanding as of September 30, 2000 (including 158,632
shares issuable on an as-converted basis upon exercise of the
H&QGF preferred stock warrant and 112,600 shares of common stock
issuable upon exercise of the BH Capital and Excalibur warrants);
- 2,356,583 shares of common stock issuable upon exercise of stock
options outstanding as of September 30, 2000; and
- 1,039,791 shares of common stock remaining issuable upon
conversion of preferred stock we either have issued or may issue
under the equity line of credit agreement with H&QGF.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following summary consolidated financial data should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and notes
thereto appearing elsewhere in the prospectus. The statement of operations data
set forth below with respect to the years ended December 31, 1997, 1998 and 1999
is derived from, and is referenced to, the audited consolidated financial
statements included elsewhere in this prospectus. The summary consolidated
financial data presented below as of September 30, 2000 and for the nine months
ended September 30, 1999 and 2000 has been derived from the Company's unaudited
consolidated financial statements included elsewhere in this prospectus. The pro
forma data reflects the issuance of the additional $2.0 million in Series E
Convertible Preferred Stock and the assumed conversion to 649,087 shares of
Common Stock.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------- ------------------------
1997 1998 1999 1999 2000
---------- ---------- ---------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net revenues......................... $ 10,145 $ 14,683 $ 11,547 $ 9,041 $ 7,177
Loss from operations................. (16,599) (18,307) (7,767) (4,424) (7,940)
Net loss............................. (16,145) (19,811) (8,487) (4,873) (7,792)
Dividends to preferred stockholders -- (358) (448) (222) (1,012)
Net loss attributable to common
stockholders....................... (16,145) (20,169) (8,935) (5,095) (8,805)
Net loss per share................... $ (4.91) $ (5.27) $ (1.91) $ (1.12) $ (1.13)
Net loss per share -- assuming
dilution........................... $ (4.91) $ (5.27) $ (1.91) $ (1.12) $ (1.13)
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 2000
(UNAUDITED)
-------------------------
PRO
ACTUAL FORMA
-------- --------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit) $ 33 $ 2,033
Total assets...................... 10,834 12,834
Total liabilities................. 4,356 4,356
Accumulated deficit............... (65,376) (65,729)
Total stockholders' equity........ 6,478 8,478
</TABLE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus discuss our plans and
strategies for our business and are "forward-looking statements" as that term is
defined in the Private Securities Litigation Reform Act. The words
"anticipates," "believes," "estimates," "expects," "plans," "intends" and
similar expressions are meant to identify these statements as forward-looking
statements, but they are not the exclusive means of identifying them. The
forward-looking statements in this prospectus reflect the current views of our
management; however, various risks, uncertainties and contingencies could cause
our actual results, performance or achievements to differ materially from those
expressed in or implied by these statements, including:
- our limited operating history in targeted markets
- our history of losses and negative operating cash flows
- our future capital needs and the uncertainty of additional funding
- difficulties in managing rapid growth
- competition
- a developing market, rapid technological changes and new products
- our dependence on online distribution
5
<PAGE> 8
- our substantial dependence on courseware and third-party courseware
providers
- our substantial dependence on third-party technology
- our limited marketing experience and substantial dependence on
third-party distribution
We assume no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
For a discussion of important risks of an investment in our common stock,
including factors that could cause actual results to differ materially from
results referred to in the forward-looking statements, see the "Risk Factors"
section of this prospectus. In light of the risks and uncertainties discussed in
"Risk Factors" and elsewhere in this prospectus, events referred to in
forward-looking statements in this prospectus might not occur.
AVAILABLE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of
common stock offered hereby. This prospectus does not contain all of the
information set forth in the registration statement and the exhibits and
schedules filed with it. For further information with respect to our company and
the common stock offered hereby, reference is made to the registration statement
and the exhibits and schedules filed with it. Statements contained in this
prospectus as to the contents of any contract or any other document referred to
are not necessarily complete, and in each instance reference is made to the copy
of that contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement may be inspected without charge
at the offices of the SEC in Washington, D.C. 20549, and copies of all or any
part of the registration statement may be obtained from the Public Reference
Section of the SEC, Washington, D.C. 20549 upon the payment of the fees
prescribed by the SEC. The SEC maintains a Web site (http://www.sec.gov) that
contains reports, proxy and information statements and other information
regarding registrants, such as our company, that file electronically with the
SEC. We also maintain a Web site (http://www.vcampus.com).
6
<PAGE> 9
RISK FACTORS
You should be aware that there are various risks to an investment in our
common stock, including those described below. You should carefully consider
these risk factors, together with all of the other information included in this
prospectus, before you decide to invest in shares of our common stock.
If any of the following risks, or other risks not presently known to us
or that we currently believe to not be significant, develop into actual events,
then our business, financial condition, results of operations or prospects could
be materially adversely affected. If that happens, the market price of our
common stock could decline, and you may lose all or part of your investment.
This prospectus contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ materially from those
discussed in this prospectus. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below and elsewhere
in this prospectus, and in any documents incorporated in this prospectus by
reference.
WE HAVE INCURRED LOSSES AND ANTICIPATE FUTURE LOSSES. We have incurred
significant losses since our inception in 1984, including net losses of $16.1
million, $19.8 million and $8.5 million for the years ended December 31, 1997,
1998 and 1999, and of $7.8 million for the nine months ended September 30, 2000.
As of September 30, 2000, we had an accumulated deficit of $65,376,189,
stockholder's equity of $6,478,297 and working capital of $33,141. We expect
losses from operations to continue at least through the second quarter of 2001
until our online revenue stream matures. For these and other reasons, we cannot
assure you that we will ever operate profitably.
WE HAVE A LIMITED OPERATING HISTORY. Although the Company was founded in
1984, we changed our business focus in 1993 to take advantage of, among other
things, the market opportunities we saw for online education that resulted from
technological developments relating to the Internet. We introduced our first
revenue-generating Web-based course in Spring 1996. Given our limited operating
history in the online education and training business, we cannot assure you that
our online revenues will grow.
WE MAY NOT BE ABLE TO MEET OUR ONLINE BUSINESS OBJECTIVE. Our key
objective is to be the leading publisher of online courseware for the corporate
training and education market. Pursuing this objective may significantly strain
our administrative, operational and financial resources. We cannot assure you
that we will be able to find, train and retain qualified administrative
personnel, or do so on a timely basis, or that we will have the operational,
financial and other resources to the extent required to meet our online business
objective.
WE MAY BE UNABLE TO EXECUTE OUR DIVESTITURE STRATEGY. In December 1998 we
announced plans to sell our remaining non-online businesses in order to better
focus on our core online business. Our ability to implement this divestiture
strategy will depend on our ability to identify potential acquirers and to
negotiate favorable agreements for the sale of our non-online businesses. We
cannot assure you that we will be successful in identifying potential acquirers,
or that we will be able to sell our remaining non-online businesses on favorable
terms, if at all. Even if we succeed in executing our divestiture strategy, we
cannot assure you that we will successfully overcome the risks associated with
such a strategy, such as the potential disruption of our ongoing business, the
additional expense associated with the divestiture, the impairment of
relationships with employees and customers and any other problems we may
encounter. Any of these factors could adversely affect our financial condition
and the market price of our common stock may decline.
WE WILL NEED TO RAISE ADDITIONAL CAPITAL. In the near future, we will
need to raise additional funds through public or private sale of our equity or
debt securities or from other sources for the following purposes:
- to build our core online business;
- to divest our non-online businesses; and
- to maintain compliance with Nasdaq listing requirements.
As of the date of this filing, we have initiated efforts to raise
additional capital. We cannot assure you, however, that additional funds will be
available when we need them, or that if funds are available, they will be on
terms favorable to us and our stockholders. If we are unable to obtain
sufficient funds or if adequate funds are not available on terms acceptable to
us, we may be unable to meet our business objectives. A lack of sufficient funds
could also prevent us from taking advantage of important opportunities or being
able to
7
<PAGE> 10
respond to competitive conditions. Any of these results could have a material
adverse effect on our business, financial condition and results of operations.
Our need to raise additional funds could also directly and adversely
affect your investment in our common stock in another way. When a company raises
funds by issuing shares of stock, the percentage ownership of the existing
stockholders of that company is reduced or diluted. If we raise funds in the
future by issuing additional shares of stock, you may experience significant
dilution in the value of your shares. Additionally, certain types of equity
securities that we may issue in the future could have rights, preferences or
privileges senior to your rights as a holder of our common stock.
WE FACE UNCERTAINTIES AND RISKS RELATING TO OUR NASDAQ SMALLCAP MARKET
LISTING. Our common stock is currently listed on the Nasdaq SmallCap Market.
Nasdaq has certain requirements that a company must meet in order to remain
listed on the Nasdaq SmallCap Market. If we continue to experience losses from
our operations or if we are unable to raise additional funds, we may not be able
to maintain the standards for continued quotation on the Nasdaq SmallCap Market.
The Nasdaq SmallCap Market is a significantly less active market than the
Nasdaq National Market. You could find it more difficult to dispose of your
shares of our common stock than if our common stock were listed on the Nasdaq
National Market.
Furthermore, Nasdaq recently adopted new rules that make continued
listing of companies on the Nasdaq SmallCap Market more difficult. If as a
result of the application of these new rules, our common stock were delisted
from the Nasdaq SmallCap Market, we would not have the right to obtain
additional funds by issuing preferred stock under our equity line of credit
agreement with H&QGF, and it could be more difficult for us to obtain other
sources of financing in the future. Moreover, if our common stock were delisted
from the Nasdaq SmallCap Market, our stock could be subject to what are known as
the "penny stock" rules. The "penny stock" rules place additional requirements
on broker-dealers who sell or make a market in such securities. Consequently, if
we were removed from the Nasdaq SmallCap Market, the ability or willingness of
broker-dealers to sell or make a market in our common stock could decline. As a
result, your ability to resell your shares of our common stock could be
adversely affected.
THE LARGE NUMBER OF OUR SHARES ELIGIBLE FOR FUTURE SALE COULD HAVE AN
ADVERSE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK. A large number of shares
of common stock already outstanding, or issuable upon exercise of options or
warrants, is eligible for resale, which may adversely affect the market price of
our common stock. As of September 30, 2000, we had 8,284,472 shares of common
stock outstanding, an additional 2,216,896 shares were issuable upon conversion
of outstanding preferred stock and another 5,535,368 shares upon exercise of
outstanding warrants and options. In addition, in May 1999 we entered into an
equity line of credit agreement with H&QGF under which, as amended, we have
issued and may continue to issue shares of preferred stock that will be
convertible into up to 1,031,824 additional shares of common stock. We have also
granted warrants to H&QGF to purchase 158,632 shares of preferred stock that
will be convertible into an equal number of shares of common stock.
Substantially all of the shares subject to outstanding warrants and options
will, when issued upon exercise, be available for immediate resale in the public
market pursuant to currently effective registration statements under the
Securities Act of 1933, as amended, or pursuant to Rule 701 promulgated
thereunder. The shares of stock acquired, or to be acquired, by H&QGF and the
other Selling Stockholders will be available for immediate resale in the public
market pursuant to this prospectus. Some of the shares that are or will be
eligible for future sale, including the H&QGF shares, have been or will be
issued at discounts on the market price of our common stock on the date of
issuance. Resales or the prospect of resales of these shares may have an adverse
effect on the market price of our common stock.
WE SUBSTANTIALLY DEPEND ON THIRD-PARTY RELATIONSHIPS. We rely on
maintaining and developing relationships with academic institutions and
businesses that provide content for our products and services and with companies
that provide the Internet and related telecommunications services used to
distribute our products and services to customers.
We have relationships with a number of academic institutions and
businesses that provide us with course content for our online products and
services. Many of the agreements we have entered into with these content
providers limit our use of their course content, some do not cover use of any
future course content and most may be terminated by either party upon breach or
bankruptcy. Given our plans to introduce additional online courses in the
future, we will need to license new course content from existing and prospective
content providers. However we might not be able to maintain and modify, if
necessary, our existing agreements with content providers, or successfully
negotiate agreements with prospective content providers. If the fees we pay to
acquire content increase, it could have an adverse effect on our results of
operations. We might not be able to license course content at commercially
reasonable rates or at all.
We depend heavily on third-party providers of Internet and related
telecommunications services. In order to reach customers, our products and
services have to be compatible with the web browsers they typically use. Our
customers have access to us through their
8
<PAGE> 11
arrangements with Internet service providers.
For the academic institutions and businesses that provide content for our
products and services, the companies that provide the Internet and related
telecommunications services used to distribute our products and services to
customers, and the web-site operators that provide links to our company
web-sites, we cannot assure you that:
- they regard their relationships with us as important to their own
businesses and operations;
- they will not reassess their commitment to our products or services at
any time in the future;
- they will not develop their own competitive products or services;
- the products or services by which they provide access or links to our
products or services will achieve market acceptance or commercial
success; or
- our relationships with them will result in successful product or
service offerings or generate significant revenues.
If one or more of these entities fail to achieve or maintain market
acceptance or commercial success, or if one or more of the entities that do
succeed decide to end their relationship with us, it could have a material
adverse effect on our company. Likewise, if our position on a web browser is
terminated, or if one of our competitors secures an exclusive arrangement with
respect to positioning on a web browser, traffic on our web-sites would be
significantly reduced, which could have a material adverse effect on our results
of operations.
We sell a significant amount of products and services through resellers
and strategic partners. We might not be able to attract resellers and partners
that can market our products effectively and provide timely and cost-effective
customer support and service. Some of our resellers and partners compete with
one another and with prospective resellers of our products. Conflicts among
resellers and partners can potentially have an adverse effect on our operations,
such as when a reseller requires us to refrain from linking our products with
competing products. We may be adversely affected by pricing pressure or other
adverse consequences of competition or conflict among or with our resellers and
partners, or should any reseller or partner fail to adequately penetrate its
market segment. The inability to recruit, manage or retain important resellers
or partners, or their inability to penetrate their respective market segments,
would materially adversely affect our company.
WE OPERATE IN A HIGHLY COMPETITIVE INDUSTRY AND MAY NOT BE ABLE TO
COMPETE EFFECTIVELY. The market for educational and training products and
services is highly competitive and we expect that competition will continue to
intensify. There are no substantial barriers to entry into our business, and we
expect that established and new entities will enter the market for online
educational and training products and services in the near future.
A number of our existing competitors, as well as a number of potential
new competitors (including some of our strategic partners), have longer
operating histories, greater name recognition, larger customer bases, more
diversified lines of products and services and significantly greater resources
than we do. Such competitors may be able to undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to potential customers. In competing against us, our strategic partners
could use information obtained from us to gain an additional competitive
advantage over us. Our current and potential competitors might develop products
and services that are superior to ours or that achieve greater market acceptance
than ours. We might not compete effectively and competitive pressures might have
a material adverse effect on our business, financial condition and results of
operations.
WE DEPEND ON KEY PERSONNEL. Our future success depends on the continued
contributions of our key senior management personnel, some of whom have worked
together for only a short period of time. Certain of our executive officers,
including Narasimhan P. Kannan, Chairman of the Board of Directors and Daniel J.
Neal, Chief Executive Officer, have employment agreements and we maintain "key
man" life insurance in the amount of $1 million each on Mr. Kannan and Mr. Neal.
Neither the insurance nor the employment agreements will necessarily fully
compensate us for, or preclude, the loss of services of these executive
officers. The loss of services of any of our key management personnel, whether
through resignation or other causes, or the inability to attract qualified
personnel as needed, could have a material adverse effect on our financial
condition and results of operation.
WE ANTICIPATE SIGNIFICANT FLUCTUATIONS IN OUR QUARTERLY RESULTS. Our
expense levels are based in part on our expectations as to future revenues.
Quarterly sales and operating results generally depend on the licensing and
support revenues, online revenues and
9
<PAGE> 12
development and other revenues, which are difficult to forecast. We may not be
able to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant revenue shortfall would have an
immediate adverse impact on our business and financial condition.
Our operating results may fluctuate significantly in the future as a
result of a variety of factors, some of which are outside of our control. These
factors include:
- demand for online education;
- acceptance and usage of the Internet;
- the budgeting cycles of customers;
- seasonality of revenues corresponding to academic calendars;
- capital expenditures and other costs relating to the expansion of
operations;
- the introduction of new products or services by us or our competitors;
- the mix of the products and services sold and the channels through
which those products and services are sold;
- pricing changes; and
- general economic conditions.
As a strategic response to a changing competitive environment, we may
elect from time to time to make certain pricing, service or marketing decisions
that could have a material adverse effect on us. We believe that
period-to-period comparisons of our operating results should not be relied upon
as an indication of future performance. Due to all of the foregoing factors, it
is possible that in some future quarter, our operating results will be below the
expectations of public market analysts and investors. In such event, the price
of our common stock would likely be materially and adversely affected.
WE RELY ON SIGNIFICANT CUSTOMERS. A significant portion of our revenues
is generated by a limited number of customers. We expect that we will continue
to depend on large contracts with a limited number of significant customers
through the near future. This situation can cause our revenue and earnings to
fluctuate between quarters based on the timing of contracts. Most of our
customers have no obligation to purchase additional products or services from
us. Consequently, if we fail to develop relationships with significant new
customers, our business, financial condition and results of operations will be
materially and adversely affected.
WE DEPEND ON THE INCREASED USAGE AND STABILITY OF THE INTERNET. The
future of the Internet as a center of commerce and information exchange will
depend in significant part on the following factors:
- continued rapid growth in the number of households and commercial,
educational and government institutions with access to the
Internet;
- the level of Internet usage by individuals;
- the number and quality of products and services designed for use on the
Internet; and
- expansion of the Internet infrastructure.
Because usage of the Internet as a medium for online exchange of
information, advertising, merchandising and entertainment is a recent
phenomenon, it is difficult to predict whether the number of users will continue
to increase and whether any significant market for our online products and
services, or any substantial commercial use of the Internet, will develop. It is
also uncertain whether the cost of Internet access will decrease. If Internet
communication fails to achieve increased acceptance and does not become
accessible to a broad audience at moderate costs, the viability of Internet
commerce and the market for our products and services will be jeopardized.
10
<PAGE> 13
The success of our business also depends on a significant expansion of
the Internet infrastructure to provide adequate Internet access and proper
management of Internet traffic. It also needs to be expanded to provide a
substantial amount of public education to increase confidence in the integrity
and security of Internet commerce and communication. If the Internet
infrastructure is not adequately expanded or managed, or if our products and
services do not achieve sufficient market acceptance, then our business,
financial condition and results of operations will be materially and adversely
affected.
WE FACE THE RISK OF SYSTEM FAILURES AND CAPACITY CONSTRAINTS. A key
element of our strategy is to generate a high volume of online traffic to our
products and services. Accordingly, the performance of our products and services
is critical to our reputation, our ability to attract customers and market
acceptance of our products and services. Any system failure that causes
interruptions in the availability or increases response time of our products and
services would result in less traffic to our web-sites and, if sustained or
repeated, would reduce the attractiveness of our products and services. An
increase in the volume of use of our products and services could strain the
capacity of the software or hardware we use or the capacity of our network
infrastructure, which could lead to slower response time. We experienced
capacity constraints in early 1999, and might again. Any failure to expand the
capacity of our hardware or network infrastructure on a timely basis or on
commercially reasonably terms would have a material adverse effect on our
business. We also depend on web browsers and Internet service providers for
access to their products and services, and users may experience difficulties due
to system failures unrelated to our systems, products and services.
WE FACE SECURITY RISKS. We include in our products certain security
protocols that operate in conjunction with encryption and authentication
technology. Despite these technologies, our products may be vulnerable to
break-ins and similar disruptive problems caused by online users. Such computer
break-ins and other disruptions would jeopardize the security of information
stored in and transmitted through our computer systems and the computer systems
of end-users, which may result in significant liability for us and may also
deter potential customers. For example, computer "hackers" could remove or alter
portions of our online courseware. Persistent security problems continue to
plague the Internet, the Web and other public and private data networks.
Alleviating problems caused by third parties may require us to make significant
expenditures of capital and other resources and may cause interruptions, delays
or cessation of service to our customers and to us. Moreover, our security and
privacy concerns and those of existing and potential customers, as well as
concerns related to computer viruses, may inhibit the growth of the online
marketplace generally, and our customer base and revenues in particular. We
attempt to limit our liability to customers, including liability arising from a
failure of the security features contained in our products, through contractual
provisions limiting warranties and disallowing damages in excess of the price
paid for the products and services purchased. However, these limitations might
not be enforceable. We currently do not have product liability insurance to
protect against these risks and insurance might not be available to us on
commercially reasonable terms or at all.
WE FACE AN UNDEVELOPED AND RAPIDLY CHANGING MARKET FOR OUR PRODUCTS AND
SERVICES. The market for our products and services is rapidly evolving in
response to recent developments relating to online technology. The market is
characterized by evolving industry standards and customer demands, and an
increasing number of market entrants who have introduced or developed online
products and services. It is difficult to predict the size and growth rate, if
any, of this market. As is typical in the case of a rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty. Moreover, critical issues concerning the
commercial use of online networks (including reliability, cost, ease of use and
access, quality of service and market acceptance) remain unresolved and may
impact potential future growth. Although costs have been decreasing while ease
of use, market acceptance and access have been increasing, we cannot assure that
these trends will continue. Our future success will depend in significant part
on our ability to continue to improve the performance, features and reliability
of our products and services in response to both evolving demands of the
marketplace and competitive product offerings, and we cannot assure that we will
be successful in developing, integrating or marketing such products or services.
In addition, our new product releases may contain undetected errors that require
significant design modifications, resulting in a loss of customer confidence and
adversely affecting our business.
THERE ARE RISKS RELATING TO OUR INTELLECTUAL PROPERTY RIGHTS. We regard
our copyrights, trademarks, trade dress, trade secrets and similar intellectual
property as critical to our success, and we rely upon trademark and copyright
law, trade secret protection and confidentiality and/or license agreements with
our employees, customers, partners and others to protect our proprietary rights.
We have had certain trademark applications denied, and may have more
denied in the future. We will continue to evaluate the need for registration of
additional marks as appropriate. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or
services or to obtain and use information that we regard as proprietary. In
addition, the laws of some foreign countries do not protect proprietary rights
to as great an extent as do the laws of the United States. Litigation may be
necessary to protect our proprietary technology. Any such litigation may be
time-consuming and costly, cause product release delays, require us to redesign
our products or services or require us to enter into royalty or licensing
agreements, any of which could have a
11
<PAGE> 14
material adverse effect upon us. These royalty or licensing agreements, if
required, may not be available on terms acceptable to us or at all. Our means of
protecting our proprietary rights might not be adequate and our competitors
might independently develop similar technology, duplicate our products or
services or design around patents or other intellectual property rights we have.
In addition, distributing our products through online networks makes our
software more susceptible than other software to unauthorized copying and use.
For example, online delivery of our courseware makes it difficult to ensure that
others comply with contractual restrictions, if any, as to the parties who may
access such courseware. We allow users to download electronically certain of our
courseware content, which could adversely affect our ability to collect payment
from users that obtain copies from our existing or past customers. If, as a
result of changing legal interpretations of liability for unauthorized use of
our software or otherwise, users were to become less sensitive to avoiding
copyright infringement, we would be materially adversely affected.
WE FACE GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES. There are
currently few laws or regulations that directly apply to activities on the
Internet. We believe that we are not currently subject to direct regulation by
any government agency in the United States, other than regulations that are
generally applicable to all businesses. A number of legislative and regulatory
proposals are under consideration by federal and state lawmakers and regulatory
bodies and may be adopted with respect to the Internet. Some of the issues that
these laws and regulations may cover include user privacy, pricing and
characteristics and quality of products and services. The adoption of any such
laws or regulations may decrease the growth of the Internet, which could in turn
decrease the projected demand for our products and services or increase our cost
of doing business. The applicability to the Internet of existing U.S. and
international laws governing issues such as property ownership, copyright, trade
secret, libel, taxation and personal privacy is uncertain and developing. Any
new legislation or regulation, or application or interpretation of existing
laws, could have a material adverse effect on our business, results of
operations, financial condition and prospects.
WE COULD ISSUE PREFERRED STOCK AND TAKE OTHER ACTIONS THAT MIGHT
DISCOURAGE THIRD PARTIES FROM ACQUIRING US. Our board of directors has the
authority, without further action by the stockholders, to issue up to 10,000,000
shares of preferred stock and to fix the rights, preferences, privileges and
restrictions, including voting rights, of such shares. We currently have
outstanding two classes of preferred stock. The rights of the holders of the
common stock are subject to the rights of the holders of our outstanding
preferred stock, and will be subject to, and may be adversely affected by, the
rights of the holders of any preferred stock that may be issued in the future.
Issuing preferred stock could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock, thereby
delaying, deferring or preventing a change in control of our company.
Furthermore, the preferred stock may have other rights, including economic
rights, senior to our common stock, and as a result, issuing preferred stock
could have a material adverse effect on the market value of our common stock.
Certain provisions of our certificate of incorporation and our bylaws
could make it more difficult for a third party to acquire, and could discourage
a third party from attempting to acquire, control of our company. Some of them
eliminate the right of stockholders to act by written consent and impose various
procedural and other requirements which could make it more difficult for
stockholders to undertake certain corporate actions. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of our common stock and may have the effect of delaying or preventing a
change in control of our company. We may in the future adopt other measures that
may have the effect of delaying, deferring or preventing a change in control of
our Company. Certain of these measures may be adopted without any further vote
or action by the stockholders, although we have no present plans to adopt any
such measures. We are also afforded the protections of Section 203 of the
Delaware General Corporation Law, which could delay or prevent a change in
control of our company, impede a merger, consolidation or other business
combination involving our company or discourage a potential acquirer from making
a tender offer or otherwise attempting to obtain control of our Company.
WE MIGHT NOT BE ABLE TO USE NET OPERATING LOSS CARRYFORWARDS. As of
December 31, 1999, we had net operating loss carryforwards for federal income
tax purposes of approximately $38.0 million, which will expire at various dates
through 2019. Our ability to use these net operating loss and credit
carryforwards to offset future tax obligations, if any, may be limited by
changes in ownership. Any limitation on the use of net operating loss
carryforwards, to the extent it increases the amount of federal income tax that
we must actually pay, may have an adverse impact on our financial condition.
THERE ARE DILUTIVE EFFECTS OF THE EQUITY LINE OF CREDIT AGREEMENT WITH
H&QGF. The continued sale of stock pursuant to the equity line of credit
agreement with H&QGF will have a dilutive impact on our stockholders. As a
result, our net income per share could be materially decreased, or net loss per
share materially increased, in future periods and the market price of our common
stock could be materially and adversely affected. The shares of preferred stock
issued and to be issued under the equity line of credit agreement, which will be
convertible into a like number of shares of common stock, have been issued and
will be issued at a discount to the then-prevailing market price of the common
stock. These discounted sales could have an immediate adverse effect on the
market price of the common stock. We also issued to H&QGF warrants to purchase
158,632 shares of preferred stock convertible, initially, into an equal number
of shares of common stock. The issuance of shares of preferred stock under the
equity line of credit agreement or upon
12
<PAGE> 15
exercise of the H&QGF warrants, and the subsequent conversion of those shares
into common stock and resale of the common stock would have a further dilutive
effect on our common stock and could adversely affect its market price.
WE DO NOT PRESENTLY ANTICIPATE PAYING CASH DIVIDENDS ON OUR COMMON STOCK.
We intend to retain all earnings for the foreseeable future for funding our
business operations. In addition, our outstanding preferred stock and credit
facilities contain restrictions on our ability to declare and pay dividends on
our common stock. Consequently, we do not anticipate paying any cash dividends
on our common stock for the foreseeable future.
THE OFFER AND SALE OF SHARES OF PREFERRED STOCK TO H&QGF UNDER THE
PRIVATE EQUITY LINE ARRANGEMENT MIGHT VIOLATE SECURITIES LAWS. In a convertible
transaction like our sale of convertible preferred stock to H&QGF, the issuer of
such securities generally may register the resale of securities prior to their
issuance if the issuer has completed a valid exempt sale of the securities to
the investor, and the investor is at market risk at the time of filing of the
registration statement. Because H&QGF might not be deemed to have been at market
risk prior to filing of the registration statement, the transaction might not
qualify for an exemption from the registration requirements of the Securities
Act of 1933. If this transaction is deemed to have violated the Securities Act
of 1933, H&QGF would have the right, for a period of up to one year from the
date of its purchase of preferred stock, to recover the cash it paid, or, if it
had already sold the stock, sue for damages resulting from its purchase. These
damages could total up to the full $7.0 million plus interest that H&QGF might
purchase under the equity line. If this occurs, our business, results of
operations and financial condition would be harmed. In particular, such an
occurrence would have a material adverse effect on our liquidity position and
our ability to meet short-term obligations and we might not be able to secure
alternative financing on favorable terms or at all.
13
<PAGE> 16
THE EQUITY LINE OF CREDIT AGREEMENT
On May 4, 1999, we entered into an equity line of credit agreement with
H&QGF, pursuant to which, subject to the satisfaction of certain conditions, we
were granted the right to issue and sell to H&QGF, from time to time, up to an
aggregate of $3.0 million, subject to certain limitations, of our Series E
Convertible Preferred Stock. On March 23, 2000, H&QGF agreed to increase the
capacity of the equity line from $3.0 million to $5.0 million and extend the
term until July 31, 2000, in exchange for warrants to purchase 43,632 shares of
Series E Preferred Stock. On October 20, 2000, H&QGF agreed to increase the
capacity of the equity line to $7.0 million and extend the term until December
31, 2000, in exchange for warrants to purchase 15,000 shares of Series E
Preferred Stock.
Beginning on the date the post-effective amendment to the registration
statement, of which this prospectus forms a part, is declared effective by the
Securities and Exchange Commission (the "SEC"), and continuing from that date
through December 31, 2000, we may from time to time, in our sole discretion,
sell ("put") shares of our preferred stock to H&QGF at a price per share equal
to 85% of the lower of (1) the closing market price of our common stock on the
date of issuance and (2) the average of the lowest intra-day prices of our
common stock over the five-day period ending on the date of issuance.
As soon as practicable after the effectiveness of this post-effective
amendment to the registration statement (probably within a week), we plan to
drawdown the maximum amount permitted under the equity line. Based on our 30-day
average share price of $2.31 per share and our 30-day average daily trading
volume of 38,765 shares as of November 17, 2000, we would be entitled to
drawdown approximately $180,000 in connection with the first drawdown. We expect
to effect subsequent drawdowns of the maximum amount permitted under the equity
line every 15 trading days thereafter until December 31, 2000, the termination
date of the equity line.
Our ability to put shares of our preferred stock to H&QGF is subject to
certain conditions and limitations, including, but not limited to, the
following:
- the registration statement, of which this prospectus is a part, must
have previously become effective and shall remain effective on the
date of each put;
- our representations and warranties to H&QGF set forth in the equity
line of credit agreement must be true and correct in all material
respects as of the date of each put;
- no statute, rule, regulation, executive order, decree, ruling or
injunction shall be in effect that prohibits, nor any action, suit
or proceeding shall be in progress, pending or threatened that
seeks to enjoin or prohibit, the transactions contemplated under
the equity line of credit agreement, or otherwise has a material
adverse effect on our business, operations, properties or
financial condition;
- at the time of a put, there shall have been no material adverse change
in our business, operations, properties, prospects or financial
condition, except as disclosed in our reports filed with the SEC
pursuant to the Securities Exchange Act of 1934, as amended;
- our common stock shall not have been delisted from its principal market
(currently the Nasdaq SmallCap Market) nor suspended from trading;
- the issuance of shares to H&QGF shall not violate the Nasdaq SmallCap
Market (or other principal market) shareholder approval
requirements;
- the total of all H&QGF's purchases of preferred stock under the equity
line of credit agreement shall not exceed $7.0 million;
- no more than the lesser of two times the average dollar trading volume
for the 30 days preceding the put and $500,000 of preferred stock
can be put to H&QGF at a time and at least 15 trading days must
elapse between puts; and
- the number of shares of preferred stock already held by H&QGF, together
with those shares we propose to put to H&QGF, shall not exceed
9.9% of the total amount of our common stock that would be
outstanding after completion of the put, including the preferred
stock on an as-converted basis.
H&QGF, or other underwriters of the securities, have the right to review
this registration statement and our records and properties
14
<PAGE> 17
to obtain information about us and the accuracy of this registration statement
and prospectus. H&QGF has the opportunity to comment on the registration
statement and prospectus, but is not entitled to reject a put by us based on
their review. H&QGF may be entitled to indemnification by us for any lawsuits
based on language in this prospectus with which it does not agree.
We cannot assure you that we will satisfy all conditions required under
the equity line agreement with H&QGF, or that we will be able to sell any
additional shares to H&QGF thereunder. If, for example, we fail to maintain the
quotation of our common stock on the Nasdaq SmallCap Market, we will not be able
to sell additional preferred stock to H&QGF under the equity line of credit
agreement.
