| ECOLLEGE COM ITEM 1A RISK FACTORS Risk Factors This section identifies certain risks and uncertainties that we face |
| If we are unable to appropriately address these and other circumstances that could have a negative effect on our business, our business may suffer |
| Negative events may decrease our revenues, increase our costs, negatively affect our financial results and decrease our financial strength, thereby causing our stock price to decline |
| The risks and uncertainties described below are not the only ones we face |
| Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may have a negative impact on our business |
| Revenue from a small number of customers has comprised a substantial portion of the historical revenue of eLearning and Datamark and is expected to represent a substantial portion of divisional revenue for the foreseeable future |
| For the year ended December 31, 2005, our 30 largest eLearning customers accounted for approximately 70prca of eLearning division revenue and the 30 largest customers of the Enrollment division accounted for approximately 92prca of Enrollment division revenue |
| One institution (Corinthian Colleges) that is a customer of both the eLearning and Enrollment divisions accounted for approximately 22prca of consolidated revenue in the year ended December 31, 2005 |
| Any cancellation, deferral, or significant reduction in work performed for these principal customers, or failure to collect accounts receivable from these principal customers, could have a material adverse effect on our business, financial condition, and results of operations |
| Our Stock Price Is Likely to be Volatile |
| The market price of our common stock has been and is likely to continue to be volatile and could be subject to significant fluctuations in response to factors such as the following, some of which are beyond our control: • Quarterly variations in our operating results; • Operating results that vary from the expectations of securities analysts and investors; • Changes in expectations as to our future financial performance; • Announcements of technological innovations or new products by us or our competitors; • Changes in market valuations of other online service companies or our customers; • Future issuances of our common stock; 11 ______________________________________________________________________ • Stock market price and volume fluctuations; • General political and economic conditions, such as a recession, further military action or additional terrorist attacks, or interest rate or currency rate fluctuations; and • Other risk factors discussed in this report |
| These factors may adversely affect the market price of our common stock |
| In addition, the market prices for stocks of many internet-related and technology companies have historically experienced extreme price fluctuations that appeared to bear no relationship to the operating performance of these companies |
| In the event our stock price fell significantly, investors might sue the Company, causing increased litigation expenses and, possibly, the payment of large damages or settlement fees |
| A substantial portion of our eLearning division revenue is derived from fees for each enrollment in an online course that we host for our customers |
| Generally, we do not market directly to students to generate enrollments in our customers’ courses and therefore have little influence on the number of students that enroll |
| We are therefore dependent on the institutions and organizations that purchase our products and services to market to individual students |
| The failure of these third parties to effectively attract, maintain, and increase student enrollments could affect our revenue growth and have a material adverse effect on our business and financial results |
| Although Datamark provides enrollment marketing services to its customers, the majority of Datamark’s customers are not customers of our eLearning division, and there can be no assurance that they will become customers of our eLearning division |
| Our Operating Results May Fluctuate Significantly and May Be Below the Expectations of Analysts and Investors |
| The sales cycle for our products and services vary widely and can be very lengthy, particularly for the eLearning division |
| Because of the variability and length of the sales cycle, it may be difficult for us to predict the timing of particular sales, the rate at which online campuses, courses, and/or course supplements will be implemented, the number of students who will enroll in the online courses, or the rate of which new or future customers will utilize our enrollment marketing services |
| Because a significant portion of our eLearning division’s costs are fixed and are based on anticipated revenue levels, small variations in the timing of revenue recognition could cause significant variations in operating results from quarter-to-quarter |
| Since we may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall, any significant decrease in revenue would likely have an immediate material adverse effect on our business and financial results |
| Further, any such variations could cause our operating results to fall below the expectations of securities analysts and investors |
| In such an event, the trading price of our stock would likely fall and investors might sue the Company, causing increased litigation expenses and, possibly, the payment of large damages or settlement fees |
| We Depend on Our Key Personnel |
| Our success depends on the performance of our key management, technical, sales and other critical personnel and on our ability to continue to attract, motivate and retain management and highly qualified key personnel |
| Failure to do so could disrupt our operations, adversely affect our customer relationships and impair our ability to successfully implement and complete Company initiatives |
| We are facing increased labor costs, particularly with respect to technical personnel; if this trend continues, we may be required to pay higher compensation to attract qualified personnel and our results of operations may be adversely affected |