We have filed a registration statement, of which this prospectus forms a
part, in order to permit H&QGF to resell to the public any common stock it may
hold by converting shares of preferred stock issued under the equity line of
credit agreement.
In conjunction with the equity line of credit agreement, as amended, we
have issued to H&QGF two warrants to purchase 100,000 shares and 43,632 shares
of our preferred stock, initially convertible into a like number of shares of
common stock, at an exercise price of $2.50 and $8.50 per share, respectively.
These H&QGF warrants are exercisable through November 2006 and March 2007,
respectively. In addition, we have recently issued another warrant to H&QGF to
purchase 15,000 shares of our preferred stock, initially convertible into a like
number of shares of common stock, at an exercise price of $1.9375 per share.
Each of these warrants contains provisions that protect H&QGF against dilution
by adjustment of the exercise price and the number of shares issuable thereunder
upon the occurrence of certain events, such as a merger, stock split or reverse
stock split, stock dividend or recapitalization. The exercise prices of the
H&QGF warrants are payable either in cash or by cashless exercise, in which that
number of shares of preferred stock issuable pursuant to the warrants having a
fair market value at the time of exercise equal to the aggregate exercise price
are cancelled as payment of the exercise price. The fair market value of the
preferred stock shall be determined using the then-current market price of our
common stock and the ratio for converting preferred stock into common stock then
in effect.
Under the equity line of credit agreement with H&QGF, we agreed to
register for resale the common stock issuable upon conversion of any preferred
stock issued to H&QGF under the agreement. Registration will permit H&QGF to
resell this common stock from time to time in the market or in
privately-negotiated transactions. We will prepare and file amendments and
supplements to the registration statement as may be necessary in order to keep
the registration statement effective as long as H&QGF holds shares of our stock.
We have agreed to bear certain expenses (other than broker discounts and
commissions, if any), including H&QGF's legal fees not to exceed $5,000, in
connection with the registration statement.
THE 9% SECURED SUBORDINATED CONVERTIBLE DEBENTURES
DUE DECEMBER 15, 2000
In June 1999 we issued $2.5 million principal amount of our 9% Secured
Subordinated Convertible Debentures due December 15, 2000 to BH Capital and
Excalibur. The entire amount of principal and accrued interest under these
debentures was converted into a total of 1,022,866 shares of our common stock at
various times from November 30, 1999 through the final conversion on March 10,
2000 at an average conversion price of $2.58 per share.
Pursuant to the agreement providing for the issuance of the debentures,
we have issued warrants to BH Capital and Excalibur to purchase 112,600 shares
of common stock at an exercise price of $6.38 per share (which equals 115% of
the 5-day average closing bid price for our common stock prior to the issuance
of the debentures). The warrants contain provisions to protect against dilution
by adjustment of the exercise price and the number of shares issuable under them
upon the occurrence of certain events, including a merger, consolidation,
disposition of assets, stock split or reverse stock split, stock dividend or
recapitalization. The exercise price of the warrants is payable either in cash
or by cashless exercise, in which that number of shares of common stock issuable
pursuant to the warrant having a market value (as determined using the
then-current market price of the common stock) at the time of exercise equal to
the aggregate exercise price are cancelled as payment of the exercise price.
The effective interest rate of the Secured Subordinated Convertible
Debentures is approximately 20% after valuation of the warrants issued to BH
Capital and Excalibur and the conversion feature. We agreed to register for
resale the common stock issuable upon conversion of the debentures and exercise
of the warrants issued to BH Capital and Excalibur. We have been advised by BH
Capital and Excalibur that all of the shares issued upon conversion of the
debentures have been sold pursuant to this registration. Registration will
permit them to resell the remaining common stock issuable upon exercise of the
warrants from time to time in the market or in privately-negotiated
transactions. We will prepare and file amendments and supplements to the
registration statement as necessary in order to keep the registration statement
effective as long as BH Capital and Excalibur hold shares of our stock. We have
agreed to bear certain expenses (other than broker discounts and commissions, if
any) in connection with the registration statement.
15
<PAGE> 18
DETERMINATION OF OFFERING PRICE
The Selling Stockholders may offer, pursuant to this prospectus, shares
of common stock to purchasers from time to time in public or private
transactions, on or off on the Nasdaq SmallCap Market, at prevailing market
prices or at privately negotiated prices. As such, the offering price is
indeterminate as of the date of this prospectus. See "Plan of Distribution."
PRICE RANGE OF OUR COMMON STOCK
Our common stock is currently listed on the Nasdaq SmallCap Market under
the symbol VCMP. For each quarter since the beginning of 1998, the high and low
bid quotations for our common stock, as reported by Nasdaq, were as follows:
<TABLE>
<S> <C> <C>
1998
First quarter.............................. $ 16.50 $ 7.75
Second quarter............................. $ 13.25 $ 3.88
Third quarter.............................. $ 8.00 $ 4.00
Fourth quarter............................. $ 9.13 $ 1.94
1999
First quarter.............................. $ 5.87 $ 2.62
Second quarter............................. $ 8.31 $ 2.62
Third quarter.............................. $ 8.00 $ 3.00
Fourth quarter ............................ $ 4.00 $ 2.18
2000
First quarter.............................. $ 19.00 $ 3.38
Second quarter............................. $ 11.00 $ 4.25
Third quarter.............................. $ 10.38 $ 2.88
Fourth quarter through November 15, 2000... $ 4.44 $ 1.44
</TABLE>
The foregoing bid quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not represent actual transactions.
DIVIDEND POLICY
We have never paid or declared any cash dividends on our common stock. We
currently intend to retain any future earnings for our business and, therefore,
do not anticipate paying cash dividends in the foreseeable future. Future
dividends, if any, will depend on, among other things, our results of
operations, capital requirements, restrictions in loan agreements and on such
other factors as our Board of Directors, in its discretion, may consider
relevant.
USE OF PROCEEDS
The proceeds from the sale of the common stock will be received directly
by the Selling Stockholders. No proceeds will be received by the Company from
the sale of the common stock offered hereby. However, the Company will receive
the put price pursuant to the equity line of credit agreement with H&QGF to the
extent we issue and sell additional preferred stock (convertible into common
stock offered by this prospectus) to H&QGF pursuant to the agreement. As
determined under the agreement, the put price equals 85% of the lower of (1) the
closing market price of our common stock on the date of issuance and (2) the
average of the lowest intra-day prices of our common stock over the five-day
period ending on the date of issuance. The Company will also receive the
proceeds, if any, relating to the exercise of the warrant granted to H&QGF in
connection with the equity line of credit agreement and the warrants granted to
BH Capital and Excalibur in connection with the issuance of our 9% Secured
Subordinated Convertible Debentures due December 15, 2000. All proceeds, if any,
from the sale of preferred stock under the Equity Line Agreement and from the
exercise of the H&QGF, BH Capital and Excalibur warrants will be used for
general corporate purposes.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of
September 30, 2000: (i) on an actual basis; and (ii) on a pro forma basis to
reflect the issuance of the additional $2.0 million in Series E Convertible
Preferred Stock and the immediate conversion to 649,087 shares of Common Stock.
This table should be read in conjunction with the Company's Consolidated
Financial Statements and the Notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
-------------------------
ACTUAL PRO FORMA
----------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Long-term debt:
Convertible Subordinated Debentures..................... $ -- $ --
Other notes payable (current)........................... -- --
Total Long-Term Debt.............................. -- --
Stockholders' Equity:
Series C Convertible Preferred Stock, $0.01 par value
per share; 1,000,000 shares authorized; 623,339
shares issued and outstanding......................... 6 6
Series D Convertible Preferred Stock, $0.01
par value per share; 1,200,000 shares
authorized; 1,070,643
shares issued and outstanding......................... 11 11
Series E Convertible Preferred Stock, $0.01 par value
3,000,000 shares authorized; 390,704 shares issued
and outstanding....................................... 4 4
Common Stock, $0.01 par value per share; 36,000,000
shares authorized; 8,284,472 and 8,933,559 shares
issued and outstanding for Actual and Pro Forma,
respectively (2)...................................... 83 89
Additional paid-in capital (1)........................ 71,751 74,097
Accumulated deficit (1)............................... (65,376) (65,729)
----------- -----------
Total Stockholder's Equity........................ 6,479 8,478
---------- ----------
Total Capitalization......................... $ 6,479 $ 8,478
========== ==========
</TABLE>
----------
(1) The purchase price of the Series E Convertible Preferred Stock is at a
15% discount from the market price of the Common Stock and converts to
Common Stock on a one-for-one basis. The intrinsic value of this feature
is reflected as a deduction from retained earnings and an increase to
additional paid-in capital based on the assumed conversion to Common
Stock.
(2) Excludes 3,024,893 shares of Common Stock reserved for issuance under the
1996 Stock Option Plan. See "Executive Compensation -- 1996 Stock Plan."
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected consolidated financial data for the
five years ended December 31, 1999, the nine-month periods ended September 30,
1999 and 2000 and certain pro forma data as of September 30, 2000. The statement
of operations data set forth below with respect to the years ended December 31,
1997, 1998 and 1999, and the balance sheet data as of December 31, 1998 and 1999
are derived from, and are referenced to, the audited consolidated financial
statements included elsewhere in this prospectus. The statement of operations
data set forth below with respect to the years ended December 31, 1995 and 1996
and the balance sheet data as of December 31, 1995, 1996 and 1997 are derived
from audited consolidated financial statements not included in this prospectus.
The selected consolidated financial data presented below as of September 30,
2000 and for the nine months ended September 30, 1999 and 2000 has been derived
from the Company's unaudited consolidated financial statements included
elsewhere in this prospectus. The pro forma data reflects the issuance of the
additional $2.0 million in Series E Convertible Preferred Stock and the assumed
conversion to 649,087 shares of Common Stock.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net revenues:
Online tuition revenues........................ $ 56 $ 119 $ 1,662 $ 1,549 $ 3,835
Virtual campus software revenues............... 2,718 112 216
Product sales revenues......................... 2,330 3,348 1,222
Development and other revenues................. 76 399 1,631 926 977
Instructor-led training revenues............... 1,086 6,303 4,992
Other service revenues......................... 416 424 718 2,445 305
--------- --------- ---------- ---------- ----------
Total net revenues............................... 548 942 10,145 14,683 11,547
Costs and expenses:
Cost of revenues............................... 82 129 1,849 8,869 5,749
Sales and marketing............................ 933 1,593 4,439 5,304 4,286
Product development and operations............. 588 1,548 4,926 6,102 2,241
General and administrative..................... 927 2,477 2,387 3,783 2,633
Depreciation and amortization.................. 309 144 1,012 3,347 2,956
Acquired in-process research, development and
content...................................... -- -- 11,100 -- --
Compensation expense in connection with the
acquisition of HTR, Inc...................... -- -- 690 -- 1,089
Reorganization and other non-recurring
charges...................................... -- -- 340 5,585 360
--------- --------- ---------- ---------- ----------
Total costs and expenses......................... 2,839 5,891 26,743 32,990 19,314
Loss from operations............................. (2,291) (4,949) (16,599) (18,307) (7,767)
Other income (expense):
Gain (loss) on sale of subsidiaries............ -- -- -- (907) 1
Other income (expense)......................... 126 304 125 -- --
Interest income (expense)...................... (75) 4 329 (597) (721)
--------- --------- ---------- ---------- ----------
Loss before extraordinary gain on debt
forgiveness.................................... (2,240) (4,641) (16,145) (19,811) (8,487)
Extraordinary gain on debt forgiveness........... -- -- -- -- --
--------- --------- ---------- ---------- ----------
Net loss......................................... $ (2,240) $ (4,641) $ (16,145) $ (19,811) $ (8,487)
========= ========= ========== ========== ==========
Dividends to preferred stockholders.............. (175) (331) -- (358) (448)
--------- --------- ---------- ---------- ----------
Net loss attributable to common stockholders..... $ (2,415) $ (4,972) $ (16,145) $ (20,169) $ (8,935)
========= ========= ========== ========== ==========
Net loss per share............................... $ (3.13) $ (4.98) $ (4.91) $ (5.27) $ (1.91)
========= ========= ========== ========== ==========
Net loss per share -- assuming dilution.......... $ (3.13) $ (4.98) $ (4.91) $ (5.27) $ (1.91)
========= ========= ========== ========== ==========
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1999 2000
----------- ----------
(UNAUDITED)
<S> <C> <C>
Net revenues:
Online tuition revenues........................ $ 2,958 $ 3,710
Virtual campus software revenues............... 170 93
Product sales revenues......................... 845 337
Development and other revenues................. 841 633
Instructor-led training revenues............... 3,995 2,275
Other service revenues......................... 231 129
-------- --------
Total net revenues............................... 9,040 7,177
Costs and expenses:
Cost of revenues............................... 4,518 2,614
Sales and marketing............................ 3,304 4,644
Product development and operations............. 1,489 2,619
General and administrative..................... 1,906 2,171
Depreciation and amortization.................. 2,247 2,231
Acquired in-process research, development and
content...................................... -- --
Compensation expense in connection with the
acquisition of HTR, Inc...................... -- 654
Reorganization and other non-recurring
charges...................................... -- 184
-------- --------
Total costs and expenses......................... 13,464 15,117
Loss from operations............................. (4,424) (7,940)
Other income (expense):
Gain (loss) on sale of subsidiaries............ 1 --
Other income (expense)......................... -- --
Interest income (expense)...................... (451) 148
-------- --------
Loss before extraordinary gain on debt
forgiveness.................................... (4,873) (7,792)
Extraordinary gain on debt forgiveness........... -- --
-------- --------
Net loss......................................... $ (4,873) $ (7,792)
======== ========
Dividends to preferred stockholders.............. (222) (1,012)
-------- --------
Net loss attributable to common stockholders..... $ (5,095) $ (8,805)
======== ========
Net loss per share............................... $ (1.12) $ (1.13)
======== ========
Net loss per share -- assuming dilution.......... $ (1.12) $ (1.13)
======== ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
DECEMBER 31, (UNAUDITED)
-------------------------------------------------------------- ------------------------
1995 1996 1997 1998 1999 ACTUAL PRO FORMA
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit).. $ (1,402) $ 14,833 $ (3,789) $ (4,631) $ (5,155) $ 33 $ 2,033
Total assets............... 613 17,489 26,465 14,871 10,668 10,834 12,834
Total liabilities.......... 1,887 1,287 13,054 9,051 8,646 4,356 4,356
Accumulated deficit........ (6,742) (11,383) (27,528) (47,697) (56,632) (65,376) (65,729)
Total stockholders' equity. (1,274) 16,202 13,411 5,820 2,022 6,478 8,478
</TABLE>
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
From time to time, as used herein, the term "Company" shall mean VCampus
Corporation and its subsidiaries: Cognitive Training Associates, Inc., a Texas
corporation; Cooper & Associates, Inc., an Illinois corporation, d/b/a
Teletutor; HTR, Inc., a Delaware corporation; and UOL Leasing, Inc., a Delaware
corporation.
The following presentation of management's discussion and analysis of the
Company's consolidated financial condition and results of operation should be
read in conjunction with the Company's consolidated financial statements,
accompanying notes thereto and other financial information appearing elsewhere
in this prospectus.
OVERVIEW
The Company develops, manages and hosts Internet-based training and
education for corporations, government agencies and academic institutions. The
Company offers its online courseware primarily through its proprietary virtual
campus product, or VCampus(TM), a full-service, centrally-hosted, scalable
distance education platform. It allows for the registration, enrollment,
teaching, testing, grading and certification of distance learners. Through its
HTR and Teletutor subsidiaries, the Company also offers courseware through more
traditional media, including on-site and classroom training, diskette, CD-ROM
and printed formats. During 1999, the Company began implementing its plan to
divest its non-online businesses with the exception of Teletutor and the
instructor-led division of HTR, in order to focus its efforts on managing its
core online customers and content.
The Company was formed in 1984 as IMSATT Corporation, a multimedia
research and development company. In 1991, the Company acquired from Control
Data certain rights to resell the CYBIS online courseware, which consisted
primarily of courses in language arts, mathematics, social studies, science,
business and a variety of technical subjects. In 1993, the Company modified its
business focus to capitalize on market opportunities for online education
resulting from technological advances relating to the Internet. Subsequently,
the Company raised additional financing and focused its development efforts on
migrating its technology to the Web in preparation for the launch of its first
Web-based course in November 1995. Under the current business model, the
Company's revenues are derived from five primary sources:
- online tuition revenues;
- product sales revenues;
- development revenues;
- other service revenues; and
- instructor-led training revenues.
Online tuition revenues are generated primarily from online tuition
derived from corporate and academic customers. Product sales revenues are
derived from the sale of computer-based training ("CBT") courses that are
delivered through traditional CBT format (e.g. CD-ROM). Development revenues
consist primarily of fees paid to the Company for developing and converting
courseware. Other service revenues consist primarily of monthly fees generated
by the licensing and maintenance of the CYBIS courseware under contract with the
U.S. Army. Instructor-led training revenues are generated from on-site and
classroom training fees. During 1998 the Company announced a new strategy to
move away from licensing the VCampus(TM) software towards the sales of online
courseware subscriptions. While prior to 1997 licensing and support revenues
have represented a substantial majority of the Company's revenues, the Company
believes that online revenues and product sales will become the primary sources
of its revenues in the future.
ACQUISITIONS AND DIVESTITURES
Since 1994, the Company has completed five acquisitions -- HTR Inc.,
Cooper & Associates, Inc. (d/b/a Teletutor), Ivy Software, Inc., Cognitive
Training Associates, Inc. and the CYBIS Division of Control Data Corporation.
Each of these acquisitions was accounted for as a purchase, and accordingly, the
operating results of each acquired company are included in the Company's
financial statements from the effective date of each respective acquisition.
These acquisitions provided the Company with customers and courseware content in
non-online format. The Company does not currently have an agreement, commitment
or understanding with any other potential acquisition candidates. The Company
has followed a strategy of moving content and customers to an online training
19
<PAGE> 22
platform from the traditional classroom and CBT based training sold through its
non-online business. During 1999, the Company began implementing its plan to
divest its non-online businesses with the exception of Teletutor, in order to
focus its efforts on managing its core online customers and content. In December
1999, the Company decided to retain and further restructure HTR's instructor-led
training business, closing the Atlanta training facility, streamlining the
operations in Rockville and Washington, D.C., and focusing on moving the
remaining customer base to online.
In October 1997, the Company acquired HTR, Inc. ("HTR") a corporation
primarily engaged in the business of providing traditional and on-site technical
training, publishing and consulting services for the information technology
("IT") industry. The Company acquired HTR for common stock, warrants and options
totaling 620,000 shares, and the assumption of approximately $3,500,000 of debt
and cash and notes payable aggregating approximately $600,000. The executive
officers of HTR were to receive bonuses no later than December 31, 1998 in the
total amount of $690,000 granted in conjunction with the signing of three-year
employment agreements. In June 1998, the executive officers of HTR agreed to
convert approximately $420,000 of their sign-on bonuses and $320,000 of
acquisition-related indebtedness into 134,447 shares of the Company's Series D
convertible Preferred Stock. In addition, the Company created a stock option
pool of 180,000 shares of Common Stock and an incentive bonus pool with a
potential payout not to exceed approximately $3,300,000 for three years,
contingent upon the financial performance of HTR. In December 1998, the Company
sold HTR's consulting division for $750,000 in cash and notes receivable. The
note bears interest at 5% and is payable in eight equal quarterly installments
beginning March 31, 1999 through December 31, 2000. As a result of the sale, the
Company recorded a loss on the sale of subsidiary of $525,472 (or $0.14 per
share) for the year ended December 31, 1998. In December 1998, as a result of
the Company's plans to divest the remaining non-online businesses, the Company
revalued the remaining assets of HTR's non-online businesses. As a result, the
Company wrote off $3,669,598 (or $0.96 per share) of goodwill related to these
businesses for the year ended December 31, 1998. In June 1999, the Company sold
the HTR Knowledgeworks legacy business for $1,500,000. In December 1999, the
Company decided to retain and restructure HTR's non-online (instructor-led
training) business.
In April 1997, the Company acquired Cooper & Associates, Inc., d/b/a
Teletutor ("Teletutor") Teletutor, which develops, distributes and supports
computer-based training courses for the data and telecommunications industry.
This acquisition provided the Company with additional content that has been
converted into the Company's online format, as well as access to Teletutor's
existing customer base. The Company paid $3,000,000 in cash and $2,000,000 in
promissory notes to be paid ratably on the first, second and third anniversary
dates of the acquisition. In December 1997, the Company's management, in
accordance with its impairment policy for long-lived assets, determined that the
employee workforce asset had been impaired as of December 31, 1997 due to
planned workforce reductions, and as such, wrote off approximately $250,000 of
the carrying amount of the asset. During 1998, goodwill was reduced to zero and
the remaining intangible assets were reduced ratably by approximately $329,000
due to a purchase price adjustment related to the acquisition. During 1998, the
Company paid the first installment of $666,667 in cash on the note balance. In
December 1998, the Company and the former stockholders of Teletutor restructured
the terms of the note as follows: the Company issued 105,000 shares of Common
Stock and three-year warrants to purchase 55,000 shares of its Common Stock at
an exercise price of $6.00 per share; the Company executed a new non-interest
bearing promissory note for $826,666, payable in installments between March 15,
1999 and April 15, 2000. As a result, the Company recorded $145,208 as loss on
debt restructuring for the excess of the fair market value of the Common Stock,
warrants and new promissory note over the carrying amount of the original
promissory note. The loss in debt restructuring is included in reorganization
and non-recurring expenses in the 1998 statement of operations.
In March 1997, the Company acquired Ivy Software, Inc. ("Ivy") which
develops and distributes business and accounting textbook and software for the
academic education market. This acquisition provided the Company with additional
content as well as access to Ivy's existing customers in the academic
marketplace, ranging from community colleges to large universities. The Company
acquired Ivy in exchange for $314,000 in cash and potential future payments not
to exceed approximately $862,000. In September 1998 the Company sold Ivy back to
its original owner for $250,000 in cash and a note receivable for $196,000. The
note bears interest at 6% and is payable in quarterly installments through
September 2005. As a result of the sale, the Company recorded a loss on the sale
of subsidiary of $381,954, or $0.10 per share, during the third quarter of 1998.
The Company's obligation to make the remaining potential future payments of
approximately $300,000 related to the acquisition was terminated upon the sale.
The Company retains the right to distribute the online versions of Ivy Software.
In August 1996, the Company acquired Cognitive Training Associates, Inc.
("CTA") which develops and distributes technology-based applications online via
distributed networks for educational institutions, corporations and government
agencies. CTA customers can access these applications from remote locations
using the Internet or their organization's intranets. This acquisition provided
the Company with an established customer base and additional content,
particularly in the electrical, medical and scientific equipment subject areas.
The Company acquired CTA in exchange for 42,487 shares of the Company's Common
Stock.
20
<PAGE> 23
In 1994, the Company acquired the CYBIS division of Control Data,
together with a perpetual nonexclusive license for the CYBIS courseware, which
consisted primarily of courses in language arts, mathematics, social studies,
science, business and a variety of technical subjects. The Company's ability to
distribute a portion of the CYBIS courseware is limited by the terms of its
license. The Company is responsible for the CYBIS computer-based education and
training portion of certain CYBIS contracts to which Control Data is a party, as
well as support and other services under such contracts. The Company believes
that Web-based courseware developed from the CYBIS courseware, to the extent not
restricted by the terms of its license, may contribute to revenues in the
future. The Company acquired CYBIS in exchange for $150,000 in cash and $544,000
in notes.
RESULTS OF OPERATIONS
The following table sets forth certain statement of operations data as a
percentage of total net revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------- ---------------------
1997 1998 1999 1999 2000
----------- ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Online tuition revenues.......... 16.4% 10.6% 33.2% 32.7% 51.7%
Virtual campus software
revenues...................... 26.8 0.8 1.9 1.9 1.3
Product sales revenues........... 22.9 22.8 10.6 9.3 4.7
Development and other revenues... 16.1 6.3 8.5 9.3 8.8
Instructor-led training
revenues...................... 10.7 42.9 43.2 44.2 31.7
Other service revenues........... 7.1 16.6 2.6 2.6 1.8
------ ------ ------ ----- -----
Total net revenues....... 100.0 100.0 100.0 100.0 100.0
Costs and expenses:
Cost of revenues................. 18.2 60.4 49.8 50.0 36.4
Sales and marketing.............. 43.7 36.1 37.1 36.5 64.7
Product development and
operations.................... 48.6 41.6 19.4 16.5 36.5
General and administrative....... 23.5 25.8 22.8 21.1 30.3
Depreciation and amortization.... 10.0 22.8 25.6 24.8 31.1
Reorganization and other
non-recurring charges......... 119.6 38.0 12.6 -- 11.7
------ ------ ------ ----- ------
Total costs and
expenses.............. 263.6 224.7 167.3 148.9 210.7
------ ------ ------ ----- -----
Loss from operations............... (163.6) (124.7) (67.3) (48.9) (110.7)
Other income (expense):
Other income (expense)........... 1.2 (6.2) -- -- --
Interest income (expense)........ 3.2 (4.1) (6.2) (5.0) 2.1
------ ------ ------ ----- -----
Net loss........................... (159.2)% (135.0)% (73.5)% (53.9)% (108.6)%
====== ====== ====== ===== ======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
Summary
For the nine months ended September 30, 2000, the Company incurred a net
loss of $8,804,526 (or $1.13 per share after accrual of dividends for preferred
stockholders) as compared to a net loss of $5,095,120 (or $1.12 per share) for
the nine months ended September 30, 1999. The increase in the net loss for the
nine months ended September 30, 2000 was primarily due to increased investments
in sales and marketing, product development and operations, as well as amounts
paid to former HTR executives in the first quarter of 2000 pursuant to their
employment agreements.
NET REVENUES
Online tuition revenues increased 25.4% to $3,709,852 for the nine months
ended September 30, 2000, compared to $2,957,706 for the same period in 1999.
The Company believes that online tuition revenues will continue to increase in
absolute dollars and as a percentage of total revenue as the Company targets new
customers and its existing customer base matures.
Virtual campus software revenues decreased 45.2% to $93,283 for the nine
months ended September 30, 2000, compared to $170,162 for the same period in
1999. The Company continues to derive virtual campus software revenues primarily
from existing customers who renew their agreements.
21
<PAGE> 24
Online development and other revenues decreased 24.8% to $633,034 for the
nine months ended September 30, 2000, compared to $841,443 for the same period
in 1999. The decrease was primarily due to a decrease in courseware development
for one of the Company's largest customers.
Product sales revenues decreased 60.1% to $337,027 for the nine months
ended September 30, 2000, compared to $844,686 for the same period in 1999. The
decrease was primarily due to the decrease in Teletutor product sales as that
portion of the customer base migrates from traditional CD-ROM to online
delivery.
Other service revenues decreased 44.1% to $129,413 for the nine months
ended September 30, 2000, compared to $231,360 for the same period in 1999. The
decrease was primarily due to the decline of CYBIS-related revenues.
Instructor-led training revenues decreased 43.1% to $2,274,736 for the
nine months ended September 30, 2000, compared to $3,995,201 for the same period
in 1999. The decrease was due primarily to the closing of the instructor-led
training facilities in Boston, MA and Atlanta, GA in September 1999 and December
1999, respectively, as a result of management reorganization plans designed to
increase the Company's focus on development of online revenues.
COST OF REVENUES
Cost of revenues decreased 42.2% to $2,613,671 for the nine months ended
September 30, 2000 as compared to $4,518,376 for the same period in 1999. The
decrease was due primarily to the closing of two low margin instructor-led
training facilities at the end of the third and fourth quarters of 1999, the
sale of Knowledgeworks in the second quarter of 1999, and the increase in higher
margin online revenues as a percentage of total revenues. Cost of instructor-led
training revenues for the nine months ended September 30, 2000 was $1,886,461
compared to $3,524,378 for the same period in 1999. Cost of online tuition
revenues for the nine months ended September 30, 2000 was $325,667 compared to
$222,906 for the same period in 1999.
OPERATING EXPENSES
Sales and Marketing. Sales and marketing expenses increased 40.6% to
$4,644,471 for the nine months ended September 30, 2000 as compared to
$3,304,063 for the same period in 1999. The increase was due primarily to the
Company's expansion of its sales force and increased marketing investments.
Product Development. Product development expenses increased 75.9% to
$2,618,557 for the nine months ended September 30, 2000 compared to $1,488,879
for the same period in 1999. The increase was due primarily to additional costs
incurred in transitioning to a new hosting facility, reconfiguring the
architecture of the courseware delivery platform, and leasing certain hardware
designed to improve capacity and performance of delivering courseware as well as
up-front costs related to establishing an application hosting platform under the
Company's application hosting agreement with a large reseller.
General and Administrative. General and administrative expenses increased
13.9% to $2,171,487 for the nine months ended September 30, 2000 as compared to
$1,906,199 for the same period in 1999. The increase was primarily due to the
hiring of additional personnel and related costs incurred in connection with the
Company's new Chief Executive Officer in September 2000.
Depreciation and Amortization. Depreciation and amortization expense
remained relatively unchanged. Depreciation expense for the nine months ended
September 30, 2000 was $2,230,603 as compared to $2,246,677 for the same period
in 1999.
Compensation Expense in Connection with the Acquisition of HTR.
Compensation expense in connection with the acquisition of HTR consists of
$654,294 paid to former HTR executives in the first quarter of 2000 pursuant to
their employment agreements.
Stock-Based Compensation Expense was $184,175. Stock-based compensation
expense consists primarily of stock and stock options issued to the Company's
newly appointed President and Chief Executive Officer in September 2000.
Gain 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.
Interest Income (Expense). Interest income in the nine months ended
September 2000 was primarily derived from income earned on divestiture-related
notes receivable and cash raised in the Company's private placements. Interest
expense for the nine months
22
<PAGE> 25
ended September 30, 1999 was primarily attributable to the Company's borrowings
under its convertible debentures and line of credit facilities.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Summary
The Company incurred a net loss of $8,934,909 (or $1.91 per share) in
1999 as compared to a net loss of $20,169,155 (or $5.27 per share) in 1998.
Excluding certain non-recurring items in both years, the Company incurred a net
loss of $7,487,115 (or $1.60 per share) in 1999 as compared to a net loss of
$13,676,515 (or $3.57 per share) in 1998. Non-recurring items for 1999 amounted
to $1,447,794 (or $0.31 per share) and included $1,089,240 of bonuses payable to
the former executives of HTR pursuant to their employment agreements, $360,000
of costs related to a settlement with Sage Interactive, a former partner, and
$1,446 of gain related to the sale of Knowledgeworks. Non-recurring items for
1998 amounted to $6,492,640 (or $1.70 per share) and included $1,770,408 of
costs incurred pursuant to a management reorganization plan, $3,669,598 of
goodwill impairment related to the planned divestiture of certain non-online
businesses, losses of $907,426 related to the sale of Ivy and HTR's consulting
division, and a loss on debt restructuring of $145,208.
Total revenues in 1999 were $11,547,439 as compared to $14,683,112 for
1998. The decrease in revenues was primarily due to the sale of HTR's consulting
line of business n December 1998, the sale of Knowledgeworks in June 1999, the
transition of some Teletutor customers from CD-ROM to online, and the closing of
several HTR training facilities in the latter part of 1998, and in 1999. The
decrease was partially offset by increases in online tuition revenues,
VCampus(TM) software revenues and development and other revenue. Online tuition
revenues increased from $1,548,950 in 1998 to $3,834,617 in 1999 primarily due
to increased course usage by some of the Company's older customers, the addition
of new customers, and the transition of some Teletutor customers to online
delivery. Excluding the non-recurring items described above, total costs and
expenses were $17,864,951 in 1999 as compared to costs of $27,404,598 for 1998.
The decrease was due primarily to the sale of Ivy, and HTR's consulting and
Knowledgeworks businesses in September 1998, December 1998, and June 1999,
respectively, as well as the closing of several HTR training facilities in the
latter part of 1998, and in 1999 as a result of certain management
reorganization plans.
Net Revenues
Total net revenues decreased 21.4% from $14,683,112 in 1998 to
$11,547,439 in 1999. Online tuition revenues increased from 1,548,950 (10.5% of
net revenues) in 1998 to $3,834,617 (33.2% of net revenues) in 1999. The
increase was primarily due to increased course usage by some of the Company's
older customers, the addition of new customers, and the transition of some
Teletutor customers to online delivery. Virtual campus software revenues
increased from $112,253 (0.8% of net revenues) for 1998 to $216,341 (1.9% of net
revenues) for 1999. The increase is primarily due to the addition of new
customers. Online development and other revenues increased slightly from
$925,751 (6.3% of net revenues) in 1998 to $977,295 (8.5% of net revenues) in
1999. Development revenues were primarily related to courseware conversion
between the Company and its customers in both years. Product sales revenues
decreased from $3,347,777 (22.8% of net revenues) in 1998 to $1,222,389 (10.6%
of net revenues) in 1999. The decrease was primarily due to the sale of
Knowledgeworks in June 1999, and the transition of some Teletutor customers from
CD-ROM to online usage. Other service revenues decreased from $2,444,719 (16.6%
of net revenues) in 1998 to $305,046 (2.6% of net revenues) in 1999. The
decrease was due primarily to the sale of HTR's consulting division in December
1998. Instructor-led training revenues decreased from $6,303,662 (42.9% of net
revenues) in 1998 to $4,991,751 (43.2% of net revenues) in 1999. The decrease
was due primarily to the closing of several HTR training facilities in the
latter part of 1998, and in 1999 as a result of certain management
reorganization plans.
Cost of Revenues
Total cost of revenues decreased 35.2% from $8,868,351 (60.4% of net
revenues) in 1998 to $5,748,745 (49.8% of net revenues) in 1999. 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, the sale of Knowledgeworks in June, 1999
and the increase in higher gross margin online tuition revenues.
Operating Expenses
Sales and Marketing. Sales and marketing expenses decreased 19.2% from
$5,304,394 (36.1% of net revenues) in 1998 to $4,285,989 (37.1% of net revenues)
in 1999. Sales and marketing expenses consist primarily of costs related to
personnel, sales
23
<PAGE> 26
commissions, travel, market research, advertising and marketing materials. 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 partially offset
by increased marketing efforts in the latter part of 1999.
Product Development. Product development expenses decreased 63.3% to from
$6,102,265 (41.6% of net revenues) in 1998 to $2,241,283 (19.4% of net revenues)
in 1999. Product development and operations expenses consist primarily of
certain costs associated with the design, programming, testing, documenting and
support of the Company's new and existing courseware and software. 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 $694,000 related to previously
capitalized content acquisition and development costs.
General and Administrative. General and administrative expenses decreased
30.4% from $3,782,844 (25.8% of net revenues) in 1998 to $2,632,937 (22.8% of
net revenues) in 1999. General and administrative expenses consist primarily of
personnel costs, facilities and related costs, as well as legal, accounting and
other costs. 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
decreased 11.7% from $3,346,744 (22.8% of net revenues) in 1998 to $2,955,997
(25.6% of net revenues) in 1999. 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.
Compensation expense in connection with the acquisition of HTR, Inc.
During 1999, the Company recognized compensation expense of approximately
$1,089,000 related to bonuses to be paid to the HTR executives pursuant to their
employment agreements.
Reorganization and Other Non-Recurring Charges . During 1998, the Company
implemented a plan to reduce its workforce and close certain office facilities.
The plan resulted in (i) the termination of approximately 85 employees primarily
from the product development and administrative areas and (ii) the closure of
the Company's training facilities located in Los Angeles, and Baltimore, and an
executive office in McLean, Virginia. As a result, the Company recorded a
restructuring charge of approximately $1,770,000. The restructuring charge
included approximately $1,494,000 for employee severance and termination costs
and approximately $276,000 primarily for expenses related to facilities lease
cancellations and write down of assets no longer in use. During 1998, the
Company paid approximately $1,224,000 in costs under the restructuring accrual.
In November 1999, an arbitrator found the Company liable to Sage Interactive for
approximately $360,000 arising out of an alleged contract between Sage
Interactive and the Company. The Company is attempting to settle this dispute
for less than the awarded amount. The Company has accrued for the amount of the
award as of December 31, 1999. The expense is included in reorganization and
other non-recurring charges in the 1999 statement of operations.
Interest and Other Income (Expense). Net interest expense increased 20.8%
from $597,139 in 1998 to $721,423 in 1999. Interest expense was primarily
incurred in connection with the Company's borrowings on its lines of credit
facility and term loans. Interest expense increased in 1999, primarily due to
non-cash expense related to the issuance of warrants to the holders of the
Company's Secured Subordinated Convertible Debentures as an inducement to
convert a portion of their notes to common stock in December 1999.
Gain (loss) on Sale of Subsidiaries. During 1998 the Company announced
plans to divest its non-online businesses in order to focus its efforts on its
core online training business. The Company believes this move is consistent with
its strategy of moving content and customers to an online training platform from
the traditional classroom training sold through its non-online businesses. As
such, in September 1998, the Company sold Ivy back to its original owner. As a
result of this sale, the Company recorded a loss on the sale of subsidiary of
$381,954 (or $0.10 per share) during the third quarter of 1998. In December
1998, the Company sold HTR's consulting division. As a result of this sale, the
Company recorded a loss on the sale of subsidiary of $525,472 (or $0.14 per
share) for the year ended December 31, 1998. In June 1999, the Company sold
HTR's Knowledgeworks business and recorded a gain of $1,446 upon the sale.
24
<PAGE> 27
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Summary
The Company incurred a net loss of $20,169,155 (or $5.27 per share) in
1998 as compared to a net loss of $16,144,763 (or $4.91 per share) in 1997.
Excluding certain non-recurring items in both years, the Company incurred a net
loss of $13,676,515 (or $3.57 per share) in 1998 as compared to a net loss of
$4,014,419 (or $1.22 per share) in 1997. Non-recurring items for 1998 amounted
to $6,492,640 (or $1.70 per share) and included $1,770,408 of costs incurred
pursuant to a management reorganization plan, $3,669,598 goodwill impairment
related to the planned divestiture of certain non-online businesses, losses of
$907,426 related to the sale of Ivy and HTR's consulting division, and a loss on
debt restructuring of $145,208. Non-recurring items for 1997 totaled $12,130,344
(or $3.69 per share) and included acquired in-process research and development
costs of $2,700,000 and $8,400,000 related to the acquisition of Teletutor and
HTR, respectively, $690,000 of compensation expense related to the acquisition
of HTR and $340,344 pursuant to a management reorganization plan. Total revenues
in 1998 were $14,683,112 in 1998 as compared to $10,144,500 for 1997. The
increase in revenues was due primarily to the acquisitions of Ivy, Teletutor and
HTR and was partially offset by decreases in VCampus(TM) software revenues and
development and other revenue. Online tuition revenues decreased from $1,662,058
in 1997 to $1,548,950 in 1998 primarily due to the Company's change in method
for recognizing revenue for its VCampus(TM) software systems and prepaid online
tuition fees upon adoption of the AICPA Statement of Position 97-2, "Software
Revenue Recognition, ("SOP 97-2"). VCampus(TM) software revenues decreased from
$2,718,000 in 1997 to $112,253 primarily due to the Company's new marketing
strategy of moving away from licensing the VCampus(TM) software towards sales of
online courseware subscriptions. Development and other revenues decreased in
1998 as compared to 1997 primarily due to an agreement with one customer in 1997
that provided funding for the development of a custom VCampus(TM) in exchange
for a share of future net revenues derived from the operation of such campus and
warrants to purchase Common Stock of the Company. Excluding this one customer
from 1997, development and other revenues decreased slightly from 1997 to 1998.
Excluding the non-recurring items described above, total costs and expenses were
$27,404,598 in 1998 as compared to costs of $14,612,719 for 1997. The increase
was due primarily to the addition of Ivy, Teletutor and HTR costs and expenses
as well as increased operating costs related to the expansion of operations
prior to workforce reductions and the closing of certain office facilities
implemented during 1998 as a result of certain management reorganization plans.
Net Revenues
Total net revenues increased 45% from $10,144,500 in 1997 to $14,683,112
in 1998. Online tuition revenues decreased from $1,662,058 (16.4% of net
revenues) in 1997 to $1,548,950 (10.6% of net revenues) in 1998. While the
Company delivered approximately 95,000 courses online, a six-fold increase over
1997's approximately 15,000, online tuition revenues decreased due to the
Company's adoption of SOP 97-2 as of January 1, 1998, which requires the Company
to recognize revenue ratably over the length of the service period. Virtual
campus software revenues decreased from $2,718,000 (26.8% of net revenues) for
1997 to $112,253 (0.8% of net revenues) for 1998. The decrease is primarily due
to the Company's new marketing strategy of moving away from licensing the
VCampus(TM) software towards sales of online courseware subscriptions. Product
sales revenues increased in absolute terms from $2,330,029 (22.9% of net
revenues) in 1997 to $3,347,777 (22.8% of net revenues) in 1998. The increase
was due primarily to the acquisition of the Ivy, Teletutor and HTR product
lines. Development and other revenues decreased from $1,631,233 (16.1% of net
revenues) in 1997 to $925,751 (6.3% of net revenues) in 1998 primarily due to an
agreement with one customer in 1997 that provided funding for the development of
a custom VCampus(TM) in exchange for a share of future net revenues derived from
the operation of such campus and warrants to purchase Common Stock of the
Company. Excluding this one customer from 1997, development and other revenues
decreased slightly from 1997 to 1998. Development revenues were primarily
related to courseware conversion between the Company and its customers in both
years. Other service revenues increased from $717,546 (7.1% of net revenues) in
1997 to $2,444,719 (16.6% of net revenues) in 1998. The increase was due
primarily to the acquisition of HTR in October 1997. Instructor-led training
revenues increased from $1,085,634 (10.7% of net revenues) in 1997 to $6,303,662
(42.9% of net revenues) in 1998. The increase was due primarily to the
acquisition of HTR in October 1997.
Cost of Revenues
Total cost of revenues increased from $1,849,287 (18.2% of net revenues)
in 1997 to $8,868,351 (60.4% of net revenues) in 1998. Total cost of revenues
increased in absolute dollars due primarily to the acquisitions of Ivy,
Teletutor and HTR. As a percentage of net revenues, cost of revenues increased,
due primarily to the addition of instructor-led training revenues, which have
higher direct costs than the Company's other sources of revenues. The Company
believes that in the future, once the remaining non-online businesses are sold,
cost of revenues will decrease in absolute dollars, and will decrease as a
percentage of total net revenues.
25
<PAGE> 28
Operating Expenses
Sales and Marketing. Sales and marketing expenses increased in absolute
terms from $4,438,717 (43.7% of net revenues) in 1997 to $5,304,394 (36.1% of
net revenues) in 1998. Sales and marketing expenses consist primarily of costs
related to personnel, sales commissions, travel, market research, advertising
and marketing materials. Sales and marketing expenses increased in absolute
dollars due primarily to the addition of Ivy, Teletutor and HTR, but decreased
as a percentage of revenues because of the greater increase in revenues. The
Company expects sales and marketing expense to increase substantially in the
future as the Company expands its sales and marketing efforts.
Product Development and Operations. Product development and operations
expenses increased in absolute terms from $4,925,956 (48.6% of net revenues) in
1997 to $6,102,265 (41.6% of net revenues) in 1998. Product development and
operations expenses consist primarily of certain costs associated with the
design, programming, testing, documenting and support of the Company's new and
existing courseware and software. Product development and operations expenses
increased in absolute dollars due primarily to the acquisition of Teletutor and
HTR. In addition, the Company wrote-off approximately $694,000 related to
certain content acquisition and development costs. As a percentage of net
revenues, product development and operations expenses decreased in 1998 as
compared to 1997 due primarily to increased revenues and workforce reductions
implemented during 1998 as a result of management reorganization plans and
because of 1997 efforts to build the Company's courseware library.
General and Administrative. Excluding $1,300,000 of bad debt expense
recognized in the first quarter of 1998 for certain uncollectible accounts
receivable, general and administrative expenses increased from $2,387,172 (23.5%
of net revenues) in 1997 to $2,482,844 (17.0% of net revenues) in 1998. General
and administrative expenses consist primarily of personnel costs, facilities and
related costs, as well as legal, accounting and other costs. General and
administrative expenses increased in absolute dollars due primarily to the
acquisition of Ivy, Teletutor and HTR. As a percentage of revenues, general and
administrative costs decreased in 1998 as compared to 1997 due primarily to
increased revenues and workforce reductions during 1998 as a result of
management reorganization plans.
Depreciation and Amortization. Depreciation and amortization expense
increased from $1,011,587 (10.0% of net revenues) in 1997 to $3,346,744 (22.8%
of net revenues) in 1998. Depreciation expense increased due primarily to
additional purchases of computer equipment and other assets in 1997 to support
product development, technical operations and personnel needs as well as the
acquisitions of Ivy, Teletutor and HTR. Amortization expense increased due
primarily to the acquisitions of Ivy, Teletutor and HTR, and amortization of
capitalized software and acquired content costs.
Reorganization Costs. During 1998, the Company implemented a plan to
reduce its workforce and close certain office facilities. The plan resulted in
(i) the termination of approximately 85 employees primarily from the product
development and administrative areas and (ii) the closure of the Company's
training facilities located in Los Angeles, and Baltimore, and an executive
office in McLean, Virginia. As a result, the Company recorded a restructuring
charge of approximately $1,770,000. The restructuring charge included
approximately $1,494,000 for employee severance and termination costs and
approximately $276,000 primarily for expenses related to facilities lease
cancellations and write down of assets no longer in use. During 1998, the
Company paid approximately $1,224,000 in costs under the restructuring accrual.
Included in accounts payable and accrued expenses at December 31, 1998 is
approximately $546,000 primarily representing future severance payments.
Interest and Other Income (Expense). Net interest income was $328,800 in
1997 and net interest expense was $597,139 in 1998. Interest income was derived
primarily from investing funds raised in the Company's private and public
securities offerings during 1996. Other income of $125,000 in 1997 was derived
from the sale of an investment in a joint venture (an asset acquired in
connection with the acquisition of HTR).
Loss on Sale of Subsidiaries. During 1998 the Company announced plans to
divest its non-online businesses in order to focus its efforts on its core
online training business. The Company believes this move is consistent with its
strategy of moving content and customers to an online training platform from the
traditional classroom training sold through its non-online businesses. As such,
in September 1998, the Company sold Ivy back to its original owner. As a result
of this sale, the Company recorded a loss on the sale of subsidiary of $381,954
(or $0.10 per share) during the third quarter of 1998. In December 1998, the
Company sold HTR's consulting division. As a result of this sale, the Company
recorded a loss on the sale of subsidiary of $525,472 (or $0.14 per share) for
the year ended December 31, 1998.
26
<PAGE> 29
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, the Company had $204,555 in cash and cash
equivalents. Since its inception, the Company has financed its operating cash
flow needs primarily through offerings of equity and debt securities and, to a
lesser extent, borrowings. Cash utilized in operating activities was $2,670,523
for the year ended December 31, 1999 and $9,500,483 for the year ended December
31, 1998. Use of cash was primarily attributable to the net loss recorded.
As of September 30, 2000, the Company had $1,037,964 in cash and cash
equivalents. Cash used in operating activities was $8,001,202 for the nine
months ended September 30, 2000, funded by the $4,000,000 private placement of
the common stock to iGate Capital, $4,141,000 raised through the H&QGF equity
line, $2,500,000 raised through the US West private placement, and customer
prepayments. Net cash used in operating activities is primarily due to amounts
paid to former HTR executives in the first quarter of 2000 pursuant to their
employment agreements, an increase in expenditure for sales and marketing
designed to increase online revenues, and expenditures to increase capacity,
performance, and reliability of the VCampus platform.
Cash utilized in investing activities was $60,514 for the year ended
December 31, 1999 as compared to $1,398,793 for the year ended December 31,
1998. The use of cash for investing activities in 1998 was primarily
attributable to purchases of equipment, software development costs that were
capitalized, and in 1998, approximately $356,000 paid to the former shareholder
of Ivy pursuant to the acquisition agreement. The use of cash for investing
activities during 1998 primarily represented purchases of equipment and
investments in software and courseware development.
Net cash used in investing activities was $1,299,151 for the nine months
ended September 30, 2000 and cash generated from investing activities was
$22,947 for the nine months ended September 30, 1999. The use of the cash for
investing activities was primarily attributable to purchase of equipment and
software development costs that were capitalized.
Cash provided by financing activities was $2,599,299 for the year ended
December 31, 1999 as compared to $8,529,979 provided by financing activities for
the year ended December 31, 1998.
Net cash provided by financing activities was $10, 403, 862 for the nine
months ended September 30, 2000 and $1, 898, 907 for the nine months ended
September 30, 1999. During the nine months ended September 30, 2000, the Company
completed a private placement of its common stock to iGate Capital Corporation.
The Company issued 1,136,253 shares of common stock at $3.62 per share,
resulting in net proceeds to the Company of approximately $4,000,000. The
Company also issued one-year warrants to purchase 450,000 shares of its common
stock at an exercise price between $4.34 and $6.125 per share. Under the terms
of the H&QGF equity line agreement, the Company drew down $4,141,000 during the
nine months ended September 30, 2000, and issued to H&QGF 605,515 shares of
Series E Preferred Stock at an average price of $6.84 per share. The Company
also issued 482,574 shares of its common stock to its convertible debenture
holders at an average price of $3.30 per share, upon conversion of the remaining
balance of approximately $1,590,000 in principal and accrued interest in the
first quarter of 2000. In April 2000, the Company raised $2,500,000 through a
private placement of 357,142 shares of common stock to US West Internet
Ventures, Inc. at $7.00 per share and five-year warrants to purchase 714,285
shares of the Company's common stock at $7.00 per share.
The Company expects negative cash flow from operations to continue for at
least the next six months until the online revenue stream matures. The Company
recognizes that it must raise additional funding to meet its working capital
requirements and fund anticipated ongoing operating loses, particularly in the
near term. The Company expects the H&QGF equity line, together with additional
short-term private equity bridge financings, to provide working capital through
the end of 2000 and through the first quarter of 2001.
Although the Company expects to achieve breakeven sometime during 2001,
the Company expects it will need to secure more substantial long-term private
equity financings during the second quarter of 2001 to satisfy its working
capital needs in 2001. If the Company does not achieve substantial positive cash
flow from operations during 2001 or 2002, it will need to continue to raise
additional funds in those years to support operations and fund its efforts to
grow online revenues. Additional financing night not be available to the
Company, or might not be available on terms acceptable to the Company
If the Company does not address its funding needs, it may 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 reseller, and the extent to which the Company invests in new
technology and research development projects.
27
<PAGE> 30
As of December 31, 1999, the Company had net operating loss carryforwards
of approximately $38,033,000 for federal income tax purposes, which will expire
at various dates through 2019. The Company's ability to utilize all of its net
operating loss and credit carryforwards may be limited by changes in ownership.
RECENT ENACTED ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) released
Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial
Statements. SAB 101 summarizes certain of the Staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. On June 26, 2000, the SEC deferred the effective date of SAB 101 to
require adoption by the fourth quarter of the first fiscal year beginning after
December 15, 1999. Although the Company does not expect the adoption of SAB 101
to have a material impact on the consolidated financial position or results of
operations of the Company, management is currently reviewing the additional
guidance recently released by the Staff.
28
<PAGE> 31
BUSINESS OF THE COMPANY
VCampus Corporation is a leading e-Learning Application Service Provider
(ASP) that develops, manages and hosts turn-key, web-based learning environments
for corporations, academic institutions and government agencies enabling them to
offer global distance learning solutions to their customers, employees and
students. The VCampus(R) e-Learning platform allows its customers to address
their Customer Relationship Management (CRM), Enterprise Resource Planning (ERP)
and product-related strategic business plans through a rapidly-deployed,
outsourced, scalable e-Learning solution. The Company's e-Learning solution
enables customers to improve the performance of their distribution channels,
measure and develop their employees' knowledge, skills and abilities, and
increase their customers' satisfaction and loyalty.
As of September 30, 2000, VCampus had approximately 50 customers
delivering over 1,300 courses in information technology, telecommunications,
insurance/finance, management, healthcare, personal development and office
skills. The VCampus solution, which includes the Student Management System,
Courseware Construction Set and Courseware Delivery Engine, has been proven and
tested through successful implementations at customer sites including Graybar
Electric, Lucent Technologies, University of Texas System and U.S. General
Services Administration, where thousands of students have been introduced to
e-Learning.
The corporate training marketplace is rapidly evolving to meet the
increasing demand for worker training and re-training in a cost-effective and
convenient manner. Online delivery technology significantly reduces training
costs, including those associated with students' time away from work, and
permits resources to be concentrated directly on the educational process. We are
initially targeting customers in the telecommunications, healthcare, utilities,
information technology and financial services industries, as well as academic
institutions, all of which we believe have relatively large training and
education budgets, significant training needs and receptiveness to new
technology. The U.S. corporate learning market, according to a recent annual
survey by Training Magazine is estimated at $62.5 billion. The corporate
e-Learning market share is approximately 20% of the total corporate learning
market and is expected to double by 2003, according to a 1999 study by Corporate
University Xchange.
The Company's existing courseware library includes over 1,300 online
courses. These courses are in what the Company believes are high-demand subject
matter areas such as information technology, telecommunications,
compliance/OSHA, business, management and finance. The Company converts
courseware that it believes are proven and popular in diverse subject matter
areas to the Company's interactive online format. Through September 30, 2000,
the Company had delivered over 1,100,000 course enrollments through its
corporate and academic partnerships.
The Company offers a complete outsourced solution through the VCampus
e-Learning management system that allows for the enrollment, registration,
teaching, tracking, testing, grading and certification of distance learners. The
Company provides a value-added service that enables its customers to place
third-party courseware, proprietary training courses and/or accredited courses
on an open architecture, remotely-hosted, Internet distribution platform
displaying the customer's graphical "look and feel". The core element of the
VCampus system is found in the Student Management System -- a sophisticated,
activity-tracking tool that manages all aspects of student and employee progress
through an established learning plan.
When an organization's internal courses are combined with the VCampus
off-the-shelf library, offering hundreds of courses in Management Skills,
Information Technology, Telecommunications and Personal Development, the
combined delivery and tracking of courses creates a turn-key solution for those
entities requiring an enterprise-wide learning environment. VCampus offers its
customers a choice: VCampus can convert content for them or it can provide them
with an easy method of converting content themselves through the VCampus
Courseware Construction Set(R). With over 250,000 students enrolled in the
VCampus system, the Company offers a very large content distribution channel for
non-proprietary courseware.
Through its Teletutor and HTR subsidiaries, the Company also offers
courseware through more traditional media, including on-site and classroom
training, diskette, CD-ROM and printed formats. The Company introduced its first
Web-based demonstration course in November 1995, its first revenue-generating
Web-based course in Spring 1996 and the VCampus e-Learning management system in
1997. The Company intends to leverage the courseware and the customer base of
its subsidiaries, as well as the courseware and customers provided by future
partnerships, to facilitate the development of its online training and education
business.
The Company's objectives are to be the leading e-Learning ASP for the
corporate training, academic, and government education market, and to make its
VCampus e-Learning platform the global standard for online delivery of corporate
training and education courseware. The Company's strategy to achieve these
objectives includes: increasing its customer base (through targeted marketing,
29
<PAGE> 32
expanding its direct sales force, and by leveraging the sales channels of
strategic partners), developing strong brand recognition for its products and
services, delivering high-demand courseware (including courseware certified by
independent academic institutions) and upgrading its existing technologies to
maintain its position as a leader in corporate e-Learning. The Company's
strategy also includes enhancing the "stickyness" of its customer sites by
converting more and more of the customer's proprietary content for online
distribution through the VCampus platform. The intended result is increased
penetration into the enterprise and enhanced customer loyalty.
Although the Company continues to provide products and services through
delivery methods other than online delivery, in December 1998, the Company
announced plans to divest its non-online businesses in order to focus its
efforts on its core online training business. The Company believes this move is
consistent with its strategy of moving content and customers to an online
training platform from the traditional classroom and Computer Based Training
("CBT") sold through its non-online businesses. In furtherance of this
divestiture strategy, in September 1998 the Company sold Ivy Software, Inc.
("Ivy") while retaining the rights to sell and distribute the online versions of
the Ivy courseware. In December 1998, the Company sold HTR's consulting
division. In June 1999 the Company sold HTR's Knowledgeworks business for $1.5
million in a combination of cash and notes receivable. In December 1999, the
Company decided to retain and further restructure HTR's instructor-led training
business, closing the Atlanta training facility, streamlining the operations in
Rockville and Washington DC, and focusing on moving the remaining customer base
to online.
INDUSTRY BACKGROUND
Corporate training is a rapidly growing segment of the training and
education market, primarily as a result of the demand for increasing skills
required by employers. As the United States economy continues to shift from a
focus on industry to one focused on information and knowledge, employers seeking
to compete successfully in the marketplace find it necessary to invest more in
the training and education of their employees. The current corporate e-Learning
market share, which is about 20% of the total corporate training market, is
expected to double by 2003, according to a recent survey by Corporate University
Xchange.
Use of Technology in Training and Education
Historically, corporations, training organizations and academic
institutions have provided education through traditional classroom training.
Companies choosing to provide this type of training in-house must devote
managerial and financial resources towards training facilities, instructors,
materials and curriculum management. Companies often choose to use third parties
to provide training services to avoid some of the management and facility issues
but must pay tuition and materials fees. Both in-house and outsourced
traditional classroom approaches result in lost productivity and travel-related
costs while the employee attends and travels to and from the training. Distance
learning methods (satellite-based delivery, mail exchanges, voice mail, CD-ROMs,
diskettes) address space limitations by allowing students to take courses at
remote locations. Web-based delivery, due to its scalability, enables
corporations, training organizations and academic institutions to extend their
reach more cost-effectively than other distance learning methods. In addition,
Web-based delivery offers the ability to rapidly and cost-effectively update
course materials and can provide students a significant degree of time and place
independence.
With the advent of the Web, the Company has benefited from the way its
courseware can be managed, delivered and consumed. The use of such technologies
can lower publishing costs and could significantly increase demand. Online
technology makes it possible to combine the best elements of online connectivity
between students and teachers and the interactivity of a CD-ROM. The Company
believes that its online delivery of courseware combines convenience,
affordability, self-pacing, standardized curricula, individualized tailoring of
courses, immediate performance measurement and a high degree of student-teacher
interaction.
The use of the Company's products and services will depend in large part
upon the development of an infrastructure for providing online access and
services. Because global commerce and online exchange of information on the
Internet and other similar open wide area networks are new and evolving, it is
difficult to predict with any assurance whether such networks will prove to be
viable commercial marketplaces. In particular, such networks are an unproven
medium for education. In the event such networks fail to become a viable
education medium, the Company may not be able to overcome the costs and
difficulties associated with adapting to alternative media, if and when they
become available. If such networks do not become viable commercial marketplaces
or do not develop as a viable medium for education, the Company would be
materially adversely affected. Additionally, such networks have experienced, and
are expected to continue to experience, significant growth in the number of
users and amount of traffic. The infrastructures of such networks may not be
able to support the demands placed on them by this continued growth. In
addition, such networks could lose their viability due to delays in the
development or adoption of new standards and protocols (for example, the
next-generation Internet Protocol) to handle increased levels of activity,
increased governmental regulation or other factors. The
30
<PAGE> 33
infrastructure or complementary services necessary to make such networks viable
commercial marketplaces may not be developed. Even if developed, such networks
may not become viable commercial marketplaces for products and services such as
those offered by the Company.
COMPANY STRATEGY
The Company's objectives are to be the leading e-Learning ASP for the
corporate training and education market, and to make its VCampus the global
standard for online delivery of corporate training and academic instruction. The
Company's strategy to achieve these objectives includes expanding its customer
base, developing brand recognition for its products and services, delivering
high-demand courseware (including courseware certified by independent academic
institutions), and upgrading its existing technologies to maintain its position
as a leader in corporate e-Learning.
- Expand Customer Base. The Company intends to continue to develop
relationships with its existing and new business and academic
institution customers to increase the number of enrollments and
accelerate awareness and acceptance of its online content. The
Company also intends to leverage the sales channels of any
strategic partners to more quickly scale its customer base. The
Company believes that development of a VCampus for customers
provides it with cross-marketing opportunities. A VCampus can
promote courses from, and/or contain "hot links" to, other
VCampuses. See "-- Customers" and "-- Sales and Marketing."
- Develop Brand Recognition. The Company plans to achieve and maintain
brand recognition through marketing efforts and the creation of a
standards-based user interface, incorporating audio, animation,
graphics and text as appropriate to create a stimulating learning
experience. The Company also intends to enter into arrangements
with content providers to adopt the Company's VCampus as their
standard for online courseware delivery. See "-- Products and
Services -- VCampus."
- Deliver High-Demand Courseware. The Company intends to continue to
expand its courseware library primarily through relationships with
content providers. The Company seeks high quality courseware in
subject areas that the Company expects will be in high demand by
customers in the corporate training and education market including
business, management, finance, accounting, technology, and basic
technical and developmental skills. The Company intends to
continue to provide courseware certified by independent academic
institutions. See "-- Products and Services."
- Develop Proprietary Technology. The Company intends to maintain its
position as a leader in online courseware delivery technology by
continuing to develop and enhance the features and functionality
of its proprietary technology. See "-- Products and Services --
VCampus."
ACQUISITIONS AND DIVESTITURES
Since 1994, the Company has completed five acquisitions -- HTR, Inc.,
Cooper & Associates, Inc., (d/b/a Teletutor), Ivy Software, Inc., Cognitive
Training Associates, Inc. and the CYBIS Division of Control Data Corporation.
These acquisitions provided the Company with customers and courseware content in
non-online format. The Company does not currently have an agreement, commitment
or understanding with any other potential acquisition candidates. The Company
has followed a strategy of moving content and customers to an online training
platform from the traditional classroom and computer based training. In December
1998, the Company announced plans to divest its non-online businesses in order
to focus its efforts on developing and managing its core online customers and
content.
HTR, Inc. ("HTR") In October 1997, the Company acquired HTR, a
corporation primarily engaged in the business of providing traditional and
on-site technical training, publishing and consulting services for the
information technology ("IT") industry. In December 1998, the Company sold the
consulting division of HTR for $750,000 in cash and notes receivable. The
Company sold the HTR Knowledgeworks legacy business for $1,500,000 in June 1999.
Cooper & Associates, Inc., d/b/a Teletutor ("Teletutor") In April 1997,
the Company acquired Teletutor, which develops, distributes and supports
computer-based training courses for the data and telecommunications industry.
This acquisition provided the Company with additional content that has been
converted into the Company's online format, as well as access to Teletutor's
existing customer base.
Ivy Software, Inc. ("Ivy") In March 1997, the Company acquired Ivy, which
develops and distributes business and accounting textbooks and software for the
academic education market. This acquisition provided the Company with additional
content as well as
31
<PAGE> 34
access to Ivy's existing customers in the academic marketplace, ranging from
community colleges to large universities. In September 1998 the Company sold Ivy
back to its original owner, while retaining the right to distribute the online
versions of Ivy Software.
Cognitive Training Associates, Inc. ("CTA") In August 1996, the Company
acquired CTA, which develops and distributes technology-based applications
online via distributed networks for educational institutions, corporations and
government agencies. CTA customers can access these applications from remote
locations using the Internet or their organization's intranets. This acquisition
provided the Company with an established customer base and additional content,
particularly in the electrical, medical and scientific equipment subject areas.
CYBIS. In 1994, the Company acquired the CYBIS division of Control Data,
together with a perpetual nonexclusive license for the CYBIS courseware, which
consisted primarily of courses in language arts, mathematics, social studies,
science, business and a variety of technical subjects. The Company's ability to
distribute a portion of the CYBIS courseware is limited by the terms of its
license. The Company is responsible for the CYBIS computer-based education and
training portion of certain CYBIS contracts to which Control Data is a party, as
well as support and other services under such contracts. The Company believes
that Web-based courseware developed from the CYBIS courseware, to the extent not
restricted by the terms of its license, may contribute to revenues in the
future.
Any acquisition is accompanied by such risks as, among other things, the
difficulties in assimilating the operations and personnel of acquired companies,
potential disruption to the Company's ongoing business, difficulties of
incorporating acquired technology into the Company's products and additional
expense associated with amortization of acquired intangible assets. Particular
acquisitions may not ultimately provide the benefits originally anticipated by
the Company's management.
As consideration for future acquisitions, the Company intends to use
various combinations of Common Stock, cash and notes. The Company may also use
Preferred Stock as all or part of the consideration for one or more potential
acquisitions. Paying for any future acquisitions with equity securities or cash
could result in potential dilution to the value of the Company's Common Stock,
could require the Company to raise additional financing, which may not be
available on terms favorable to the Company and/or could have an adverse effect
on the Company's liquidity. The Company may use a line of credit or incur other
indebtedness, if available, to help fund acquisitions. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources." In pursuing this strategy, the Company may not
be able to identify attractive targets and make successful acquisitions in the
future on commercially reasonable terms, or that it will be successful in
overcoming these risks. The Company does not anticipate implementing any
acquisition strategy at this time.
PRODUCTS AND SERVICES
The Company offers its online courseware primarily through its
proprietary virtual campus product, or Vcampus(R), an online courseware delivery
system and environment that facilitates development, management and
administration of training and education over the Internet and corporate
intranets. Through its HTR and Teletutor subsidiaries, the Company also offers
courseware through more traditional media, including on-site and classroom
training, diskette, CD-ROM and printed formats, although the Company divested a
large portion of these non-online businesses during 1999.