| Our future success and our ability to pursue our growth strategy will depend to a significant extent on the continued service of our senior management personnel |
| Executives have left the Company over the years, and there may be additional departures from time to time |
| Although we have employment agreements with our executive officers, these agreements do not obligate them to remain employed by us |
| The loss of services of any senior management personnel could make it more difficult for us to successfully pursue our business goals |
| We Face Significant Competition in our Markets |
| The online learning market has evolved quickly over the past ten years and is subject to technological change |
| Some colleges and universities construct online learning systems using in-house personnel and create their own software or purchase software components from a vendor |
| Therefore we face significant competition from a variety of entities including software companies with specific products for the college and university market and service companies that specialize in consulting, system integration and support in the eLearning industry |
| We have recently seen a number of open source solutions enter the market |
| Other competitors in this market include a wide range of education and training providers using video, mail correspondence, CD-ROM, and live online training |
| We also face significant competition in the market for enrollment marketing services to the post-secondary education industry |
| Competition is most intense from colleges and universities that perform their own enrollment marketing services in-house |
| Datamark also faces competition from other enrollment marketing companies, direct marketing companies, media placement agencies and online marketing companies |
| 12 ______________________________________________________________________ Some of our current and potential competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we do |
| Certain competitors may be able to secure alliances with customers and affiliates on more favorable terms, devote greater resources to marketing and promotional campaigns and devote substantially more resources to systems development than we can |
| In addition, it is possible that certain competitors, or potential competitors, could reduce their pricing to levels that would make it difficult for us to compete |
| Increased competition may result in reduced operating margins, as well as loss of market share and brand recognition |
| In addition, in order to compete effectively in our markets, we may need to change our business in significant ways |
| For example, we may change our pricing, product, or service offerings, make key decisions about technology directions or marketing strategies, or acquire additional businesses or technologies |
| Any of these actions could hurt our business, results of operations, and financial condition |
| Recent Rapid Growth in Our Markets May Not Continue and our Ability to Grow May be Adversely Affected |
| The online learning market and the for-profit post-secondary education market have grown rapidly in recent years, and there can be no assurance that such growth levels will continue |
| Our ability to execute our growth strategy will depend in part on continued growth in these markets |
| With respect to the online learning market, our success will depend in part on the continued adoption by our customers and potential customers of online education initiatives |
| Online education is a relatively new development, and some academics and educators are opposed to it in principle |
| It is possible that their opposition could reduce the demand for our products and services or result in increased costs or burdens for customers and potential customers offering online education |
| With respect to our enrollment marketing services, the marketing strategies and budgets of our current and prospective customers are subject to frequent change |
| The continuing and uninterrupted performance of our network infrastructure and computer systems is critical to our success |
| Any system failure that causes interruptions in our ability to provide services could reduce customer satisfaction and, if sustained or repeated, would reduce the attractiveness of our technology and services to our customers and their students and to prospective customers and could require us to issue credits or pay penalties under our contracts with certain customers |
| In addition, a system failure could expose us to significant remediation expense and could divert management’s attention and other company resources |
| Because our services involve the storage and transmission of proprietary and confidential customer and student information, our success depends on our ability to provide superior network security protection and maintain the confidence of our customers in that ability |
| Unauthorized disclosure of such information could subject us to liability and have a negative impact on our reputation |
| Our system is designed to prevent unauthorized access from the internet and, to date, our operations have not been affected by security breaks; nevertheless, in the future we may not be able to prevent unauthorized disruptions of our network operations, whether caused unintentionally or by computer “hackers” or by the failure of our internet service providers to provide us with adequate bandwidth and service |
| Despite precautions we have taken, unanticipated problems affecting our systems have from time to time in the past caused, and in the future could cause, interruptions or delays in the delivery of our products and services |
| Any damage or failure that interrupts or delays our operations could have a material adverse effect on our business and financial results |
| We are almost exclusively dependent on Microsoft for our underlying software technology platform |
| We are therefore potentially vulnerable to business or operational disruption caused by changes in the Microsoft platform, security flaws in Microsoft software, and/or potential price increases or licensing changes by Microsoft |