Vcampus(R)
The Company's VCampus is a centrally served delivery and tracking system
accessible by virtually any Internet-ready PC. Generally, students enroll in the
Company's courses online through a VCampus, but have the option to enroll in
person, by telephone or through the mail. Enrolled students can then access the
courseware online, typically through a PC connected to the Internet or a
corporate intranet. Once a student has completed the course, he or she will
receive credit or certification, if appropriate. As of September 30, 2000, the
Company had approximately 50 VCampuses in operation with its corporate and
academic institution partners.
The VCampus environment is customizable and designed for ease of
administration and access to students, instructors and training administrators.
In addition, by using any combination of courses from the Company's courseware
library and the customer's own internal training libraries, customers can offer
a variety of distance learning options. The VCampus includes the following
components:
Registrar: In the "Registrar" function students can sign up for
courses and modify their student profile. Administrators can add new
course offerings, admit students, enroll students into course offerings,
modify the course offerings, search student records and administer much
of the VCampus functionality.
32
<PAGE> 35
Classrooms: In the "Classrooms" function students can enter their
registered courses or check their grades for any course for which they
are registered. Administrators and instructors may also access courses
and have the capability to view student grades.
Faculty: Students can use the "Faculty" function to contact
VCampus instructors.
Information: Using the "Information" function administrators can
post news, announcements and answers to frequently asked questions to
keep students informed about their training options.
Commons: In the optional "Commons" function students can access
games and socialize with other students.
The VCampus supports a wide variety of tools and utilities supplied by
third parties, such as Netscape Navigator/Communicator, Microsoft Internet
Explorer, Macromedia Shockwave, Geo Emblaze, etc. In addition, the Company has
developed the following proprietary software tools that facilitate the
functionality of the VCampus:
VCampus Courseware Delivery Engine. This product was designed and built
to serve as an integrated, Web-based courseware construction and courseware
delivery tool. First delivered in August 1997, the product is currently at the
release level 2.16 and has been used to build and deliver the Company's
courseware library of over 1,300 online courses as of September 30, 2000. By
incorporating features developed for the Company's earlier version of the tool,
the VCampus Courseware Delivery Engine provides a simple, easy-to-use
environment for instructors and students that is capable of assessing,
recommending, tracking and testing students as they complete a course. The
product also enables courseware developers to easily construct, deliver and
track a highly interactive and media-rich online course.
For the instructor, the VCampus Courseware Delivery Engine provides
real-time editing of the course introduction, the syllabus, help items and
reference items. Students can visit the "Gradebook" functionality of the product
to get a real-time view of how they are doing in a course. The courseware
developer has access to a complete suite of Web-based tools necessary to
construct and deliver a highly interactive, online course. The "PointPage"
functionality of the product provides a choice of methods for displaying
content. To make PointPage even more powerful, the "Activity Studio" enables
non-programmers to construct and include into their PointPage, multimedia-rich
(animation, sound and student interactivity) activities by answering a few
simple questions. Courseware developers can also take advantage of the testing
system, which includes many advanced features such as question randomization and
pooling. Additionally, courseware developers can choose to link selected test
questions and PointPages to learning objectives, which allows a courseware
developer to group content and assess a student's progress based on performance.
VCampus Curriculum/Group Manager. This product facilitates the grouping
of students with similar education needs and abilities to appropriate groups of
courses within a VCampus. This can improve overall system efficiency and
facilitate interaction among students. The result of this intersection of
student groups and course groups is a specific student "Training Plan". The
Training Plan is designed to guide students to courses that match the student's
ability. Additionally, the Training Plan can evaluate a student's performance in
each course against minimum standards established by the VCampus administrator
for test scores and attendance. The Curriculum/Group Manager was released during
the first quarter of 1998.
VCampus Batch/Mass Enrollment Tools. This series of tools facilitates the
enrollment of large groups into the VCampus and/or courses without student
involvement. Companies with a large population of students can use this tool to
import demographic data from legacy enterprise resource planning or human
resources systems, thus streamlining the implementation process. This
functionality was first made available in July 1998 and was substantially
enhanced in January 1999.
Existing Courseware Library
The Company's existing courseware library includes over 1,300 online
courses. These courses are in what the Company believes to be high-demand
subject matter areas such as information technology, telecommunications,
compliance/OSHA, business, management and finance. Although the Company does not
provide accreditation or certification itself, a number of its current courses
provide either accreditation or certification through its content providers. The
current library was built from a combination of acquisitions, the Company's own
development efforts and relationships with leading content providers such as
NETg, Infosource, Vital Learning, Crisp Publications Inc. and American Media
Inc. Conversion of courseware into the Company's online format typically takes
approximately 45 days, although conversion time varies depending on any number
of factors, including the size and format of the original courseware content.
33
<PAGE> 36
Traditional Delivery
The Company provides products and services through delivery methods other
than online delivery in order to expand its customer base and courseware library
for online delivery. For example, through its HTR and Teletutor subsidiaries,
the Company offers courseware through more traditional media, including on-site
and classroom training, as well as CD-ROM and printed formats. During 1999, the
Company began implementing its plan to divest its non-online businesses, with
the exception of Teletutor, in order to focus its efforts on managing its core
online customers and content. In December 1999, the Company decided to retain
and further restructure HTR's instructor-led training business, closing the
Atlanta training facility, streamlining the operations in Rockville and
Washington DC, and focusing on moving the remaining customer base to online.
HTR's strategy is to deliver a total solution for corporate IT training
through its suite of products and services, which includes traditional and
on-site training, and courseware. HTR seeks to provide a "Knowledge Transfer" to
its customers through flexible and customizable courseware titles for
client/server systems. IT training is delivered by instructors at HTR's offices
located in the U.S., as well as at customer locations, and is provided through
both pre-scheduled, open enrollment classes and on-demand corporate training
sessions. HTR also provides customized training to meet a customer's specific
needs by tailoring existing titles for developing an entirely new course.
Furthermore, HTR converts certain content into other products (e.g., end-user
books, videos, etc.) to extend its product line and to reach additional market
segments with minimum additional investment in content development.
Teletutor's strategy is to focus its products and services primarily on
the data and telecommunications industry. Teletutor develops, distributes and
supports courseware, primarily in CBT formats, to the telecommunications
industry.
CUSTOMERS
The Company's primary target market is the corporate training and
education market. The Company focuses its sales and marketing efforts on Fortune
1,000 companies and is initially targeting customers in the telecommunications,
healthcare, utilities, IT and financial services industries, as well as academic
institutions, all of which the Company believes have relatively large training
and education budgets, significant training needs and receptiveness to new
technology. In 1999 one customer, State Farm, accounted for approximately 11.6%
of the Company's revenues. The Company currently anticipates that future
revenues may be derived from sales to a limited number of customers.
Accordingly, the cancellation or deferral of a small number of contracts could
have a material adverse effect on the Company.
Business Customers
As of September 30, 2000, the Company had approximately 50 online
corporate business customers, including: All-Phase Electrical Supply Company;
A.T. Kearney, Inc; Cable and Wireless, Inc.; Graybar Electric Co. Inc.; and
Global One Communications, Inc. The Company plans to establish relationships
with additional business customers and strategic partners, in particular those
that offer access to large numbers of users (including the prospective
customer's employees or end-users), vendors and resellers, as well as
significant amounts of courseware content. The Company's business customers
generally agree to market and promote the Company's products and services, and
to share with the Company the net revenues generated from access and other fees
charged to such customer's end-users.
Academic Institution Customers
As of September 30, 2000, the Company had 8 online academic institution
customers, including: AIMS Community College; George Mason University;
Northeastern University; Park College; Swindon College, England; and the
University of Texas System. The Company plans to establish relationships with
additional academic institution customers, in particular those that have
significant enrollments, offer broad curricula and provide the Company with the
opportunity to publish online courseware developed by such institutions. The
Company's agreements with these academic institutions generally provide the
Company with exclusive rights, or limit the institution's right to develop
and/or distribute the online courseware subject to the agreements. The academic
institutions market these courses in the same manner as their existing,
traditional course offerings, including through direct mail, course catalogs,
print advertising and through the Web.
SALES AND MARKETING
The Company's primary marketing goals are to create a strong brand
identity as a leading training and educational courseware publisher for
corporations and academic institutions, and to establish its core technology,
the VCampus e-Learning platform, as the
34
<PAGE> 37
global standard for corporate training and education needs.
In addition to its direct sales efforts, the Company markets its products
and services through a variety of means, including the Web, public relations,
trade shows, direct mail, trade publications, customers, resellers and strategic
partners. The Company cross-markets through customers' VCampuses to promote its
products and services and to attract students. The Company believes that forming
strategic marketing alliances with partners who will sell, promote and market
the Company's products and services will be important for rapid market
penetration.
The Company changed its business focus in 1993 and began divesting its
non-online businesses in 1999, and therefore has limited marketing experience in
its current industry. The Company's direct marketing and sales staff does not
have significant experience marketing in the sales of education products using
Web-based delivery systems. There can be no assurance that the Company will be
able to attract resellers or customers that will be able to market the Company's
products effectively and will be qualified to provide timely and cost-effective
customer and end-user support and service. In addition, certain of the Company's
resellers and customers may compete with one another and the Company, and the
Company may also be required to manage conflicts among its resellers and
customers. For example, certain of the Company's content providers have required
the Company to refrain from linking its products with competing products. The
Company may be adversely affected by pricing pressure or other adverse
consequences of competition or conflict among or with its resellers and
customers, or in the event any reseller or customer fails to adequately
penetrate its market segment. The inability to recruit, manage or retain
important resellers or customers would materially adversely affect the Company.
COMPETITION
The market for educational and training products and services is highly
competitive and the Company expects that competition will continue to intensify.
Although the Company believes that it was the first to offer Web-based,
interactive, on-demand courseware, there are no substantial barriers to entry in
the online education and training market. A number of companies, including
SmartForce, Learn2.com, Inc., Click2learn.com, DigitalThink, Inc., Centra
Software, Inc. and ZDU, have recently entered this market and the Company
expects this trend to continue to accelerate. In addition to traditional
classroom and distance learning providers, other institutions such as Apollo
Group, Inc. (through University of Phoenix) offer their own accredited courses
online or in an email-based format. They, and many other education providers,
use some of the Company's methods, including email, bulletin boards, electronic
conferencing and CD-ROMs, as well as satellite communications, and audio and
video tapes. The Company also expects to encounter significant competition in
connection with its efforts to establish its VCampus as the standard learning
environment and format in the industry.
The Company believes that competition in the developing market for online
training and education will be based upon various factors, including: quality,
breadth and depth of courseware; marketing and third party relationships;
quality, flexibility and reliability of delivery system; and, to a lesser
degree, pricing. In addition, the Company believes that its products and tools
make the Company's courseware affordable, convenient, easy to use and
administer, and provide the Company with a competitive edge in attracting
additional customers. Most of the Company's competitors, as well as a number of
potential new competitors (including the Company's customers and partners), have
significantly greater financial, technical and marketing resources than the
Company. The Company will require financing to compete effectively in this
rapidly evolving market. In addition, any of these competitors may be able to
respond more quickly than the Company to new or emerging technologies, and to
devote greater resources to the development, promotion and sale of their
services. A number of the Company's current customers and partners have also
established relationships with certain of the Company's competitors, and future
customers and partners may establish similar relationships. In addition, the
Company's partners could use information obtained from the Company to gain an
additional competitive advantage over the Company. The Company's competitors may
develop products and services that are superior to those of the Company or that
achieve greater market acceptance than the Company's products and services.
GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES
The Company is not currently subject to direct regulation by any
government agency, other than regulations applicable to businesses generally,
and there are currently few laws or regulations directly applicable to access to
or commerce on online networks. Due to the increasing popularity and use of
online networks, it is possible that a number of laws and regulations may be
adopted with respect to online networks, covering issues such as user privacy,
pricing, taxation and/or the characteristics and quality of products and
services. The adoption of any such laws or regulations may decrease the growth
of online networks, which could in turn decrease the demand for the Company's
products and increase the Company's cost of doing business or otherwise have an
adverse effect on the Company. Moreover, the applicability to online networks of
existing laws governing issues such as property ownership, sales taxes, libel
and personal privacy is uncertain. Furthermore, as a publisher of educational
materials, the Company could be subject to
35
<PAGE> 38
accreditation or other governmental regulations. Any new legislation or
regulation applicable to online networks, the Company or its products or
services could have a material adverse effect on the Company.
Because materials may be downloaded by the online or Internet services
operated or facilitated by the Company or the Internet access providers with
which it has a relationship and be subsequently distributed to others, there is
a potential that claims will be made against the Company for copyright or
trademark infringement or based on other legal theories. Such claims have been
brought against online services in the past. Although the Company carries
general liability insurance, the Company's insurance may not cover claims of
this type, or may not be adequate to cover all liability that may be imposed.
Any imposition of liability that is not covered by insurance or is in excess of
insurance coverage could have a material adverse effect on the Company.
TRADEMARKS AND PROPRIETARY RIGHTS
The Company regards its copyrights, trademarks, trade dress, trade
secrets and similar intellectual property as critical to its success, and the
Company relies upon federal statutory, as well as common law copyright and
trademark law, trade secret protection and confidentiality and/or license
agreements with its employees, customers, partners and others to protect its
proprietary rights. The Company owns registered trademarks in the United States
for HTR, the HTR logo, Teletutor, The Chalkboard, VCampus and "What you think
... is our business." Additionally, the Company has applied for registration in
the United States for certain of its other trademarks, including
VCampus(TM).com, Virtual Campus, Test Wizard, PointPage, Courseware Construction
Set, Registrar Architect, Test Architect, Thought Leaders, and "Take It Online".
The Company has had certain trademark applications denied, and may have
more denied in the future. The Company will continue to evaluate the
registration of additional marks as appropriate. Despite the Company's efforts
to protect its proprietary rights, unauthorized parties may attempt to copy
aspects of the Company's products or services or to obtain and use information
that the Company regards as proprietary. In addition, the laws of some foreign
countries do not protect proprietary rights to as great an extent as do the laws
of the United States. Litigation may be necessary to protect the Company's
proprietary rights. Any such litigation may be time-consuming and costly (even
if successful), cause product release delays, require the Company to redesign
its products or services, or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect on the
Company. Such royalty or licensing agreements, if required, may not be available
on terms acceptable to the Company or at all. The Company's means of protecting
its proprietary rights may prove inadequate and the Company's competitors may
independently develop similar technology or duplicate the Company's products or
services or design around intellectual property rights of the Company. In
addition, distributing the Company's products through online networks makes the
Company's software more susceptible than other software to unauthorized copying
and use. For example, online delivery of the Company's courseware makes it
difficult to ensure compliance by the Company with contractual restrictions, if
any, as to the parties who may access such courseware. The Company cannot
prevent users from downloading electronically certain of its courseware content,
which could adversely affect the Company's ability to collect payment from users
that obtain copies from the Company's existing or past customers. If, as a
result of changing legal interpretations of liability for unauthorized use of
the Company's software or otherwise, users were to become less sensitive to
avoiding copyright infringement, the Company would be materially adversely
affected.
EMPLOYEES
As of September 30, 2000, the Company had 126 employees, including 107
full-time employees and 19 part-time employees, consisting of 27 full-time
employees in general business operations, 39 full-time employees in sales and
marketing, 26 full-time and 18 part-time employees in product development, and
15 full-time and 1 part-time employees in general and administrative. None of
the Company's employees are represented by a union and there have been no work
stoppages. The Company believes that its employee relations are good.
The Company's performance is substantially dependent on the performance
of its executive officers and key employees. The loss of the services of any of
its executive officers or other key employees could have a material adverse
effect on the Company. The Company maintains key man life insurance in the
amount of $1,000,000 on Narasimhan P. Kannan, Chairman of the Board of
Directors, and has employment agreements with certain of its executive officers.
However, neither such insurance nor such agreements necessarily fully compensate
the Company for, or preclude the loss of the services of the relevant personnel.
The Company anticipates that future growth, if any, will require it to identify,
recruit, hire, compensate train and retain a substantial number of new,
technical, managerial, sales and marketing personnel. Competition for qualified
personnel is intense, and the Company may be unable to attract, assimilate and
retain such personnel. The loss of the services of key personnel, or the
inability to attract and retain additional qualified personnel, could have a
material adverse effect on the Company.
36
<PAGE> 39
PROPERTIES
A current summary showing the operating properties of the Company, all of
which are leased, is shown below:
<TABLE>
<CAPTION>
LEASE
AREA EXPIRATION MONTHLY
LOCATION PRINCIPAL USE (SQUARE FEET) DATE RENT
------------------ ------------------------ --------------- ---------------- -------
<S> <C> <C> <C> <C>
Reston, VA........ Executive offices and 16,701 February 2010 $37,925*
principal
administration,
technical marketing and
sales operations
Waxahachie, TX.... CTA offices 5,000 July 2001 2,000
Rockville, MD..... HTR executive offices 6,222 January 2006 11,936
Washington, DC.... HTR Branch office 2,253 July 2002 5,539
</TABLE>
-------------------------
*Subject to 3% annual increases
During the second half of 1998 and the first quarter of 1999, as a result
of reorganization plans, the Company closed one of its McLean executive office
facilities and moved primarily all of Teletutor's product fulfillment operations
to its remaining office facility in Virginia. Also, the Company closed its
training facilities in Los Angeles, CA, Baltimore, MD, Waltham, MA, McLean, VA
and Atlanta, GA.
The Company believes that its existing office space is sufficient to
accommodate its current needs and that suitable additional space will be
available on commercially reasonable terms to accommodate any expansion needs in
2001 should it become necessary.
LEGAL PROCEEDINGS
In November 1999, an arbitrator found the Company liable to Sage
Interactive for approximately $360,000 arising out of an alleged contract
between Sage Interactive and the Company. The Company paid this award in 2000.
Although the Company is not currently involved in any other material pending
legal proceedings, the Company could be subject to legal proceedings and claims
in the ordinary course of its business or otherwise, including claims relating
to license agreements, royalties or claims of alleged infringement of the
trademarks and other intellectual property rights of third parties by the
Company and its licensees.
37
<PAGE> 40
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
As of November 1, 2000, the directors and executive officers of the
Company were as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------ ----- ------------------------
<S> <C> <C>
Narasimhan P. Kannan.... 52 Chairman of the Board of Directors
Daniel J. Neal.......... 42 Director and Chief Executive Officer
Edson D. deCastro....... 62 Director
Barry K. Fingerhut...... 55 Director
Kamyar Kaviani.......... 38 Director
William E. Kimberly..... 67 Director
John D. Sears........... 45 Director
Ashok Trivedi........... 51 Director
Michael W. Anderson..... 46 Chief Operating Officer
Michael A. Schwien...... 44 Chief Financial Officer and Secretary
</TABLE>
Narasimhan P. "Nat" Kannan has served as Chief Executive Officer and
Chairman of the Board of Directors of the Company since he founded the Company
in 1984. In September 2000, Mr. Kannan stepped down as Chief Executive Officer.
Prior to founding the Company, he co-founded Ganesa Group, Inc., a developer of
interactive graphics and modeling software, in 1981. Prior thereto, he served as
a consultant to Booz Allen and Hamilton, Inc., the MITRE Corporation, The
Ministry of Industry of the French Government, the Brookhaven and Lawrence
Livermore National Laboratories, the White House Domestic Policy Committee on
Energy, and Control Data Corporation. He serves on the board of directors of TV
on the Web, Inc. He holds a B.S. in Engineering from the Indian Institute of
Technology in Madras, India, and he performed advanced graduate work in business
and engineering at Dartmouth College.
Daniel J. Neal has served as a director and Chief Executive Officer of
the Company since September 2000. From July 1998 until joining the Company, Mr.
Neal served in various positions with USinternetworking, Inc., including Vice
President/General Manager, Senior Director, E-Commerce Partnering and Senior
Director, Acquisition Integration. From April 1996 until July 1998, he was the
Director of National Partnering for Global One Communications, LLC, a subsidiary
of Sprint. Prior to that, Mr. Neal served as a Senior Staff Member with the
Office of the Vice President of the United States. Mr. Neal received his B.A.
from the University of California, Berkeley, and holds an M.B.A. from the
Wharton School at the University of Pennsylvania.
Edson D. deCastro has been a director of the Company since 1994. From
June 1995 to January 1997 Mr. deCastro served as Chief Executive Officer of
Xenometrix, Inc. and served as its Chairman from 1992 until November 1997. Mr.
deCastro was the founder of Data General Corporation and served as its Chief
Executive Officer from 1968 to 1990. From January 1990 to June 1995, Mr.
deCastro was an independent contractor. Mr. deCastro now works as a consultant.
Mr. deCastro also serves on the boards of directors of Boston Life Sciences,
Inc., Avax Technologies, Inc., Eprise Corp. and Healthgate Data Corp., all
public companies, and of several private early-stage technology companies. He
holds a B.S. in Electrical Engineering from the University of Lowell.
Barry K. Fingerhut has been a director of the Company since August 1996.
Since 1981 he has been employed by GeoCapital, a registered investment advisor,
and has served as its Portfolio Manager and President since 1991. Mr. Fingerhut
is an officer of the General Partner of the Wheatley Partnerships, investment
partnerships. In addition, he is an officer of a General Partner of 21st Century
Communications Partners, L.P., also an investment partnership. Mr. Fingerhut
serves as a director of several private companies. Mr. Fingerhut holds a B.S.
from the University of Maryland and an M.B.A. with a concentration in
Finance/Investments from New York University.
Kamyar Kaviani has been a director since November 1997. Mr. Kaviani
joined the Company as Executive Vice President upon the Company's acquisition of
HTR in October 1997 and served in such capacity until September 2000. Prior to
such acquisition, Mr. Kaviani co-founded HTR in 1987 and has served as its
Chairman and Chief Executive Officer since that time. Mr. Kaviani holds a B.A.
in Economics from the University of Maryland.
William E. Kimberly has been a director of the Company since October
1995. Mr. Kimberly served as the President of the Manchester Group, Ltd., an
investment banking firm, from 1990 to 1994, and as Chairman of NAZTEC
International Group, Inc., its successor, since 1994. Prior thereto, Mr.
Kimberly served in various senior executive capacities for 23 years for Kimberly
Clark Corporation. Mr. Kimberly also serves as a director of Sytel Corporation.
He is a member of the Board of Trustees of The Asheville School and the Pan
American Development Foundation.
38
<PAGE> 41
John D. Sears has been a director of the Company since 1998 and has been
employed in various executive capacities by the University of Phoenix since
1987, currently serving as Vice President of the Office of Institutional
Development, and prior thereto as the Vice President of the Center for Distance
Education. Mr. Sears holds a B.A. from the University of Notre Dame and a
Masters in Business Administration from the University of Denver.
Ashok Trivedi has been a director since March 2000. Mr. Trivedi is the
Co-Chairman, President and Co-Founder of iGate Capital Corporation (f/k/a
Mastech Corporation), a corporation founded in 1986. Prior thereto, Mr. Trivedi
served as Product Manager for Unisys Corporation, where he was employed for 12
years. Mr. Trivedi holds a Masters in Business Administration from Ohio
University as well as Masters and Bachelors degrees in Physics from Delhi
University in India.
Michael W. Anderson holds the title of Executive Vice President,
Publishing and Academic Markets. From November 1998 to September 2000, he was
the Company's Chief Operating Officer after serving as the Company's Vice
President of Technology and Operations since March 1996. From 1994 to 1996, Mr.
Anderson was a marketing research consultant at O'Donnell & Associates, Inc.
From 1990 to 1994 he served as Vice President and Director of Marketing
Operations at HarperCollins College Publishers. From 1977 to 1990 he was
employed by Scott, Foresman & Company, most recently as Vice President of
Marketing Operations. Mr. Anderson holds a B.A. in English and Mathematics from
the University of Texas.
Michael Schwien joined the Company as Controller in May 1998 and was
named Chief Financial Officer in June 1999. From 1993 to May 1998, Mr. Schwien
worked for BDM Technologies, Inc. most recently as Director of Business
Operations. From 1988 to 1993, he worked for ICF Kaiser International as
Supervisor of Corporate Accounting. Prior to working for ICF Kaiser
International he was a staff auditor with Deloitte & Touche. Mr. Schwien holds a
B.S. in Business Administration from the University of Colorado and is a
Certified Public Accountant.
EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth all compensation paid by us for
services rendered to us in all capacities for the fiscal years ended December
31, 1997, 1998 and 1999 to our Chief Executive Officer and our four other
highest-paid executive officers who earned at least $100,000 in the respective
fiscal year (collectively, the "Named Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
LONG-TERM
ANNUAL COMPENSATION COMPENSATION AWARDS
-------------------------------------------------------------------------------------------------------------------------------
FISCAL STOCK OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS (SHARES) COMPENSATION
----------------------------------- ---------- ----------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C> <C>
Narasimhan P. Kannan............... 1999 $ 180,000 $ 3,900 102,000 $ 1,242(4)
Chairman and 1998 $ 195,000(2) $ -- 189,013 $ 46,077(3)
Chief Executive Officer(1) 1997 $ 164,123 $ 32,500 -- $ 1,080(4)
Kamyar Kaviani..................... 1999 $ 149,903 $ 73,250 2,000 $ 9,600(6)
Executive Vice President (5) 1998 $ 154,583 $310,500 -- $ 9,600(6)
1997 $ 113,595 $ -- 70,900 $ --
Farzin Arsanjani................... 1999 $ 150,000 $ 73,250 2,000 $ 9,600(6)
Executive Vice President (7) 1998 $ 154,583 $ 310,500 20,000 $ 9,600(6)
1997 $ 112,732 $ -- 70,900 $ --
Michael W. Anderson................ 1999 $ 159,996 $ 3,467 12,000 $ --
Chief Operating Officer 1998 $ 144,848 $ -- 70,300 $ --
1997 $ 138,337 $ 25,833 -- $ 12,155(8)
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 42
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Michael A. Schwien................. 1999 $ 101,457 $ 2,492 32,000 $ --
Chief Financial Officer
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>
------------------------------------------
(1) Mr. Kannan resigned as Chief Executive Officer in September 2000.
(2) Includes $15,000 of salary for Mr. Kannan from December 1997 that was
paid in 1998.
(3) Consists of $1,566 of taxable premiums paid for life insurance and
$44,511 of accrued vacation paid in the form of Common Stock.
(4) Consists of taxable premiums paid for life insurance.
(5) Mr. Kaviani resigned as Executive Vice President in September 2000.
(6) Consists of expenses for automobile allowance.
(7) Mr. Arsanjani resigned as Executive Vice President in September 2000
(8) Consists of moving expenses.
Option Grants, Exercises and Holdings and Fiscal Year-End Option Values.
The following table summarizes all option grants during the year
ended December 31, 1999 to the Named Officers:
OPTION GRANTS DURING THE YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
% OF TOTAL
NUMBER OF OPTIONS POTENTIAL REALIZABLE VALUE
SHARES GRANTED TO EXERCISE OR AT ASSUMED ANNUAL RATES OF
UNDERLYING EMPLOYEES IN BASE PRICE STOCK PRICE APPRECIATION FOR
NAME OPTIONS GRANTED 1999 PER SHARE EXPIRATION DATE OPTION TERM(1)
-------------------------- --------------- ------------ ----------- --------------- -------------------------------
5% 10%
---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Narasimhan P. Kannan...... 100,000 28.9% $3.75 9/09/09 $235,835 $597,653
2,000 0.6% $3.75 9/09/09 $4,717 $11,953
Kamyar Kaviani............ 2,000 0.6% $3.75 9/09/09 $4,717 $11,953
Farzin Arsanjani.......... 2,000 0.6% $3.75 9/09/09 $4,717 $11,953
Michael Anderson.......... 10,000 2.9% $3.75 9/09/09 $23,584 $59,765
2,000 0.6% $3.75 9/09/09 $4,717 $11,953
Michael A. Schwien........ 30,000 8.7% $3.75 9/09/09 $70,751 $179,296
2,000 0.6% $3.75 9/09/09 $4,717 $11,953
</TABLE>
------------------------------------------
(1) The compounding assumes a 10-year exercise period for all option grants.
These amounts represent certain assumed rates of appreciation only.
Actual gains, if any, on stock option exercises are dependent on the
future performance of the Common Stock and overall stock market
conditions. The amounts reflected in this table may not be necessarily
achieved.
40
<PAGE> 43
No stock options were exercised by the Named Officers during 1999. The
following table sets forth certain information concerning the number and value
of unexercised options held by the Named Officers as of December 31, 1999:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
AT DECEMBER 31, 1999 AT DECEMBER 31, 1999 (1)
------------------------------------- -------------------------------------
Name EXERCISABLE(2) UNEXERCISABLE(2) EXERCISABLE(2) UNEXERCISABLE(2)
-------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C>
Narasimhan P. Kannan......... 28,513 262,500 $0 $0
Kamyar Kaviani............... 15,500 57,400 $0 $0
Farzin Arsanjani............. 15,500 77,400 $0 $0
Michael W. Anderson.......... 38,812 95,000 $0 $0
Michael A. Schwien........... 4,500 50,000 $0 $0
</TABLE>
(1) Options are considered in-the-money if the market value of the shares
covered thereby is greater than the option exercise price. None of the
listed options had any value at December 31, 1999 because all of their
exercise prices were higher than the fair market value of the shares on
that date ($3.125), as quoted on the Nasdaq Stock Market.
(2) The first number represents the number or value (as called for by the
appropriate column) of exercisable options; the second number represents
the number or value (as appropriate) of unexercisable options.
1996 STOCK PLAN
The Company's 1996 Stock Plan (the "1996 Plan") was adopted and approved
by the Board of Directors in August 1996 and by the stockholders of the Company
in September 1996. A total of 3,024,893 shares of Common Stock have been
reserved for issuance under the 1996 Plan. As of September 30, 2000, 43,506
shares of Common Stock had been issued upon exercise of options granted under
the 1996 Plan, and options for2,241,972 shares were outstanding thereunder at a
weighted average exercise price of $10.56 per share. The 1996 Plan also allows
for the grant of purchase rights, under which 47,619 shares have been purchased
to date.
The 1996 Plan provides for the grant of "incentive stock options" within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended (the
"Code"), solely to employees (including officers and employee directors), and
nonstatutory stock options to employees, directors and consultants. As of
September 30, 2000, approximately 130 persons were eligible to receive grants
under the 1996 Plan. The 1996 Plan is administered by the Compensation Committee
of the Board of Directors. Subject to the restrictions of the 1996 Plan, the
Compensation Committee determines who is granted options, the terms of options
granted, including exercise price, the number of shares subject to the option
and the option's exercisability. The current members of the Compensation
Committee are Messrs. deCastro and Fingerhut.
The exercise price of options granted under the 1996 Plan is determined
on the date of grant, and in the case of incentive stock options must be at
least 100% of the fair market value per share at the time of grant. The exercise
price of any option granted to an optionee who owns stock possessing more than
10% of the voting power of the Company's outstanding capital stock must equal at
least 110% of the fair market value of the Common Stock on the date of grant.
The aggregate fair market value of Common Stock (determined as of the date of
the option grant) for which incentive stock options may for the first time
become exercisable by any individual in any calendar year may not exceed
$100,000. Payment of the exercise price may be made by delivery of cash or a
check to the order of the Company, or by any other means determined by the Board
of Directors.
Options granted to employees under the 1996 Plan generally become
exercisable in increments, based on the optionee's continued employment with the
Company, over a period of up to five years. The term of an incentive stock
option may not exceed 10 years. The form of option agreement generally provides
that options granted under the 1996 Plan, whether incentive stock options or
nonstatutory options, expire 10 years from the date of grant. Incentive stock
options granted pursuant to the 1996 Plan are not transferable by the optionee,
other than by will or the laws of descent and distribution, and are exercisable
during the optionee's lifetime only by the optionee. Generally, in the event of
a merger of the Company with or into another corporation or a sale of all or
substantially all of the Company's assets, all outstanding options under the
1996 Plan shall accelerate and become fully exercisable upon consummation of
41
<PAGE> 44
such merger or sale of assets.
The Board may amend the 1996 Plan at any time or from time to time or may
terminate the 1996 Plan without the approval of the stockholders, provided that
stockholder approval is required for any amendment to the 1996 Plan requiring
stockholder approval under applicable law as in effect at the time. However, no
action by the Board of Directors or stockholders may alter or impair any option
previously granted under the 1996 Plan. The Board may accelerate the
exercisability of any option or waive any condition or restriction pertaining to
such option at any time. The 1996 Plan will terminate in August 2006, unless
terminated sooner by the Board.
EMPLOYMENT AGREEMENTS
Under the terms of our form of employment agreement for executive
officers, such officers are entitled to annual incentive-based bonus
compensation of up to 50% of their base salary. The exact amount of such
compensation is determined by the Board of Directors, generally based upon the
achievement of specified performance goals established by the Board. Under such
agreements, executive officers are also eligible to participate in all employee
benefit plans and programs that we offer to our executive employees and are
entitled to reimbursement for all documented reasonable business expenses they
incur. Generally, consistent with Company policies, in the event that an
executive officer is terminated without cause or resigns for good cause, we are
required under our form of employment agreement to continue paying salary to
such officer for six to nine months as severance.
Mr. Kannan's employment agreement with the Company, as amended,
provides for an annual base salary of $220,000. The term of the agreement
expires on August 10, 2001, but the agreement is subject to automatic one-year
renewal terms. In the event of a material change in Mr. Kannan's duties, titles,
authority or position with the Company, he may elect, in lieu of receiving his
severance pay, to enter into a consulting arrangement with the Company, whereby
Mr. Kannan would provide consulting services to the Company for a period of one
year and be paid $750 per day for providing such services.
COMPENSATION OF DIRECTORS
All directors are reimbursed for expenses incurred in connection with
each board committee meeting attended.
The 1996 Plan provides for the grant of nonstatutory options to our
non-employee directors. The 1996 Plan provides automatic grants on January 1 of
each year to directors who are not employees of the Company of an option to
purchase 10,000 shares. In addition, in the case of a new director, automatic
grants shall be effective upon such director's initial election or appointment
to the Board with the number of underlying shares equal to the product of 2,500
multiplied by the number of regularly scheduled meetings remaining in that year.
Subject to continued status as a director, options vest 25% per year on each of
the fifth, sixth, seventh and eighth anniversaries of the date of grant;
provided, however, that 2,500 shares vest on each date the director attends a
Board meeting in person during that year. In addition, such director will
automatically be granted a fully-vested option to purchase an additional 2,500
shares on each date the director attends a meeting of a committee of the Board
other than on the same day or within one day of a Board meeting.
Under the 1996 Plan, during 1999 the non-employee directors received
options as follows: Mr. Fingerhut - 10,000; Mr. Wallman - 17,500; Mr. Kimberly -
17,500; Mr. Sears - 10,000; and Mr. deCastro - 10,000.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Compensation Committee of the Board of Directors consists of Messrs.
deCastro and Fingerhut, none of whom was at any time during the fiscal year
ended December 31, 1999 or at any other time an officer or employee of the
Company. No executive officer of the Company serves as a member of the board of
directors or compensation committee of any entity which has one or more
executive officers serving as a member of the Board of Directors or the
Compensation Committee of the Company.
42
<PAGE> 45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
ownership of shares of our Common Stock and Preferred Stock as of April 25, 2000
by (1) each person known by us to beneficially own more than 5% of the
outstanding shares of any class of our capital stock, (2) each of our directors
and director nominees, (3) each of the Named Officers, as listed under "--
Executive Compensation -- Summary Compensation" above, and (4) all of our
directors and executive officers as a group. As of April 25, 2000 we had
outstanding (a) 8,046,143 shares of Common Stock, (b) 623,339 shares of Series C
Preferred Stock (convertible into 755,549 shares of Common Stock based on a
conversion ratio of 1.2121-for-1), (c) 1,073,370 shares of Series D Preferred
Stock convertible into Common Stock on a one-for-one basis, and (d) 127,913
shares of Series E Preferred Stock convertible into Common Stock on a
one-for-one basis. Share ownership in the case of Common Stock includes shares
issuable upon conversion of Preferred Stock into Common Stock, and exercise of
warrants and options that may be exercised in each case within 60 days after
April 25, 2000 for purposes of computing the percentage of Common Stock owned by
such person but not for purposes of computing the percentage owned by any other
person. Percentage voting power is calculated assuming the Common Stock and all
series of Preferred Stock vote together as one class with each share of Common
Stock and Preferred Stock entitled to one vote. Except as indicated in the
footnotes to this table, the persons named in this table have sole voting and
investment power with respect to all shares of Common Stock and Preferred Stock
indicated below.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
---------------------------------------------------------------------------------
SERIES C SERIES D
COMMON STOCK STOCK PREFERRED STOCK PREFERRED
-------------------------- --------------------------- --------------------------
NUMBER OF PERCENT NUMBER OF PERCENT NUMBER OF PERCENT
SHARES OF SHARES SHARES OF CLASS SHARES OF CLASS
NAME ---------- --------- --------- -------- --------- --------
----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Barry K. Fingerhut (1)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021.............. 1,485,857 16.5% 229,839 36.9% 409,090 38.1%
iGate Capital Corporation (2)
1004 McKee Road
Oakdale, PA 15071............... 1,436,253 17.2% -- -- -- --
Barry Rubenstein(3)(10)
68 Wheatley Road
Brookville, NY 11545............ 1,201,332 13.5% 218,612 35.1% 381,817 35.6%
Irwin Lieber(4)(10)
80 Cuttermill road, Suite 311
Great Neck, NY 11021............ 1,176,502 13.2% 207,387 33.3% 381,817 35.6%
Seth Lieber(5)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021............ 1,109,012 12.6% 192,025 30.8% 363,636 33.9%
Jonathan Lieber(6)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021............ 1,106,200 13.1% 192,025 30.8% 363,636 33.9%
Wheatley Partners, L. P.(7)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021............ 1,099,666 12.5% 189,071 30.3% 363,636 33.9%
Wheatley Foreign Partners, L. P.
(8)(10)
Third Floor, One Capital Place
George Town, Grand Cayman
Cayman Islands, B. W. I......... 1,099,666 12.5% 189,071 30.3% 363,636 33.9
Wheatley Partnres, LLC(9)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021............ 1,099,666 12.5% 189,071 30.3% 363,636 33.9%
US West Internet Ventures, Inc(11) 714,284 8.5% -- -- -- --
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------
SERIES E
STOCK PREFERRED
--------------------------
NUMBER OF PERCENT PERCENTAGE
SHARES OF CLASS TOTAL VOTING
NAME --------- -------- POWER
---------------------------------- -----
<S> <C> <C> <C>
Barry K. Fingerhut (1)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021.............. -- -- 12.0%
iGate Capital Corporation (2)
1004 McKee Road
Oakdale, PA 15071............... -- -- 11.5%
Barry Rubenstein(3)(10)
68 Wheatley Road
Brookville, NY 11545............ -- -- 9.5%
Irwin Lieber(4)(10)
80 Cuttermill road, Suite 311
Great Neck, NY 11021............ -- -- 9.4%
Seth Lieber(5)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021............ -- -- 8.9%
Jonathan Lieber(6)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021............ -- -- 8.8%
Wheatley Partners, L. P.(7)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021............ -- -- 8.8%
Wheatley Foreign Partners, L. P.
(8)(10)
Third Floor, One Capital Place
George Town, Grand Cayman
Cayman Islands, B. W. I......... -- -- 8.8%
Wheatley Partnres, LLC(9)(10)
80 Cuttermill Road, Suite 311
Great Neck, NY 11021............ -- -- 8.8%
US West Internet Ventures, Inc(11) -- -- 3.6%
</TABLE>
43
<PAGE> 46
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Hambrecht & Quist Guaranty Finance, LLC
One Bush Street
San Francisco, CA 94101......... 127,913 1.6% -- -- -- --
Kamyar Kaviani(12)................ 318,061 3.9% -- -- 68,358 6.4%
Farzin Arsanjani(13).............. 228,315 2.8% -- -- 56,834 5.3%
Narasimhan P. Kannan(14).......... 218,020 2.7% -- -- -- --
William E. Kimberly(15)........... 95,915 1.2% -- -- -- --
Steven M. H. Wallman(16).......... 71,923 * -- -- -- --
Michael W. Anderson(17)........... 39,112 * -- -- -- --
Michael A. Schwien(18)............ 35,750 * -- -- -- --
Edson D. deCastro(18) 24,298 * -- -- -- --
John D. Sears(18)................. 17,500 * -- -- -- --
Ashok Trivedi(18)................. 2,500 -- -- -- -- --
All directors and executive officers
as a group (8 directors and 5
executive officers)(19) 2,539,751 27.1% 229,839 36.7% 534,282 49.4%
</TABLE>
<TABLE>
<S> <C> <C> <C>
Hambrecht & Quist Guaranty Finance, LLC
One Bush Street
San Francisco, CA 94101......... 127,913 100% 1.3%
Kamyar Kaviani(12)................ -- -- 3.1%
Farzin Arsanjani(13).............. -- -- 2.2%
Narasimhan P. Kannan(14).......... -- 1.9%
William E. Kimberly(15)........... -- -- *
Steven M. H. Wallman(16).......... -- -- *
Michael W. Anderson(17)........... -- -- *
Michael A. Schwien(18)............ -- -- *
Edson D. deCastro(18) -- -- *
John D. Sears(18)................. -- -- *
Ashok Trivedi(18)................. -- -- *
All directors and executive officers
as a group (8 directors and 5
executive officers)(19) -- -- 20.0%
</TABLE>
--------------------------------------------------------------------------------
(*) Less than one percent.
(1) Consists of: (i) 228,054 shares of Common Stock, 45,835 shares of Common
Stock issuable upon conversion of Series C Preferred Stock, 45,454 shares
of Common Stock issuable upon conversion of Series D Preferred Stock,
37,814 shares of Common Stock issuable upon exercise of warrants which
are currently exercisable and 22,500 shares of Common Stock issuable upon
exercise of options which are currently exercisable, all held by Mr.
Fingerhut; (ii) 298,242 and 19,541 shares of Common Stock, 211,231 and
17,945 shares of Common Stock issuable upon conversion of Series C
Preferred Stock, 335,162 and 28,474 shares of Common Stock issuable upon
conversion of Series D Preferred Stock and 174,266 and 14,805 shares of
Common Stock issuable upon exercise of warrants which are currently
exercisable, all held by Wheatley Partners, L.P. and Wheatley Foreign
Partners, L.P., respectively, two investment partnerships of which Mr.
Fingerhut serves as an officer of the General Partner; and (iii) 3,580
shares of Common Stock issuable upon conversion of Series C Preferred
Stock and 2,954 shares of Common Stock issuable upon exercise of warrants
which are currently exercisable held in a joint account with respect to
which Mr. Fingerhut has investment and voting power. Mr. Fingerhut
disclaims beneficial ownership of the shares held by Wheatley Partners,
L.P. and Wheatley Foreign Partners, L.P., except to the extent of his
pecuniary interest therein.
(2) Includes 300,000 shares issuable upon exercise of a warrant.
(3) Consists of 1,099,666 shares beneficially owned by Wheatley Partners,
L.P. and Wheatley Foreign Partners, L.P., with respect to each of which
Mr. Rubenstein is the CEO of the general partner, and 35,806 shares of
Common Stock issuable upon conversion of Series C Preferred Stock,
18,181 shares of Common Stock issuable upon conversion of Series D
Preferred Stock, 29,541 shares of Common Stock issuable upon exercise of
warrants and 18,138 shares of Common Stock, held by three investment
partnerships with respect to which Mr. Rubenstein is a general partner.
(4) Consists of: (i) 1,099,666 shares beneficially owned by Wheatley
Partners, L.P. and Wheatley Foreign Partners, L.P. , with respect to
each of which Mr. Leiber may be deemed to share voting and dispositive
power; (ii) 4,297 shares of Common Stock issuable upon conversion of
Series C Preferred Stock and 3,545 shares of Common Stock issuable upon
exercise of a warrant, both held by Mr. Leiber's child; and (iii) 14,771
shares of Common Stock issuable upon exercise of a warrant, 17,904
shares of Common Stock issuable upon exercise of Series C Preferred
Stock, 18,181 shares of Common Stock issuable upon exercise of Series D
Preferred Stock and 18,138 shares of Common Stock, all held by Mr.
Leiber.
(5) Consists of: (i) 1,099,666 shares beneficially owed by Wheatley
Partners, L.P. and Wheatley Foreign Partners, L.P., with respect to
which Mr. Leiber may be deemed to share voting and dispositive power;
and (ii) 2,954 shares of Common Stock issuable upon exercise of a
warrant, 3,580 shares of Common Stock issuable upon conversion of Series
C Preferred Stock and 2,812 shares of Common Stock, all held by Mr.
Leiber.
44
<PAGE> 47
(6) Consists of: (i) 1,099,666 shares beneficially owned by Wheatley
Partners, L.P. and Wheatley Foreign Partners, L.P., with respect to which
Mr. Leiber may be deemed to share voting and dispositive power; and (ii)
3,580 shares of Common Stock issuable upon conversion of Series C
Preferred Stock and 2,954 shares of Common Stock issuable upon exercise
of a warrant, all held by Mr. Leiber.
(7) Includes: (i) 211,231 shares of Common Stock issuable upon conversion of
Series C Preferred Stock; (ii) 174,266 shares of Common Stock issuable
upon exercise of warrants which are currently exercisable; (iii) 335,162
shares of Common Stock issuable upon conversion of Series D Preferred
Stock; and (iv) 19,541 shares of Common Stock, 14,805 shares of Common
Stock issuable upon exercise of a warrant, 17,945 shares of Common Stock
issuable upon conversion of Series C Preferred Stock and 28,474 shares of
Common Stock issuable upon conversion of Series D Preferred Stock, all
held by Wheatley Foreign Partners, L.P. Wheatley Partners, L.P. disclaims
beneficial ownership of the shares held by Wheatley Foreign Partners,
L.P., except to the extent of its pecuniary interest therein.
(8) Includes 1,018,901 shares beneficially held by Wheatley Partners, L.P.
Wheatley Foreign Partners, L.P. disclaims beneficial ownership of such
securities, except to the extent of its pecuniary interest therein.
(9) Consists of 1,099,666 shares beneficially owned by Wheatley Partners,
L.P. and Wheatley Foreign Partners, L.P., with respect to each of which
Wheatley Partners, LLC is a general partner.
(10) Based on the Schedule 13D amendment filed as of August 11, 1999 with the
SEC by this stockholder and a group of affiliated investors. These share
numbers also include the annual 5% dividend on the Series D Preferred
Stock paid in shares of Common Stock in June and December 1999.
(11) Includes 357,142 shares of common stock issuable upon exercise of a
warrant that is currently exercisable. Excludes 357,142 shares of common
stock issuable upon exercise of a warrant that is not exercisable within
60 days from the Record Date.
(12) Includes 15,500 shares of Common Stock issuable upon exercise of options
which are currently exercisable and 68,358 shares of Common Stock
issuable upon conversion of Series D Preferred Stock.
(13) Includes 56,834 shares of Common Stock issuable upon conversion of Series
D Preferred Stock and 15,500 shares of Common Stock issuable upon
exercise of options which are currently exercisable.
(14) Includes 169,092 shares of Common Stock held by two trusts of which Mr.
Kannan and his wife are co-trustees; 8,513 shares of Common Stock held by
a limited partnership as to which Mr. Kannan and his wife are the general
partners, and 28,513 shares of Common Stock issuable upon exercise of
options which are currently exercisable.
(15) Includes 44,298 shares of Common Stock issuable upon exercise of options
which are currently exercisable, as well as 8,344 outstanding shares of
Common Stock held by Elena Kimberly, Mr. Kimberly's wife.
(16) Includes 37,500 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(17) Includes 38,812 shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(18) Consists of shares of Common Stock issuable upon exercise of options
which are currently exercisable.
(19) Includes the shares (including shares underlying options and warrants)
discussed in footnotes (12) - (18).
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In December 1996, the Company loaned Nat Kannan, our founder, former
Chief Executive Officer and Chairman, $100,000 to help satisfy Mr. Kannan's
income tax withholding obligations relating to back wages paid to Mr. Kannan by
us in 1996. The largest outstanding principal amount under the loan, together
with interest accrued thereon, during 1999 was approximately $124,182. The loan
bears interest at the prime rate, as announced from time to time by First Union
National Bank, minus one percent with principal and accrued interest payable in
full upon demand.
In May 1999, we raised approximately $1.3 million through a private
placement of 448,297 shares of common stock at a price of $2.9375 per share.
Barry K. Fingerhut, a director and one of our largest beneficial stockholders,
purchased an aggregate of 102,127 of such shares for an aggregate consideration
of $300,000. The holders of shares issued in this financing are entitled to
certain registration rights.
In January 2000, we raised approximately $4.0 million through a strategic
private placement to Mastech Corporation (now iGate Capital Corporation) of
1,136,253 shares of common stock, representing approximately 19.9% of our
outstanding common stock, at $3.62 per share. This price represented a 20%
premium above the average closing price of our common stock for a 15-day
trailing period. In addition, we granted iGate a warrant to purchase an
additional 450,000 shares of common stock for a period of one year at a 20%
premium to market at the date of exercise, subject to a floor of $4.34 pre share
and a ceiling of $6.125 per share. The holders of shares issued in this
financing are entitled to certain registration rights. As part of this strategic
investment, Ashok Trivedi, iGate's Chairman, President and 29.6% shareholder,
was subsequently appointed to our Board and is included in management's slate of
nominees for election to our Board by the shareholders at the Meeting.
45
<PAGE> 48
In April 2000, we raised $2.5 million through a strategic private
placement to US West Internet Ventures, Inc., a subsidiary of US West, Inc., of
357,142 shares of common stock, representing approximately 46% of our
outstanding common stock, at $7.00 per share (the closing price of our common
stock on the date of issuance). In addition, we granted US West a five-year
warrant to purchase an additional 714,284 shares of common stock at $7.00 per
share. One-half of the warrant shares are immediately exercisable and the
remaining shares become exercisable on April 20, 2001. The holders of shares
issued in this financing are entitled to certain registration rights. As part of
this strategic investment, US West was granted the right to designate one
representative for election to the Board.
We have adopted a policy that all future transactions between us and our
executive officers, directors and other affiliates must be approved by a
majority of the members of our Board of Directors and by a majority of the
disinterested members of our Board of Directors, and must be on terms no less
favorable to us than could be obtained from unaffiliated third parties. Any new
loans or advances with insiders and any forgiveness of loans to insiders must be
for a bona fide business purpose and be approved by a majority of the
independent members of our Board of Directors who do not have an interest in the
transactions.
All past transactions involving insiders were approved by at least a
majority of our independent and disinterested directors at the time of the
transactions. All ongoing transactions involving insiders have been approved by
a majority of our independent and disinterested directors.
46
<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED STOCK
As of the date of this prospectus, the Company's authorized capital stock
consists of 36,000,000 shares of common stock, $0.01 par value per share, and
10,000,000 shares of preferred stock, $0.01 par value per share. The description
below is a summary of all material provisions of the Company's common stock and
preferred stock.
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters voted on by the stockholders, including elections of directors. Subject
to the preferential rights, if any, of holders of any then outstanding preferred
stock, the holders of common stock are entitled to receive dividends when, as
and if declared by the Board of Directors of the Company out of funds legally
available therefor. The terms of the common stock do not grant to the holders
thereof any preemptive, subscription, redemption, conversion or sinking fund
rights. Subject to the preferential rights of holders of any then outstanding
preferred stock, the holders of common stock are entitled to share ratably in
the assets of the Company legally available for distribution to stockholders in
the event of the liquidation, dissolution or winding up of the Company. As of
September 30, 2000, 8,284,472 shares of common stock were issued and
outstanding, 3,178,785 shares of common stock were reserved for issuance upon
the exercise of certain outstanding warrants and approximately 3,024,893 shares
were reserved for issuance pursuant to the Company's stock plans.
The certificate of incorporation and bylaws of the Company contain
certain provisions which may have the effect of delaying, deferring, or
preventing a change of control of the Company. In addition, the Board generally
has the authority, without further action by stockholders, to fix the relative
powers, preferences, and rights of the unissued shares of preferred stock of the
Company. Provisions that could discourage an unsolicited tender offer or
takeover proposal, such as extraordinary voting, dividend, redemption, or
conversion rights, could be included in this preferred stock.
PREFERRED STOCK
Pursuant to the Certificate of Incorporation, the Company has the
authority to issue up to 10,000,000 shares of preferred stock, $0.01 par value
per share, in one or more series as determined by the Board of Directors of the
Company. The Board of Directors of the Company may, without further action by
the stockholders of the Company, issue one or more series of preferred stock and
fix the rights and preferences of such shares, including the dividend rights,
dividend rates, conversion rights, exchange rights, voting rights, terms of
redemption, redemption price or prices, liquidation preferences and the number
of shares constituting any series or the designation of such series. The rights
of the holders of common stock will be subject to, and may be adversely affected
by, the rights of holders of preferred stock issued by the Company in the
future. In particular, the issuance of additional shares of preferred stock may
adversely affect the voting power of the common holders. In addition, the
issuance of preferred stock could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from attempting
to acquire, control of the Company.
As of September 30, 2000, the Company had designated 1,000,000 shares of
Series C Convertible Preferred Stock, of which 623,339 shares were issued and
outstanding, 1,200,000 shares of Series D Convertible Preferred Stock, of which
1,070,643 shares were issued and outstanding, and 3,000,000 shares of Series E
Convertible Preferred Stock, of which 390,704 were issued and outstanding.
The following is a summary of the terms, rights and privileges of the
Company's designated preferred stock.
Rank. Our Series C, Series D and Series E preferred stock all rank on an
equal basis with each other, senior to any future series of preferred stock, and
prior to the common stock as to dividends and distributions of assets.
Dividends. Holders of Series C preferred stock will be entitled to
receive cash dividends, if any, when, as and if declared by our Board out of
funds legally available for dividends.
Holders of Series D preferred stock are entitled to receive a 5% annual
dividend, compounded and paid semiannually each June 30 and December 31,
payable, at our option, either in cash or in our common stock at 90% of the
average closing bid price of the stock for the five trading days prior to the
dividend due date.
47
<PAGE> 50
Holders of Series E preferred stock are entitled to receive a 6% annual
dividend, compounded and paid monthly in shares of Series E preferred stock
valued at 85% of the closing price of our common stock on the dividend payment
date.
Conversion Rate. At any time, holders of shares of any series of our
preferred stock may convert all or a portion of those shares into a number of
shares of common stock computed by multiplying the number of shares to be
converted by the purchase price of those shares, and dividing the result by the
conversion price then in effect.
The conversion price for the Series D and Series E preferred stock is
initially the purchase price paid for that stock (so that these series of
preferred stock initially converts into common stock on a 1-to-1 basis), as may
be adjusted from time to time to account for any stock splits, stock dividends,
recapitalizations, mergers, asset sales or similar events.
The conversion price for the Series C preferred stock is $6.9815625 (so
that one share of Series C preferred stock initially converts into 1.2121 shares
of common stock), as may be adjusted from time to time to account for any stock
splits, stock dividends, recapitalizations, mergers, asset sales or similar
events.
Liquidation. Upon a change in control, liquidation, dissolution or
winding up of our affairs, each holder of shares of any series of our preferred
stock will be entitled, on an equal basis with all other holders of our
preferred stock, to a liquidation preference prior in right to any holders of
common stock. The liquidation preference equals the amount paid for the
preferred stock.
Redemption. Within 60 days after June 29, 2005, the seventh anniversary
of the issuance of the Series D preferred stock, we may, at our sole option,
redeem all outstanding shares of Series D preferred stock not previously
converted into common stock. The redemption price is initially $6.875 per share,
as adjust to reflect any subdivisions (by stock split, stock dividend or
otherwise) or combinations or consolidations of the Series D preferred stock
since its issuance, plus all declared but unpaid dividends. The redemption price
is payable in cash in equal quarterly installments over a one-year period.
Voting. Holders of shares of any series of our preferred stock are
entitled to vote on all matters submitted to stockholders for a vote, voting
together with the holders of our common stock as a single class. Holders of
Series C or Series D preferred stock are entitled to one vote per share of
preferred stock held. Holders of Series E preferred stock are entitled to one
vote for each share of common stock into which the preferred stock they hold is
convertible.
Each series of preferred stock is entitled to vote as a separate class on
the creation of any new series of preferred stock or the issuance of additional
shares of capital stock ranking senior or equal to that series of preferred
stock.
WARRANTS
As of the date of this prospectus, we had issued warrants to purchase an
aggregate of 3,193,785 shares of common stock (including 875,832 warrant shares
registered under this prospectus) at a weighted average exercise price of $ 6.83
per share, all of which are currently exercisable. These warrants expire at
various times between November 2000 and October 2007.
OPTIONS
See "Management -- Stock Plans" for a discussion of our outstanding
options.
TRANSFER AGENT AND REGISTRAR
Boston EquiServe is the transfer agent and registrar for the common
stock.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Under Section 203, certain "business
combinations" between a Delaware corporation whose stock generally is publicly
traded or held of record by more than 2,000 stockholders and an "interested
stockholder" are prohibited for a three-year period following the date that such
a stockholder became an interested stockholder, unless (i) the corporation has
elected in its original certificate of incorporation not to be governed by
Section 203; (ii) the business combination was approved by the Board of
Directors of the corporation before the other party to the business combination
became an interested stockholder, (iii) upon consummation of the transaction
that made it an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the
48
<PAGE> 51
commencement of the transaction (excluding voting stock owned by directors who
are also officers or held in employee benefit plans in which the employees do
not have a confidential right to tender or vote stock held by the plan); or (iv)
the business combination was approved by the Board of Directors of the
corporation and ratified by two-thirds of the voting stock which the interested
stockholder did not own. The three-year prohibition also does not apply to
certain business combinations proposed by an interested stockholder following
the announcement or notification of certain extraordinary transactions involving
the corporation and a person who had not been an interested stockholder during
the previous three years or who became an interested stockholder with the
approval of the majority of the corporation's directors. The term "business
combination" is defined generally to include mergers or consolidations between a
Delaware corporation and an interested stockholder, transactions with an
interested stockholder involving the assets or stock of the corporation or its
majority-owned subsidiaries and transactions which increase an interested
stockholder's percentage ownership of stock. The term "interested stockholder"
is defined generally as a stockholder who, together with affiliates and
associates, owns (or, within three years prior, did own) 15% or more of a
Delaware corporation's voting stock. Section 203 could prohibit or delay a
merger, takeover or other change in control of the Company and therefore could
discourage attempts to acquire the Company.
49
<PAGE> 52
SELLING STOCKHOLDERS
The shares offered under this prospectus are being sold for the account
of the Selling Stockholders named in the following table. The table also
contains information regarding the Selling Stockholder's beneficial ownership of
shares of our common stock prior to the offering, and as adjusted to give effect
to the sale of the shares.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP BENEFICIAL OWNERSHIP
PRIOR TO OFFERING AFTER OFFERING
------------------------------ --------------------------
NUMBER
NUMBER PERCENT OF SHARES NUMBER PERCENT
NAME OF SHARES OF CLASS TO BE SOLD OF SHARES OF CLASS
--------------------------------------- -------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C> <C>
Hambrecht & Quist Guaranty Finance
LLC.................................. 1,190,456(1) 24.5% 1,190,456(2) -- --
BH Capital Investments, L.P............ 56,300(3) 1.1% 56,300(4) -- --
Excalibur.............................. 56,300(3) 1.1% 56,300(4) -- --
OTHER SELLING STOCKHOLDERS:
Farzin Arsanjani (5).............. 222,125 5.1% 209,823 12,302 *
Lee Backus........................ 17,000 * 17,000 -- --
Bridgewater Partners.............. 41,849 * 2,450 -- --
The Buckingham Research Group..... 51,000 1.0% 51,000 -- --
Cannmont Investments.............. 16,737 * 16,737 -- --
Cardinal Capital.................. 78,820 1.6% 78,820 -- --
James Cooper (6).................. 84,000 1.7% 35,000 -- --
CSL Associates.................... 41,849 * 41,849 -- --
William Dioguardi................. 13,796 * 13,796 -- --
EDN Equities...................... 125,551 2.3% 125,551 -- --
Robert Keith Fetter............... 25,000 * 25,000 -- --
Friedman Billings Ramsey (7)...... 36,500 * 36,500 -- --
Austin Furst...................... 353,846 7.1% 179,848 173,998 3.6%
David M. Goldsmith................ 85,106 1.8% 85,106 -- --
Terry Hambel...................... 33,000 * 17,000 -- --
Thomas Johnson.................... 33,000 * 28,000 -- --
Kamyar Kaviani (8)................ 311,021 6.4% 298,962 12,059 *
David B. Keidan................... 51,000 1.0% 51,000 -- --
Georgia Keidan.................... 26,000 * 26,000 -- --
Donald Kendall.................... 20,923 * 20,923 -- --
Manny Korman...................... 51,063 1.0% 51,063 -- --
Steven Kroll...................... 10,000 * 10,000 -- --
Laurence C. Leeds................. 17,000 * 17,000 -- --
Gregg Levin....................... 5,000 * 5,000 -- --
Eli Levitin....................... 9,346 * 9,346 -- --
Dana Lieber....................... 7,841 * 3,545 4,296 *
Irwin Lieber...................... 1,148,349 24.4% 31,951 1,116,398 23.7%
Jonathan Lieber................... 1,079,387 23.2% 2,954 1,076,433 23.2%
Seth Lieber....................... 1,082,199 23.3% 2,954 1,079,245 23.3%
Stephen Maguire................... 14,000 * 14,000 -- --
Martin Maliska.................... 34,000 * 34,000 -- --
Mark McGowan...................... 5,000 * 5,000 -- --
John P. McNiff.................... 41,849 * 6,250 -- --
P.A.W. Offshore Fund, Ltd......... 41,849 * 41,849 -- --
Errol Rudman...................... 3,539 * 1,600 1,939 *
Rudman Partners................... 22,601 * 10,217 12,384 *
Sand Hill Capital, LLC............ 257,000 5.1% 257,000 -- --
Seneca Ventures................... 13,069 * 5,908 7,161 *
South Ferry Building Co........... 95,252 1.9% 95,252 -- --
Marc Tesio........................ 33,780 * 33,780 -- --
Aaron Wolfson..................... 18,696 * 5,909 12,787 *
Morris Wolfson.................... 9,346 * 2,954 6,392 *
Wolfson Equities.................. 265,766 5.1% 265,766 -- --
Woodland Partners................. 74,571 1.5% 34,523 40,048 *
Woodland Venture Fund............. 13,069 * 5,908 7,161 *
103336 Canada, Inc................ 16,737 * 16,737 -- --
--------- ---------
Subtotal for Other Selling
Stockholders.............. 2,330,831(9)
Total........................ 3,633,887
========= =========
</TABLE>
----------
(*) Less than one percent.
(1) Consists of 158,632 shares of common stock issuable upon exercise
of the warrant issued to H&QGF and up to 1,031,824 remaining
shares of common stock issued or issuable to H&QGF upon conversion
of preferred stock, both in connection with the equity line of
credit agreement.
50
<PAGE> 53
(2) Assumes that all shares acquired pursuant to the equity line of
credit agreement and the warrant issued to H&QGF in connection
with the agreement are sold pursuant to this prospectus. The
actual number of shares to be issued to H&QGF in connection with
the equity line agreement will depend upon the market price of our
common stock each time we draw down on such line.
(3) Consists of shares of common stock issuable upon exercise of the
warrant issued to the stockholder in connection with the
stockholder's purchase of $1.25 million principal amount of our 9%
Secured Subordinated Convertible Debentures due December 2000. The
entire amount of principal and accrued interest under these
debentures was converted into 511,433 shares of our common stock,
all of which have been previously sold as part of this
registration.
(4) Assumes that all shares of common stock acquired upon exercise of
the warrant issued in connection with the debentures are sold
pursuant to this prospectus.
(5) Mr. Arsanjani, a former VCampus employee, was an affiliate of HTR,
Inc., a company we acquired in October 1997. See "Certain
Transactions."
(6) Mr. Cooper, a former VCampus employee, was an affiliate of Cooper
& Associates, Inc., a company we acquired in April 1997. See
"Certain Transactions."
(7) Friedman Billings & Ramsey was the lead underwriter in our
November 1996 initial public offering.
(8) Mr. Kaviani, a former VCampus executive officer and current member
of our Board of Directors, was an affiliate of HTR, Inc., a
company we acquired in October 1997. See "Certain Transactions."
(9) Includes 875,832 shares issuable upon exercise of warrants and
268,393 shares issuable upon conversion of preferred stock.
Except as set forth above, no selling stockholder has had any material
relationship with the Company during the last three years.
PLAN OF DISTRIBUTION
This prospectus covers the proposed resale of up to an estimated
3,633,887 shares of our common stock by the Selling Stockholders, including
H&QGF. There is no over allotment option and no shares will be sold by us. The
Selling Stockholders may offer the shares at various times in one or more of the
following transactions:
- on the Nasdaq SmallCap Market;
- in the over-the-counter market;
- in transactions other than market transactions;
- in connection with short sales of VCampus shares;
- by pledge to secure debts or other obligations;
- in connection with the writing of non-traded and exchange-traded call
options, in hedge transactions and in settlement of other
transactions in standardized or over-the-counter options;
- purchases by a broker-dealer as principal and resale by the
broker-dealer for its account; or
- in a combination of any of the above.
The Selling Stockholders may sell shares at market prices then
prevailing, at prices related to prevailing market prices, at negotiated prices
or at fixed prices.