| As of December 31, 2005, the Company’s principal debt obligations totaled approximately dlra20dtta0 million (dlra22dtta0 million face value) |
| Of this amount, dlra17dtta9 million (dlra20dtta0 million face value) is secured by all of our assets |
| Our debt could have important consequences to our stockholders |
| Because of our substantial debt: • Our ability to obtain additional financing for working capital, capital expenditures, acquisitions, general corporate purposes, or other purposes may be impaired in the future; • A substantial portion of our cash flow from operations may be dedicated to the payment of principal and interest on our indebtedness, thereby reducing the funds available to us for other purposes; • We may be exposed to increased interest rates because certain of our borrowings are at variable rates of interest; and 13 ______________________________________________________________________ • Our flexibility to adjust to changing market conditions and ability to withstand competitive pressures could be limited, and we may be more vulnerable to a downturn in general economic conditions or our business or be unable to carry out capital spending that is necessary or important to our growth strategy and productivity improvement programs |
| The breach of any of the covenants or restrictions contained in our Senior Subordinated Notes, Seller Notes or New Revolver could result in a cross default under the applicable agreements which would permit the applicable lenders to declare all amounts then outstanding to be due and payable, together with accrued and unpaid interest, and, in the case of the Senior Subordinated Notes and New Revolver, to foreclose on our assets |
| In any such case, we may be unable to make any borrowings under our New Revolver and may not be able to repay the amounts due under our Senior Subordinated Notes or Seller Notes |
| This could have serious consequences to our financial condition and results of operations and could cause us to become bankrupt or insolvent |
| We may desire or need to raise additional capital through public or private financing, strategic relationships, or other arrangements in the future |
| In the event that we desire or need to raise additional capital, we cannot assure that additional funds will be available or that funds will be available on terms favorable to us |
| Furthermore, we may have to sell stock at prices lower than those paid by existing stockholders, which would result in dilution to those stockholders, or we may have to sell stock or bonds with rights superior to rights of holders of common stock |
| Any debt financing might involve restrictive covenants that could limit our operating flexibility |
| If adequate funds are not available on acceptable terms, we may be unable to develop or enhance our services and products, take advantage of future opportunities, or respond to competitive pressures, which could have an adverse effect on our business and our financial position |
| Any future need to raise additional funds could also directly and adversely affect our stockholders’ investment in our common stock |
| We May be Unable to Sustain Profitability |
| Although we have reported net income for each fiscal quarter beginning with the period ended March 31, 2003, and Datamark, under its previous owners and structure, had realized net income for each reporting period since 2001, there can be no guarantee that we will be able to sustain profitability |
| We believe that our success depends, among other things, on our ability to increase our revenue by further developing existing customer relationships and developing new relationships with colleges, universities, and other potential customers without increasing our expenses at the same rate |
| If we are unable to continue to increase our revenue, our business and financial results will be materially and adversely affected |
| Our Internal Control over Financial Reporting Is Not Effective, which Could Result in Possible Regulatory Sanctions and a Decline in our Stock Price |
| Section 404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) requires us to furnish annually a report on our internal control over financial reporting |
| The internal control report must contain an assessment by our management of the effectiveness of our internal control over financial reporting (including disclosure of any material weakness) and a statement that our independent auditors have attested to and reported on management’s evaluation of such internal control |
| As disclosed in Item 9A of this Annual Report on Form 10-K, we have identified a material weakness in our internal control over financial reporting that existed as of December 31, 2005 |
| As a result, neither management nor our independent auditors were able to conclude that our internal control over financial reporting was effective within the meaning of Section 404 of Sarbanes-Oxley as of such date |
| As a result, we could be subject to regulatory sanctions or lose investor confidence in the accuracy and completeness of our financial reports, either of which could have an adverse effect on the market price for our securities |
| We May Not be Able to Protect Our Intellectual Property and Proprietary Rights and We May be Subject to Claims of Infringement by Third Parties |
| Our success depends, in part, on our ability to protect our proprietary rights and technology, such as our trade and product names, and the proprietary software included in our products |
| We rely on a combination of copyrights, trademarks, servicemarks, patents, trade secret laws, and employee and third-party nondisclosure agreements to protect our proprietary rights |
| Despite our efforts to protect these rights, unauthorized parties may attempt to duplicate or copy aspects of our services or software or to obtain and use information that we regard as proprietary |
| If others infringe or misappropriate our copyrights, servicemarks or other proprietary rights, our business could be hurt |