The Selling Stockholders may use broker-dealers to sell shares. If this
happens, broker-dealers will either receive discounts or commissions from the
Selling Stockholders, or they will receive commissions from purchasers of shares
for whom they have acted as
51
<PAGE> 54
agents. Selling Stockholders (other than H&QGF) may be deemed to be underwriters
with respect to the shares sold by them, and H&QGF is an underwriter with
respect to any shares sold by it. Broker-dealers who act in connection with the
sale of the common stock may also be deemed to be underwriters. Profits on any
resale of the common stock as a principal by these broker-dealers, and any
commissions received by the broker-dealers, may be deemed underwriting discounts
and commissions under the Securities Act of 1933.
Pursuant to our equity line agreement with H&QGF, as amended, beginning
on the date the post-effective amendment to the registration statement, of which
this prospectus forms a part, is declared effective by the SEC and through
December 31, 2000, subject to the conditions described under "The Equity Line of
Credit Agreement" section of this prospectus, we may from time to time, in our
sole discretion, sell to H&QGF up to an additional $2.0 million of shares of our
Series E preferred stock. Through November 15, 2000, we have sold to H&QGF $5.0
million of shares of our Series E preferred stock pursuant to the equity line.
These preferred shares are immediately convertible into our common stock on a
share for share basis. Through November 15, 2000, H&QGF had converted 709,544
shares of preferred stock into an equal number of shares of our common stock,
all of which H&QGF has sold pursuant to this registration, leaving a total of up
to 1,031,824 shares of common stock (and up to 158,632 additional shares upon
exercise of a warrant issued under the equity line agreement) available for
resale under this prospectus. Other than the equity line agreement, we do not
have any material relationship with H&QGF or H&Q.
H&QGF has advised us that Brean Murray & Co., Inc. has agreed to act as a
selling agent for H&QGF for the resale of all shares H&QGF may acquire under the
equity line agreement. Brean Murray & Co., Inc. is not affiliated with H&QGF or
the Company. No volume limitations will be placed on sales and either party will
be free to terminate the arrangement at any time. As of the date of this
prospectus, we do not know of any arrangements of the other Selling Stockholders
to sell the shares, nor do we know which brokerage firms, if any, they may
select to sell the shares.
The price at which we issue preferred stock to H&QGF is 85% of the lower
of (1) the closing market price of our common stock on the date of issuance or
(2) the average of the lowest intra-day prices of our common stock over the
five-day period ending on the date of issuance. We may sell as much as $500,000
in preferred stock at any time, with the total amount sold not to exceed the
remaining $2.0 million of the total of $7.0 million, except that the number of
shares of preferred stock we can sell to H&QGF is further limited by the
requirement that H&QGF beneficially hold no more than 9.9% of our outstanding
stock at any given time. Assuming the remaining $2.0 million available under the
equity line were drawn-down at a conversion rate of approximately $2.13 (which
equals 85% of the closing market price of $2.50 per share on October 20, 2000)
and all such shares were resold by H&QGF at that market price, compensation
would be as follows:
- Discount to H&QGF, $352,941; and
- The value of H&QGF's additional warrant to purchase 15,000 shares of
common stock at $1.9375 per share (the closing price per share for
our common stock on the date of NASD approval).
No underwriting commissions or finder's fees have been or will be paid us.
The following table sets forth the other direct costs and expenses in
connection with the issuance and distribution of the securities previously
registered. Except as described below, we will bear all expenses incurred in
connection with the sale of the common stock previously registered.
<TABLE>
<S> <C>
SEC registration fee..................... $ 9,140
NASD filing fee.......................... 3,788
Printing fees and expenses*.............. 15,000
Legal fees and expenses*................. 110,000
Blue sky expenses and filing fees*....... 25,000
Accounting fees and expenses*............ 20,000
Premium on liability policy for H&QGF.... 10,938
Miscellaneous............................ 5,000
----------
Total.......................... $ 198,866
==========
</TABLE>
----------
* Estimate
In addition, under the equity line agreement we have agreed to reimburse
H&QGF for all their reasonable out-of-pocket expenses, including their legal
expenses, incurred in the preparation, negotiation, execution and delivery of
the equity line agreement and related documents and their participation in the
preparation of this registration statement. In addition, we have agreed to pay
H&QGF: (1) a
52
<PAGE> 55
quarterly fee equal to 0.002 times the maximum aggregate consideration still
available under the equity line as of such date; and (2) a pro rated fee equal
to 0.002 times the unused commitment for the period from the end of the last
quarter to the termination date for the commitment, December 31, 2000.
H&QGF and the other Selling Stockholders will pay all broker-dealer
commissions and related selling expenses associated with the sale of the common
stock. The common stock offered hereby is being registered pursuant to our
contractual obligations, and we have agreed to pay the costs of registering the
shares, including the fees outlined above. Under the equity line agreement, we
have also agreed to indemnify H&QGF with respect to the shares offered hereby
against certain liabilities, including certain liabilities under the Securities
Act.
To the extent required under the Securities Act, we will disclose in a
prospectus supplement or, if necessary, an amendment to the registration
statement:
- the name of any additional broker-dealers;
- the number of shares of common stock involved;
- the price at which such common stock is to be sold;
- the commissions paid or discounts or concessions allowed to such
broker-dealers, where applicable; and
- other facts material to the transaction.
In connection with the offering, persons participating in the offering
may purchase and sell shares of common stock on the open market. These
transactions may include short sales, stabilizing transactions in accordance
with Rule 104 of Regulation M under the Exchange Act and purchases to cover
positions created by short sales. H&QGF has advised us that it does not intend
to engage in any short sale or stabilization transactions. Short sales involve
the sale by an underwriter of a greater number of shares than they are required
to purchase in the offering which creates a short position. Stabilizing
transactions consist of certain bids or purchases made for the purpose of
preventing or limiting a decline in the market price of the common stock.
These activities, if taken by the underwriters, may stabilize, maintain
or otherwise affect the market price of the common stock. As a result, the price
of the common stock may be higher than the price that otherwise might exist in
the open market. If these activities are commenced, they may be discontinued by
the underwriters at any time. These transactions may be effected on the Nasdaq
SmallCap Market, in the over-the-counter market or otherwise.
Subject to Regulation M and the rules and regulations adopted thereunder,
persons participating in this offering could engage in passive market making
transactions in the common stock on the Nasdaq SmallCap Market. Passive market
making consists of displaying bids on the Nasdaq SmallCap Market limited by the
prices of independent market makers and affecting purchases limited by such
prices and in response to order flow. Rule 103 of Regulation M promulgated by
the SEC limits the amount of net purchases that each passive market maker may
make and the displayed size of each bid. Passive market making, if undertaken by
any of the participants in the offering, may stabilize the market price of the
common stock at a level above that which might otherwise prevail in the open
market and, if commenced, may be discontinued at any time. H&QGF has advised us
that it does not intend to engage in passive market making transactions in
connection with the offering.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for the Company by Wyrick Robbins Yates & Ponton LLP, Raleigh, North
Carolina. As of the date hereof, partners of that firm beneficially owned
approximately 2,839 shares of the Company's Series D Convertible Preferred
Stock.
EXPERTS
The consolidated financial statements of VCampus Corporation as of
December 31, 1999 and 1998, and for the years ended December 31, 1999, 1998 and
1997, appearing in this Prospectus and Registration Statement have been audited
by Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement and have been so
included in reliance upon such report given upon the authority of such firm as
experts in accounting and auditing.
53
<PAGE> 56
VCAMPUS CORPORATION
(FORMERLY KNOWN AS UOL PUBLISHING, INC.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Ernst & Young LLP, Independent Auditors............... F-2
Consolidated Balance Sheets as of December 31, 1998 and
1999.......................................................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998 and 1999.............................. F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1997, 1998 and 1999.......... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998 and 1999.............................. F-6
Notes to Consolidated Financial Statements...................... F-7
Unaudited Consolidated Statements of Operations for the
Three Months and Nine Months Ended September 30, 1999 and
2000.......................................................... F-22
Consolidated Balance Sheets as of December 31, 1999 and September
30, 2000 (unaudited)............................................ F-23
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 2000...................... F-24
Notes to Unaudited Consolidated Financial Statements............ F-25
</TABLE>
F-1
<PAGE> 57
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
VCampus Corporation
We have audited the accompanying consolidated balance sheets of VCampus
Corporation (formerly known as UOL Publishing, Inc.) as of December 31, 1998 and
1999 and the related consolidated statements of operations, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of VCampus
Corporation (formerly known as UOL Publishing, Inc.) at December 31, 1998 and
1999, and the consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
McLean, Virginia
February 24, 2000, except for note 18
as to which the date is March 23, 2000
F-2
<PAGE> 58
VCAMPUS CORPORATION (FORMERLY UOL PUBLISHING, INC.)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
PRO FORMA AS OF
ASSETS DECEMBER 31, DECEMBER 31,
------------ 1999
1998 1999 (UNAUDITED)
---------------- ---------------- -----------------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................................ $ 336,194 $ 204,455 $ 5,317,691
Accounts receivable, less allowance of $567,000 and $142,000
at December 31, 1998 and 1999, respectively........................... 3,087,268 1,349,332 1,349,332
Loans receivable from related parties.................................... 143,515 124,182 124,182
Loans receivable -- current.............................................. 232,375 1,213,717 1,213,717
Prepaid expenses and other current assets................................ 172,926 599,645 315,009
-------------- -------------- --------------
Total current assets....................................................... 3,972,278 3,491,331 8,319,931
Property and equipment, net................................................ 2,436,534 1,464,483 1,464,483
Capitalized software costs and courseware development costs,
net...................................................................... 2,130,665 1,543,520 1,543,520
Acquired online publishing rights, net..................................... 407,552 169,624 169,624
Loans receivable -- less current portion................................... 380,234 150,226 150,226
Other assets............................................................... 194,644 180,988 180,988
Other intangible assets, net............................................... 2,508,664 1,913,259 1,913,259
Goodwill, net.............................................................. 2,840,460 1,754,682 1,754,682
-------------- -------------- --------------
Total assets..................................................... $ 14,871,031 $ 10,668,113 $ 15,496,713
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses.................................... $ 4,617,418 $ 5,492,116 $ 5,601,404
Notes payable -- current portion......................................... 3,075,139 1,877,509 535,624
Deferred revenues........................................................ 911,072 1,276,283 1,276,283
-------------- -------------- --------------
Total current liabilities........................................ 8,603,629 8,645,908 7,413,311
Long-term liabilities:
Deferred revenues -- less current portion................................ 109,834 --- ---
Notes payable -- less current portion.................................... 337,235 --- ---
-------------- -------------- --------------
Total liabilities................................................ 9,050,698 8,645,908 7,413,311
-------------- -------------- --------------
Stockholders' equity:
Series C convertible Preferred Stock, $0.01 par value per share;
aggregate liquidation preference of $7,910,172; 1,000,000
shares authorized; 626,293 and 623,339 shares issued and
outstanding at December 31, 1998 and 1999, respectively............... 6,263 6,233 6,233
Series D convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $8,855,303;
1,200,000 shares authorized; 1,082,625 and 1,073,370 shares issued
and outstanding at December 31, 1998 and 1999, respectively........... 10,826 10,734 10,734
Series E convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $860,370
3,000,000 shares authorized; no shares issued and outstanding at
December 31,
1998, 214,928 shares issued and outstanding at December 31, 1999...... --- 2,149 3,327
Common Stock, $0.01 par value per share; 36,000,000 shares
Authorized; 3,990,046 and 5,684,110 shares issued and
Outstanding at December 31, 1998 and 1999, respectively............... 39,900 56,840 73,027
Additional paid-in capital............................................... 53,460,264 58,578,078 64,798,381
Accumulated deficit...................................................... (47,696,920) (56,631,829) (56,808,300)
-------------- -------------- --------------
Total stockholders' equity....................................... 5,820,333 2,022,205 8,083,402
-------------- -------------- --------------
Total liabilities and stockholders' equity....................... $ 14,871,031 $ 10,668,113 $ 15,496,713
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE> 59
VCAMPUS CORPORATION (FORMERLY UOL PUBLISHING, INC.)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
---------------- ---------------- ----------
<S> <C> <C> <C>
Revenues:
Online tuition revenues........................ $ 1,662,058 $ 1,548,950 $ 3,834,617
Virtual campus software revenues............... 2,718,000 112,253 216,341
Online development and other revenues.......... 1,631,233 925,751 977,295
Product sales revenues......................... 2,330,029 3,347,777 1,222,389
Other service revenues......................... 717,546 2,444,719 305,046
Instructor-led training revenues............... 1,085,634 6,303,662 4,991,751
--------------- --------------- ---------------
Net revenues..................................... 10,144,500 14,683,112 11,547,439
Costs and expenses:
Cost of revenues............................... 1,849,287 8,868,351 5,748,745
Sales and marketing............................ 4,438,717 5,304,394 4,285,989
Product development and operations............. 4,925,956 6,102,265 2,241,283
General and administrative..................... 2,387,172 3,782,844 2,632,937
Depreciation and amortization.................. 1,011,587 3,346,744 2,955,997
Acquired in-process research, development and
Content..................................... 11,100,000 -- --
Compensation expense in connection with the
acquisition of HTR, Inc..................... 690,000 -- 1,089,240
Reorganization and other non-recurring
Charges..................................... 340,344 5,585,214 360,000
-------------- -------------- --------------
Total costs and expenses......................... 26,743,063 32,989,812 19,314,191
-------------- -------------- --------------
Loss from operations............................. (16,598,563) (18,306,700) (7,766,752)
Other income (expense):
Gain (loss) on sale of subsidiaries............ -- (907,426) 1,446
Other income (expense)......................... 125,000 -- --
Interest income (expense)...................... 328,800 (597,139) (721,423)
-------------- -------------- --------------
Net loss......................................... $ (16,144,763) $ (19,811,265) $ (8,486,729)
============== ============== ==============
Dividends to preferred stockholders.............. -- (357,890) (448,180)
-------------- -------------- --------------
Net loss attributable to common stockholders..... $ (16,144,763) $ (20,169,155) $ (8,934,909)
============== ============== ==============
Net loss per share............................... $ (4.91) $ (5.27) $ (1.91)
============== ============== ==============
Net loss per share -- assuming dilution.......... $ (4.91) $ (5.27) $ (1.91)
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE> 60
VCAMPUS CORPORATION (FORMERLY UOL PUBLISHING, INC.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES C SERIES D
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK
--------------- ---------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ............................ -- -- -- --
Issuance of Common Stock in connection with the HTR
acquisition .......................................... -- -- -- --
Issuance of stock options and warrants in connection
with the HTR acquisition ............................. -- -- -- --
Issuance of Common Stock in connection with
exercise of options and exercise of warrants ......... -- -- -- --
Issuance of compensatory stock options and warrants .... -- -- -- --
Net loss ............................................... -- -- -- --
Balance at December 31, 1997 ............................ -- -- -- --
Issuance of Series C convertible Preferred Stock ....... 626,293 $ 6,263 -- --
Issuance of Series D convertible Preferred Stock ....... -- -- 1,082,625 $ 10,826
Issuance of Common Stock primarily in connection
with conversion of debt to equity .................... -- -- -- --
Issuance of Common Stock for payment of Series D
convertible Preferred Stock dividends ................ -- -- -- --
Issuance of Common Stock in connection with
exercise of options and exercise of warrants ......... -- -- -- --
Compensatory stock options and warrants ................ -- -- -- --
Net loss ............................................... -- -- -- --
Dividends on convertible Preferred Stock ............... -- -- -- --
Balance at December 31, 1998 ............................ 626,293 6,263 1,082,625 10,826
Issuance of Series E convertible Preferred Stock ........ -- -- -- --
Issuance of Series E convertible Preferred Stock for
payment of Series E dividends ...................... -- -- -- --
Issuance of Common Stock ................................ -- -- -- --
Conversion of Preferred Stock to Common Stock .......... (2,954) (30) (9,255) (92)
Issuance of Common Stock primarily in connection
with conversion of debt to equity .................... -- -- -- --
Issuance of Common Stock for payment of Series D
Convertible Preferred Stock dividends ............... -- -- -- --
Issuance of Common Stock in connection with exercise
of options and exercise of warrants ................. -- -- -- --
Compensatory stock options and warrants ................. -- -- -- --
Net loss ................................................ -- -- -- --
Dividends on convertible preferred stock ................ -- -- -- --
Balance at December 31, 1999 ............................ 623,339 $ 6,233 1,073,370 $ 10,734
<CAPTION>
SERIES E
CONVERTIBLE
PREFERRED STOCK COMMON STOCK
--------------- ------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 ............................ -- -- 3,186,167 $31,861
Issuance of Common Stock in connection with the HTR
acquisition .......................................... -- -- 585,940 5,860
Issuance of stock options and warrants in connection
with the HTR acquisition ............................. -- -- -- --
Issuance of Common Stock in connection with
exercise of options and exercise of warrants ......... -- -- 13,103 131
Issuance of compensatory stock options and warrants .... -- -- -- --
Net loss ............................................... -- -- -- --
Balance at December 31, 1997 ............................ -- -- 3,785,210 37,852
Issuance of Series C convertible Preferred Stock ....... -- -- -- --
Issuance of Series D convertible Preferred Stock ....... -- -- -- --
Issuance of Common Stock primarily in connection
with conversion of debt to equity .................... -- -- 138,039 1,380
Issuance of Common Stock for payment of Series D
convertible Preferred Stock dividends ................ -- -- 28,902 289
Issuance of Common Stock in connection with
exercise of options and exercise of warrants ......... -- -- 37,895 379
Compensatory stock options and warrants ................ -- -- -- --
Net loss ............................................... -- -- -- --
Dividends on convertible Preferred Stock ............... -- -- -- --
Balance at December 31, 1998 ............................ -- $ -- 3,990,046 39,900
Issuance of Series E convertible Preferred Stock ........ 379,437 3,794 -- --
Issuance of Series E convertible Preferred Stock for
payment of Series E dividends ...................... 532 5 -- --
Issuance of Common Stock -- -- 850,567 8,506
Conversion of Preferred Stock to Common Stock .......... (165,041) (1,650) 177,876 1,779
Issuance of Common Stock primarily in connection
with conversion of debt to equity .................... -- -- 540,292 5,402
Issuance of Common Stock for payment of Series D
Convertible Preferred Stock dividends ............... -- -- 79,395 794
Issuance of Common Stock in connection with exercise
of options and exercise of warrants ................. -- -- 45,934 459
Compensatory stock options and warrants ................. -- -- -- --
Net loss ................................................ -- -- -- --
Dividends on convertible preferred stock ................ -- -- -- --
Balance at December 31, 1999 ............................ 214,928 $2,149 5,684,110 $56,840
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
------- ------- ------
<S> <C> <C> <C>
Balance at December 31, 1996 ............................ $27,553,128 $(11,383,002) $ 16,201,987
Issuance of Common Stock in connection with the HTR
acquisition .......................................... 12,591,850 -- 12,597,710
Issuance of stock options and warrants in connection
with the HTR acquisition ............................. 591,118 -- 591,118
Issuance of Common Stock in connection with
exercise of options and exercise of warrants ......... 15,250 -- 15,381
Issuance of compensatory stock options and warrants .... 149,850 -- 149,850
Net loss ............................................... -- (16,144,763) (16,144,763)
Balance at December 31, 1997 ............................ 40,901,196 (27,527,765) 13,411,283
Issuance of Series C convertible Preferred Stock ....... 5,445,553 -- 5,451,816
Issuance of Series D convertible Preferred Stock ....... 5,859,185 -- 5,870,011
Issuance of Common Stock primarily in connection
with conversion of debt to equity .................... 806,166 -- 807,546
Issuance of Common Stock for payment of Series D
convertible Preferred Stock dividends ................ 150,585 -- 150,874
Issuance of Common Stock in connection with
exercise of options and exercise of warrants ......... 88,279 -- 88,658
Compensatory stock options and warrants ................ 209,300 -- 209,300
Net loss ............................................... -- (19,811,265) (19,811,265)
Dividends on convertible Preferred Stock ............... -- (357,890) (357,890)
Balance at December 31, 1998 ............................ 53,460,264 (47,696,920) 5,820,333
Issuance of Series E convertible Preferred Stock ........ 1,006,795 -- 1,010,589
Issuance of Series E convertible Preferred Stock for
payment of Series E dividends ...................... (7) -- (2)
Issuance of Common Stock ................................ 2,059,849 -- 2,068,355
Conversion of Preferred Stock to Common Stock .......... -- -- 7
Issuance of Common Stock primarily in connection
with conversion of debt to equity .................... 945,972 -- 951,374
Issuance of Common Stock for payment of Series D
Convertible Preferred Stock dividends ............... 295,757 -- 296,551
Issuance of Common Stock in connection with exercise
of options and exercise of warrants ................. 78,229 -- 78,688
Compensatory stock options and warrants ................. 731,219 -- 731,219
Net loss ................................................ -- (8,486,729) (8,486,729)
Dividends on convertible preferred stock ................ -- (448,180) (448,180)
Balance at December 31, 1999 ............................ $58,578,078 $(56,631,829) $ 2,022,205
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE> 61
VCAMPUS CORPORATION (FORMERLY UOL PUBLISHING, INC.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
---------------- ---------------- ----------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss....................................................... $ (16,144,763) $ (19,811,265) $ (8,486,729)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation................................................. 442,151 1,058,950 1,033,354
Amortization................................................. 663,663 2,287,796 1,922,643
Loss (gain) on sale of subsidiaries.......................... -- 907,426 (1,446)
Loss on debt restructuring................................... -- 145,208 166,135
Net write-off of acquired online publishing rights........... -- 266,000 95,000
Net write-off of capitalized software and courseware
Development costs.......................................... -- 428,284 --
Revenues in connection with non-monetary transactions........ (795,000) -- --
Acquired in-process research, development and content........ 11,100,000 -- --
Non-cash stock option and stock warrant expense.............. 149,850 -- 349,201
Write-off of intangible assets............................... 237,344 3,669,598 --
Write-off of fixed assets.................................... -- -- 16,134
Interest expense related to notes payable.................... 66,130 -- --
Increase in allowance for doubtful accounts.................. -- (162,693) (650,505)
Changes in operating assets and liabilities:
Accounts receivable........................................ (2,345,382) 1,425,813 1,893,441
Prepaid expenses and other current assets.................. (103,894) 307,112 (384,662)
Other assets............................................... (168,042) 49,814 13,656
Accounts payable and accrued expenses...................... 926,450 (596,041) 1,107,878
Deferred revenues.......................................... 195,684 523,516 255,377
-------------- -------------- --------------
Net cash used in operating activities.......................... (5,775,809) (9,500,482) (2,670,523)
INVESTING ACTIVITIES
Purchases of property and equipment............................ (1,412,537) (700,383) (77,643)
Acquired online publishing rights.............................. (60,000) -- --
Capitalized courseware development costs....................... (1,990,494) (992,163) (354,735)
Acquisitions of businesses, net of cash acquired............... (3,106,294) -- --
Additions to intangible assets................................. (330,798) (355,809) ---
Proceeds from loans receivable from related parties............ -- -- 27,333
Advances under loans receivable from related parties........... (32,072) (9,999) (8,000)
Proceeds from sale of subsidiaries............................. -- 337,500 75,000
Proceeds from loans receivable................................. -- 325,000 277,531
Advances under loans receivable................................ -- (2,939) ---
-------------- -------------- --------------
Net cash used in investing activities.......................... (6,932,195) (1,398,793) (60,514)
FINANCING ACTIVITIES
Proceeds from issuance of Common Stock......................... 15,381 123,466 2,148,001
Proceeds from the issuance of Series C convertible Preferred
Stock........................................................ -- 5,244,824 --
Proceeds from the issuance of Series D convertible Preferred
Stock........................................................ -- 5,115,545 --
Proceeds from the issuance of Series E convertible Preferred
Stock........................................................ -- -- 859,000
Proceeds from notes payable.................................... 3,700,000 4,047,931 2,521,561
Repayments of notes payable.................................... (3,775,917) (6,001,787) (2,929,264)
-------------- -------------- --------------
Net cash provided by (used in) financing activities............ (60,536) 8,529,979 2,599,298
Net decrease in cash and cash equivalents...................... (12,768,540) (2,369,296) (131,739)
Cash and cash equivalents at the beginning of the year......... 15,474,030 2,705,490 336,194
-------------- -------------- --------------
Cash and cash equivalents at the end of the year............... $ 2,705,490 $ 336,194 $ 204,455
============== ============== ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid.................................................. $ 125,000 $ 377,516 $ 445,000
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE> 62
VCAMPUS CORPORATION (FORMERLY UOL PUBLISHING, INC.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
VCampus Corporation (formerly known as UOL Publishing, Inc.) (the
"Company") was incorporated in Virginia in 1984 and reincorporated in Delaware
in 1985. The Company is a publisher of high quality, interactive and on-demand
courseware for the corporate training and education market. Through certain of
its subsidiaries, the Company also offers courseware through more traditional
media, including on-site and classroom training, and diskette and CD-ROM
formats.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of the consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Reclassification
Certain previously reported amounts have been reclassified to conform to
the Company's current presentation. Amortization of capitalized software and
acquired content costs previously included in "Cost of revenues," is now
presented under "Depreciation and amortization." In addition, certain customer
support and telecommunication costs previously included in "Costs of revenues"
are now presented under "Product development and operations."
Cash Equivalents
Cash equivalents, which are stated at cost, consist of highly liquid
investments with original maturities of three months or less.
Capitalized Software Costs
During 1997, 1998 and 1999, the Company capitalized certain software
development costs. Capitalization of software costs began upon the establishment
of technological feasibility, which management deemed to have occurred upon the
completion of a working model of the Company's virtual campus product
("VCampus(TM)"). The establishment of technological feasibility and the ongoing
assessment of recoverability of capitalized software costs requires considerable
judgment by management with respect to certain external factors, including, but
not limited to, technological feasibility, anticipated future gross revenues,
estimated economic life and changes in software and hardware technology.
Amortization of such costs is based on the greater of (1) the ratio of current
gross revenues to the sum of current and anticipated gross revenues, or (2) the
straight-line method over the remaining economic life of the VCampus. During
1998, the Company changed its estimate of the economic life of the VCampus(TM)
from five years to three years. This change in estimate was not material to the
net loss or net loss per share recorded by the Company for 1998. As with
estimates of this nature, it is possible that estimates of future gross
revenues, the remaining economic life of the products or both may be revised
again as a result of future events. During 1998, the Company wrote off
approximately $280,000 of software development costs for courses within certain
industry segments that the Company does not anticipate pursuing in the
short-term. The write off has been included in product development costs in the
1998 statement of operations.
Capitalized Courseware Development Costs
During 1997, the Company capitalized certain courseware development
costs. Capitalization of courseware development costs began upon the
establishment of technological feasibility, which management deemed to have
occurred upon the completion of a
F-7
<PAGE> 63
working model of the relevant courseware. The establishment of technological
feasibility and the ongoing assessment of recoverability of capitalized
courseware development costs requires considerable judgment by management with
respect to certain external factors, including, but not limited to,
technological feasibility, anticipated future gross revenues, estimated economic
life and changes in software and hardware technology. Amortization of such costs
is based on the greater of (1) the ratio of current gross revenues to the sum of
current and anticipated gross revenues, or (2) the straight-line method over the
remaining economic life of the product, typically two to three years. It is
possible that those estimates of future gross revenues, the remaining economic
life of the products or both may be reduced as a result of future events. During
1998, the Company wrote off approximately $150,000 of courseware development
costs for courses within certain industry segments that the Company does not
anticipate pursuing in the short-term or courses that have not shown meaningful
activity. The write-off has been included in product development costs in the
1998 statement of operations.
Acquired Online Publishing Rights
During 1997, the Company acquired online publishing rights to certain
courseware. Generally, the Company's acquisition of online publishing rights has
occurred in connection with non-monetary exchanges; see Note 2, "Non-Monetary
Transactions". At the time of licensing to the Company, this courseware was
generally established in CD-ROM, diskette or printed formats. The Company
capitalized the costs associated with acquiring this content and amortizes them
based on the greater of (1) the ratio of current gross revenues to the sum of
current and anticipated gross revenues, or (2) the straight-line method over the
remaining economic life of the product, typically two to three years.
Amortization begins when the course becomes available for sale online. It is
possible that those estimates of future gross revenues, the remaining economic
life of the products or both may be reduced as a result of future events. During
1998 and 1999, the Company wrote off approximately $270,000 and $95,000
respectively of acquired online publishing rights to courses belonging to
certain industry segments that the Company does not anticipate pursuing in the
short-term. The write-off has been included in product development costs in the
1998 and 1999 statements of operations.
Goodwill and Other Intangible Assets
Goodwill and other intangibles represent the unamortized excess of the
cost of acquiring subsidiary companies over the fair values of such companies'
net tangible assets at the dates of acquisition. Goodwill related to the
Company's acquisitions as described in Notes 6 and 7 are being amortized on a
straight-line basis over periods ranging from ten to twelve years. Other
intangibles, including contracts, content, trademarks, workforce, customer base
and others, are being amortized on a straight-line basis over periods ranging
from three to twelve years.
Impairment of Long-Lived Assets
At each balance sheet date, management determines whether any property
and equipment or any other assets have been impaired based on the criteria
established in Statement of Financial Accounting Standards ("SFAS") No. 121,
Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed of. During 1997, the Company wrote off approximately $250,000 of the
workforce asset, which resulted from the Teletutor acquisition (see Note 6).
During 1998, the Company wrote off approximately $280,000 in capitalized
software development costs, $150,0000 in capitalized courseware development
costs and approximately $270,000 in acquired online publishing rights. Also,
during 1998, the Company wrote off approximately $3,670,000 of goodwill recorded
in connection with the acquisition of HTR, Inc. ("HTR") as a result of its
decision to dispose of HTR's non online businesses as described in Note 7.
During 1999, the Company wrote off $95,000 in acquired online publishing rights.
Revenue Recognition
The Company derives its revenues from the following sources --
instructor-led training revenues, product sales revenues, other service
revenues, online tuition revenues, virtual campus software revenues, and
development and other revenues.
Revenues for instructor-led training and other services are recognized as
the services are delivered.
The Company recognizes product sales revenues, online tuition revenues
and virtual campus software revenues in accordance with Statement of Position
97-2, Software Revenue Recognition ("SOP 97-2"), as amended by Statement of
Position 98-4, Deferral of the Effective Date of a Provision of SOP 97-2 and
Statement of Position 98-9, Modification of SOP 97-2 "Software Revenue
Recognition" With Respect to Certain Transactions. The Company recognizes
revenues from product sales upon delivery of the product to the customer,
provided no significant obligations remain. The costs of remaining Company
obligations (which are insignificant) are accrued when the related revenues are
recognized. For online tuition fees, revenue is recognized at the time the
student has accessed
F-8
<PAGE> 64
the selected course and is contractually obligated to pay for the course or
ratably over the length of the courses (for academic partners). For prepaid
online tuition fees and VCampus(TM) software revenues, the Company recognizes
revenue ratably over the period during which customers are entitled to use the
courseware and the duration of the VCampus(TM) licenses, respectively.
During 1997, the Company recognized revenues from the sale of prepaid
online tuition fees and VCampus(TM) software systems at the time the courses or
systems were delivered to the customer or reseller, in accordance with Statement
of Position 91-1, Software Revenue Recognition.
Development and other revenues earned under courseware conversion
contracts are recognized using the percentage-of-completion method. For these
contracts, revenues are recognized based on the ratio that total costs incurred
to date bear to the total estimated costs of the contract. Provisions for losses
on contracts are made in the period in which they are determined.
In 1997 and 1998, no individual customer represented more than 10% of net
revenues. In 1999, one customer represented more than 10% of net revenues.
Stock-Based Compensation
In October 1995, the Financial Accounting Standards Board issued SFAS No.
123, Accounting for Stock-Based Compensation, ("SFAS No. 123"). SFAS No. 123
allows companies to account for stock-based compensation either under the
provisions of SFAS No. 123 or under the provisions of Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, ("APB No. 25"),
but requires pro forma disclosures in the footnotes to the consolidated
financial statements as if the measurement provisions of SFAS No. 123 had been
adopted. The Company accounts for its stock-based compensation in accordance
with the intrinsic value method of APB No. 25.
Concentration of Credit Risk
The Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
maintains reserves for credit losses, and such losses have been within
management's expectations. During 1998, the Company increased its allowance for
doubtful accounts to approximately $2,030,000 in order to reserve for certain
receivables for which collection had become doubtful. The Company subsequently
wrote off approximately $1,460,000 of the amount reserved. As such, the
allowance for doubtful accounts totaled approximately $570,000 as of December
31, 1998. During 1999, the Company increased its allowance for doubtful accounts
to approximately $824,000 in order to reserve for certain receivables for which
collection had become doubtful. The Company subsequently wrote off approximately
$682,000 of the amount reserved. As such, the allowance for doubtful accounts
totaled approximately $142,000 as of December 31, 1999.
Non-Monetary Transactions
During 1997, the Company entered into several transactions with third
parties whereby the third party exchanged a non-monetary asset (such as the
online publishing rights with respect to certain courseware content) as payment
(or partial payment) for the purchase of a VCampus software product as well as
courseware development services.