| In addition, the laws of many countries do not protect our proprietary rights to as great an extent as do the laws of the United States |
| Our failure to meaningfully protect our intellectual property could have a material adverse effect on our business and financial results |
| 14 ______________________________________________________________________ In addition, although we do not believe that we are infringing the intellectual property rights of others, other parties might assert infringement claims against us |
| We may encounter disputes over rights and obligations concerning intellectual property |
| These disputes, even if without merit, could lead to litigation, which may be time-consuming and costly (even if we are successful), may require us to redesign our products or services, may require us to enter into royalty or licensing agreements (which may not be available on acceptable terms or at all), and could be a distraction to management, any of which could have a material adverse effect on our business |
| In addition, our agreements with our customers require us to indemnify our customers in the event they are sued by a third party claiming that our products and services infringe a third party’s intellectual property rights |
| In the event of such a lawsuit against our customers, our performance of these indemnification obligations could have a material adverse effect on our business, financial condition and results of operations |
| The federal government, through the Higher Education Act and other legislation, may consider changes in the laws that affect distance education in higher education |
| Legislation could be adopted that would have a material adverse effect on our business |
| In addition, it is possible that laws and regulations may be adopted with respect to the internet, relating to user privacy, content, taxation, intellectual property ownership and infringement, distribution, and characteristics and quality of products and services |
| The adoption of any additional laws or regulations may decrease the popularity or expansion of online education, and may cause us to incur unanticipated compliance costs |
| The adoption of federal or state laws or regulations concerning privacy of personal information could impair Datamark’s ability to purchase lists of prospective students from third party vendors or increase the costs of obtaining such lists |
| Our increasing presence in many states across the country may subject us to additional tax laws and government regulations, which may adversely affect our future operating results |
| Our violation of any state statutes, laws or other regulations could have a material adverse effect on our business and financial results |
| We cannot predict the impact, if any, that future regulation or regulatory changes may have on our business |
| Datamark Does Not Have Long-Term Agreements With Its Customers and May Be Unable to Retain Customers, Attract New Customers or Replace Departing Customers With Customers that Can Provide Comparable Revenues |
| Most of Datamark’s contracts with its customers are short-term |
| Datamark’s current customers may not continue to use its products and services, Datamark may not be able to replace in a timely or effective manner departing customers with new customers that generate comparable revenues, and Datamark may not continue to increase its customer base |
| Further, there can be no assurance that Datamark’s customers will continue to generate consistent amounts of revenues over time |
| Datamark’s failure to develop and sustain long-term relationships with its customers could materially and adversely affect the results of operations of Datamark and eCollege as a whole |
| If We are Unable to Continue to Receive our Current Level of Access to and Costs for Mailing Lists, Our Competitive Advantage Could Be Materially Affected |
| Our Enrollment division obtains mailing lists from third party vendors |
| Because of our unique relationships with some of our key vendors, we are able to purchase these lists in high volumes under favorable pricing and in formats compatible with our systems |
| If we were unable to continue to obtain these mailing lists at our current pricing levels and in the formats in which we historically have received these lists, it could reduce our competitive advantage and have a material adverse effect on our business |
| The direct marketing activities of Datamark may be adversely affected by increases in certain costs |
| Datamark’s direct mail activities may be adversely affected by postal rate increases, especially increases that are imposed without sufficient advance notice to allow adjustments to be made to marketing budgets |
| With regards to Datamark’s interactive marketing services, rising demand for online advertising has in the past and may in the future cause Internet media prices to increase |
| Because Datamark is generally obligated under its contracts to deliver a specified number of leads at a specified price, Datamark may be unable to adjust its pricing to reflect increased Internet lead costs until contracts expire and are renegotiated |
| Any of these occurrences could materially and adversely affect the business, financial condition and results of operations of Datamark and eCollege as a whole |
| Our Business and Future Operating Results Are Subject to a Broad Range of Uncertainties Arising Out of Terrorist Attacks on the United States of America |
| Our business and operating results are subject to uncertainties arising out of terrorist attacks on the United States of America |
| These uncertainties include a potential global economic slowdown and the economic consequences of further military action or additional terrorist activities |
| While terrorist attacks have not had a material impact on our financial position or results of operations to date, any future attacks or events arising as a result of the attacks, such as interruptions to the international telecommunications network or the internet, could have a material impact on our business |