Royalties
The Company has a royalty arrangement with an entity that has provided
product development funding, which royalties become due and payable by the
Company upon the completion and sale of these products.
Royalties are also due and payable by the Company upon the sale of
certain courses for which the Company has acquired the online publishing rights.
In addition, the Company may be obligated to pay certain royalties related to
courses which a VCampus(TM) customer may have converted to an online format and
elected to distribute to all the Company's VCampus(TM)customers. Royalties
accrue at a rate of 10% to 70% of the tuition fees related to certain courses.
Royalties are classified as a cost of revenues and amounted to
approximately $315,000, $368,000 and $335,000 during the years ended December
31, 1997, 1998 and 1999, respectively.
Advertising Costs
F-9
<PAGE> 65
The Company expenses advertising costs as incurred. Advertising costs
amounted to approximately $149,000, $153,000 and $380,000 for the years ended
December 31, 1997, 1998, and 1999 respectively.
Income Taxes
The Company provides for income taxes in accordance with the liability
method.
Net Loss Per Share
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, Earnings per Share ("SFAS No. 128").
SFAS No. 128 replaced the calculation of primary and fully diluted earnings per
share with basic and diluted earnings per share. Unlike primary earnings per
share, basic earnings per share excludes any dilutive effects of options,
warrants and convertible securities. Diluted earnings per share is very similar
to the previously reported fully diluted earnings per share. All net loss per
share amounts for all periods have been presented, and where appropriate,
restated to conform to the SFAS No. 128 requirements.
Comprehensive Income
Effective January 1, 1998, the company adopted SFAS No. 130, Reporting of
Comprehensive Income ("SFAS No. 130"). SFAS No. 130 establishes standards for
the display of comprehensive income and its components in a full set of
financial statements. Comprehensive income includes all changes in equity during
a period except those resulting from the issuance of shares of stock and
distributions to shareholders. There were no differences between net loss and
comprehensive loss.
Segment Information
In June 1997, the Financial Accounting Standards Board issued SFAS No.
131, Disclosures about Segments of an Enterprise and Related Information ("SFAS
No. 131"). SFAS No. 131 changes the way public companies report segment
information in annual financial reports to stockholders. It also establishes
standards for related disclosures about products and services, geographic areas,
and major customers. Management believes the Company's operations compromise
only one segment and as such adoption of SFAS No. 131 has not impacted the
disclosures made in the Company's financial statements.
Supplemental Information of Non-Cash Investing and Financing Activities
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1997
-----------------
<S> <C>
Fair value of assets acquired & acquired in-process research
& development............................................. $ 27,232,695
Less: Cash paid............................................. 3,393,390
Notes payable issued........................................ 2,308,590
Stock issued................................................ 13,184,870
-------------
Liabilities assumed......................................... $ 8,345,845
=============
</TABLE>
F-10
<PAGE> 66
3. PROPERTY AND EQUIPMENT
Property and equipment, including leasehold improvements, are stated at
cost. Depreciation is calculated using the straight-line method over an
estimated useful life of three to seven years. Leasehold improvements are
amortized over the lesser of the related lease term or the useful life. Property
and equipment consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
-------------- -------------
<S> <C> <C>
Equipment...................... $ 2,634,111 $ 2,681,366
Computer software.............. 1,068,049 1,078,030
Leasehold improvements......... 88,357 84,940
Furniture and fixtures......... 396,708 394,884
------------- -------------
4,187,225 4,239,220
Less accumulated depreciation.. (1,750,691) (2,774,737)
------------- -------------
Total.......................... $ 2,436,534 $ 1,464,483
============= =============
</TABLE>
4. CAPITALIZED SOFTWARE AND COURSEWARE DEVELOPMENT COSTS
Capitalized software and courseware development costs consisted of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1998 1999
------------- ------------
<S> <C> <C>
Capitalized software costs................. $ 2,195,160 $ 2,529,503
Capitalized courseware development costs... 806,425 806,425
------------ ------------
3,001,585 3,335,928
Less accumulated amortization.............. (870,920) (1,792,408)
------------ ------------
Total...................................... $ 2,130,665 $ 1,543,520
============ ============
</TABLE>
During 1998, the Company wrote off approximately $280,000 of software
development costs and $150,000 of courseware development costs (see Note 2).
5. ACQUIRED ONLINE PUBLISHING RIGHTS
Acquired online rights consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Acquired online publishing rights. $ 505,000 $ 410,000
Less accumulated amortization..... (97,448) (240,376)
---------- ----------
Total............................. $ 407,552 $ 169,624
========== ==========
</TABLE>
In 1997, the Company acquired approximately $795,000 of the acquired
online publishing rights through non-monetary transactions (See Note 2).
During 1998 and 1999, the Company wrote off approximately $270,000 and
$95,000, respectively, of acquired online publishing rights (see Note 2).
6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets were comprised of:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Goodwill........................ $ 3,234,499 $ 2,265,340
Contracts....................... 200,000 --
Developed content............... 1,369,836 1,369,836
Work force...................... 407,080 393,580
Trademarks and names............ 969,444 969,444
Customer base................... 369,444 369,444
Other........................... 100,000 --
------------- -------------
6,650,303 5,367,644
Less accumulated amortization... (1,301,179) (1,699,703)
------------- -------------
$ 5,349,124 $ 3,667,941
============= =============
</TABLE>
F-11
<PAGE> 67
In December 1997, the Company's management, in accordance with its
impairment policy for long-lived assets, determined that the Teletutor employee
workforce asset had been impaired as of December 31, 1997 due to planned
workforce reductions, and as such, wrote off approximately $250,000 of the
carrying amount of the asset. This amount is included in reorganization and
non-recurring expenses in the 1997 statement of operations. In 1998, as a result
of the sale of Ivy Software, Inc. ("Ivy"), the Company wrote off approximately
$775,000 which was the remaining net unamortized goodwill balance that had
resulted from the acquisition of Ivy . In addition, during 1998, goodwill that
had resulted from the acquisition of Teletutor was reduced to zero and the
remaining intangible assets were reduced ratably by approximately $329,000 due
to purchase price adjustments. In December 1998, upon the sale of its consulting
line of business, the Company wrote off approximately $1,238,000 in goodwill and
workforce assets. In addition, in accordance with its impairment policy for
long-lived assets, the Company determined that goodwill that resulted from the
HTR acquisition which related to HTR's non-online businesses had been impaired
as of December 31, 1998. As a result, the Company wrote off approximately
$3,670,000 of goodwill (see Note 7).
7. ACQUISITIONS AND DISPOSITIONS
During the three years ended December 31, 1999 the Company made the
following acquisitions, all of which were accounted for using the purchase
method. Accordingly, the purchase price of each company acquired was allocated
first to the fair market value of the acquired tangible and identifiable
intangible assets.
Ivy Software, Inc.
In March 1997, the Company acquired Ivy Software, Inc. ("Ivy"), a
Virginia corporation that develops and distributes business and accounting
software for the academic education market, for $314,000 in cash and potential
future payments not to exceed approximately $862,000, which were based upon
integration of operations, conversion of software and operating results. In
connection with this transaction, the President and sole shareholder of Ivy
entered into a three-year consulting agreement with the Company. As a result of
this acquisition, the Company recorded goodwill in the amount of $300,000, which
was subsequently adjusted to $869,643 upon scheduled payments to the former
shareholder of Ivy. In September 1998, the Company sold Ivy for approximately
$250,000 in cash and $196,000 in a note receivable. The note bears interest at
6% and is payable in quarterly installments through September 2005. The Company
retained the rights to sell and distribute the online versions of Ivy software.
As a result of the sale, the Company wrote off the unamortized goodwill balance
and recorded a loss on the sale of subsidiary of $381,954. The Company's
potential future obligations of approximately $300,000 related to the
acquisition were terminated upon the sale. The operating results of Ivy are
included in the Company's financial statements from the effective date of the
acquisition through the effective date of the sale.
Cooper & Associates, Inc. (d/b/a. Teletutor)
In April 1997, the Company acquired Cooper & Associates, Inc., d/b/a
Teletutor ("Teletutor"), an Illinois corporation that develops, distributes and
supports computer-based training courses for the data and telecommunications
industry. The terms of the transaction included a $3,000,000 cash payment at
closing and a $2,000,000 non-interest bearing note to be paid ratably on the
first, second and third anniversary dates of the acquisition. The operating
results of Teletutor are included in the Company's financial statements since
the effective date of the acquisition. In conjunction with this acquisition, the
Company allocated the excess of the purchase price over the fair market value of
the acquired net assets as follows: (i) $829,575 to developed content, $273,858
to work force, $456,875 to trademarks and names, $456,875 to customer base and
contracts and $5,138 to goodwill and (ii) $2,700,000 to acquired in-process
research, development and content.
In December 1997, the Company's management, in accordance with its
impairment policy for long-lived assets, determined that the employee workforce
asset had been impaired as of December 31, 1997 due to planned workforce
reductions, and wrote off approximately $250,000 of the carrying amount of the
asset. This amount was included in reorganization and non-recurring expenses in
the statement of operations for the year ended December 31, 1997. In addition,
during 1998, goodwill was reduced to zero and the remaining intangible assets
were reduced ratably by approximately $329,000 due to purchase price
adjustments.
HTR, Inc.
In October 1997, the Company acquired HTR, Inc. ("HTR"), a Delaware
corporation primarily engaged in the business of providing technical training,
publishing and consulting services for the information technology industry. The
Company acquired HTR for common stock, warrants and options totaling 620,000
shares in exchange for all of the outstanding equity securities of HTR. In
addition, the Company paid the former HTR stockholders $600,000 in a combination
of cash and short-term notes and assumed
F-12
<PAGE> 68
approximately $3,500,000 of HTR debt. The executive officers of HTR were to
receive bonuses in the total amount of $690,000 granted in conjunction with the
signing of three-year employment agreements no later than December 31, 1998. In
addition, the Company created a stock option pool of 180,000 shares of Common
Stock and an incentive bonus pool with a potential payout not to exceed
approximately $3,300,000 for three years, contingent upon the financial
performance of HTR. In conjunction with this acquisition, the Company allocated
the excess of the purchase price over the fair market value of the acquired net
assets as follows (i) $8,010,590 to goodwill, $700,000 to developed content,
$500,000 to workforce, $600,000 to trademarks and names, and (ii) $8,400,000 to
acquired in-process research, development and content. On June 29, 1998, the
executive officers of HTR agreed to convert approximately $420,000 of their
sign-on bonuses and $320,000 of acquisition related indebtedness into 134,447
shares of the Company's Series D convertible Preferred Stock (see Note 13).
In December 1998, the Company sold HTR's consulting business for $750,000
in cash and a note receivable. The note bears interest at 5% and is payable in
quarterly installments through December 2000. As a result of the sale, the
Company wrote off the intangible assets related to the consulting business and
recorded a loss on the sale of $525,472.
In December 1998, the Company announced its intention to dispose of HTR's
non-online businesses. In accordance with SFAS 121, the Company has reported
assets related to such businesses at the lower of carrying amount or fair value
less estimated selling costs. This resulted in a write off of approximately
$3,670,000 of goodwill related to the non-online businesses. In December 1999,
the Company decided to retain HTR's non-online business and began to further
restructure these operations.
In June 1999, the Company sold HTR's Knowledgeworks business for
$1,500,000 in cash and a note receivable. The note bears interest at 7% and is
payable in quarterly installments through December 2000. As a result of the
sale, the Company wrote off intangible assets related to Knowledgeworks of
approximately $844,000 and recorded a gain on the sale of $1,446.
During 1999, the Company recognized compensation expense of approximately
$1,089,000 related to bonuses to be paid to the HTR executives pursuant to their
employment agreements.
8. RESTRUCTURING OF OPERATIONS AND OTHER NON RECURRING ITEMS
During 1998, the Company implemented a plan to reduce workforce and close
certain office facilities. The plan resulted in (i) the termination of
approximately 85 employees primarily from the product development and
administrative areas and (ii) closure of the Company's training facilities
located in Los Angeles and Baltimore and an executive office in McLean,
Virginia. As a result, the Company recorded a restructuring charge of
approximately $1,770,000 in 1998 included in reorganization and other
non-recurring charges in the 1998 statement of operations. The restructuring
charge included approximately $ 1,494,000 for employee severance and termination
costs and approximately $276,000 primarily for expenses related to facilities
lease cancellations and write-down of assets no longer in use. During 1998, the
Company paid approximately $1,224,000 in costs under the restructuring accrual.
Included in accounts payable and accrued expenses at December 31, 1998 is
approximately $546,000 primarily representing future severance payments. During
1999, the remaining severance payments were charged against the accrual.
In November 1999, an arbitrator found the Company liable to Sage
Interactive for approximately $360,000 arising out of an alleged contract
between Sage Interactive and the Company. The Company is attempting to settle
this dispute for less than the awarded amount. The Company has accrued for the
amount of the award as of December 31, 1999. The expense is included in
reorganization and other non-recurring charges, in the 1999 statement of
operations.
9. LOANS RECEIVABLE FROM RELATED PARTIES
Loans receivable from the Company's officers and employees amounted to
$125,000 and $100,000 as of December 31, 1998 and 1999. The Company accrues
interest on the loans receivable at a rate of prime less 1%. Interest income
related to loans receivable amounted to $8,516, $10,000 and $8,840 during the
years ended December 31, 1997, 1998 and 1999, respectively.
10. NOTES PAYABLE
In connection with the Teletutor acquisition (see Note 7), the Company
entered into a non-interest bearing promissory note with the stockholders of
Teletutor whereby the Company agreed to pay $2,000,000 due in three annual
installments of $666,667 beginning on May 1, 1998. The Company has used a 5.5%
discount rate in recording this note. During 1998, the Company paid $666,667 in
cash on the note balance. In December 1998, the Company and the former
stockholders of Teletutor restructured the terms of the note as follows: the
Company issued 105,000 shares of Common Stock and three-year warrants to
purchase 55,000 shares of its Common
F-13
<PAGE> 69
Stock at an exercise price of $6.00 per share; and the Company executed a new
non-interest bearing promissory note for $826,666, payable in installments
through April 2000. As a result, the Company recorded $145,208 as loss on debt
restructuring for the excess of the fair market value of the Common Stock,
warrants and new promissory note over the carrying amount of the original
promissory note. The loss on debt restructuring is included in reorganization
and non-recurring expenses in the 1998 statement of operations.
In connection with the HTR acquisition, the Company assumed approximately
$3,633,000 of notes payable and accrued interest. In December 1997, the Company
repaid the principal and accrued interest on the notes payable. The Company also
issued notes payable to former stockholders of HTR totaling $509,968 and bearing
simple interest at an annual rate of 6%. The principal amounts of these notes
were due in two annual installments payable on October 31, 1998 and October 31,
1999. During 1998, the Company repaid approximately $100,000 and converted
approximately $352,000 into 9,191 and 58,194 of the Company's Common and Series
D convertible Preferred Stock, respectively (see Note 13). During 1999, the
Company repaid approximately $16,000 of these notes. Subsequent to December 31,
1999, the majority of amounts outstanding on these notes were repaid.
In August 1998, the Company obtained a secured lending facility through a
new lending institution that provided up to $2,000,000 in a revolving line of
credit ("Line of Credit") and a $500,000 senior term loan ("Senior Term Loan").
Borrowings under the Line of Credit originally matured on February 15, 1999,
while the Senior Term Loan was set to mature on July 15, 2001. In addition, in
August 1998, the Company obtained a secured term loan for $500,000 with another
lending institution, that is subordinated to the two facilities described above
(the "Subordinated Term Loan"). The Subordinated Term Loan initially expired on
February 15, 1999. In connection with these transactions, the Company issued
warrants for the purchase of an aggregate of 90,000 shares of Series D Preferred
Stock at an aggregate exercise price of $495,000.
In February 1999, the Company repaid the Senior Term Loan. During 1999,
the Company issued warrants for the purchase of an aggregate of 127,000 shares
of its common stock at an aggregate exercise price of $515,500 in exchange for
the lenders extending the maturity dates of the Line of Credit and Subordinated
Term Loan. The fair value of such warrants was recognized during 1999 as
additional interest expense on the related borrowings. In June 1999, all amounts
outstanding under the Line of Credit and Subordinated Term Loan were repaid with
proceeds from the Secured Subordinated Convertible Debentures.
In June 1999, the Company raised $2.5 million through the issuance of 9%
Secured Subordinated Convertible Debentures. The debentures mature on December
15, 2000 with accrued interest payable quarterly. The debentures are convertible
into shares of the Company's common stock at a per share price of $5.55. The
conversion price was at a discount from the market value of the Company's common
stock on the date the debentures were issued. In addition, the Company issued
five-year warrants to the debenture holders for the purchase of 112,600 shares
of the Company's common stock at $6.38 per share. The Company recorded an
aggregate debt discount of approximately $413,000 for the value of the warrants
and the ability to convert at a discount from market value.
Notes payable at December 31, 1998 and 1999 consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Line of credit to a bank.......................... $ 1,547,931 $ --
Notes payable to banks............................ 985,000 --
Secured Subordinated Convertible debentures....... -- 1,341,875
Notes payable to former stockholders of Teletutor. 769,346 453,797
Notes payable to former stockholders of HTR....... 60,078 43,902
Other............................................. 50,019 37,935
------------ ------------
$ 3,412,374 $ 1,877,509
------------ ------------
Current portion of notes payable.................. $ 3,075,139 $ 1,877,509
------------ ------------
Notes payable, less current portion............... $ 337,235 $ --
============ ============
</TABLE>
Annual maturities of notes payable at December 31, 1999 were as follows:
<TABLE>
<S> <C>
1999.............................. $ 1,877,509
------------
$ 1,877,509
============
</TABLE>
11. COMMITMENTS
LEASES
The Company leases office space under non-cancelable operating lease
agreements with various renewal options. Future minimum
F-14
<PAGE> 70
lease payments may be periodically adjusted based on changes in the lessors'
operating charges. Additionally, the Company leases various office equipment
under non-cancelable operating leases. Rent expense for the years ended December
31, 1997, 1998 and 1999 was $437,756, $1,022,693, and $882,776 respectively.
As of December 31, 1999, payments due under non-cancelable operating
leases were as follows:
<TABLE>
<S> <C>
2000................................................ $ 641,464
2001................................................ 419,519
2002................................................ 341,215
2003................................................ 265,714
2004................................................ 247,946
------------
$ 1,915,858
============
</TABLE>
Employment Agreements
During 1996 and 1997, the Company entered into employment agreements with
certain key executives under which the Company is required to pay the following
base salaries annually over the next three years:
<TABLE>
<S> <C>
2000.................. 500,000
-----------
$ 500,000
===========
</TABLE>
In addition, the Company is required to pay certain performance
incentives limited to 50% of such base salaries.
12. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
Accounts payable and accrued expense.... $ 3,690,090 $ 3,968,743
Accrued payroll and payroll taxes....... 164,957 127,049
Accrued reorganization and non recurring costs....... 545,669 1,274,240
Accrued vacation........................ 216,702 122,084
------------ ------------
$ 4,617,418 $ 5,492,116
============ ============
</TABLE>
Accrued payroll as of December 31, 1999 consists of earned but unpaid
commissions.
In 1998, the Company implemented a reorganization plan to reduce
workforce and close certain office facilities (see Note 8). Amounts accrued at
December 31, 1998 primarily represent payments to be made under employee
severance agreements. Amounts accrued as non recurring costs in 1999 consist of
the Company's obligations under the employment agreements with the executive
officers of HTR and its dispute with Sage Interactive. See Notes 7 and 8.
13. STOCKHOLDERS' EQUITY
Equity Transactions
On October 31, 1997, the Company issued 585,940 shares of Common Stock in
connection with the purchase of HTR (see Note 7). In addition, the Company
issued 34,020 of options and warrants in connection with the HTR acquisition,
which options and warrants were valued at fair value ($591,118) using the
Black-Scholes pricing model and were accounted for as purchase price.
In March 1998, the Company raised net proceeds of approximately
$5,300,000 in a private placement of Series C Preferred Stock and warrants (the
"Series C Preferred Stock"). In this transaction, the Company issued
approximately 626,300 shares of the Series C Preferred Stock, which are
convertible into approximately 759,100 shares of Common Stock. The Company also
issued five-year warrants to purchase approximately 626,300 shares of Common
Stock at an exercise price of $8.46 per share. The Series C Preferred Stock has
a liquidation preference of $12.69 per share upon sale or liquidation of the
Company. The Common Stock underlying both the Preferred Stock and the warrants
has certain registration rights. The Company has recorded a deemed dividend of
approximately $207,000 due to the Series C Preferred Stock being convertible to
Common Stock at a discount from fair value on the date of issuance.
In June 1998, the Company raised approximately $5,200,000 in net proceeds
through its private placement of Series D Preferred Stock (the "Series D
Preferred Stock"). In this transaction, the Company issued 1,082,625 shares of
the Series D Preferred Stock,
F-15
<PAGE> 71
which are convertible to an equal number of common shares. The holders of Series
D Preferred Stock are entitled to receive a 5% annual dividend compounded and
paid semi-annually beginning December 31, 1998. Such dividends are payable, at
the option of the Company, either in cash or in Common Stock. The Series D
Preferred Stock has a liquidation preference of $8.25 per share upon sale or
liquidation of the Company. In June and September 1998, respectively, 137,174 of
Series D shares and 17,569 shares of the Company's Common Stock were issued in
connection with the conversion of approximately $867,000 of indebtedness
primarily to certain former shareholders of HTR. The non-cash portion of this
transaction has been excluded from the 1998 consolidated statement of cash
flows.
In October 1998, the Company issued 9,191 shares of Common Stock at $3.75
per share, the closing price of the Company's Common Stock on the date of
issuance, to two former HTR shareholders in exchange for cancellation of the
Company's indebtedness to such shareholders.
In December 1998, the Company issued 6,279 shares at $7.06 per share
though an employee stock purchase program. For each share purchased, employees
also received a fully vested option to purchase one share of the Company's
Common Stock at an exercise price of $7.06, the closing price of the Common
Stock at the date of issuance.
In December 1998, the Company issued 105,000 shares at $5.875 per share,
the closing price of the Company's Common Stock on the date of issuance,
primarily to former Teletutor shareholders pursuant to a restructuring of the
Company's indebtedness to such shareholders. Pursuant to that restructuring, the
Company also issued three-year warrants to purchase 55,000 shares of its Common
Stock with an exercise price of $6.00 per share.
In December 1998, the Company also issued 28,902 shares of Common Stock
to its Series D Preferred Stockholders as payment for accrued dividends. The
number of shares to be issued as payment of the dividend was determined based on
the fair market value of the Company's Common Stock on the date of issuance.
In February 1999, the Company issued 282,500 shares of its common stock
at $4.00 per share to certain accredited investors. 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 1999, the
Company issued an additional 119,770 shares of its common stock to the same
investors pursuant to their registration rights agreements.
In April 1999, the Company issued 448,297 shares of its common stock to
certain accredited investors at $2.94 per share.
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. 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 Series E Convertible Preferred Stock has an aggregate
liquidation preference of $860,370. As of December 31, 1999 the Company had
issued 379,969 shares of Series E Preferred Stock at an average price of
approximately $2.26 under this Agreement, of which 165,041 shares were converted
to common stock on a one to one ratio. In connection with the same Agreement,
the Company issued seven year warrants to purchase 100,000 shares of its Series
E preferred stock to H&QGF at $2.50 per share, and ten year warrants to purchase
100,000 shares of its common stock at $4.00 per share to a third party. During
1999, the Company recorded deemed dividends of approximately $152,000 due to the
Series E Convertible Preferred Stock being issued at a discount from fair value
on the date of issuance.
During 1999, the Company issued an aggregate of 12,836 shares of its
common stock upon the conversion of 2,954 and 9,255 shares of its Series C and
Series D Preferred Stock, respectively.
During 1999, the Company issued 540,292 shares of its common stock at an
average price of $1.93 per share upon the conversion of a portion of the
Company's Secured Subordinated Convertible Debentures. See Note 10. Pursuant to
the same Agreement, the Company also issued five year warrants to purchase
225,200 shares of its common stock at $6.38 per share. In addition, three year
warrants to purchase 55,000 shares of the Company's common stock at $2.75 per
share were issued to the debenture holders as an inducement to convert a portion
of the debentures. The fair value of the warrants (approximately $70,000) was
recognized as inducement expense during 1999.
F-16
<PAGE> 72
In June and December 1999, the Company also issued 22,819 and 56,576
shares of Common Stock respectively to its Series D Preferred Stockholders as
payment for accrued dividends. The number of shares to be issued as payment of
the dividend was determined based on the fair market value of the Company's
Common Stock on the date of issuance.
Stock Option Plans
The Company adopted a stock option plan (the "Original Plan") which
permitted the Company to grant options to purchase up to 288,916 shares of
Common Stock to employees, board members and others who contribute materially to
the success of the Company. In November 1996, the Company's Board of Directors
decided not to grant any further options under the Original Plan.
During 1996, the Company's Board of Directors approved a new stock plan
(the "1996 Plan"), which reserved 135,960 shares of Common Stock for issuance,
pursuant to options or otherwise, to employees, directors and consultants. The
number of shares reserved was subsequently increased to 524,893 options. During
1997, the Company's Board of Directors approved an additional increase of
1,000,000 shares, which was approved by the stockholders at the annual
stockholder meeting in 1998. During 1998, the Company's Board of Directors
approved an additional increase of 1,000,000 shares, which was approved by the
stockholders at the annual stockholder meeting in 1999. Stock options under the
Original Plan and 1996 Plan are generally granted at prices which the Company's
Board of Directors believes approximates the fair market value of its Common
Stock at the date of grant. Individual grants generally become exercisable
ratably over a period of four to five years from the date of grant. The
contractual terms of the options range from three to ten years from the date of
grant.
Common stock option activity was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------------------
1997 1998 1999
--------------------------- --------------------------- -------------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------------ ------------ ------------ ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at the beginning of the
Year.............................. 595,233 $ 10.23 1,236,481 $ 11.69 1,456,046 $ 10.62
Granted........................... 766,460 12.64 1,096,877 9.08 346,571 4.08
Exercised......................... (12,604) 1.29 (33,265) 3.25 (45,114) 1.74
Canceled or expired............... (112,608) 11.61 (844,047) 12.61 (349,347) 8.65
--------- ------- --------- ------- --------- -------
Outstanding at the end of the
Year.............................. 1,236,481 11.69 1,456,046 10.62 1,408,156 9.79
========= ======= ========= ======= ========= =======
Options exercisable at year-end..... 303,638 $ 8.76 364,824 $ 9.79 390,529 $ 9.11
========= ======= ========= ======= ========= =======
</TABLE>
As of December 31, 1999, 1,167,651 shares were available for issuance
under the 1996 Plan.
The following table summarizes information about fixed-price stock
options outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- ---------------------------------
NUMBER AVERAGE WEIGHTED- NUMBER WEIGHTED-
OUTSTANDING AT REMAINING AVERAGE EXERCISABLE AT AVERAGE
RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
------------------ ------------- --------------- --------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Less than $1.00... 849 6.6 $ 0.12 849 $ 0.12
$1.01 - $3.00..... 21,420 6.7 1.95 21,420 1.95
$3.01 - $6.00..... 462,946 9.2 4.28 129,606 4.62
$6.01 - $9.00..... 287,483 8.4 7.37 75,550 8.33
$9.01 - $12.00.... 135,825 8.2 10.56 66,736 10.95
$12.01 - $15.00... 322,383 7.9 13.05 62,268 13.09
$15.01 - $18.00... 12,950 7.7 16.87 7,100 16.93
Greater than
$18.00.......... 164,300 7.8 23.00 27,000 23.00
---------- --- -------- -------- --------
1,408,156 8.4 $ 9.79 390,529 $ 9.11
========== === ======== ======== ========
</TABLE>
F-17
<PAGE> 73
Had compensation expense related to the stock option plans been
determined based on the fair value at the grant date for options granted during
the years ended December 31, 1997, 1998 and 1999 consistent with the provisions
of SFAS No. 123, the Company's net loss and net loss per share would have been
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Net loss -- pro-forma............ $ (17,885,671) $ (22,672,194) $ (9,506,125)
-------------- -------------- --------------
Net loss per share -- pro-forma.. $ (5.44) $ ($5.92) $ ($2.03)
============== ============== ==============
</TABLE>
The effect of applying SFAS No. 123 on the years ended December 31, 1997,
1998, and 1999 pro forma net loss as stated above is not necessarily
representative of the effects on reported net loss for future years due to,
among other things, the vesting period of the stock options and the fair value
of additional stock options in future years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1997: dividend yield of 0%;
expected volatility of 69%; risk-free interest rate of 6.5%; and expected life
of the option term of seven years. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing fair value
model with the following weighted-average assumptions used for grants in 1998:
dividend yield of 0%; expected volatility of 100%; risk-free interest rate of
5.0%; and expected life of the option term of seven years. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing fair value model with the following weighted average assumptions
used for grants in 1999: dividend yield of 0%; expected volatility of 100%; risk
free interest rate of 5.5%; and expected life of the option term of seven years.
The weighted average fair values of the options granted in 1997 with a stock
price equal to the exercise price, and with a stock price greater than the
exercise price, and with a stock price less than the exercise price are $9.85,
$10.81 and $11.57, respectively. The weighted average fair values of the options
granted in 1998 with a stock price equal to the exercise price, and with a stock
price greater than the exercise price, and with a stock price less than the
exercise price are $6.07, $7.98 and $6.27, respectively. The weighted average
fair values of the options granted in 1999 with a stock price equal to the
exercise price was $3.46.
Warrants
The Company has also granted warrants to purchase Common Stock to various
investors, employees and outside vendors. Warrant activity was as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ -----------
<S> <C> <C> <C>
Outstanding at the beginning of the year. 476,367 535,368 1,355,512
Granted................................ 60,199 862,294 1,033,389
Exercised.............................. (1,198) (42,150) (3,399)
Canceled or expired.................... -- -- (414,365)
------- --------- ---------
Outstanding at the end of the year....... 535,368 1,355,512 1,971,137
======= ========= =========
</TABLE>
Exercise prices on the outstanding warrants range from $2.75 to $20.50
per share.
Of the total warrants outstanding at December 31, 1999, warrants to
purchase 1,308,274 shares of Common Stock were issued in connection with equity
transactions and a research and development agreement and warrants to purchase
662,863 Common Stock were issued in connection with convertible related party
debt and short-term debt. There are certain anti-dilution rights associated with
these warrants, which are effective upon the occurrence of certain events.
In connection with the Company's IPO, the exercise prices of warrants to
purchase 35,167 shares of Common Stock were reduced from $17.65 or $18.83 per
share to the IPO price, $13.00 per share, to satisfy certain anti-dilution
rights previously granted. The holders of these warrants have agreed to waive
further price-based anti-dilution rights, except with respect to issuances of
Common Stock below $8.83 per share. During 1999,the number of shares and
exercise prices of certain warrants were adjusted to satisfy certain anti-
dilution rights previously granted.
Reserve for Issuance
As of December 31, 1999 the Company had reserved 3,379,293 shares of
Common Stock for issuance upon the exercise of outstanding options and warrants.
F-18
<PAGE> 74
14. RESEARCH AND DEVELOPMENT AGREEMENT
On April 15, 1996, the Company entered into an agreement with Autodesk,
Inc. ("Autodesk") to develop and maintain a campus-like graphical user interface
located on the Internet. The Company will be entitled to certain revenues
generated by the project and will pay 20% in royalties to Autodesk for the use
of certain trademark rights. Additionally, the Company will pay royalties to the
authors of the projects. During September 1996 and as later amended, the Company
contracted with InternetU, Inc., ("InternetU"), a stockholder, to provide the
funding for the project. In exchange for $1,550,000, to be provided in
installments through September 30, 1997, corresponding to the achievement of
certain milestones, the Company agreed to grant InternetU Common Stock warrants
to purchase 73,172 shares of Common Stock at an exercise price of $13.00 per
share. In addition, InternetU will receive royalties on certain future revenues
generated by the project. The Company determined that the fair value of the
warrants was approximately $150,000 and will recognize this amount as research
and development expense in line with the payments it receives from InternetU.
This agreement is cancelable and should either party to the agreement fail to
perform no additional cash or warrants are required to be paid or issued, or
revenues shared. The Company recognized $250,000 as revenue during 1996 as the
related work to achieve the milestone was completed during 1996. Accordingly,
the Company recorded $24,180 as expense for the warrants to be issued to
InternetU. In 1997, the Company recognized an additional $560,000 of revenue
related to the work performed to achieve the milestones set as of March 31, 1997
and June 30, 1997. The Company recognized $54,350 as expense for the warrants
issued to InternetU pursuant to the terms of the agreement in 1997.
15. RETIREMENT PLANS
Teletutor had a 401(k) Retirement Savings Plan covering all employees who
met defined eligibility requirements. Employee contributions to Teletutor's plan
were made at predetermined rates elected by the employees. Additionally, the
employer had the option to match a portion of the employee contributions and
make a discretionary contribution to the plan. The Company did not make
discretionary contributions in 1997 or 1998. The Company did automatically vest
all employees separated from Teletutor in 1998 due to a partial plan termination
which was approved on November 30, 1998.
HTR, Inc. maintained a tax deferred savings and retirement plan to
provide retirement benefits for all eligible employees. HTR's 401(k) plan assets
were frozen in July 1998 and all participants were eligible to begin deferrals
into the VCampus Corporation 401(k) plan at that time. All assets were merged
into the VCampus Corporation 401(k) plan on December 31, 1998.
The VCampus Corporation 401(k) plan (adopted in 1997) allows employees to
elect an amount between 1% and 15% of their total compensation to contribute to
the plan. All full-time employees are eligible to make participation elections
in January and July of each year. There is a graduated vesting schedule for
employee contributions in which contributions fully vest over a period of four
years. The plan allows discretionary Company contributions. In 1997, 1998 and
1999, there were no discretionary Company contributions made to the plan.
16. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting and income tax purposes. Significant components of the Company's net
deferred tax assets were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1998 1999
-------------- ---------------
<S> <C> <C>
Net operating loss carryforwards.. $ 12,266,000 $ 15,215,000
Accrued payroll................... 131,000 485,000
Reserves.......................... 708,000 217,000
Other assets and liabilities, net. 199,000 1,525,000
-------------- ---------------
Total deferred tax assets......... 13,304,000 17,442,000
Valuation allowance............... (13,304,000) (17,442,000)
-------------- ---------------
Net deferred tax assets........... $ -- $ --
============== ===============
</TABLE>
As of December 31, 1998and 1999 the Company had net operating loss
carryforwards for federal income tax purposes of approximately $30,661,000 and
$38,033,000 respectively, which will expire at various dates through 2019. The
Company may have had changes in ownership, which may impose limitations on its
ability to utilize net operating loss carryforwards under Section 382 of the
Internal Revenue Code.
F-19
<PAGE> 75
17. NET LOSS PER SHARE
The following table sets forth the computation of basic and diluted net
loss per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
Numerator:
Net loss............................ $ (16,144,763) $ (19,811,265) $ (8,486,729)
Accrued dividends to preferred
stockholders..................... -- (357,890) (448,180)
-------------- -------------- --------------
Net loss available to common
stockholders..................... (16,144,763) (20,169,155) (8,934,909
============== ============== ==============
Denominator:
Denominator for basic earnings per
share -- weighted-average
shares........................... 3,286,281 3,827,216 4,680,850
============== ============== ==============
Denominator for diluted earnings
per share -- adjusted
weighted-average shares.......... 3,286,281 3,827,216 4,680,850
============== ============== ==============
Basic net loss per share.............. $ (4.91) $ (5.27) $ (1.91)
============== ============== ==============
Diluted net loss per share............ $ (4.91) $ (5.27) $ (1.91)
============== ============== ==============
</TABLE>
The net loss per share amounts exclude the dilutive effect of stock
purchase warrants, options and convertible securities because the net losses
recorded by the Company for 1999, 1998 and 1997 make such common stock
equivalents anti-dilutive.
18. SUBSEQUENT EVENTS
In January 2000, the Company completed a private placement of its Common
Stock. The Company issued 1,136,253 shares of Common Stock to Mastech
Corporation at $3.62 per share, a 20% premium over the average closing price for
a 15-day trailing period, with gross proceeds of approximately $4,000,000. The
Company also issued warrants to purchase 450,000 shares of its Common Stock at
exercise prices between $4.34 and $6.125 per share.
In January 2000, the Company issued 362,524 shares of its common stock to
the Secured Subordinated Convertible Debenture holders at an average price of
$5.55 per share, upon conversion of approximately $925,000 in principal and
accrued interest.
On March 23, 2000, H&QGF agreed to increase the capacity under the equity
line agreement from $3.0 million to $5.0 million and to extend the term of the
agreement through July 31, 2000 in exchange for warrants to purchase 43,632
shares of the Company's Series E Convertible Preferred Stock. This amendment is
subject to NASD approval, if required.
19. EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF INDEPENDENT AUDITORS REPORT
In February 2000, the Company drew $500,000 on its H&QGF Agreement and
consequently issued 74,460 shares of Series E Convertible Preferred Stock at
$6.715 per share. In March 2000, the Company drew $500,000 on its H&QGF
Agreement and consequently issued 44,332 shares of Series E Convertible
Preferred Stock at $11.28 per share.
In March 2000, the Company issued 120,050 shares of its common stock to
the Secured Subordinated Convertible Debenture holders at an average price of
$5.55 per share, upon conversion of approximately $666,000 in principal and
accrued interest. No principal is outstanding under the convertible debentures
subsequent to March, 2000.
The Company expects negative cash flow from operations to continue for
at least the next six months until the online revenue stream matures. The
Company recognizes that it must raise additional funding to meet its working
capital requirements and fund anticipated ongoing operating losses. The Company
expects the H&QGF Equity Line Agreement, together with additional short-term
private equity bridge financings, to provide working capital through the end of
2000 and through the first quarter of fiscal 2001. The Company anticipates that
it will need to secure more substantial long-term private equity financings
during the second quarter of 2001. If the Company does not achieve substantial
positive cash flow from operations beyond the first quarter of fiscal 2001, it
will need to raise additional funds to support operations and fund its efforts
to grow online tuition revenues. Additional financing might not be available to
the Company, or might not be available on acceptable terms.
20. PRO FORMA (UNAUDITED)
The pro forma balance sheet as of December 31, 1999 reflects (i) the
private placement of the Company's common stock completed in January 2000, (ii)
the issuance of Series E Convertible Preferred Stock in February and March 2000,
and (iii) the issuance of common stock upon conversion of the Company's Secured
Subordinated Convertible Debentures between January and March 2000. See Notes 18
and 19.
F-20
<PAGE> 76
SCHEDULE I -- VALUATION AND QUALIFYING ACCOUNT AND RESERVE
(IN THOUSANDS)
VCAMPUS CORPORATION
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
CLASSIFICATION PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
---------------------------------- -------------- ----------- ------------ ---------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1997...... 36 703* -- 739
Year ended December 31, 1998...... 739 1,293 1,465 567
Year ended December 31, 1999...... 567 257 682 142
</TABLE>
----------
* Includes additions of $253,500 from purchase price adjustments resulting from
the acquisitions of Ivy Software, Inc., Cooper & Associates, Inc. (d/b/a
Teletutor), and HTR, Inc.
F-21
<PAGE> 77
VCAMPUS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------- --------------------------------
1999 2000 1999 2000
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Online tuition revenues................... $ 1,108,967 $ 1,218,929 $ 2,957,706 $ 3,709,852
Virtual campus software revenues.......... 53,070 24,124 170,162 93,283
Development and other revenues............ 265,244 311,689 841,443 633,034
Product sales revenues.................... 133,541 62,267 844,686 337,027
Other service revenues.................... 81,044 49,292 231,360 129,413
Instructor-led training revenues.......... 1,434,622 631,274 3,995,201 2,274,735
------------ ------------ ------------ ------------
Net revenues................................ 3,076,488 2,297,575 9,040,558 7,177,344
Costs and expenses:
Cost of revenues.......................... 1,568,453 820,766 4,518,376 2,613,671
Sales and marketing....................... 1,107,623 1,892,571 3,304,063 4,644,471
Product development and operations........ 477,248 1,061,380 1,488,879 2,618,557
General and administrative................ 584,156 746,362 1,906,199 2,171,487
Depreciation and amortization............. 707,861 792,884 2,246,677 2,230,603
Compensation expense in connection with
the acquisition of HTR................. -- -- -- 654,294
Stock based compensation.................... -- 184,175 -- 184,175
------------ ------------ ------------ ------------
Total costs and expenses.................... 4,445,341 5,498,138 13,464,194 15,117,258
------------ ------------ ------------ ------------
Loss from operations........................ (1,368,853) (3,200,563) (4,423,636) (7,939,914)
Gain on the sale of subsidiary.............. -- -- 1,446 --
Interest income (expense)................... (158,440) 58,352 (450,758) 147,779
------------ ------------ ------------ ------------
Net loss.................................... $ (1,527,293) $ (3,142,211) $ (4,872,948) $ (7,792,135)
============ ============ ============ ============
Dividends to preferred stockholders......... (74,535) (399,150) (222,172) (1,012,391)
------------ ------------ ------------ ------------
Net loss attributable to common
stockholders.............................. $ (1,601,828) $ (3,541,361) $ (5,095,120) $ (8,804,526)
============ ============ ============ ============
Net loss per share.......................... $ (0.33) $ (0.43) $ (1.12) $ (1.13)
============ ============ ============ ============
Net loss per share -- assuming
dilution.................................. $ (0.33) $ (0.43) $ (1.12) $ (1.13)
============ ============ ============ ============
</TABLE>
See accompanying notes.
F-22
<PAGE> 78
VCAMPUS CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
-------------- --------------
(UNAUDITED)
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents..................................... $ 204,455 $ 1,307,964
Accounts receivable, less allowance of $142,000 and
$144,000 at December 31, 1999 and September 30, 2000,
respectively............................................... 1,349,332 1,483,026
Loans receivable from related parties......................... 124,182 130,182
Loans receivable -- current................................... 1,213,717 1,072,959
Prepaid expenses and other current assets..................... 599,645 395,080
-------------- --------------
Total current assets.................................. 3,491,331 4,389,211
Property and equipment, net..................................... 1,464,483 1,796,642
Capitalized software costs and courseware development costs,
Net........................................................... 1,543,520 1,056,718
Acquired online publishing rights, net.......................... 169,624 69,207
Loans receivable -- less current portion........................ 150,226 130,442
Other assets.................................................... 180,988 246,956
Other intangible assets, net.................................... 1,913,259 1,606,041
Goodwill, net................................................... 1,754,682 1,539,150
-------------- --------------
Total assets.......................................... $ 10,668,113 $ 10,834,367
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................. $ 2,819,956 $ 1,417,091
Accrued expenses.............................................. 2,672,160 1,432,149
Notes payable -- current portion.............................. 1,877,509 --
Deferred revenues............................................. 1,276,283 1,432,553
Accrued dividends payable..................................... -- 74,277
-------------- --------------
Total current liabilities............................. 8,645,908 4,356,070
Stockholders' equity:
Series C convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $7,910,172;
1,000,000 shares authorized; 623,339 and 623,339 shares
issued and outstanding at December 31, 1999 and September
30, 2000, respectively..................................... 6,233 6,233
Series D convertible Preferred Stock, $0.01 par value per
Share; aggregate liquidation preference of $8,855,303 and
$8,832,805 at December 31, 1999 and September 30, 2000,
respectively; 1,200,000 shares authorized; 1,073,370 and
1,070,643 shares issued and outstanding at December 31,
1999
and September 30, 2000, respectively....................... 10,734 10,706
Series E convertible Preferred Stock, $0.01 par value per
share; aggregate liquidation preference of $860,370 and
$3,700,791 at December 31, 1999 and September 30, 2000,
respectively; 3,000,000 shares authorized; 214,928 and
390,704 shares issued and outstanding at December 31,
1999 and
September 30, 2000, respectively.......................... 2,149 3,907
Common Stock, $0.01 par value per share; 36,000,000 shares
authorized; 5,684,110 and 8,284,472 shares issued and
outstanding at December 31, 1999 and September 30, 2000,
respectively............................................... 56,840 82,845
Additional paid-in capital.................................... 58,578,078 71,750,795
Accumulated deficit........................................... (56,631,829) (65,376,189)
-------------- --------------
Total stockholders' equity............................ 2,022,205 6,478,297
-------------- --------------
Total liabilities and stockholders' equity............ $ 10,668,113 $ 10,834,367
============== ==============
</TABLE>
See accompanying notes.
F-23
<PAGE> 79
VCAMPUS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
1999 2000
-------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss................................................. $ (4,872,948) $ (7,792,135)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation........................................... 773,613 880,459
Amortization........................................... 1,473,061 1,350,144
Gain on sale of subsidiary............................. (1,446) --
Loss on sale of fixed assets........................... 16,134 918
Stock, option and warrant compensation................. 176,904 184,175
(Decrease) increase in allowance for doubtful accounts. (355,436) 2,848
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable.......... 1,313,881 (136,542)
Increase in prepaid expenses and other current
assets............................................. (531,039) (27,986)
Decrease (increase) in other assets................. (1,316) (65,981)
Decrease in accounts payable and accrued expenses... (16,359) (2,553,372)
(Decrease) increase in deferred revenues............ (63,870) 156,270
-------------- -------------
Net cash used in operating activities.................... (2,088,821) (8,001,202)
INVESTING ACTIVITIES
Purchases of property and equipment...................... (55,996) (1,213,522)
Capitalized software and courseware development costs.... (264,384) (240,171)
Proceeds from loans from related parties................. 23,541 --
Proceeds from loans receivable........................... 275,225 239,288
Proceeds from sale of subsidiary......................... 75,000 --
Advances under loans (interest) receivable............... (30,439) (78,746)
Advances under loans receivable from related parties..... -- (6,000)
------------- -------------
Net cash used in investing activities.................... 22,947 (1,299,151)
FINANCING ACTIVITIES
Proceeds from issuance of common stock................... 2,426,469 6,798,496
Proceeds from Series E convertible Preferred Stock....... -- 4,141,000
Proceeds from notes payable.............................. 2,300,000 --
Repayments of notes payable and short-term debt.......... (2,827,562) (535,634)
------------- -------------
Net cash provided by financing activities................ 1,898,907 10,403,862
------------- -------------
Net (decrease) increase in cash and cash equivalents..... (166,967) 1,103,509
Cash and cash equivalents at the beginning of the period. 336,194 204,455
------------- -------------
Cash and cash equivalents at the end of the period....... $ 169,227 $ 1,307,964
============= =============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid............................................ $ 311,500 $ 26,600
============= =============
</TABLE>
See accompanying notes.
F-24
<PAGE> 80
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, 2000. For further information, refer to the audited financial
statements and footnotes thereto included in the VCampus Corporation ("VCampus"
or the "Company") Annual Report on Form 10-K for the year ended December 31,
1999.
NOTE B -- EQUITY TRANSACTIONS
In January 2000, the Company completed a private placement of its Common
Stock to iGate Capital Corporation (formerly Mastech Corporation). The Company
issued 1,136,253 shares of Common Stock at $3.62 per share, a 20% premium over
the average closing price for a 15-day trailing period, resulting in gross
proceeds to VCampus of approximately $4,000,000. No obligations with respect to
the delivery of goods or the performance of services were involved in
determining this purchase price. The Company also issued warrants to purchase
450,000 shares of its Common Stock at exercise prices between $4.34 and $6.125
per share. The warrants expire in January 2001.
During the three months ended March 31, 2000, the Company issued 482,574
shares of its common stock to its convertible debenture holders, at an average
price of $3.30 per share, in exchange for the conversion of the remaining
balance of approximately $1,590,000 in principal and accrued interest under the
convertible debentures.
During the nine months ended September 30, 2000, the Company drew down
$4,141,000 under the terms of its equity line agreement with Hambrecht & Quist
Guaranty Finance, LLC ("H&QGF"), and issued to H&QGF 605,515 shares of Series E
Preferred Stock at an average price of $6.84 per share.
In April 2000, the Company raised $2,500,000 through a private placement
of its common stock to US West Internet Ventures, Inc. The Company issued
357,142 shares of common stock at $7.00 per share and five-year warrants to
purchase 714,285 shares of the Company's Common Stock at $7.00 per share.
NOTE C -- 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,
--------------------------------- ----------------------------------
1999 2000 1999 2000
--------------- --------------- --------------- --------------
<S> <C> <C> <C> <C>
Numerator:
Net loss............................................ $ (1,527,293) $ (3,142,211) $ (4,872,948) $ (7,792,135)
Accrued dividends to preferred stockholders......... (74,535) (399,150) (222,172) (1,012,391)
------------ ------------ ------------ ------------
Net loss available to common stockholders........... $ (1,601,828) $ (3,541,361) $ (5,095,120) $ (8,804,526)
============ ============ ============ ============
Denominator:
Denominator for basic earnings per share --
weighted-average shares.......................... 4,838,668 8,197,783 4,553,835 7,764,310
============ ============ ============ ============
Denominator for diluted earnings per share --
adjusted weighted-average shares................. 4,838,668 8,197,783 4,553,835 7,764,310
============ ============ ============ ============
Basic net loss per share.............................. $ (0.33) $ (0.43) $ (1.12) $ (1.13)
============ ============ ============ ============
Diluted net loss per share............................ $ (0.33) $ (0.43) $ (1.12) $ (1.13)
============ ============ ============ ============
</TABLE>
F-25
<PAGE> 81
================================================================================
NO ONE (INCLUDING ANY SALESMAN OR BROKER) IS AUTHORIZED TO PROVIDE ORAL
OR WRITTEN INFORMATION ABOUT THIS OFFERING THAT IS NOT INCLUDED IN THIS
PROSPECTUS.
---------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
----
<S> <C>
Prospectus Summary.................. 2
Special Note Regarding Forward-Looking
Statements........................ 5
Available Information............... 6
Risk Factors........................ 7
The Equity Line of Credit Agreement. 14
The 9% Secured Subordinated
Convertible Debentures Due December
15, 2000.......................... 15
Determination of Offering Price..... 16
Price Range of Our Common Stock..... 16
Dividend Policy..................... 16
Use of Proceeds..................... 16
Capitalization...................... 17
Selected Consolidated Financial
Data.............................. 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations..................... 19
Business of the Company............. 29
Management.......................... 38
Executive Compensation.............. 39
Security Ownership of Certain
Beneficial Owners and Management.. 43
Certain Relationships and Related
Transactions...................... 45
Description of Capital Stock........ 47
Selling Stockholders................ 50
Plan of Distribution................ 51
Legal Matters....................... 53
Experts............................. 53
Index to Consolidated Financial
Statements........................ F-1
</TABLE>
3,633,887 SHARES
[VCAMPUS CORPORATION LOGO]
COMMON STOCK
---------------
PROSPECTUS
---------------
NOVEMBER 22, 2000
================================================================================
<PAGE> 82
VCAMPUS CORPORATION
POST EFFECTIVE AMENDMENT NO. 1
TO
REGISTRATION STATEMENT ON FORM S-1
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, incurred in connection with the sale of
Common Stock previously registered under this registration statement (all
amounts are estimated except the SEC registration fee, the NASD filing fee and
the Nasdaq listing fee). The Company will bear all expenses incurred in
connection with the sale of the Common Stock previously registered.
<TABLE>
<S> <C>
SEC registration fee..................... $ 9,140
NASD filing fee.......................... 3,788
Printing fees and expenses............... 15,000
Legal fees and expenses.................. 110,000
Blue Sky expenses and filing fees........ 25,000
Accounting fees and expenses............. 20,000
Premium on liability policy for H&QGF.... 10,938
Miscellaneous............................ 5,000
----------
Total............................... $ 198,866
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 ("Section 145") of the Delaware General Corporation Law, as
amended, generally provides that a director or officer of a corporation (i)
shall be indemnified by the corporation for all expense of such legal
proceedings when he is successful on the merits, (ii) may be indemnified by the
corporation for the expenses, judgments, fines and amounts paid in settlement of
such proceedings (other than a derivative suit), even if he is not successful on
the merits, if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceedings, had no reasonable cause to believe his
conduct was unlawful, and (iii) may be indemnified by the corporation for the
expenses of a derivative suit (a suit by a stockholder alleging a breach by a
director or officer of a duty owed to the corporation), even if he is not
successful on the merits, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
corporation. No indemnification may be made under clause (iii) above, however,
if the director or officer is adjudged liable for negligence or misconduct in
the performance of his duties to the corporation, unless a corporation
determines that, despite such adjudication, but in view of all the
circumstances, he is entitled to indemnification. The indemnification described
in clauses (ii) and (iii) above may be made only upon a determination that
indemnification is proper because the applicable standard of conduct has been
met. Such a determination may be made by a majority of a quorum of disinterested
directors, independent legal counsel, the stockholders or a court of competent
jurisdiction.
Article VI of the Company's Bylaws provides in substance that, to the
fullest extent permitted by Delaware law as it now exists or as amended, each
director and officer shall be indemnified against reasonable costs and expenses,
including attorneys' fees and any liabilities which he may incur in connection
with any action to which he may be made a party by reason of his being or having
been a director or officer of the Registrant. The indemnification provided by
the Company's Bylaws is not deemed exclusive of or intended in any way to limit
any other rights to which any person seeking indemnification may be entitled.
Section 102(b)(7) of the Delaware General Corporation Law, as amended,
permits a corporation to provide in its Certificate of Incorporation that a
director of the corporation shall not be personally liable to the corporation or
its stockholders for monetary damages for breach of fiduciary duty as a
director, except for liability (i) for any breach of the director's duty of
loyalty to the corporation or its stockholders, (ii) for acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit.
Article VII of the Company's Certificate of Incorporation provides for
the elimination of personal liability of a director for breach
<PAGE> 83
of fiduciary duty, as permitted by Section 102(b)(7) of the Delaware General
Corporation Law.
The Registrant maintains liability insurance insuring the Registrant's
officers and directors against liabilities than they may incur in such
capacities.
Insofar as indemnification for liabilities arising under the Act may be
permitted to directors, officers or persons controlling the registrant pursuant
to the foregoing provisions, the Registrant has been informed that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Company has issued the following unregistered securities during the
past three years:
1. From January 1, 1998 to March 31, 1998, the Company issued 626,293 shares
of Series C redeemable convertible Preferred Stock and warrants to purchase
626,293 shares of Common Stock to certain accredited investors.
2. From April 1, 1998 to June 30, 1998, the Company issued the following
unregistered securities: (a) 1,082,625 shares of Series D redeemable convertible
Preferred Stock to certain accredited investors; and (b) 5,194 shares of Common
Stock to one accredited investor.
3. In October 1998, the Company issued an aggregate of 9,191 shares of
Common Stock to two former HTR shareholders in exchange for cancellation of the
Company's indebtedness to such shareholders, at a conversion price of $3.75 per
share, the closing price of the Company's Common Stock on the date of issuance.
4. In December 1998, the Company issued an aggregate of 105,000 shares of
Common Stock to the three former stockholders of Teletutor and their attorney,
pursuant to a restructuring of the Company's indebtedness to such shareholders.
Pursuant to this restructuring, the Company also issued to such persons
three-year warrants to purchase an aggregate of 55,000 shares of Common Stock.
5. In December 1998 and June 1999, the Company issued an aggregate of 28,902
and 22,819 shares of Common Stock, respectively, to the Company's Series D
Preferred Stockholders in payment of accrued dividends.
6. In December 1998, the Company issued an aggregate of 1,480 shares of
Common Stock to one former security holder of HTR upon net exercise of a
warrant.
7. In January 1999, the Company issued 282,500 shares of Common Stock and
warrants to purchase 70,625 of Common Stock to nine accredited investors.
8. In May 1999, the Company issued 448,297 shares of Common Stock to certain
accredited investors.
9. In June 1999, the Company issued warrants to purchase an aggregate of
5,000 shares of Common Stock to each of two former employees in connection with
the sale of the Knowledgeworks division of HTR.
10. In June 1999, the Company issued a $2.5 million convertible debenture to
two accredited investors. The debenture was convertible into shares of Common
Stock at an initial conversion ratio of $5.50 per share.
11. From April 1, 1999 to June 30, 1999, the Company issued the following
unregistered securities: (a) 22,819 shares of Common Stock as a dividend to the
Company's Series D Preferred Stockholders; (b) 13,752 shares of Common Stock to
certain accredited holders of the Company's Common Stock pursuant to the terms
of their subscription agreements; (c) 3,580 shares of Common Stock to a Series C
Preferred Stockholder pursuant to his conversion of 2,954 shares of Series C
Preferred Stock on a 1 to 1.21 ratio; and (d) warrants to purchase: (i) 457,200
shares of Common Stock; (ii) 5,000 shares of Series D Preferred Stock; and (iii)
100,000 shares of Series E Preferred Stock to certain accredited investors.
12. From July 1, 1999 to September 30, 1999, the Company issued the following
unregistered securities: (a) 48,261 shares of Common Stock to certain accredited
holders of the Company's Common Stock pursuant to the terms of their
subscription
<PAGE> 84
agreements; (b) 9,255 shares of Common Stock 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; and (c) 820 shares of Common Stock to one investor upon the exercise of
warrants.
13. From October 1, 1999 to December 31, 1999, the Company issued the
following unregistered securities: (a) 57,757 shares of Common Stock to certain
accredited holders of the Company's Common Stock pursuant to the terms of their
subscription agreements; (b) 56,576 shares of Common Stock as a dividend to the
holders of the Company's Series D Preferred Stock; (c) 379,437 shares of Series
E Preferred Stock were issued to H&QGF at a price per share ranging from $2.17
to $2.42 pursuant to the terms of the Company's equity line with H&QGF; and (d)
three-year warrants to purchase an aggregate of 55,000 shares of Common Stock
with an exercise price of $2.75 per share to two accredited investors in
exchange for their agreement to convert approximately $500,000 of convertible
debentures into common stock prior to December 31, 1999.
14. From January 1, 2000 to March 31, 2000, the Company issued the following
unregistered securities: (a) 1,136,253 shares of Common Stock at $3.62 per share
and one-year warrants to purchase 450,000 shares of Common Stock at exercise
prices ranging from $4.34 to $6.125 per share to one accredited investor; (b)
24,648 shares of Common Stock upon the exercise of warrants; and (c) five-year
warrants to purchase 113,625 shares of Common Stock at $3.62 per share to a
provider of investment banking services.
15. From April 1, 2000 to June 30, 2000, the Company issued the following
unregistered securities: (a) 357,142 shares of Common Stock at $7.00 per share
and five-year warrants to purchase 714,285 shares of Common Stock at an exercise
price of $7.00 per share to one accredited investor; (b) 19,552 shares of Common
Stock as a dividend to the Company's Series D Preferred Stockholders; and (c)
five-year warrants to purchase 35,714 shares of Common Stock at $7.00 per share
to a provider of investment banking services.
16. From July 1, 2000 to September 31, 2000, the Company issued the following
unregistered securities: (a) 2,727 shares of Common Stock in connection with the
conversion of 2,727 shares of Series D Preferred Stock.
The sales of the above securities were deemed to be exempt from
registration under the Act in reliance upon Section 4(2) of the Act or
Regulation D or Rule 701 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 16. EXHIBITS
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------------ -----------------------------------------------------------------------------------------
<S> <C>
4.1 (a) Form of Common Stock Certificate.
5.1(k) Opinion of Wyrick, Robbins, Yates & Ponton LLP
10.12(a) Employment Agreement, dated July 31, 1996, with Michael L.Brown.
10.13(a) Employment Agreement, dated August 15, 1996, with Leonard P. Kurtzman.
10.14(a)* Agreement, dated August 14, 1995, as amended, with Educational Services
Institute.
10.15(a) Form of Online Educational Services Distribution Agreement.
10.16(a) Form of University Master Agreement for Online Education Services.
10.17(a) Form of Online Educational Services Agreement.
10.18(a) Form of Inner Circle Online Educational Services Development and Distribution
Agreement.
10.19(a)* Agreement, dated April 15, 1996, with Autodesk, Inc.
10.20(a)* Project Financing and Development Agreement with InternetU, Inc., as amended.
10.21(a) Employment letter agreement, dated October 29, 1996, with W. Braun Jones, Jr.
10.23(e) Employment Agreement, dated April 30, 1997, with James R. Cooper.
10.24(e) Employment Agreement, dated January 1, 1997, with Michael W. Anderson.
10.25(e) Employment Agreement, dated October 31, 1997, with Kamyar Kaviani.
</TABLE>
<PAGE> 85
<TABLE>
<S> <C>
10.26(e) Employment Agreement, dated October 31, 1997, with Farzin Arsanjani.
10.27(e) Employment Agreement, dated October 31, 1997, with Daniel J. Callahan, IV.
10.28(e) Letter agreement, dated December 18, 1997, with Leonard P. Kurtzman.
10.29(f) First Union loan amendment documents dated March 31, 1998.
10.30(f) Series C Preferred Stock and Warrant Purchase Agreement.
10.31(f) Registration Rights Agreement, dated March 31, 1998.
10.32(g) Series D Preferred Stock Purchase Agreement, dated June 29, 1998.
10.33(g) Amended and Restated Registration Rights Agreement, dated June 29, 1998.
10.34(g) Certificate of Designations, Preferences and Rights of Series D Convertible
Preferred Stock dated June 26, 1998.
10.35(g) Certificate of Designations, Preferences and Rights of Series C Convertible
Preferred Stock dated June 25, 1998.
10.36(h) Loan and Security Agreement dated August 14, 1998 with Imperial Bank.
10.37(h) Warrant to Purchase Stock dated August 14, 1998 issued to Imperial Bank.
10.38(h) Loan Agreement dated August 14, 1998 with Sand Hill Capital, LLC.
10.39(h) Warrant to Purchase Stock dated August 14, 1998 issued to Sand Hill Capital, LLC.
10.40(i) Form of Subscription Agreement for the $1.05 million Spencer Trask Financing.
10.41(j) Private Equity Line of Credit Agreement dated May 4, 1999 with Hambrecht &
Quist Guaranty Finance, LLC.
10.42(j) Certificate of Designations, Preferences and Rights of Series E Convertible
Preferred Stock.
10.43(j) Convertible Debenture and Warrants Purchase Agreement dated June 4, 1999 with
Excalibur Limited Partnership and BH Capital Investments, L.P. relating to
the $2.5 million convertible debenture financing.
10.44(j) Form of Convertible Debenture for the $2.5 million convertible debenture
financing in June 1999.
10.45(k) Asset Purchase Agreement relating to the sale of the Knowledgeworks division
of HTR effective on June 30, 1999.
10.46(k) Receivables factoring agreements, as amended, with Bankers Capital.
21.1 (k) List of Subsidiaries.
23.1 Consent of Ernst & Young LLP.
23.2(k) Consent of Wyrick Robbins Yates & Ponton LLP (contained in Exhibit 5.1).
24.1 (k) Power of Attorney.
</TABLE>
----------
<TABLE>
<S> <C>
* Confidential treatment requested.
(a) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Registration Statement on Form S-1 (File No. 333-12135).
(e) Incorporated by reference to the similarly numbered Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1997.
(f) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31,
1998.
(g) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.
(h) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1998.
(i) Incorporated by reference to the identically numbered Exhibit to the
Registrant's Annual Report on Form 10-K for the year ended December 31, 1998.
(j) Incorporated by reference to the corresponding appendix filed with the
Registrant's preliminary proxy materials on Schedule 14A dated July 16, 1999
for its 1999 annual meeting of stockholders.
(k) Previously filed with registration statement (No. 333-83885) filed with the
SEC on July 27, 1999, as amended.
</TABLE>
<PAGE> 86
ITEM 17. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement. Notwithstanding the foregoing, any increase
or decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering
range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the registration
statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(4) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person or the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
<PAGE> 87
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this
post-effective amendment No. 1 to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Reston,
State of Virginia, on this 20th day of November 2000.
VCAMPUS CORPORATION
/s/ DANIEL J. NEAL
---------------------------------------------
DANIEL J. NEAL, CHIEF EXECUTIVE OFFICER
---------------
Pursuant to the requirements of the Securities Act of 1933, this
post-effective amendment No. 1 to Registration Statement has been signed by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATE
------------------------------------------------ -------- ----
<S> <C> <C>
/s/ NARASIMHAN P. KANNAN* Chairman of the Board November 20, 2000
------------------------- of Directors
NARASIMHAN P. KANNAN
Chief Executive Officer
/s/ DANIEL J. NEAL (Principal November 20, 2000
------------------ Executive Officer)
DANIEL J. NEAL
/s/ MICHAEL A. SCHWIEN Chief Financial Officer November 20, 2000
---------------------- (Principal Financial
MICHAEL A. SCHWIEN and Accounting Officer)
/s/ EDSON D. DECASTRO* Director November 20, 2000
----------------------
EDSON D. DECASTRO
/s/ BARRY K. FINGERHUT* Director November 20, 2000
-----------------------
BARRY K. FINGERHUT
/s/ KAMYAR KAVIANI* Director November 20, 2000
-------------------
KAMYAR KAVIANI
/s/ WILLIAM E. KIMBERLY* Director November 20, 2000
------------------------
WILLIAM E. KIMBERLY
/s/ JOHN D. SEARS* Director November 20, 2000
------------------
JOHN D. SEARS
................................................ Director November 20, 2000
------------------------------------------------
ASHOK TRIVEDI
/s/ MICHAEL A. SCHWIEN
----------------------
MICHAEL A. SCHWIEN
*ATTORNEY-IN-FACT
</TABLE>
